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Executives

Fred Callon - Chairman, President and CEO

Terry Trovato - Head of IR

Bob Weatherly - EVP and CFO

Analysts

Ron Mills - Johnson Rice

Philip Dodge - Stanford Group

Neal Dingmann - Dahlman Rose

Chris Pikul - Morgan, Keegan

Scott Lewis - Lewis Capital Management

Richard Tullis - Capital One

Callon Petroleum Co. (CPE) Q4 2007 Earnings Call March 7, 2008 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Callon Petroleum Company Fourth Quarter and Year End 2007 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Friday, March 07, 2008.

I would now like to turn the conference over to Mr. Fred Callon, Chairman and CEO of Callon Petroleum Company. Please go ahead, sir.

Fred Callon

Thank you and good morning. We appreciate you dialing in for our year-end conference call. Before we begin the formal portion of our presentation, I'd like to ask Terry Trovato, who heads our Investor Relations to make his comments. Terry?

Terry Trovato

Thank you, Fred. We'd like to remind everyone that some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given that these events will occur or that the projections will be attained. Please refer to the cautionary language included in our news release and in the risk factors described in our SEC filings. We undertake no obligation to publicly update or revise such forward-looking statements.

It is also important to note, that the SEC permits us in our filings with them, to disclose only proved reserves that we have demonstrated by actual production or conclusive formation tests to be economically and legally producible, under existing economic and operating conditions. During today's discussion, we may use terms like reserve potential or probable reserves that the SEC's Guidelines strictly prohibit us from using in their filings with them. These estimates, by their very nature, are more speculative than estimates of proved reserves, and accordingly, are subject to a substantially greater risk of being actually realized by the company.

Finally, today we will be discussing 2007 cash flow, which is considered a non-GAAP financial measure. Reconciliation and calculation schedules for the non-GAAP financial measure were stated in our fourth quarter 2007 results news release, and can be referenced there on our website at www.callon.com for subsequent review. Fred?

Fred Callon

Thank you, Terry. As most of you know, we recently announced that CIECO Energy has signed an agreement with us to participate in the development of our Entrada field and we'll discuss that in a few minutes as well as an operations update. But first Bob Weatherly will review our results of operations for the fourth quarter and for the full year of 2007. Bob?

Bob Weatherly

Thank you, Fred. December 31, 2007, our estimated net proved reserves were 264 billion cubic feet of natural gas equivalent, which was an 81% increase over December 31, 2006 reserves of 146 billion cubic feet of natural gas equivalent. The pre-tax PV10 value of these reserves was $1.6 billion and $535 million at December 31, 2007 and 2006 respectively.

For the year ended December 31, 2007, we reported net income of $15.2 million or $0.71 per share. This exceeded the consensus estimate of $0.67 per share by $0.04. This is compared to $40 million or $1.90 per share for 2006. The decrease in 2007 earnings is primarily due to a significant increase in interest expense, resulting from the financing associated with our acquisition of BP's interest in Entrada field in April of 2007 and lower oil production at the Medusa field.

Net income for the quarter ended December 31, 2007 was $4.5 million or $0.21 per share. This also exceeds analyst expectations by $0.03 per share. All share amounts are on a diluted basis.

For the year ended December 31, 2007, we reported oil and gas sales of $170.8 million, which was down by 6% from the 2006 sales of $182.3 million. Average production for 2007 was within the range we previously issued at 51.3 million cubic feet of natural gas equivalent per day and was comprised of 12.3 billion cubic feet of natural gas, and 1,063,000 barrels of oil. This compares to 2006 production of 11 billion cubic feet of gas and 1,634,000 million barrels of oil for an equivalent 56.9 million cubic feet of natural gas per day. The increase in gas volume is due to production from 2005 and 2006 discoveries. These increases were offset by the loss in production from the divestiture of our Mobile Bay Blocks 952, 953, 955 in the second quarter of 2007 and early water production at North Padre Island 913 and High Island 73 fields.

The decrease in oil production is primarily due to previously reported mechanical problems at the Medusa field A1 well, which occurred in the fourth quarter of 2006, and when this was corrected by remedial work, resulted in oil production being restored at a lower rate. There was no impact on reserves from this.

Oil and gas sales for the fourth quarter of 2007 were $43.9 million compared to $44.8 million in the fourth quarter of 2006. Production for the fourth quarter of 2007 was 45.6 million cubic feet of natural gas equivalent per day and included 2.5 billion cubic feet of natural gas and 289,000 barrels of oil. Production was 3.7 billion cubic feet of natural gas and 294,000 barrels of oil during the fourth quarter of 2006.

The average realized oil price for the fourth quarter of 2007 was $82.47 per barrel, which was significantly higher than the realized oil price in the same quarter last year of $52.77. Oil hedging positions decreased our average realized price by $1.95 per barrel in the quarter. The benchmark oil price for the period measured by the average closing price of NYMEX contracts for delivery of WTI, averaged $90.68 per barrel.

