Drilling & Completions | Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Hedging | Capital Markets | 2020 Guidance

Callon Petroleum Second Quarter 2020 Results

Share Print Bookmark    |    Tuesday,August 04,2020

Callon Petroleum Co. reported its Q2 2020 results.

Recent Highlights

• Delivered production of approximately 108.7 Mboe/d (65% oil), above the high end of guidance, for the second quarter of 2020
  
  
• Posted accrued operational capital spending of $85.1 million, 15% below the second quarter target of $100 million
  
  
• Generated net cash from operating activities of $97.8 million and free cash flow¹ of $18.0 million for the second quarter
  
  
• Loss available to common stockholders of $1,564.7 million, or $3.94 per fully diluted share, driven by an impairment of evaluated oil and gas properties of $1,276.5 million, adjusted EBITDA¹ of $153.4 million, and adjusted income per share¹ of $0.01 for the second quarter of 2020
  
  
• Achieved lease operating expense ("LOE") of $50.8 million or $5.14 per Boe for the second quarter of 2020, an improvement of 10% over the comparable three-month period ended March 31, 2020
  
  
• Lowered cost structure with total operating expenses, including full cash G&A costs¹, of $9.58/Boe in the quarter, 16% below the prior quarter
  
  
• Reduced Delaware and Midland drilling and completion costs versus the prior quarter by approximately $100 per 1,000 lateral feet, representing incremental savings of 11% and 17% respectively
  
  
• Announced a 1-for-10 reverse stock split effective as of the close of business on August 7, 2020

Joe Gatto, President and Chief Executive Officer commented, "Our operational and financial results for the second quarter reflect Callon's commitment to thoughtful capital allocation and operational execution that we have overlaid on an exceptional, diversified asset base. As oil markets began to erode in March, our team acted quickly to reduce capital activity while maintaining a clear focus on near and long-term operating goals. As a result, our drilling and completion costs are down across the board, second quarter production was well ahead of estimates, and operating costs continue to decline beyond our targeted synergy goals.

"Our success in reducing our cost structure, combined with leading capital efficiency from strong well productivity and well cost reductions, positioned us to generate free cash flow this quarter. This is just the first step as we have developed a longer-term plan designed to consistently generate free cash flow while maintaining production levels with a reduced reinvestment rate. After moving past the working capital cash impact of expenditures incurred in the first quarter, a meaningful portion of which added to our current inventory of drilled, uncompleted wells, we will be dedicating all of our expected free cash flow to credit facility reductions and forecast our current credit facility balance to decline into year end and continue into 2021.

"Despite tremendous business, social, and personal hurdles resulting from the current pandemic and extreme turbulence in the financial markets, our team has remained focused on synergy realization and the integration of people, systems, and processes. Our operational and financial results highlight our progress as an organization and I applaud the Callon team for persevering through an incredibly difficult past few months. Importantly, we remain committed to their safety and that of our vendors, partners, and communities." 

Operations Update

At June 30, 2020, Callon had 1,471 gross (1,298.0 net) horizontal wells producing from established flow units in the Permian Basin and Eagle Ford Shale. Net daily production for the three months ended June 30, 2020 grew 168% to 108.7 Mboe/d (65% oil), as compared to the same period of 2019.

For the three months ended June 30, 2020, Callon drilled 29 gross (27.0 net) horizontal wells and placed a combined 26 gross (24.9 net) horizontal wells on production. During the course of the quarter, all rigs and completion crews ceased activity upon completion of projects in progress. The Company does not have any active rigs or completion crews at this time but does intend to resume development activity during the third quarter. Near-term operational activity will be focused on completing a drilled, uncompleted inventory of approximately 70 wells in both the Permian Basin and Eagle Ford Shale with one dedicated completion crew. The Company also intends to return two to three drilling rigs to service later in the third quarter for the balance of the year.

During the second quarter in the Delaware Basin, the seven-well Dorothy Sansom project was placed on production in April, consisting of targets in the 3rd Bone Spring Shale, Wolfcamp A (2), Upper Wolfcamp B, Lower Wolfcamp B (2), and Wolfcamp C. Initial results have been positive with cumulative production (adjusted for shut-ins during the quarter) matching or exceeding production from primary zones in the Crowley-St. Clair project which was completed in 2019. Comparable wells in the Wolfcamp A and B zones on the Dorothy Sansom project were drilled and completed offsetting parent wells, unlike the unbounded Crowley-St. Claire wells. The current performance is encouraging for future development of offset wells in the area. 

At the WildHorse area in the Midland Basin, the Company brought online the nine-well Dunkin/Horton/Wright project that had previously been deferred during the early portion of the quarter. The project consists of Wolfcamp A wells (4), Lower Spraberry wells (3), and a Wolfcamp B and Middle Spraberry test. Initial production from the Wolfcamp A and B has exceeded expectations and significantly outperformed 2019 vintage Wolfcamp A offsets in the immediate area through the first fifty days. Early results from the Middle Spraberry are encouraging for potential future development in the area as production currently continues to outpace initial type curve estimates. 

