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Callon Petroleum Fourth Quarter, Full Year 2021 Results

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   |    Thursday,February 24,2022

Callon Petroleum Company reported results of operations for the three months and full-year ended December 31, 2021.

2021 Highlights

  • Full-year 2021 production of 95.6 MBoe/d (64% oil)
  • Year-end proved reserves of 484.6 MMBoe (60% oil) with a standardized measure of future discounted cash flows of total proved reserves of $6.3 billion
  • PV-10 of total proved reserves of $7.1 billion; Proved developed reserves represent 57% of total reserve volumes with an associated PV-10 of $4.5 billion
  • Generated net cash provided by operating activities of $974.1 million and adjusted free cash flow of $274.2 million
  • Net income of $365.2 million, or $7.26 per diluted share, adjusted EBITDA of $998.8 million, and adjusted income of $437.4 million or $8.69 per diluted share
  • Achieved a full year operating margin of $42.05 per Boe, a 141% increase over last year
  • Announced approximately $210 million in non-core asset sales
  • Asset monetization proceeds, debt exchanges, and free cash flow contributed to a reduction in total debt of approximately $760 million, excluding cash consideration paid for acquisitions
  • Exited the year with a net debt / last twelve months EBITDA ratio of 2.3x pro forma for the Primexx acquisition and a net debt / fourth quarter annualized EBITDA of 2.0x

Fourth Quarter 2021 Highlights

  • Fourth quarter 2021 production of 112.4 MBoe/d (64% oil) with 16.8 net wells placed on production
  • Generated $366.3 million of net cash provided by operating activities and adjusted free cash flow of $123.6 million
  • Net income of $285.4 million, or $4.78 per diluted share, adjusted EBITDA of $339.2 million, and adjusted income of $159.2 million or $2.66 per diluted share
  • Achieved an operating margin of $48.71 per Boe, a 130% increase over last year
  • Closed the acquisition of 35,000 net acres and approximately 18,000 net barrels of oil equivalent per day in the Delaware Basin
  • Realized $153 million in proceeds through the divestiture of non-core Eagle Ford and Midland producing assets and water infrastructure assets

Joe Gatto, President and Chief Executive Officer commented, "During the fourth quarter and throughout the year, our team has outperformed expectations and set new records, all the while dealing with pandemic-related workplace challenges and a dynamic industry environment. Our operations team once again delivered solid results with production for the fourth quarter and the full year coming in at the high end of guidance while delivering our program under budget for the year.

"In 2021, Callon successfully completed a large acquisition that was both accretive and deleveraging. We followed through on our monetization targets for the year, announcing approximately $210 million in gross proceeds from non-core asset sales. Financially, we set several new records, generating record net income of $365.2 million and annual adjusted EBITDA of $999 million which represents an increase of over 40% relative to last year. Our capital discipline and high margins enabled us to deliver $274 million in adjusted free cash flow, a new company record. These outstanding achievements allowed us to dramatically improve the balance sheet and reduce Callon's leverage ratio by over 2x during the year. We look forward to raising the bar even further in 2022.

"Our 2022 capital budget reflects both our continued commitment to capital discipline and a greater focus on Callon's high rate of return Permian Basin assets. Inclusive of capitalized expenses, our capital budget implies a reinvestment rate1 of approximately 60% of adjusted discretionary cash flow at $75 per barrel WTI price and an adjusted free cash flow breakeven price of approximately $40 per barrel. We are in the process of implementing our operating model on the recently acquired Delaware assets and are actively taking measures to improve both production efficiency and operating cost structure. After completing our work to transition the acquired assets to larger project developments in the first quarter, we expect to generate oil production growth in excess of 10% over the course of the year.

"The industry continues to face inflationary cost pressures in items like steel tubulars and fuel, as well as overall labor and service costs. These inflationary pressures have increased estimated spot market well costs by over 15% based on recent data points. Given our scaled program of steady development activity and longer-term agreements with service providers, we expect to benefit from a wide range of efficiencies and limit the anticipated inflationary impact on our well costs to approximately 10%.

"Based on our planned operational activity and leading operating margins, we expect to generate over $500 million in adjusted free cash flow in 2022, based on $75 per barrel. This level of free cash flow puts us on a path to further reduce our absolute debt levels and achieve a leverage ratio of less than 1.5x by year end 2022," concluded Mr. Gatto.

Environmental, Social, and Governance ("ESG") Updates

Callon advanced its sustainability initiatives during 2021 with the Company achieving numerous milestones as detailed below:

  • Issued its second sustainability report, aligned with SASB and TCFD frameworks
  • Completed the second series of field electrification projects in the Eagle Ford and Delaware Basin
  • Improved its carbon footprint through flaring reduction initiatives
  • Reduced its spill occurrences and total fluid spill rate
  • Invested in employee development and wellness with the initiation of the Employee Development Program and Employee Wellness Program
  • Expanded community engagement through employee volunteering and financial support of education, social, and environmental initiatives

The Company remains committed to continued GHG emission reductions. As a result of these achievements, Callon made significant progress in environmental performance in 2021 and is announcing the adoption of more aggressive reduction goals:

  • End routine flaring by end of 2022, an acceleration of three years versus the previous goal
  • 50% reduction in GHG intensity by 2024, targeting the high end of previous guidance and accelerating the achievement timeline by one year
  • Reduce all flaring to less than 1% by 2024
  • Reduce methane intensity to less than 0.2% by 2024

To advance these goals, Callon will be investing nearly $20 million in emission reduction projects this year as part of a broader multi-year emission reduction program. This capital allocation will help expand the field electrification and other system upgrades that will allow Callon to continue to reduce its greenhouse gas emissions and overall carbon footprint.

