Callon Petroleum Reports Q1'12 Results; Permian Catalysts Stacking Up Through 2012

| About: Callon Petroleum (CPE)

Callon Petroleum Company (NYSE:CPE), an independent oil and gas exploration & production [E&P] company operating both offshore and onshore in the United States, announced operational and financial results for the Q1'12 period ended March 31, 2012.

CPE reported Q1'12 net income of $0.5 million, or $0.01 per share compared to Q1'11 net income of $4.2 million, or earnings per share of $0.12. Oil and natural gas sales during Q1'12 totaled $29.3 million, an increase of 15% compared to $25.4 million in sales during Q1'11. Production during the quarter averaged 4,308 barrels of oil equivalent per day [BOEPD] compared to 4,713 BOEPD during the comparable period last year.

Click here for the news release.

Notable highlights for the quarter include:

  1. Increased the number of gross producing wells in the Permian Basin to 78 at March 31, 2012, almost double from 40 in the same quarter last year.
  2. Initiated a seismic program on its net 14,470 acre position in Borden County, Texas, and began all necessary permitting and preliminary infrastructure work for its four well locations scheduled to be drilled beginning in the third quarter of 2012.
  3. Commenced drilling of the company's first horizontal oil well targeting the Wolfcamp B shale at the company's East Bloxom Field in Upton County, Texas.
  4. Completed two vertical Wolfberry wells at the Pecan Acres Field with a gross average 24-hour initial production of 200 BOEPD, averaging 85% oil, with two additional wells currently flowing back.

OAG360 Comments:

To summarize the quarter, CPE is producing more oil from its early stage projects and less gas from its Haynesville and offshore fields, mainly due forces beyond the company's control. Callon reported that average daily production in Q1'12 declined to 4,308 BOEPD, an 8% decrease from the same period last year, primarily as the result of downtime at the company's Haynesville natural gas well and the shutting-in of its East Cameron 257 offshore natural gas field due to downtime of the Stingray Pipeline (operated by Enbridge). Despite the decline in natural gas production, however, the company said on its earnings conference call today that oil production from its core Permian Basin projects increased to an average of approximately 1,500 BOEPD in April, up from the 2011 exit rate of 1,300 BOEPD.

The company restated its commitment to transition its current vertical drilling program targeting the Wolfberry oil play to a horizontal drilling program targeting both the Wolfcamp B in the south (East Bloxom Field) and the Cline play to the north in the company's recently acquired Borden County position (northern Midland Basin). In response to an analyst question, Callon indicated that the impact from its horizontal program in 2012 should include two quarters of production from the addition of two new horizontal Wolfcamp B wells at East Bloxom (estimated initial production rate of 600 BOEPD each) and one quarter of production from two new horizontal Cline wells in Borden County (estimated initial production rate of 500 BOEPD each).

Q2'12 and Full Year 2012 Guidance Update

Callon released production guidance for Q2'12 and the full year 2012 in a news release following the earnings announcement. For Q2'12, the company is guiding production to average between 4,000 BOEPD and 4,400 BOEPD. For the full year 2012, CPE is guiding to average daily production of 4,500 BOEPD to 5,000 BOEPD, with the midpoint falling approximately 5% lower than midpoint of guidance previously provided on March 14, 2012. The downward guidance is primarily the result of [a] previously-mentioned shut-in of East Cameron 257, [b] unexpected continued downtime from the company's Haynesville natural gas well and later in the year [c] expected downtime at both of the company's deepwater offshore fields for drilling and maintenance operations.

CPE's 2012 capital expenditure budget of $139 million is 32% higher than CPE's 2011 budget and 80% of it is earmarked to drilling in the Permian Basin. Callon guided to a drilling program consisting of 21 (gross) vertical and seven (gross) horizontal Permian oil wells, acquisition of additional acreage (the budget is inclusive of the recent Permian leasehold acquisition) and seismic data acquisition and interpretation work. Approximately $28 million is allocated to the planned Habanero #2 sidetrack well in the Gulf of Mexico (operated by Shell) and capitalized costs. Management indicated that the 2012 capital budget would be funded entirely from cash flow generated from operations, existing cash and borrowing capacity on the Company's revolving credit facility.

Click here for the guidance release.

CPE's liquidity position as of March 31, 2012, was $54.9 million, including $9.9 million in cash, and borrowing availability of $45 million under its Third Amended and Restated Senior Secured Credit Agreement. During May 2012, CPE signed a commitment letter with Regions Bank for an amended credit facility with a total principal amount of $200 million and a maturity date of July 31, 2014, subject to customary closing conditions. In addition, Callon`s initial borrowing base amount would be increased to $60 million from $45 million under the new agreement. As of May 7, 2012, there were no outstanding borrowings on the existing bank facility.

On May 3, 2012, we published our write-up Callon Petroleum Company: The Amphibian Strategy for Growing Oil Production and Value. At that time, we estimated the company's sum-of-parts NAV to range between $6.18 and $14.44 per share.

Disclosure: I am long CPE.

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