Callon Petroleum CPE Potential Case

[Roadster]

"CPE traded at about $8 per share late 2018 to about July 2019, CPE announced acquisition of Carrizo.

The aggressive move would about double the output of CPE, and was aggressively opposed by analysts such as Paige Meyer (CFRA), resulting in CPE stock lowering to about $4 per share until the Covid-19/oil war/glut. The CPE floor was about $0.80 in May until this same analyst lowered her CPE rating to sell with a $0.50 target, and herds of uninformed investors sold out lowering the price from $0.80 to $0.60, destroying the momentum heading to over $1.

I held my shares, looking to increase holdings, and here is why Paige Meyer’s analysis is so flawed and wrong. Meyer’s calculated value based upon a multiple of her 2020 estimate of EBITDA. An oil price averaging in the $20’s range for 2020 was used for earnings (2020 average as of 26 May is $37.41, with current price over $33 tracking towards $40 range). Meyer’s then applied a multiple of EBITDA to her lowballed estimate; even Investopedia states EBITDA “Makes Companies Look Cheaper Than They Are: Worst of all, EBITDA can make a company look less expensive than it really is. When analysts look at stock price multiples of EBITDA rather than bottom-line earnings, they produce lower multiples.” Meyer’s not only applied flawed estimates and analytics, but she valued based upon 4.5x EBITDA, rather than the 6x applied to the sector! This rating trips off other ratings, such as ResearchTeam rates stocks with a single sell recommendation as ‘reduce’.

EBITDA is a poor value to use, because it ignores earnings. For example, let’s compare CPE to another shale company, CDEV (currently $1.10 with market cap of $310 million as of 26 May). CDEV earnings for Q1 2020 were a loss of -$1.99 per share, which reduced shareholder equity from $3.258 billion to $2.717 billion, while CPE earned +$0.12 per share and increased shareholder equity from $3.223 to $3.443 billion. CDEV has a lower shareholder equity that may be reduced once again in Q2, however CPE is tracking up to $100 million earnings into cash flow for remaining 2020 (not to mention nearly double the total assets/wells producing should oil prices recover).

Should prices turn around, CPE can more easily reduce debt and add shareholder equity, since the Periman leases CPE owns are the richest, most cost efficient shale area in the US.

Prior to the CRZO acquisition, CPE had above average reserve life (17 years vs industry 11 year avg), and industry leading recycle ratio (185% cash received from drilling wells, finding & development costs). The Meyer’s lead criticism is CPE will be dragged down by less impressive CRZO results, however it appears just the opposite. The CPE lead board (8 CPE, 3 CRZO) is finding efficiencies and beginning to realize merger goals. There is risk to any stock investment, but it appears to me CPE will not only survive this crisis, but thrive in the future. I estimate the stock is currently worth $2.25, and it should take $4 per share to buy out/acquire these valuable assets. Also note, CPE is in the top 10 shale companies with access to the gulf (not land locked).

I see a Zacks report showing CPE missed earnings Q1. No doubt these Zacks analysts raised the consensus average of $0.13 by their $0.16 estimate;

I use Vanguard, whose estimates I tend to value/trust since they are the second largest institutional holder. Vanguard estimates for Q1 were $0.11, so $0.12 beat Vanguards more informed estimate. Zacks appears to look at how a company is trending meeting estimates for their determination, where Vanguard would look at the whole picture. CPE spent $733 million to acquire CRZO last Dec, however the current CPE market cap is $298 million. I hope to look back as see this was one of my best, rare opportunities as I’m poised to take full advantage, and will add to my position anytime the price dips. "

[bobs]

The bond deal apparently didnt work out for CPE.
That would probably be viewed as a negative.
How does that impact your views?

[dan_s]

Read the "Liquidity" section in our May 18th profile.

Personally, I thought the timing of trying to restructure their debt was bad to begin with.