Callon Petroleum Announces 2nd Quarter 2022 Results

Source: www.gulfoilandgas.com 8/3/2022, Location: North America

Callon Petroleum Company reported results of operations for the three and six months ended June 30, 2022.

Second Quarter 2022 and Recent Highlights
- Delivered production of approximately 100.7 MBoe/d (61% oil and 81% liquids) in the second quarter of 2022
- Increased Delaware Basin well productivity in 2022 by approximately 20% over 2021 as co-development offset spacing and completions initiatives are implemented
- Generated net cash provided by operating activities of $372.3 million and adjusted free cash flow of $125.6 million
- Reported net income of $348.0 million, or $5.62 per diluted share, adjusted EBITDA of $418.5 million, and adjusted income of $227.8 million, or $3.68 per diluted share
- Achieved an operating margin of $67.58 per Boe, a sequential increase of over 15%
- Executed a refinancing transaction that extended maturities and reduced term balances, with total debt balance of $2.5 billion at June 30 after continued debt reduction

"Callon continues to execute on important steps to solidify a foundation for durable free cash flow generation" said Joe Gatto, President and Chief Executive Officer. "In the inflationary environment that we operate in today, and likely for the foreseeable future, operating margins are critical to our cash generation objectives. In our most recent quarter, our operating margins increased to almost $70 per Boe produced, our eighth consecutive quarterly increase, which drove unhedged adjusted EBITDA of over $600 million. When our industry leading margins are combined with demonstrated well productivity gains in the Delaware and drilling and completion efficiencies across the portfolio, we expect to drive more efficient conversion of EBITDA into free cash flow. These cash flow benefits will be further enhanced in the near-term with a steadily decreasing impact of financial hedges and a reduced interest expense burden as debt continues to be reduced."

Callon Operations Update
At June 30, 2022, Callon had 1,377 gross (1,229.3 net) wells producing from established flow units in the Permian and Eagle Ford. Net daily production for the three months ended June 30, 2022 was 100.7 MBoe/d (61% oil and 81% liquids).

Production volumes for the quarter include the impact of the following items:
Increased Workover Activity – Callon experienced a higher level of well failures than historical trends due to intermittent power disruptions and the timing of useful equipment lives. During these outages, Callon accelerated its artificial lift initiatives, which provide production and runtime benefits, primarily in Delaware Basin South. Given the additional time to complete these conversion and repair projects, which were roughly double the level executed in the first quarter, downtime was elevated in the second quarter. Portions of this activity were previously planned to occur later in the year and, as a result, workovers and associated downtime for this initiative should be reduced going forward relative to our previous forecast.

Conversion of Midland Basin Gathering Contract – Natural gas and NGL volumes increased from the conversion of a Midland Basin gathering contract from a percentage of proceeds to fee-based which resulted in a reduction in oil cut for the quarter.

For the three months ended June 30, 2022, Callon drilled 35 gross (32.6 net) wells and placed a combined 33 gross (29.1 net) wells on production. Completions operations for the quarter included 6 gross (5.9 net) wells in the Delaware Basin, 7 gross (6.3 net) wells in the Midland Basin, and 15 gross (13.0 net) wells in the Eagle Ford Shale. Callon placed 11 gross (10.1 net) wells on production in the Delaware Basin, 7 gross (6.0 net) wells in the Midland Basin, and 15 gross (13.0 net) wells in the Eagle Ford Shale. The average lateral length for the wells completed during the second quarter was 8,281 feet. Operated completions during the second quarter consisted of 4 Upper Wolfcamp A wells and 2 Lower Wolfcamp A wells in the Delaware Basin; 2 Lower Spraberry wells, 3 Wolfcamp A wells and 2 Wolfcamp B wells in the Midland Basin; and 15 lower Eagle Ford Shale wells.

Leverage and Liquidity Update
On June 9, 2022, Callon priced $600 million principal amount of 7.50% Senior Notes due 2030 in a private offering. On June 24, 2022, the Company deposited with the trustee the proceeds from the offering of the 7.50% Senior Notes due 2030, along with borrowings under the Credit Facility, to redeem all of its outstanding 6.125% Senior Notes due 2024 and 9.0% Second Lien Notes due 2025. As of June 30, 2022, the drawn balance on the facility was $779.0 million and cash balances were $6.1 million. The Company intends to continue its application of organic free cash flow towards repayment of debt balances related to the credit facility and other debt instruments.

