Callon Petroleum Company Announces Second Quarter 2016 Results

NATCHEZ, Miss., Aug. 8, 2016 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three months ended June 30, 2016.

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.

Financial and operational highlights for the second quarter of 2016 and other recent data points include:

• Net daily production of 13,451 barrels of oil equivalent per day ("BOE/d"), an increase of 8% compared to the first quarter of 2016, comprised of 77% oil volume
• Estimated July 2016 net daily production of over 16,000 BOE/d after a prolonged period of production downtime in June 2016 caused by offsetting completions activity at the Carpe Diem field, compounded by the impact of electrical outages
• Lease operating expense, including workovers, of $5.97 per barrel of oil equivalent ("BOE"), a decrease of 3% from the first quarter of 2016
• GAAP loss per diluted common share of $0.61 and Adjusted Income per fully diluted common share, a non-GAAP financial measure⁽ⁱ⁾, of $0.05
• Closed two Midland Basin transactions for a total purchase price of $362.6 million, including the establishment of a new core operating area in Howard County
• Completed first Callon-operated Wolfcamp A well (completed lateral length of 7,363') in northern Howard County which has produced approximately 48,600 BOE (90% oil) in the first 30 days after being placed on production in early July 2016
• Borrowing base increased 28% from $300 million to $385 million following the closing of recent transactions
• Recently added second horizontal rig to be focused in the WildHorse area in Howard County
• Signed purchase and sale agreement for the acquisition of an incremental 4% working interest in the Casselman and Bohannon fields (the "CaBo area")

"It was an important quarter for our organization, demonstrating our ability to manage through periods of commodity price weakness by living within our cash flow while delivering capital efficient production growth. This solid operating and financial position also allowed us to complete two acquisitions that almost doubled our surface acreage in the Midland Basin, expanding our inventory of investments that we expect will deliver solid returns on capital through all phases of commodity cycles." commented Fred Callon, Chairman and Chief Executive Officer. "With a strong balance sheet and low cost operating structure, we have returned our second horizontal rig to service in August 2016 and are planning to add a third horizontal rig in early 2017 with continued signs of rebalancing in the oil markets. A large portion of this increased drilling activity will be focused in Howard County, a rapidly emerging core area which has produced encouraging well results from three delineated zones to date, including our recent Wolfcamp A well." 

Operations Update

At June 30, 2016, Callon had 118 gross (93.0 net) horizontal wells producing from five established zones. Our net daily production for the three months ended June 30, 2016, grew approximately 41% to 13,451 BOE/d (approximately 77% oil) as compared to the same period of 2015. Sequentially, we grew production more than 8% compared to the first quarter of 2016.

For the three months ended June 30, 2016, we drilled 6 gross (3.7 net) horizontal wells, completed 5 gross (3.4 net) horizontal wells, and placed 5 gross (3.4 net) horizontal wells on production. As of June 30, 2016, we had 6 gross (4.2 net) horizontal wells awaiting completion, including 2 gross drilled, uncompleted wells recently acquired as part of our western Reagan County transaction.

Monarch

Production from the Monarch areas was adversely impacted during most of the month of June 2016 by production disruptions at our largest producing field, Carpe Diem. Several wells in the field experienced hydraulic interference from two offsetting completions being performed by other operators offsetting the eastern side of Carpe Diem. The situation was compounded by power outages caused by adverse weather conditions which hindered our efforts to de-water the wells in order to restore normalized production levels. We estimate that this unexpected downtime negatively impacted total net production volumes in the quarter by approximately 425 BOE/d.

During the second quarter, we continued our focus on development of the Lower Spraberry on our Monarch assets in Midland County. For the three months ended June 30^th, we drilled 6 gross (3.7 net) wells, completed 4 gross (2.4 net) wells and placed 5 gross (3.4 net) wells on production. Since placing our first two Lower Spraberry wells on production in November 2014, we now have 28 gross wells producing from two levels of this zone across our asset base, including 25 at Monarch, with drilled lateral lengths ranging from 5,000' to 10,000'.

We continue to deliver strong, consistent well results and capital efficiency from our Monarch development program. As detailed in the table above, eight Lower Spraberry wells, all in the lower bench of the zone (or, "LLS"), achieved 24-hour peak initial production ("IP") rates during the quarter. The LLS wells averaged a 24-hour peak IP of 866 Boe/d (or 162 Boepd per 1,000') and a 30-day average peak IP of 706 Boe/d (or 134 Boepd per 1,000'). 

At our Pecan Acres field, we placed 3 gross (1.4 net) LLS wells on production. While one of the wells continues to build towards its 30-day average peak IP, the other two wells yielded an average 30-day average peak IP of 743 BOE/d (86% oil) or 164 BOE/d per 1,000' from an average drilled lateral length of approximately 5,000'. We also plan to commence completion operations on our first Wolfcamp A well in the Monarch area in August 2016 which is being developed as a stacked lateral with a LLS well. Each of the wells was drilled to a lateral length of approximately 10,000'.

