APA: Callon Transaction Is Low-Quality but Very Cheap; Boosting Fair Value Estimate 9%

APA has agreed to acquire Callon Petroleum in an all-stock transaction worth $4.5 billion. Callon is a pure-play Permian producer with about 145,000 net acres and third-quarter 2023 production of about 102,000 barrels of oil equivalent per day (57% oil). On a pro forma basis, APA’s Permian production will increase about 48% to 311,000 boe/d. After incorporating Callon into our model, we’ve increased our APA fair value estimate to $61 per share from $56. We maintain our no-moat rating. Broadly, we think the Callon assets are very low-quality, but APA is acquiring the firm for an extremely cheap price, more than offsetting the value lost by offering its undervalued shares. While the deal is positive for our fair value estimate, we think the overall quality of APA’s portfolio has decreased.