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Callon Petroleum: Slowly Clawing Its Way Out Of Debt

May 01, 2021 6:43 AM ETCallon Petroleum Company (CPE)68 Comments


  • Callon may be able to generate around $233 million in positive cash flow in 2021 at low-$60s WTI oil.
  • It would then be able to generate a similar amount of positive cash flow per year at $55 WTI oil in 2022 and 2023.
  • This would help it reduce its net debt to around $2.3 billion (or 2.3x EBITDAX) by the end of 2023 at $55 WTI oil and without additional divestitures.
  • Callon's unsecured notes now yielding around 8.5% to 9.8% to maturity, indicating the potential for refinancing them properly if oil averages in the mid-$50s to low-$60s.
  • Callon appears fairly valued based on longer-term $55 WTI oil (beyond 2021).
  • Looking for more investing ideas like this one? Get them exclusively at Distressed Value Investing. Learn More »

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Callon Petroleum (NYSE:CPE) appears able to slowly dig itself out of its debt (towards an acceptable level) at current strip prices. It may be able to generate $233 million in positive cash flow in 2021 at low-$60

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

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Comments (66)

@Elephant Analytics

It seems that Callon is paying $46.1 million to Primexx as a deposit for the takeover. If CPE's shareholders do not vote the acquisition the $46.1 million will be lost for Callon.

In addition, Callon pays a deposit of $14 million to BPP for the takeover. The same, if shareholders do not agree/vote, the money will be lost.

What is your opinion about all these and about the new acquisition?

What is the target price for CPE in your opinion considering the latest news?

Thank you!
Looks like I was right. Down it goes. Too much debt
frackedup profile picture
None of you have any excuses for not making a fortune on CPE. I still think CPE finds themselves in some M&A this month as commodity prices continue to swell.
@frackedup OPEC seems to be breaking down. Whilst CPE might have some news, something tells me it won’t push the stock price up
@frackedup opec deal seems to be negative for this. Production increasing. Looks like this will see lows again soon.
frackedup profile picture
@oilaction you have to go back through the history of my comments to understand the context of the one on July 1, 2021.
Also, this is a great lesson on why you never carry an oil equity without insurance, which is covered in other comments.
How does the recent senior notes offering (seekingalpha.com/...) impact the business/its debt?
@valuefirst281 8% coupon is high…

It is high.

I expect management to come up with other actions such as selling shares or an acquisition. The uncertainty is getting higher for the shareholders of CPE.

OXY is becoming a much better option as it will be faster to benefit from oil price increase. OXY has much better hedging than CPE or LPI.
Well I guess this had its day in the sun. That’s over
frackedup profile picture
@invest_4_freedom guess you borrowed John5554's magic 8-ball
frackedup profile picture
I have come to the realization that CPE should be acquiring another Permian or Eagle Ford player. Why? Because it's the best way out of their terrible hedging losses. This will be an all stock transaction more than likely, and it will accelerate free cash flow and debt reduction to shareholders.

This will happen by the end of July. Watch and learn boys.
@frackedup What will that do to their share price?
frackedup profile picture
@invest_4_freedom so long as they don't pay more than a 15% premium, it'll be good. The market is quite receptive to M&A right now, especially in the Permian where you had tons of companies piled on top of each other. With that said, it would be better for them to go Eagle Ford in my opinion. The oil window and the LLS pricing that comes with it makes it some extremely lucrative acreage.
@frackedup this stock so volatile
Being added to the Russell. Maybe buying will pickup?
WTI above 71 and this thing is red.
I would not be surprised if CPE will generate over $800 million in FCF just next year. If WTI will go over $80, as signs indicate.

RBC just increased the price target for CPE from $44.00 ➝ $54.00. It is the first analyst to admit the price target should be over $50. For now.

Pay attention! OXY recently announced that it sold acreage for just over $20,300 per acre. But OXY's wells from that to-be-sold acreage produce on average just slightly less than 28 Boe/d. Callon's wells produce over 62 Boe/d.

Again, if we consider CPE's acreage to be valued at $34,000 per acre, as in the very recent LPI transactions, Callon's share price should be over $85.

OXY paid a couple of years ago $78,000 per acre in the Anadarko transaction. Now oil is higher than when the Anadarko transaction was done and I expect oil will continue to go higher. Expensive oil is much better to convince everybody to switch to cleaner energy.

