Callon Petroleum Company Announces Second Quarter 2017 Results

NATCHEZ, Miss., Aug. 2, 2017 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three months ended June 30, 2017.

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 2017, and other recent data points include:

• Completed delineation of Wolfcamp A zone across aerial extent of Howard County position
• Successful Lower Spraberry well density test leading to 15% uplift in Monarch inventory
• Deployed 4^th rig to Delaware basin and began operated drilling program at Spur in July
• Increased production by 9% quarter over quarter, driven primarily by higher oil mix (79%)
• Reduced lease operating expense per BOE by 15% from previous quarter
• Increased borrowing base to $650 million with a company-elected commitment of $500 million
• Raised $200 million in a senior notes offering that priced at a yield-to-worst of 5.2%
• Revising guidance to lower lease operating expense per unit and increase the oil mix for fiscal year 2017

"During the quarter we delivered double-digit oil production growth coupled with a double-digit reduction in lease operating expense," commented Joe Gatto, President and Chief Executive Officer. "In addition, we made important strides in the delineation of our asset base, including the extension of our program development into the central portion of Howard County and the completion of successful Lower Spraberry density spacing tests in our Monarch area. We also recently added a dedicated rig to our Spur area in the Delaware Basin in July and are now running four rigs that will be active across all four of our operating areas during the second half of 2017. In keeping with our strategy of sustainable growth and financial discipline, we are well-positioned to add a fifth rig in early 2018 and achieve our 2018 target exit rate goal of 40,000 BOE per day."

Operations Update

At June 30, 2017, we had 205 gross (151.1 net) horizontal wells producing from seven established flow units in the Permian Basin. Net daily production for the three months ended June 30, 2017 grew approximately 65% to 22.2 thousand barrels of oil equivalent per day ("MBOE/d") (approximately 79% oil) as compared to the same period of 2016. Sequentially, we grew production by approximately 9% compared to the first quarter of 2017, with a corresponding 11% sequential increase in our oil volumes.

For the three months ended June 30, 2017, we operated three horizontal drilling rigs, drilling 14 gross (10.7 net) horizontal wells in the Monarch, Ranger and WildHorse areas. We placed a combined 14 gross (9.7 net) horizontal wells on production in the quarter in the Monarch, Spur and WildHorse areas. In July 2017, we moved from a three-rig program to a four-rig program with the arrival of our first operated rig in the Delaware basin allocated to our Spur area. In addition, we recently added a second dedicated completion crew to account for our ramp in activity during the second half of 2017.

In the Midland Basin, we completed delineation of the Wolfcamp A across our Howard County position with recent well results tracking the 1 million barrels of oil equivalent ("MMBOE") type curve.  Infrastructure development in the region continues to drive down lease operating expense per BOE and is expected to enhance early time peak fluid capacity, leading to improved de-watering of the formation and early time increases in oil cuts.  Recent Lower Spraberry completions in Howard County continue to produce with shallow declines and upcoming wells in the formation are expected to benefit from new completion designs that focus on high density, near-wellbore design.

Production results and pressure data from the Monarch density pilot program support the establishment of a new 13 well per section stack-and-stagger model for the Lower Spraberry.  This higher density well pattern increases the Lower Spraberry inventory at Monarch by approximately 15%.  The inventory for the Lower Spraberry at Monarch now equates to more than 10 years of drilling inventory for a full-time rig line.

During the second quarter, we fracture stimulated our first two Lower Wolfcamp B wells in Reagan County since 2015.  These wells are currently flowing back and are expected to reach peak rate during the third quarter.  Additional drilling activity is currently planned during the second half of 2017 at Ranger, inclusive of a Wolfcamp C test well.

In the Delaware basin, the two wells acquired from the previous operator are tracking the respective acquisition type curves (1.6 MMBOE for the Wolfcamp A and 900 MBOE for the Wolfcamp B, both normalized for a 7,500 foot lateral).  With a full-time rig now dedicated to Spur, upcoming wells will incorporate changes to both completion design and optimized landing zone for upcoming drilling in multiple intervals within the Wolfcamp formation.

On June 5, 2017, we completed the acquisition of 7,031 gross (2,488 net) acres in the Delaware Basin, contiguous to the Spur operating area, for total cash consideration of $52.5 million, excluding customary purchase price adjustments. The purchase price was funded with available cash-on-hand and the proceeds from the recent $200 million senior notes add-on offering.

