Callon Petroleum Company reported results of operations for the three and six months ended June 30, 2020.
- Delivered production of approximately 108.7 Mboe/d (65% oil), above the high end of guidance, for the second quarter of 2020
- Posted accrued operational capital spending of $85.1 million, 15% below the second quarter target of $100 million
- Generated net cash from operating activities of $97.8 million and free cash flow1 of $18.0 million for the second quarter
- Loss available to common stockholders of $1,564.7 million, or $3.94 per fully diluted share, driven by an impairment of evaluated oil and gas properties of $1,276.5 million, adjusted EBITDA1 of $153.4 million, and adjusted income per share1 of $0.01 for the second quarter of 2020
- Achieved lease operating expense ("LOE") of $50.8 million or $5.14 per Boe for the second quarter of 2020, an improvement of 10% over the comparable three-month period ended March 31, 2020
- Lowered cost structure with total operating expenses, including full cash G&A costs1, of $9.58/Boe in the quarter, 16% below the prior quarter
- Reduced Delaware and Midland drilling and completion costs versus the prior quarter by approximately $100 per 1,000 lateral feet, representing incremental savings of 11% and 17% respectively
Announced a 1-for-10 reverse stock split effective as of the close of business on August 7, 2020
Joe Gatto, President and Chief Executive Officer commented, "Our operational and financial results for the second quarter reflect Callon's commitment to thoughtful capital allocation and operational execution that we have overlaid on an exceptional, diversified asset base. As oil markets began to erode in March, our team acted quickly to reduce capital activity while maintaining a clear focus on near and long-term operating goals. As a result, our drilling and completion costs are down across the board, second quarter production was well ahead of estimates, and operating costs continue to decline beyond our targeted synergy goals."
He continued, "Our success in reducing our cost structure, combined with leading capital efficiency from strong well productivity and well cost reductions, positioned us to generate free cash flow this quarter. This is just the first step as we have developed a longer-term plan designed to consistently generate free cash flow while maintaining production levels with a reduced reinvestment rate. After moving past the working capital cash impact of expenditures incurred in the first quarter, a meaningful portion of which added to our current inventory of drilled, uncompleted wells, we will be dedicating all of our expected free cash flow to credit facility reductions and forecast our current credit facility balance to decline into year end and continue into 2021."
Mr. Gatto also shared, "Despite tremendous business, social, and personal hurdles resulting from the current pandemic and extreme turbulence in the financial markets, our team has remained focused on synergy realization and the integration of people, systems, and processes. Our operational and financial results highlight our progress as an organization and I applaud the Callon team for persevering through an incredibly difficult past few months. Importantly, we remain committed to their safety and that of our vendors, partners, and communities."
At June 30, 2020, Callon had 1,471 gross (1,298.0 net) horizontal wells producing from established flow units in the Permian Basin and Eagle Ford Shale. Net daily production for the three months ended June 30, 2020 grew 168% to 108.7 Mboe/d (65% oil), as compared to the same period of 2019.
For the three months ended June 30, 2020, Callon drilled 29 gross (27.0 net) horizontal wells and placed a combined 26 gross (24.9 net) horizontal wells on production. During the course of the quarter, all rigs and completion crews ceased activity upon completion of projects in progress. The Company does not have any active rigs or completion crews at this time but does intend to resume development activity during the third quarter. Near-term operational activity will be focused on completing a drilled, uncompleted inventory of approximately 70 wells in both the Permian Basin and Eagle Ford Shale with one dedicated completion crew. The Company also intends to return two to three drilling rigs to service later in the third quarter for the balance of the year.
During the second quarter in the Delaware Basin, the seven-well Dorothy Sansom project was placed on production in April, consisting of targets in the 3rd Bone Spring Shale, Wolfcamp A (2), Upper Wolfcamp B, Lower Wolfcamp B (2), and Wolfcamp C. Initial results have been positive with cumulative production (adjusted for shut-ins during the quarter) matching or exceeding production from primary zones in the Crowley-St. Clair project which was completed in 2019. Comparable wells in the Wolfcamp A and B zones on the Dorothy Sansom project were drilled and completed offsetting parent wells, unlike the unbounded Crowley-St. Claire wells. The current performance is encouraging for future development of offset wells in the area.
At the WildHorse area in the Midland Basin, the Company brought online the nine-well Dunkin/Horton/Wright project that had previously been deferred during the early portion of the quarter. The project consists of Wolfcamp A wells (4), Lower Spraberry wells (3), and a Wolfcamp B and Middle Spraberry test. Initial production from the Wolfcamp A and B has exceeded expectations and significantly outperformed 2019 vintage Wolfcamp A offsets in the immediate area through the first fifty days. Early results from the Middle Spraberry are encouraging for potential future development in the area as production currently continues to outpace initial type curve estimates.
In the Eagle Ford, the Company placed on production the Pena project with a portion of the wells reaching first production at the very end of March and the remainder falling into early April. These wells have produced over 75,000 cumulative Boe (~90% oil) on average (1.2 MMBoe in total) through the first 120 days online, matching type curve expectations.
During the second quarter, Callon saw additional gains in operational efficiency, with average development costs improving. Some of the highlights include:
- Delaware well costs further reduced to approximately $850 per lateral foot, an 11% improvement versus the previous quarter and a 23% improvement versus our 2019 average of $1,100 per lateral foot; and
- Midland Basin well costs are now approaching approximately $500 per lateral foot, a 17% improvement over the first quarter and 37% improvement over 2019
The Company entered into short-term fixed price contracts in May and June for Eagle Ford Shale production to secure firm transportation and also mitigate the effect of the calendar month average ("CMA") roll calculation on realized pricing. Those fixed price contracts have since returned to our previous MEH linked pricing structure. Callon recently secured incremental firm transportation for production volumes to ensure delivery of barrels produced from the Eagle Ford assets to improve market options for the future.
In addition, the Company has entered into a multi-year agreement with a diverse global player in waterborne oil markets that will be purchasing up to 10,000 barrels per day of oil of Permian Basin production at Brent-linked prices for volumes delivered under our firm transportation agreement to the Houston Ship Channel area on the Echo Pipeline. In April, we began delivering 15,000 barrels per day into the Corpus refinery complex under our firm transportation agreement on Gray Oak pipeline. These barrels are part of multi-year term sales agreements receiving a combination of Brent and MEH based pricing.
Minimal production volumes that were voluntarily shut-in by the Company during the second quarter have been returned to production. The Company is not subject to repayment of volumes or cover cost at second quarter pricing since it met all sales obligations during the quarter.
For the three months ended June 30, 2020, Callon incurred $85.1 million in operational capital expenditures on an accrual basis.