Operations Update and Outlook

At December 31, 2021, Callon had 1,326 gross (1,187.1 net) horizontal wells producing from established flow units in the Permian and Eagle Ford. Net daily production for the three months ended December 31, 2021 grew 18% to 112.4 MBoe/d (64% oil) as compared to the same period of 2020. Full year production for 2021 averaged 95.6 MBoe/d (64% oil), a decrease of 6% over 2020 volumes.

For the three months ended December 31, 2021, Callon drilled 27 gross (24.9 net) horizontal wells and placed a combined 19 gross (16.8 net) horizontal wells on production. Wells placed on production during the quarter were completed in the Lower Spraberry and Wolfcamp A in the Midland Basin and the 3rd Bone Spring, Wolfcamp A and Wolfcamp C in the Delaware Basin.

Currently, the Company has seven active rigs with four in the Delaware Basin, one in the Eagle Ford, and two in the Midland Basin. Callon plans to release one of the Delaware rigs in late April. The Company is operating two completion crews with operations currently in the Delaware Basin.

Capital Expenditures

For the year ended December 31, 2021, Callon incurred $508.6 million in operational capital expenditures on an accrual basis as compared to $488.6 million in 2020. For the three months ended December 31, 2021, the Company incurred $159.8 million in operational capital expenditures on an accrual basis, which represented a $44.8 million increase from the third quarter of 2021.

Financial Results

Revenue. For the quarter ended December 31, 2021, Callon reported total revenue of $632.9 million, which excluded revenue from sales of commodities purchased from a third-party of $59.3 million. Total revenue increased $129.0 million during the fourth quarter of 2021 as compared to the third quarter of 2021 primarily as a result of an 11% increase in the price of oil as well as a 13% increase in production. Revenues including the gain or loss from the settlement of derivative contracts ("Adjusted Total Revenue"1) were $483.0 million, reflecting the impact of a $149.9 million loss from the settlement of derivative contracts. Average daily production for the quarter was 112.4 MBoe/d compared to average daily production of 99.7 MBoe/d in the third quarter of 2021. Average realized prices, including and excluding the effects of hedging, are detailed above.

Lease Operating Expenses, including workover ("LOE"). LOE per Boe for the three months ended December 31, 2021 was $7.11 per Boe, compared to $4.66 per Boe in the third quarter of 2021. The increase in LOE per Boe is primarily attributable to the addition of the recently acquired Delaware production as well as overall cost inflation in materials and labor.

Production and Ad Valorem Taxes. Production and ad valorem taxes were $3.26 per Boe for the three months ended December 31, 2021, representing approximately 5.3% of revenue excluding revenue from sales of commodities purchased from a third-party and before the impact of derivative settlements.

Gathering, Transportation and Processing. Gathering, transportation and processing for the three months ended December 31, 2021 were $22.1 million, or $2.14 per Boe, as compared to $20.9 million, or $2.28 per Boe in the third quarter of 2021. The decrease in gathering, transportation and processing per Boe was primarily attributable to the addition of the recently acquired Delaware production which carried lower gathering, transportation and processing fees.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended December 31, 2021 was $10.89 per Boe compared to $9.80 per Boe in the third quarter of 2021. The increase in DD&A per Boe was primarily attributable to a larger percentage increase in production as compared to the depletion rate of our proved reserves from the third quarter of 2021 to the fourth quarter of 2021.

General and Administrative Expense ("G&A"). G&A for the three months ended December 31, 2021 and September 30, 2021 was $13.1 million and $9.5 million, respectively. G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A1" ) was $13.4 million for the three months ended December 31, 2021 compared to $12.0 million for the third quarter of 2021. The cash component of Adjusted G&A of $12.2 million for the fourth quarter of 2021 increased as compared to $10.4 million for the third quarter of 2021 primarily as a result of increased compensation costs during the fourth quarter.

Income Tax. Callon provides for income taxes at a federal statutory rate of 21% adjusted for permanent differences expected to be realized. The Company recorded income tax benefit of $0.8 million for the three months ended December 31, 2021, compared to $2.4 million income tax expense for the three months ended September 30, 2021. 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 $285.4 million and adjusted EBITDA was $339.2 million for the fourth quarter of 2021 as compared to net income of $171.9 million and adjusted EBITDA of $292.2 million for the third quarter of 2021. The increases in net income and adjusted EBITDA from the third quarter of 2021 were primarily due to incorporating the assets recently acquired in the southern Delaware as well as an increase in the price of oil partially offset by higher payments on derivative settlements.

Proved Reserves

DeGolyer and MacNaughton prepared the estimates of Callon's proved reserves as of December 31, 2021. As of December 31, 2021, Callon's estimated net proved reserves were 484.6 MMBoe and included 290.3 MMBbls of oil, 577.3 Bcf of natural gas, and 98.1 MMBbls of NGLs with a standardized measure of discounted future net cash flows of $6.3 billion using average realized prices for sales of oil, natural gas, and NGLs on the first calendar day of each month during the year of $65.44/Bbl for oil, $3.31/Mcf for natural gas, and $29.19/Bbl for NGLs.

Oil constituted approximately 60% of the Company's estimated equivalent proved developed reserves as well as the Company's estimated equivalent total proved reserves. The Company added 36.2 MMBoe of new reserves in extensions and discoveries through development efforts in 2021, with a total of 68 gross (61.3 net) wells drilled and 112 gross (103.8 net) wells completed.

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