For the year, the average realized oil price was $67.63 per barrel, which was $15.31 higher than the realized oil price in 2006 of $52.32 per barrel. Oil hedging positions increased our average realized price by $0.53 per barrel. The benchmark oil price for the period measured by the average closing price of NYMEX contracts for delivery of WTI averaged $72.33 per barrel.

Just a reminder, that the spread between the benchmark oil price in our average realized oil price is primarily due to quality adjustments incurred in the sale of our production from our Medusa and Habanero fields, which account for approximately 85% of our fourth quarter oil production. Please refer to our news release for a reconciliation of our realized oil price to the NYMEX price.

Natural gas price realizations averaged $8.18 per Mcf for the fourth quarter of 2007. This was up from $7.82 per Mcf for the fourth quarter of 2006. Natural gas hedging positions increased our average price by $0.70 per Mcf for the three-month period ended December 31, 2007.

For the year, natural gas price realization was $8.01 per Mcf, which is down slightly from the 2006 price of $8.07. Natural gas hedging position increased our average realized price by $0.61 per Mcf for 2007.

On the expense side, LOE for the fourth quarter was $7.2 million. For the year ended December 31, 2007, LOE was $27.8 million or $1.48 per equivalent Mcf of production. This was within our guidance range of $27.5 million to $28.5 million. G&A expense was $2.8 million and $9.9 million for the fourth quarter and full year 2007 respectively.

Interest expense for the quarter was $10.4 million, which was a significant increase over the fourth quarter 2006 amount of $4.2 million. This increase is due to the interest costs associated with the $200 million debt instrument that Callon placed in connection with the acquisition of BP's 80% working interest in the Entrada Field. For the full year 2007, interest expense was $34.4 million and in the middle of our guidance range of $33.9 million to $35 million.

Depletion, depreciation and amortization for the fourth quarter of 2007 totaled $16.2 million, which was a 25% decrease from the fourth quarter of 2006 amount of $21.7 million. For the full year 2007, DD&A was $72.8 million which was below the guidance range of $74 million to $78 million. The decrease in 2007 was a result of lower production.

Discretionary cash flow is a non-GAAP measure and in our news release, we have provided reconciliation to cash provided by operating activities. Discretionary cash flow in the fourth quarter totaled $25.1 million or $1.17 per share. Discretionary cash flow for the full year totaled $104.6 million or $4.91 per share. Available cash and cash flow funded our capital expenditure and abandonment obligations for 2007.

It is important to note that following the acquisition of BP's interest in the Entrada Field in April of 2007, our focus shifted to ensuring our ability to fund the development plan for the significant property. We decided to limit our 2007 exploration program to just previously committed projects and then later sold our non-core, non-operated royalty and mineral interests and closed that in December of 2007 for $61.5 million.

As a result, we accumulated a cash balance of $53.3 million and have no borrowings under our senior secured credit facility at year end. We did have a letter of credit outstanding for $35 million at year end, which reduced our borrowing base to $35 million. Overall, this gives us $88.3 million liquidity at year end.

Now Fred will give you an update on operations.

Fred Callon

Thank you, Bob. Let me begin with a review of the status of our major fields. Our Medusa field is currently producing 13,000 barrels of oil and 12.8 million cubic feet of gas a day. As a result of several workovers performed in the fourth quarter of 2007 and early this year. Production increased approximately 3,500 barrels of oil and 2.5 million cubic feet of natural gas a day.

In addition, the development well has spud and is targeting undrained fault block. Production from this well is expected to be approximately 8,000 barrels of oil a day beginning in June. We own a 15% working interest in the Medusa field and Murphy is the operator.

Current production from our Habanero field is 7,700 barrels of oil and 12.8 million cubic feet of natural gas per day from our two wells there. Both are producing from the Hab 52 oil reservoir. The number two well produces 2,700 barrels of oil and 4.5 million cubic feet of natural gas.

During the fourth quarter of last year, the number one well was sidetracked up depth of the number two well. Current production from the number one well is 5,000 barrels of oil and 8.3 million cubic feet of gas per day. We are on 11.25% working interest in the number two well and a 25% interest in the number one well and Shell is the operator.

The West Cameron Block 295 field is currently producing at a rate of 29 million cubic feet of natural gas and 180 barrels of oil per day. We recompleted the number four well in December of 2007; it is currently producing 6 million cubic feet of gas a day. Later this year, early in 2009, we expect to recomplete the number three well which is currently producing 7.3 million cubic feet a day from a secondary sand, below the main pay zone. At that time, production from the number three well should increase to approximately 20 million cubic feet of gas a day. We have been anticipating this workover for sometime now, but have not been able to perform this workover because of better than expected production from the secondary completion.

Additionally, another well maybe drilled in 2008, depending on well performance. The number two and number four wells are operated by Mariner Energy, while the number three well is operated by Cimarex. We have a 20.5% working interest in the field.

Production from the High Island Block 165 field is currently 17 million cubic feet a gas a day, and 150 barrels of oil per day from the High Island 130 number two well, which produces from Gyro K2 sand.

