In an all-stock deal announced today, Callon Petroleum is acquiring Carrizo Resources for $3.2 billion, about $13 per share.
Likewise, the deal metrics come to 4.5 times operating income (ebitda), $35,000 per flowing barrel of existing oil production, and $16,500 per acre for Carrizo’s 120,000 acres in the Eagle Ford and Permian basins of Texas.
The deal would have cost multiples of that in 2014, when the Permian boom was fresh Carrizo used to trade at $67. Just a couple years ago the sector traded at 8 times ebitda, $100,000 per flowing barrel and $150,000 an acre for prime tracts.
So why sell so low? Oppenheimer equity analyst Joseph Beninati in a note this morning described the deal as “a capitulation to scale” by Carrizo management, who realized there was no point in going it alone anymore.
A decade into the fracking revolution and the U.S. oil industry has boosted crude production from 5 million barrels per day to 12.2 million bpd, a record. Companies have found so much oil that more and more the concern is that world demand for the carbon-intensive stuff will begin to decline long before the frackers stop unlocking more of it from deep under the earth. Since 2014, the last time oil was above $100 a barrel. Since tripping down to $30 in 2016, then advancing to $80 in 2018, it’s now at $60. Not dear enough to generate much profit for any drillers (or OPEC), nor is it cheap enough to dry up growth altogether.
Consolidation enables economies of scale. Callon and Carrizo figure the combined company can squeeze out $150 million a year in synergies — that’s enough to fund half their capex budget. In a letter to shareholders, Callon CEO Chip Johnson explained that, "as the shale basins continue to mature, it has become evident that large co-development projects represent the optimal development strategy. We believe that size and scale drive the efficiencies that are critical to this strategy and the long term success of an E&P company."
The deal illustrates a changing of the guard underway in the industry. Carrizo’s Johnson, 63, CEO since 1993, will cede control to Callon’s Joe Gatto, 47, and his considerably younger management team. Gatto became CEO in 2017 upon the death of Fred Callon. He joined the company in 2012 out of investment banking, and served as CFO and treasurer. Last year Gatto led Callon to acquire assets from Cimarex for $570 million, or about $40,000 per flowing barrel and $10,300 per undeveloped acre, according to Cowen & Co.
Shareholders of both companies will have to vote on the deal. Carrizo shareholders would have had to settle for a lot less if they wanted cash. Instead, the all-stock deal will conclude with existing Callon shareholders owning 54% of the company, to Carrizo’s 46%. The new Callon will produce about 110,000 bpd by year’s end, carry $3 billion in debt, and boast more than 2,500 drilling locations in inventory — enough for more than a decade of drilling.
Other deals over the past year included BP buying $10.5 billion of BHP Billiton assets for $25,000 per barrel and $12,000 per acre; Concho buying RSP Permian for $49,000 per flowing barrel and $74,000 per acre ($9.5 billion); and Occidental grabbing Anadarko for $30,000 per flowing and $60,000 per acre. BP paying $25,000 per flowing barrel and $12,000 per acre for BHP Billiton’s U.S. assets looks to be a bargain, though that portfolio was more of a grab bag.
There’s even cheaper oilfields on the public market. According to data from Jefferies & Co., WPX Energy is trading at an implied enterprise value of $11,400 per acre, and Centennial Resource Development at $8,500 per acre.