Ranger operating area sold

By Richard Rostad, analyst, Oil & Gas 360

Callon Petroleum brought activity to a slow U.S. M&A market yesterday, shuffling its Permian portfolio in several deals.

Callon has agreed to divest its non-core Midland Basin properties for $260 million in cash, plus up to $60 million in contingent payments. The company is selling its Ranger operating area, assets that include 80 producing wells over 9,850 net acres. Callon estimates the area has 70 delineated undrilled locations that can produce a 25% IRR at strip pricing. The assets produced 4 MBOEPD in February. This production implies there are few new wells in the area, as the 80 producing wells are yielding an average of 50 BOEPD per well.

The Metrics of Callon’s $260-Million Portfolio Shuffle and Trade

Based on a purchase price of $260 million, Callon received $26,400 per acre for the assets, though this sum falls to $12,200 per acre if the price is adjusted for existing production. Callon’s estimate of 70 undrilled locations means the company received $3.7 million per location, or $1.7 million after adjusting for production.

When compared to previous Permian deals, this price per acre is rather low, especially when compared to the prices seen during the late 2016-early 2017 buying frenzy. There have been 21 other Permian transactions in 2018 and 2019 with sufficient data to determine an adjusted acreage price. Out of these, 14 deals saw higher acreage valuations than Callon’s sale, while seven were made at a lower valuation.

Price per location is a seldom-seen metric, more difficult to compare to past transactions. However, an adjusted $1.7 million per location is a steep cost. The buyer, which Callon did not identify, likely plans to drill more than 70 wells on the acreage, thus lessening each individual well’s cost of acquisition.

Callon’s capital program is unchanged by the sale, as no activity was planned in the area for 2019. The funds will be used to reduce debt and possibly retire the company’s preferred stock. Additional funds may be used to fund Callon’s capital program, as the company is expected to outspend cash flows this year.

Trades yield 167 acres, $14 million

Callon also completed an acreage swap during Q1, consolidating its acreage. Callon received two new long-lateral DSUs in exchange for low working interest properties in Midland County. Callon received a net 167 acres and $14 million in the trade.

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