Callon Petroleum Company Announces Second Quarter 2014 Financial and Operating Results

NATCHEZ, Miss., Aug. 6, 2014 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three and six month periods ended June 30, 2014.

The Company highlighted financial and operating results for the second quarter of 2014:

• Net daily production of 5,280 barrels of oil equivalent per day ("BOE/d"), a sequential increase of 21% over the first quarter of 2014, comprised of 84% oil volume
• Adjusted EBITDA, a non-GAAP financial measure, of $27.8 million (See "Non-GAAP Financial Measures and Reconciliations" discussed below)
• Net income available to common shareholders of $0.07 per diluted share and adjusted income available to common shareholders ("Adjusted income"), a non-GAAP financial measure, of $0.14 per diluted share. Adjusted income excludes certain items that the Company believes affect the comparability of operating results, and are generally non-recurring items or items whose timing and/or amount cannot be reasonably estimated (See "Non-GAAP Financial Measures and Reconciliations" below)

Callon also highlighted recent operational activity and corporate developments (production data presented on a "two-stream" basis):

• Six (gross) horizontal wells drilled and nine (gross) horizontal wells completed in the second quarter of 2014, targeting three discrete Wolfcamp shale zones
• Two Wolfcamp B wells in Callon's newest development area at the Carpe Diem field in Midland County, the Kendra Kristen 1121 and Kendra Kristen 1122, produced at peak 24-hour rates of 1,163 BOE/d (6,566' completed lateral) and 1,176 BOE/d (6,582' completed lateral), respectively
• Average peak 24-hour rates of 866 BOE/d per well (average 4,965' completed lateral) from a three-well pad targeting the Lower Wolfcamp B in Reagan County at the Taylor Draw field
• First Lower Spraberry horizontal well spud in Midland County, expanding drilling in the Midland Basin to four targeted benches
• Drilling of first horizontal well (planned 9,400' completed lateral) targeting the Wolfcamp B on recently acquired acreage in Upton County commenced in partnership with offsetting operator
• Additional drilling rig scheduled for delivery in the fourth quarter of 2014 to accelerate horizontal development, targeting approximately 40 (gross) operated, horizontal well completions in 2015

Fred Callon, Chairman and CEO commented, "We are pleased to announce another solid quarter of execution of our horizontal drilling program, resulting in a three-fold increase in Permian production since the first quarter of 2013 and a continued decrease in lease operating expense. We look forward to building upon this success with the application of this execution capability across an expanded set of drilling opportunities with the addition of a drilling rig later this year. Based on our current plans, we expect to have over 80 operated horizontal wells producing by the end of next year, firmly establishing Callon as a leading operator in the Midland Basin."

Operating and Financial Results

Total Revenue. For the quarter ended June 30, 2014, Callon reported total revenues of $40.5 million, comprised of oil revenues of $37.7 million and natural gas revenues of $2.8 million. Average daily production for the quarter was 5,280 BOE/d compared to average daily production of 4,355 BOE/d in the first quarter of 2014. Average realized prices were $93.10 per barrel of oil and $6.17 per Mcf of natural gas in the second quarter of 2014, representing a weighted average of $84.30 per BOE produced.

Lease Operating Expenses, including workover expense ("LOE"). LOE for the three months ended June 30, 2014 was $9.08 per BOE, compared to LOE of $10.78 per BOE in the first quarter of 2014, which was within the range of published guidance.

Production Taxes, including ad valorem taxes. Production taxes were $4.71 per BOE in the second quarter of 2014. Production taxes were lower than published guidance.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2014 was $24.96 per BOE compared to $26.88 per BOE in the first quarter of 2014, with the decrease in per unit DD&A being attributable to increased estimated proved reserves relative to our depreciable asset base (the full cost pool).

