{"id":18731,"date":"2019-09-16T08:31:22","date_gmt":"2019-09-16T12:31:22","guid":{"rendered":"https:\/\/capital10x.com\/old\/?p=18731"},"modified":"2019-09-16T08:31:22","modified_gmt":"2019-09-16T12:31:22","slug":"callon-petroleum-pull-out-deal-cpe","status":"publish","type":"post","link":"https:\/\/capital10x.com\/old\/callon-petroleum-pull-out-deal-cpe\/","title":{"rendered":"Callon Petroleum Needs to Pull Out of This Deal"},"content":{"rendered":"

Callon Petroleum<\/strong> (NYSE: CPE) has been in a soup this year. Shares of the oil producer are down more than 30% this year despite a decent operating performance<\/a> that has been hurt by weak oil prices. However, there\u2019s one more reason why investors seem to be shunning the stock apart from lower oil prices.<\/p>\n

Investors don\u2019t want Callon to acquire Carrizo Oil and Gas<\/h2>\n

In July this year, Callon announced<\/a> that it will acquire Eagle Ford and Permian Basin operator Carrizo Oil and Gas in an all-stock deal that valued the latter at $3.2 billion.<\/p>\n

That valuation represented a 25% premium to Carrizo\u2019s stock price at that time, but Callon investors were not impressed with the money the latter was going to pay. Callon tried to convince shareholders by stating that the acquisition will yield immediate benefits such as a jump in cash flow and earnings.<\/p>\n

Callon also said that it expects to generate $100 million in free cash flow each year thanks to the acquisition starting in 2020. However, key investor Paulson & Co. that holds a 9.5% stake has raised objections to the deal, citing that Callon is paying a high premium for a company that doesn\u2019t have great assets.<\/p>\n

As reported by Reuters<\/a>:<\/p>\n

\u201cPaulson, which has a 9.5% stake in Callon, in a letter to the company’s board said adding Carrizo’s “inferior Eagle Ford assets will permanently reduce the attractiveness of Callon to potential acquirers.\u201d<\/p>\n

The risk of moving into a new asset base in the Eagle Ford and weakness in the oil price scenario as a result of macroeconomic problems could pose a challenge for potential acquirers of Callon. As such, shares of Callon have remained under pressure this year and they could continue to be that way until and unless the overhang of the acquisition doesn\u2019t go away.<\/p>\n

Some more things to consider<\/h2>\n

Callon is doing well on its own, so it probably doesn\u2019t need Carrizo. The company\u2019s production increased<\/a> 40% year over year in the second quarter of 2019. Its average daily production during the quarter came in at 40,516 barrels of oil equivalent per day, 77% of which was oil.<\/p>\n

So, even though its average realized sales price dropped from $52.02 per BOE in the year ago period to $45.31 per BOE in the second quarter of 2019, its revenue increased nearly 22% year over year. Of course, weak oil prices did take a toll on Callon\u2019s operating margin and the bottom line, but investors shouldn\u2019t forget that the production increase was achieved at a lower capital expense.<\/p>\n

Callon\u2019s Q2 2019 capital expenditure came in at $166 million as compared to $187 million a year ago. This makes it evident that the company is already taking the right steps by increasing output in an efficient manner, which is why it doesn\u2019t make sense for it to diversify and take on another company at a time when there is uncertainty in the oil price environment.<\/p>\n","protected":false},"excerpt":{"rendered":"

Callon Petroleum (NYSE: CPE) is doing well on its own, so it shouldn’t acquire another company given the uncertainty in the oil price environment.<\/p>\n","protected":false},"author":8,"featured_media":15328,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[60],"tags":[],"class_list":{"0":"post-18731","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-energy"},"acf":[],"yoast_head":"\nCallon Petroleum Needs to Pull Out of This Deal | Capital 10X<\/title>\n<meta name=\"description\" content=\"Callon Petroleum (NYSE: CPE) is doing well on its own, so it shouldn't acquire another company given the uncertainty in the oil price environment.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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