Callon Petroleum (CPE) Update - October 19

[dan_s]

From RBC Capital Markets
October 18, 2021
Callon Petroleum Company
Primed and Ready; Re-establishing Coverage

Our view: We reinstate and update our estimates to reflect the closing of
the Primexx acquisition, our recently updated commodity price forecast
(link), and other changes to our model based on our channel checks, data
analytics, and conversations with the company. Debt reduction remains
the top priority as leverage sits above peers, however this is improving
at a rapid pace owing in part to higher commodity prices but also the
strengthened FCF outlook post closing Primexx.

Key points:
Re-establishing coverage at Sector Perform with a $66/share price target. < My valuation is $79.
Our target includes the impact of the recently closed Primexx acquisition
and our increased expectations for both oil & gas to $71-81/bbl (WTI) and
$3.50-3.85/Mcf (HH) through 2023, on average. The Primexx acquisition
added accretive scale to the business that includes 18 Mboe/d (11 Mb/d
oil) of production, valuable water infrastructure, and adjacent assets that
should drive further synergies in the field with CPE able to target longer
laterals and larger pad sizes.

Delaware Basin integral to go-forward strategy. Post closing Primexx, CPE
now has 140k net acres in the Permian including 110k in the Delaware
portion of the basin. Moving forward we anticipate the Delaware will
account for three-fourths of its activity given the optionality for larger, more
economic projects as well as depth of its more core inventory. The company
is currently building a DUC backlog in the Delaware that we expect gets
worked through early next year.

Debt reduction remains top focus with FCF. The first call on near term
FCF generation remains on leverage reduction. At last update leverage
sat at 4.1x; we expect this trends lower to sub 2.5x by YE21 and model
further improvement to sub 1.5x by late 2022 based on our $81/bbl (WTI)
forecast next year. Asset sales have been successful in accelerating when
CPE could achieve its leverage targets. YTD the company has announced
$140 million in asset sales after the recent non-core Eagleford divestment
and delivered on its guided $125-225 million of sale proceeds for the year.
We think a potential JV of the water business remains a possibility but
not likely this year. Strategic monetizations continue to be a strategy to
accelerate deleveraging efforts, however we expect CPE remains patient in
considering any sale.

Thoughts into 3Q21 and beyond. Our 3Q21 EPS/CFPS of $2.59/$4.97 < Compares to my forecast of $2.46/$5.20.
are a touch above Consensus at $2.57/$4.89. We expect an integration
update comes at earnings as well as early indications on 2022 activity
plans. We think CPE likely reiterates a pro forma maintenance plan for
next year with the formal 2022 budget specifics to come at 4Q21 earnings
as usual. A conversation on shareholder returns could start to be a focal
point. Management previously messaged that discussions could start when
leverage reaches 1.5x at a mid-cycle $55-60/bbl oil price. We think this
target is achieved late 2022/early 2023.