Will Callon Petroleum Turn Around This Earnings Season?

Callon Petroleum [stock_market_widget type="inline" template="generic" color="default" assets="CPE" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] will soon release its results for the first quarter of fiscal 2019 on May 7, and investors will be expecting some good news from the company, building upon the gains it has already delivered this year.

As it turns out, Callon shares have lost momentum in the past week, but that could soon change. Let’s take a look at what can be expected of the company when it releases its results.

The Headline Numbers  

The company was originally anticipating a 23% jump over last year’s production with capital expenses expected to decline 12%.

Wall Street expects Callon Petroleum’s revenue to increase 12.7% year over year to $143.5 million. However, its earnings are expected to decline slightly to $0.18 per share as compared to $0.20 per share in the year-ago period.

The increase in the top line will be the result of an increase in Callon’s output this year. The company was originally anticipating production of 39,500 to 41,500 barrels of oil equivalent per day for 2019, which represents a 23% jump over last year’s production. At the same time, its capital expenses are expected to decline 12%.

So it won’t be surprising to see the company deliver better-than-expected results this time because of its production increase, as well as an uptick in oil prices. Callon’s average realized sales price of oil stood at $62.28 per barrel in the year-ago period. Now that oil prices have inched up to that level, Callon investors can expect a good top line performance from the company.

Focusing on Efficiency

Callon Petroleum was in the news earlier in April when it announced the sale of non-core assets in the Midland Basin. The company will receive $260 million initially from this sale, with the potential for another $60 million in incremental cash payment if WTI oil prices hold a level of $60 per barrel.

According to Callon, the divested non-core assets include the “Ranger operating area in the southern Midland Basin which includes approximately 9,850 net Wolfcamp acres (66% working interest), over 80 currently producing horizontal wells that have been drilled since 2012 and 70 net, delineated locations that exceed our internal threshold of an IRR of greater than 25% at strip pricing.”

This divestiture is going to impact the company’s output to a small extent as the daily production from these assets was around 4,000 BOE/day in February, though only 52% of that was oil. Callon hadn’t planned any capital investment in the divested asset, so its capex outlook for the year will not change.

Callon management took this step of selling non-core assets to improve capital efficiency as the divested asset carried lower margins as compared to the rest of the portfolio. As a result, the company can now focus on its three core operating areas, but at the same time, it can reduce its debt at a faster pace. Callon also plans to retire its preferred stock in a bid to reduce its cash financing expenses.

In all, it can be concluded that Callon Petroleum is taking the right steps to boost operational efficiency, which will translate into top- and bottom-line growth in the future as oil prices keep improving.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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