SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
SCHEDULE 13D (RULE 13D - 101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO 13d-2(a)
(Amendment No.)*
Callon Petroleum Company (Name of Issuer)
Ordinary stock, par value $0.01 (Title of Class of Securities)
13123X102 (CUSIP Number)
Christopher P. Davis, Esq. Kleinberg, Kaplan, Wolff & Cohen, P.C. 551 Fifth Avenue, New York, New York 10176 Tel. (212) 986-6000 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)
September 9, 2019 (Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box [ ].
Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7 for other parties to whom copies are to be sent.
*The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 1. NAMES OF REPORTING PERSONS I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Paulson & Co. Inc.
2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP
(a) [ ] (b) [ ]
3. SEC USE ONLY
4. SOURCE OF FUNDS
OO
5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6. CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
NUMBER OF SHARES BENEFICIALLY OWNED BY EACH REPORTING PERSON WITH:
7. SOLE VOTING POWER
21,593,523 (1)
8. SHARED VOTING POWER
0
9. SOLE DISPOSITIVE POWER
21,593,523 (1)
10. SHARED DISPOSITIVE POWER
0
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
21,593,523 (1)
12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ]
13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.5%
14. TYPE OF REPORTING PERSON
IA,
(1) See Note 1 to Item 5 below. Item 1. Security and Issuer.
This statement relates to the ordinary shares, par value $0.01 (the “Common Stock”), of Callon Petroleum Company (the “Issuer”). The Issuer’s principal executive office is located at One Briarlake Plaza, 2000 W. Sam Houston Parkway, S., Suite 2000, Houston, Texas 77042.
Item 2. Identity and Background.
(a) Paulson & Co. Inc. (the “Reporting Person” or “Paulson”)
(b) The principal business address of the Reporting Person is 1133 Avenue of the Americas, New York, New York 10036.
(c) Paulson, an investment advisor that is registered under the Investment Advisers Act of 1940, furnishes investment advice to and manages onshore and offshore pooled investment vehicles and to separately managed accounts (collectively, such pooled investment vehicles and accounts shall be referred to as the “Funds”). John Paulson is the President and sole Director of Paulson & Co. Inc.
Information regarding the directors, executive officers and/or control persons of the Reporting Person (collectively, the “Instruction C Persons”) is set forth in Schedule A attached hereto.
(d) No Reporting Person or any Instruction C Person has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).
(e) No Reporting Person or any Instruction C Person has, during the last five years, been party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.
(f) Paulson is a Delaware corporation. Each of the Instruction C Persons are citizens of the United States of America.
Item 3. Source and Amount of Funds or Other Consideration.
The consideration for the purchase of the securities reported herein by the Reporting Person was derived from the available capital of the Funds managed by Paulson.
Item 4. Purpose of Transaction.
The Reporting Person acquired the securities disclosed herein based on the Reporting Person’s belief that the securities, when acquired, were undervalued and represented an attractive investment opportunity.
On September 9, 2019, Paulson sent a letter to the Board of Directors of the Issuer expressing its views on the Issuer’s proposed merger with Carrizo Oil & Gas, Inc. (the “Letter”). The foregoing is qualified in its entirety by reference to the Letter, the body of which is incorporated herein and attached hereto as Exhibit 99.1.
Depending upon overall market conditions, other investment opportunities available to the Reporting Person, and the availability of securities of the Issuer at prices that would make the purchase or sale of such securities desirable, the Reporting Person may endeavor from time to time (i) to increase or decrease its position in the Issuer through, among other things, the purchase or sale of securities of the Issuer on the open market or in private transactions or otherwise, on such terms and at such times as the Reporting Person may deem advisable and/or (ii) to enter into transactions that increase or hedge its economic exposure to the securities of the Issuer without affecting its beneficial ownership. The Reporting Person does not have any present plan or proposal which would relate to or result in any of the matters set forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D except as set forth herein or such as would occur upon completion of any of the actions discussed herein. The Reporting Person intends to review its investment in the Issuer on a periodic basis and may from time to time engage in discussions with management and the Board and other shareholders and potential shareholders of the Issuer concerning, among other things, the business, operations and future plans of the Issuer. Depending on various factors including, without limitation, the Issuer’s financial position and investment strategy, the price levels of the securities of the Issuer, conditions in the securities markets and general economic and industry conditions, the Reporting Person may in the future take such actions with respect to their respective investments in the Issuer as it deems appropriate including, without limitation, making proposals concerning changes to the capitalization, ownership structure, Board composition or operations of the Issuer, purchasing additional securities of the Issuer, selling some or all of its securities of the Issuer, engaging in short selling of or any hedging or similar transaction with respect to the securities of the Issuer, or changing its intention with respect to any and all matters referred to in this Item 4.