During the fourth quarter of last year, we drilled our fourth well in the field, targeting deeper sands, but the well was unsuccessful. During the second quarter, we planned to recomplete the number one well to a Rob-L sand, which we expect to have neutral production rate of approximately 10 million cubic feet of gas a day.

Callon owns a 16.7% interest in the Gyro K1 and the Rob L and 11.7% interest in the deeper sands. The field is operated by Mariner Energy, who acquired this interest from Statoil Hydro.

Our Highland Block A-540 number one well is producing at a rate of 7.8 million cubic feed of natural and 520 barrels of oil per day. Callon owns a 60% working interest and Walter Oil and Gas is the operator on this block.

Our East Cameron 109, number five well is producing at a rate of 3.6 million cubic feet of gas a day and 55 barrels of oil. EPL operates, and we on own a 25% working interest. We have drilled and are in the process of completing our North Pronghorn prospect. First production is expected in the second quarter of 2008 at a rate of 10 million cubic feet of gas and 300 barrels of oil per day. We operate and have a 50% working interest.

The Bob North number three well located in Mississippi Canyon, Block 860, as you know, was drilled in the second half of 2007 after finally drilling the well successfully, we had non-commercial shows encountered in the well was deemed uneconomical and has been plugged and abandoned.

With respect to 2008 drilling, the Board has approved an initial capital budget of $180 million, which will fund our Entrada development, several developer wells, as well leasehold and seismic for exploration program. We currently have 23 prospects in inventory and are continuing to add to that inventory and would be bidding one additional block at the upcoming lease sale. After closing our agreement with CIECO the Board plans to review the company's financial position and consider increasing the companies drilling capital budget.

Now let's talk about Entrada. As most of you know in September of last year we retained Merrill Lynch Petrie Divestiture Advisors to assist us in identifying a partner for our Entrada field development. On February 11th of this year we signed a purchase and sale agreement with CIECO energy, a subsidiary of Tokyo based ITOCHU Corporation. This agreement provides for the following.

CIECO will pay Callon total cash consideration of $175 million, including a $155 million payment at closing and $20 million of the $40 million contingent payment we owe to BP after meeting certain cumulative field production milestones. We plan to utilize the $155 million initial cash proceeds, plus existing cash balances to repay the $200 million senior revolver credit facility, which we put in place with the acquisition of BP's interest, last year.

At closing CIECO will also reimburse us for 50% of Entrada capital expenditures, which we've incurred to date. We estimate that to be approximately $18 million. CIECO will pay Callon an additional $2.50 per barrel oil equivalent for every barrel of oil equivalent produced after cumulative gross production in the field is 30 million barrels, through the year 2018.

Also as a part of the transaction CIECO will provide a non-recourse loan of $150 million to Callon for the financing of Callon's 50% of the $300 million estimated cost to develop the field. The loan will bear interest at LIBOR plus 375 basis points and will mature within five years from the date of post production.

We are obviously very excited about the CIECO transaction. We gained a very strong and important strategic partner with CIECO, their parent company ITOCHU Corporation. It is one of the oldest, most highly respected international trading houses in Japan, with global enterprise, which includes a significant long term investments in energy industry throughout the most of the major basins in the world.

As a result of this agreement we now have a fully funded development plan for the Entrada field, this represents our final major step in the goals that we had set forth for achieving post production in early 2009. After acquiring BP's interest and taking over as operator in April of last year, our focus was on several major milestones, which we accomplished during 2007, beginning with the completion of the engineering design work for the project and followed by the negotiation in signing for production, handling agreement with ConocoPhillips and Devon to process our production through the Magnolia TLP.

And then finally contracting with Diamond Offshore for their Ocean Victory drilling rig, which drilled the initial wells at Entrada and we will use to drill a complete developer wells for Entrada, beginning in July-August of this year.

The closing was targeted for February 29th, however this has turned to be a somewhat aggressive timetable to complete all the necessary documentation and consents. We now expect to close in approximately two weeks. Now Bob will give you an update on guidance. Bob?

Bob Weatherly

Thanks, Fred. I will give you a summary of the guidance for the first quarter and full year of 2008 that was provided in our news release. For the first quarter we are projecting 40 million to 43 million cubic feet equivalent per day of production and for the year 41 million to 45 million cubic feet equivalent per day, approximately 53% of the projected production will be natural gas.

Lease operating expense would be approximately $5 million to $5.5 million and $21.7 million to $24.5 million for the first quarter and full year 2008, respectively. G&A should be within $2.6 million to $3 million and $10.5 million to $11.7 million for the first quarter and full year of 2008. Interest expense should range between $20.8 million to $23 million and $34.2 million to $37.7 million for the first quarter and full year of 2008 respectively.

With regard to DD&A, we are projecting ranges of $14 million to $16 million and $57 million to $65 million for the quarter and the year of 2008. For the first quarter we have 450 million cubic feet of natural gas hedged in the form of collars with the $9.94 ceiling, $7.61 floor. For the year 2.9 billion cubic feet of gas is hedged with collars with an average ceiling of $10.10 and an average floor of $7.66. Most of our production is sold in the general area of Henry Hub, which is comparable to NYMEX.

