Callon Petroleum (CPE) update - July 20

[dan_s]

From TPH Morning Report:

CPE Stock Thoughts: Ongoing equity weakness presents opportunity for longer dated investors

Sector: NAm E&P | Ticker: CPE | Recommendation: BUY | Target: $23 | Close: $11.25

Though the name has underperformed recently (-18% vs. peers flat since early May), we believe this presents a solid buying opportunity for those with a longer-term view. Valuation screens very attractive with 2020 EV / EBITDA of 3.6x vs. peers 4.4x. Put another way, ascribing $40k / boepd of PDP value to TPHe Q4'18 production of 42mboepd implies ~$23k/acre, while recent core Permian assets have sold for $25-40k+/acre.
Regarding Permian takeaway, although the company is well positioned from a flow assurance standpoint, pricing remains a concern for investors heading into 2019. To that end, we're watching for the company to layer on additional 2019 hedges with realized pricing >$50/bbl.
Additionally, we believe that the company may look to add a 6th rig in 2019 with production weighted to H2'19 as diffs begin to tighten. Operationally, we are looking for i) longer dated Monarch “megapad” data, ii) the WildHorse downspacing test, and iii) Reagan WC C delineation to drive further upside to our 3P NAV of $23/shr assuming $64 Brent / $58 WTI / $2.72 HHUB LT.