CPE - Callon Petroleum Shareholders: Attractive Choices

2024-01-23 19:24:45 ET

Summary

• APA Corporation has agreed to acquire Callon Petroleum in an all-stock deal valued at $4.5 billion.
• Callon shareholders have the option to accept the deal, reject it, or merge with other neighboring companies and sell to a larger player.
• The oil market outlook should improve in 2024 as EV car sales growth continues to soften. A Trump Presidency is also likely to help oil.
• Longer-term, peak oil demand will eventually lead to lower oil prices.
• I recommend Callon with a Buy. In the next year or two, the stock has attractive catalysts for shareholders.

Introduction

On 4 January 2024, APA Corporation ( APA ) announced it agreed to buy Callon Petroleum ( CPE ) in an all-stock deal valued at $4.5 billion inclusive of Callon’s debt. Callon shareholders are to receive 1.0425 APA shares for each Callon share. The transaction is expected to close in Q2 2024.

The deal was initially viewed positively by Callon shareholders with the shares advancing 3% following the announcement but negatively by APA shareholders with its shares down 7%. Since then, markets have contracted, oil prices have softened, and oil shares are trading lower.

Callon shareholders can accept the APA deal or, subject to penalties, may ultimately walk away. Should Callon terminate the acquisition agreement, the company must pay $85 million to APA plus costs of up to $24 million maximum, potential total $109 million. By contrast, if APA terminates the transaction, they must pay $170 million to Callon, plus expenses up to a maximum of $48 million. APA’s acquisition offer expires October 3, 2024, but can be extended with the agreement of both parties.

Callon shareholders have three options: (1) Reject the APA deal and sit tight without taking any other action; (2) Accept the APA offer, or; (3) Merge Callon with other small contiguous neighbors and then sell the enlarged entity to a nearby bigger E&P company....

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