Carrizo ‘creative’ in financing acquisition, minimizing equity, debt

By Devika Patel

Knoxville, Tenn., July 7 – Carrizo Oil & Gas, Inc. will get “creative” in a new acquisition, using funds from a private placement of redeemable preferred stock and a high-yield offering of eight-year 8¼% senior notes to acquire 16,488 net acres in the Delaware Basin from ExL Petroleum Management for $648 million in cash.

The company may also use proceeds from non-core asset sales to fund the acquisition, with management stressing that they wanted to minimize dilution and protect leverage in a “challenging” market.

“Financing this significant acquisition in a challenging market was probably most complicated as it relates to our desire to use a significant amount of equity to fund the transaction,” vice president and chief financial officer David Pitts said on the company’s conference call announcing the acquisition on Friday.

“We didn’t want to issue equity at these prices, but we didn’t think it was prudent to do an acquisition this size without including some level of equity, so we picked a minimum level that we thought was appropriate which was about $225 million.

“Leverage was a significant consideration,” Pitts stated.

“We thought it made sense to finance the rest of this transaction with some level of debt.

“If you look at 2018 and the EBITDA that we expect to be generated by these assets, the leverage ratio of the debt we’re using to help finance this, that EBITDA is a leverage ratio of 2x or less, and in 2019 it’s less than 2x.

“The other thing we’re thinking about in whether or not to finance this with debt is we’re expecting proceeds from asset sales and with those proceeds, which we’re expecting to have by the end of the year, we could use to pay down other debt and so we considered the impact of those deleveraging events as well in determining to issue senior notes,” he said.

Pitts said that the company decided to try something different from normal equity and debt financings and settled on selling some preferreds.

“Trying to minimize dilution and protect leverage is hard to do, so we looked beyond equity and debt to something that would have minimal impact on dilution and not impact leverage.

“So we started looking at preferred stock, which will be funded by GSO at the closing of the transaction.

“The important thing about the preferred stock is that for GAAP purposes it’s going to be treated as equity, which means that’s how it’s going to be treated under our credit facility, and therefore it does not impact leverage,” Pitts said.

“It was a terrible time to have to be raising money so we did a pretty creative financing,” president and chief executive officer S.P. “Chip” Johnson said of the arrangement on the call.

Pitts said that the asset sales would also help pay off an upcoming maturity.

“We would directly use those asset sales to start paying [our 2020 maturity] down.

“If not, then we’d have to deal with that a year from now or two years from now,” he said.

Financing details

Carrizo has agreed to issue $250 million of new, redeemable preferreds to funds managed by GSO Capital Partners LP.

The preferreds accrue dividends at 8.875% per year.

Carrizo may pay all of the dividends in common stock for the first year, 75% of the dividends in stock in the second year and 50% of the dividends in stock in the third year.

After three years, the company may redeem the preferreds at 104.4375 in cash.

GSO also received warrants for 2.75 million shares, each exercisable at $16.08 for 10 years.

On June 29, Carrizo priced a $250 million issue of eight-year senior notes (B3/B+) at par to yield 8¼%.

The yield printed on top of yield talk that had been set in the 8¼% area.

Citigroup was joint global coordinator and left bookrunner. BofA Merrill Lynch was a joint global coordinator and joint bookrunner. Wells Fargo Securities LLC, Capital One, RBC Capital Markets LLC, Credit Agricole CIB, SG CIB, BBVA, Compass, BMO Securities, Scotia Capital and ABN Amro were also joint bookrunners.

The Houston-based oil and gas exploration, development and production company plans to use the proceeds to partially fund the acquisition and for general corporate purposes.

A special mandatory redemption at par plus accrued interest will be in place for the first four months in the event that the acquisition does not occur.

Closing is expected in mid-August.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.