General and Administrative, net of amounts capitalized ("G&A"). G&A for the three months ended June 30, 2014 was $9.6 million compared to $10.8 million in the first quarter of 2014. G&A excluding certain non-recurring items and non-cash valuation adjustments ("Adjusted G&A", a non-GAAP measure) was $4.9 million for the current period and $4.5 million for the first quarter of 2014. Adjusted G&A for the second quarter of 2014 excluded $4.7 million of expense related to the following items:

• $0.1 million in non-recurring, cash expense related to a withdrawn proxy contest
• $4.6 million in non-cash expense related to the mark-to-market adjustment of performance-based phantom stock incentive awards

Interest Expense. Interest expense incurred during the three months ended June 30, 2014 increased to $1.8 million compared to $1.0 million in the first quarter of 2014, primarily due to an increase in interest expense related to the increase in the balance of our Credit Facility, additional interest in connection with our Second Lien Facility and first quarter 2014 amortization of deferred credit in the amount of $0.4 million related to the Senior Notes. Offsetting these increases was a decrease in interest expense resulting from the full redemption of the Senior Notes completed on April 11, 2014.

Income (Loss) Available to Common Shareholders. The Company reported net income available to common shareholders of $2.8 million in the second quarter of 2014 and Adjusted income, a non-GAAP measure, of $5.7 million, or $0.14 per diluted share, which excludes (net of tax effects): (a) $5.0 million in expenses related to the non-cash, mark-to-market valuation of the Company's derivative positions and phantom stock equity awards, (b) $2.1 million gain on early redemption of our Senior Notes, and (c) $0.1 million of non-recurring G&A expenses. The Company's effective tax rate for the second quarter was 45% due to non-deductible executive compensation expense and state income taxes.

For a definition of Adjusted income and a reconciliation of income (loss) available to common shareholders to Adjusted income, see "Non-GAAP Financial Measures and Reconciliations" below. No adjustments have been made to Adjusted income for non-recurring items, such as the increased income statement tax rate described above.

Discretionary Cash Flow. Discretionary cash flow, a non-GAAP measure, for the second quarter of 2014 was $23.5 million, an increase of $4.8 million, or 26%, over the first quarter of 2014 of $18.7 million. The second quarter of 2014 included $1.4 million for retained asset retirement obligation expenditures related to Gulf of Mexico properties that were sold in the fourth quarter of 2013. Excluding this expenditure for discontinued operations, discretionary cash flow from continuing operations was $24.9 million or $0.60 per diluted share.

For a definition of discretionary cash flow and reconciliation to net cash flow provided from operating activities, see "Non-GAAP Financial and Reconciliations" below. No adjustments have been made to discretionary cash flow for non-recurring cash items, such as the asset retirement obligation expenditures described above.

Capital Expenditures

The following table summarizes the Company's drilling activity in the Permian Basin for the three months ended June 30, 2014:

Callon's total capital expenditures for the second quarter of 2014 are detailed below (in thousands):

Our updated 2014 operational capital expenditure budget approximates $215 million, excluding acquisitions and capitalized expenses. This budgeted amount includes plans to drill up to 30 gross (25.3 net) horizontal and seven gross (4.7 net) vertical wells, while completing 31 gross (26.7 net) horizontal and five gross (3.3 net) vertical wells. Our initial operational capital expenditure budget was established at $185 million and has been subsequently increased for the items below.

In the first half of 2014, we began testing larger horizontal well completion designs in an effort to improve production rates and the amount of recoverable resources. Based on satisfactory drilling, completion and well performance to date, we believe that our enhanced completion designs create the potential for increased total returns on capital after adjusting for incremental costs of approximately $0.5 million to $0.8 million per completion depending on the depth of the well. While we continue to monitor the effectiveness of our enhanced completion designs, we increased our 2014 operational budget to include the incremental change in costs for the completion designs by approximately $10 million for this initiative.

In addition, we recently commenced the drilling of a horizontal well in partnership with a large public company on our recently acquired acreage in Upton County. This non-operated well, in which we own a 57% working interest, is estimated to cost approximately $5.5 million on a net basis.

As discussed above, we signed an agreement for a drilling rig to be used in an expanded horizontal development program. We currently forecast that this initiative will add approximately $9 million to our initial operating capital expenditure budget in 2014.

The remaining difference, approximately $5.5 million, is primarily due to a higher number of scheduled completions resulting from modifications to our original drilling schedule. We currently intend to complete 26.7 net horizontal wells relative to 24.7 net wells in our previous forecast.

Third Quarter and Full Year 2014 Guidance

The following third quarter guidance assumes the drilling of eight gross (6.6 net) horizontal wells and the completion of seven gross (5.9 net) horizontal wells. Full year guidance, previously provided on May 8, 2014, has been updated for third quarter 2014 guidance and actual results for 2014 to date.

