Callon Petroleum Company Announces Third Quarter 2014 Financial and Operating Results

Callon Petroleum Company (CPE) (“Callon” or the “Company”) today reported results of operations for the three and nine month periods ended September 30, 2014.

The Company highlighted financial and operating results for the third quarter of 2014:

• Net daily production of 5,641 barrels of oil equivalent per day (“BOE/d”), an increase of 30% over the first quarter of 2014, comprised of 82% oil volume
• Average realized price of $76.41 per barrel of oil equivalent (“BOE”) produced with an associated operating margin of $60.00 per BOE, both excluding the impact of cash-settled derivatives
• Adjusted EBITDA and discretionary cash flow, non-GAAP financial measures, of $26.9 million and $23.0 million, respectively (See “Non-GAAP Financial Measures and Reconciliations” discussed below). Excluding asset retirement obligations related to certain divested offshore properties, discretionary cash flow was $24.8 million.
• Net income available to common shareholders of $0.23 per diluted share and adjusted income available to common shareholders (“Adjusted income”), a non-GAAP financial measure, of $0.06 per diluted share based on total average diluted shares outstanding of 44.2 million shares and an effective tax rate of 37%. Adjusted income excludes certain items that the Company believes affect the comparability of operating results, and are generally non-recurring items or items whose timing and/or amount cannot be reasonably estimated (See “Non-GAAP Financial Measures and Reconciliations” below).

Callon also highlighted recent operational activity and corporate developments (production data presented on a “two-stream” basis):

• Closing of the previously announced acquisition in the Central Midland Basin on October 8, 2014 and assumption of operatorship of the Casselman and Bohannon fields (the “Ca-Bo” operating area). Callon acquired additional working interests in October 2014 and its current working interest in the fields is 62.7%.
• Completion of term debt and common equity financings for a combined $429 million in gross proceeds, contributing to estimated total liquidity of approximately $235 million as of November 1, 2014
• Expansion of horizontal development to three zones at the East Bloxom field, with the Neal 658 LH targeting the Lower Wolfcamp B zone from a three-well pad which also included two Upper Wolfcamp B horizontal wells. The Neal 658 LH (7,099′ completed lateral) produced at a peak 24-hour rate of 1,027 BOE/d (80% oil) after being placed on submersible pump, following the cumulative production of 36 thousand BOE under natural flowing pressure over the first 71 days of production.
• Expansion of horizontal development to three zones at the Garrison Draw field, with the University 26-35 #15 AH targeting the Wolfcamp A zone from a two-well pad which also included an Upper Wolfcamp B well. The Wolfcamp A (7,472′ completed lateral) produced at a peak 24-rate of 1,449 BOE/d and an average 60-day rate of approximately 595 BOE/d (75% oil) on submersible pump.
• Progression of horizontal development of the Lower Spraberry shale, with two wells currently completing in Midland County and one well currently drilling in Upton County
• Average total completed well costs of approximately $900 per lateral foot for the latest 10 horizontal wells
• Increased fourth quarter 2014 production guidance with a midpoint of 7,400 BOE/d, of which approximately 68% oil and 64% of natural gas volumes are covered by swap contracts sold at an average of $93.58 per barrel of oil and $4.14 per million Btu, respectively.

Operating and Financial Results

Total Revenue. For the quarter ended September 30, 2014, Callon reported total revenues of $39.7 million, comprised of oil revenues of $36.3 million and natural gas revenues of $3.3 million. Average daily production for the quarter was 5,641 BOE/d compared to average daily production of 5,280 BOE/d in the second quarter of 2014. Average realized prices were $85.52 per barrel of oil and $5.86 per Mcf of natural gas in the third quarter of 2014, representing a weighted average of $76.41 per BOE produced.

Lease Operating Expenses, including workover expense (“LOE”). LOE for the three months ended September 30, 2014 was $12.08 per BOE, compared to LOE of $9.08 per BOE in the second quarter of 2014 and $10.68 per BOE for the nine months ended September 30, 2014. The increase in the third quarter was primarily related to elevated workover activity in association with the impact of horizontal well completion operations on surrounding producing wells in certain fields.

