Callon Petroleum (CPE) Valuation Update - Aug 3

[dan_s]

At the time of this post CPE was trading for $36.87

I have updated my forecast/valuation model for CPE, adding Q2 actual results and adjusting Q3 and Q4 for the Company's detailed guidance.

My valuation increases by $2.50 to $84.50/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 $46.78."

Why is my valuation so much higher than the TipRanks' price target?
> Now that Callon has closed the Percussion Acquisition and Eagle Ford Sale, they have a stronger balance sheet and a lot more running room. By now you should know that I am a big fan of "running room".
> So, I raised my valuation to 4X annualized operating cash flow per share.
> Callon is going to generate solid free cash flow quarter after quarter.
> They are going to drop one operated drilling rig in a few weeks and then stick with 5 operated rigs in the Permian Basin.
> Production will dip about 5,000 Boepd from Q2 to Q3 because of the Eagle Ford sale to ~101,500 Boepd, but ramp up to ~108,000 Boepd by year end.
> My 2024 forecast assumes Callon's production will average 112,000 Boepd, which I believe is conservative if they run 5 rigs all year. Their 2024 production mix should be approximately 60% crude oil, 21% natural gas and 19% NGLs. Revenues are heavily weighted to oil.
> My 2024 operating cash flow per share forecast is $22.08, which compares to TipRanks' consensus forecast of $19.84 CFPS. My 2024 revenue forecast is actually lower than TipRanks' forecast, so I don't see how their CFPS forecast is so much lower. Regardless, there is no reason that I see for CPE to be trading for just 2X operating cash flow per share.

The Wall Street Gang won't give Callon full credit for the significant running room they now have due to the Percussion Petroleum Acquisition until they see a few quarters of production growth.