Fitch Ratings has placed
The RWP placement follows the announcement that
The combined company will produce over 500 thousand barrels of oil equivalent per day (Mboepd), will hold approximately 425 thousand net acres in the Permian basin, excluding
Fitch expects to resolve the RWP at close which is currently expected in 2Q24. Although unlikely, the closing of the transaction and resolution of the RWP could take longer than six months.
Key Rating Drivers
Acquisition Enhances Footprint: The announced
The acquisition also adds 102 Mboepd, boosting APA's pro forma size by around one-quarter to over 500 Mboepd and increasing its portfolio tilt toward the
Modestly Leveraging: The Callon acquisition is moderately leveraging (44% debt funding), and will add
Sub-2.0x Standalone Leverage: Fitch forecasts sub-2.0x standalone mid-cycle EBITDA leverage for Callon, which utilizes Fitch's
Derivation Summary
Callon's 3Q23 average daily production of 102 Mboepd (57% oil) is higher than Permian peers
The company's Fitch-calculated unhedged cash netback of
Key Assumptions
Base Case WTI oil price of
APA Acquisition closes as contemplated in 2Q24;
Average standalone annual production growth in the low single-digit percentage points;
Standalone growth-linked capital expenditures throughout the rating case.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch expects to resolve the RWP upon completion of the contemplated transaction under proposed terms and favorable treatment of Callon's debt.
Factors that could lead to a positive rating action for Callon independent of the transaction include:
FCF generation that leads to gross debt reduction approaching
Organic and/or M&A growth resulting in total production approaching 125 Mboepd;
Maintenance of economic drilling inventory, proved reserve life and unit costs;
Mid-cycle EBITDA leverage sustained below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Inability to generate FCF leading to an erosion of the liquidity profile and/or RBL utilization sustained at or above 50%;
Inability to manage economic drilling inventory and/or expectations for weakened unit economics;
Mid-cycle EBITDA Leverage sustained above 2.5x.
Liquidity and Debt Structure
Adequate Standalone Liquidity: As of
Fitch believes Callon's outstanding notes will be refinanced with new APA term loans and the credit facility will be fully repaid and terminated on or shortly after the transaction close.
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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