We are currently completing a three-well pad with an average drilled lateral length of approximately 9,750' in our Carpe Diem field with two of the wells targeting the upper section of the Lower Spraberry ("ULS") and the third well targeting the LLS. This pad was drilled on 11 wells-per-section spacing, supported by long-term production and pressure data from our previous well density tests. In addition, we plan to drill an additional two LLS wells at Carpe Diem in the third quarter with planned drilled lateral lengths of 10,000' that were increased from a previous planned lateral length of 5,000' after a recently completed partnership agreement with an offset operator.

We continue to build upon our well density tests of the Lower Spraberry in the Monarch area which have been focused on the Carpe Diem field to date. The next step in our progression of this initiative will be a 13 wells-per-section test in the CaBo area that was spud in July 2016, with two wells landed in the LLS and the third landed in the ULS.

Callon recently signed a purchase agreement for the acquisition of an incremental 4% working interest in the CaBo area, increasing our working interest in the area to approximately 75%. The purchase price for the acquired interest is $13 million with an effective date of August 1, 2016. Completion of the acquisition is subject to customary closing conditions. 

WildHorse

During the second quarter, we began our first operated completion in the recently acquired WildHorse area in Howard County, Texas. The well (Silver City Unit A #1H; 100% WI) was completed in the Wolfcamp A with a lateral length of 7,363'. It is the northernmost Wolfcamp A completion to date on our operated acreage, located in our Sidewinder field in northwest Howard County. After a first oil production date on July 3, 2016, the well has produced approximately 48,600 BOE (90% oil) during the first 30 days of production.

We anticipate initiating our operated drilling program in Howard County during the fourth quarter of 2016 with a dedicated one-rig program. The rig will initially drill two-well pads in the Wolfcamp A at our Fairway acreage in central Howard County, before expanding its scope to include our broader footprint and other prospective zones in 2017, including the Lower Spraberry and Wolfcamp B. We currently expect to place our first two-well pad from this program on production in mid-December 2016. Additionally, we are preparing to further increase our drilling activity in the WildHorse area should commodity prices warrant the addition of a third rig to our operated drilling program.

Ranger

The two wells listed in the table above were completed using a new generation completion design employed by the previous operator of our newly acquired Lonesome Draw field, which included shorter stage lengths and higher proppant volumes. We will continue to evaluate the longer-term performance of wells completed with this enhanced design, but early indications include 30-day average peak IPs trending approximately 50% higher versus older generation completions we used in the Ranger area. We plan to incorporate these enhanced completion techniques in two upcoming completions of drilled, uncompleted wells acquired at Lonesome Draw. These wells will be targeting the Wolfcamp A and Upper Wolfcamp B zones and are planned to commence completion operations in August 2016.

Capital expenditures

For the three months ended June 30, 2016, we accrued $21.3 million in operational capital expenditures, including facilities expenditures of $4.0 million, compared to $35.0 million in the first quarter of 2016. Total capital expenditures, inclusive of capitalized expenses, are detailed below on an accrual and cash basis (in thousands):

Operating and Financial Results

The following table presents summary information for the periods indicated:

Total Revenue. For the quarter ended June 30, 2016, Callon reported total revenues of $45.2 million and total revenues including cash-settled derivatives ("Adjusted Total Revenue," a non-GAAP financial measure⁽ⁱ⁾) of $49.2 million, including the $4.0 million impact of settled derivative contracts. The table above reconciles to the related GAAP measure of the Company's revenue to Adjusted Total Revenue. Average daily production for the quarter was 13,451 BOE/d compared to average daily production of 12,440 BOE/d in the first quarter of 2016. Average realized prices, including and excluding the effects of hedging, are detailed below.

Hedging impacts. For the quarter ended June 30, 2016, Callon recognized the following hedging-related items:

Average realized prices, including and excluding the impact of cash settled derivatives during the second quarter, were as follows:

Lease Operating Expenses, including workover expense ("LOE"). LOE per BOE for the three months ended June 30, 2016 was $5.97 per BOE, compared to LOE of $6.15 per BOE in the first quarter of 2016.

Production Taxes, including ad valorem taxes. Production taxes were $2.01 per BOE in the second quarter of 2016, representing approximately 5.4% of total revenue before the impact of derivative settlements.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2016 was $13.31 per BOE compared to $13.89 per BOE in the first quarter of 2016, with the decrease in per unit DD&A being attributable to increases in proved reserves relative to our depreciable asset base and assumed future development costs related to undeveloped proved reserves. The decrease in our depreciable base was primarily related to the write-down of oil and natural gas properties during 2015 and the first half of 2016.

