Callon Petroleum (CPE) Update - Jan 5

[dan_s]

I have updated my forecast/valuation model for CPE. It will be posted to the EPG website later today.

My valuation increases $3.00 to $21.00 per share, primarily because of the increased oil price assumptions used in my models for 2021 and 2022 that I posted here earlier today. Netting out regional commodity price differentials and cash settlements on their hedges, Callon's realized prices in 2021 should be approximately $47.00/bbl of oil, $2.00/mcf for natural gas and $16.25/bbl of NGLs. Callon's production mix is approximately 61% crude oil, 21% NGLs and 18% natural gas.
The HUGE negative commodity price differentials in West Texas have been and should continue to normalize now that the Permian Basin has ample pipeline takeaway capacity. < This is very important for all of the Permian Basin companies.

During December four energy sector analyst updated their models and price targets for CPE. Their price targets range from $7.00 to $20.00. The only reason that I can see for the single digit price targets is that several firms are still using very low oil price assumptions for modeling purposes and/or several of them still have CPE in the Wall Street "Penalty Box" for the merger with Carrizo in late 2019 which they did not approve of. Many of the Wall Street Herd hold grudges for a long time.

If Callon's 2021 guidance confirms or exceeds my production assumptions, there is significant share price upside because my valuation is only 1.25 X annualized operating cash flow per share for 2020 to 2022. A valuation multiple that low is not reasonable for a profitable company. First Call forecasts for 2021 are earnings per share of $3.52 and operating cash flow per share of $14.22 based on much lower commodity price assumptions than I am using. CPE's operating cash flow will be approximately $14.20/share for 2020.

Callon only has 40 million shares of common stock outstanding, which is extremely low for a company with close to 100,000 Boe per day of production.