Current CPE Stock Info

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.

Last Remaining Deepwater Asset to Divest

The company reported it had authorized the marketing of its 15% working interest (WI) in the Medusa deepwater field and 10% interest in Medusa Spar LLC to prospective buyers. After selling its deepwater Habanero Field late last year, Medusa is Callon’s last remaining  deepwater asset. As of year-end 2012, the Medusa field was credited with 3.9 MMBOE of proved reserves net to CPE with a pre-tax present value, discounted at 10%, of approximately $180 million. During 2012, the Medusa field produced 464 MBOE (1,268 BOEPD) net to Callon from eight wells, which accounted for 29% of company-wide production in 2012.

Previous Sale of Deepwater Assets

Callon has a track record of being able to successfully market its offshore assets. Back in November 2012, CPE sold its 11.25% WI in the Habanero field to Shell Offshore Inc., a subsidiary of Royal Dutch Shell plc (ticker: RDS.B) for $42 million. To put the company’s onshore transformation in perspective, at year-end 2009, 17% of CPE’s total proved reserves of 9.7 MMBOE were located onshore and the company’s onshore production was 350 BOEPD during Q4’09. Pro forma for the Habanero sale, CPE reported that its onshore assets represent 67% of total company proved reserves of approximately 14.6 MMBOE (primarily in the Permian Basin) and 51% of pro forma October 2012 production of 4,390 BOEPD (63% crude oil).


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Thoughts on Callon

If the company divests its final deepwater asset, Callon’s offshore presence will be limited to legacy fields in the shallow waters of the GOM shelf region, which accounted for only 4% of its year-end 2012 proved reserves and 22% of its total production in 2012.

The intended sale signals Callon’s commitment to the Permian Basin and would provide additional capital to accelerate drilling and production from its Permian properties, an area that continues to attract industry attention. Pioneer Natural Resources (ticker: PXD) made a presentation earlier this month in which they said they believe the Midland Basin Wolfcamp and Jo Mill Shale plays combined hold an estimated recoverable resource of 50 billion barrels of oil equivalent, making it the second largest field in the world. Needless to say, Callon chose an excellent growth play.

Callon believes the additional capital generated from the sale could provide them with the financial strength and flexibility to pursue complementary Permian basin acquisitions with an improved overall cost of capital. Thanks to continued execution of its business strategy, Callon is close to becoming a pure-play Permian Basin story.

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