Callon Petroleum (CPE) Update - Dec 26

[dan_s]

In a report released 12/23/2019, Brad Heffern from RBC Capital maintained a Buy rating on Callon (CPE), with a price target of $8.00. The company’s shares closed last Monday at $4.55 and moved to $4.74 on Thursday.

According to TipRanks.com, Heffern is a 4-star analyst with an average return of 4.0% and a 46.3% success rate. Heffern covers the Basic Materials sector, focusing on stocks such as Par Pacific Holdings, Marathon Petroleum, and Denbury Resources.

RBC Capital’s Brad Heffern thinks “the post deal trading multiples and FCF yield screen well versus the peer group.” The analyst added, “We like the company's strong asset positions in the Permian and Eagle Ford Basins. Given the recent acquisition of CRZO, we think CPE has successfully transitioned from a Permian pure play growth story, to a sustainable corporate return model with asset diversification, centered around sustainable growth and free cash flow generation.”

Accordingly, Heffern reiterated an Outperform rating on Callon. The 4-star analyst’s price target is $8, indicating Heffern’s confidence in CPE’s ability to add 71% to its share price over the coming year.

Does the rest of the Street think the beaten-down stock is ready to surge, too? Yes, it does. Callon’s Strong Buy consensus rating is formed of 7 Buys and 1 Hold. Though, not quite as enthusiastic as the RBC analyst’s take, the average price target of $6.56 still presents potential upside of 40%. < First Call's price target of $7.79 is the average of 19 analysts reports on file with Reuters. Some of them are over six months old and don't include the impact of the merger with Carrizo or the recent increase in oil prices.

[John.A.Hunt]

... we think CPE has successfully transitioned from a Permian pure play growth story, to a sustainable corporate return model with asset diversification ...

Dan, this is first time in a long time I recall seeing "asset diversification" mentioned in a positive light regarding domestic oil companies. It seems like the past few years companies were criticized for owning a mix of petroleum properties in different basins, praised for transitioning to "pure play" with only horizontal eggs in one basket.

Is this a "tell" at the poker table?
Are the sharks about to wager some chips?

[dan_s]

John;

Too much diversification is not good because you need teams of geologists and engineers focused on each area, hence more overhead expense. "Pro Forma Callon" will have two core areas, but they are both in Texas and quite similar. A Big Plus of this merger is that both companies have strong technical teams.

When I went to work at Hess Corp. in 1983 one of the things that I noticed first was that the company had way too much diversification. It created tension between the asset teams that were fighting for budget money, which caused them to over-state the potential of their areas at the annual budget meetings. I recall one year when the Onshore Gulf Coast Team presented exploration projects that were extremely high risk. John Hess, with no exploration experience at the time, got excited by their BS and the company pissed away over $100 million by drilling dry hole after dry hole in South Louisiana.

I like the Callon + Carrizo merger because the new core area in the Eagle Ford is more developed and generates a lot of free cash flow that can be used to develop the high quality leasehold position that Callon has in the Permian Basin. Carrizo also brings more Permian leasehold. Since most of the Eagle Ford leasehold is held by production they might only have one rig drilling there in 2020.

Trying to figure out what the Wall Street Gang will focusing on in six months is difficult, if not impossible. Today "Free Cash Flow" is #1 by a wide margin. Any upstream company can generate FCF just by stopping all drilling and depleting out their proven reserves. Finding upstream companies that can generate FCF and continue building production and proven reserves is my focus.

Take a hard look at the Callon Pro Forma forecast model on our website (under the Sweet 16 tab).
> Look at Row 47: "Cash Flow From Operations" and compare it to the combined CapEx of CPE + CRZO
> Look at Row 54: "Daily Production per quarter"
This will tell you why CPE is one of my Top Picks for 2020.