Callon Petroleum (CPE) Update -

[dan_s]

These two transactions increase my valuation of CPE by $5.50 to $82.50/share.
Only a small decline in production is expected from Q2 to Q3 (~1,500 Boepd) and the acquisition adds some high-quality "running room".
Reduces Outstanding Debt by Approximately $300 Million < Callon has no near-term debt problems and balance sheet ratios are good.
Will Commence Share Buyback Program in the Third Quarter

HOUSTON, July 5, 2023 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today announced that it closed its previously announced acquisition of Delaware Basin assets from Percussion Petroleum Operating II, LLC ("Percussion") and the sale of its Eagle Ford assets to Ridgemar Energy Operating, LLC ("Ridgemar") on July 3, 2023.

"We are excited to announce the completion of another important strategic move for Callon and its shareholders. Through these two transactions, we have created a singular focus on the Permian Basin, reduced our absolute debt position, and kicked off a shareholder return plan," said Joe Gatto, President and CEO. "The bolt-on Percussion transaction improves our Delaware inventory depth and also lowers our cost structure. I would like to thank everyone at Callon, Percussion, and Ridgemar for their efforts to close these transactions."

Financial Impact of Transactions
The consideration paid at closing for the Percussion transaction consisted of $249 million in cash and approximately 6.3 million shares of Callon common stock, subject to customary post-closing adjustments. Callon received $551 million in cash at closing for the sale of its Eagle Ford assets to Ridgemar, subject to customary post-closing adjustments. Both transactions reflect an effective date of January 1, 2023, and exclude transaction expenses.

Stock Repurchase Program
As previously announced, the Board of Directors authorized a two-year, $300 million stock repurchase program in conjunction with the transactions that became effective upon their closing on July 3rd. Callon intends to repurchase its first shares under this program in the third quarter of 2023.

Balance Sheet Update
At closing, Callon's outstanding debt was reduced by approximately $300 million and gross debt is now less than $2.0 billion. Subsequently, Callon submitted a notice of redemption for the $187.2 million of 8.25% Senior Notes maturing July 2025 and expects to complete the redemption in early August. These notes are callable at par and will be funded using the Company's revolving credit facility.

About Callon Petroleum
Callon Petroleum Company is an independent oil and natural gas company focused on the acquisition, exploration and sustainable development of high-quality assets in the Permian Basin in West Texas. For more information about Callon Petroleum, please visit www.callon.com.

[ChuckGeb]

Without getting into the weeds of the number crunching, I am trying to grasp which part of the recent sale/purchase that net increased the value of the stock by $375 million. They sold Eagleford for $551 million, paid $249 million cash and $211 stock for Permian assets and after closing the stock is worth $375 million more. That seems like a bit of hocus pocus unless the assets bought have some hidden intrinsic value. If this were a Harold Hamm transaction it is plausible but not with Callon. Thoughts?

[Fraser921]

I was confused too. If so, they should just keep on buying stuff and the stock will be worth 250

[dan_s]

Stronger Balance sheet, more running room in the Permian Basin and CPE was grossly under-valued before these two deals closed. Some of the Wall Street Gang won't consider the benefits of M&A until the deals close.
> 2022 actual results were $19.63 earnings per share and $25.61 operating cash flow per share.
> My 2023 forecast is $10.63 earnings per share and $19.55 operating cash flow per share.

My current valuation of CPE ($82.50/share) is based on just 3.75 X annualized operating cash flow per share. CPE is free cash flow positive and there is nothing that I can see which justifies it trading at less than 2 X operating cash flow per share.

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." < The three analysts to most recently evaluate CPE, rate it a BUY with price targets of $53, $59, and $71.

[ChuckGeb]

So it went up because you increased the multiple? As I understand current production actually went down. Just a little surprised that with the spread between the current price and your previous valuation (over 100%) you would increase valuation another $5 plus per share solely on the basis of the transaction without taking some time to see if the assets were commensurate with the value paid. The market didn't seem to give a lot of credit to the move. It just surprises me to see valuation increase based solely on the transaction being consummated.