We have a 150,000 barrels of oil hedged for the first quarter, 60,000 barrels at swaps, 90,000 as collars, the average swap price is $91.91. The collars have average ceiling price of $81.50 and floor of $65. For the year, we have 555,000 barrels of oil hedged, 195,000 is swap, 360,000 is collars. The average swap price is $91.23, with regard to the collars the ceiling price is $81.50, average floor price is $65.

Just a reminder that realized oil prices will continue to be affected by quality differentials and transportation costs. We anticipate transportation costs should average about $1.15 to $1.20 per barrel.

With that I guess, we are now ready to take questions, Fred?

Fred Callon

Yes. We're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Ron Mills of Johnson Rice. Please proceed with your question.

Ron Mills - Johnson Rice

Good morning, guys.

Fred Callon

Good morning, Rob.

Bob Weatherly

Hey, Rob.

Ron Mills - Johnson Rice

Just for you, Bob, a couple of just mop ups, can you go with the reserves again, I don't know if you broke it down between gas and oil?

Bob Weatherly

Just a second Ron, let me see. Okay, total reserves are 264 million cubic feet equivalent. I think that's 24 million barrels of oil and 116 million cubic feet.

Ron Mills - Johnson Rice

Okay. And then if you look at a pro forma for the sale of the 50% interest in Entrada, as I recall it's roughly a 15 million barrel equivalent decrease, as we look ahead to factor in 2008 reserves.

Bob Weatherly

Yeah. I think that's right.

Ron Mills - Johnson Rice

Okay. And then one more for you, on the first quarter interest expense can you walk through why that first quarter interest expense is so high relative to say even the fourth quarter addition charges in there for extinguishing the Merrill Lynch debt?

Bob Weatherly

Absolutely, that is the difference Ron, as we've anticipated closing, as Fred said, in the first quarter and the difference between the normal run rate that we've had for interest in the first quarter are the early extinguishment related costs.

Ron Mills - Johnson Rice

And what are those costs and are those buried both in the cash and non-cash component?

Bob Weatherly

The cash and non-cash. I think the non-cash is about $6 million and I think the early the cash part is $7.5 million or so.

Ron Mills - Johnson Rice

Okay, great. And then over your $180 million capital budget, how much can you walk through Entrada, Habanero, Medussa and shelf in terms of how much you plan to spend in each of those areas?

Bob Weatherly

I think the easy, well first at the macro split if you take the $180 million, I think that's Fred gave you, round numbers Entrada is $120 million to be spent in '08, remember we'll have some spend in '09, as we complete it. $60 million of difference. And about of that $60 million, probably about 40% to 45% of that is for shelf related drilling and development cost, the balance is allocated for the lease sale and normal capitalized interest and overheads.

Ron Mills - Johnson Rice

So, no real expenditures plan then at Medusa or Habanero?

Bob Weatherly

Sorry, in the Medusa we have one well, and I think we got about $10 million or so scheduled for that Medusa -- the number 5 well at Medusa.

Ron Mills - Johnson Rice

And that would be included in that 55% to 60%?

Bob Weatherly

Yes.

Ron Mills - Johnson Rice

Okay. And then, in terms of the Entrada timeline are we still on track in terms of with the Ocean Victory is the work been completed in Pascagoula. And everything looks like its on track at least for as is your view today for July-August part spud of the initial next well?

Fred Callon

Yes, Ron. And in fact the Ocean Victory is out, and Ocean Victory is on location at Medusa drilling a well there. So, right now, we are on schedule for July-August timeframe for receiving the rigs. At this point, everything continues to be on schedule.

Ron Mills - Johnson Rice

Okay, great. Let me -- someone to chip on and I'll get back in line.

Fred Callon

Thanks.

Operator

Our next question comes from the line Philip Dodge of Stanford Group. Please proceed with your question.

Philip Dodge - Stanford Group

Good morning. Thanks for the comments. Ron got my questions there, but let me just confirm the Entrada portion of the total reserves, state the same as Entrada have been in the past, which I think would have been about 192 Bcf equivalent?

Fred Callon

Yes.

Philip Dodge - Stanford Group

Thank you.

Terry Trovato

We have additional questions?

Operator

Yes your next question comes from the line Neal Dingmann of Dahlman Rose. Please proceed with your question.

Neal Dingmann - Dahlman Rose

Good morning guys.

Fred Callon

Good morning Neal.

Neal Dingmann - Dahlman Rose

I was wondering on the 23 prospects you mentioned or that Bob mentioned in inventory. How do those play out? Is part of those in Entrada or how does that stack up?

