Callon Petroleum update - Jan 14

[dan_s]

From JP Morgan

In conjunction with our 2022 E&P Outlook, we are
revising our CPE model to incorporate our updated outlook heading
into next year.
Our 2021/2022 EPS estimates move to $8.89/$12.85
from $8.93/$13.05. Our 2021/2022 CFPS estimates move to
$18.86/$23.11 from $18.91/$23.37.
Along with our model update, we are introducing a new price target methodology, which values the company based off a blended fair value approach using an equal weighting of NAV at the strip and our asset values assuming a long term Brent oil price of $80 per bbl ($77.50 per bbl WTI). Against this backdrop, we reiterate our Neutral rating and are increasing our Dec-22 price target to $71 per share (from $70 per share).

[epg3601]

Your Jan 8 email said:
"Callon Petroleum (CPE) was the top gainer in 2021, up 259%. I've updated my valuation to $90.00, so IMO it still has 73% upside from where it closed on Friday".
Is the valuation $71?

[dan_s]

$71 is JP Morgan's price target which is based on a lower oil price.

[Hoeberian]

Thanks Dan. I have been working on Callon yesterday and today and get a similar number as JPM for 2022: EPS of $13.60/share, rising to $15.66 in 2023. In the past few days i crunched EPG, FANG, LPI and now CPE. What I see is that EOG looks fully valued, FANG and CPE look cheap and LPI looks ridiculously cheap.

So I am still trying to understand what is going on with these valuation differentials. You can’t blame it totally on debt. Yes EOG has a better balance sheet but using EV/EBITDA adjusts for that anyway. EOG is 5.7x 2023 EV/EBITDA (my model). FANG is 4.5x, CPE is 4.0x and LPI is 2.1x.

It’s not a matter of one having more undeveloped reserves than the others, that I can see.

So it is either about a very sophisticated understanding of future full-cycle profitability by play-type, or the market is just lazy: EOG is big and debt-free and easy to understand, so it gets the fat valuation. LPI practically vaporized its shareholders just a year ago, so it gets the lowest valuation. Etc etc.

[CreativeEquity]

EOG is enormous compared to the other producers you mentioned. Larger will always be assigned a higher multiple because G&A will be lower /boe. And they can attract fund capital that the small companies will never have access to due to poor market liquidity (daily shares traded).

[Hoeberian]

Upon further reflection, yeah, EOG has a better track record even than FANG which is about half the size of EOG (so still in the same ballpark). LPI has been a train wreck and Callon has been “less bad” but not great over the past 5-10 years.

So it seems investors are buying track records as much as anything. It’s not clear to me that the SGA/barrel differential alone accounts for these enormous differences in EV/EBITDA — especially in such a fortuitous macro environment such as we have now.

I think the base case is simply that the smaller names are priced for bad times, but bad times do not seem like the most likely scenario. As prices rise, margins move further away from zero and investors should become more comfortable boosting multiples on the smaller players.

[Fraser921]

What do you both think of CLR , PXD, ROCC ?

At these prices, CLR is making 10 billion a day, roughly 15 % FCF yield !

PXD covered their hedges which so far looks like a well timed move.

[Hoeberian]

I haven’t hit them yet. Part of the reason I am doing this exercise is to figure out if it is worth the effort. I mean there are 150+ crunchable E&Ps. How much does one vary from another after adjusting for valuation? My evolving sense is “quite a lot actually.” So I guess I will keep going ...

[dan_s]

EOG deserves a much higher valuation multiple because of the quality and size of its leasehold. Plus, an incredible track record of production growth.

EOG's guidance is 10% production growth this year. FANG's guidance is no or minimal growth.

Focus should be on operating cash flow & ability to generate lots of FCF

[Hoeberian]

Ah thanks Dan. I figured there had to be a rational answer. Quality of leasehold is something very difficult for non-Texan generalists to figure out. It's a black hole in the middle of my own analysis. Still it does seem that one might do better "building one's own" EOG by buying 15 smaller E&Ps than buying EOG itself (assuming the oil/gas price curves hold up).