Callon Petroleum (CPE) Update - March 17

[dan_s]

Callon Reduces 2020 Capital Program by Over 25% and Provides Operational and Hedging Updates

HOUSTON, March 17, 2020 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) today provided an update on its 2020 development program, prioritizing free cash flow and financial flexibility in 2020 and beyond. The revised plan accounts for recent changes in the macroeconomic outlook, including the following highlights:

Reducing operational capital plan for full-year 2020 to $700 to $725 million from $975 million, significantly reducing average quarterly expenditures for the remainder of 2020 by approximately 50% from a previously budgeted first quarter level of over $275 million and resulting in relatively flat year-over-year production growth versus the predecessor companies' combined 2019 production volumes

Reducing current operated rig count of nine to five before the end of the second quarter of 2020

Reducing frac crew count from five to two upon the completion of currently in-process projects

2H20 and preliminary 2021 plans employ three to four drilling rigs (two to three in the Permian Basin and one in the Eagle Ford) and one to two completion crews focused on a high-graded set of shorter cycle projects

Shifting capital allocation to high return, shorter cash cycle projects in the Midland Basin and Eagle Ford Shale while preserving the long-term, co-development strategy in the Delaware Basin
Forecasted free cash flow1 generation of $75 to $100 million for the balance of the year (second quarter through year-end) assuming no service cost deflation and flat NYMEX prices of $35/Bbl and $2.00/MMBtu for the balance of the year

Assuming $40/Bbl and $2.25/MMBtu average NYMEX prices in 2021, no service cost deflation and a capital allocation strategy similar to the revised 2020 program, expectations for over $100 million of free cash flow1 in 2021 under an operational capital program of $400 to $500 million with the upper end of the range supporting a maintenance capital program and the lower end of the range resulting in modestly lower year-over-year production volumes

Joe Gatto, President and Chief Executive Officer commented, "Our ability to pivot quickly to shorter cycle, less capital-intensive projects reflects Callon's inherent optionality across our expanded pro forma portfolio. This will allow us to continue with capital efficient, scaled development, while also focusing on a program that shortens cash conversion cycles in a lower commodity price environment. Our differentiated development model is underpinned by 'flexibility with continuity', optimizing near-term returns without sacrificing long-term value or the balance sheet. The diversification of our asset base means that we can and will stay true to our strategy of large scale, co-development of our Delaware position. Although we will be reducing the amount of activity in the near-term, our opportunity set will be preserved for future development and not be compromised by near-term high grading at the expense of optimal multi-zone development over time. Moreover, Callon's enhanced, pro forma scale affords us the ability to preserve the cost and cycle time efficiencies that are driven by the key tenets of scaled development—namely, the deployment of simultaneous operations and the continuous utilization of drilling rigs and completion crews—despite the substantial reduction in our planned capital spend. Lastly and most importantly, our rapid shift in capital allocation gives us the free cash flow profile to reduce absolute leverage and protect our financial position. We will continue to adapt to any changes in the commodity price environment with the same vigor, discipline and priorities in the coming months. On a final note, we have instituted a company-wide work policy grounded in a remote workplace and social distancing to protect our employees, reduce potential COVID-19 transmission risks and maintain business continuity for our operations."

Callon plans to provide additional detail on updated guidance for 2020 as part of its first quarter conference call and, as such, the 2020 guidance issued on February 26th should no longer be relied upon.

Operational Update

Callon successfully implemented several previously announced operational enhancements as part of its recent large-scale projects in the Delaware Basin and the Eagle Ford Shale. Operational changes for 2020 include: upspacing based on 2019 learnings, a more conservative flowback and reservoir management strategy, and fluid efficiency improvements to further reduce costs and improve well recoveries.

In the Delaware Basin, initial production from the five-well Wally project is currently performing above expectations on a restricted choke. The outperformance of this multi-zone project, which was drilled on 800-foot horizontal spacing, emphasizes the importance of ongoing design modification and inventory preservation through co-development. In the Eagle Ford Shale, initial production from the 16-well Brown Trust project began as scheduled in February and the wells are currently averaging approximately 700 Bbls/d of oil per well (gross) on restricted chokes. Importantly, this project witnessed more than a 50% improvement in average recovery time for shut-in production and a 33% reduction in the aerial range of interference with offset parent wells relative to similarly sized, precedent projects in the area. These improvements are the result of continued optimization of frac design, sequencing and flowback management that will carry into similar multi-well projects scheduled this year.

Liquidity and Hedging Update

At the end of February 2020, Callon's liquidity position was approximately $700 million, supported by a credit facility with a borrowing base of $2.5 billion and an elected commitment of $2.0 billion, and no debt maturities prior to 2023. The Company's net debt to pro forma last quarter annualized adjusted EBITDA2 was 2.6x at year-end 2019.

In light of recent market volatility, Callon restructured existing hedge contracts and continues to actively manage its hedge position to provide cash flow certainty at favorable commodity prices. Over 11 million barrels of three-way collars for the balance of 2020 were recently restructured into swaps, significantly improving downside protection. For the whole of 2020, the Company now holds swap contracts at an average of $50.31/Bbl for nearly 11 million barrels of oil. Price certainty for natural gas was also increased through the addition of 3.6 million MMBtu in swaps. Callon now has 10 million MMBtu of gas hedged through swap instruments alone in 2020.

[dan_s]

I have updated my forecast/valuation model based on the press release. Thanks to their hedges, Callon should be able to generate about $100 million of free cash flow from operations while holding YOY production flat. Production will peak in 1H2020 and then decline into year-end. Assuming WTI gets back to $50/bbl in 2021, the company should be well positioned to resume growth.

The updated forecast model will be posted to the EPG website this afternoon.

[KCHenry8]

Dan,
Moody's Downgraded Callon as follows. Can you explain in layman's terms what these rating mean. Thanks

Moody's Investors Service ("Moody's") downgraded Callon Petroleum Company's (Callon) Corporate Family Rating (CFR) to B3 from B1, Probability of Default Rating (PDR) to B3-PD from B1-PD and the ratings on its senior unsecured notes to Caa1 from B2. "The downgrade of Callon Petroleum's ratings reflects the decline in commodity prices and the impact it will have on the company's cash flows and liquidity," stated James Wilkins, Moody's Vice President

[dan_s]

I can't because we live in Crazy Coronavirus World.

Callon should report Q1 cash flow from operations of more approximately $200 million after paying interest on there debt.

Moody's job is to be super conservative and I'm sure that they are basing their valuations on very low oil prices staying low forever.