Callon Petroleum (CPE) Update - Oct 5

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Callon Petroleum Strengthens Balance Sheet, Boosts Liquidity

Zacks Equity Research
October 5, 2020

Callon Petroleum Company (CPE) recently announced several transactions to boost its liquidity position and strengthen the balance sheet. It has also agreed to divest essentially all non-operated assets.

Callon Petroleum made an overriding royalty interest transaction with Kimmeridge Energy, a private equity firm. The transaction generated proceedings of $140 million. Moreover, the company sold $300 million of principal value second lien secured notes to the energy-focused equity firm. Proceeds from these transactions will likely decrease the upstream company's borrowing on a credit facility by almost 33.3%.

It reaffirmed its borrowing base at $1.7 billion. Considering the adjustments, the base was decreased to $1.6 billion. The increased short-term liquidity was well ahead of debt maturities. Strengthening of the balance sheet was an important move, given the negative impact of low oil and natural gas prices in the upstream energy market.

At second quarter-end, the company’s total cash and cash equivalents amounted to $7.5 million, down from the first quarter’s $14.8 million. Moreover, long-term debt totaled $3.4 billion, up from $3.2 billion in the first quarter, suggesting total debt to capitalization of 64%. In fact, its debt to capitalization was significantly higher than 37.3% of the composite stocks belonging to the industry.

For $30 million of gross cash proceeds, the company intends to divest non-operated assets. The transaction is expected to close in early November. Production from the assets is estimated at 1,600 barrels of oil equivalent per day (Boe/d), of which 55% is expected to be crude oil. The move will further boost its liquidity.
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MY TAKE: CPE has been trading at a deep discount to my valuation of $19 because the Wall Street Gang was worried that the Company's bankers would cut their credit facility. With the credit facility now confirmed at $1.6 Billion and the big slug of cash coming in from the sales above, CPE has no near-term liquidity problem and almost zero risk of needing to anymore debt restructuring. PLUS: CPE is free cash flow positive at today's oil & gas prices.