Fund manager Paulson & Co. Inc, a shareholder of Callon Petroleum, is dropping its opposition to a merger between Callon and Carrizo Oil & Gas that could be the start of consolidation among smaller shale players after the massive Occidental-Anadarko deal.
Paulson & Co, which held 9.5 percent of Callon Petroleum earlier in November, said on Monday that it no longer opposes the deal and would vote in favor of the proposed all-stock merger, after the two energy companies revised the terms of the agreement to give a lower premium to Carrizo shareholders.
Paulson will, however, cut its shares in Callon.
The first announcement of the proposed merger was made in July. The terms of the initial deal valued Carrizo at US$1.2 billion.
But Paulson has been opposing the terms of the proposed deal, saying that a standalone Callon would be less risky by focusing just on the Permian.
In an effort to save the deal, Callon and Carrizo amended the terms of the deal last week, cutting the exchange ratio for the all-stock merger, which now implies a much lower premium for Carrizo shareholders—6.7 percent, compared to 25 percent premium in the initial terms of the deal.
Paulson has argued that the initially proposed steep premium was not worth the spend, and Callon would no longer be a pure Permian play producer after picking up Carrizo.
The revised merger terms were satisfactory to Paulson, which said today it no longer opposes the deal, but it cut its shareholding in Callon, although it was unclear by how much.
“While Paulson believes that a pure Permian focused producer would be a more attractive alternative, Paulson respects that different shareholders might have different viewpoints on this matter. As such, although Paulson no longer opposes the transaction, it has reduced its investment position in Callon,” the fund manager said.
The Callon and Carrizo deal was expected to be the litmus test of a possible new wave of mergers and acquisitions (M&A) in the U.S. shale patch after Occidental and Anadarko completed in August one of the largest oil deals of the past few years.
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Scott Sheffield, president and CEO at Pioneer Natural Resources, said on the Q3 conference call “I’ve been on public record talking about the Permian is going to slow down significantly over the next several years.”
“A lot of it has to do with free cash flow to start with, the free cash flow model that public independents are adopting, the issues that private equity firms are going through in regard to consolidation-reducing activity,” Sheffield said.
OPEC and the IEA continue to expect U.S. production to grow by more than 1 million bpd in 2020, with OPEC seeing American production growth at 1.5 million bpd, despite slightly lowering forecasts in its latest report.
But Goldman Sachs has cut its growth and spending forecasts for the U.S. oil sector. The investment bank now expects U.S. oil production to rise by 600,000 bpd in 2020 compared to 2019, implying an 8-percent capex decline.
According to Wood Mackenzie, growth is significantly slowing and “the tide is ebbing.”
Next year, growth will be just 500,000 bpd and the exit rate, that is monthly year-on-year growth rate, could fall close to zero, according to Robert Clarke and R.T. Dukes of WoodMac’s Lower 48 Upstream Research team.
The slowdown mostly reflects the fact that Independents, which produce 80 percent of Permian volumes, are slashing spending.
“They’re being forced by investors to generate cash flow and pay dividends,” WoodMac’s experts said last month.
Earlier this month, IHS Markit issued an even gloomier forecast for U.S. production growth, expecting U.S. production growth to be 440,000 bpd in 2020, “before essentially flattening out in 2021.”
“Going from nearly 2 million barrels per day annual growth in 2018, an all-time global record, to essentially no growth by 2021 makes it pretty clear that this is a new era of moderation for shale producers,” Raoul LeBlanc, vice president for North American uncoventionals at IHS Markit, said.
Persistently low crude oil prices and investor demands for returns amid closed capital markets will shape the U.S. oil production trends in the coming years, according to IHS Markit’s report.
With capital discipline required by investors and WTI Crude prices expected to average around US$50 in 2020 and 2021, IHS Markit expects capital spending for onshore drilling and completions to fall by 10 percent to US$102 billion this year, by further 12 percent to US$90 billion next year, and by another 8 percent to US$83 billion in 2021.
Reduced capital availability in the U.S. shale patch leads to reduced spending on drilling, which in turn results in lower growth rates.
Pioneer’s Scott Sheffield put it bluntly on the conference call: “I don’t think OPEC has to worry that much more about U.S. shale growth long-term.”
