Callon Petroleum Update - Nov 8

[dan_s]

I have updated my forecast model for CPE's outstanding Q3 results and their updated guidance.

I have increased my valuation by just $0.25/share to $17.25, but I could easily justify a higher valuation. First Call's price target is $17.45.

Why?

> I now have a much higher level of confidence in my 2019 forecast because we've seen a full quarter that includes the acquisition from Cimarex (XEC)

> Based on the midpoint of their updated production guidance for 2018, Callon should exit 2018 with production of ~40,000 Boepd (~77% crude oil). This compares to an exit rate of 26,500 Boepd (79% crude oil) at 12/31/2017.

> As I mentioned at both of our luncheons this week, a pleasant surprise has been much higher NGL prices than I was forecasting for Q3 (for all companies). Callon reports their natural gas and NGLs on a combined basis. Their combined gas production sold for $4.51/mcfe in Q3, compared to $3.81/mcfe in Q2. Higher NGL prices offset lower realized oil prices.

> Lower crude oil prices in the Permian Basin will last for 3 more quarters, then the big differential to WTI should fade away. CPE's realized oil price (including cash settlements on hedges) was $52.87/bbl in Q3, compared to $57.38/bbl in Q2.

Callon has a strong balance sheet and lots of running room in the Permian Basin. ~40% YOY production growth is now locked in for 2018 and, with a strong exit rate and 5+ rigs running, they should top that growth rate in 2019.

The updated forecast/valuation model will be posted to the EPG website this evening.

PS: On Nov. 7 Gabriele Sorbara at Williams Capital sent his updated forecast for CPE to Reuters. He rates it a BUY with a $16.00/share valuation. Gabriele is one of the top analysts covering this sector.