Item 5. Interest in Securities of the Issuer.
(a) The aggregate percentage of Common Stock reported owned by the Reporting Person is based upon 228,304,366 shares of Common Stock outstanding as of July 31, 2019, as disclosed in the Issuer’s Quarterly Report on Form 10-Q, filed with the Securities Exchange Commission on August 7, 2019. As of the date hereof, the Reporting Person may be deemed to have beneficially owned approximately 9.5% of the outstanding Common Stock.
(b) Number of shares of Common Stock as to which Paulson has:
(i) Sole power to vote or direct the vote: 21,593,523 (see Note 1).
(ii) Shared power to vote or direct the vote: 0
(iii) Sole power to dispose or direct the disposition: 21,593,523 (see Note 1).
(iv) Shared power to dispose or direct the disposition: 0
(c) Except as set forth on Schedule 1 hereto, the Reporting Person has not entered into any transactions in the Ordinary Shares during the past sixty days
(d) See Note 1.
(e) Not applicable.
Note 1: Paulson, an investment advisor that is registered under the Investment Advisers Act of 1940, furnishes investment advice to and manages the Funds. In its role as investment advisor, or manager, as the case may be, Paulson possesses voting and investment power over the securities of the Issuer described in this Schedule 13D that are owned by the Funds. The pecuniary interest of all securities reported in this Schedule is owned by the Funds. Except for the purpose of determining beneficial ownership under Section 13(d) of the Securities Exchange Act of 1934, as amended, Paulson disclaims beneficial ownership of all securities reported in this Schedule 13D.
For reporting purposes, the aggregate amount of Common Stock deemed to be beneficially owned by the Reporting Person is calculated based on an aggregate of 21,593,523 shares of Common Stock held by the Reporting Person as of the date hereof.
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.
None.
Item 7. Material to be Filed as Exhibits.
Ex. 99.1 Letter to Board of Directors, dated as of September 9, 2019, from Paulson & Co. Inc. SIGNATURES
After reasonable inquiry and to the best of its knowledge and belief, each of the undersigned certifies that the information with respect to it set forth in this statement is true, complete, and correct.
Dated: September 9, 2019
PAULSON & CO. INC.
By: /s/ Michael D. Waldorf Name: Michael D. Waldorf Title: Authorized Signatory SCHEDULE A
INFORMATION REGARDING THE INSTRUCTION C PERSONS The following table sets forth the name, title, principal occupation, business address and place of employment of each of the executive officers and directors of Paulson & Co. Inc.
Name Title and Principal Occupation Business Address and Place of Employment John Paulson President, Director, Portfolio Manager 1133 Avenue of the Americas New York, NY 10036
Chris Bodak Chief Financial Officer 1133 Avenue of the Americas New York, NY 10036
Stuart Merzer General Counsel and Chief Compliance 1133 Avenue of the Americas Officer New York, NY 10036
Andrew Hoine Director of Research 1133 Avenue of the Americas New York, NY 10036
Linda Forish Chief Operating Officer 1133 Avenue of the Americas New York, NY 10036 SCHEDULE 1 Transaction in Securities of the Issuer During the Past 60 Days
Date Security Amount of Shs. Bought/(Sold) Approx. price ($) per Share
7/15/2019 Common Stock 1,025,000 $5.473 7/15/2019 Common Stock 1,025,000 $5.43 7/15/2019 Common Stock 769,004 $5.4985 7/15/2019 Common Stock 1,435,000 $5.4516 7/16/2019 Common Stock 2,050,000 $5.6951 7/16/2019 Common Stock 410,000 $5.6 7/16/2019 Common Stock 135,860 $5.6304 7/16/2019 Common Stock 307,500 $5.71 7/16/2019 Common Stock 4,407,500 $5.7048 7/16/2019 Common Stock 615,000 $5.7285 7/17/2019 Common Stock 120,316 $5.2806 7/17/2019 Common Stock 205,000 $5.23 7/17/2019 Common Stock 205,000 $5.27 7/17/2019 Common Stock 512,500 $5.2585 7/17/2019 Common Stock 283,878 $5.2566 7/18/2019 Common Stock 410,000 $4.8634 7/18/2019 Common Stock 102,500 $4.8 7/18/2019 Common Stock 372,311 $4.8215 7/18/2019 Common Stock 410,000 $5.0439 7/18/2019 Common Stock 410,000 $4.9366 7/22/2019 Common Stock 615,600 $5.1089 7/22/2019 Common Stock 1,603,211 $5.0827 7/23/2019 Common Stock 205,000 $5.2537 7/24/2019 Common Stock 717,500 $5.4537 7/24/2019 Common Stock 250,598 $5.3239 7/25/2019 Common Stock 53,530 $4.9881 7/25/2019 Common Stock 517,830 $5.0718 7/26/2019 Common Stock 190,643 $4.8909 7/26/2019 Common Stock 615,000 $4.94 7/26/2019 Common Stock 307,542 $4.929 7/29/2019 Common Stock 307,500 $4.6878 7/29/2019 Common Stock 73,100 $4.7079 7/30/2019 Common Stock 410,000 $5.039 8/14/2019 Common Stock 307,500 $4.2 8/14/2019 Common Stock 207,600 $4.117 September 9, 2019