Capital Expenditures

For the three months ended June 30, 2017, we incurred $64.0 million in cash operational capital expenditures compared to $55.5 million in the first quarter of 2017. 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, 2017, Callon reported total revenue of $82.3 million and total revenue including cash-settled derivatives ("Adjusted Total Revenue," a non-GAAP financial measure⁽ⁱ⁾) of $82.0 million, including the impact of a $0.3 million loss from the settlement of derivative contracts. The table above reconciles Adjusted Total Revenue to the related GAAP measure of the Company's revenue. Average daily production for the quarter was 22.2 MBOE/d compared to average daily production of 20.4 MBOE/d in the first quarter of 2017. Average realized prices, including and excluding the effects of hedging, are detailed below.

Hedging impacts. For the quarter ended June 30, 2017, Callon recognized the following hedging-related items (in thousands, except per unit data):

Lease Operating Expenses, including workover and gathering expense ("LOE"). LOE per BOE for the three months ended June 30, 2017 was $6.01 per BOE, compared to LOE of $7.04 per BOE in the first quarter of 2017. The decrease in this metric was related to early-day benefits from infrastructure projects materializing throughout the quarter as well as an increase in production volumes.

Production Taxes, including ad valorem taxes. Production taxes were $2.38 per BOE for the three months ended June 30, 2017, representing approximately 5.9% of total revenue before the impact of derivative settlements.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2017 was $12.97 per BOE compared to $13.29 per BOE in the first quarter of 2017. The decrease on a per unit basis was primarily attributable to greater increases in the estimated total proved reserve base as compared to the increases in our depreciable asset base and assumed future development costs related to undeveloped proved reserves.

General and Administrative ("G&A"). G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A", a non-GAAP measure⁽ⁱ⁾) was $6.5 million, or $3.20 per BOE, for the three months ended June 30, 2017 compared to $5.5 million, or $3.00 per BOE, for the first quarter of 2017. The cash component of Adjusted G&A was $5.4 million, or $2.67 per BOE, for the three months ended June 30, 2017 compared to $4.5 million, or $2.43 per BOE, for the first quarter of 2017.

For the three months ended June 30, 2017, 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):

Settled share-based awards. In June 2017, the Company settled the outstanding share-based award agreements of its former Chief Executive Officer, resulting in a payment of $6.4 million.

Income tax expense. Callon typically provides for income taxes at a statutory rate of 35% adjusted for permanent differences expected to be realized, which primarily relate to non-deductible executive compensation expenses and state income taxes. We recorded an income tax expense of $0.3 million for the three months ended June 30, 2017. At June 30, 2017 we had a valuation allowance of $115.9 million. Adjusted Income per fully diluted common share, a non-GAAP financial measure⁽ⁱ⁾, adjusts our income (loss) available to common stockholders to reflect our theoretical tax provision of $11.2 million (or $0.06 per diluted share) for the quarter as if the valuation allowance did not exist.

2017 Guidance Update

Hedge Portfolio Summary

The following tables summarize our open derivative positions for the periods indicated:

Income (Loss) Available to Common Shareholders. The Company reported net income available to common shareholders of $31.6 million for the three months ended June 30, 2017 and Adjusted Income available to common shareholders of $17.2 million, or $0.09 per diluted share. Adjusted Income per fully diluted common share, a non-GAAP financial measure⁽ⁱ⁾, adjusts our income (loss) available to common stockholders to reflect our theoretical tax provision for the quarter as if the valuation allowance did not exist. The following tables reconcile to the related GAAP measure the Company's income (loss) available to common stockholders to Adjusted Income and the Company's net income (loss) to Adjusted EBITDA (in thousands):

Discretionary Cash Flow. Discretionary cash flow, a non-GAAP measure⁽ⁱ⁾, for the three months ended June 30, 2017 was $57.4 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 G&A," "Adjusted Income," "Adjusted EBITDA," and "Adjusted Total Revenue." 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 natural 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 is 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 Revenue 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 Thursday, August 3, 2017, to discuss second quarter 2017 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 using the following numbers:

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 wells anticipated to be drilled and placed on production; future levels of drilling activity and associated production and cash flow expectations; the Company's 2017 guidance and capital expenditure forecast; estimated reserve quantities and the present value thereof; and 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 natural 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:
Mark Brewer
Callon Petroleum Company
1-800-451-1294

SOURCE Callon Petroleum Company