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Callon Petroleum First Quarter 2022 Results

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   |    Friday,May 13,2022

Callon Petroleum Co. reported results of operations for the three months ended March 31, 2022.

First Quarter 2022 and Recent Highlights:

  • Delivered production of approximately 102.7 MBoe/d (63% oil) in the first quarter of 2022
  • Placed two co-development projects on production in the Delaware South area with performance exceeding expectations
  • Increased drilled, uncompleted well count to 42 wells at quarter end
  • Generated net cash provided by operating activities of $281.3 million and adjusted free cash flow of $183.3 million
  • Reported net income of $39.7 million, or $0.64 per diluted share, adjusted EBITDA of $393.7 million, and adjusted income of $212.7 million, or $3.43 per diluted share
  • Reduced lease operating expense and gathering, processing & transportation expense on a sequential basis by $6.2 million and $1.3 million, respectively
  • Achieved an operating margin of $58.35 per Boe, including oil price realizations of over 100% of WTI benchmark
  • Reduced trailing twelve-month net debt-to-adjusted EBITDA to 1.97x, calculated pursuant to our credit facility, driven by strong operating margins and absolute debt reduction during the quarter

President & CEO Joe Gatto said: "Callon delivered another outstanding quarter as our results reflected both strong Permian well performance and increased overall capital and operating efficiency. We took several steps this quarter to help set the stage for future production growth and sustained free cash flow generation, including the build-out of a DUC inventory on our newly acquired Delaware South acreage to accommodate a more efficient scaled development model going forward. Our initial projects in this area implementing our scaled development model and completion designs are performing above expectations, and future activity in Delaware South will be an important contributor to our targeted 10% oil production growth by the fourth quarter of this year.

"We are pleased with the rapid transformation of our balance sheet that has been the product of disciplined capital allocation and leading cash margins. Our leverage ratio was below 2.0x at the end of the first quarter and we expect that metric to approach 1.0x by year-end 2022 providing improved optionality for capital allocation, including a program of capital returns that accompany further debt reduction and re-investment in a deep inventory of low-breakeven projects," concluded Mr. Gatto.

Callon Operations Update

At March 31, 2022, Callon had 1,344 gross (1,204.3 net) wells producing from established flow units in the Permian and Eagle Ford. Net daily production for the three months ended March 31, 2022 was 102.7 MBoe/d (63% oil).

For the three months ended March 31, 2022, Callon drilled 31 gross (26.4 net) wells and placed a combined 17 gross (16.5 net) wells on production. First quarter completion activity was solely focused on the Delaware Basin. Within the Delaware Basin, a six-well co-development project targeting Wolfcamp A and B zones was brought online in January and has exceeded production expectations with average 30-day production rates of 1,312 barrels of oil equivalent (Boe) per day and an oil cut of approximately 71%. Additionally, a five-well project, targeting the same two zones, was brought online in February and also has strong performance with an average 30-day production rates of 1,199 Boe/d and an oil cut of approximately 70%. As part of a broader optimization program for producing assets, Callon continues to convert gas lift systems to electric submersible pumps, positively impacting the production profile of the existing asset base across the Delaware position.

In the Eagle Ford, Callon drilled 9 gross (7.2 net) wells during the quarter but had no completion activity. During the quarter, the Company expanded its electrification efforts in the area, advancing sustainability initiatives and improving productivity. The project has resulted in the removal of another 25 generators, providing a cleaner and more reliable source of energy for field operations. Altogether, these efforts are expected to save approximately $1.5 million annually in lease operating expenses. Additional field electrification efforts are progressing and are expected to be completed by year-end.

Credit Facility Redetermination

On May 2, 2022, Callon completed the spring redetermination for its senior secured credit facility. The borrowing base and elected commitment were both reaffirmed at $1.6 billion. As of March 31, 2022, the drawn balance on the facility was $712.0 million and cash balances were $4.2 million. The Company intends to continue its application of organic free cash flow towards repayment of debt balances related to the credit facility and other debt instruments.

Second Quarter Activity Outlook and Guidance

Callon is currently running seven rigs, with four rigs in the Delaware Basin, two rigs in the Midland Basin and one rig in the Eagle Ford. One rig is expected to be released in June. The Company plans to utilize two completion crews for the second quarter, supporting new production across the Midland, Delaware and Eagle Ford positions.

