Callon Petroleum (CPE) Q2 Results - Aug 2

[dan_s]

Second Quarter 2023 Highlights

Generated 7% sequential growth in total daily production volumes and 5% sequential growth in daily oil volumes (107 MBoe/d and 63 MBbls/d, respectively) < Beat my Q2 production forecast of 106.5 Boepd / 64,000 BOPD.

Capital expenditures at the low end of guidance at $285.1 million

Reduced lease operating expense on a per unit basis by 6% sequentially

3rd Bone Spring Shale well in Ward County is outperforming expectations, expanding the development area for this formation within the Company's Delaware Basin footprint

Net loss of $107.9 million, or $1.74 per share (all share amounts are stated on a diluted basis), adjusted EBITDAX of $332.3 million, and adjusted income of $123.1 million or $1.99 per share < Adjusted Net Income beat my forecast of $114.7 million.

Net cash provided by operating activities was $279.5 million and adjusted free cash flow was $12.3 million < My operating cash flow forecast was $280.1 million.

"The second quarter highlighted the contributions from several large-scale projects across the Permian Basin combined with improvements in our cash operating structure and efficiencies in our capital spending program," said Joe Gatto, President and Chief Executive Officer. "We enter the second half of 2023 as a Permian-focused company with multiple initiatives to drive further improvements in our capital efficiency and operating margins which are already delivering near-term results. Importantly, we now progress forward with another lever to increase shareholder value through a share repurchase program that will complement further reductions in our debt balances."

Financial Results

Callon reported a second quarter 2023 net loss of $107.9 million, or $1.74 per share, and adjusted EBITDAX of $332.3 million. Excluding a one-time $406.9 million non-cash impairment charge related to the sale of the Eagle Ford assets as well as other items, adjusted income was $123.1 million, or $1.99 per share.

The Company generated $279.5 million of net cash provided from operating activities in the second quarter. Total operational capital expenditures for the quarter were $285.1 million. Callon expects adjusted free cash flow to increase in the second half of 2023 materially and be allocated between debt reduction and the recently announced two-year, $300 million share buyback program. < This is very good news for investors.

Operational Results

Second quarter production averaged 107 MBoe/d (59% oil and 80% liquids), in line with guidance. During the quarter, 32 gross wells were turned in-line.

Average realized commodity prices during the quarter were $73.52 per Bbl for oil (100% of NYMEX WTI), $19.87 per Bbl for natural gas liquids, and $1.23 per MMBtu for natural gas (53% of NYMEX HH). Total average realized price for the period was $49.00 per Boe on an unhedged basis.

Lease operating expense, which includes workover expense, for the quarter was $76.8 million or $7.89 per Boe compared to $75.1 million or $8.36 per Boe in the first quarter of 2023. The sequential per unit decrease was primarily related to increases in total production volumes.

Third and Fourth Quarter Outlook and Guidance

Callon entered the third quarter running seven drilling rigs, five in the Delaware Basin, one in the Midland Basin, and one in the Eagle Ford. Upon closing the Eagle Ford divestiture on July 3rd, the acquiring party assumed the Eagle Ford rig.

Callon has finalized plans for integrating the newly acquired Delaware Basin assets into its scaled co-development model and drilling and completion schedules. The Company intends to release a drilling rig in the Permian Basin in August and maintain a 5-rig drilling program through the end of the year. Development activity on the acquired assets is scheduled to resume in the second half after the previous operator dropped its one drilling rig in the second quarter. Five drilled but uncompleted wells acquired with the asset package are expected to be turned to sales in the fourth quarter.

During the second quarter, the now divested Eagle Ford assets produced 17 MBoe/d and the newly acquired Delaware assets produced 14 MBoe/d. Transitioning to the third quarter, the Company expects to produce 100 – 103 MBoe/d, which includes oil volumes of 60 – 62 MBbls/d. These estimates include the impact of a force majeure event at a large Midland Basin natural gas processing facility in July that lasted for 14 days. Given the elevated occurrences of weather-related power and midstream disruptions experienced during June and July, the Company has also assumed incremental downtime above previous seasonal levels used for forecasting. Combined, these two factors reduced third quarter production estimates by approximately 1,500 Boe/d. Wells turned in-line are expected to be 30 - 35 gross operated wells (27 - 32 net). Operational capital expenditures are expected to be $250 - $275 million on an accrual basis. < Operating cash flow should exceed $300 million.

For the fourth quarter, Callon expects to produce 104 – 108 MBoe/d which includes oil volumes of 63 – 65 MBbls/d.

Capital spending for the second half now includes approximately $15 million in non-operated capital projects previously budgeted for 2024 due to a change in the operator's schedule. Despite the incremental activity, Callon's 2023 full-year capital expenditure guidance is unchanged due to identified savings related to the base activity plan that offset the project spend. The production contribution from these non-operated capital projects is expected in 2024.

Full-year 2023 production and capital spending guidance remains unchanged and is available in the accompanying presentation.

Capital Structure Update

As of June 30, 2023, the drawn balance on the revolving credit facility was $528.0 million. After the quarter end, the Company applied the net cash proceeds from the recent transactions to pay down the revolving credit facility and redeemed all $187.2 million of Callon's outstanding 8.25% Senior Notes due 2025 at par. The pro forma effect of these subsequent events leaves Callon with approximately $1.1 billion of liquidity and less than $2.0 billion of total debt.

In the second quarter, Callon received upgrades from two rating agencies. Standard & Poor's Global Ratings upgraded Callon's issuer credit rating to B+ and its senior unsecured notes rating to BB- with a stable outlook; and Fitch Ratings upgraded Callon's long-term issuer default rating to B+ with a stable outlook and its senior unsecured notes rating to BB-.

[marc.wolin@yahoo.com]

CPE - was it in line with what you expected? Good, bad what?