Two midcap energy companies announced Monday an agreement under which Callon Petroleum Co. (NYSE: CPE) will acquire Carrizo Oil & Gas Inc. (NASDAQ: CRZO) in an all-stock deal valued at $3.2 billion. Carrizo shareholders will receive 2.05 Callon shares for each Carrizo share they own, a premium of 18% to Carrizo’s trailing 60-day volume-weighted average price.

In premarket trading, Callon traded down about 11% and Carrizo traded up nearly 10% after the announcement. Callon’s market cap as of Friday’s close was $1.46 billion; Carrizo’s was $971 million, and its enterprise value was $2.94 billion.

That’s not the whole story on Carrizo though. In April, activist firm Kimmeridge Energy Management, which owned an 8.1% stake in the exploration and production company, began to apply pressure for a sale of Carrizo’s non-Permian Basin assets, including a possible merger with another Permian producer. Last month Kimmeridge sold its stake in Carrizo for a profit of $90 million (on an investment of $100 million), according to a report at The Wall Street Journal.

Carrizo shares traded at an all-time high of near $70 in 2014 but haven’t traded above $15 a share since early December of last year. The company had or has assets in the Eagle Ford, Marcellus, Utica and Niobrara shale plays and, according to Monday’s announcement, Callon expects to be “a premier Texas operator with an extensive inventory of core Permian and Eagle Ford locations” No word on the other assets, but more asset sales in the non-core properties seems a reasonable likelihood.

On a pro forma basis, the two companies produced 102.3 million barrels of oil equivalent per day in the first quarter of 2019 of which 71% was oil. The merged company expects to operate nine or 10 rigs with three or four completion crews, mostly in the Permian Basin, next year.

At the end of 2018, Carrizo reported proved reserves of 329.4 million barrels of oil equivalent of which 55% was oil, 21% was natural gas liquids and 24% was natural gas. Year over year, the amount of proved reserves rose by 26%, primarily in the Permian’s Delaware basin and Eagle Ford play.

Assuming that the price includes the assumption of Carrizo’s reported long-term debt of $1.7 billion, Callon is paying less than $10 a barrel for Carrizo’s proved reserves in Texas. That’s not unreasonable for barrels in two of the most productive onshore regions in the country.

But crude oil prices have been trading in a fairly narrow range and events (attacks on ships in the Gulf of Oman; hurricanes in the Gulf of Mexico) have driven increases, not by a long-lived increase in demand. If OPEC and Russia can’t withhold enough barrels to move the price of crude higher, then Callon-Carrizo has to get its barrels to market before the price falls.

This is a tricky time for exploration and production companies. Debt is cheap but most have already loaded up over the past few years. Piling on more debt is risky, partly due to the rising adoption of electric vehicles and partly due to tougher rules on carbon emissions. Any global effort to lift electric vehicle sales or charge a carbon tax could send crude prices sharply lower. Better to drill and pump now, and that’s exactly what the Callon-Carrizo combination plans to do.

Callon’s management team will run the combined company once the merger is completed, expected to happen in the fourth quarter of this year. The company’s board will be composed of 11 members, eight from Callon’s current board and three to be named from Carrizo’s board.

Callon stock traded down more than 16% about half an hour after markets opened Monday to $5.34, below a 52-week range of $5.57 to $13.09. Carrizo stock traded up about 1% at $10.60, in a 52-week range of $8.64 to $29.58.

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