Callon Petroleum (CPE) Valuation Update - May 22

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Callon Petroleum (CPE) Valuation Update - May 22

Post by dan_s »

We currently have three super smart young people (compared to me) that all have MBA degrees from SMU up in Dallas. They all have "real jobs", but in their spare time they work up the company profiles that we publish. Callon Petroleum was assigned to Steven, who has been helping me for over five years.

This morning I spent several hours reviewing my forecast model and the profile update for Callon Petroleum (CPE).

CPE trades at a deep discount to my current valuation of $77/share, so I wanted to confirm that I am not missing anything significant in my model.
My conclusion is that the production volumes used in the model are reasonable and likely to be too conservative. The oil, gas and NGL price assumptions look reasonable, but keep in mind that I am assuming that WTI does ramp up to $80/bbl in Q3 and then up to $90/bbl in Q4 and 2024. If you watched my Saturday podcast, you know that several of the Wall Street Gang are now forecasting much higher prices. Raymond James' current WTI forecast for Q4 2022 is $105/bbl.

I think CPE deserves a higher share price TODAY and if 2023 results match my forecast, CPE should justify a price target over $100.
> Callon is a profitable company already: Earnings per share of $5.95 in 2021, $19.63 in 2022 and $3.58 in Q1 2023.
> The Company's production increased 9.1% YOY in 2022. Production dipped in Q1 2023, but their guidance is for a strong production rebound in Q2.
> THIS IS VERY IMPORTANT: On May 3rd Callon announced two SIGNIFICANT transactions that are set to close in July. Our updated profile, which should be on the EPG website this afternoon, has six pages of details about these deals.
> Callon is selling their Eagle Ford assets for $655 million of cash + some contingent payments to them if oil prices go up as I expect them to do.
> They are purchasing additional production and lots of "running room" in their core areas in the Permian Basin for $265 million in cash + 6.46 million shares of CPE.
> Net cash of ~$390 million will significantly improve Callon's balance sheet ratios. < This should draw a lot of "love" from the Wall Street Gang.

TipRanks: "In the last 3 months, 9 ranked analysts set 12-month price targets for CPE. The average price target among the analysts is $51.77. Their price targets range from $36 to $71 (5-Star analyst Neal Dingmann at Truist Financial)".

If 2023 plays out as I have modeled, Callon should generate ~$300 million of free cash flow in 2H 2023 (in addition to the $390 million from the deals that should close in July) and be heading into a very profitable 2024 with the potential to generate close to $1.6 billion of operating cash flow for the year ($23/share), with $600 million of free cash flow. A pure play Permian Basin company that is generating free cash flow, has lots of running room, and a strong balance sheet should trade for at least 4X operating cash flow per share.

BTW the TipRanks consensus operating cash flow forecasts are $20.94 for 2023 and $22.22 for 2024.

Read the profile carefully.
Dan Steffens
Energy Prospectus Group
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