Bob Weatherly

No, those do not include Entrada. And this is just prospect inventory that we continue to build and these are prospects that we have generated. Again going into the lease sale mentioned before, we got a fairly significant 3-D seismic coverage and continue to over the last several years invest in reprocessing, some pre-stack time and depth migration, use an AVO analysis on a quite a bit of what we're doing now on the shelf. So this is just kind of a is for a summary of the prospects inside shelf and there are some in deepwater, mostly shelf, but some in deepwater as well and certainly we are anticipating as cash flow comes in from Entrada next year, we would be able to ramp up our drilling activity and as I mentioned earlier, Board is just very careful to be sure that we are in the position to finance Entrada, and so after we close CIECO, then we'll take a look at the CapEx again for this year in terms of looking at what we might want to do in terms of additional drilling for the rest of the year, and certainly anticipate we'll be revising the CapEx support here after we close the CIECO transaction, probably at the May Board meeting.

Neal Dingmann - Dahlman Rose

I get you. But of those 23 prospects, Bob mentioned the 45% of the 60 million that's been in the shelf. None of those necessarily, at least initially would be geared towards any of those 23 prospects?

Bob Weatherly

Not really. Maybe one. But no. For the most part, no.

Neal Dingmann - Dahlman Rose

Okay. And then a couple of more questions, moving over to Entrada. What did you mention as far as what CIECO pays per barrel of oil, and how will that go for the life or how does that play out, does that continue through, I guess all the plays.

Bob Weatherly

I'm sorry. In terms of the…

Neal Dingmann - Dahlman Rose

The additional type, you mentioned, I think what CIECO pays per, I think you said per barrel of oil what the payment.

Bob Weatherly

Yes. In the agreement that we have negotiated, provides obviously, as I say, the $175 million, $155 upfront. So remember, we have $40 million payment due to BP, after we produced I think 12.5 million barrels, and they will pay their $20 million share of that.

And in addition, we negotiated a payment whereby CIECO has agreed to pay us $2.50 a barrel. For every barrel oil equivalent produced in excess of 30 million barrels in the field and that will continue through December 31 of 2018, and it was just an incentive payment that we negotiated in the transaction.

Neal Dingmann - Dahlman Rose

Okay. And then, Fred, I know you've laid out really well I think between that and your analyst day as far as for the plans in Entrada. How much could that change, Fred, if the first few wells -- obviously if you've got the rig already lined up, if the first few wells looked better or worse or different than you are expecting, will the plans that certainly used to have a lot of factors that you could change the timing behind that as you look to mid to late '09?

Fred Callon

You are telling me with respect to Entrada?

Neal Dingmann - Dahlman Rose

Correct, basically I guess what I am asking is, how long are the plans laid out and those obviously continue to change depending on what you see, both on that sort of on how prolific the wells and obviously what the commodity prices are at that time.

Fred Callon

Yeah couple of things. We have sort of laid out a plan here with, to drill the initial two wells and based on the well performance of the number three well, we do have scheduled out, I think in 2011 an additional well out there, which will be dependent on well performance. We hope that the well will perform such that we may feel the need to drill an additional well and we do have that in the schedule. We also have a drilling call. We have a small prospect called Little Jim that lies on our block as well as on Conoco-Phillips and Devon, and we plan to drill a well there. I think we currently have that scheduled in 2010, I believe, subject to negotiating the appropriate agreements with Conoco-Phillips and Devon. But we do have plans there and beyond that, we do have a couple of other opportunities, Cameron Block that we are evaluating now. That again we would hope to add into the schedule over the next couple of years.

Neal Dingmann - Dahlman Rose

Okay. And then obviously after this pay down Fred you are going to have a lot of dry powder. Fred, just wondered what your personal ideas, what your thoughts are, as far as, I think here Bob mentioned potential lease block sales. Obviously there are properties out there for sale. I am just wondering what's your view of the market is now? And Fred, what you think is more attractive when you look at sort of '09 or maybe even for the later part of this year with the type of dry powder that you all have? Where do you anticipate maybe being most active, would it be in that acquisition markets, the lease markets, I just wondered what type of area?

Fred Callon

Yeah, and I think the answer is both. I mean we've been -- in someway its fortunate we had some time here with the focus on Entrada and our guys here in Houston office have done a great job, and had the time and we've been investing the money in some of the technical work. I mentioned just kind of drill -- talked on reprocessing of data. And so, I think we've generated some excellent opportunities.

At the same time I will also say that we have seen some acquisition opportunities, where I guess over the last couple of years we weren't as interested, but we are perhaps seeing some acquisition opportunities that we think may make some sense. And so, we may very well be looking at some opportunities like that. And particularly opportunities that are in areas where we have been doing some work and see some additional potential. And so, I think we are probably looking at acquisition opportunities more so now than we have in the last couple years. But I think you'll continue to see that. Acquisition opportunities, you certainly can't count on them from quarter-to-quarter, year-to-year. So, I think we will be looking at some opportunities like that and hopefully find something that can make sense for us. But in the mean time I think we do have a good inventory of shelf projects that we can to execute on and we control the timing of it.

Neal Dingmann - Dahlman Rose

All right guys, look forward to all of the activity.

Fred Callon

Thank you.

Operator

Our next question comes from the line of Chris Pikul of Morgan, Keegan. Please proceed with your question.

Chris Pikul - Morgan, Keegan

Yes I have read.

Fred Callon

Hi Chris. How are you?

