425: APA Corporation Addresses Litigation and Provides Supplemental Disclosures Regarding Callon Petroleum Merger

APA Corporation provides supplemental disclosures to its joint proxy statement/prospectus related to the proposed merger with Callon Petroleum, addressing stockholder demand letters and lawsuits alleging disclosure deficiencies.

Summary

• APA Corporation has filed a Form 8-K report addressing litigation related to its proposed merger with Callon Petroleum Company.
• APA and Callon have received demand letters from purported stockholders alleging disclosure deficiencies in the joint proxy statement/prospectus.
• Five complaints, known as the Stockholder Actions, have been filed against Callon and its board, with one also naming APA as a defendant.
• APA believes the allegations in the demand letters and Stockholder Actions are without merit but is providing supplemental disclosures to avoid delaying the merger and minimize expenses.
• The supplemental disclosures relate to details of the merger agreement, including discussions with another potential acquirer (Company D), the role of RBCCM as a financial advisor, and financial analyses by Citi and Morgan Stanley.
• The disclosures also cover synergy estimates, discount rates used in financial analyses, and equity research analyst price targets.
• The Callon Board executed a unanimous written consent on March 15, 2024, ratifying and affirming the matters approved on January 3, 2024, regarding the merger.
• Since the announcement of the transaction on January 4, 2024, no other potential counterparties have contacted Callon or its advisors to express interest in acquiring Callon.

Sentiment

Score: 6

Explanation: The sentiment is neutral. While the document addresses litigation, it also provides supplemental information to ensure transparency and facilitate the merger, suggesting a proactive approach to managing potential risks.

Positives

• APA is proactively addressing potential legal challenges to the merger.
• The supplemental disclosures provide additional transparency regarding the merger process and financial analyses.
• The Callon Board executed a unanimous written consent on March 15, 2024, ratifying and affirming the matters approved on January 3, 2024, regarding the merger.
• Since the announcement of the transaction on January 4, 2024, no other potential counterparties have contacted Callon or its advisors to express interest in acquiring Callon.

Negatives

• The existence of demand letters and Stockholder Actions suggests potential shareholder dissatisfaction with the merger terms or disclosures.
• The need for supplemental disclosures, while proactive, may indicate initial deficiencies in the proxy statement/prospectus.
• The involvement of litigation, even if deemed without merit by APA, can create uncertainty and potentially delay the merger.

Risks

• The outcome of the Stockholder Actions is uncertain and could potentially delay or impede the merger.
• The potential for additional, similar demand letters or complaints exists.
• The integration of Callon's operations may not be as successful as anticipated, and the expected synergies may not be fully realized.
• Unforeseen liabilities or unexpected future capital expenditures could negatively impact the combined company's financial performance.
• Changes in industry, market, economic, political, or regulatory conditions could adversely affect the combined company.

Future Outlook

The document contains forward-looking statements regarding the closing of the proposed acquisition of Callon and the expected benefits of the transaction, which are subject to various risks and uncertainties.

Industry Context

The document highlights the ongoing consolidation trend in the oil and gas industry, with APA's acquisition of Callon representing a strategic move to expand its Permian Basin footprint and achieve operational efficiencies.

Comparison to Industry Standards

• The document references precedent transactions and comparable companies in the oil and gas industry to benchmark the financial analyses and synergy estimates related to the merger.
• Enterprise Value / 2024E EBITDA multiples for selected companies are provided, including Devon Energy Corporation (4.5x), Marathon Oil Corporation (4.0x), and Ovintiv Inc. (3.8x).
• Enterprise Value / Forward EBITDA multiples for precedent transactions are also listed, such as Civitas Resources' acquisition of Selected Assets of Vencer Energy, LLC (2.8x) and Permian Resources Corp.'s acquisition of Earthstone Energy, Inc. (3.1x).

Legal Proceedings

• APA and Callon have received demand letters from purported stockholders alleging disclosure deficiencies in the joint proxy statement/prospectus.
• Five complaints, known as the Stockholder Actions, have been filed against Callon and its board, with one also naming APA as a defendant.

Stakeholder Impact

• The merger is expected to benefit APA and Callon stockholders through potential synergies and increased scale.
• Employees of both companies may be affected by potential cost savings and operational efficiencies.
• Customers and suppliers may experience changes as a result of the integration of the two companies.

Next Steps

• APA and Callon stockholders will vote on the merger on March 27, 2024.
• APA will continue to defend against the Stockholder Actions.
• APA and Callon will work to complete the merger, subject to the satisfaction of the remaining closing conditions.

Key Dates