In that higher oil environment, if the acre will get back to $78,000, as OXY and Chevron priced it just 2 years ago, Callon Petroleum could be worth over $274 per share. Of course, I subtracted the entire debt in the calculation.

So, the fair price of CPE will be in 2022 between $85 and $274 per share.
Royal Dutch Shell intends to sell its Permian acreage for $10 billion.

This is over $38,000 per acre.

When I estimated the fair price for CPE above I used $34,000 per acre for the bottom value of $85 per share.

It looks like the value of acreage in the Permian is going up very fast !!! Callon will rock.

Can anyone explain how this can trade so negative when WTI is at record highs? What am I missing?
frackedup profile picture
@john5554 alright. I'm just going to have to ask. Do you suffer from a mental illness of any kind? You missed a 25-30% run in the last couple weeks.
@frackedup I think that’s a little aggressive. I have been in since the 30s. Just didn’t expect -5% when WTI is at record highs for the year
@john5554 then just sell and lock in your gains. thanks
Very disappointing action
frackedup profile picture
New resistance around $49.15

OVX has some non-trending spikes but continues to consolidate near 30.
$DXY got a gust of wind in its sails but has started to pullback again.
Better yet, VXXLE is continuing its down trend and consolidation around 30.

The VXXLE is the "fear gauge" for the energy sector folks. As the VXXLE falls, that tells us that less people are using options (insurance contracts). You typically only purchase insurance when you start to become fearful of a directional change in your investment. The VXXLE is nearing a 1 year low, which tells us that institutions are quite comfortable with their positions on a trending basis. And yes--I know retail investors trade options regularly and not for the purpose of insurance but to make money on directional moves. I'm talking about the major institutions that can't fire sale millions of shares every time they get a bit uneasy about the market.

Positive API data could help oil begin its move over $70. If EIA data comes in hot Wednesday morning, it is likely going to be the catalyst needed to start the run to $75-80/bbl range.

Furthermore, not sure why but EIA data showed US production at 10.8MM for the week ended May 28. It's possible there was an outage or disruption but I haven't identified it yet. If EIA data is 10.8MM again for the week ended June 4 then what we're seeing is the aggressive nature of shale declines as oil rig counts remain sub 400 and more importantly frac spreads remain below 250.

US Shale is now down 2.1-2.3MMBO/day since 2019. If the demand picture strengthens to pre-pandemic levels, there is plenty of room for Iranian crude.

The entire 22-month strip is over $60 now. US shale MUST continue to show discipline here. If rig counts and frac spreads remain suppressed, the OVX and VXXLE will continue to fall, and oil prices will continue to rise.

Once CPE goes over $49.15 range, which should come from oil's next run up, we should stampede toward to $60-65/share.
@frackedup this is great input! Thank you!

Anyway, in less than 2 months, when the results for the second quarter will be published, CPE, OXY and other oil companies will go much higher. Now it is still the time to buy high beta oil stocks.

Just take a look at this :)

@frackedup looks like China suppressing oil prices now…
frackedup profile picture
@john5554 toothless attempt. A 1-2% reduction in their purchasing for a month or two is about 100-200MBO/day. Means nothing.

Look at the last 5 trading days. CPE is testing the heck out of $49.15 - $49.34 and it has found support just above $46.

The play here is to try and accumulate shares as close to $46 as you can right now before API data comes out this evening. Strong API data from memorial weekend will represent the first cannon fired for summer demand. Strong data will move crude into $70s this evening. If the EIA firms up the API data, that means the projections are all on point and oil will get the nod. When oil gets the nod, CPE will break out again and go make $60/share.

Look, if you're scared of the downside then protect yourself with Puts. The 16 JUL 21 chain has $40 Puts going for like $1.40 right now. This stock is a violent mover (just look at the chart). If you buy 1,000 shares of the equity, just buy 15 Put contracts on the July monthly at like $38, $39 or $40. If the data is awful, then cut loose the equity before it goes below $46 and watch your Puts go through the roof. If it falls below $46 this sucker goes into free fall (just look at the chart). Because the VXXLE is down, the insurance is cheap. You can buy a little bit more coverage here and sacrifice some share appreciation because the next move that CPE makes is going to be well in excess of $2/share. It's really simple math.

Also, what we know for certain right now is that the supply-demand picture is the furthest thing from equilibrium. We're not going to trade sideways here. Not coming out of a pandemic, not with OPEC+ adding barrels in July, and not with Iranian bbls possibly coming in August, and not with a possible US Shale rig boom again.

