Callon Petroleum Company (CPE - Free Report) is well poised to grow on the back of strong Permian presence and production surge. However, rising costs and its inability to generate positive free cash flow are persistent concerns.
Headquartered in Natchez, MS, Callon Petroleum is solely focused on exploration, and production of oil and gas resources in the Permian Basin. The company, with a market cap of more than $1.5 billion, has an expected earnings growth rate of 11% for the next five years. It has lost 3.9% year to date compared with 4.8% decline of the industry it belongs to.
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Favoring the Stock?
Strong Permian Presence: Callon Petroleum’s operation is solely focused on the Permian Basin, which is among the country’s most prolific oil and gas plays. The company boasts an impressive footprint (75,000 net acres) throughout the Permian Basin, which is the highest-producing shale play in the United States. Callon Petroleum, which had entered the basin in 2009 with around 8,800 net acres, has been strengthening presence in the region since then.
Unlike most of the explorers in the Permian Basin, Callon Petroleum is not significantly exposed to infrastructure bottlenecks. This is because the company has reserved the Permian pipeline networks to transport roughly 90% of its produced liquid volumes to local refineries.
Production Surge: In first-quarter 2019, net production volumes averaged nearly 40,311 barrels of oil equivalent per day (Boe/d), reflecting a huge increase from the year-ago period’s 26,567 Boe/d. Moreover, Callon Petroleum anticipates full-year 2019 output in the band of 38-39.5 thousand barrels of oil equivalent per day (MBoe/d), which is significantly higher than the year-ago reported figure of 32.9 MBoe/d. The expected surge in output can be attributed to the Ward County acquisition and strong performance from its Spur area assets.
Prospective Projects: In first-quarter 2019, the company completed a five-well pad in the southern part of WildHorse, developing an entire half section in the Wolfcamp A. The ongoing larger developments in the Midland Basin, primarily focused on WildHorse, will enable it to unlock greater values in the prolific shale play.
However, there are a few factors that are impeding the growth of the stock lately.
Rising Costs: Total operating expenses of the company are on the rise. During 2018, its total operating expenses rose nearly 46% year over year to $328.1 million. In first-quarter 2019, total operating expenses amounted to $109.8 million, higher than the year-ago level of $66.5 million. For full-year 2019, lease operating expense per barrel of oil equivalent is expected in the range of $5.50-$6.50. The upper limit of this projected range is much higher than the 2018 level of $5.76. Rising expenses will hamper its profit margin in the coming quarters.
Negative Free Cash Flow: Callon Petroleum’s free cash flow remained negative in the past few years, even though oil price recovered significantly from the 2016 lows. Notably, in the trailing 12-month period ended Mar 31, 2019, the company’s free cash flow plunged 63.7% to negative $220 million. This reflects weakness in its operations.
Debt Burden: The inability to generate positive free cash flow means that the company should rely on debt and equity capital for financing future growth projects. Markedly, Callon Petroleum supported acreage addition in the Delaware Basin through offering of shares and senior notes. The stock offering diluted its shareholders’ position, while the notes offering made the balance sheet more levered. It can be seen in the company’s balance sheet, which has total cash and cash equivalents of only $10.5 million, and a debt burden of $1,319.9 million as of Mar 31, 2019.
To Sum Up
Despite riding on significant growth prospects, increasing costs and the inability to generate positive free cash flow are concerns. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.
Which Way are Estimates Headed?
The Zacks Consensus Estimate for 2019 earnings per share is 82 cents, which witnessed four upside and 10 downside estimate revisions in the past 60 days. In the past seven days, the estimate increased from 81 cents per share. Notably, the company missed estimates just once in the trailing four quarters.
Stocks to Consider
Some better-ranked players in the energy space include Approach Resources Inc. (AREX - Free Report) , Berry Petroleum Corporation (BRY - Free Report) and Cheniere Energy, Inc. (LNG - Free Report) . While Approach Resources sports a Zacks Rank #1 (Strong Buy), Berry Petroleum and Cheniere have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Approach Resources’ beat earnings estimates thrice in the trailing four quarters, with positive surprise of 12.7%.
Berry Petroleum’s 2019 earnings per share are expected to grow 23.8% year over year.
Cheniere’s 2019 earnings per share are expected to grow 8.4% year over year.
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