Callon Petroleum Co. (NYSE: CPE) entered into definitive agreements with three private entities to acquire certain assets operated by Big Star Oil and Gas LLC for total consideration of $220 million in cash and approximately 9.3 million shares of Callon common stock, subject to customary purchase price adjustments. In addition, Callon has signed definitive agreements that increase its exposure to an existing core operating area in a separate transaction.
With the deal, noted Wunderlich Securities analyst Irene Haas, Callon’s Permian footprint nearly doubles.
“The company will pay $334 million in aggregate and acquire 15,848 net acres along with 2,884 boe/d of production (78% oil) and 192 net locations. CPE issued ~9.3 million shares and paid $253 million in cash for the two deals. Callon also raised another 25.3 million shares to fund the deal. Price paid per acreage is ~$15,630 per acre with14,089 net acres in Howard, Dawson, Martin, and Borden counties and 1,759 net acres in Reagan County. We are comfortable with the Reagan acreage and the southern Big Star block. The northern Big Star acreage is on trend with Diamondback’s Cobra acquisition, but lacks well control in Dawson County. On the whole, these deals have given CPE a large footprint with more runway,” said Haas in a note to investors Wednesday morning.
The big Star transaction adds approximately 17,298 gross (14,089 net) surface acres, primarily located in Howard County, Texas, with additional acreage in Martin, Borden and Dawson counties, Texas. The acreage includes 178 gross (165 net) identified horizontal drilling locations targeting the Wolfcamp A, Lower Spraberry and Wolfcamp B zones which are currently producing on the Big Star acreage and directly offsetting fields, using an initial assumption of horizontal development with six to eight wells per section. The largely contiguous lease positions allowing for average lateral lengths of over 8,300 feet.
Currently, there are five producing horizontal wells, including three Wolfcamp A and two Lower Spraberry horizontal wells with average 30-day peak production rates of 1,165 barrels of oil equivalent per day (boe/d).
Upon closing of the Big Star transaction, Callon will assume operatorship of over 80% of the acquired acreage and own an estimated 81% average working interest (61% average net revenue interest).
Separately, on April 15, 2016, Callon entered into definitive purchase and sale and joint development agreements for the following transactions (collectively, the "AMI Transaction") comprising total net cash consideration of $33 million, subject to customary purchase price adjustments. Key elements of the AMI Transaction include:
- Formation of an area of mutual interest with TRP Energy LLC in western Reagan County, Texas, through the joint acquisition from a private party of 4,745 net acres (with a 55% share to Callon) north of the Garrison Draw field; and
- Callon's simultaneous sale of a 27.5% interest in the Garrison Draw field to TRP.
Upon closing of the AMI Transaction, Callon’s acreage position in western Reagan County will be increased by 1,759 net acres. Assuming the AMI Transaction was completed on January 1, 2016, the AMI Transaction would have contributed net daily production of approximately 953 boe/d for the first quarter of 2016 primarily from existing horizontal wells targeting the Wolfcamp A and both the upper and lower benches of the Wolfcamp B.
On a pro forma basis assuming the closing of the pending Big Star and AMI transactions, Callon's operational base will include over 30,000 net surface acres in core areas of the Midland Basin that have been de-risked for multi-zone horizontal development within a total Midland Basin position of approximately 34,000 net surface acres. Estimated pro forma net production for the first quarter of 2016 (assuming the closing of the pending transactions on January 1, 2016) would have been approximately 15,300 Boe/d, including production of approximately 12,400 Boe/d (79% oil) from Callon's existing operations.
"These acquisitions are a significant step forward in Callon's continued evolution as a leading operator in the Permian Basin. Our team has proven its ability to consistently deliver capital efficient growth, and we are excited to leverage our capabilities across an expanded footprint in the coming years, including a new core operating area in Howard County. While we expect any near-term increase in operational activity following the acquisitions to be limited in 2016, we anticipate the horizontal development of the Big Star properties to be an important part of an expanded 2017 operational program incorporating a total of two to three horizontal drilling rigs," stated Fred Callon, chairman and CEO."
The pending Big Star and AMI transactions are expected to close in the second quarter of 2016. Neither transaction is contingent on the other. Jefferies LLC acted as financial advisor to Callon in connection with the pending Big Star transaction. Scotia Waterous acted as financial advisor to Big Star.