Production Taxes, including ad valorem taxes. Production taxes were $4.33 per BOE in the third quarter of 2014, representing approximately 5.7% of total revenue.

Depreciation, Depletion and Amortization (“DD&A”). DD&A for the three months ended September 30, 2014 was $31.05 per BOE compared to $24.96 per BOE in the second quarter of 2014, with the increase in per unit DD&A being attributable to an increased depreciable asset base (the “full cost pool”) relative to estimated proved reserves and an immaterial prior period adjustment. During the quarter, the full cost pool was increased due to the inclusion of the carrying value of our Northern Midland acreage that was previously classified as unevaluated properties. DD&A for the nine months ended September 30, 2014 was $27.76 per BOE.

General and Administrative, net of amounts capitalized (“G&A”). G&A for the three months ended September 30, 2014 was $3.3 million compared to $9.6 million in the second quarter of 2014. The $6.3 million decrease primarily relates to a net decrease of $6.1 million in the mark-to-market valuation of performance-based phantom stock incentive awards period over period. G&A excluding certain non-recurring items and non-cash valuation adjustments (“Adjusted G&A”, a non-GAAP measure) was $4.7 million, or $8.98 per BOE, for the current period and $4.9 million, or $10.25 per BOE, for the second quarter of 2014. Adjusted G&A for the third quarter of 2014 excludes the following items from reported G&A:

• $0.1 million in non-recurring, cash expense related to a withdrawn proxy contest
• $1.5 million in non-cash gain related to the mark-to-market adjustment of performance-based phantom stock incentive awards

Adjusted G&A for the third quarter of 2014 was comprised of $4.0 million of cash expenses and $0.7 million of non-cash expenses related to stock-based compensation and depreciation and amortization of corporate items. As a result, Adjusted G&A on a cash basis was $7.78 per BOE.

Interest Expense. Interest expense incurred during the three months ended September 30, 2014 increased to $2.2 million compared to $1.8 million in the second quarter of 2014, primarily due to the increase in the balance of our Second Lien Loan.

Income (Loss) Available to Common Shareholders. The Company reported net income available to common shareholders of $10.2 million in the third quarter of 2014 and Adjusted income, a non-GAAP measure, of $2.6 million, or $0.06 per diluted share, which excludes (net of tax effects): (a) $7.7 million in expenses related to the non-cash, mark-to-market valuation of the Company’s derivative positions and phantom stock equity awards and (b) $0.1 million of non-recurring G&A expenses. The Company’s effective tax rate for the third quarter was 37% representative of the statutory rate of 35% adjusted for non-deductible executive compensation expense and state income taxes.

For a definition of Adjusted income and a reconciliation of income (loss) available to common shareholders to Adjusted income, see “Non-GAAP Financial Measures and Reconciliations” below. Adjusting items to arrive at Adjusted income are reflected net of tax at the 35% statutory tax rate.

Discretionary Cash Flow. Discretionary cash flow, a non-GAAP measure, for the third quarter of 2014 was $23.0 million. The third quarter of 2014 included $1.8 million for retained asset retirement obligation expenditures related to Gulf of Mexico properties that were sold in the fourth quarter of 2013. Excluding this expenditure attributable to the sold properties, discretionary cash flow from continuing operations was $24.8 million or $0.56 per diluted share.

For a definition of discretionary cash flow and reconciliation to net cash flow provided from operating activities, see “Non-GAAP Financial and Reconciliations” below. No adjustments have been made to discretionary cash flow for non-recurring cash items, such as the asset retirement obligation expenditures described above.

Capital Expenditures

The following table summarizes the Company’s drilling activity in the Permian Basin for the three months ended September 30, 2014:

Callon’s total capital expenditures for the third quarter of 2014 are detailed below (in thousands):

Our base 2014 operational capital expenditure budget approximates $215 million, excluding acquisitions and capitalized G&A and interest. We currently forecast operational expenditures of $47.0 million for the fourth quarter of 2014, including plans to drill eight gross (6.5 net) and complete seven gross (6.1 net) horizontal wells. This planned level of activity would result in the drilling of 30 gross (26.3 net) horizontal and seven gross (4.2 net) vertical wells, and completion of 29 gross (27.3 net) horizontal and five gross (3.1 net) vertical wells for the 2014 fiscal year.