Chris Pikul - Morgan, Keegan

Doing great. Hey wanted to touch base on I guess I was a little surprised by the production guidance been -- kind of seems like definitely getting lower. Maybe I was reading between the lines before, but was there something that happened between in the last conference call? And is there anything incremental to the production side of story that we haven't touched on yet? Can you just give me a little background on that?

Fred Callon

Well, I guess a couple things and Bob can add here, is that we kind of set out -- we were about 51 million a day last year. Is that right? And we were certainly trying to hold productions flat before we bring Entrada on. And I think it's, as we have been talking about the fact that from the standpoint of the Board, and we have talked about this, wanted to pull back on terms of new drilling, and so obviously we are continuing to see just a natural declines. And we are kind of aware of that, but I think the sale last year as a result of the sale of these mineral interests, while it's not major, but if you add that with Mobile properties that we sold, which again it was we felt like it was a excellent transaction for us in terms of the P&A liability we're able to reduce. But in total it was about a 5 million a day from pure property sales. So and hopefully, and we felt like we need to provide a guidance range that we feel like we can certainly achieve. And I would like to think, as we go through the year, and the Board hopefully increases our CapEx budget, then we'll have an opportunity to increase that guidance later in the year.

Chris Pikul - Morgan, Keegan

Okay. Given that, let me touch on Habanero again real quick, I know some of those activities you did in the fourth quarter maybe didn't come online at rates that you might have initially expected. Did I hear Bob say that there was no reserve impact from those wells?

Fred Callon

Yeah, I think.

Bob Weatherly

That was Medusa. Chris, what I said was that I think I was referring at that moment I might have not been clear, but we were talking about Medusa well that came back online in '07.

Chris Pikul - Morgan, Keegan

Okay.

Bob Weatherly

Where it was in '06 and it was merely a rate, it didn't have any impact on those reserves.

Chris Pikul - Morgan, Keegan

Well if that's the case, were there any negative revisions associated with Habanero then for year end '07?

Fred Callon

Yes, and it was the number, I'm sorry Chris, I'm going to get it for you.

Chris Pikul - Morgan, Keegan

It's all right. And could you be able to give us your PV10 number, or should we just wait for the K?

Fred Callon

No, you got that?

Bob Weatherly

Yeah, I think we gave earlier, Chris, I had given the year end PV10.

Chris Pikul - Morgan, Keegan

Oh you did. I must have missed that Bob, sorry.

Bob Weatherly

Yes that's fine. It was $1.6 billion pre-tax.

Chris Pikul - Morgan, Keegan

It's a good number?

Bob Weatherly

I like it

Fred Callon

Yep. I don't know what it means.

Chris Pikul - Morgan, Keegan

While you're looking for that other. Just remind us how many shelf wells you drilled in '07?

Fred Callon

Seven.

Chris Pikul - Morgan, Keegan

It was seven?

Bob Weatherly

That does include the development well.

Fred Callon

Yeah like I said, and that was included several -- I'm sorry two were deep water, that obviously with Bob North and Habanero. And so I guess it would be five on the shelf.

Chris Pikul - Morgan, Keegan

And so, until this deal closes you're not going to be able to give us a good sense of what you are going to be drilling this year?

Fred Callon

Yeah that's exactly right. And that we have kind of seen that -- Board has just been rightly so, just we are cautiously sure that, try to discover it, but certainly based on getting this closed, I would certainly think that we're going to have some dry powder for use, even later this year.

Bob Weatherly

Well in respect to that, I think we've said that in respect is that with Entrada development looming at us in '08, that we did a combination of consciously, particularly in the last half of the year, not pursuing some exploration prospects that we had. Just to be sure that we didn't burn cash and as we said, we sold the minerals, got a very nice price for the minerals. But both of those things, as you are aware, if you kind of dial back your activity for whatever reason, then in the next year or two, you see the impact of that plus the fact that both the combination of the minerals, the volumes in the mineral sales, plus the Mobile Bay sale hurt us by about five.

So I mean, we wish it was going the other way, of course. But first things first, we needed to focus on liquidity, and I think as we said, we've got strong liquidity at year end which we needed and now that once we get the financing transaction with CIECO through the detail process, and are really able to assess that, which we think is very good to our cash flow going forward.

The Board has said, we'll go back and revisit kind of where our exploration and acquisition strategy is, and as Fred said earlier, you're not going to go out here today and promise anything, you don't have your arms around. But hopefully, we will be able to improve it.

Chris Pikul - Morgan, Keegan

All right, thanks.

Bob Weatherly

Sure.

Operator

Our next question comes from the line of Scott Lewis of Lewis Capital Management. Please go ahead, sir.

Scott Lewis - Lewis Capital Management

Hey, good morning guys.

Fred Callon

Good morning.

Scott Lewis - Lewis Capital Management

Hey Fred, I was wondering if you could just take a minute or two and kind of discuss the returns that you guys have seen in the last three or four years on your exploration kind of spend, because it's a little hard with all the moving pieces with Entrada and what's been going on with Habanero and Medusa to kind of really see, how that has played out. And then relatively, do you guys think at all that with the cash flow you're going to be receiving from Entrada and you look at your current share price and your PV10, does it make some sense to put some of that cash flow into stock repurchases?

