Callon Petroleum (CPE) Q4 Results - Feb. 26

[dan_s]

Callon's Q4 results beat my forecast for production volume and operating cash flows. The company's production increased by 43.5% year-over-year in 2018 and based on their guidance (which they consistently beat) production will increase another 25% YOY in 2019. I will update my forecast/valuation model in the morning, but this stock is trading at an insanely low multiple if you believe their 2019 guidance. - Dan

HOUSTON, Feb. 26, 2019 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three months and full-year ended December 31, 2018.

Presentation slides accompanying this earnings release are available on the Company's website at www.callon.com located on the "Presentations" page within the Investors section of the site.

2018 Highlights

Full-year 2018 production of 32.9 Mboe/d (79% oil), an increase of 44% over 2017 volumes and at the top of the 2018 guidance range with a higher oil cut
Year-end proved reserves of 238.5 MMboe (76% oil), a year-over-year increase of 74% combined with an oil content that has remained consistently over 75% since commencing horizontal development in 2012
Proved reserve additions replaced 690% of 2018 production at a "drill-bit" finding and development cost (i) of $7.03 per Boe and a proved developed finding and development cost(i) of $13.40 per Boe
Generated an operating margin of $40.16 per Boe reflecting our high level of oil volumes, proactive investments in infrastructure and offtake relationships, and cost structure improvements
Realized net income of $300.4 million and generated Adjusted EBITDA(i) of $432.5 million relative to cash drilling and completion capital expenditures of $403.5 million
Completed the acquisition of 34,523 net working interest acres and 1,530 net mineral acres within our core operating areas, more than doubling our Delaware footprint since 2017, and also traded 4,420 net acres to further long-lateral development
Divested 3,540 net acres as part of ongoing initiatives to monetize non-core assets and enhance returns on capital
Executed firm transportation and marketing agreements that are expected to transition 25 MBbl/d of our gross oil production to a combination of Gulf Coast, Brent and waterborne pricing January 2020
Fourth Quarter 2018 Highlights

Fourth quarter 2018 production of 41.1 Mboe/d (81% oil), an increase of 55% over fourth quarter 2017 volumes and a sequential increase of 18%
Generated $151.6 million of cash provided by operating activities, exceeding cash used in investing activities for operational capital additions of $127.8 million in the development of oil and natural gas properties
Began building an inventory of drilled, uncompleted wells to support our transition to larger scale development in the Delaware Basin in 2019
Joe Gatto, President and Chief Executive Officer commented, "The past year represented a significant inflection point in the maturity of our Permian operations and progression to a development model that will drive increased capital efficiency and corporate returns. The critical steps we took this past year will assist in our transition to full-field development, employing larger pad concepts as part of an integrated technical and operational approach to multi-zone resource monetization. We enter 2019 with a substantial proved reserve base approaching 250 million BOE that has consistently carried one of the highest percentages of oil across our peer group since we commenced horizontal development. As part of the maturation of our business, our corporate decline rates have also moderated over the last few years, setting the stage for decreasing capital intensity as more capital will contribute to incremental production growth and less capital will be needed for replacement. This dynamic, combined with the impact of larger scale program development in the Delaware Basin that will emerge around mid-year, provides a solid foundation for quality growth in 2019 and beyond." He continued, "As the industry landscape evolves, operators are faced with the choice of pursuing short-term benefits at the expense of future reinvestment opportunities, capital efficiency and longer-term growth trajectory. We remain steadfast in our long-term value focus, employing resource development concepts and pace of activity that will keep us on a path to sustainable free cash flow generation at WTI prices in the low $50s from repeatable investments in our high quality asset base."

Operations Update

At December 31, 2018, we had 466 gross (364 net) horizontal wells producing from eight established flow units in the Permian Basin. Net daily production for the three months ended December 31, 2018 grew 55% to 41.1 Mboe/d (81% oil) as compared to the same period of 2017. Full year production for 2018 averaged 32.9 Mboe/d (79% oil) reflecting growth of 44% over 2017 volumes.

For the three months ended December 31, 2018, we drilled 17 gross (15.3 net) horizontal wells, and placed a combined 19 gross (17.2 net) horizontal wells on production. Wells placed on production during the quarter totaled approximately 106,000 net lateral feet and were completed in the upper and lower intervals of the Lower Spraberry, Wolfcamp A and Wolfcamp B within the Midland Basin and the Lower Wolfcamp A within the Delaware Basin.

