The merger wave in the oil patch is continuing in 2024. The latest deal will see APA Corporation (APA 1.15%) acquire fellow oil company Callon Petroleum (CPE). That acquisition will enhance APA's scale in the resource-rich Permian Basin.
The deal follows the blueprint of leaders ExxonMobil (XOM -0.01%) and Occidental Petroleum (OXY 0.75%), which have made large deals in that same region. Here's a look at the latest oil stock merger and what it means for investors.
Drilling down into the deal
APA Corporation is buying Callon Petroleum in an all-stock deal valued at $4.5 billion, including the assumption of debt. The merger will create a much larger oil company with a total enterprise value of more than $21 billion and combined production of over 500,000 barrels of oil equivalent per day (BOE/D).
The main draw of Callon is its nearly 120,000-acre position in the oil-rich Delaware Basin side of the Permian. That complements APA's Midland-focused position, giving the company greater scale across that entire region:
Image source: APA Corporation.
As the slide shows, the deal will more than double APA's acreage and production from the Delaware Basin, while also adding some incremental acreage and output in the Midland. That increased scale will enable APA to capture cost savings and other synergies, which it estimates is over $150 million annually.
Those cost savings are helping drive the company's view that the acquisition will be accretive to its financial metrics, including free cash flow per share. While the transaction will cause a slight rise in the company's leverage ratio (from 1x to 1.1x), it will maintain a strong investment-grade balance sheet following the deal.
The company plans to maintain its capital return framework of returning at least 60% of its free cash flow to shareholders through its strong base dividend (currently yielding 2.7%) and share repurchases. Given the accretive nature of the transaction, APA should be able to repurchase more shares in the future while strengthening its balance sheet.
Following the leaders
APA Corp's acquisition of Callon Petroleum follows the patterns of recent deals by ExxonMobil and Occidental Petroleum. Exxon is acquiring Pioneer Natural Resources in an all-stock transaction valued at $64.5 billion (including the assumption of debt).
That acquisition will significantly enhance Exxon's position in the Midland Basin, where Pioneer is a leading producer and will more than double Exxon's Permian acreage and its regional production. That increased scale should boost Exxon's cash flow and returns.
Meanwhile, Occidental Petroleum recently agreed to acquire CrownRock for $12 billion in stock, cash, and the assumption of debt. That deal will enhance the oil company's position in the Midland Basin side of the Permian.
It drives its view that the acquisition will bolster its free cash flow. That gave Occidental the confidence to boost its dividend by 22%.
All three deals share a common theme. The acquiring company is enhancing its position in the Permian to grow its scale so it can capture cost savings and produce more free cash flow. That will position them to return more money to shareholders through higher dividends and repurchase rates.
With those larger oil producers getting bigger and better, it will likely spur more merger and acquisition (M&A) activity in the oil patch. ConocoPhillips, Devon Energy, and other rivals were interested in buying CrownRock before Occidental Petroleum won the bidding. With CrownRock and now Callon Petroleum finding suitors, these interested bidders need to turn their attention elsewhere for a deal.
There are lots of possibilities, including Endeavor Energy Partners, which reportedly put itself up for sale. Future deals would likely follow a similar blueprint as recent ones, with the acquirer increasing its scale to reduce costs so it can produce more free cash to return to shareholders.
The M&A wave should continue
APA Corp is the latest oil company to participate in the sector's current consolidation wave. Its deal follows those of the industry leaders by bolstering its position in the Permian, enabling it to capture cost savings and boost its free cash flow to return more money to investors. That will put pressure on rivals that haven't yet found a deal, which could fuel more mergers in the coming months.
