Energy Prospectus

from SNL Energy Finance Daily

Callon faces tough road as it looks to restructure its debt

Byline: Mark Passwaters

Investors responded favorably April 2 to reports that Callon Petroleum Co. enlisted advisers to help it restructure more than $3 billion in debt, but the task may be easier said than done.

The move comes less than five months after the closing of Callon's hotly-contested acquisition of Carrizo Oil & Gas Inc., in which Callon assumed approximately $1.7 billion of Carrizo's debt. The stock was up 17.7% to 48 cents per share in early afternoon trading on the New York Stock Exchange. The stock has traded consistently lower during the first three months of 2020, reaching a high of $4.88 per share Jan. 6 before beginning a prolonged slide.

The company does not have any debt due until $650 million of notes comes due in April 2023, but Callon's issues go beyond that.

"[Callon] has the greatest risk in our coverage with 65.1% of their $2.0 billion borrowing base commitment drawn (52.1% of their $2.5 billion borrowing base)," Seibert Williams Shank & Co. Managing Director for Equity Research Gabriele Sorbara said. "CPE is at risk with a large cut in their spring borrowing base redetermination."

Outside funding sources have been difficult for oil and gas producers to obtain before the recent oil price collapse and the COVID-19 pandemic, and the current situation has complicated matters for Callon. During the company's fourth-quarter 2019 earnings call Feb. 27, Senior Vice President and CFO James Ulm said Callon would be seeking to reduce its debt through asset sales in 2020.

"We were able to monetize over $300 million in non-core assets last year, and we are actively progressing efforts to generate another $300 million to $400 million this year between non-core asset sales and infrastructure monetizations," Ulm said. With virtually every company in the sector now slashing their budgets and minimizing spending, the concept of asset sales in the near future seems farfetched.

"They will need a miracle to execute a transaction in the current environment," Sorbara said.

During the February earnings call, Ulm said the company had "ample liquidity, especially with a program that is projected to generate free cash flow at $50 a barrel." With prices now approximately $30 per barrel less than Callon's base-case scenario, the situation has changed.

"Even if [Callon] makes it past the spring redetermination, they will be operating tight until the $650 million of notes are due in April 2023," Sorbara said.

If the bankers want to play hardball with the upstream companies and call the credit facilities they will push a lot of the companies into Chapter 11. It won't turn out well for all of the debt holders.

Callon has ~54% of this year's oil hedged at approximately $50/bbl. They should have no problem servicing their debt. The debt covenants may allow the bankers to call the debt, but that doesn't mean that they should.

Chapter 11 will put all debt payments on hold, including the banks that hold the credit facility debt.
Look at row 49 of the Callon forecast model and you will see that they will generate $140 million per quarter in cash flow from operation this year even if WTI stays at $25/bbl. Natural gas prices should be much higher than what I have used in the model for Q3 and Q4.

BTW the bankruptcy lawyers LOVE a situation like this because they will get paid a lot to drag out the Chapter 11 case.

To be clear: ALL OF THE UPSTREAM COMPANIES ARE HIGH RISK IF OIL PRICES DO NOT REBOUND IN 2H 2020.

On April 7th Matthew Sorenson an energy sector analyst at Scotiabank rated CPE a Hold with a price target of $0.75. Three months ago he rated it a BUY with a price target of $8.00. This is "Crazy Coronavirus World".

Callon Petroleum Is Maintained at Equal-Weight by Morgan Stanley
Dow Jones 3/31/20 10:05 AM ET

Moody's Downgrades Callon Petroleum's Cfr To B3; Negative Outlook
Dow Jones 3/20/20 4:22 PM ET

Callon Petroleum Coverage Assumed by Credit Suisse at Neutral
Dow Jones 3/19/20 6:28 AM ET

Callon Reduces 2020 Capital Program by Over 25% and Provides Operational and Hedging Updates
PR Newswire 3/17/20 7:00 AM ET

I have updated my forecast for CPE and it will be posted to the EPG website this afternoon.

It is based on the press release by the company on 3/17/2020.

All of my forecast models are based on WTI oil price of $45 in Q1, $25 in Q2, $35 in Q3 and $45 in Q4.
For each company, I adjust for hedges and regional price differentials.
For Callon, there is additional uncertainty due to the merger with Carrizo that closed on 12/20/2019, therefore my cash flow forecasts for each quarter have got "cushions" built in.

2020 Forecasts:
First Call: $0.53 net income per share and $2.43 operating cash flow per share on revenues of $1.40 Billion < FC forecasts are based on all of the analysts' forecasts submitted to Reuters.
My Forecast: $0.48 net income per share and $1.68 operating cash flow per share on revenues of $1.25 Billion < Keep in mind that "Reported Net Income" is going to include some wild non-cash items this year.

These are challenging times, but the steps that Callon announced on March 17th are what they should be doing.

The forecast/valuation models for each company on the EPG website are "macro driven" Excel spreadsheets. You can download them to Excel on your computer and put in new assumptions at the bottom to see how net income, operating cash flow and stock valuation is impacted.