Callon Petroleum (CPE) Update - June 19

dan_s · Post by **dan_s** » Fri Jun 19, 2020 4:19 pm

MKM Partners initiates CPE with a Buy and price target of $2.
Analyst John Gerdes said, "We are initiating CPE with a Buy rating and $2 per share price target. Our 2Q20 production expectation of ~106.4 Mboepd reconciles with guidance (>105 Mboepd). Our 2020 production expectation is ~103.6 Mboepd (~64% oil) and integrates the company's gross oil production curtailment of approximately 1.5 Mbopd in April and ~3 Mbopd in May.
> Assuming ~$600 million in capital expenditures this year, Callon is approximately ~$30 million FCF negative in 2020 assuming NYMEX ~$33 oil/~$2.10 gas.
> Assuming approximately $600 million in capital spending next year and NYMEX $45 oil/$2.65 gas, the company should generate ~$70 million of FCF in 2021.
> From 2022 through 2024, assuming equilibrium NYMEX $55 oil/$2.65 gas and ~$825 million in annual capital spending (seven-rig program), Callon's production should stabilize and the company should generate an ~39% average per annum FCF yield given a highly diminished market capitalization.
As a consequence of a higher cash operating margin (~64% oil production composition), partially offset by a ~15% higher capital intensity, Callon's full-cycle return of 130%-135% is solidly above the industry median of approximately 120%. The company's net debt-to-EBITDA is ~4.3x at YE20, approximates 4.1x at YE21 though meaningfully declines to ~3.2x at YE22 assuming oil price recover to $55 NYMEX. The suspension of the bank line total leverage ratio of 4x though March 2022 should provide Callon the financial latitude to navigate the current period of low oil prices."
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Callon has ~95% of their Q2 to Q4 2020 crude oil production hedged at $43/bbl. Regional price differentials will shave off $2 to $3 bbl.
I have made slight adjustments to my forecast/valuation model for CPE and I'm increasing my valuation by $0.10 to $3.60. There is definitely more upside because as oil prices firm up, the outlook for 2021 improves and the risk of bankruptcy fades. Callon is now generating more than enough cash flow from operations to meet all of their financial obligations. As oil & gas prices firm up, CPE should deserve to trade at a much higher multiple of operating cash flow per share than I am using today. The current share price compares to my 2020 operating CFPS forecast of $1.55.