Board of Directors Callon Petroleum Company 2000 W. Sam Houston Parkway South Suite 2000 Houston, TX 77042
Dear Members of the Board,
As managers of funds owning 21,593,523 shares of Callon Petroleum, representing approximately 9.5% of the outstanding shares, we write to inform you of our intention to vote our shares against the value-destructive acquisition of Carizzo Oil & Gas. Callon stock’s astounding 36% decline since the transaction was announced demonstrates shareholder dissatisfaction with the deal and its terms.
Investors purchased Callon shares on the basis of the Company’s commitment to be a pure-play, high-quality Permian producer. Because of this focus the Company’s shares have historically traded at a meaningful premium to those of its multi-basin peers. The acquisition of Carrizo’s inferior Eagle Ford assets at an unwarranted 25% premium would eliminate this pure-play status, while effectively transferring $240 million in value from Callon’s shareholders to Carrizo’s.
We believe Callon shareholders would be better off if Callon’s board and management pursued a sale of the Company. Based on multiples garnered by similar pure-play Permian Basin assets, a sale could produce a 64% increase in Callon’s value relative to the current stock price. We believe that there would be many acquirers interested in Callon. Problematically, adding Eagle Ford to Callon’s pure Permian portfolio would permanently discourage potential acquirers of Callon.
By pursuing the Carrizo transaction, we can only conclude that the interests of the board and management, who collectively only hold 0.5% of Callon’s outstanding shares, have diverged from those of shareholders. The reasons for our decision to vote against the Carrizo merger are summarized below:
1) Callon stock price is down 36% since acquisition was announced.
The 36% decline in Callon’s share price since the acquisition announcement, which is significantly more severe than the decline in the sector, underscores investors’ deep skepticism of this transaction. Although management points to synergies from a lower cost structure and larger scale, the combined effect of poor quality assets, massive share issuance, and a lower multiple far outweighs the purported benefits.
2) Callon is offering an unwarranted 25% premium to Carrizo.
Even though the majority of Carrizo’s assets are in the less attractive Eagle Ford, the agreement provides for Callon to pay a 25% premium to Carrizo’s shareholders, translating to $240m of value transfer from Callon shareholders to Carrizo shareholders. According to the proxy, no other potential buyer of Carrizo was willing to pay such a premium.
3) Callon shareholders would be massively diluted.
Alarmingly, Callon’s intention to issue an additional 83% of its current shares outstanding to acquire Carrizo would massively dilute its current shareholders.
4) Callon would lose its standing as a premium pure-play company, causing value erosion.
In Callon’s 2018 Annual Report, Callon states that the Company “is an independent oil and natural gas company focused on the acquisition, exploration and development of high-quality assets in the heart of the Permian Basin” (emphasis added). Since 2016, Callon has raised $2.7 billion of external capital to position itself as a leading pure-play Permian producer. It has acquired four highly productive and prospective asset packages in the Permian for $1.8 billion and spent the remaining capital to drill out these assets. The proposed acquisition of Carrizo, a primarily Eagle Ford producer, is an abrupt departure from the strategy that Callon has articulated. Permian pure-play companies trade at meaningfully higher valuations than multi-basin peers. On 2019E EBITDA, companies with exposure solely to the Eagle Ford trade around 3.8x while companies with Permian-only exposure trade at 5.7x. By adding Carrizo’s primarily Eagle Ford assets, Callon would almost certainly trade at a lower multiple.
