Callon Petroleum (ticker: CPE) is engaged in the acquisition, development, exploration and operation of oil and gas properties in Texas, Louisiana and the offshore waters of the Gulf of Mexico. In 2009, Callon began a strategic initiative to diversify its operations from strictly offshore Gulf of Mexico by entering the Permian Basin of West Texas. The company’s move to diversify onshore was made to reduce reinvestment risk and create a strong foundation of visible growth potential. Callon’s plan is twofold: reinvest cash flow generated from its offshore fields 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.
Two CPE representatives (Bob Weatherly, Chief Financial Officer, and Joe Gatto, Senior Vice President) recently presented the story. Highlights include:
• Increased emphasis on its horizontal drilling program, where two rigs are currently running in the Permian Basin;
• “Nearing” the point to being fully onshore in the Permian Basin;
• The ongoing process to sell the Medusa asset, its last remaining asset in the Gulf of Mexico
Gatto said the company is still seeking options to expand its Permian presence. “We’re certainly looking at opportunities outside of our existing acreage base, whether through acquisitions, partnership opportunities, partnering with sort of traditional legacy vertical players in the Permian Basin that don’t have the operational team or technical expertise to drill horizontally … Callon, being a smaller operator, usually presents itself as a good partner for some of these legacy partners out in the Permian basin.”
CPE is adamantly trying to sell its Medusa territory in the Gulf of Mexico, and plans to ramp up its onshore activity with the proceeds. “If we get to the sale around that property, obviously certainly a lot of proceeds will be coming in to redeploy into acquisitions and increased drilling activity.”
Gatto added: “We introduced some targeted exit rates for 2013 and 2014, roughly a 120% increase year-over-year targeting the end of this year and then moving to 5,750 barrel equivalent by the end of 2014 based on our existing level of activity with running two horizontal rigs. Importantly, from a reserve perspective, we’re not forecasting total proved reserves, but our proved developed producing reserves increased almost 150% as we targeted based on our type curves for the end of this year. Obviously, that’s very impactful as we look at our commercial bank lending relationships and our borrowing base and other debt markets as we continue our spending in the Permian.”
Weatherly closed the presentation by providing a forecast of Callon’s future. “Clearly the biggest thing on the (near-term) horizon is executing the sale of our Medusa interest in the Gulf of Mexico. And once that’s done, we’ll have several options which include obviously the acquisition of additional acreage, but it could include calling in part or all of the 2016 notes that we have. Our Permian inventory is increasing, both with acreage acquisitions and delineation of additional horizons. The second rig accelerates our progress, and cash flow and capital will add to that. Infrastructure is largely in place. We spent a lot of money in 2012 and 2013 to get us ready to go for program drilling.”
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