Callon Petroleum Company Announces Third Quarter 2017 Results

NATCHEZ, Miss., Nov. 6, 2017 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three months ended September 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 third quarter of 2017, and other recent data points include:

• Increased production by 36% year-over-year, with an increased percentage of oil volumes
• Reduced lease operating expense by 9% on a sequential basis to $5.08 per BOE, contributing to a total reduction of 23% since the first quarter of 2017
• Generated a third quarter operating margin of $32.58 per BOE
• First operated Delaware Basin Lower Wolfcamp A well had a 24 hour peak flowing rate of 238 BOE/d per 1,000' (82% oil)
• Successful return to Ranger drilling program with two Lower Wolfcamp B wells outperforming previous type curves

Joe Gatto, Chief Executive Officer and President commented, "This quarter's results speak to our team's commitment to generating strong returns by focusing on driving down costs while extracting the best well results possible from our premier asset base. Consistent improvement in our already strong cash margins, despite production deferrals during the quarter, is evidence that we are taking the correct steps to create shareholder value. Our goal is to manage growth as a function of creating returns on our capital investment. We have been consistent in our focus on these priorities and will continue to be into 2018." He continued, "Callon's well results were strong across all four of our operations areas during the third quarter, including our first operated well in the Delaware Basin. Early well results in the fourth quarter have been equally strong and we are excited about our prospects for 2018."

Operations Update

At September 30, 2017, we had 218 gross (161.2 net) horizontal wells producing from seven established flow units in the Permian Basin. Net daily production for the three months ended September 30, 2017 grew approximately 36% to 22.5 thousand barrels of oil equivalent per day (approximately 77% oil) as compared to the same period of 2016.

For the three months ended September 30, 2017, we operated four horizontal drilling rigs, drilling 13 gross (10.3 net) horizontal wells in the Spur, WildHorse, Ranger and Monarch areas. We placed a combined 11 gross (10.1 net) horizontal wells on production in the quarter in these areas.

In the Delaware Basin, we drilled and completed our first operated Lower Wolfcamp A well, the Sleeping Indian A1 #1LA well.  The well is currently outperforming the 7,500 foot type curve, with an oil cut of approximately 82%. We recently completed our second operated well, the Saratoga A1 #7LA and have placed the well on flowback. We expect to commence multi-well pad development prior to the end of this year with co-development of the Upper and Lower Wolfcamp A.

In the Midland Basin, we were active across all three focus areas: WildHorse, Ranger and Monarch. In Howard County at our WildHorse area, we placed multiple Wolfcamp A wells on production during the second half of the quarter. The wells are cleaning up and have shown similar productivity to our previous wells in the area on an early time basis. Our plans are to continue program development of multiple zones across our footprint and we also expect to test tighter Wolfcamp A spacing, at 10 wells per section, in 2018.

In Reagan County at our Ranger area, our first operated Lower Wolfcamp B wells since 2015 are outperforming the type curve by more than 20%. During the quarter, we drilled our first Wolfcamp C well in this area, which is scheduled for completion during the fourth quarter along with two additional Lower Wolfcamp B wells. We currently do not account for any Wolfcamp C locations in our delineated inventory.

At our Monarch area in Midland County, we drilled a three-well pad consisting of our longest wells to date at an average of over 21,000 feet true measured depth. The completed lateral length for these wells averaged approximately 10,600 feet and the wells are entering their fourth week of flowback.

Infrastructure investment continued to be a key focus in the third quarter. We realized an impressive reduction in lease operating expenses this quarter, and we expect this infrastructure investment to continue to improve operating margins as well as position Callon as an environmentally-responsible operator for the long term. We continued to invest in saltwater disposal wells in the Midland Basin and Delaware Basin, resulting in increased disposal capacity and reduced disposal costs.  In addition, we have begun utilizing recycled water volumes in the Midland Basin and are currently preparing infrastructure at our Spur asset to implement water recycling for our planned two rig program in 2018. Importantly, after developing a substantial base of Callon-owned infrastructure, we are now positioned to selectively monetize portions of our asset base while ensuring reliable operations. As an initial step in this initiative, we expect to complete at least $20 million of such transactions in the fourth quarter, with other identified transactions expected to close by the end of the first quarter of 2018.

Total Revenue. For the quarter ended September 30, 2017, Callon reported total revenue of $84.6 million and total revenue including cash-settled derivatives ("Adjusted Total Revenue," a non-GAAP financial measure⁽ⁱ⁾) of $83.4 million, including the impact of a $1.2 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 22.5 MBOE/d compared to average daily production of 22.2 MBOE/d in the second quarter of 2017. Average realized prices, including and excluding the effects of hedging, are detailed below.

Hedging impacts. For the quarter ended September 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 September 30, 2017 was $5.60 per BOE, compared to LOE of $6.01 per BOE in the second quarter of 2017. The decrease in this metric resulted primarily from a decrease in the number of workovers period over period.

Production Taxes, including ad valorem taxes. Production taxes were $2.62 per BOE for the three months ended September 30, 2017, representing approximately 6.4% of total revenue before the impact of derivative settlements.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended September 30, 2017 was $13.75 per BOE compared to $12.97 per BOE in the second quarter of 2017. The increase on a per unit basis was primarily attributable to greater increases in our depreciable asset base and assumed future development costs related to undeveloped proved reserves as compared to the estimated total proved reserve base.

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 $3.15 per BOE, for the three months ended September 30, 2017 compared to $6.5 million, or $3.20 per BOE, for the second quarter of 2017. The cash component of Adjusted G&A was $5.2 million, or $2.50 per BOE, for the three months ended September 30, 2017 compared to $5.4 million, or $2.67 per BOE, for the second quarter of 2017.

For the three months ended September 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):

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 $0.2 million for the three months ended September 30, 2017 which relates to deferred State of Texas gross margin tax. At September 30, 2017 we had a valuation allowance of $109.8 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 $6.1 million (or $0.03 per diluted share) for the quarter as if the valuation allowance did not exist.

Income (Loss) Available to Common Shareholders. The Company reported net income available to common shareholders of $15.3 million for the three months ended September 30, 2017 and Adjusted Income available to common shareholders of $18.1 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 September 30, 2017 was $61.9 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 above. 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 our 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 Tuesday, November 7, 2017, to discuss third 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 under 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
Director of Investor Relations
Callon Petroleum Company
[email protected]
1-800-451-1294

SOURCE Callon Petroleum Company