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Callon Stocking Up in West Texas, Nearly Doubling Permian Running Room

Callon Petroleum Co. said late Tuesday it is acquiring close to 16,000 net acres, 192 net locations and 2,884 boe/d in private transactions that will nearly double its position in the Permian Basin of Texas.

The Natchez, MS-based independent said it would pay a total of $253 million in cash and issue shares, for an aggregate of $334 million, to buy acreage across the play, increasing total acreage by an estimated 90% and boosting current production by 23%.

"These acquisitions are a significant step forward in Callon's continued evolution as a leading operator in the Permian Basin," CEO Fred Callon said. "Our team has proven its ability to consistently deliver capital efficient growth, and we are excited to leverage our capabilities across an expanded footprint in the coming years, including a new core operating area in Howard County."

In one transaction with two entities of Big Star Oil and Gas LLC, Callon agreed to pay $220 million and issue 9.3 million common shares to acquire 14,089 net acres that are mostly in Howard, but also in Dawson, Martin and Borden counties. Callon also captured 1,759 net acres in Reagan County.

Separately, the producer paid $33 million net to form an area of mutual interest (AMI) with TRP Energy LLC in Reagan County, where they acquired acquired another 4,745 net acres from a private party. The AMI, 55% owned by Callon, is north of its Garrison Draw field, in which Callon is selling TRP a 27.5% interest.

"While we expect any near-term increase in operational activity following the acquisitions to be limited in 2016, we anticipate the horizontal development of the Big Star properties to be an important part of an expanded 2017 operational program incorporating a total of two to three horizontal drilling rigs," the CEO said.

The company "has found success in pursuing privately negotiated transactions in the Midland Basin in recent years, and these acquisitions are yet another example. Importantly, the transactions not only deliver high-quality, de-risked asset bases that compete favorably for capital in our combined portfolio, but also present the opportunity to add to our management team with Mr. Bradley Cross, a founding partner of Big Star, who has been offered a senior role in operations with Callon."

Callon, considered one of the smaller independents working in the Permian, before the purchases had about 17,233 net acres in the basin, with 521 net delineated locations and 12,400 boe/d 79% weighted to oil.

Tudor, Pickering, Holt & Co. (TPH) estimated that Callon paid about $17,000/acre for the increased position, versus other recent Permian area deals that have been in the $25,000 to $35,000/acre range. Considering the separate cash and stock transactions to fund the acquisitions, TPH said quick math implies that Callon was trading at $50,000/acre prior to the transactions, highlighting its "incentives toward continuing to reach critical mass" which explains its rationale behind the transactions.

In the Big Star transaction, Callon has identified 165 net horizontal drilling locations that target the Permian's Wolfcamp A and B, and Lower Spraberry zones using an initial assumption of six to eight wells per section. Included are five horizontals now producing, with average 30-day peak production rates of 1,165 boe/d. There also are 112 net drilling locations targeting Wolfcamp D (Cline) and Middle Spraberry zones.

In 1Q2016, estimated production from the Big Star properties is 1,931 boe/d net, 82% weighted to oil, Callon said. Once the Big Star transaction is completed, Callon is to assume operatorship of more than 80% of the acreage and own 81% average working interest.

On a pro forma basis assuming the closing of the pending Big Star and AMI transactions, Callon estimated its operational base will include more than 30,000 net surface acres in core areas of the Permian's Midland sub-basin, within a total Midland position of 34,000 net surface acres.

The pending transactions are expected to close by the end of June, but neither transaction is contingent on the other. Callon intends to finance the cash purchase price of the acquisitions with cash on hand, borrowings under its revolving credit facility, which was reaffirmed in early April with a borrowing base of $300 million, including related commitments of $300 million, and the proceeds of capital markets transactions, depending on prevailing market conditions.

Once the transactions are completed, Callon estimated the new production would contribute 2,500-3,000 boe/d to full-year 2016 estimates, raising annual guidance to 14,000-15,000 boe/d from a previous estimate of 11,500-12,000 boe/d. The increased estimate includes a production contribution from three drilled but uncompleted wells on the properties to be acquired in the pending transactions, one in Howard County and two in Reagan County, that are expected to be brought on line by the end of June.

Given the increased expenditures related to incremental completions and infrastructure investment to develop the acquired properties, Callon now expects operational capital expenditures this year, including facilities, of $95-105 million.

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