Callon Petroleum (CPE) Q4 Results - Feb 25

[dan_s]

Callon's Q4 2020 production beat my forecast and their detailed guidance for 2021, which looks very conservative to me, gives me a higher level of confidence in my forecast/valuation model.
As a results I am able to raise the multiple of operating cash flow that I use to value the stock.

CPE is trading at $25.65 at the time of this post, which compares to my pre-release valuation of $25.00. On April 10, 2020 CPE closed at $5.10.

Forecasts for 2021
> First Call (average of the forecasts submitted to Reuters and most are before CPE's guidance update): EPS of $4.35 with operating cash flow of $15.30 per share.
> My forecast/valuation that is based on Callon's production and line-by-line expense guidance: EPS of $7.17 with operating cash flow of $18.20 per share with FCF of ~$300 million.
> Callon has a lot of their 2021 production hedges, which is bad since they hedged at lower oil & gas prices than we have today, but it does reduce their commodity price risk. My model assumes realized prices for 2021 (net of cash settlements on their hedges) of $49.25/bbl oil, $2.50/mcf for natural gas and $18/bbl for NGLs.
> I am raising my valuation by $11 to $36, which is just 2X operating cash flow per share.
> As we move through the year, if commodity prices hold up and I gain more confidence in my 2022 forecast, the valuation multiple should go a lot higher. An upstream company with this much "running room" in the Permian Basin should be trading for at least 4X operating cash flow per share.

On August 7, 2020 Callon did a 1 for 10 reverse stock split. It only has 39.8 million shares outstanding, which is very low for a company of this size. As a result of the low share count, a small change in the model assumptions can have a significant impact on the valuation.

My updated forecast/valuation model for CPE will be posted to the EPG website this evening.