Callon Petroleum (ticker: CPE) continues to make headway on its drilling initiatives in the Permian Basin while acquiring additional running room and properties in the play. CPE operates all of its Permian acreage and has positions in both the Delaware Basin portion on the western side of the Permian and in the Midland Basin east of the Central Basin Platform. As of June 21, 2012, CPE owned 26,000 net acres in the Permian Basin with 100% of its production operated.
CPE first entered the basin in 2009 with the acquisition of approximately 8,202 net acres in the Delaware Basin portion of the play, as part of its strategic diversification strategy for reinvesting cash flow generated from its offshore fields in the U.S. Gulf of Mexico into onshore oil plays.
CPE remains committed to drilling holes in the ground out in West Texas. The company announced on June 21, 2012 that it completed drilling its first horizontal well in the Wolfcamp B formation, the Neal #321H (100% WI), at its East Bloxom field in Upton County, Texas. Fracture stimulation and completion of the 27 planned stages began on June 18. Callon is currently drilling its second horizontal Wolfcamp B well at East Bloxom.
Callon’s horizontal drilling focus on the Wolfcamp B shale is not limited to Upton County. A second horizontal drilling program focused on the Wolfcamp B shale is being initiated on 1,762 net acres Callon purchased on June 8, 2012, in Regan County, Texas. CPE paid $12 million for the 1,762 net acres providing the company with an additional 19 horizontal Wolfcamp B drilling locations and net proved developed reserves of 215 thousand barrels of oil equivalent from seven existing vertical Sprayberry wells.
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Callon’s Permian Basin leasehold in this multi-pay/multi-play region also includes the Cline shale formation that the company is targeting in Borden County, Texas. Callon picked-up a total of 14,470 net acres earlier in 2012, and has since acquired 22 square miles of 3D seismic in the area. CPE’s first horizontal Cline well is scheduled to be drilled in Q3’12. For the Cline, Callon’s well economics model is based on results from other operators in the area and the company is estimating an EUR of 420 MBOE per well consisting of 60% crude oil, with a 30-day IP of 578 BOEPD (75% oil). These estimates assume 160-acre spacing, a 4,000-foot lateral leg and a 15-stage fracture completion. When we input the variables, we estimate a Cline well is capable of generating an IRR of 26% at commodity prices of $90.00 per Bbl and $2.00 per Mcf. Assuming gas reinjection and no revenue generated from produced natural gas, we estimate the breakeven point for a Cline well based on our well economics at $62.01 per Bbl.
Financial Update:
CPE improved its liquidity position by receiving an increase in its borrowing base by 33% to $60 million and extended the maturity to July 31, 2014. The borrowing base increase reflects Callon`s continued success in growing its onshore, oil-weighted reserves and production in the Permian Basin. The strengthened financials will help CPE focus on horizontal drilling in the Midland Basin, the Cline oil shale to the north and the Wolfcamp B formation in the south part of the company’s operational footprint.
Also in the June 21, 2012 announcement, the company indicated it had repurchased $10 million of its 13% Senior Notes due 2016 for $10.2 million. The repurchase reduces the balance of the Senior Notes to $97 million and results in annual cash interest savings of $1.3 million.
In summary, Callon Petroleum Company continues to advance its onshore diversification strategy by expanding its onshore presence in the prolific and oil-prone Permian Basin, establishing a firm foundation for growing oil production and reserves, while reducing debt.