In the Eagle Ford, the Company placed on production the Pena project with a portion of the wells reaching first production at the very end of March and the remainder falling into early April. These wells have produced over 75,000 cumulative Boe (~90% oil) on average (1.2 MMBoe in total) through the first 120 days online, matching type curve expectations.

During the second quarter, Callon saw additional gains in operational efficiency, with average development costs improving. Some of the highlights include:

• Delaware well costs further reduced to approximately $850 per lateral foot, an 11% improvement versus the previous quarter and a 23% improvement versus our 2019 average of $1,100 per lateral foot; and
  
  
• Midland Basin well costs are now approaching approximately $500 per lateral foot, a 17% improvement over the first quarter and 37% improvement over 2019

Marketing

The Company entered into short-term fixed price contracts in May and June for Eagle Ford Shale production to secure firm transportation and also mitigate the effect of the calendar month average ("CMA") roll calculation on realized pricing. Those fixed price contracts have since returned to our previous MEH linked pricing structure. Callon recently secured incremental firm transportation for production volumes to ensure delivery of barrels produced from the Eagle Ford assets to improve market options for the future.

In addition, the Company has entered into a multi-year agreement with a diverse global player in waterborne oil markets that will be purchasing up to 10,000 barrels per day of oil of Permian Basin production at Brent-linked prices for volumes delivered under our firm transportation agreement to the Houston Ship Channel area on the Echo Pipeline. In April, we began delivering 15,000 barrels per day into the Corpus refinery complex under our firm transportation agreement on Gray Oak pipeline. These barrels are part of multi-year term sales agreements receiving a combination of Brent and MEH based pricing.

Minimal production volumes that were voluntarily shut-in by the Company during the second quarter have been returned to production. The Company is not subject to repayment of volumes or cover cost at second quarter pricing since it met all sales obligations during the quarter. 

Capital Expenditures

For the three months ended June 30, 2020, Callon incurred $85.1 million in operational capital expenditures on an accrual basis. Total capital expenditures, inclusive of capitalized expenses, are detailed below on an accrual and cash basis:

Hedging

For the three months ended June 30, 2020, Callon recognized a hedge gain of $84.2 million consisting of settled positions and monetization of certain future oil positions. During the course of the quarter and through July, the Company has continued to add hedge coverage for oil, natural gas, and ethane in 2021, and restructured certain oil swaps for the remaining six months of 2020 into two-way collars providing additional upside for oil prices to as high as $45 per barrel. Average floor prices for the second half of 2020 for WTI NYMEX oil contracts are approximately $40 per barrel covering just over nine million barrels of production, or roughly 80% of projected oil production for the remainder of 2020. 

The Company took advantage of an improved natural gas outlook and entered into a combination of NYMEX Henry Hub swaps and collars for 2021 providing coverage for over 22,000 BBtu or just over 60,000 MMBtu per day at an average floor price $2.61 per MMBtu. Natural gas production is now approximately 70% hedged for the remainder of 2020 and just over 60% hedged for 2021. Details regarding the Company's full hedge positions can be found in the hedge summary within the earnings release or within the appendix of the second quarter 2020 earnings slide deck on the website.

Operating and Financial Results

The following table presents summary information for the periods indicated: 

Total Revenue. For the quarter ended June 30, 2020, Callon reported total revenue of $157.2 million and total revenue including the gain or loss from the settlement of derivative contracts ("Adjusted Total Revenue"⁽¹⁾) of $241.4 million, reflecting the impact of an $84.2 million gain from the settlement of derivative contracts. Average daily production for the quarter was 108.7 Mboe/d, compared to average daily production of 101.0 Mboe/d in the first quarter of 2020. Average realized prices, including and excluding the effects of hedging, are detailed above.

Hedging impacts. For the quarter ended June 30, 2020, the net (gain) loss on commodity derivative contracts includes the following (in thousands):

For the quarter ended June 30, 2020, the cash (paid) received for commodity derivative settlements includes the following (in thousands):

Lease Operating Expenses, including workover ("LOE"). LOE per Boe for the three months ended June 30, 2020 was $5.14 per Boe, compared to LOE of $5.70 per Boe in the first quarter of 2020. The decrease in LOE per Boe was driven by improved field practices and a reduction in workovers during the second quarter of 2020 as compared to the first quarter of 2020.

Production Taxes, including ad valorem taxes. Production taxes were $1.05 per Boe for the three months ended June 30, 2020, representing approximately 6.6% of total revenue before the impact of derivative settlements.

