Callon Petroleum Company Announces Third Quarter 2020 Results

Updates 2020 Operating Plan and Outlook

Enters Into Private Debt Exchange Agreement

HOUSTON , Nov. 2, 2020 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three and nine months ended September 30, 2020.

Presentation slides accompanying this earnings release are available on the Company's website at www.callon.com  located on the "Presentations" page within the Investors section of the site.

Recent Highlights

• Delivered production of approximately 102.0 Mboe/d (63% oil), above expectations, for the third quarter of 2020

• Posted accrued operational capital spending of $38.4 million , below consensus estimates, and lowered the top end of operational capital range to $510 million , a 15% reduction since announcing the modified development program in May 2020

• Generated net cash from operating activities of $135.7 million and free cash flow ¹ of $80.3 million for the third quarter

• Loss available to common stockholders of $680.4 million , or $17.12 per fully diluted share, driven by an impairment of evaluated oil and gas properties of $685.0 million , adjusted EBITDA ¹ of $170.9 million , and adjusted income per share ¹ of $0.64 for the third quarter of 2020

• Achieved lease operating expense ("LOE") of $45.9 million or $4.89 per Boe for the third quarter of 2020, an improvement of approximately 10%, on an absolute basis, over the comparable three-month period ended June 30, 2020

• Resumed completion and drilling activity with recent well costs for Eagle Ford and Delaware third quarter completions at $460 and $825 per lateral foot, respectively, exceeding previous targets as a result of continued operational efficiency gains

• Increased liquidity to nearly $600 million and reduced total net debt by approximately $160 million after transaction expenses through a series of strategic transactions including the issuance of $300 million of secured second lien notes, an overriding royalty interest ("ORRI") transaction, and a non-operated working interest sale

• Completed the fall borrowing base redetermination with a reaffirmed borrowing base of $1.7 billion which was subsequently reduced to $1.6 billion , reflecting a minimal reduction to account for the recent ORRI sale and second lien note issuance

• Entered into a privately negotiated debt exchange of $286 million of unsecured Senior Notes for new second lien notes, reducing net debt by an estimated $128 million , with an option for the counterparties and their affiliates to exchange additional unsecured Senior Notes up to approximately $104 million

Joe Gatto , President and Chief Executive Officer commented, "During the third quarter, our operations team continued to execute on our cost reduction efforts, posting meaningful gains that bolstered our free cash flow generation to approximately $100 million over the last two quarters. These achievements coupled with our recent strategic initiatives to improve liquidity and propel our debt reduction efforts have placed us in a much better position as we look to close out 2020 with the resumption of moderated development across all three of our asset areas."

He continued, "Well performance from our modified stacking and spacing program has met or exceeded expectations, confirming the merits of our life-of-field development model that will preserve the future value of our inventory while simultaneously delivering near-term economic returns at current strip prices. Moreover, our focus on cost control and operational efficiency through scaled development is pushing us towards even lower cost thresholds that should generate improved cash flow and lower break-even pricing over time."

Mr. Gatto closed by sharing, "Alongside these operational and strategic achievements, we have continued to focus on operating safely, with a clear vision for reducing our environmental impact, maintaining our social awareness and treatment of our workforce, and strengthening our alignment with the needs of our shareholders. The recent issuance of our inaugural Sustainability report provides a clear and well-documented picture of where we stand and the path to continuously improving in each of these three critical areas. As we finalize the details of our 2021 budget and activity levels, our focus will be on our debt reduction efforts, maintaining a low cost development and operations structure, and creating durable and cogent changes that not only enhance shareholder returns but also positively impact our employees, communities, and our broader stakeholder group." 

Private Debt Exchange

Callon also announced another meaningful step today in the execution of its deleveraging plan. On November 2nd , the Company entered into a privately negotiated agreement with certain holders of its outstanding unsecured debt securities to exchange $286 million of principal of the Company's existing unsecured Senior Notes (the "Senior Notes") for $158 million aggregate principal of new 9.00% Second Lien Notes due 2025, payable semi-annually (the "Second Lien Notes"), to be issued by Callon at a weighted average exchange ratio of approximately $555 per $1,000 of principal exchanged. Over 60% of the existing Senior Notes to be exchanged are due 2023 and 2024. Upon completion of the exchange, Callon's total net debt will be reduced by approximately $128 million and total cash interest expense by approximately $5 million .

