Callon Petroleum Company (CPE - Free Report) is well poised to grow on the back of strong Permian presence and acquired Eagle Ford acres. However, balance sheet weakness and a volatile commodity price environment are persistent concerns.
Headquartered in Houston, TX, the firm is solely focused on exploration, and production of oil and gas resources in the Permian Basin. The company, with a market cap of around $544 million, has tremendous growth potential. The stock has rallied 190.2% since the beginning of the second quarter compared with 66% rise 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?
Callon Petroleum’s operations are primarily focused on the oil-rich Permian Basin, which is among the country’s most prolific oil and gas plays. The company boasts an impressive footprint (86,000 net acres) throughout the Permian Basin, which is the highest-producing shale play in the United States. Callon Petroleum had entered the basin in 2009 with 8,800 net acres and has been strengthening hold in the region since then. Moreover, it received Eagle Ford acres from the Carrizo merger, which further strengthened its portfolio.
In 2019, net production volumes averaged 41.3 Mboe/d, reflecting an increase of 26% from the year-ago levels. Production for the June quarter of 2020 is currently estimated to be more than 105 Mboe/d. For 2020, Callon Petroleum’s oil production is expected to be flat or more than its volumes registered in the March quarter. The company expects to have an inventory of 70 drilled, uncompleted wells by second quarter-end, which will pave the way for capital-efficient production addition in the upcoming months. Given high production volume, it will likely generate more profits. Markedly, of the total crude oil production, a significant portion is already hedged.
Callon Petroleum’s acquisition of Carrizo Oil & Gas, Inc. boosted its footprint in the prolific Permian Basin. Moreover, with the inclusion of oil-rich acres in the Eagle Ford, following the closure of the deal by 2019-end, the company was able to diversify presence beyond the Permian basin.
Moreover, unlike most of the explorers in the Permian basin, Callon Petroleum is not significantly exposed to Permian bottlenecks. This is because the company has reserved Permian pipeline networks to transport roughly 90% of produced liquid volumes to local refineries.
However, there are a few factors that are impeding the growth of the stock lately.
Total operating expenses of the company are on the rise. During 2019, its total operating expenses rose more than 52% year over year to $498.9 million. The metric further rose to $242.1 million in the first quarter from the year-ago level of $109.9 million. Also, the company expects lease operating expenses in the range of $195-$235 million for 2020, implying an increase from $91.8 million in 2019. Rising expenses will likely hurt its profit margin in the coming quarters.
As of Mar 31, 2020, the company’s total cash and cash equivalents amounted to $14.8 million, and long-term debt totaled $3.2 billion, with total debt to total capital ratio of 0.49. Low cash balance and high debt load are reflecting weaknesses in its financials. Moreover, the debt-to-capitalization ratio is much higher than the industry average of 0.36. This can affect the company's financial flexibility. Also, its ability to pay off a portion of the total long-term debt is in question since there has been prolonged weakness in global energy demand without possibilities of recovery anytime soon.
Weakness in the crude pricing scenario is hurting Callon Petroleum’s operations, as oil accounts for 64% of the upstream energy player’s total production volume. With oil price not expected to improve anytime soon, the company’s profit level is not likely to revamp in the short term.
To Sum Up
Despite significant production growth opportunities, balance sheet weakness and volatile commodity prices 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 2020 earnings per share is 20 cents, which has witnessed two upward estimate revisions and one in the opposite direction in the past 30 days. The company beat estimates thrice and missed once in the trailing four quarters, with a positive earnings surprise of 14.3%.
Stocks to Consider
Some better-ranked players in the energy space include Chaparral Energy, Inc. (CHAP - Free Report) , CNX Resources Corporation (CNX - Free Report) and Concho Resources Inc. (CXO - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Chaparral Energy’s bottom line for 2020 is expected to rise 57.8% year over year.
CNX Resources beat earnings estimates thrice and met once in the last four quarters, with average positive surprise of 111.5%.
Concho Resources has a positive earnings surprise of 4.9% in the last four quarters.
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