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Callon Petroleum to Divest Non-Core Midland Basin Assets

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Callon Petroleum Company (CPE - Free Report) has agreed to divest certain non-core assets in the Midland Basin and has inked a definitive agreement.

Subject to customary purchase price adjustments, the transaction will raise initial cash proceeds of $260 million. Per the agreement, potential incremental cash payments of about $60 million will be provided based on future commodity prices with upside participation starting at the West Texas Intermediate level of $60 per barrel.

The assets include the Ranger operating area in the southern Midland Basin, which comprises net Wolfcamp acreage of about 9,850 (66% working interest). It also includes more than 80 currently producing horizontal wells that have been drilled since 2012 and 70 net as well as delineated locations that surpass an internal rate of return (IRR) of greater than 25% at strip pricing.

In February 2019, daily production from these assets averaged about 4,000 barrels of oil equivalent per day (Boe/d), of which 52% was oil. For 2019, Callon Petroleum’s capital plans were unchanged as there was no activity planned in the Ranger area. Full-year guidance will be updated on completion of the sale.

During the first quarter of 2019, Callon Petroleum completed a strategic deal in addition to the pending divestiture. The deal has strengthened the company’s adjacent position in northwest Howard County through the addition of two incremental long-lateral drilling spacing units (DSUs) in exchange for low working interest properties in Midland County.

The deal augmented the net acreage of Callon Petroleum's Midland Basin leasehold position byabout 167 acres and raised $14 million in cash proceeds. The company’s current asset base is well placed for the efficient, large pad development model deployed across the portfolio.

The transaction is in sync with the company’s strategy of monetizing lower margin, non-core properties. The proceeds from this divestiture will be used to lower debt and provide the opportunity to retire its preferred stock and reduce cash financing costs. This has also helped Callon Petroleum to simplify its business structure by focusing on three core operating areas. This has resulted in lower capital requirements and boosted shareholders’ value.

Zacks Rank & Key Picks

Currently, Callon Petroleum carries a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space are Antero Resources Corporation (AR - Free Report) , CrossAmerica Partners L.P. (CAPL - Free Report) and SEACOR Holdings, Inc (CKH - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Antero Resources is an independent explorer, primarily engaged in the acquisition and development of natural gas, natural gas liquids as well as oil resources in the Appalachian Basin. The company’s earnings beat the Zacks Consensus Estimate in two of the last four quarters.

CrossAmerica Partners is involved in the wholesale distribution of motor fuels, comprising gasoline and diesel fuel. The partnership delivered an average positive earnings surprise of 452.2% in the last four quarters.

SEACOR Holdings is a diversified holding company, mainly focused on domestic and international transportation, logistics as well as risk management consultancy. The bottom line for 2019 is expected to inch up 1.7% year over year. The company delivered an average positive earnings surprise of 20.5% in the trailing four quarters.

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