Energy Prospectus

Since CPE announce Q1 results, four Wall Street energy sector analysts have sent new reports to Reuters. They all rate it a BUY with price targets of $11.00 to $13.00.

The Company reported net loss available to common shareholders of $21.4 million for the three months ended March 31, 2019 and Adjusted Income available to common shareholders of $35.4 million, or $0.16 per fully diluted share. < Adjusted Net Income compares to my forecast of $37.2 million, $0.16 per share.

Highlights

Increased production to 40.3 Mboe/d (79% oil), an increase of 52% year-over-year < Compares to my q1 production forecast of 39.5 Mboepd.

Generated an operating margin of $32.57 per Boe

Recently completed a five-well pad in the southern portion of WildHorse, developing an entire half section in the Wolfcamp A

Initial 2nd Bone Spring shale well placed on production in the Delaware and showing positive early performance

Continued strong production from a Middle Spraberry well drilled at Monarch as part of multi-well, co-development of three flow units

Improved completion efficiency, measured in stages per day, by more than 25% compared to the same period in 2018

Reduced average drilling and completion costs by 15% sequentially, resulting in an average cost per lateral foot below $1,000

Announced the pending sale of certain non-core assets in the southern Midland Basin for estimated gross proceeds of $260 million, with potential contingency payments of up to $60 million based upon average annual commodity prices over a three-year period

Reaffirmed a borrowing base of $1.1 billion, pro forma for the pending non-core asset sale

"We are ahead of our plan to build out an inventory of drilled, uncompleted wells to extend our usage of a larger pad development model, applying this concept to the Delaware Basin as we continue to build upon our success in the Midland Basin. Capitalizing on the efficiencies of larger development, we delivered a sequential decrease in average drilling and completion cost per lateral foot of 15% in the first quarter. Our drilling plan is quickly progressing to the point where we will decrease to four drilling rigs and start larger Delaware Basin pad completions towards the end of the second quarter." commented Joe Gatto, President and Chief Executive Officer. He continued, "The previously announced sale of our Ranger properties will streamline our operations with a focus on three core operating areas with well-established infrastructure. Since we did not have any planned Ranger activity in 2019, the divestiture will not impact our base 2019 activity levels, but will allow us to optimize our 2020 capital allocation with the removal of Ranger drilling obligations. Upon closing, all cash proceeds will be directed to bolstering our financial position. We remain focused on executing our 2019 plan within our previously announced budget range, with the benefit of incremental cash flow from commodity realizations above our planning case flowing to the bottom line and the benefit our shareholders."

I will update my forecast/valuation model on May 7.

By Derrick Whitfield at Stifel: Callon Petroleum Company (CPE, $7.56, Buy; Target $12.00)

CPE Delivers strong quarter and operations update
We view the release as slightly positive. The positives include i) a solid total and oil production beat (2.8% and 2.0% above consensus, respectively), ii) continued strong well results in the company’s Spur area (Lower WC-A wells achieving IP30 rates ~80% above Stifel’s type curve), iii) encouraging results from multi-interval, co-development pilots in the Monarch area (MS well achieving IP30 rates ~25% above Stifel’s type curve) and iv) the reduction in average D&C costs by 15% sequentially. The negatives include i) higher than expected capex (3.5% above consensus) and ii) lingering field maintenance in the Delaware (~1.6 mboepd in Q219).
Net-net, the strong quarter and encouraging operations update should offset the higher than expected Q119 capex.

I have updated my forecast/valuation model for CPE and it will be posted to the EPG website this evening.

I am lowering my valuation by $2.50/share to $14.00/share, which is still way above the current share price. I was just using a higher multiple of operating cash flow per share to value it than it probably deserves.

May 9 from TPH
CPE Stock Thoughts
Expecting operational outperformance to bode well for upcoming guidance refresh
Sector: NAm E&P | Ticker: CPE | Recommendation: HOLD | Target: $15 | Close: $8.10

Management plans to provide updated guidance incorporating the impact of the Ranger sale once the transaction closes in June. After updating our model for potential cycle time improvements, we believe the company may be able to leave oil guidance unchanged as wells are pulled forward due to efficiency gains. Specifically, Ranger was producing 4mboepd (52% oil) in February, and our updated model calls for 39.8mboepd / 31.4mbpd of FY'19 oil vs legacy guidance midpoints of 40.5 / 31.4. In addition, the updated capex cadence results in a heavier H1 weighting (now 60 / 40 vs ~even split previously), though we feel comfortable that management will stick to the original $600-630MM capex budget as evidenced by plans to drop from 6 to 4 rigs in the near term. All-in, our model shows a FCF inflection in Q3'19 at current strip pricing. Looking ahead to 2020, we see 36.5mbopd of oil production on $640MM capex compared to Street 36.3 / $620MM, though it's hard to say if numbers are updated for the Ranger sale. On valuation, the name trades at 2020 metrics of TPHe 4.4x EV / EBITDA and 6.0x P /E while generating a 10% ROCE and 2% FCF yield with a balance sheet at 1.7x leverage. We remain sidelined on the equity for now, but are becoming increasingly constructive as the FCF inflection point nears.