Energy Prospectus

HOUSTON , Aug. 4, 2020 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three and six months ended June 30, 2020. Presentation slides accompanying this earnings release are available on the Company's website at www.callon.com located on the "Presentations" page within the Investors section of the site.

Recent Highlights

Delivered production of approximately 108.7 Mboe/d (65% oil), above the high end of guidance, for the second quarter of 2020 < Compared to my forecast of 105,000 Boepd, 63.8% oil.

Posted accrued operational capital spending of $85.1 million , 15% below the second quarter target of $100 million

Generated net cash from operating activities of $97.8 million and free cash flow 1 of $18.0 million for the second quarter

Loss available to common stockholders of $1,564.7 million , or $3.94 per fully diluted share, driven by an impairment of evaluated oil and gas properties of $1,276.5 million , adjusted EBITDA of $153.4 million , and adjusted income per share 1 of $0.01 for the second quarter of 2020 < Adjusted net income compares to my forecast of an $11.5 million loss.

Achieved lease operating expense ("LOE") of $50.8 million or $5.14 per Boe for the second quarter of 2020, an improvement of 10% over the comparable three-month period ended March 31, 2020

Lowered cost structure with total operating expenses, including full cash G&A costs 1 , of $9.58 /Boe in the quarter, 16% below the prior quarter < This is VERY GOOD.

Reduced Delaware and Midland drilling and completion costs versus the prior quarter by approximately $100 per 1,000 lateral feet, representing incremental savings of 11% and 17% respectively

Announced a 1-for-10 reverse stock split effective as of the close of business on August 7, 2020

Joe Gatto , President and Chief Executive Officer commented, "Our operational and financial results for the second quarter reflect Callon's commitment to thoughtful capital allocation and operational execution that we have overlaid on an exceptional, diversified asset base. As oil markets began to erode in March, our team acted quickly to reduce capital activity while maintaining a clear focus on near and long-term operating goals. As a result, our drilling and completion costs are down across the board, second quarter production was well ahead of estimates, and operating costs continue to decline beyond our targeted synergy goals."

He continued, "Our success in reducing our cost structure, combined with leading capital efficiency from strong well productivity and well cost reductions, positioned us to generate free cash flow this quarter. This is just the first step as we have developed a longer-term plan designed to consistently generate free cash flow while maintaining production levels with a reduced reinvestment rate. After moving past the working capital cash impact of expenditures incurred in the first quarter, a meaningful portion of which added to our current inventory of drilled, uncompleted wells, we will be dedicating all of our expected free cash flow to credit facility reductions and forecast our current credit facility balance to decline into year end and continue into 2021."

Mr. Gatto also shared, "Despite tremendous business, social, and personal hurdles resulting from the current pandemic and extreme turbulence in the financial markets, our team has remained focused on synergy realization and the integration of people, systems, and processes. Our operational and financial results highlight our progress as an organization and I applaud the Callon team for persevering through an incredibly difficult past few months. Importantly, we remain committed to their safety and that of our vendors, partners, and communities."
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I will be updating my forecast/valuation model this evening.

Hi Dan

Did you see they did some hedging for 2021? This is positive in that oil prices are in a range that they can hedge 2021.

Followed the "Big Bath" write-off principal with $ 1.3 billion charge. Dan your thoughts? IMHO they would not have done this if any debt covenants would be violated. This "impairment" write-off
(LOL best oil property in the world in Permian basin ?) to me sets up large income in future.

Callon 10 for 1 stock reverse spli t--wow from 397 million down to only 39 million outstanding. Squeezing the shorts....imho.

Callon Book value at $ 4.74 share. Selling at 27% of book value. CRAZY ????

Do you see anything here that Callon will not be a survivor?

Thanks

I was planning to finish updating the Callon forecast model last night, but our power went out in Sugar Land last night.

The impairment charges are not "optional". They are required by GAAP and SEC rules. "Impairment" does not equal "abandonment". They still own all the properties and the proven reserves will go up again when oil & gas prices rebound, but (because GAAP rules don't make a lot of sense sometime), once assets are impaired they cannot be un-impaired. Good news is that when the proven reserves are increased the DD&A rate will go way down.

Operations Update

At June 30, 2020, Callon had 1,471 gross (1,298.0 net) horizontal wells producing from established flow units in the Permian Basin and Eagle Ford Shale. Net daily production for the three months ended June 30, 2020 grew 168% to 108.7 Mboe/d (65% oil), as compared to the same period of 2019.

For the three months ended June 30, 2020, Callon drilled 29 gross (27.0 net) horizontal wells and placed a combined 26 gross (24.9 net) horizontal wells on production. During the course of the quarter, all rigs and completion crews ceased activity upon completion of projects in progress. The Company does not have any active rigs or completion crews at this time but does intend to resume development activity during the third quarter. Near-term operational activity will be focused on completing a drilled, uncompleted inventory of approximately 70 wells in both the Permian Basin and Eagle Ford Shale with one dedicated completion crew. The Company also intends to return two to three drilling rigs to service later in the third quarter for the balance of the year.

This means production will be down in Q3, but free cash flow from operations will be up. Production growth should resume in Q4, fully funded by operating cash flow.

I have updated my forecast/valuation model for CPE and posted it to the EPG website home page.

CPE is trading for $1.26 this morning. My valuation stays at $3.50 (pre-reverse split).

What I like:
> Q2 production beat my forecast, but they drop all drilling rigs by June 30 and will only run one completion rig in Q3.
> Production will be down in Q3, but free cash flow should be up since CapEx spending has been slashed.
> ~100% of their Q3 and Q4 oil is hedged at $43/bbl and gas & NGL prices are rising.
> Callon provided detailed guidance for 2H 2020, so I have a HIGH level of confidence in the model.
> The stock is trading today at less than 1X operating cash flow per share.
> Some hedge funds cannot own stocks under $5, so reverse split might draw more interest, but low float doesn't help.

Hi Dan

Any concern for post split performance of CPE?

A director did purchase in open market last week----small.

As you know performance after a reverse split is normally poor. However oil has been strong.

Thank you

My updated forecast for Callon can be found on the EPG website. Just click on the Sweet 16 tab after logging on.

Their production will be down from Q2 to Q3, but the realized prices for all of their production will be up so cash flow from operations should be about the same. Callon is generating more than enough cash flow from operations to pay all of their bills including interest on their debt. They should generate over $100 million of free cash flow in 2H 2020.

The stock has continued in a downward spiral post RS for the last 2 weeks.
Do you have concerns Callon will be forced into making more decision to dilute the shares/lower share price?

All of the upstream companies are down this morning.

I don't know what Callon will do, but my forecast is based on lower oil prices than we have today for Q3 and Q4. Based on the Company's guidance, they will generate quite a bit of free cash flow from operations in Q3 and Q4.

You should go to the Callon website and review their August presentation slides. Their future plans are listed on slide 6.