Energy Prospectus

Callon announced that it sold a royalty interest to an entity controlled by private equity investor Kimmeridge Energy for $140 million. In addition, Callon sold Kimmeridge a $300 million note. The proceeds from these transactions were used to reduce the company's borrowing on a credit facility by roughly 33%.

This removes near-term liquidity risk: The company also announced that its borrowing base was affirmed at $1.7 billion. Given the agreements noted above, though, that figure was adjusted slightly to $1.6 billion. Still, this is a positive outcome given the impact that low oil and natural gas prices are having on the energy sector this year. There was a very real risk, not unique to Callon, that the borrowing base could have been lowered much more.

The spike in the share price at the open was lots of short covering.

In the last 3 months, 8 ranked analysts set 12-month price targets for CPE. The average price target among the analysts is $11.13. My valuation is $19.00.

The Company has entered into an overriding royalty interest ("ORRI") transaction with a private investment vehicle managed by Kimmeridge Energy ("Kimmeridge"), an energy-focused private equity firm, that generated gross cash proceeds of $140 million dollars. Callon has also issued $300 million of principal value second lien secured notes ("2nd Lien Notes") to Kimmeridge. The proceeds of the Kimmeridge transactions will be used to reduce borrowings on the Company's credit facility by nearly a third to approximately $1 billion. Separately, Callon recently entered into a definitive agreement to sell substantially all of its non-operated assets for gross cash proceeds of $30 million.

The Company has completed the fall borrowing base redetermination for its senior secured credit facility resulting in a reaffirmation of Callon's borrowing base at $1.7 billion. The borrowing base and elected commitment were subsequently reduced to $1.6 billion in consideration of the ORRI sale and total 2nd Lien Notes capacity.

President and CEO Joe Gatto commented, "These transactions represent an important step forward in delivering on our stated goals to improve Callon's liquidity position. Absolute debt reduction is also accelerated, complementing our free cash flow generation that has been bolstered by the significant synergies realized from the Carrizo acquisition. Importantly, the asset monetizations are accretive to our 2021 leverage metrics given a blended transaction multiple of approximately 6.5 times projected operating cash flow at current strip pricing. We will continue to pursue initiatives that improve our financial position and are encouraged by the expanding spectrum of actionable alternatives that have emerged as we execute on our strategic plan as a scaled operator in premier operating areas."

Highlights of the combined transactions:

Total gross cash proceeds of approximately $465 million after original issue discount
Estimated pro forma liquidity of $600 million after transaction expenses, with the next regularly scheduled borrowing base redetermination in spring 2021
Flexibility to issue up to a total of $700 million of 2nd Lien Notes under the indenture, including, $300 million notes issued to Kimmeridge, $300 million reserved for potential exchanges of unsecured notes and up to an additional $100 million that may be issued to Kimmeridge under certain conditions and at its election
Significant financial position improvements from the monetization of approximately 3.5% of current daily production with a resulting average net revenue interest (8/8ths basis) of over 74% for both our existing producing wells, as well as our undeveloped location inventory
2nd Lien Notes overview:

Private placement of $300 million in principal due 2025, issued at 98% of par and callable beginning in two years from the issuance date
Cash coupon of 9.00%, payable semi-annually
Concurrent issuance of approximately 7.27 million warrants at a strike price equal to the 20-day volume weighted average stock price prior to the closing date to be settled on a net share basis above the strike price if exercised (i.e., no additional common shares issued unless warrants exercised above the strike price with the number of shares issued calculated according to the warrant agreement)
No maintenance-based financial covenants

ORRI overview:

$140 million of gross cash proceeds received at closing
2.0% (on an 8/8ths basis) overriding royalty interest, proportionately reduced to Callon's net revenue interest, in substantially all Callon-operated oil and gas leaseholds with an effective date of October 1, 2020
ORRI burdened by ad valorem and severance taxes and post-production costs, including gathering, handling, processing, separating, treating, compression, dehydrating, transportation, and marketing costs

Non-operated working interest overview:

Estimated $30 million of gross cash proceeds receivable upon an anticipated closing date in early November
Current daily production of approximately 1,600 barrels of oil equivalent (55% oil)

Advisors

Jefferies LLC acted as financial advisor to Callon for the issuance of the 2nd Lien Notes and for the ORRI transaction. RBC Capital Markets acted as lead financial advisor for the ORRI transaction. Kirkland & Ellis LLP acted as legal advisor to Callon for the issuance of the 2nd Lien Notes and for the ORRI transaction. TenOaks Energy Advisors acted as sell-side advisor for the non-operated working interest sale.

Barclays acted as exclusive financial advisor and Sidley Austin LLP acted as legal advisor to Kimmeridge.