In addition, certain other affiliated parties have the option to exchange up to an additional approximately $104 million of principal of Senior Notes under the same exchange terms. At full participation, the estimated total debt reduction and total cash interest expense reduction would be approximately $175 million and $7 million , respectively.

Participants in the exchange will also receive between 1.16 and 1.76 million warrants, dependent on final participation levels, with a strike price of $5.60 which is consistent with the strike price for the warrants issued recently in relation to the Company's initial issuance of Second Lien Notes that was announced on October 1st .

The private debt exchange is scheduled to close on November 17th . Callon currently expects the borrowing base under its credit facility to remain unchanged at $1.6 billion , and its next scheduled redetermination will take place in May 2021 .

Operations Update

At September 30, 2020, Callon had 1,479 gross (1,305.9 net) horizontal wells producing from established flow units in the Permian Basin and Eagle Ford Shale. Net daily production for the three months ended September 30, 2020 grew 170% to 102.0 Mboe/d (63% oil), as compared to the same period of 2019.

For the three months ended September 30, 2020, Callon drilled zero horizontal wells and placed a combined 12 gross (11.4 net) horizontal wells on production, all of which were turned to production late in the quarter. The Company reactivated two completion crews, one each in the Eagle Ford and Delaware Basin, both of which completed previously drilled multi-well projects during September. Subsequently, one of the two completion crews has been released and three drilling rigs have resumed operations, two restarting operations in the Midland and Delaware Basin during September and the third reactivated in the Eagle Ford during October. The Company expects to operate three drilling rigs and a single completion crew during the fourth quarter.

Recent project costs and well performance reflect a continuation of the operational efficiency levels achieved during the second quarter of 2020 and support the enhanced stacking and spacing efforts. Some of the highlights include:

• The Eagle Ford wells placed on production late in the third quarter averaged over 2,000 feet of completed lateral per day

• The combined six wells came in just below $475 per lateral foot with an average completed lateral length of approximately 7,500 feet

• In the Delaware , the six-well Amphitheater pad was placed on production during the final days of the third quarter and first week of the fourth quarter, with the project averaging a completion pace of just under nine stages per day or nearly 1,800 lateral feet per day

• The Amphitheater project averaged approximately 9,400 feet per well with an average well cost of less than $8 million ( $825 per lateral foot)

• Initial production from the six-well Amphitheater pad recently reached a per well average of over 1,200 Boe per day (gross, ~84% oil) with total cumulative production of more than 140,000 Boe (gross, ~84% oil) in just over three weeks of production

• Over 95% of the volumes sourced for the Amphitheater completions utilized recycled produced water volumes sourced from Callon's own recycling facilities

Capital Expenditures

For the three months ended September 30, 2020, Callon incurred $38.4 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 September 30, 2020 , Callon recognized a loss from the settlement of derivative contracts of $5.5 million . Callon has continued to actively manage its hedge portfolio adding nearly 5.7 million barrels or 15,500 barrels per day of WTI NYMEX coverage for 2021. This raises the percentage of NYMEX coverage via collars to nearly 90% and raises the average ceiling price to over $46 per barrel, providing incremental upside while maintaining the price floor within one dollar of the previous weighted average position. In addition, the Company has improved its Brent-based hedges, raising the average floor from approximately $38 per barrel to almost $41 per barrel and increasing coverage by just over 300,000 barrels per year. Additional coverage for natural gas pricing was achieved through the addition of more than 10,000,000 MMBtu of Waha basis swaps, improving the weighted average differential by $0.16 per MMBtu.

Accounting for the Company's recent adjustments, total hedge coverage for 2021 is now more than 60% of anticipated oil production and just under 60% of anticipated natural gas production. 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 third quarter 2020 earnings slide deck on the website.

Operating and Financial Results

The following table presents summary information for the periods indicated: 

Revenue.   For the quarter ended September 30, 2020, Callon reported revenue of $269.7 million , which excluded revenue from the sales of commodities purchased from a third-party of $20.3 million . Revenues including the gain or loss from the settlement of derivative contracts ("Adjusted Total Revenue" ¹ ) were $264.2 million , reflecting the impact of a $5.5 million loss from the settlement of derivative contracts. Average daily production for the quarter was 102.0 Mboe/d, compared to average daily production of 108.7 Mboe/d in the second quarter of 2020. Average realized prices, including and excluding the effects of hedging, are detailed above.

