Callon Petroleum: Slowly Clawing Its Way Out Of Debt
Summary
- 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).
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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 WTI oil and a similar amount of positive cash flow per year in 2022 and 2023 at $55 WTI oil (which is slightly below current strip for those years).
This scenario would leave Callon with net debt of 2.3x EBITDAX at the end of 2023, before any further reductions from asset sales. While this level of leverage is still a bit higher than ideal, it would probably be enough for Callon to refinance its existing notes albeit at fairly high interest rates.
Callon's stock appears to be fairly price for a longer-term $55 WTI oil scenario at the moment, as it is valued at around 4.0x EV/EBITDAX based on projected 2023 results at that oil price.
2021 Outlook At Low-$60s WTI Oil
Callon is expecting to average approximately 91,000 BOEPD (63% oil, 19% NGLs and 18% natural gas) during 2021. This would result in generating $1.476 billion in oil and gas revenue at $61 to $62 WTI oil during 2021.
Callon's 2021 hedges have around negative $232 million in projected value at that oil price. It has approximately 74% of its 2021 oil production hedged at an average of mid-$40s WTI (or equivalent) oil.
| Type | Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million |
| Oil | 20,925,450 | $60.50 | $1,266 |
| NGLs | 6,301,850 | $19.00 | $120 |
| Natural Gas | 35,872,200 | $2.50 | $90 |
| Hedge Value | -$232 | ||
| Total Revenue | $1,244 |
Callon's cash expenditures are estimated at $1.011 billion in this scenario, including $430 million in total operational capex. Callon's cash interest payments (which differs from its interest expense on its income statement due to some of its interest being capitalized) is estimated at around $170 million per year, so this remains a significant expense.
| $ Million | |
| Lease Operating Expense (Including Workovers) | $200 |
| Gathering, Processing, and Transportation | $75 |
| Production and Ad Valorem Taxes | $96 |
| G&A (Cash Basis) | $40 |
| Cash Interest | $170 |
| Operational Capital Expenditures | $430 |
| Total Expenses | $1,011 |
Thus Callon is projected to generate $233 million in positive cash flow during 2021.
Debt Situation
Callon ended 2020 with $2.992 billion in net debt, so its projected positive cash flow in 2021 would reduce its net debt to $2.759 billion by the end of the year. This is 3.3x its projected 2021 EBITDAX (with hedges) or 2.6x its projected 2021 EBITDAX (without hedges), so Callon still is fairly heavily leveraged despite its ability to generate a decent amount of positive cash flow during the year.
Source: Callon Petroleum
At $55 WTI oil in 2022 and 2023, Callon may be able to increase its production by low-single digits each year and reduce its net debt to around $2.3 billion by the end of 2023. At last report Callon had few hedges after 2021, so at $55 WTI oil it could generate similar positive cash flow to projected 2021 levels (at low-$60s WTI) despite lower WTI prices and a larger (average of $560 million per year) operational capex budget.
This scenario would leave Callon with net debt at 2.3x EBITDAX by the end of 2023. Callon may also divest assets (targeting $125 million to $225 million in asset sales in 2021) to further reduce its debt, but the impact of those divestitures on EBITDAX is uncertain.
A $55 WTI long-term oil price is probably enough for Callon to refinance its existing notes, although it may end up with higher interest rates with new notes. Callon's existing unsecured notes are currently yielding around 8.5% to 9.8% to maturity.
Valuation
Callon had 46.2 million shares outstanding as of February 2021. This is an increase of around 6.4 million since October 2020 and may indicate that most of Callon's warrants were exercised on a cashless basis. In a $55 WTI long-term oil scenario, Callon would have $2.3 billion in net debt at the end of 2023 and may be able to generate approximately $1 billion EBITDAX during 2023. A 4.0x EV/EBITDAX multiple would result in a market cap of $1.7 billion or approximately $36.80 per share. This is close to Callon's current share price, while the 2022/2023 strip is currently close to $57.
Conclusion
Callon is now projected to generate around $233 million in positive cash flow in 2021 at low-$60s WTI oil. It may also be able to generate a similar amount of positive cash flow in 2022 and 2023 while modestly increasing (low-single digits) production levels.
This scenario would allow Callon to reduce its net debt to around 2.3x EBITDAX by the end of 2023 and put it in a decent position to refinance its notes (although with high interest rates for any new unsecured notes). Callon may also be able to slightly improve its position with asset sales.
Overall, Callon's share price appears fair for a longer-term $55 WTI oil scenario. It is valued at 4.0x EV to 2023 EBITDAX based on $55 WTI oil in 2023 currently, which is around the midpoint of its pre-pandemic (roughly 3.5x to 4.5x) valuation range.
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Comments (66)
Also, this is a great lesson on why you never carry an oil equity without insurance, which is covered in other comments.
$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.
