Evgenii Mitroshin
Callon Petroleum (NYSE:CPE) lowered its free cash flow expectations for 2022 by approximately $150 million compared to early June. This reduction does not appear to be due to operational issues or cost inflation, though, but rather due to lower strip prices for 2022.
Despite lower strip prices, Callon still appears capable of reducing its net debt to under $1.3 billion by the end of 2023, which would leave its leverage at a reasonable 0.7x. This is close to $500 million higher net debt than I had previously projected for Callon at the end of 2023, which does reduce Callon’s estimated value. However, at long-term (after 2023) $70 WTI oil, I still estimate Callon’s value at approximately $68 per share.
Notes On Production And Guidance
Callon’s Q2 2022 production was affected by increased workover activity resulting in elevated downtime. Callon experienced a higher than typical level of well failures due to power disruptions and other issues, so during these outages it accelerated some of its workover activity (planned for later this year) into Q2. This hit Q2 2022 a bit, but downtime should be a bit less than previously expected during 2H 2022.
Callon also converted a Midland Basin gathering contract from percentage of proceeds to fee-based. This increased its non-oil volumes.
As a result, Callon bumped up its total production guidance for 2022 by 500 BOEPD at guidance midpoint, while its oil cut went down from 64% to 63%. Gathering costs for 2022 have increased by $5 million due to the contract conversion.
Updated 2022 Outlook
In early June, Callon had projected over $900 million in free cash flow for 2022. This has been reduced to around $750 million now, although the decrease is mostly due to lower commodity prices rather than operational issues or cost inflation.
At the time Callon made that projection, the WTI strip for 2022 was approximately $11 higher than it is now. The current 2022 strip is now approximately $97 to $98 WTI oil and $7.30 Henry Hub natural gas. This is a level where Callon can generate $2.827 billion in oil and gas revenues before hedges, while its 2022 hedges have negative $490 million in estimated value.
| Type | Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million |
| Oil | 23,799,825 | $96.00 | $2,285 |
| NGLs | 7,177,425 | $40.00 | $287 |
| Natural Gas | 40,799,700 | $6.25 | $255 |
| Hedge Value | -$490 | ||
| Total Revenue | $2,337 |
Callon is now expected to generate $752 million in positive cash flow in 2022.
| $ Million | |
| Lease Operating Expense | $285 |
| Gathering, Processing, and Transportation | $80 |
| Production and Ad Valorem Taxes | $170 |
| G&A and Other (Cash Basis) | $90 |
| Cash Interest | $160 |
| Operational Capital Expenditures | $800 |
| Total Expenses | $1,585 |
This should allow Callon to reduce its net debt below $2.1 billion by the end of 2022.
Potential 2023 Outlook And Valuation
For 2023, Callon’s hedges have approximately negative $30 million in estimated value at the current mid-$80s WTI strip. Due to its reduced hedges, Callon may still be able to generate $800+ million in positive cash flow in 2023 with mid-$80s WTI oil. This would be higher than its 2022 cash flow.
This would put Callon’s net debt below $1.3 billion by the end of 2023, which would be a reasonable 0.7x EBITDAX.
The reduction in expected cash flow in 2022 and 2023 due to lower commodity prices does affect Callon’s estimated value a bit. However, I still believe that Callon is worth around $68 per share in a scenario where commodity prices follow current strip (such as mid-$80s WTI oil for 2023) until the end of 2023 and then reverts to $70 WTI oil after that.
Callon is somewhat risky due to its relatively high (approximately $2.5 billion) net debt levels, but with low-$90s WTI oil during the rest of 2022 and mid-$80s WTI oil during 2023, it would be able to reduce its net debt by around 50% by the end of 2023.
Conclusion
Despite weaker commodity prices, Callon still appears capable of reducing its net debt from approximately $2.5 billion currently to under $1.3 billion by the end of 2023. This would leave Callon a relatively healthy (0.7x) amount of leverage and supports a value of $68 per share in a scenario where WTI prices average $70 after 2023.
In a longer-term $70 WTI oil scenario, Callon may also be able to generate around $450 million per year in positive cash flow.
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