Fred Callon

Okay. Well taking different orders. In term of stock repurchase, the Board has talked about it from time to time and I guess just in general, we have felt like that we do continue to have opportunities that make sense to pursue and in particular obviously right now with Entrada and the prospect inventory that we put together and feel like, going back over the last year to obviously with Entrada trying to develop. Entrada's stock price certainly moved down to a point, where it was very tempting. But at the same time, we felt like that it was critical that we maintain a capital structure, so that we can be sure we in fact could get Entrada developed and that was uppermost in our minds. And again we continue to see opportunities that we think generate returns that we think will help, obviously grow the reserve base and on a good economical basis.

If you look back over the last couple of years, we have had some mixed success. We have had some, as we saw over the last year or two with shelf drilling cost going up significantly. We have had some smaller shelf discoveries, where the economics get strained and your F&D cost goes up significantly. But we think on a going forward basis, we have had some relief there in terms of cost. We came out of Katrina, where costs went up fairly significantly. We have at least seen sort of a leveling out of those cost and accessing jack-up rates coming down fairly significantly. So that we all think that will help the economics on the shelf which I think are on the smaller projects. At the same time, certainly we have kind of focused where several years ago we were perhaps looking at some opportunities that were smaller, which maybe had good economics, but I think as cost moved up, put some strain on those projects. I think we're probably looking at targets that are of little -- the larger size targets. And as we've had time, we think we've identified a number of opportunities and we've certainly just from a drilling standpoint been able to drill with the success rate certainly over 50% in terms of identifying hydrocarbons out here.

And so, the answer is yes, we think the prospect inventory we going to put together going forward, we think we've got quite a few opportunities, both from the shelf and some in deepwater, which is part of the bigger strategy. As I mentioned earlier, we are certainly monitoring and looking at some acquisition opportunities that we feel like that perhaps the price of some of the acquisition opportunities are better now than they have been in the couple of years. And certainly on a opportunistic basis, we are certainly planning to be looking for some of those as well.

Scott Lewis - Lewis Capital Management

I know in '07 you dialed back your exploration program because of Entrada, but say on '04, '05, '06, do you think you got a good return on your exploration budget?

Fred Callon

No. I would say it's mixed. I think we did on some of the deepwater things, we did on some of the larger shelf prospects, and certainly on where we were utilizing AVO, processing, like I said we're able to generate I think a good drilling success rate, kind of over 50%. I think, we have projects like High Island 165 and West Cam 295, where we had excellent results. And we've had follow up with the drilling of three or four wells on each of those, and continue to have upside potential. On the other hand we've had some smaller prospects that we drove over, we've found hydrocarbons but in fact they watered out early and have hurt finding costs. And certainly in going forward, like I said, you won't see us pursuing projects of those size any more.

Scott Lewis - Lewis Capital Management

Okay. So, then just last comment on the stock repurchase, I understand why the Board didn't do it this year, because of Entrada, but once Entrada is flowing, you won't have those issues right?

Fred Callon

That's true and its not to say if you have a very strong balance sheet, I think that option is one you can certainly take a look at. As I said, I think that given where we were and particularly given the critical importance of getting Entrada developed and for a small company our size we've just felt like its been best to keep our capital to be sure we can fund Entrada.

Scott Lewis - Lewis Capital Management

Okay. Great thanks a lot Fred.

Operator

Our next question comes from the line of Richard Tullis of Capital One. Please proceed with your question.

Richard Tullis - Capital One

Good morning.

Fred Callon

Good morning.

Richard Tullis - Capital One

Just a couple of questions following up on what some of the other folks had asked. Fred, what's the overall base decline rate right now?

Fred Callon

Base decline rate right now would be 30%. If you ask me for -- our (inaudible) simply when you have several properties that are fairly significant it can vary. But if you ask me I would say 30%.

Richard Tullis - Capital One

Okay. On your 23 prospects you had mentioned little bit earlier, what are you looking at on net risk reserves on those?

Fred Callon

I am sorry. I just don't have the number. We can certainly get it for you. We will be glad to and we will get that to you.

Richard Tullis - Capital One

Sure.

Fred Callon

Don't have it, didn't bring with me.

Richard Tullis - Capital One

That's fine. If you could and I know you touched on this little bit already, but could you recap for me again what's your '08 drilling is going to be?

Fred Callon

Well, and again, I described it as an initial capital budget, which right now is roughly $180 million. And that is to fund primarily Entrada and in Entrada we are seeing $120 million and the remaining $60 million basically funds, well capitalized overhead interest, but is included in that. But also seismic, leasehold for the lease sales this year and then from a drilling standpoint, right now, it would include our Medusa well that we are currently drilling and we've got maybe three shelf wells like West Cam and then I guess our (inaudible) well that we actually have already drilled and is down and we are in the process of completing. So, we don't have any new drilling in the CapEx in the $180 million and as we have mentioned a couple of times, the Board felt like that we need to close CIECO and then take a look it at the next board meeting and consider increase in our CapEx budget for the remainder of the year.

