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Callon Petroleum First Quarter 2020 Results

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   |    Monday,May 11,2020

Callon Petroleum Co. reported its Q1 2020 results.

Recent Actions

In response to the recent commodity price collapse and the global impact of the novel coronavirus pandemic (COVID-19), Callon has taken a number of steps to ensure the safety of our team members, their families, and our service providers, as well as preserve the integrity and value of our business. Some of these recent actions include:

• Instituted updated safety procedures for all field employees and enhanced communication with our current vendors to ensure safe social distancing.
• Material reductions in general and administrative costs including: 35% compensation reduction for board members, 35% reduction in CEO target cash compensation, and at least 25% reduction in target cash compensation by all other officers. This is in addition to previously planned staff reductions and a suspension of hiring activity, contributing to an incremental 15% reduction from post-merger integration targets.
• The Company also announced today that it has further reduced activity, including the suspension of all completion activity in April and moving to one active drilling rig by mid-May. Callon currently forecasts total operational capital expenditures of approximately $250 - $325 million over the remaining three quarters of 2020, assuming resumption of completion activities in the second half of the year. The ultimate timing and level of activity will continue to be based on maximizing free cash flow in 2020 and 2021.

Recent Highlights

• Delivered production of approximately 101 Mboe/d (64% oil), above the high end of guidance, for the first quarter of 2020
• Realized fully diluted earnings per share of $0.55, adjusted income per share of $0.12, net income of $216.6 million, and adjusted EBITDA of $217.5 million⁽¹⁾ for the first quarter of 2020
• Achieved lease operating expense ("LOE") per Boe of $5.70 for the first quarter of 2020, an improvement of nearly 14% over the comparable three month period ended March 31, 2019
• Enhanced corporate liquidity position through incremental hedging and conversion of previous instruments to NYMEX oil swaps, basis hedges, and incremental gas hedges resulting in a mark-to market value of $245 million as of May 1, 2020
• Achieved new peak efficiency gains with recent Eagle Ford and Midland Basin projects delivering average daily completion rates of more than 2,000 lateral feet per day with completion costs of approximately $250 per lateral foot
• On May 7, completed the spring borrowing base redetermination for Callon's senior secured credit facility resulting in a facility commitment and elected borrowing base of $1.7 billion along with a new secured leverage ratio covenant to temporarily replace the previous total leverage ratio covenant until March 31, 2022

Joe Gatto, President and Chief Executive Officer commented, "Beginning in early March, our team began taking decisive action to align our activity levels with the current economic environment. We also quickly moved to enhance our cash flow protection through strategic hedging initiatives which provide support as we transition the business to lower levels of activity. Additionally, the leadership team, along with our Board, has made the decision to pare costs through voluntary G&A reductions.

"Our operational and financial performance since the beginning of the year clearly demonstrates the collective effort of our organization to execute on our post-merger integration plan and drive the synergies that will position us to manage through a challenging time for our industry. We have developed numerous scenarios that support returning to a modest level of completion activity in the next few months, and our decisions will be based on our outlook for sustainable, unhedged returns on capital that generate incremental value. These scenarios will also be governed by the optimization of free cash flow⁽²⁾ for debt reduction over the balance of the year while preparing ourselves for a solid foundation into 2021."

Credit Facility and Liquidity

Callon recently completed the spring redetermination for its senior secured credit facility. The borrowing base and elected commitment were both set at $1.7 billion, relative to a previous elected commitment of $2.0 billion. As of March 31, the drawn balance on the facility was $1.35 billion. Other key elements of the credit facility following the redetermination process include:

• Suspension of the total leverage ratio test until March 31, 2022
• Addition of a secured leverage ratio test of 3.0x
• Temporary waiver of the current ratio test
• Allowance for $400 million of junior secured debt without any reduction to the borrowing base

Operations Update

At March 31, 2020, Callon had 1,439 gross (1,268 net) horizontal wells producing from established flow units in the Permian Basin and Eagle Ford Shale. Net daily production for the three months ended March 31, 2020 grew 150% to 101.0 Mboe/d (64% oil), as compared to the same period of 2019.

For the three months ended March 31, 2020, Callon drilled 40 gross (39.4 net) horizontal wells and placed a combined 36 gross (30.8 net) horizontal wells on production. Of the wells placed on production, 61% were in the Eagle Ford Shale with the remaining 39% in the Permian Basin.

Callon continued to post meaningful gains in efficiency driven by the significant shift to simultaneous operations across the entirety of the asset base. Some of the operational highlights include:

• An improvement of more than 80% in lateral feet completed per crew per day in the Midland Basin (as compared to the first quarter of 2019) with recent projects exceeding 2,000 lateral feet per day
• Recent completion costs in the Midland Basin and Eagle Ford Shale approaching roughly $250 per lateral foot in both areas, representing year over year improvements of roughly 50% and 33% respectively
• A reduction in average drilling days in the Delaware West area (legacy Carrizo properties) of more than 10%
• An increase in drilled footage per day in the Delaware East area (Ward County) of roughly 24% compared to 2019
• Results from recent mega-pad development in the Delaware East region are exceeding estimates for early time oil production while maintaining higher pressures from both the Lower and Upper Wolfcamp A utilizing restricted choke management techniques

The Company recently reduced development activity, relative to the plan previous communicated in the update provided on March 17, in response to further weakness in the commodity prices. All completion activity was suspended in April after the completion of recent projects in the Delaware and Midland Basins. Operations has also reduced drilling activity and expects to be transitioning to a single rig by mid-May.

Recently, Callon entered into additional marketing arrangements to ensure placement of its production volumes. Currently, approximately 60,000 gross barrels of oil per day ("Bbl/d") are covered by term sales agreements with an agreement for an additional 20,000 to 25,000 barrels currently under negotiation. Additionally, the Company holds 15,000 Bbls/d of firm transport capacity and will add another 10,000 Bbls/d during the third quarter to support movement of oil volumes from the Permian Basin to Gulf Coast markets.

Callon has been closely monitoring field level economics to make decisions regarding voluntary production curtailment decisions. The Company has shut-in approximately 1,500 Bbl/d (gross) through April and expects to reach over 3,000 Bbl/d (gross) during May. June volumes are currently under evaluation. In addition, Callon has deferred the flowback of a recently completed project in the WildHorse area until expected netbacks improve.

Capital Expenditures

For the three months ended March 31, 2020, Callon incurred $277.6 million in operational capital expenditures on an accrual basis.