Callon Petroleum Co (CPE.N) said on Monday it would buy Carrizo Oil & Gas Inc (CRZO.O) in a $3.2 billion deal, the latest in a string of acquisitions as energy companies scale up to boost cash flow in the face of investor criticism.
Energy companies have been under pressure to cut costs and increase buybacks and dividends to shareholders, who are no longer willing to back drilling programs in the absence of strong cash flow.
Lion Point Capital, Carrizo’s fourth-largest shareholder with a 5.05% stake, in May urged the company to look at a potential merger or to sell its units.
The deal will bolster Callon’s presence in the oil-rich Permian shale basin, the country’s most prolific, and the Eagle Ford shale field.
The combined company, which will have about 200,000 net acres in the two basins, produced more than 100,000 barrels of oil equivalent per day in the first quarter, with oil constituting nearly three quarters of the total output.
Low natural gas prices, down nearly 18% this year, have also forced companies to invest more in oil-rich assets.
The deal is also expected to generate positive free cash flow of more than $100 million at current pricing and save $100 million to $125 million in costs annually.
Carrizo shareholders will receive 2.05 Callon shares for each share held, or about $13.12 per Carrizo share based on Callon’s closing share price on July 12, representing a 25% premium.
Shares of Callon Petroleum fell 12% at $5.63 before the opening bell, while Carrizo was up 9% at $11.46 – well below the offer.
The equity value of the deal is $1.21 billion, based on Carrizo’s outstanding shares, according to Reuters calculations. As of March 31, Carrizo had long-term debt of $1.71 billion.
Callon shareholders will own about 54% of the combined entity, with Carrizo shareholders owning the rest.
The combined company, which will remain headquartered in Houston, will have an 11-member board with eight from Callon’s board and three from Carrizo’s.
The deal, expected to close in the fourth quarter, will immediately add to earnings and net asset value per share, the companies said.