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Permian Shrink Continues with $4.5B APA-Callon Deal

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APA Corp. (APA) will acquire Callon Petroleum (CPE) for $4.5B. The deal is likely to result in rig cuts, continuing the consolidation trend underway in the Permian Basin.

The companies announced the all-stock deal on January 4. East Daley Analytics tracks APA and CPE rigs by G&P system in Energy Data Studio, as well as the producers’ historical processing volumes by G&P system. Callon holds ~145,000 acres and produces ~100 Mb/d of crude oil exclusively in the Permian. The producer currently runs 3 rigs in the Delaware and 1 rig in the Midland.

During an investor call, CEO John Christmann said APA will evaluate rig counts for the combined assets after closing. No near-term rigs reductions are planned for the CPE assets, APA executives guided.Picture2-Jan-23-2024-11-14-31-7580-PM

APA and CPE currently run 9 rigs combined in the Permian: 6 rigs in the Delaware and 3 in the Midland, according to allocations in Energy Data Studio.

Kinetik (KNTK) and the company’s Raptor system has the most exposure to CPE and APA in the Delaware. KNTK gathers ~70% of Callon’s volumes in the Delaware, with TRGP, Salt Creek, and Brazos Midstream servicing the rest of the producer’s volumes. In the Midland, West Texas Gas’ North Texas and Targa Resource’s (TRGP) West Texas systems are the primary gathers for CPE and APA.

The APA-CPE deal continues a consolidation trend that has caused Permian drilling to slow. East Daley’s tracking of operators involved in recent Permian M&A finds a 37% decline in combined rigs through November 2023 (see figure). Acquiring companies, mostly public operators, are primarily focused on building scale and backfilling inventory, and do not need the rigs of the acquired operators.

CPE operated 5 rigs on average in the Delaware in 2023, including 2 rigs on KNTK - Raptor. CPE’s rig count on Raptor reached a high of 4 rigs in the first half of the year. If the company reduces activity on the CPE assets by 1 rig in 2024, it would lower KNTK’s total EBITDA by $82MM (2%) through 2027, according to the KNTK Financial Blueprint. – James Taylor Tickers: APA, CPE, KNTK, TRGP

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