General and Administrative ("G&A"). G&A for the second quarter of 2015 was $6.3 million, or $5.15 per BOE, compared to $5.6 million, or $4.91 per BOE, for the first quarter of 2016. G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A", a non-GAAP measure⁽ⁱ⁾) was $4.3 million, or $3.55 per BOE, for the second quarter of 2016 compared to $4.6 million, or $4.10 per BOE, for the first quarter of 2016. The cash component of Adjusted G&A was $3.6 million, or $2.92 per BOE, for the second quarter of 2016 compared to $4.0 million, or $3.55 per BOE, for the first quarter of 2016.

For the second quarter of 2016, G&A and Adjusted G&A, which excludes the amortization of equity-settled, share-based incentive awards and corporate depreciation and amortization, are calculated as follows (in thousands):

Write-down of Oil and Natural Gas Properties. As a result of the ceiling test limitation, the Company recognized a write-down of oil and natural gas properties of $61.0 million in the second quarter of 2016.

Income (Loss) Available to Common Shareholders. The Company reported a net loss available to common shareholders of $71.9 million in the second quarter of 2016 and Adjusted Income available to common shareholders of $6.1 million, or $0.05 per diluted share.

Capital Budget Update

Following the closing of its recent Midland Basin acquisitions, the Company has completed a review of its operational plans for the balance of 2016. Callon recently returned a second horizontal rig to service after being idled in the first quarter of 2016. The rig will initially be focused on program development of the Wolfcamp A zone in the WildHorse area after drilling two 10,000' lateral wells targeting the LLS at the Carpe Diem field. In addition, the Company has budgeted for investments in facilities, seismic and land to support the longer-term development plans in each of our focus areas, including the potential addition of a third horizontal rig during the first half of 2017.

A breakdown of the Company's anticipated 2016 operational plan and associated expenditures is presented below:

2016 Guidance Update

Hedge Portfolio Summary

The following table summarizes our open derivative positions as of August 8, 2016:

The following tables reconcile to the related GAAP measure the Company's loss available to common stockholders to Adjusted Income and the Company's net loss to Adjusted EBITDA (in thousands):

Discretionary Cash Flow. Discretionary cash flow, a non-GAAP measure⁽ⁱ⁾, for the second quarter of 2016 was $29.0 million and is reconciled to operating cash flow in the following table (in thousands):

Non-GAAP Financial Measures and Reconciliations

This news release refers to non-GAAP financial measures such as "discretionary cash flow," "Adjusted Income (Loss)," "Adjusted G&A" and "Adjusted EBITDA," and "Adjusted Total Revenues." 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. Discretionary cash flow and discretionary cash flow per diluted share are calculated using net income (loss) adjusted for certain items including depreciation, depletion and amortization, the impact of financial derivatives (including the mark-to-market effects, net of cash settlements and premiums paid or received related to our financial derivatives), remaining asset retirement obligations related to our divested offshore properties, restructuring and other non-recurring costs, deferred income taxes and other non-cash income items.
• 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 above details all adjustments to G&A on a GAAP basis to arrive at Adjusted G&A.
• We believe that the non-GAAP measure of Adjusted Income available to common shareholders ("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 above were computed in accordance with GAAP.
• 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.
• We believe that the non-GAAP measure of Adjusted Total Revenues is useful to investors because it provides readers with a revenue value more comparable to other companies who account for derivative contracts and hedges and include their effects in revenue. We believe Adjusted Total Revenue is also useful to investors as a measure of the actual cash inflows generated during the period.

Earnings Call Information

The Company will host a conference call on Tuesday, August 9, 2016, to discuss second quarter 2016 financial and operating results.

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

Date/Time:            Tuesday, August 9, 2016, at 8:00 a.m. Central Time (9:00 a.m. Eastern Time)
Webcast:              Live webcast will be available at www.callon.com in the "Investors" section of the website.

Alternatively, you may join by telephone using the following numbers:

Toll Free:                            1-888-349-0096
Canada Toll Free:                1-855-669-9657
International:                       1-412-902-0125
Request to join:                   Callon Petroleum Company Earnings Call

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 Petroleum Company is an independent energy company focused on the acquisition, development, exploration, and operation of oil and natural 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 under the "News" 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 the consummation of the pending transactions, wells anticipated to be drilled and placed on production, future levels of drilling activity and associated production, the Company's 2016 guidance, capital budget amounts and expected cash flows, reserve quantities and the present value thereof, 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. Without limiting the foregoing, forward-looking statements contained in this news release specifically include the expectation of total reserve potential and EUR. 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 and Quarterly Reports on Form 10-Q, 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

SOURCE Callon Petroleum Company