The path to Carrizo Oil & Gas Inc.’s (NASDAQ: CRZO) $648 million deal to buy ExL Petroleum Management LLC began in the Delaware Basin, stumbled toward Russian ownership and finally found itself in a sketchy oil price neighborhood.

Add in Carrizo’s initial skepticism and the company’s bid not being the highest ExL received, the agreement to buy 16,488 net acres in Reeves and Ward counties, Texas, seems more improbable.

But along the way, Carrizo’s management became increasingly convinced of the merits of ExL’s assets—despite its initial doubts. The deal, which is expected to close in August, eventually sets up Carrizo to be a Texas operator after jettisoning assets in the Appalachia and Niobrara.

Michael Hsu, an analyst at Jefferies LLC, said that since a large package near Carrizo’s Delaware acreage was put up for sale, the company’s increased Permian exposure came at an attractive valuation, adding to its 22,000 net acre position in the western Delaware Basin at about $22,000 per acre.

Carrizo first reviewed ExL’s acreage last fall and wasn’t impressed, particularly by a gassy well on the acreage’s northern flank, S.P. "Chip" Johnson IV, Carrizo's president and CEO, said during an analyst call on July 7—more than a week after the deal was announced June 28.

“We felt like this was an area in the Delaware where there were some risks from faulting,” he said.

Johnson appeared to confirm the reason Russian billionaire Mikhail Fridman’s company, Letter One, pulled out of a $700 million deal to buy Quantum Energy Partners-backed ExL last year.

“This asset was put up for sale last fall and a Russian company was the high bid,” Johnson said. “That deal was nixed by the U.S. government and so the property was remarketed this spring.”

The deal was reviewed by the U.S. Treasury Department’s Committee on Foreign Investment in the United States (CFIUS), which evaluates the national security implications of foreign transactions.

Fridman has previously told Bloomberg that CFIUS—and accusations of his ties to President Donald Trump—were not factors in his decision to walk away.

Carrizo continued searching for a prime asset in the Delaware core and in April four large marketed deals were available. The company placed bids on three of the marketed packages and made unsolicited offers for two other positions in the basin.

ExL was back on their radar by then, with 8,000 barrels of oil equivalent per day (boe/d) production looking more attractive.

“When we looked early this year, in April and May, at the wells that they were bringing online that defined the middle part of this acreage we were very impressed,” Johnson said. “These wells were over 1,000 boe per day [and] some were 65% oil.”

Carrizo bought 3-D seismic data and analyzed it before signing the agreement to confirm ExL’s geology and understand why the northern well was gassy.

“We were very confident at that point, as their wells came on that they drilled early this year, that we understood the rock,” he said.

In particular, Johnson said he was confident to bid based on the Wolfcamp A and upper and lower Wolfcamp B, which he said are de-risked.

Overall, Johnson said the acreage has up to 10 layers with more than 3,800 ft of potential stacked pay.

Carrizo has bid on several Permian packages only to come up short in recent months.

ExL was no different. They weren’t the high bidder but were still chosen as the buyer.

Johnson speculated that ExL dealt with Carrizo because companies may not have been able to raise the money or because Carrizo just negotiated better.

“We used the same exact criteria we’ve used before and failed every time to be the top bidder,” he said. “We felt like this acquisition had superior rock quality. It’s in the center of the basin.”

“We felt like this was really core acreage. It’s also blocked up. We think we can already drill 40% of the future wells with 10,000 ft laterals,” he said.

In the midst of working out the deal, Johnson said oil prices continued to tank. Carrizo and ExL agreed to kicker payments of up to $125 million.

“If oil averages more than $50 a barrel in calendar years in ’18, ’19, ’20, ’21, we can pay up to $125 million in extra proceeds. We felt like that was a great trade for the short term cost of the deal,” Johnson said.

Hsu noted that “assuming the max payment, the deal becomes $30,000 per acre; a price CRZO would likely be fine with paying in exchange for higher oil prices.”

To finance the transaction, Carrizo said June 28 that it will commence an underwritten public offering of 15.6 million shares of its common stock. In addition, the company agreed to issue $250 million of newly-created redeemable preferred stock to funds managed by GSO Capital Partners LP.

Carrizo’s remaining A&D will mostly be in the divestiture column. The company hopes to receive about $300 million from noncore asset sales in the Marcellus, Utica and a portion of the Niobrara.

While bolt-on deals will be needed to block up some acreage, “deals of this size are off the table for a long time for us,” Johnson said.

Darren Barbee can be reached at dbarbee@hartenergy.com.