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Despite the tough environment for most E&Ps, one company is expanding its footprint in the heralded Permian Basin, landing a new core operating area in one of the basin’s hot spots.
Callon Petroleum Co. (NYSE: CPE) said April 19 it has entered definitive agreements with three private entities to acquire Midland Basin acreage in Howard County, Texas.
The acquisition will cost Callon, based in Natchez, Miss., $221 million in cash and 9.3 million shares of its common stock. Based on the April 18 closing price of Callon’s stock, total consideration amounts to about $301 million, according to an investor presentation.
Separately, Callon entered definitive purchase and sale and joint development agreements involving its Midland Basin acreage in Reagan County, Texas. The transactions, with a private entity and Houston-based TRP Energy LLC, comprise total net cash considerations of $33 million.
“Callon has found success in pursuing privately-negotiated transactions in the Midland Basin in recent years and these acquisitions are yet another example,” said Fred Callon, the company’s chairman and CEO, in a statement.
The transactions are set to boost Callon’s position in the Midland Basin to about 34,000 net surface acres. This includes more than 30,000 net surface acres in core areas of the Midland Basin that have been de-risked for multizone horizontal development, according to the release.
A&D Hotbed
In Howard County, Callon is acquiring about 17,298 gross (14,089 net) surface acres. The company will also gain additional acreage in Martin, Borden and Dawson counties in Texas.
In recent years, Howard County has seen a number of significant deals and become a stronghold for A&D activity.
In November 2015, Moss Creek Resources LLC acquired acreage in Howard and Borden counties in two separate transactions with Tall City Exploration and Plymouth Petroleum. In the deal, Moss Creek bought about 78,000 net acres for more than $1 billion.
Before the drop in oil prices in 2014, Encana Corp. (NYSE: ECA) made its blockbuster deal to acquire Athlon Energy Inc. for $7.1 billion, including debt. The acquisition consisted of roughly 140,000 net acres, a bulk of which was located in Howard County.
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As part of its own transaction, Callon will acquire 178 gross (165 net) identified horizontal drilling locations. The locations target the Wolfcamp A, Lower Spraberry and Wolfcamp B zones and are currently producing.
Additionally, the company will gain 124 gross (112 net) potential horizontal drilling locations targeting the Wolfcamp D (Cline) and Middle Spraberry zones.
The acquired assets, currently operated by Midland, Texas-based Big Star Oil and Gas LLC, produced an estimated 1,931 net barrels of oil equivalent per day, 82% oil, during first-quarter 2016.
Upon closing, Callon will assume operatorship of more than 80% of the assets. The company will also own an estimated 81% average working interest with 61% average net revenue interest in the assets.
The company expects any near-term increase in operational activity following the acquisitions to be limited in 2016, Callon said.
However, the company anticipates “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,” he added.
Bradley Cross, a founding partner of Big Star, has been offered a senior role in operations with Callon.
Reagan County Shuffle
Callon said it entered agreements on April 15 to buy and sell Midland Basin acreage as part of a joint venture (JV) with TRP Energy. The company added that the maneuver is expected to increase its acreage position in western Reagan County by 1,759 net acres.
Through a joint acquisition from a private party of 4,745 net acres, Callon and TRP will establish an area of mutual interest (AMI) north of the Garrison Draw Field in western Reagan County. Simultaneously, Callon will sell a 27.5% interest in the Garrison Draw Field to TRP.
Following the completion of the transaction, Callon will hold a 55% share in the AMI.
Callon anticipates the transactions will close in second-quarter 2016, subject to the completion of customary due diligence and closing conditions. None of its transactions are contingent of each other, according to the release.
Callon intends to finance the cash purchase price of the acquisitions with cash on hand, borrowings under its revolving credit facility and the proceeds of its equity offering, which is estimated to total $187 million.
The company’s revolver was reaffirmed in early April with a borrowing base of $300 million, including related commitments of $300 million.
Jefferies LLC was financial adviser to Callon in connection with its acquisition in Howard County. Scotia Waterous was Big Star's financial adviser.
Emily Moser can be reached at emoser@hartenergy.com.
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