Callon Petroleum (ticker: CPE) is engaged in the acquisition, development, exploration and operation of oil and gas properties in the Permian Basin of West Texas.
In 2009, Callon began a strategic initiative to diversify its operations onshore in an effort to reduce reinvestment risk and increase visible growth potential. Callon entered the Permian Basin of West Texas and since then has been steadily reducing its presence in the U.S. Gulf of Mexico. Callon’s plan is twofold: reinvest cash flow generated from its offshore fields producing in the U.S. Gulf of Mexico into onshore oil plays, and divest non-core offshore Gulf of Mexico assets to provide increased liquidity and capital to grow onshore.
Callon announced it had sold its interest in the Medusa Field, operated by Murphy Oil, and all of its offshore operations for cash consideration of $100 million. With the sale of its last material offshore asset the company’s onshore transition is complete.
Callon Petroleum released its Q3’13 results on November 7, 2013. Operating revenues for the quarter totaled $30.8 million, with $27 million (88%) from crude oil. Average production was 4,370 BOEPD as the company completed its transition to a pure Permian Basin operator.
The company posted a net loss of $0.9 million and $0.02 per diluted share in Q3’13, but net cash flow increased to $15 million from $13.9 million in Q3’12. On a non-GAAP basis for Q3’13, excluding the after-tax losses related to the unrealized mark-to-market derivative adjustments, Callon reported net income of $1.1 million and earnings per share of $0.03 with $19.2 million in discretionary cash flow. The company currently has $58.9 million in liquidity.
Shift to the Permian
CPE sold substantially all of its non-core, offshore assets and will now focus solely on the Permian Basin. The company expects Permian production to reach 3,500 BOPD by year-end 2013, which is roughly 10 times higher than in Q3’09.
Production in Q3’13 from the Permian Basin averaged 2,456 BOEPD, representing a volume increase of 30% when compared to Q2’13, driven higher by increased drilling and completion activity. Four gross horizontal wells were completed in the quarter and another four were drilled, all in the southern Midland Basin. CPE expects to bring six horizontals into production in Q4’13. The company expects to exit 2014 at a production rate of 5,750 BOEPD.
Callon estimates it has a captured net resource of 100 MMBOE in the Permian Basin. At the end of October 2013, Callon estimates it has an inventory of 414 oil wells in the Permian, providing the company with over 15 years of visible growth potential at current activity rates.
Three Upper Wolfcamp B horizontal wells were completed in the East Bloxom property, and at quarter-end one was producing and two others were flowing back. Based on a year-long horizontal review, CPE has determined it can downspace the area into seven laterals per section and based on its current type curve, estimates EURs in the area to be 480 MBOE. At this time, the company anticipates targeting the horizontal Wolfcamp B drilling from two-well pads. To date, the four horizontal wells drilled into the Wolfcamp B averaged 24-hour IP rates of 1,031 BOEPD and a 30-day rate of 600 BOEPD. A Wolfcamp A test was completed, but stimulation problems resulted in a 30-day rate of 178 BOEPD (92% oil). Another Wolfcamp A well will be drilled in Q1’14.
A three-well pad targeting the Lower Wolfcamp B in Taylor Draw is nearing completion and expected to commence production in December 2013. CPE’s existing horizontal Lower Wolfcamp B well produced at a peak 30-day rate of 455 BOEPD (76% oil). Two Upper Wolfcamp B wells were completed in Q3’13 and produced an average 30-day rate of 354 BOEPD (76% oil). A 380 MBOE type curve is expected in the region with spacing at approximately 700 feet per well.
Callon is drilling two Upper Wolfcamp B horizontal wells at its Carpe Diem asset in Midland County and expects to complete them in early 2014. Pre-drill expectations are between 400 MBOE and 600 MBOE. Two additional wells will be drilled after a project in Bloxom is completed. Another Wolfcamp B was drilled in the Garrison Draw and is flowing back.
The Baird Ranch is in the process of delineation. Two vertical wells and two horizontal wells have been drilled to evaluate different zones. One vertical was completed with a single stage slickwater frack and produced at a peak 24-hour rate of 326 BOEPD (92% oil). Additional testing in the area will be performed to determine if this area is best developed using horizontal or vertical wells.
In addition, Callon’s steadfast attention to environmental and homeowner concerns in Midland earned it the Bruno Hanson/Midland College Award for Environmental Excellence, adding to its reputation as a Permian mainstay.
Asset Sales
Callon sold substantially all of its Gulf of Mexico assets for approximately $100 million in Q3’13 and the deal is expected to close by November 30, 2013. Production in CPE’s Medusa field produced an average of 1,017 BOEPD, 89% of which was crude oil. Properties on the shelf produced an average of 864 BOEPD. Callon also reached an agreement to sell its Swan Lake field (69% WI) in the Haynesville shale for $2 million. Swan Lake consists of 429 net acres and produced an average of 173 Mcfe/d in the quarter.
In the conference call, CPE said they are actively seeking additional bolt-on acreage opportunities near its core areas.
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Callon following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
SunTrust Robinson Humphrey Note – 11.11.13
Minor tweaks following results. Following the GOM sale, Callon adjusted 2013E production guidance from 4.0-4.3 Mboepd to 3.8-4.1. Our 2013 remains essentially unchanged at 4.0 Mboepd. Operating expense declined 15% q/q to $15.61 and just $11.21/Boe for Permian operations. As a result, our 2014 operating cost assumption declines meaningfully from $12.50/Boe to $11.45/Boe. However, G&A was $14.53/Boe in 3Q versus our $12.21 estimate, so we boost 2014E G&A by 12% to $27.2 million.
Northern Midland success. A vertical single-stage Mississippian Chat well commenced at 326 Boepd and averaged ~130 Boepd in its first 20 days. The result comes after the company announced in April a horizontal test that fracked into water and commenced at only 136 Boepd. Callon attributed success in part to a smaller stimulation and indicated the vertical test was making hardly any water and had positive pressure indications.
Raising resource estimates. We are encouraged by this test and now assume 25% of the northern acreage is prospective. Given the company’s northern position is almost twice the size of the combined southern/central Midland position, further success would create significant upside.
Carpe Diem up next, already drilling extended reach laterals. Callon expects to complete its first two Midland County wells in its Carpe Diem field targeting the Wolfcamp B early 1Q14. Interestingly, Callon’s first two wells will be drilled at 8,100′ and 9,000′, respectively. As some of the best results in the basin have been from offset operators targeting longer laterals, we feel early indications of 400-600 Mboe could be overly conservative.
With notes set to be retired, refinancing cannot be too far behind. Based on terms of its new borrowing base ($83 million versus $75 million previously), Callon appears set to retire at least 50% of its 13% notes due 2016 this quarter. We model the 50% retirement but look for Callon to soon refinance these notes at a much lower cost of capital.
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