Buy the insurance so you don't miss out on a big bull run. Don't sell the insurance. As oil prices go higher, the disagreement on the value of the energy sector will rise, this will cause the VXXLE to rise, which will cause the insurance premiums to rise.
So what kind of valuation should CPE be at with WTI at near 70? It seems to still be lagging
@john5554 if you sell just the land and leases, the over 200,000 net acres, at the per acre price from the recent LPI transactions, and you subtract the debt, you get about $85 per share.

However, CPE is more than the net acres. It has also knowhow.

Moreover, I would not be surprised if WTI goes above $90 during the next 12 months. That would change many valuations. OXY and CPE will rock.
Yup breakdown
CPE looks like it's going to breakdown
frackedup profile picture
Keep an eye on the OVX. If that falls below 35, and even better if it goes sub 30, you better get greedy on CPE because it will run to $60+

$DXY has softened up nicely. As above, OVX falling but needs to stabilize below 35. Covid cases in the US way down, coming down in India as well. Frac spreads and rig counts still way down. Higher refining margins plus accelerated summer demand helping to keep oil prices around mid $60s.

We'll have to see what June and July have in store for us but if travel ramps up and demand rises back toward 100mmbo/day, you can bet the farm we see mid $70s, maybe even a bump to $80 oil again by July.
@frackedup what is OVX ?
frackedup profile picture
@Daniel07 oil volatility index. Historically, the higher the OVX, the more difficult it becomes for crude to sustain price appreciation. If the OVX can sustain sub 35 for several trading days, even weeks, it's the strongest indication that traders agree on the price of oil. More agreement (lower OVX), means a better supply-demand picture, which will mean price appreciation. Once the OVX rises and sustains that increase, it means that traders no longer agree on the price, and they expect large movements in the price. Historically, if you study the relationship between the OVX and WTI, the higher the OVX goes, the uglier it gets for the WTI. The lower it goes, and the longer it sustains that low, the better it gets for the WTI.

The key component here is demand. If we see a ramp-up in demand, it will firm up the price action and send prices toward $80/bbl.
@frackedup Thank you! Great explanation!

Why do you believe CPE will run to $60+ ?
@Elephant Analytics

Considering the new LPI deals, would it be fair if we would evaluate CPE in the current oil environment at higher than $34,000 per acre?

200,000 acres x 34,000 minus debt would be around $85 per share.

What do you think?

If you do not agree with $34,000 per acre, what would be a fair value in your opinion?
thanks for the article, lets hope CPE can return back to $60 or $6 per share pre split
Brevarthan Research profile picture
You need to look at their written (short) oil calls. Take them into account and they are well over 90% hedged, perhaps over 100% in Q1. See the footnotes on the presentation and the 10-k.
Wimal profile picture
@Brevarthan Research CPE's heding details are on p/12 in the presentation linked below. Their Oil production is 60% hedged for 2H/2021;

Just Myself profile picture
I much prefer BCEI and PDCE. See my post from: seekingalpha.com/...

What do y’all know about mostly Colorado producer PDCE (has some Texas Delaware Basin production...but primarily in Wattenberg Field)?

Using figures from Yahoo Finance finance.yahoo.com/...

PDCE’s share price is about 10% higher than BCEI and is expected to earn $0.89/share in 1Q 2021 vs. $0.75 for BCEI. But, PCDE’s earnings are estimated to lag BCEI over FY2021 and FY 2022. PDCE’s estimates for FY2021 and FY2022 are currently $3.99 and $4.47 whereas the current estimates for BCEI are $4.72 ad $6.05.

PDCE seems to have $1.6 billion in debt which they have been paying off nicely and has talked about a capital return policy late this year or in 2022 when they reduce their debt. BCEI did not have debt but seems to have assumed about $150 million in debt from their merger with Highpoint and issued $100 million in bonds. The article states that they expect BCEI to exit 2021 with around $50 million in debt.

So, it would seem I should perhaps consolidate my investments in both to BCEI. What are your thoughts and comparisons on these two? I will wait until I see the reports from both as PDCE consolidated with SCRI about a year ago and BCEI consolidated with Highpoint recently....so I will want to validate all these figures with updated balance sheets.

Thanks in advance for anyone who can provide additional insight into these two. BCEI reports on May 3rd and PDCE reports on May 5t
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