Callon Petroleum Company Announces Second Quarter 2021 Results

HOUSTON, Aug. 4, 2021 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three and six months ended June 30, 2021.

Presentation slides accompanying this earnings release are available on the Company's website at www.callon.com located on the "Presentations" page within the Investors section of the site.

Second Quarter 2021 and Recent Highlights

• Delivered production of approximately 89.0 MBoe/d (63% oil) in the second quarter of 2021
• Generated net cash provided by operating activities of $175.6 million and adjusted free cash flow1 of $6.9 million
• Net loss of $11.7 million, or $0.25 per diluted share, driven primarily by a loss on derivative contracts of $190.5 million, adjusted EBITDA1 of $196.8 million, and adjusted income1 of $70.3 million, or $1.49 per diluted share
• Achieved an operating margin of $37.76 per Boe, a 13% increase from the previous quarter
• Completed the divestiture of certain non-core assets for aggregate net cash proceeds of $30.7 million
• Issued $650 million of new 8.00% senior unsecured notes due 2028 and completed the redemption of the 6.25% senior unsecured notes due 2023
• Received company credit rating upgrades from both Moody's and S&P following successful senior notes offering
• Reduced the outstanding balance on Callon's senior secured credit facility to approximately $780 million, representing less than 50% utilization of the available capacity2
• Executed Callon's largest multi-well project in history, the 29-well Irvin West project, driving robust production growth with July volumes estimated to be approximately 10% above second quarter average daily production
• Issued the company's second annual sustainability report, highlighting meaningful improvement in key categories as well as incremental transparency measures and alignment with both SASB and TCFD reporting standards.

Joe Gatto, President and Chief Executive Officer, commented, "Our team advanced critical priorities during the second quarter, preparing ourselves for a very strong second half of 2021. We generated positive adjusted free cash flow for the fourth consecutive quarter, despite the second quarter being our highest projected capital spending period of the year. We actively managed our nearest maturities and further reduced our credit facility borrowings, both of which support a continued upward trajectory in our credit profile. The third quarter is off to a tremendous start with July production volumes well ahead of our second quarter average and our commodity price realizations are projected to benefit from the reduction in overall hedged production. Our adjusted free cash flow during the third and fourth quarter should further reduce our credit facility borrowings and continue to advance our deleveraging goals with the potential to accelerate that timeline through selective monetizations."

He continued, "We recently issued our 2020 Sustainability report showing meaningful improvement in numerous critical areas including greenhouse gas emissions reductions, flaring, and safety. In addition, we have aligned our disclosure with both the Sustainability Accounting Standards Board ("SASB") and the Task Force on Climate-Related Financial Disclosures ("TCFD") frameworks providing additional clarity and transparency on issues that our shareholders and stakeholders value. This represents another step towards achieving alignment with shareholder expectations."

Issuance of 2028 Senior Unsecured Notes and Redemption of 2023 Senior Unsecured Notes

On June 21, 2021, the Company entered into a Purchase Agreement where it issued $650.0 million in aggregate principal amount of 8.00% senior unsecured notes due 2028 (the "8.00% Senior Notes") through private placement, which closed on July 6, 2021 for net proceeds of approximately $638.1 million, net of underwriting discounts and commissions and offering costs.

Also on June 21, 2021, the Company delivered a redemption notice with respect to all $542.7 million of its outstanding 6.25% senior unsecured notes due 2023 (the "6.25% Senior Notes"), which became redeemable on July 21, 2021. The Company used a portion of the net proceeds from the 8.00% Senior Notes to redeem all of its outstanding 6.25% Senior Notes with the remaining proceeds used to partially repay amounts outstanding under its Credit Facility.

Following the issuance of the new 8.00% Senior Notes, Callon was upgraded by both Moody's and S&P at the corporate level due to improving credit metrics and corporate outlooks. Moody's raised Callon's corporate family ratings to B3 and S&P raised its issuer credit rating to B- with a stable outlook.

Credit Facility and Liquidity

On May 3, 2021, Callon completed the spring redetermination for its senior secured credit facility. The borrowing base and elected commitment were both reaffirmed at $1.6 billion. As of June 30, 2021, the drawn balance on the facility was $875.0 million and cash balances were $3.8 million. Upon completion of the redemption of the 6.25% Senior Notes, the remaining proceeds from the issuance of the 8.00% Senior Notes were used to repay outstanding borrowings on the credit facility further reducing the outstanding balance to approximately $780.0 million2.

Sale of Delaware Basin Assets

During the second quarter of 2021, the Company completed its divestitures of certain non-core assets in the Delaware Basin for aggregate net cash proceeds of $30.7 million, subject to post-closing adjustments. The divestitures were primarily comprised of natural gas producing properties in the Western Delaware Basin as well as a small undeveloped acreage position.

Operations Update

At June 30, 2021, Callon had 1,536 gross (1,359.2 net) wells producing from established flow units in the Permian and Eagle Ford. Net daily production for the three months ended June 30, 2021 was 89.0 MBoe/d (63% oil).

For the three months ended June 30, 2021, Callon drilled 8 gross (6.5 net) wells and placed a combined 47 gross (44.9 net) wells on production. Wells placed on production during the quarter were completed in the Eagle Ford in South Texas, the Delaware Basin and the Midland Basin.

During the second quarter, Callon placed on production 29 gross wells in the Eagle Ford as part of its Irvin West project, the largest horizontal well development project in Company history. With an average lateral length of approximately 6,200 feet, the project involved the completion of more than 760 unique frac stages and has demonstrated very solid productivity with current rates averaging approximately 400 barrels of oil per day per well.

