Callon Petroleum (CPE) production is expected to decline in early 2022 as it strives to integrate its Primexx acquisition and pushes more development activity into late 2022. Callon production in the fourth quarter of 2022 is expected to be fairly similar to its adjusted (for acquisitions and divestitures) Q4 2021 production however, and at current tape prices, it could be able to generate over $700 million in positive cash flow.
This amount of positive cash flow would greatly aid Callon’s deleveraging efforts and should see him hit his 1.0x leverage target in 2023, even if oil prices fall to around $70 next year.
Callon expects average production of 103,000 BOEPDs in 2022. This is a notable decline from fourth quarter 2021 production of 112,400 BOEPDs, although Callon mentioned that the divested assets represent approximately 3,000 BOEPDs of this production. Thus, the drop in production (comparing 2022 to Q4 2021) on the remaining assets is around 6%.
Average production in 2022 is also impacted by a relatively low number of wells put on production in early 2022, while Callon expects to increase its DUC inventory during the year. Callon plans to drill 12 more gross wells in 2022 than it completes during the year.
Callon’s production is expected to increase from approximately 101,000 BOEPD in H1 2022 to approximately 107,000 BOEPD in Q4 2022. Callon’s oil percentage could also increase from approximately 62% in 1H 2022 to approximately 66% in Q4 2022.
Thus, Callon’s total production in Q4 2022 could be around -2% compared to its production in Q4 2021 (adjusted for acquisitions and disposals), while its oil production in Q4 2022 could be +1% compared to its production in Q4 2022. in Q4 2021.
With an average production of 103,000 BOEPD (64% oil) in 2022, Callon is expected to generate $2.612 billion in oil and gas revenue before current band hedges. The current strip for 2022 involves approximately $92 to $93 of WTI oil and $4.55 of Henry Hub natural gas.
Callon’s hedges for 2022 have a negative estimated value of $391 million at these commodity prices. Callon has hedges covering approximately 56% of its oil production, 54% of its natural gas production and 11% of its NGL production for 2022.
|Type||Barrels/Mcf||$ per barrel/Mcf (realized)||millions of dollars|
Source: Author’s work
Callon expects its rental operating expenses to increase to approximately $7.60 per boe in 2022, a significant increase from its average of $5.82 per boe in 2021. The Primexx assets appear to have fairly high rental operating expense levels (potentially over $10 per boe), so Callon will attempt to reduce this now that it has resumed these operations.
|millions of dollars|
|Rental operating expenses||$285|
|Collection, processing and transport||$80|
|Taxes on production and ad valorem||$157|
|G&A and others (cash basis)||$90|
|Operating capital expenditure||$725|
Source: Author’s work
This leads to a projection that Callon can generate $724 million in cash flow positive in 2022.
Callon had net debt of $2.713 billion at the end of 2021. So, based on current strip prices, it could reduce its net debt to $1.989 billion by the end of 2022. This would make its debt net at the end of 2022 equal to 1.2 x EBITDAX.
Callon still has relatively high debt for an upstream business, but looks capable of meeting its medium-term goal of reducing leverage to 1.0x. This could happen in 2023 at current strip prices.
Notes on assessment
I would now estimate Callon’s value at around $55 per share long term (post 2022) $65 WTI Oil and around $65 per share long term $70 WTI Oil. This is based on maintaining at least Q4 2022 production levels (approximately 107,000 BOEPD with 66% oil) after 2022 and assumes oil prices in 2022 to average in the $90s. At $75 of long-term WTI oil, Callon common stock could be worth close to $75.
I reduced Callon’s estimated value (at various long-term commodity prices) by a few dollars due to increased costs per boe after its acquisition of Primexx. This is partially offset by upward revisions to cash flow estimates for 2022, with spot oil prices reaching over $100.
While spot WTI oil prices are above $100, the futures curves are in steep decline with the current WTI band for 2023 to 2025 around $74. In September 2013, the EIA mentioned that the WTI futures curves were in sharp decline when the first-month contract was about $13 higher than the 15-month contract. Currently, the first-month contract is $13 higher. around $24 at the 15 month contract, so this is a very large discount.
Strong near-term oil prices could allow Callon to generate more than $700 million in positive cash flow in 2022, despite projecting nearly $400 million in realized hedging losses at the current strip. Callon’s net debt would fall below $2 billion with this amount of positive cash flow, and he would then be on track to meet his medium-term leverage target of 1.0x in 2023 at $70 oil. WTI.
Callon now seems about a fair price for a scenario where oil averages in the $90s in 2022 and then $65s thereafter. If longer-term prices average $70+, Callon stock should have a reasonable upside.