Callon Petroleum to acquire Howard County assets for $327M

Callon Petroleum Company (NYSE: CPE) has entered into a definitive agreement to acquire certain undeveloped acreage and producing oil and gas properties in the Permian Basin for total consideration of $327 million in cash. The company is acquiring the assets from Plymouth Petroleum, operated by affiliates of Element Petroleum, based in Midland, Texas. Both entities are indirectly owned by ArcLight Capital Partners LLC and management.

Deal specifics
Key attributes of the pending acquisition include:

  • Approximately 6,916 gross (5,667 net) surface acres, primarily located in Howard County, Texas;
  • Over 75% of acreage offsetting Callon's position in northwest Howard County, providing opportunities for shared infrastructure and extended laterals across Callon's pro forma footprint in this area;
  • 167 gross (112 net) identified horizontal drilling locations targeting the Wolfcamp A, Lower Spraberry and Wolfcamp B zones, increasing Callon's existing inventory of drilling locations in these delineated zones in its WildHorse operating region by over 90%, assuming current development spacing of six to eight wells per section;
  • Additional potential horizontal drilling locations from emerging prospective zones and increased well density being evaluated;
  • Current net production of approximately 2,300 barrels of oil equivalent per day (Boe/d) (86% oil) from 9 horizontal (gross) and 16 vertical wells (gross) based on information provided by the seller;
  • Estimated 12.2 million barrels of oil equivalent (MMBoe) (87% oil) of net proved reserves as of September 1, 2016 based on Callon's evaluation and interpretation of reserve and production information provided by the seller, as well as Callon's analysis of available geologic and other data. Callon's estimate of proved reserves has not been reviewed by Callon's independent reserve engineers, and Callon may revise these estimates following ownership and operation of these properties;
  • Overriding royalty interests in three 480 acre units offsetting the acreage, one of which is operated by Callon; and
  • Upon closing of the pending acquisition, Callon will assume operatorship of over 90% of the acquired acreage and own an estimated 82% average working interest (62% average net revenue interest).

On a pro forma basis, assuming the closing of the pending acquisition, the company's Midland Basin position will include approximately 40,000 net surface acres, including approximately 20,000 net surface acres in northwest and central Howard County and immediately adjacent areas comprising Callon's WildHorse operating region.

Fred Callon, chairman and CEO commented, "Our strong financial position, combined with an operational model proven to deliver capital efficient growth and strong cash margins, has positioned us to capture value-creating acquisitions. We are driven to identify opportunities that are underpinned by solid geology and proven well results, and also offer meaningful upside potential through application of new generation completion designs, increased well density and incremental prospective zones. We believe this acquisition has all of these attributes and its value proposition is further enhanced due to its immediately offsetting footprint within our WildHorse area, which will allow us to extend laterals within the combined well inventory and leverage infrastructure investments for future program development."

Funding
The company intends to fund substantially all of the cash purchase price with the net proceeds of an equity offering and any remaining amount with availability under its revolving credit facility. Callon has commenced an underwritten public offering of 23,000,000 shares of its common stock. Callon expects to grant the underwriters an option to purchase up to an additional 3,450,000 shares. If the pending Plymouth Acquisition is not consummated, the company intends to use the net proceeds of this offering to fund a portion of its exploration and development activities and for general corporate purposes, which may include leasehold interest and property acquisitions, repayment of indebtedness and working capital. Credit Suisse and J.P. Morgan are acting as joint book-running managers for the offering.

The pending acquisition is expected to close on or before October 20, 2016, subject to the completion of customary due diligence and closing conditions. RBC Richardson Barr acted as exclusive financial advisor to Callon in connection with the pending acquisition.

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