Energy Prospectus

October 13, 2023
Callon Petroleum Company
3Q23 Pre-Earnings Supplement and Price Deck Change

Our view: We updated our 3Q23 estimates to account for CPE's pre-
earnings 8K that provides certain commodity price information and an
updated hedge book. The net 3Q23 commodity price realization of $55/
boe matched our model, but pricing inferred slightly lower oil production
compared to our prior model. The company added over 5% to its 2024
oil hedge book. Our estimates for 2024+ increased related to our higher
commodity price deck.

Key points:

• Pre-Earnings Supplement (8K filing). The company reported a $9.1
million in cash settled derivatives loss, modestly above our prior $5.9
million estimate. The net impact of purchased commodities was inline to
our expectation, at a $2 million loss. Commodity price realizations for oil,
natural gas, and NGLs were overall similar to our model.

• 3Q23 production a bit light to our model; reducing 4Q23. We are
now modeling 59 Mb/d (oil) compared to the 60-62 Mb/d (oil)
guidance range. We extrapolated production based on commodity price
realizations in the supplemental. In our 3Q23 pre-earnings update (note),
we did highlight that hot weather persisted through the summer causing
downtime and delayed completions, but it appears it had a slightly
greater impact than we modeled. We are also reducing our 4Q23
production estimate to the low-end of guidance and this likely puts FY24
oil volumes below current guidance.

• Hedging additions. CPE added hedges to its oil, natural gas, and NGL
production. Most prominently, it added 2.9Mb/d of WTIs swaps for
at $81.66 for all of 2024, from zero previously. Oil and natural gas
production for 2024 are both ~21% hedged.

• Summary of price deck changes (full note). Our 4Q23 HH/WTI forecasts
increase by $0.25/$9.03 to $3.00/Mcf and $86.50/Bbl. Our 2024 HH
forecast was unchanged at $3.50/Mcf, while our WTI expectation
increased by $5.10 to $86.45/Bbl. Our 2025 price assumptions with
$3.75/Mcf for HH and $77/Bbl for WTI.

TipRanks: "Truist Securities analyst Neal Dingmann raised the price target on Callon Petroleum (NYSE: CPE) to $54.00 (from $50.00) while maintaining a Buy rating." In the last 3 months, 8 ranked analysts set 12-month price targets for CPE. The average price target among the analysts is $47.88.

I have updated my forecast model for CPE, lowering my current valuation by $6.50 to $78.00/share.
> I just lowered my valuation multiple from 4.0 to 3.75 X annualized operating cash flow per share.
> I also lowered my Q3 and Q4 production estimates based on RBC's comments.
> Callon's balance sheet is going to be in good shape at 9-30-2023, they generate more than enough operating cash flow to fund their drilling program and generate free cash flow, so I can't think of a reason to justify a lower valuation multiple.
> On a per share basis, CPE is one of the most profitable companies in the Sweet 16

CPE was trading at $38.58 at the time of this post. That is just 2.11 X my 2023 operating cash flow forecast of $18.28/share.

TipRanks' forecasts for 2024 are $2.4 billion revenues, $8.80 EPS and $20.67 operating CFPS. My 2024 forecast is just slightly higher based on WTI of $90/bbl.