For the second quarter, the Company expects to produce between 100 and 102 MBoe/d (64% oil) with between 32 and 35 gross wells (28 - 31 net) placed on production. In addition, Callon projects an operational capital spending level of between $225 and $240 million on an accrual basis.

Capital Expenditures

For the three months ended March 31, 2022, Callon incurred $157.4 million in operational capital expenditures on an accrual basis.

Revenue. For the quarter ended March 31, 2022, Callon reported revenue of $664.8 million, which excluded revenue from sales of commodities purchased from a third party of $112.4 million. Revenues including the gain or loss from the settlement of derivative contracts ("Adjusted Total Revenue") were $531.4 million, reflecting the impact of a $133.5 million loss from the settlement of derivative contracts. Average daily production and average realized prices, including and excluding the effects of hedging, are detailed above.

Commodity Derivatives. For the quarter ended March 31, 2022, the net loss on commodity derivative contracts includes the following (in thousands):

 

Three Months Ended
March 31, 2022

Loss on oil derivatives

$325,348

Loss on natural gas derivatives

28,181

Loss on NGL derivatives

4,771

Loss on commodity derivative contracts

$358,300

For the quarter ended March 31, 2022, the cash paid for commodity derivative settlements includes the following (in thousands):

 

Three Months Ended
March 31, 2022

Cash paid on oil derivatives, net

($95,353)

Cash paid on natural gas derivatives, net

(4,644)

Cash paid on NGL derivatives, net

(1,528)

Cash paid for commodity derivative settlements, net

($101,525)

Lease Operating Expenses, including workover ("LOE"). LOE per Boe for the three months ended March 31, 2022 was $67.3 million, or $7.29 per Boe, compared to LOE of $73.5 million, or $7.11 per Boe, in the fourth quarter of 2021. The sequential reduction in LOE was primarily due to changing service providers and improving the efficiency of operations. The increase in LOE per Boe was due to the distribution of fixed costs spread over lower production volumes.

Production and Ad Valorem Taxes. Production and ad valorem taxes for the three months ended March 31, 2022 were approximately 5.7% of total revenue excluding revenue from sales of commodities purchased from a third-party and before the impact of derivative settlements, or $4.08 per Boe.

Gathering, Transportation and Processing. Gathering, transportation and processing expense for the three months ended March 31, 2022 was $20.8 million, or $2.25 per Boe, as compared to $22.1 million, or $2.14 per Boe, in the fourth quarter of 2021. This decrease in gathering, transportation and processing expense was primarily due to the 9% decrease in production volumes between the two periods.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended March 31, 2022 was $11.15 per Boe compared to $10.89 per Boe in the fourth quarter of 2021. The increase in DD&A per Boe was primarily attributable to the larger decrease in production volumes as compared to the depletion rate of our proved reserves from the fourth quarter of 2021 to the first quarter of 2022.

General and Administrative Expense ("G&A"). G&A for the three months ended March 31, 2022 and December 31, 2021 was $17.1 million and $13.1 million, respectively. G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A") was $14.3 million for the three months ended March 31, 2022 compared to $13.4 million for the fourth quarter of 2021. The cash component of Adjusted G&A increased to $13.0 million for the three months ended March 31, 2022 compared to $12.2 million for the fourth quarter of 2021 primarily as a result of higher compensation costs during the quarter.

Income Tax. Callon provides for income taxes at the statutory rate of 21% adjusted for permanent differences expected to be realized. We recorded income tax expense of $0.5 million and income tax benefit of $0.8 million for the three months ended March 31, 2022 and December 31, 2021, respectively. Since the second quarter of 2020, we have concluded that it is more likely than not that the net deferred tax assets will not be realized and have recorded a full valuation allowance against our deferred tax assets. As long as we continue to conclude that the valuation allowance is necessary, we will not have significant deferred tax expense or benefit.

Adjusted EBITDA. Net income was $39.7 million and adjusted EBITDA was $393.7 million for the first quarter of 2022 as compared to net income of $285.4 million and adjusted EBITDA of $339.2 million for the fourth quarter of 2021. The increase in adjusted EBITDA from the fourth quarter of 2021 was primarily due to an increase in revenues primarily as a result of the 23% increase in the price of oil as well as $16.5 million less cash paid for derivative settlements.


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