Gathering, Transportation and Processing Expenses. Gathering, transportation and processing costs for the three months ended June 30, 2020 were $20.0 million as compared to $14.4 million in the first quarter of 2020 due to firm transportation contracts that began in the second quarter of 2020. In 2020, the Company began reporting gathering, transportation and processing costs separately due to the assumption of processing agreements in the Carrizo acquisition and certain contract modifications effective January 1, 2020. As such, the Company now records contractual fees associated with gathering, processing, treating and compression, as well as any transportation fees incurred to deliver the product to the purchaser, as gathering, transportation and processing expense. These fees were historically recorded as a reduction of revenue depending on when control transferred to the purchaser. 

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2020 was consistent at $14.05 per Boe compared to $14.31 per Boe in the first quarter of 2020.  

Impairment of Evaluated Oil and Gas Properties. Callon recognized an impairment of evaluated oil and gas properties of $1.3 billion for the three months ended June 30, 2020 due primarily to declines in the average realized prices for sales of oil and gas. The decrease in the trailing 12-month average realized price as of June 30, 2020 resulted in a reduction our proved oil and gas reserve volumes of less than 2% of our December 31, 2019 proved oil and gas reserves volumes. The Company did not recognize an impairment of evaluated oil and gas properties during the first quarter of 2020.

G&A. G&A for the three months ended June 30, 2020 was $10.0 million, or $1.01 per Boe, and G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A" ¹) was $8.3 million, or $0.84 per Boe, for the three months ended June 30, 2020 compared to $14.8 million, or $1.62 per Boe, for the first quarter of 2020. The cash component of Adjusted G&A was $6.8 million, or $0.69 per Boe, for the three months ended June 30, 2020 compared to $11.1 million, or $1.20 per Boe, for the first quarter of 2020. The reductions in G&A were driven by the realization of post-merger synergies and further reductions to payroll and non-payroll expenses following the pandemic, including compensation reductions for executives and the board of directors.

For the three months ended June 30, 2020 and March 31, 2020, G&A and Adjusted G&A, which excludes the amortization of equity-settled and share-based incentive awards, are calculated as follows (in thousands):

Income Tax Expense. Callon provides for income taxes at the statutory rate of 21% adjusted for permanent differences expected to be realized. Callon recorded income tax expense of $51.3 million for the three months ended June 30, 2020, compared to income tax expense of $64.0 million for the three months ended March 31, 2020. Primarily as a result of the impairment of evaluated oil and gas properties recognized during the second quarter of 2020, Callon recorded a valuation allowance against its net deferred tax assets reducing the net deferred tax assets to zero.

Loss Available to Common Stockholders. We recorded a loss available to common stockholders for the three months ended June 30, 2020 of $1.6 billion, or $3.94 per diluted share, as compared to income available to common stockholders of $216.6 million, or $0.55 per diluted share, for the first quarter of 2020. The loss was primarily due to the impairment of evaluated oil and gas properties of $1.3 billion as well as a loss on derivative contracts of approximately $127.0 million recorded during the second quarter of 2020.

Adjusted EBITDA¹. Adjusted EBITDA for the second quarter of 2020 was $153.4 million as compared to $217.5 million for the first quarter of 2020. The decrease in Adjusted EBITDA from the first quarter of 2020 was primarily due to an approximate 30% decrease in the average realized price of oil. This was partially offset by increased sequential production as well as a decrease in operating expenses as described above.  

Guidance

Callon is reinstating guidance for the full year and updating previous ranges to reflect adjustments to its operational plan and associated expectations.

In addition to the updated 2020 guidance provided in the previous table, the Company's initial outlook for 2021 for a "maintenance capital" plan will include average daily production of 90 to 95 MBoe per day from an operational capital spending level of approximately $400 million. Management believes that this program at current prices will yield meaningful additional free cash flow.

Reverse Stock Split

Today the Company also announced that its Board of Directors has approved a reverse stock split of the Company's outstanding shares of common stock at a ratio of 1-for-10, which was approved by the Company's shareholders at the Company's annual meeting of shareholders on June 8, 2020. The reverse stock split will become effective as of the close of business on August 7, 2020 and the Company's common stock will begin trading on a split-adjusted basis on the NYSE at market open on August 10, 2020. The par value of the common stock will not be adjusted in connection with the reverse stock split.

The reverse stock split is intended to, among other things, improve the opportunity for institutional ownership. Upon completion of the reverse stock split, each 10 pre-split shares of common stock outstanding will be automatically combined into one issued and outstanding share of common stock. Any fractional shares that result from the reverse stock split will be canceled, and shareholders who would otherwise hold fractional shares as a result of the reverse stock split will be entitled to receive cash (without interest and subject to applicable withholding taxes) in lieu of such fractional shares. The number of outstanding shares of common stock will be reduced from approximately 397,476,674 as of July 31, 2020 to approximately 39,747,667 shares (without giving effect to the liquidation of fractional shares). The Board has also approved a proportionate reduction of the total number of authorized shares of the Company's common stock pursuant to an amendment to the Company's Certificate of Incorporation. The total number of shares of common stock that the Company is authorized to issue will be reduced from 525,000,000 to 52,500,000 shares.