Richard Tullis - Capital One

Okay. So beyond Entrada, Medusa and three shelf wells, that's going to be it as far as you are budgeted right now?

Fred Callon

That is correct.

Richard Tullis - Capital One

Okay. And let's see I guess the Entrada costs pretty much hold in at $150 million?

Bob Weatherly

Our share?

Richard Tullis - Capital One

Yup. And just if you could recap again what you are expecting for initial production at this point from Entrada and when?

Fred Callon

Initial production, we are currently, again still looking at February of 2009.

Richard Tullis - Capital One

Okay.

Fred Callon

And we are looking at initial production of 22,500 barrels of oil a day and 37 million cubic feet of gas a day.

Richard Tullis - Capital One

Okay. And you see no problem pushing this through Magnolia. So they should have plenty of capacity.

Fred Callon

They have, yes. In our last report, their oil production I think is less than 10,000 barrels a day and they get 50,000 barrel a day capacity.

Richard Tullis - Capital One

Okay good.

Fred Callon

And we have firm capacity with them to produce the rates we are talking about.

Richard Tullis - Capital One

Okay. And how long do you think you'll hold around that rate?

Fred Callon

I think we are looking at about six months and again when I say 22,500 barrels oil a day, not all of that is from capacity. But again, there is plenty of excess capacity.

Richard Tullis - Capital One

Okay.

Fred Callon

So at least, that shouldn't be a problem.

Richard Tullis - Capital One

And I think that's all I had, Fred, Bob. Thanks a bunch.

Fred Callon

That's fair.

Bob Weatherly

Sure.

Fred Callon

Our next question comes from the line of Joseph Bachmann of Howard Weil. Please proceed with your question. Hello, Mr. Bachmann, your line is now open.

Joseph Bachmann - Howard Weil

Hi good morning guys.

Fred Callon

Hi Joe. How are you?

Bob Weatherly

Hi Joe.

Joseph Bachmann - Howard Weil

Can you update us on the Main Pass 243 prospect that you are drilling with Helix?

Fred Callon

We're not drilling it.

Joseph Bachmann - Howard Weil

Okay. So you decided not to spud that well?

Fred Callon

Correct. Yes, right.

Joseph Bachmann - Howard Weil

Okay. Thank you.

Fred Callon

Yup. No problem.

Operator

We have a follow-up question from the line of Ron Mills of Johnson Rice. Please proceed with your question.

Ron Mills - Johnson Rice

Can you walkthrough just what your fourth quarter capitalized interest and G&A numbers were?

Bob Weatherly

Fourth quarter capitalized G&A, I think, it was $2.9 million of G&A and $1.9 million of interest. Total $4.8 million.

Ron Mills - Johnson Rice

And then if you look ahead to 2008. How do those two split?

Bob Weatherly

It's about the same.

Ron Mills - Johnson Rice

So basically you have about $8 million of interest and about $12 million of G&A for the whole year?

Bob Weatherly

Just a second, Ron, let me find my note on that. I think that's right. I remember it being around $17 million to $18 million total and I would think that it will be about the same.

Ron Mills - Johnson Rice

Okay. And then in terms of your PV10 can you tell us what gas and oil prices you use?

Bob Weatherly

Year end?

Fred Callon

$7.59 on gas and $90.92 on oil.

Ron Mills - Johnson Rice

Okay. And then in terms of that PV10, do you know how much was associated with Entrada and once again I am just trying to fast forward '08, because you sold half of those reserves.

Bob Weatherly

Entrada lets say I think is about a $1.1 million.

Ron Mills - Johnson Rice

$1.6 billion is total PV10 and $1.1 is Entrada.

Bob Weatherly

Yeah that’s right

Ron Mills - Johnson Rice

Okay. Great thank you guys.

Bob Weatherly

Sorry, Ron. Absolute mayhem with me.

Ron Mills - Johnson Rice

No problem.

Operator

Our next question comes from the line of Philip Dodge, Stanford Group. Please proceed with your question.

Philip Dodge - Stanford Group

Yes, Ron got ahead of me again there on Entrada, but have, you're too quick Ron, I got one other question on the 250 extra payment, having a sunset in 2018, is the reason for that, that you expect the field to be depleted by then.

Fred Callon

No I have to say that it is nothing more than a, just a negotiated incentive payment and the idea that it should end at some point in time and quite frankly there's nothing magic about that day.

Philip Dodge - Stanford Group

Yeah hopefully it's because CIECO expects the production to last a lot longer than that.

Fred Callon

Correct, yes we do.

Philip Dodge - Stanford Group

Alright good work thanks a lot.

Fred Callon

Thank you

Bob Weatherly

Thanks Phil

Operator

And we have no further questions at this time.

Fred Callon

All right, well again we thank everyone for taking time to call in. And, as always, please feel free to give any of us here a call at anytime. Thank you so much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.

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Source: Callon Petroleum Co. Q4 2007 Earnings Call
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