In addition, we currently plan to complete two gross (1.3 net) horizontal wells in the fourth quarter on our recently acquired properties in the Central Midland Basin. We forecast these completions will add approximately $5.5 million to our original base operational capital budget.

2014 Guidance

The following fourth quarter 2014 guidance reflects the closing of the Central Midland Basin acquisition on October 8, 2014. Full year guidance, previously provided on August 6, 2014, has been updated for actual results for 2014 to date.

Approximately 68% of oil and 64% of natural gas production volumes are hedged based on the midpoint of guidance for the fourth quarter of 2014. In addition, average daily volumes of approximately 3,015 BOE/d and 4,925 MMBtu/d are hedged for calendar year 2015.

Listed below are the outstanding hedges as of November 1, 2014 for the third quarter of 2014 and calendar year 2015.

Non-GAAP Financial Measures and Reconciliations

This news release refers to non-GAAP financial measures as “discretionary cash flow,” “Adjusted income,” “Adjusted G&A” and “Adjusted EBITDA.” These measures, detailed below, are provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

• Callon believes that the non-GAAP measure of discretionary cash flow is useful as an indicator of an oil and gas exploration and production company’s ability to internally fund exploration and development activities and to service or incur additional debt. The Company also has included this information because changes in operating assets and liabilities relate to the timing of cash receipts and disbursements which the company may not control and may not relate to the period in which the operating activities occurred.
• We believe that the non-GAAP measure of Adjusted income and Adjusted income per diluted share are useful to investors because they provide readers with a meaningful measure of our profitability before recording certain items whose timing or amount cannot be reasonably determined. These measures exclude the net of tax effects of certain non-recurring items and non-cash valuation adjustments, which are detailed in the reconciliation provided below. Prior to being tax-effected and excluded, the amounts reflected in the determination of Adjusted income and Adjusted income per diluted share below were computed in accordance with GAAP.
• Callon believes that the non-GAAP measure of Adjusted G&A is useful to investors because it provides readers with a meaningful measure of our recurring G&A expense and provides for greater comparability period-over-period. The table below details all adjustments to G&A on a GAAP basis to arrive at Adjusted G&A.
• We calculate Adjusted Earnings before Interest, Income Taxes, Depreciation, Depletion and Amortization (“Adjusted EBITDA”) as Adjusted income plus interest expense, income tax expense (benefit) and depreciation, depletion and amortization expense. Adjusted EBITDA is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income (loss), operating income (loss), cash flow provided by operating activities or other income or cash flow data prepared in accordance with GAAP. However, we believe that Adjusted EBITDA provides additional information with respect to our performance or ability to meet its future debt service, capital expenditures and working capital requirements. Because Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and may vary among companies, the Adjusted EBITDA we present may not be comparable to similarly titled measures of other companies.

The following table reconciles net cash flow provided by operating activities to discretionary cash flow (in thousands) for the periods indicated:

The following tables reconcile income (loss) available to common stockholders to Adjusted income (in thousands; reconciling items are reflected net of tax):

The following tables reconcile net income (loss) to Adjusted EBITDA (in thousands) for the periods indicated:

The following tables reconcile total G&A to Adjusted G&A (in thousands) for the periods indicated:

The following table presents summary information for the periods indicated, and are followed by the Company’s financial statements.

Earnings Call Information

The Company will host a conference call on Thursday, November 6, 2014 to discuss third quarter financial and operating results.

Please join Callon Petroleum Company via the Internet for a webcast of the conference call:

Alternatively, you may join by telephone:

An archive of the conference call webcast will also be available at www.callon.com in the “Investors” section of the website.

About Callon Petroleum

Callon is an independent energy company focused on the acquisition, development, exploration, and operation of oil and gas properties in the Permian Basin in West Texas.

This news release is posted on the Company’s website at www.callon.com and will be archived there for subsequent review. It can be accessed from the “News Releases” link on the top of the homepage.