(Reuters) - Callon Petroleum Co said on Monday it would buy Carrizo Oil & Gas Inc for $1.2 billion (£955.6 million) in stock, the latest in a string of acquisitions as energy companies scale up to boost cash flow and quell investor criticism over lack of returns.
Oil and gas companies have been under pressure to cut costs and increase buybacks and dividends to shareholders, who are no longer willing to back drilling programs in the absence of strong cash flow.
Carrizo's fourth-largest shareholder, Lion Point Capital, in May urged the company to look at a potential merger or to sell its units.
The deal, valued at $3.2 billion including $1.71 billion in Carrizo's debt, will bolster Callon's presence in the Permian shale basin, the most prolific oil patch in the United States, and the Eagle Ford shale field.
"The deal highlights the importance of scale needed to meet investor demands," SunTrust Robinson Humphrey analyst Neal Dingmann wrote in a note to clients. "We believe the fit makes sense given the size and maturity of both companies."
The combined company, which will have about 200,000 net acres in the two basins, produced more than 100,000 barrels of oil equivalent per day in the first quarter, with oil constituting nearly three quarters of the total output.
Low natural gas prices, down nearly 18% this year, have also forced companies to invest more in oil-rich assets.
The deal is also expected to generate positive free cash flow of more than $100 million at current pricing and save $100 million to $125 million in costs annually.
Carrizo shareholders will receive 2.05 Callon shares for each share held, or about $13.12 per Carrizo share based on Callon's closing share price on July 12, representing a 25% premium.
Shares of Callon Petroleum fell 15.6% to $5.40, while those of Carrizo initially rose as much as 11.4% but pared most of those gains and were trading up 2.3% at $10.74 - well below the offer price.
Callon shareholders will own about 54% of the combined entity, with Carrizo shareholders owning the rest.
The combined company, which will remain headquartered in Houston, will have an 11-member board with eight from Callon's board and three from Carrizo's.
The deal, expected to close in the fourth quarter, will immediately add to earnings and net asset value per share, the companies said.
JPMorgan Chase Bank and BofA Merrill Lynch will provide financing to Callon for the deal. J.P. Morgan was the financial adviser to Callon, while RBC Capital Markets and Lazard advised Carrizo.
(Reporting by Debroop Roy in Bengaluru; Editing by Saumyadeb Chakrabarty)
By Debroop Roy