Callon Petroleum (CPE) Valuation Update - Aug 6

[dan_s]

CPE closed at $37.51 on August 5.

TipRanks: "In the last 3 months, 7 ranked analysts set 12-month price targets for CPE. The average price target among the analysts is $75.25. The 7 price targets range from $40 to $124."

Callon was the only Sweet 16 company that had disappointing Q2 results, but the Company still generated $125.6 million of free cash flow from operations during the quarter and they continue to improve their balance sheet. Total debt is moving closer to their goal of 1X EBITDAX and their Senior Debt has been pushed out. Callon has no near-term debt problems, and their drilling program is more than covered by operating cash flow.

The Q2 "disappointment" was caused by lower production from Q1 to Q2, primarily weather-related power outages, and higher cash operating expenses. They also increased their capex budget for 2022, which was not totally unexpected.

I have lowered my current valuation by $21 to $100 per share.

Why?
> Lowering my 2022 production forecast by 2,000 Boepd and shifting more production from crude oil to natural gas. < Callon's updated production guidance for 2022 is 102,000 to 105,000 Boepd with split of 63% oil, 18% natural gas and 19% NGLs.
> I am now using the high end of the Company's expenditure guidance (LOE, GPT and Production Taxes)
> I have lowered my valuation multiple from 4.5 to 4.0 X annualized operating cash flow. < IMO conservative for a company on track to generate over $700 million of FCF from operations.
> For a company of this size they have a low amount of common stock outstanding, only 61.7 million shares, so small changes in the forecast model do have big impacts on the per share numbers.

The recent dip in the oil price is partially offset by higher natural gas and NGL prices + the impact is muted by CPE's hedges.