Callon Petroleum: May be able to reduce net debt by 60% over next 2 years (NYSE: CPE)
Callon Petroleum (NYSE: CPE) looks like pretty good value under $50 as long as oil prices stay fairly high over the next two years. A scenario where oil prices average near the current band ($90 for 2022 and about $80 for 2023) would allow Callon to reduce its net debt by about 60% by the end of 2023. This would leave it in good financial shape even if oil prices average around 65 to $75 after 2023.
I estimate that Callon’s stock would then be worth around $63 in a scenario where oil prices average $65 in the long term (after 2023) and close to $79 in a scenario where oil prices average long-term average of $75. The main risk for Callon is that oil prices fall significantly before he can repay his debt.
2022 Outlook Update
The current band for 2022 has improved to high $90 WTI oil with Henry Hub natural gas reaching around $6.50. This is a scenario where Callon could generate $2.838 billion in oil and gas revenue before hedges, while its 2022 hedges have an estimated negative value of $504 million at these commodity prices.
|Type||Barrels/Mcf||$ per barrel/Mcf (realized)||millions of dollars|
I assumed there was further cost inflation since Callon released his 2022 forecast in February. So I increased its modeled rental operating costs by 5% (to about $8 per boe) and also increased its capital budget from $725 million to $775 million. Callon had already factored in 10% cost inflation in its initial capital expenditure budget forecast. At $775 million, the estimated cost inflation would be 15-20%.
|millions of dollars|
|Rental operating expenses||$300|
|Collection, processing and transport||$80|
|Taxes on production and ad valorem||$171|
|G&A and others (cash basis)||$90|
|Operating capital expenditure||$775|
Callon is now expected to generate $758 million of positive cash flow in 2022. This would allow it to reduce its net debt to $1.955 billion at the end of 2022, or approximately 1.15x its 2022 EBITDAX.
If oil prices remain reasonably high in 2023, Callon should end up with a higher amount of positive cash flow compared to 2022 due to the reduced impact of hedging. Amid WTI oil’s $80 in 2023, Callon’s hedges would be worth negative $46 million. This would potentially allow Callon to generate around $900 million in cash flow positive with WTI oil in the mid-1980s if it was to maintain 2023 production around expected Q4 2022 levels of 107,000 BOEPD.
This positive cash flow amount would allow Callon to reduce its net debt to approximately $1.055 billion by the end of 2023, or less than 0.6x EBITDAX.
The $1.658 billion of projected positive cash flow (at current strip prices) in 2022 and 2023 would allow Callon to repay its credit facility debt as well as manage its unsecured notes due 2024 with cash in hand. box.
Notes on assessment
In a scenario where commodity prices eventually follow the current strip for 2022 and 2023 and then return to long-term prices of $65 WTI oil after 2023, I would now estimate Callon’s value at around $63 per stock.
At $75 of long-term WTI oil, Callon’s estimated value is instead around $79 per share.
Callon’s value is boosted by the large amount of positive cash flow it could generate over the next two years at current strip prices, even if oil prices fall.
Callon has significant net debt at present, but at current strip prices, it would be able to reduce its net debt by approximately 60% by the end of 2023. This would then still give Callon plenty of leverage. benefits if oil prices ended. until falling into the range of $65 to $75 after 2023.
So Callon is essentially betting on oil prices remaining fairly high ($80, $90) over the next couple of years, allowing him to get his balance sheet firmly in order.