Energy Prospectus

Callon was highlighted in this weeks podcast.
They also just released an updated presentation shown here:

https://d1io3yog0oux5.cloudfront.net/_eac583d628b3017f399a92e17b242491/callon/db/252/2395/pdf/Callon_Investor_Deck_September+2023.pdf

Lets look at some numbers, cash flow and free cash flow.

Cash flow, from Dan's model: rounded to nearest thousand

q1 272
q2 289
q3 289
q4 354

Full year 1,204

shares o/s 65.1 m

cash flow per share 18.48

FCF slide 25 from presentation and adjustments to Dans numbers for cap ex

q1 7 From Callon
q2 12 From Callon
q3 14 (289 less cap ex of 275)
q4 204 ( 354 less cap ex of 150) > There is a big bump in FCF due to higher prices and lower cap x. That excites me)

Full year "FCF" 237 of which 204 happens in q4

shares o/s 65.1 m

Free cash flow per share 3.64 divided by current share price of 38.58 = 9.4 %

People aren't paying for this year though or last year, they are paying for what they expect next year and beyond.

Another way of coming at it, next year model is 1502 "cash flow" less cap ex of 1,100 = 402/ 68.5 m shares = 5.87/38.58 = 15 % or 5.87 vs TP of 84.50 = 7 %. Using 10 % 5.87 gives you 58.70

That's the reason for the big disconnect between your model and first call estimates. The model ignores Cap ex

My conclusion is that Callon is fairly priced at 40 ish and if the pricing in the model plays out 55-60 for next year

Also , this is a levered return, the return on total ev is lower

If you are just using free cash flow to value a stock remember that any upstream company can generate a ton of free cash flow just by not drilling anymore wells. If they did suspend all drilling, the debt holders would demand all of that free cash flow.

I value them as "Going Concerns", which is why I value "Running Room".

With decline rates in shale at 40% or more per year, a company cannot stop drilling and realize its current cash flow into future. It drops off significantly before plateauing at something less of 15% of IP. Using a high multiple of CFPS has significant limitations when applied to shale fields. This is the same issue Vital has had all year, significant CFPS but little fcfps. I look at stocks based primarily on current quarter and forward looking CFPS as well as proved reserves per share. I also can’t ignore significant impairment charges for a field that is mature with little pud reserves. This long held property should have been reduced by depletion as well as quarterly review for market value against book value. How can you justify being $400 million off on property in an entire area that is sold for $550 million. The Carrizo merger was in late 2019, 4 years ago. Most acquiring companies take the opportunity to write down the acquired assets in quarter prior to merger. The highlights of this company have looked good for years but their shareholder returns have been negligible. I have held long enough and will be exiting this week.

Thank Chuck for the post. Had to look up the impairment idea. What would be the CPE worth given this example?

Example of Impairment Charges
Here's a hypothetical example using a fictitious company to show how impairment charges work. Assume that NetcoDOA has:

Equity of $3.45 billion
Total debt of $3.96 billion
Intangibles of $3.17 billion
To calculate the company's tangible net worth, we need to use the following formula:

Tangible Net Worth = Total Assets − Liabilities − Intangible Assets

As such, NetcoDOA has a deficit net worth or negative net worth of $3.68 billion ($3.45 billion - $3.96 billion - $3.17 billion). This means the company's net liabilities are higher than its net assets. Although it may be a cause for concern, companies like NetcoDOA may find themselves in a situation like this for several reasons, including times when changes in future projections impair any present value calculations for assets.