[dan_s]

Paying off debt increases the equity valuation.

There will be a small decline in production from Q2 to Q3, but quickly replaced with new wells in the Permian Basin.
TipRanks forecast for 2023 ($9.87 EPS and $20.12 operating CFPS) is very close to my forecast.

I have been following and modeling Callon for over 15 years. I have a HIGH level of confidence in my model for this company.
Does CPE deserve to trade at a PE ratio of 3.5?
Does any company that is this profitable deserve to trade at such a low PE ratio?

Look at my model and tell me why CPE deserves to trade at less than 2X operating cash flow.
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Zacks Equity Research
Thu, July 6, 2023

Callon Petroleum Company CPE completed the acquisition of Delaware Basin assets of Percussion Petroleum Operating II LLC for $249 million in cash and 6.3 million shares of its common stock.

Under a separate agreement, the company exited Eagle Ford by divesting all its assets to Ridgemar Energy Operating LLC. Callon received $551 million in cash at the closing of its Eagle Ford asset divestment.

With the transaction, Callon solidified its Permian basin focus. The acquisition improves the company’s Delaware inventory depth and lowers its cost structure. The company will have an inventory of more than 1,500 high-quality locations in the Permian Basin. < This high-quality "running room" is key to my increased valuation.

Callon used the transactions to reduce its debt and start a shareholder return plan. The company authorized a $300-million stock repurchase program for a two-year period. Callon plans to repurchase its first shares under the program in the third quarter of 2023. At closing, Callon’s outstanding debt was reduced by about $300 million, with a current gross debt of less than $2 billion. < At 12-31-2022 the PV10 pre-tax valuation of Callon's proved reserves (P1 only) was $9 billion. Callon's PV10 Net Asset Value at 12-31-2022 was $125.56 per share based on SEC guidelines. Yes, the PV10 at the end of 2022 was based on $95/bbl WTI, but even at today's strip, the Company's PV10 NAV should be close to my current valuation.

The transactions, subject to post-closing adjustments, has an effective date of Jan 1, 2023.

Headquartered in Houston, TX, Callon is solely focused on the exploration and production of oil and gas resources in the Permian Basin. The company boasts an impressive footprint throughout the core of the Permian Basin.
Zacks' Conclusion: The management’s decision to shed non-core assets, while focusing on more profitable ones, is a major positive.

[dan_s]

Most recent analysts' update submitted to TipRanks: "Mizuho analyst Nitin Kumar (rated 5-Star by TipRanks) raised the firm’s price target on Callon Petroleum to $59 from $54 and keeps a Buy rating on the shares ahead of the Q2 results. Given the anticipated early Q3 close of the Percussion acquisition and Eagle Ford divestiture, the focus of the earnings call will be the post-deal outlook, the analyst tells investors in a research note.
The firm raised the price target to incorporate the deals."

My valuation is higher because I am using a WTI oil price of $90/bb after Q3 2023. I will discuss why I believe WTI prices will move a lot higher over the next few months in today's podcast.

[ChuckGeb]

I think your modeling is excellent and precise. Input variables include assumptions regarding pricing and applicable multiples which are obviously opinions which are unique to each of us. The FMV according to actual willing buyers and sellers as measured by the stock market currently and for some time reflect lower multiples which are a result of many factors including perceived risk unique to the company, the economy, and a myriad of others. I appreciate all the effort you make in providing very useful models. Your fair value reflects a significant positive paradigm shift that I am not yet sold on. Just my opinion.

[Fraser921]

Re: "your work is excellent and precise"..I think you are asking is it accurate?

Dan, we love you but bring down those valuation metrics!

Might be a good topic for the weekly podcast.

Do our favorite names have "priced in" the lower commodity prices , lower cash flows, lower variable dividends or will the market be surprise when q2 numbers come out.

I think surprised and the names will trade lower. Allen stated he thinks it's in the numbers. Certainly some of it is in; Crk 20 to 11, Ar 45 to 22, OVV 59 to 38 but is it all in?

CRK was 7 Feb 2022
AR was 12 Aug 2021

NG is lower now and appears to be a glut.