Carrizo management set for large payout in takeover

Callon Petroleum has agreed to buy Carrizo Oil and Gas in a $3.2 billion all-stock deal.

Callon (market cap $1.46 billion) has its head office in west Houston. It has oil and gas properties in the Permian Basin. Carrizo (market cap $971 million) has its head office in downtown Houston and mainly has operations in the Eagle Ford Basin.

Following the close of the transaction, Callon shareholders will own approximately 54% of the combined company, Carrizo shareholders 46%. Post-close, the company will be run by the Callon management team.

Management team payouts

The four members of the Carrizo management team are in line for large payments. According to the recent proxy statement they will get over $21 million as part of any change of control. CEO Chip Johnson will get $7.8 million, COO Brad Fisher and CFO David Pitts $5.2 million each, while General Counsel and VP of Business Development Gerald Morton will get $3.1 million.

The proxy statement also notes that, in February 2019, the Compensation Committee of Carrizo adopted a new Change in Control Severance plan. This changed some of the terms of the plan. While this didn’t significantly affect the payments due to the CEO, it did increase the severance due to the other three executives by about $700,000 each.

Cutting costs to reduce debt burden

Callon expects to generate annual operational synergies of $65 to $80 million and general and administrative savings of $35 to $45 million. The G&A savings amounts to two thirds of Carrizo’s overheads.

Both companies have a lot of debt. Callon has $1.4 billion of debt, and a debt to EBITDA multiple of 2.4x. Carrizo has $1.8 billion of debt, and a similar debt to EBITDA multiple. Neither company is generating positive free cash.

Dismal shareholder returns

Carrizo is selling for $13.12 a share. However, just last August, the company priced a public offering of 9.5 million common stock at $23 per share. In June 2014, the company had a share price of $69 and a market cap of over $3 billion.

According to Bloomberg, over the past five years, Carrizo shareholder returns have been negative 84% (compared to the sector average of negative 64%). Callon’s return has been negative 41%. Meanwhile the S&P 500 has returned a positive 69% in the same time period.

The transaction is expected to close in the fourth quarter. If the deal doesn’t close, termination fees may be payable (Callon to Carrizo $57 million, Carrizo to Callon $47 million).



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