5) Callon could be worth 64% more in a takeover.
We believe that Callon would be better off selling itself rather than acquiring Carrizo. If Callon was valued at the Permian average, Callon stock would be worth $6.69/share, or 64% more than the current stock price. We believe there would be many interested potential acquirers of Callon. Due to the sharp disparity between Callon’s potential takeover value and its current stock price, we suggest that Callon’s board and management pursue a sale of the company, rather than the dilutive transaction currently proposed. 6) Permian basin pure-plays remain attractive acquisition targets. Recent M&A activity in the oil sector has focused on the Permian basin. Both Occidental Petroleum’s and Chevron’s 2019 bids for Anadarko were largely driven by Anadarko’s Permian Basin assets. Other recent acquisitions of Permian assets include Occidental and Ecopetrol’s JV formation in the Midland Basin, Cimarex’s acquisition of Resolute, Diamondback’s acquisition of Energen, Diamondback’s acquisition of Ajax, Concho’s acquisition of RSP Permian, amongst many others. Callon would represent an attractive target for larger and peer companies either looking to gain scale in existing Permian operations or seeking to establish a presence in the basin.
Given Callon’s presence in both the Midland and Delaware basins of the Permian, we’ve identified numerous Permian producers with contiguous acreage to Callon that could be potential acquirers or merger partners. Some are listed below:
Callon Potential Acquirers
Market Cap Exxon Mobil $298 B Chevron $224 B Royal Dutch Shell $222 B ConocoPhillips $59 B Occidental $40 B Pioneer $21 B Diamondback $16 B Concho $14 B Devon $9 B Encana $6 B Parsley $5 B Jagged Peak $2 B
7) Buying Carrizo will discourage future suitors for Callon.
Callon’s attractiveness to potential buyers lies in the quality of its Permian assets. The addition of Carrizo’s gassier Permian assets and undesirable Eagle Ford assets would significantly reduce the interest of potential acquirers and the multiples they would be willing to pay. In pursuing the acquisition of Carrizo, the Company’s board and management are effectively creating a poison pill for most potential acquirers. Recent history seems to bear this out: we believe QEP’s inclusion of its Bakken assets in its Permian portfolio was the reason why it was unable to attract a buyer at an acceptable premium.
8) Pursuing this transaction suggests that the interests of Callon’s management and board have diverged from those of shareholders.
The top six executives and entire board collectively own barely 1.1 million shares, representing approximately 0.5% of the company. They have not been exposed in a meaningful way to the value loss that Callon shareholders have experienced since the transaction was announced. We can only surmise from this low level of ownership that shareholder interests have not been carefully considered. 9) Smart M&A is rewarded while poorly conceived transactions are punished. Management has suggested that the sharp decline in Callon’s stock performance post- announcement may not be reflective of the deal’s longer term potential. We disagree. The decline in Callon’s stock price is easily explained by the value-destructive nature of the proposed transaction. Investors reward smart M&A. The stock price of PDC Energy rose 17% on the day it announced its in-basin, no premium merger with SRC Energy. By contrast, Callon’s stock price fell 16% on the day of its announcement of the out-of-basin, 25% premium Carrizo merger and has only further declined since then.
10) Sell side analysts oppose the transaction.
Here are a few comments that bear this out:
-BARCLAYS (7/22/19): -“…[M]any see the deal as highly dilutive to CPE’s inventory quality and depth”
-CREDIT SUISSE (7/15/19): -“Struggling to rationalize CRZO merger on valuation and asset quality”
-“Expensive Price for Free Cash Flow”
-“Surprise acquisition creates more question marks”
-SIMMONS (7/16/19): -“…[W]e expect investor pushback as many viewed CPE as a relatively simple Permian story with optionality associated with in-basin consolidation. The innate complexity associated [with] business combinations, diminishment of the M&A put, and long lead time to value realization could result in an increased risk premium on the equity for some time.” Conclusion Based on the above factors, Paulson intends to vote its 21.6 million shares against this transaction. Callon shareholders have nothing to lose by voting down this deal. In fact, Callon’s stock would likely rise if the deal was not completed, benefiting shareholders. Furthermore, Callon would only be obligated to pay Carrizo’s expenses up to a maximum of $7.5 million. If the board and management were truly focused on their fiduciary duty to shareholders, they would be exploring a sale of Callon, rather than pursuing this ill-advised transaction.
Sincerely,
Marcelo Kim Jim Hoffman Partner Partner Paulson & Co. Inc. Paulson & Co. Inc.