Page 6 - NorthAmOil Week 28

NorthAmOil COMMENTARY NorthAmOil
share. Based on Callon’s closing share price on July 12, this represents a 25% premium.
“ e deal highlights the importance of scale needed to meet investor demands,” SunTrust Robinson Humphrey analyst Neal Dingmann wrote in a note. “We believe the t makes sense given the size and maturity of both companies.”
However, the market reacted relatively neg- atively to the transaction. Callon’s shares fell by 15.6% to $5.40 on the news, while Carrizo’s ini- tially rose 11.4% before most of the gains were wiped out, and the shares were trading up 2.3% at $10.74 – below the o er price – on the day the acquisition was announced. Not so long ago, in August 2018, Carrizo had priced a public o er- ing of 9.5mn shares of common stock at $23 per share. Indeed, the company is now trading close to its lowest levels in 10 years, and its sharehold- ers will likely welcome Carrizo being sold at any kind of premium.
Shale’s struggles
Carrizo’s performance illustrates the shale indus- try’s recent struggles. Its total return over the past ve years is negative 84%, compared with an overall industry return of negative 64%. Mean- while, Callon’s total return over the same period is negative 41%. e fact that the S&P 500 has returned a positive 69% over the same ve years also shows how di cult things have become for shale drillers.
If the combined company can achieve the synergies it anticipates, cutting costs and improving e ciency as it steps up its drilling campaign, then the transaction can be deemed a success. But synergies are di cult to measure
a er a merger has taken place, and a number of factors could still counteract the anticipated ben- e ts of the transaction. Foremost among these is the oil price, which remains volatile. WTI prices neared $60 per barrel in mid-July, before dipping somewhat to below $57 per barrel on July 18. While shale drillers, particularly in the Permian, have learned to boost their productivity even at a reduced oil price, the consensus that prices will continue to be lower for longer does not bode well for the industry. Sweet spots are increasingly being drilled out, forcing drillers to move into less productive areas. Maintaining production, let alone growing it, will therefore require an uptick in drilling. But this is being counteracted by the shareholder pressure to focus on returns over more drilling. However, at a lower price and in less productive areas, generating good returns will become all the more di cult.
For some of the struggling companies, com- bining in the way that Callon and Carrizo are doing could be an attractive option. But the appetite for acquisitions also remains muted, though a few larger players may still be seeking to scoop up companies on the cheap. Indeed, the combined company could even become an acquisition target itself if it performs well.
Callon said the combined entity would have a projected total of 9-10 drilling rigs and 3-4 com- pletion crews working during the course of 2020, predominantly in the Permian. It believes that the new company will have “the critical mass to realise supply chain savings and sustain simul- taneous operations initiatives”. It will not be too long before it becomes clearer whether the com- bined entity can succeed in achieving this.™
The combined company could even become an acquisition target itself if it performs well.
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w w w . N E W S B A S E . c o m Week 28 18•July•2019