Shares of independent oil and natural gas company Callon Petroleum (NYSE:CPE) — which specializes in exploration, production and development of the upstream component of the energy value chain — popped higher on Thursday. Fellow upstream specialist APA Corp (NASDAQ:APA) provided the catalyst, agreeing to buy out Callon in a deal worth billions. Broadly, CPE stock represents the consolidation trend that has been occurring in the hydrocarbon sector.
According to a Bloomberg report, APA agreed to acquire Callon — which focuses on shale exploration in the Permian Basin (located in West Texas and the adjoining area of southeastern New Mexico) — for $2.6 billion. Further, APA plans to retire Callon’s roughly $1.9 billion in debt. That would give the deal an enterprise value of $4.5 billion, thus explaining the upswing in CPE stock.
Further, Bloomberg notes that the deal comes almost three years after APA, formerly known as Apache, wrote down its Alpine High discovery in the Permian region. It also promised to focus on exploration spending on overseas projects in South America and North Africa. Bloomberg Intelligence believes that the acquisition of Callon’s shale assets may be to shore up the buyer’s near-term cash flow as it drives investment in a compelling offshore discovery.
Per the terms of the deal, the all-stock transaction equates to $38.31 per share for Callon. According to the two companies’ statement, the buyout is expected to close in the second quarter.
CPE Stock Comes Out a Beneficiary of the Consolidation Trend
While the buyout obviously centers on CPE stock and APA Corp, the acquisition reflects an industry-wide growing trend of consolidation. As Bloomberg mentioned, “[t]he takeover comes as investors are pushing oil producers to maintain generous buybacks and dividends even as output growth slows in US shale basins.”
Moreover, big oil companies are seeking ways to profit from untapped and lower-cost oil and gas reserves. As the aforementioned article states, “[w]ith the number of top-tier production sites dwindling, companies are increasingly buying rivals to secure new places to drill.”
Indeed, a Reuters article published late last year reported that the oil and gas industry went on a $250 billion buying spree in 2023. Fundamentally, the elevated share prices of major hydrocarbon enterprises empowered this consolidation. Oil giants Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX) and Occidental Petroleum (NYSE:OXY) made acquisitions worth a total of $135 billion last year.
Importantly, industry experts believe that the trend will continue. Per Reuters, the grand prize in the surge of deal-making centers on the previously mentioned Permian Basin. This is the largest U.S. shale-oil field. And four companies are now positioned to control about 58% of future production there. That may create a ripple effect that could have significant implications for producers and consumers.
Why It Matters
Although experts generally believe that the consolidation trend may be a positive for producers, it’s not a guaranteed outcome. Yes, CPE stock won big, but APA suffered a loss of around 7% in early afternoon trading. Operational challenges along with the impeding of financial flexibility represent possible headwinds.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
