Callon Petroleum buys Carrizo

Small firms merge in $1.2B deal with focus on shale oil, gas fields

Two Houston oil companies will merge in a deal valued at $1.2 billion as smaller firms seek to get bigger to compete in shale oil and gas fields increasingly dominated by the world’s biggest energy companies.

Callon Petroleum said Monday it will acquire Carrizo Oil & Gas in an-all stock deal that would give the combined company about 200,000 net acres in the Eagle Ford in South Texas and Permian Basin of West Texas, including 90,000 acres in the Permian’s rapidly growing western section known as the Delaware Basin. The goal of the merger is to focus on the Delaware and shift toward a manufacturing mode using efficient, repeatable drilling, said Callon Chief Executive Joe Gatto.

The U.S. oil majors Exxon Mobil and Chevron have each adopted a manufacturing approach to developing their Permian holdings.

The Callon-Carrizo deal is a merger of near-equals. The allstock deal will leave Callon shareholders with a 54 percent stake and Carrizo investors with 46 percent. The deal offers a 25 percent premium on Carrizo’s stock from Friday.

Gatto said so-called mergers of equals have become important to smaller companies that want to grow because Wall Street has soured on the industry over the past year and pulled back on investments needed for expansions. The deal would allow Callon and Carizzo to operate on a larger scale and find efficiencies, said Kashy Harrison, an analyst

at Simmons Energy in Houston, but Callon is primarily betting on healthy oil prices.

He said Callon could face some pushback from investors who viewed the company as a candidate for acquisition rather than an acquirer. Andrew Dittmar, an analyst at the Austin research firm Drilling info said he expected Callon’s stock to take a beating in the short term as investors worry that such deals will deliver profits.

Callon’s stock dropped by 16 percent Monday, falling $1.02 per share down to $5.38 a share. Carrizo’s stock climbed about 2 percent or 20 cents to $10.70 per share.

Callon moved its headquarters to Houston from Mississippi at the beginning of this year because Callon focuses exclusively on Texas oil and gas basins. That focus meshed with that of Carrizo, which has sold assets in Colorado and the Appalachian Basin in the East to concentrate on the Permian

The combined company, which will operate under the Callon name, will keep its headquarters in Houston. It will have 11 board members, including Callon’s eight directors and three appointed from Carrizo.

Callon and Carrizo each employ more than 200 people and some layoffs are expected as the merged company seeks cost savings. The deal is expected to close in the fourth quarter.