Third Quarter Activity Outlook and Guidance
Callon is currently running six rigs, with three rigs in the Delaware Basin, two rigs in the Midland Basin and one rig in the Eagle Ford which the Company will be dropping in the coming days. Callon plans to utilize two to three completion crews for the third quarter, supporting new production across the Midland, Delaware and Eagle Ford positions.

For the third quarter, the Company expects to produce between 102 and 105 MBoe/d (63% oil) with between 38 and 42 gross wells (33 and 36 net) placed on production. In addition, Callon projects an operational capital spending level of between $245 and $255 million on an accrual basis.

For full year 2022, Callon is increasing the bottom end of its production guidance to between 102 and 105 MBoe/d (63% oil) to reflect underlying Permian well performance that is above expectations, and an increase in natural gas and NGL volumes from the Midland Basin gathering contract conversion. The revised guidance is available in the accompanying presentation.

Capital Expenditures
For the three months ended June 30, 2022, Callon incurred $237.8 million in operational capital expenditures on an accrual basis. Total capital expenditures, inclusive of capitalized expenses, are detailed below on an accrual and cash basis:

Revenue. For the quarter ended June 30, 2022, Callon reported revenue of $760.3 million, which excluded revenue from sales of commodities purchased from a third party of $153.4 million. Revenues including the loss from the settlement of derivative contracts ("Adjusted Total Revenue") were $575.7 million, reflecting the impact of a $184.6 million loss from the settlement of derivative contracts. Average daily production and average realized prices, including and excluding the effects of hedging, are detailed above.

Commodity Derivatives. For the quarter ended June 30, 2022, the net loss on commodity derivative contracts includes the following (in thousands):

Lease Operating Expenses, including workover ("LOE"). LOE for the three months ended June 30, 2022 was $72.9 million, or $7.96 per Boe, compared to LOE of $67.3 million, or $7.29 per Boe, in the first quarter of 2022. The sequential increase in LOE was primarily due to increases in workover costs as well as certain operating costs such as fuel, power and equipment rentals. The increase in LOE per Boe was due to the increases in operating costs mentioned above as well as the distribution of fixed costs spread over lower production volumes.

Production and Ad Valorem Taxes. Production and ad valorem taxes for the three months ended June 30, 2022 were approximately 5.9% of total revenue excluding revenue from sales of commodities purchased from a third-party and before the impact of derivative settlements, or $4.90 per Boe.

Gathering, Transportation and Processing. Gathering, transportation and processing expense for the three months ended June 30, 2022 was $23.3 million, or $2.54 per Boe, as compared to $20.8 million, or $2.25 per Boe, in the first quarter of 2022. This increase in gathering, transportation and processing expense was primarily due to a new contract entered into during the second quarter of 2022 as well as inflationary cost increases.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2022 was $11.94 per Boe compared to $11.15 per Boe in the first quarter of 2022. The increase in DD&A per Boe was primarily attributable to higher capital expenditures during the three months ended June 30, 2022 and increases in future development cost assumptions.

General and Administrative Expense ("G&A"). G&A for the three months ended June 30, 2022 and March 31, 2022 was $10.9 million and $17.1 million, respectively. G&A, excluding non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A") was $16.0 million for the three months ended June 30, 2022 compared to $14.3 million for the first quarter of 2022. The cash component of Adjusted G&A increased to $14.1 million for the three months ended June 30, 2022 compared to $13.0 million for the first quarter of 2022 primarily as a result of higher compensation costs during the quarter.

Income Tax. Callon provides for income taxes at the statutory rate of 21% adjusted for permanent differences expected to be realized. We recorded income tax expense of $3.0 million and $0.5 million for the three months ended June 30, 2022 and March 31, 2022, respectively. Since the second quarter of 2020, we have concluded that it is more likely than not that the net deferred tax assets will not be realized and have recorded a full valuation allowance against our deferred tax assets. As long as we continue to conclude that the valuation allowance is necessary, we will not have significant deferred tax expense or benefit.


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