Callon Petroleum (CPE)

[dan_s]

CFRA LOWERS OPINION ON SHARES OF CALLON PETROLEUM TO HOLD FROM BUY:
We cut our 12-month target by $2 to $12, 5.4X our '18 cash flow estimate, above its 5-year historical average of 4.9X, balancing a solid balance sheet (no maturities until '24) with range-bound commodity prices. We trim our '17 EPS estimate to $0.49 from $0.53 and raise '18's to $0.76 from $0.75. While CPE's prospects remain solidly intact (35% production growth CAGR from '17-'19) with adequate liquidity to fund capex ($639M), drillbit internal rates of return (IRRs) lag some peers (~30% vs. ~50%). That said, we think investor sentiment continues to overshadow fundamentals.

CRRA is a respected independent research firm.

Their 2018 CFPS estimate of $12/5.4 = $2.22 compares to my forecast of $1.88
Their 2018 EPS estimate of $0.76 compares to my forecast of $0.70

In my opinion, a small-cap with 35% production growth locked in for the next three years deserves to trade at a much higher multiple of operating cash flow. I do think $12 is a good year-end price target. There is no doubt that "investor sentiment" overshadows the fundamentals today, but that can change quickly.