Callon Petroleum Stock: $2 billion in cash flow positive by the end of 2023 (NYSE: CPE)

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Callon Petroleum (NYSE: CPE) is issuing $600 million of new 7.50% unsecured notes due 2030. The proceeds of this offering along with its ability to generate nearly $900 million of positive cash flow in 2022 should put it in good shape with regard to the maturities of its notes. I expect Callon to be able to redeem all of its 2024 and 2025 maturities this year.

Callon would then be left with $300 million in credit facility debt at the end of 2022, and no further note maturities until 2026. It should also be able to generate positive cash flow by more than 1, $1 billion in 2023 at current strip prices.

Debt movements

Callon issues $600 million in new 7.50% unsecured notes due 2030. The proceeds will be used to redeem its $460.2 million in 6.125% unsecured notes due 2024 (at 101.531% of par) as well as than its $319.7 million in 9.00% subordinated notes due 2025 (at approximately 106.5% of par).

Callon’s credit facility indebtedness will also increase by approximately $220 million as part of these transactions. Callon’s annual note interest expense will decrease by $12 million as a result of these transactions, while its total interest expense will decrease by approximately $6 million per year.

Callon also previously mentioned the possibility of calling his $187.2 million in 8.25% unsecured notes due 2025 (inherited from Carrizo). The call price would be 102.063% of par in July 2022.

Callon credit facility debt

Callon credit facility debt (callon.com)

My current estimate is that Callon can generate $886 million in positive cash flow at current strip prices in 2022. This would result in the following outstanding debt at the end of 2022 if he repays his unsecured notes at 8.25 % maturing in 2025 during this year.

Debt projection at the end of 2022 millions of dollars
Credit facility maturing in 2024 $300
6.375% Unsecured Notes Due 2026 $321
8.00% Unsecured Notes Due 2028 $650
7.50% Unsecured Notes Due 2030 $600
Total debt $1,871

Callon would have about $125 million in annual interest expense, up from about $166 million at the start of 2022. He would also have significantly improved his note maturities by retiring his 2024 and 2025 notes.

2022 Outlook Update

At the current 2022 band of $108-$109 WTI oil and $7.50 Henry Hub natural gas, Callon is now expected to generate $3.142 billion in oil and gas revenue before hedges. Callon’s 2022 covers have an estimated value of minus $658 million.

Type Barrels/Mcf $ per barrel/Mcf (realized) millions of dollars
Oil 24,060,000 $107.00 $2,574
NGL 7,143,050 $42.00 $300
Natural gas 38,346,900 $7.00 $268
Coverage value -$658
Total income $2,484

Callon increased its capital expenditure budget for 2022 to as much as $800 million, while maintaining its cost forecast in other areas. He originally budgeted $725 million, which reflected 10% inflation over 2021 levels, but now expects 20% inflation.

millions of dollars
Rental operating expenses $285
Collection, processing and transport $80
Taxes on production and ad valorem $189
G&A and others (cash basis) $90
Cash interest $154
Operating capital expenditure $800
Total expenses $1,598

At current 2022 strip prices, I now expect Callon to generate $886 million in positive cash flow.

Outlook 2023 updated

Callon has about 25% of its 2023 oil production hedged, including 5,000 barrels per day in WTI swaptions with a strike price of $72. These 2023 hedges are also better priced than its 2022 hedges, so Callon could be able to generate over $1.1 billion in cash flow positive in 2023 at current strip prices (high WTI oil at $90).

Callon hedges

Callon Hurdles (callon.com)

This would allow Callon to repay its remaining indebtedness on the credit facility, repurchase its $321 million in outstanding 6.375% unsecured notes due 2026, and have approximately $500 million in cash at the end of the term. 2023.

Based on current strip prices, there is a good chance that Callon could return capital to shareholders in 2023 since its next note maturity would then be in 2028.

Notes on assessment

With Callon potentially generating about $2 billion in cash flow positive in 2022 and 2023 combined (at the current strip), I estimate it would then be worth about $77 per share in a scenario where long-term WTI oil prices would then average $70 after 2023.

Callon’s leverage could be reduced to less than 0.4x by the end of 2023 at the current strip, leaving it in good shape when it comes to its debt.

Conclusion

Callon pushes back its note maturities and has a clear path to approach its 2024 and 2025 note maturities this year and its 2026 note maturities in 2023. At current strip prices, it could end 2023 with 0 leverage. .4x and no note maturities before 2028 .

Callon needs oil prices to stay high in 2022 and 2023 so he can generate the cash flow he needs to pay down his credit facility debt and redeem his notes. If that happens, then Callon could be worth $77 per share, even in a scenario where oil prices average $70 after 2023.