Callon Petroleum (CPE) Q1 Results - May 11

[dan_s]

HOUSTON, May 11, 2020 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) today reported results of operations for the three months ended March 31, 2020.

Recent Highlights

> Delivered production of approximately 101 Mboe/d (64% oil), above the high end of guidance, for the first quarter of 2020 < Compares to my Q1 forecast of 100,500 Boepd.
> Realized fully diluted earnings per share of $0.55, adjusted income per share of $0.12, net income of $216.6 million, and adjusted EBITDA of $217.5 million for the first quarter of 2020 < My Q1 forecast was $36.5 million net income, $0.09/share.
> Achieved lease operating expense ("LOE") per Boe of $5.70 for the first quarter of 2020, an improvement of nearly 14% over the comparable three month period ended March 31, 2019

Enhanced corporate liquidity position through incremental hedging and conversion of previous instruments to NYMEX oil swaps, basis hedges, and incremental gas hedges resulting in a mark-to market value of $245 million as of May 1, 2020

Achieved new peak efficiency gains with recent Eagle Ford and Midland Basin projects delivering average daily completion rates of more than 2,000 lateral feet per day with completion costs of approximately $250 per lateral foot.

On May 7, completed the spring borrowing base redetermination for Callon's senior secured credit facility resulting in a facility commitment and elected borrowing base of $1.7 billion along with a new secured leverage ratio covenant to temporarily replace the previous total leverage ratio covenant until March 31, 2022 < VERY GOOD NEWS.

Joe Gatto, President and Chief Executive Officer commented, "Beginning in early March, our
team began taking decisive action to align our activity levels with the current economic
environment. We also quickly moved to enhance our cash flow protection through strategic
hedging initiatives which provide support as we transition the business to lower levels of
activity. Additionally, the leadership team, along with our Board, has made the decision to
pare costs through voluntary G&A reductions."

He continued, "Our operational and financial performance since the beginning of the year
clearly demonstrates the collective effort of our organization to execute on our post-merger
integration plan and drive the synergies that will position us to manage through a challenging
time for our industry. We have developed numerous scenarios that support returning to a
modest level of completion activity in the next few months, and our decisions will be based
on our outlook for sustainable, unhedged returns on capital that generate incremental value.
These scenarios will also be governed by the optimization of free cash flow for debt
reduction over the balance of the year while preparing ourselves for a solid foundation into
2021."

Credit Facility and Liquidity
Callon recently completed the spring redetermination for its senior secured credit facility. The
borrowing base and elected commitment were both set at $1.7 billion, relative to a previous
elected commitment of $2.0 billion. As of March 31, the drawn balance on the facility was
$1.35 billion.
Other key elements of the credit facility following the redetermination process include:
> Suspension of the total leverage ratio test until March 31, 2022
> Addition of a secured leverage ratio test of 3.0x
> Temporary waiver of the current ratio test
> Allowance for $400 million of junior secured debt without any reduction to the borrowing base
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I am updating my forecast/valuation model now and will post it to the EPG website this afternoon. < They definitely pass the "Survive 2020" test.

[dan_s]

Callon is setting up to be ready to "Thrive in 2021".
CapEx will not exceed cash flow from operations and even in a low oil price environment, they are on-track for a production exit rate of approximately 100,000 Boepd (slightly below Q1 actuals).

Outlook from this mornings press release:

Due to uncertain nature of the current commodity markets and the underlying supply and
demand landscape, Callon will not be providing full year guidance for 2020. As market
dynamics evolve in the upcoming months, the Company will be in a better position to
comment on the details surrounding long term expectations. In the interim, Callon believes
the following commentary may provide additional insight to investors:

> Callon currently expects to spend less than $100 million in operational capital in the second quarter of 2020
> Second quarter production is currently expected to be in excess of 105 Mboe/d, including the impact of planned curtailments through May 2020
> Assuming an improvement in benchmark commodity price and basis expectations for 2H20 and outlook for 2021, a potential return to modest completion activity at some point during 2H20 after suspending activity in April (associated total operational capital scenarios of $250 - $325 million for the remaining nine months of 2020, which includes the $100 million planned for the second quarter) < ~95% of Q2 to Q4 2020 oil production is hedged at average price of ~$43/bbl, locking in solid operating cash flow to cover all CapEx this year.

We are not considering a scenario in which total operational capital for 2020 would
exceed $525 - $600 million following a $278 million spend in the first quarter that
converted a large number of uncompleted wells from year-end 2019 to production.

The Company expects to exit the second quarter with an inventory of approximately 70
drilled, uncompleted wells that will provide a potential path for capital efficient
production additions in the coming months.

The Company expects to generate between $25 million and $100 million of free cash
flow during the final three quarters of 2020 under the range of "return to activity"
scenarios assuming average WTI oil prices of $25 - $30/Bbl over that period.

Under these potential scenarios, full year 2020 oil production is estimated to be inline
or above 1Q20 volumes and 2021 maintenance capital relative to fourth quarter 2020
volumes is estimated to be below $500 million.

First quarter LOE and cash G&A expenses, on an absolute basis, are expected to be
the highest of any quarter for the full year.

[dan_s]

Based on my forecast/valuation model and the comments above, Callon will "Survive 2020 and Thrive in 2021".
Why:
> Oil hedges lock in FREE CASH FLOW FROM OPERATIONS in 2020 of $100 to $150 million.
> With credit facility extended, there is no short-term liquidity issue AND they won't need to draw on the credit facility anyway.
> Upside to my forecast if natural gas prices rise. Q1 gas prices were terrible for all of the companies. Below $1.00 for several. Including cash settlements on hedges CPE's gas price was just $1.07/mcf in Q1. It should be much higher in 2H 2020.
> Based on 10-Q's audited balance sheet, CPE's book value is $8.67/share and there's really nothing except FEAR of low oil prices forever to justify the current share price.

My valuation (net of the "Fear Factor") increases by $1.10 to $3.50/share. The updated forecast model will be on the EPG website this afternoon and we will be publishing an update profile on the company late this week.

[Roadster]

Hi Dan

Regarding CPE Basis AND fully diluted earnings was $ .55 per share for the quarter ended 3/31/20

Stock is selling at $.78 so a PE ratio of ($.78/$.55) 1.41

Book Value is $8.67 or the stock is selling at 8.9% of book value

What am I missing? Is this not crazy?

The adjusted income per diluted common share is $ .12 ---This is NOT REAL WORLD as they adjust out there hedging.

Dan does this not say that they were profitable without hedging???

I thought CPE earnings conference call was pathetic. Come on Joe !!!! Be a professional.

[dan_s]

"Reported Net Income" or GAAP net income is a worthless number for upstream companies that have a lot of production hedged. Cash flow from operations is the most important number in upstream companies' results. The Wall Street Gang actually invented "Adjusted Net Income" because everyone knows that GAAP accounting rules for upstream companies are misleading, especially during periods of wild swings in commodity prices.

In the first quarter Callon only realized cash settlements on their hedges of $2.6 million, which compares to their operating cash flow of $160.3 million for the quarter. So, yes they were profitable in Q1 even without hedges.

Beyond Q1 their hedges will be a lot more important, but they should still generate positive cash flow without them.

Go to the EPG website and download the updated forecast model for Callon to Excel on your computer. On row 49 (two rows below Earnings Per Share highlighted in yellow) you can see "Cash Flow From Operations". Go down ten more rows and you will see the oil price that Callon should get in Q2 to Q4 that includes cash settlements on their hedges. They also have some nice hedges in place for 2021.

If WTI does rebound to $50/bbl, my valuation of CPE will triple in 2021.