Midland Basin

We brought nine gross wells online in the Monarch area in the fourth quarter achieving an average peak 24-hour rate of 235 Boe per thousand lateral feet with an average oil cut of 86%. More recent wells in the Monarch area demonstrate consistency in our well results across multiple zones with the Casselman 40 pad, a Wolfcamp A and B co-development project, averaging approximately 150 barrels of oil per thousand lateral feet in early time flowback. Additional multi-interval pad development projects targeting both upper and lower flow units in the Lower Spraberry, coupled with a Middle Spraberry well, are currently flowing back with encouraging early time results relative to offsetting wells.

In the WildHorse area in Howard County, we placed on production a three-well pad which produced an average of approximately 190 Boe (90% oil) per day per thousand lateral feet per well through the first 30 days. During the first quarter of 2019, we will be completing a five-well pad developing the Wolfcamp A on 10-well spacing, building upon our successful pilot test in the Fairway area of WildHorse last year.

The previously disclosed outage at a third party gas processing facility in Martin County has persisted into the first quarter as the plant is brought back on a gradual basis. We expect a normalized level of gas processing to resume during the month of March. We estimate lost natural gas and NGL volumes during the fourth quarter of approximately 9,800 Mcfe/d, with no impact to our oil volumes. We currently expect an impact of approximately 4,000 Mcfe/d in the first quarter of 2019.

Delaware Basin

At our Spur area in Ward County, we placed on production six gross wells with an average completed lateral length of just under 8,000 feet. A two-well development including the Teewinot A1 04LA and A2 05LA wells have demonstrated strong performance since being turned to production in December. The two wells averaged approximately 390 Boe (85% oil) per day per thousand lateral feet through the first 70 days of production resulting in total production of nearly 260,000 Boe in just over two months. The Rock Garden A 08 LA and 01 LA wells, which were completed separately and brought on production during the third and latter part of the fourth quarter respectively, have each averaged approximately 1,300 Boe (88% oil) per day over their first 60 days. Additionally, the Limber Pine A2 05LA and A1 01LA wells, brought on production in November and December respectively, have each also averaged approximately 1,175 Boe (85% oil) per day through their first 60 days on production.

We continue to build an inventory of drilled, uncompleted wells at Spur in preparation for larger pad development projects which are slated for completion during the second half of the year and are expected to provide meaningful production growth into year-end 2019 and early 2020. As part of our increased scale of planned development, we continue to enhance our field operations through an addition to our existing recycling facility. The addition will bring our total recycling capacity to 60,000 barrels of water per day, reducing our sourcing and disposal costs on a go forward basis while also reducing our environmental impact in the regional area.

Following the acquisition of a significant producing asset base in September 2018, we have advanced several initiatives to improve operational reliability and reduce operating costs. We will be accelerating our maintenance and field optimization projects over the next three months, requiring a voluntary shut-in of production during that time. We expect this deferral of production will impact our productive capacity by roughly 1,000 Boe/d during the first quarter with a decreased impact in the second quarter as the project is expected to be completed in April.

[dan_s]

Note on Feb. 27th from energy analyst at Stifel, Derrick Whitfield:
Callon Petroleum Company (CPE, $6.99, Buy; Target $20.00) - Solid production beat, operations, and 2020 outlook should more than offset Q418 capex concerns We view the release as positive. The positives include: i) a solid total and oil production beat (2.3% and 5.8% above consensus, respectively) for the quarter despite gas processing outages, ii) continued strong well results in the company’s WildHorse and Spur areas with recent wells 58% and 25% above Stifel’s type curves, respectively, iii) encouraging results from multi-interval, co-development pilots in the Monarch area, and iv) continued progress on cost cutting initiatives. The negatives include: i) higher than expected Q418 capex (9.3% above consensus) and ii) lingering 3rd-party gas processing constraints in Midland (~4.0 mmcfepd in Q119) and field maintenance in the Delaware (~1.0 mboepd in Q119). Net-net, Callon delivered a strong quarter and encouraging operations update. The company's 2020 outlook proves CPE can thrive (generate FCF and +15% growth) in a low-$50s environment. Net-net, the strong quarter and 2020 outlook should overshadow the higher than expected Q418 capex.

I am updating my forecast/valuation model now. It will be posted to the EPG website this afternoon. My valuation is going up. - Dan