Callon Petroleum (CPE) Price Target Update - Nov 4
Posted: Fri Nov 04, 2022 12:28 pm
From Neal Dingmann at Truist Financial: BUY with price target raised to $74.00
------------------------------------
Callon Petroleum Company (CPE)
Life of Field Type Development Taking on New Life
Full-scale/multi-formational development has become in focus as various producers begin
to change their operational technique to a larger, more effective drain of the overall reservoir.
Callon has made few operational changes in the last several quarters as its life of field
development has continued to target optimal economic resource capture within a reservoir
system. We believe the current peer group trading discount will begin to disappear as
investors continue to have more confidence in the company’s operations and CPE initiates
its shareholder return program.
Solid FCF Generation Produced by Life of Field Development
Following another strong quarter of FCF generation, we remain encouraged by CPE’s
multi-stack, co-development drilling approach that has produced consistent results the past
several quarters. The company has been ahead of its peers with its pursuit of a medium
term multi-stack, co-development drilling approach that is beginning to build momentum
through its highly focused development. By developing multiple, complimentary zones within
a reservoir system, and keeping economic and capital efficiency targets front of mind,
production results are trending above quarterly guidance and generating optimal FCF.
3Q’s FCF represented a year-to-date high and we fully anticipate CPE to reach year-end highs
for production and FCF to end the year. We believe the recent addition of a sixth rig will
further support operational efficiencies. We expect multiple, 10-well programs targeting
various zones, while deploying two simultaneous crews to drive increasing production results
through 4Q and into 2023. 4Q22 D&C capital spend guidance is trending toward ~$185MM
with a year-end forecast upwards of $835MM.
Updating Estimates, Price Target Increased to $74 from $73
Callon reported higher 3Q22 EBITDAX than consensus estimates though lower than
forecasted FCF, driven by strong three-stream volumes but more than anticipated capex.
The company contracted a sixth rig that will drill this quarter causing an increase in the 2022
guided capex though the incremental volumes will not be seen until 2023 resulting in an
unchanged, 2022 production guide. CPE’s large scale development operations continue with
solid recent well performance with results outperforming prior locations. We have updated
our 4Q22 and 2023 forecasts to account for an increase in capex, transportation-related
opex on a per BOE basis, and net debt reduction. Our $74 price target is derived from two
equally weighted methodologies, with the first being our ’23 EV/EBITDAX multiple of 3.5x
(vs. peer multiple of 2.8x) applied to our 2023E EBITDAX estimate of $1,953MM (consensus
of $1,833MM) and the second being a FCF/EV yield assumption of 15.0%.
------------------------------------
Callon Petroleum Company (CPE)
Life of Field Type Development Taking on New Life
Full-scale/multi-formational development has become in focus as various producers begin
to change their operational technique to a larger, more effective drain of the overall reservoir.
Callon has made few operational changes in the last several quarters as its life of field
development has continued to target optimal economic resource capture within a reservoir
system. We believe the current peer group trading discount will begin to disappear as
investors continue to have more confidence in the company’s operations and CPE initiates
its shareholder return program.
Solid FCF Generation Produced by Life of Field Development
Following another strong quarter of FCF generation, we remain encouraged by CPE’s
multi-stack, co-development drilling approach that has produced consistent results the past
several quarters. The company has been ahead of its peers with its pursuit of a medium
term multi-stack, co-development drilling approach that is beginning to build momentum
through its highly focused development. By developing multiple, complimentary zones within
a reservoir system, and keeping economic and capital efficiency targets front of mind,
production results are trending above quarterly guidance and generating optimal FCF.
3Q’s FCF represented a year-to-date high and we fully anticipate CPE to reach year-end highs
for production and FCF to end the year. We believe the recent addition of a sixth rig will
further support operational efficiencies. We expect multiple, 10-well programs targeting
various zones, while deploying two simultaneous crews to drive increasing production results
through 4Q and into 2023. 4Q22 D&C capital spend guidance is trending toward ~$185MM
with a year-end forecast upwards of $835MM.
Updating Estimates, Price Target Increased to $74 from $73
Callon reported higher 3Q22 EBITDAX than consensus estimates though lower than
forecasted FCF, driven by strong three-stream volumes but more than anticipated capex.
The company contracted a sixth rig that will drill this quarter causing an increase in the 2022
guided capex though the incremental volumes will not be seen until 2023 resulting in an
unchanged, 2022 production guide. CPE’s large scale development operations continue with
solid recent well performance with results outperforming prior locations. We have updated
our 4Q22 and 2023 forecasts to account for an increase in capex, transportation-related
opex on a per BOE basis, and net debt reduction. Our $74 price target is derived from two
equally weighted methodologies, with the first being our ’23 EV/EBITDAX multiple of 3.5x
(vs. peer multiple of 2.8x) applied to our 2023E EBITDAX estimate of $1,953MM (consensus
of $1,833MM) and the second being a FCF/EV yield assumption of 15.0%.