Even though some major shareholders have claimed Callon Petroleum Co.'s planned $3.2 billion acquisition of Carrizo Oil & Gas Inc. is a "value-destructive" proposition, an investor's note from Simmons Energy draws a different conclusion.
The all-stock deal has come under fire from the likes of Paulson & Co. Inc., which owns approximately 9.5% of company shares. Paulson said it will vote against the merger and that shareholders would be better served if Callon put itself up for sale instead. Callon's management team fired back, saying the acquisition of Carrizo's acreage, especially in the Permian Basin, would have long-term benefits for investors. Simmons Energy said its modeling came down closer to Callon's stance than Paulson's.
"We like Callon's risk/reward proposition at the current valuation. Specifically, assuming [Callon] acquires [Carrizo] and successfully executes on seemingly conservative synergy targets, we see a path toward considerable upside at the forward strip on conservative multiples … and believe the combined entity possesses a more durable investment proposition," the firm said.
If the Carrizo transaction is unsuccessful, Simmons said, Callon "looks cheap relative to peers" on 2020 multiples. The firm argues, however, that selling Callon may not have the favorable outcome Paulson and others believe it would.
"A key takeaway from our recent European conference was investors demanding larger independents remain focused on organic execution, returning cash to shareholders, and placing consolidation firmly on the back burner," Simmons said. The firm said its confidence in Callon drawing a significant premium if it was placed on the market in the current environment "isn't particularly high," as the most logical buyers — larger independents with acreage bordering its own — have either taken note of the battering the shares of Callon and other companies have taken after announcing acquisitions or are in no position to make a move.
Simmons said it does not expect Callon's stock to rebound in the near future, but the addition of Carrizo's asset base could help spur a resurgence next year.
"If [Callon] does successfully execute on both corporate synergy and operational synergy targets for 2020 (both of which screen feasible and conservative based on recent presentations), then we believe [Callon] may possess a more favorable risk/reward proposition over the medium term with [Carrizo] at the forward strip," the firm said.