In the Delaware Basin, the Company turned to production multi-well projects in both Reeves and Ward Counties. In Ward County, the Limber Pine project featured co-development of the Bone Spring, Upper Wolfcamp A, Lower Wolfcamp A and Wolfcamp B. Initial production has been positive and the wells are currently slated to be converted to electric submersible pumps ("ESPs"), which have contributed to strong productivity increases across the Delaware asset base in recent quarters. The Bush Griffin project in Reeves county was placed on production in June and early time results are tracking ahead of estimates.

The only pad placed on production during the second quarter in the Midland Basin was the Chaparral three-well project targeting the Lower Spraberry, Wolfcamp A, and Wolfcamp B. The Chaparral project was a very successful first test of an E-Frac fleet employing a crew from US Well Services. Production from this pad has significantly exceeded production estimates producing an average of more than 90 MBoe per well through the first 75 days online.

Current planned development activity in the second half of 2021 will involve three to four drilling rigs with projects spanning the Eagle Ford, Midland Basin, and Delaware Basin. Completion activity and wells turned to production will focus more heavily on Midland Basin and Delaware Basin projects during the third and fourth quarters.

Capital Expenditures

For the three months ended June 30, 2021, Callon incurred $138.3 million in operational capital expenditures on an accrual basis. Total capital expenditures, inclusive of capitalized expenses, are detailed below on an accrual and cash basis:

Guidance

For the third quarter, the Company expects to produce between 95.5 and 97.5 MBoe per day (64% oil). In addition, Callon projects an operational capital spending level of between $120 and $130 million on an accrual basis.

Hedge Portfolio Summary

As of August 2, 2021, Callon had the following outstanding oil, natural gas and NGL derivative contracts:

Operating and Financial Results

The following table presents summary information for the periods indicated:

Revenue.For the quarter ended June 30, 2021, Callon reported revenue of $394.1 million, which excluded revenue from sales of commodities purchased from a third party of $46.3 million. Revenues including the gain or loss from the settlement of derivative contracts ("Adjusted Total Revenue"1) were $294.0 million, reflecting the impact of a $100.1 million loss from the settlement of derivative contracts. Average daily production for the quarter was 89.0 MBoe/d, compared to average daily production of 81.0 MBoe/d in the first quarter of 2021. Average realized prices, including and excluding the effects of hedging, are detailed above.

Commodity Derivatives. For the quarter ended June 30, 2021, the net loss on commodity derivative contracts includes the following (in thousands):

For the quarter ended June 30, 2021, the cash paid for commodity derivative settlements includes the following (in thousands):

Lease Operating Expenses, including workover ("LOE").LOE per Boe for the three months ended June 30, 2021 was $5.74 per Boe, compared to LOE of $5.55 per Boe in the first quarter of 2021. The increase in LOE per Boe was primarily due to increased electrical costs.

Production and Ad Valorem Taxes. Production and ad valorem taxes for the three months ended June 30, 2021 represented approximately 5.6% of total revenue excluding revenue from sales of commodities purchased from a third-party and before the impact of derivative settlements.

Gathering, Transportation and Processing. Gathering, transportation and processing for the three months ended June 30, 2021 was $20.0 million, or $2.47 per Boe, as compared to $18.0 million, or $2.47 per Boe in the first quarter of 2021. This increase is related to the 11% increase in production volumes between the two periods.

Depreciation, Depletion and Amortization ("DD&A").DD&A for the three months ended June 30, 2021 was $10.27 per Boe compared to $9.74 per Boe in the first quarter of 2021. The increase in DD&A was primarily attributable to a production increase of 11%, higher capital expenditures during the second quarter of 2021 as compared to the first quarter of 2021, and increases in future development cost assumptions.

General and Administrative Expense ("G&A").G&A for the three months ended June 30, 2021 and March 31, 2021 was $11.1 million, or $1.37 per Boe, and $16.8 million, or $2.31 per Boe, respectively. G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A" 1) was $7.5 million, or $0.93 per Boe, for the three months ended June 30, 2021 compared to $10.9 million, or $1.49 per Boe, for the first quarter of 2021. The cash component of Adjusted G&A decreased to $5.8 million, or $0.71 per Boe, for the three months ended June 30, 2021 compared to $9.2 million, or $1.26 per Boe, for the first quarter of 2021 primarily as a result of lower compensation costs during the quarter.

The following table reconciles total G&A to Adjusted G&A - cash component and full cash G&A (in thousands):

Income Tax. Callon provides for income taxes at the statutory rate of 21% adjusted for permanent differences expected to be realized. We recorded income tax benefit of $0.5 million and $0.9 million for the three months ended June 30, 2021 and March 31, 2021, respectively. Since the second quarter of 2020, we have concluded that it is more likely than not that the net deferred tax assets will not be realized and have recorded a full valuation allowance against our deferred tax assets. As long as we continue to conclude that the valuation allowance is necessary, we will not have significant deferred tax expense or benefit.

Adjusted EBITDA. Net loss was $11.7 million and adjusted EBITDA was $196.8 million for the second quarter of 2021 as compared to net loss of $80.4 million and adjusted EBITDA of $170.6 million for the first quarter of 2021. The increase in adjusted EBITDA from the first quarter of 2021 was primarily due to an increase in revenues partially offset by increased payments associated with our commodity derivative settlements.

Adjusted Income and Adjusted EBITDA.The following tables reconcile the Company's net loss to adjusted income and adjusted EBITDA:

Adjusted Free Cash Flow. The following table reconciles the Company's net cash provided by operating activities to adjusted EBITDA and adjusted free cash flow:

Adjusted Discretionary Cash Flow. The following table reconciles the Company's net cash provided by operating activities to adjusted discretionary cash flow:

Adjusted Total Revenue. Adjusted total revenue is reconciled to total operating revenues, which excludes revenue from sales of commodities purchased from a third party, in the following table: