Callon Petroleum (CPE) Q2 Results - August 7

[dan_s]

See Stifel's Target Price at the bottom of this post.

CPE's Second Quarter and Recent Highlights

Increased production by 40% year-over-year to 40.5 Mboe/d (77% oil) < 500 Boe per day over my forecast.
Generated an operating margin of $36.11 per Boe, a sequential increase of over 10%
Reduced capital spending by $25 million during the second quarter, while placing approximately five additional net wells on production compared to the first quarter of 2019
Recently placed on production the first multi-zone mega-pad employing simultaneous operations in the Delaware Basin with an average cost per lateral foot below 2020 targeted synergy levels
Closed the divestiture of the Southern Midland Basin assets for net cash proceeds at closing of $245 million < Nice boost to the balance sheet!

Completed the redemption of Callon preferred stock in the amount of $73 million, reducing annual dividend obligations by more than $7 million

Announced the strategic acquisition of Carrizo Oil & Gas, Inc. ("Carrizo") in an all-stock transaction valued at $3.2 billion

"Our team's performance continued to exceed expectations during the second quarter with stronger production and lower capital spending than forecasted. We remain on track to meet all of the goals that we laid out for the market back in February while delivering on a seamless integration process to cement a highly accretive acquisition opportunity that will benefit shareholders of both Callon and Carrizo. Our operational efficiency in the Midland Basin during the second quarter and successful completion of our first Delaware mega-pad project are emblematic of the value creation that underpins the strategic rationale in combining these two high performing companies," commented Joe Gatto, Callon's President and Chief Executive Officer. He continued, "We are steadfast in our commitment to accelerating the achievement of our core goals of boosting returns on invested capital, reducing leverage, generating sustainable free cash flow growth and improving the overall long-term outlook for our shareholders. With this strategic combination, which will be enhanced by the eminently achievable, tangible synergies identified, we will unlock significant value for shareholders in the near term as the highly efficient and sustainable development program we have outlined advances all of our goals. We are very pleased with our integration progress and equally excited about the tremendous value proposition created by merging our two organizations."
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Stifel's take:

Callon Petroleum Company (CPE, $4.33, Buy; Target $8.00) by Derrick Whitfield (a very good analyst)

CPE Delivers strong quarter and synergy update, addressing M&A disclosure concerns

We view the release as positive. The positives include: i) a total equivalent and oil production beat (1.3% and 1.1%), ii) lower-than-expected capex (5.7% below consensus), iii) an EBITDAX beat driven in part by lower unit costs, iv) record D&C cost averages across the Permian from large-scale development, and v) a detailed analysis of potential synergies to be realized starting in 2020.
The only negative was slightly lower than expected gas realizations (5.4% below Stifel's estimate).
Net-net, Callon delivered a strong quarter and provided a detailed assessment of potential synergies from the CRZO acquisition.
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I hope to update my forecast/valuation models for CPE and CRZO this afternoon. "HOPE" is the key word because Q2 results are coming at me like water from a fire hose (my father was a St. Louis fireman, so I am an expert on fire hose capacity!)

[dan_s]

CPE closed at $4.79 today, up over 10% on a very crappy day for the upstream companies.

I've updated my forecast/valuation and my valuation adjusts to $11.00, which is exactly in the middle of two Wall Street firms' target prices of $12 & $10 in fresh reports that came out today. I decided to lower the multiple used to value CPE to 5X operating cash flow per share.

Callon in a nutshell:
> This is a company in transition. They are merging in an all stock deal with Carrizo Oil & Gas (CRZO) that is valued at $3.2 Billion. I will update Carrizo's forecast model tomorrow.
> Post-merger, Callon will have two core areas in the Eagle Ford and the Permian Basin.
> Strong cash flow from the Eagle Ford will be used to accelerate development drilling in the Permian.
> After the merger closes, Callon will have over 100,000 Boepd of production (~70% crude oil).
> Callon + Carrizo is a strategic merger of two companies that are very close in size. Carrizo has more production today, but Callon has more upside in the Permian Basin. IMO the merger is 1+1 = 2.2
> In the 2nd quarter, Callon closed the sale of their non-core Ranger Area asset package for proceeds of $245 million. So, production will be down about 2,000 Boepd from Q2 to Q3 (mostly natural gas).


Two of our Top Shelf MBAs are working up profiles on each company that I hope to publish next week. Then I will update my "Proforma Forecast" for the combined "New Callon". My rough draft looks VERY GOOD.