Listed below are the outstanding hedges for the second half of 2014 and calendar year 2015.

Non-GAAP Financial Measures and Reconciliations

This news release refers to non-GAAP financial measures as "discretionary cash flow," "Adjusted income," "Adjusted G&A" and "Adjusted EBITDA." These measures, detailed below, are provided in addition to, and not as an alternative for, and should be read in conjunction with, the information contained in our financial statements prepared in accordance with GAAP (including the notes), included in our SEC filings and posted on our website.

• Callon believes that the non-GAAP measure of discretionary cash flow is useful as an indicator of an oil and gas exploration and production company's ability to internally fund exploration and development activities and to service or incur additional debt. The Company also has included this information because changes in operating assets and liabilities relate to the timing of cash receipts and disbursements which the company may not control and may not relate to the period in which the operating activities occurred.
• We believe that the non-GAAP measure of Adjusted income and Adjusted income per diluted share are useful to investors because they provide readers with a meaningful measure of our profitability before recording certain items whose timing or amount cannot be reasonably determined. These measures exclude the net of tax effects of certain non-recurring items and non-cash valuation adjustments, which are detailed in the reconciliation provided below. Prior to being tax-effected and excluded, the amounts reflected in the determination of Adjusted income and Adjusted income per diluted share below were computed in accordance with GAAP.
• Callon believes that the non-GAAP measure of Adjusted G&A is useful to investors because it provides readers with a meaningful measure of our recurring G&A expense and provides for greater comparability period-over-period. The table below details all adjustments to G&A on a GAAP basis to arrive at Adjusted G&A.
• We calculate Adjusted Earnings before Interest, Income Taxes, Depreciation, Depletion and Amortization ("Adjusted EBITDA") as Adjusted income plus interest expense, income tax expense (benefit) and depreciation, depletion and amortization expense. Adjusted EBITDA is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income (loss), operating income (loss), cash flow provided by operating activities or other income or cash flow data prepared in accordance with GAAP. However, we believe that Adjusted EBITDA provides additional information with respect to our performance or ability to meet its future debt service, capital expenditures and working capital requirements. Because Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and may vary among companies, the Adjusted EBITDA we present may not be comparable to similarly titled measures of other companies.

The following table reconciles net cash flow provided by operating activities to discretionary cash flow (in thousands) for the periods indicated:

The following tables reconcile income (loss) available to common stockholders to Adjusted income (in thousands; reconciling items are reflected net of tax):

The following tables reconcile net income (loss) to Adjusted EBITDA (in thousands) for the periods indicated:

The following tables reconcile total G&A to Adjusted G&A (in thousands) for the periods indicated:

The following tables present summary information for the periods indicated, and are followed by the Company's financial statements.

Earnings Call Information

The Company will host a conference call on Thursday, August 7, 2014 to discuss second quarter financial and operating results.

Please join Callon Petroleum Company via the Internet for a webcast of the conference call:

Alternatively, you may join by telephone:

An archive of the conference call webcast will also be available at www.callon.com in the "Investors" section of the website.

About Callon Petroleum

Callon is an independent energy company focused on the acquisition, development, exploration, and operation of oil and gas properties in the Permian Basin in West Texas.

This news release is posted on the Company's website at www.callon.com and will be archived there for subsequent review. It can be accessed from the "News Releases" link on the top of the homepage.

Cautionary Statement Regarding Forward Looking Statements

This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements regarding wells anticipated to be drilled, future increases in production, the Company's 2014 and 2015 guidance, capital budget, the implementation of the Company's business plans and strategy, as well as statements including the words "believe," "expect," "plans" and words of similar meaning. These statements reflect the Company's current views with respect to future events and financial performance. No assurances can be given, however, that these events will occur or that these projections will be achieved, and actual results could differ materially from those projected as a result of certain factors. Some of the factors which could affect our future results and could cause results to differ materially from those expressed in our forward-looking statements include the volatility of oil and gas prices, ability to drill and complete wells, operational, regulatory and environment risks, our ability to finance our activities and other risks more fully discussed in our filings with the Securities and Exchange Commission, including our Annual Reports on Form 10-K, available on our website or the SEC's website at www.sec.gov.

For further information contact:
Joe Gatto
Chief Financial Officer, Senior Vice President and Treasurer
1-800-451-1294 

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SOURCE Callon Petroleum Company