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

For the quarter ended September 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 September 30, 2020 was $4.89 per Boe, compared to LOE of $5.14 per Boe in the second quarter of 2020. The decrease in LOE per Boe was driven by improved field practices and a reduction in base operating costs in the third quarter of 2020 as compared to the second quarter of 2020.

Production Taxes, including ad valorem taxes.  Production taxes were $1.72 per Boe for the three months ended September 30, 2020, representing approximately 6.0% of revenue before the impact of derivative settlements.

Gathering, Transportation and Processing Expenses.  Gathering, transportation and processing costs for the three months ended September 30, 2020 were $22.2 million as compared to $20.0 million 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 September 30, 2020 was $12.17 per Boe compared to $14.05 per Boe in the second quarter of 2020. The decrease in DD&A is primarily driven by the impairment of evaluated oil and gas properties recognized in the second quarter of 2020.    

Impairment of Evaluated Oil and Gas Properties. Callon recognized an impairment of evaluated oil and gas properties of $685.0 million for the three months ended September 30, 2020 due primarily to the continued decline in the average realized prices for sales of oil and gas. The decrease in the trailing 12-month average realized price as of September 30, 2020 resulted in a reduction of proved oil and gas reserve volumes of less than 2% of our December 31, 2019 proved oil and gas reserves volumes. For the three months ended June 30, 2020 , the Company recognized an impairment of evaluated oil and gas properties of $1.3 billion .

G&A.   G&A for the three months ended September 30, 2020 was $8.2 million , or $0.88 per Boe, and G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A" ¹ ) was $9.8 million , or $1.04 per Boe, for the three months ended September 30, 2020 compared to $8.3 million , or $0.84 per Boe, for the second quarter of 2020. The cash component of Adjusted G&A was $8.1 million , or $0.87 per Boe, for the three months ended September 30, 2020 compared to $6.8 million , or $0.69 per Boe, for the second quarter of 2020. Adjusted G&A was slightly higher in the third quarter of 2020 as compared to the second quarter of 2020 due to slightly higher contractor and employee relocation expenses.

For the three months ended September 30, 2020 and June 30, 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. As a result of the valuation allowance that Callon recorded against its net deferred tax assets, we did not have any income tax expense for the three months ended September 30, 2020, compared to income tax expense of $51.3 million for the three months ended June 30, 2020.

Loss Available to Common Stockholders. We recorded a loss available to common stockholders for the three months ended September 30, 2020 of $680.4 million , or $17.12 per diluted share, as compared to a loss available to common stockholders of $1.6 billion , or $39.41 per diluted share, for the second quarter of 2020, retroactively adjusted for the Company's 1-for-10 reverse stock split effective August 7, 2020 . The loss was primarily due to the impairment of evaluated oil and gas properties of $685.0 million for the  three months ended September 30, 2020 .

Adjusted EBITDA. Adjusted EBITDA for the third quarter of 2020 was $170.9 million as compared to $153.4 million for the second quarter of 2020. The increase in Adjusted EBITDA from the second quarter of 2020 was primarily due to an approximate 93% increase in the average realized price of oil. This was partially offset by decreased sequential production.  

Guidance

Callon is updating guidance for the full year and updating previous ranges to reflect adjustments related to strong well performance, improved operational efficiency, expanded firm transportation agreements, and the effect of both the non-operated properties sale and the ORRI transaction.

In August, the Company provided an initial outlook for 2021 which included a "maintenance capital" plan targeting average daily production of 90 to 95 MBoe per day from an operational capital spending level of approximately $400 million . For 2021, the Company is now expected to achieve average daily production of 90 to 92 MBoe per day, with the reduction resulting from the combined effect of the recent ORRI transaction and non-operated properties sale, offset partly by improved well performance and operational efficiency gains. These improvements are reflected in management's updated expectations of operational capital spending for 2021 which is now estimated to be in the range of $375 to $400 million . As a result, management estimates that this program at current prices will yield meaningful additional free cash flow.

Third Quarter 2020 Earnings Conference Call

The Company's conference call to discuss third quarter results is scheduled for Tuesday, November 3, 2020 , at 9:00 am CST . The presentation slides and associated webcast can both be found at www.callon.com located on the "News/Events" page within the Investors section on the site or by clicking on the link below.

www.callon.com/investors/news-events/ir-calendar

Hedge Portfolio Summary

The following tables summarize Callon's open derivative contracts for the remainder of 2020 and the full year 2021, updated for changes through October 29, 2020 :