CPE Callon Petroleum Company

NATCHEZ, Miss., Aug. 8, 2016 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) ("Callon" or the "Company") today reported results of operations for the three months ended June 30, 2016.

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.

Financial and operational highlights for the second quarter of 2016 and other recent data points include:

• Net daily production of 13,451 barrels of oil equivalent per day ("BOE/d"), an increase of 8% compared to the first quarter of 2016, comprised of 77% oil volume
• Estimated July 2016 net daily production of over 16,000 BOE/d after a prolonged period of production downtime in June 2016 caused by offsetting completions activity at the Carpe Diem field, compounded by the impact of electrical outages
• Lease operating expense, including workovers, of $5.97 per barrel of oil equivalent ("BOE"), a decrease of 3% from the first quarter of 2016
• GAAP loss per diluted common share of $0.61 and Adjusted Income per fully diluted common share, a non-GAAP financial measure⁽ⁱ⁾, of $0.05
• Closed two Midland Basin transactions for a total purchase price of $362.6 million, including the establishment of a new core operating area in Howard County
• Completed first Callon-operated Wolfcamp A well (completed lateral length of 7,363') in northern Howard County which has produced approximately 48,600 BOE (90% oil) in the first 30 days after being placed on production in early July 2016
• Borrowing base increased 28% from $300 million to $385 million following the closing of recent transactions
• Recently added second horizontal rig to be focused in the WildHorse area in Howard County
• Signed purchase and sale agreement for the acquisition of an incremental 4% working interest in the Casselman and Bohannon fields (the "CaBo area")

"It was an important quarter for our organization, demonstrating our ability to manage through periods of commodity price weakness by living within our cash flow while delivering capital efficient production growth. This solid operating and financial position also allowed us to complete two acquisitions that almost doubled our surface acreage in the Midland Basin, expanding our inventory of investments that we expect will deliver solid returns on capital through all phases of commodity cycles." commented Fred Callon, Chairman and Chief Executive Officer. "With a strong balance sheet and low cost operating structure, we have returned our second horizontal rig to service in August 2016 and are planning to add a third horizontal rig in early 2017 with continued signs of rebalancing in the oil markets. A large portion of this increased drilling activity will be focused in Howard County, a rapidly emerging core area which has produced encouraging well results from three delineated zones to date, including our recent Wolfcamp A well." 

Operations Update

At June 30, 2016, Callon had 118 gross (93.0 net) horizontal wells producing from five established zones. Our net daily production for the three months ended June 30, 2016, grew approximately 41% to 13,451 BOE/d (approximately 77% oil) as compared to the same period of 2015. Sequentially, we grew production more than 8% compared to the first quarter of 2016.

For the three months ended June 30, 2016, we drilled 6 gross (3.7 net) horizontal wells, completed 5 gross (3.4 net) horizontal wells, and placed 5 gross (3.4 net) horizontal wells on production. As of June 30, 2016, we had 6 gross (4.2 net) horizontal wells awaiting completion, including 2 gross drilled, uncompleted wells recently acquired as part of our western Reagan County transaction.

Monarch

Production from the Monarch areas was adversely impacted during most of the month of June 2016 by production disruptions at our largest producing field, Carpe Diem. Several wells in the field experienced hydraulic interference from two offsetting completions being performed by other operators offsetting the eastern side of Carpe Diem. The situation was compounded by power outages caused by adverse weather conditions which hindered our efforts to de-water the wells in order to restore normalized production levels. We estimate that this unexpected downtime negatively impacted total net production volumes in the quarter by approximately 425 BOE/d.

During the second quarter, we continued our focus on development of the Lower Spraberry on our Monarch assets in Midland County. For the three months ended June 30^th, we drilled 6 gross (3.7 net) wells, completed 4 gross (2.4 net) wells and placed 5 gross (3.4 net) wells on production. Since placing our first two Lower Spraberry wells on production in November 2014, we now have 28 gross wells producing from two levels of this zone across our asset base, including 25 at Monarch, with drilled lateral lengths ranging from 5,000' to 10,000'.

We continue to deliver strong, consistent well results and capital efficiency from our Monarch development program. As detailed in the table above, eight Lower Spraberry wells, all in the lower bench of the zone (or, "LLS"), achieved 24-hour peak initial production ("IP") rates during the quarter. The LLS wells averaged a 24-hour peak IP of 866 Boe/d (or 162 Boepd per 1,000') and a 30-day average peak IP of 706 Boe/d (or 134 Boepd per 1,000'). 

At our Pecan Acres field, we placed 3 gross (1.4 net) LLS wells on production. While one of the wells continues to build towards its 30-day average peak IP, the other two wells yielded an average 30-day average peak IP of 743 BOE/d (86% oil) or 164 BOE/d per 1,000' from an average drilled lateral length of approximately 5,000'. We also plan to commence completion operations on our first Wolfcamp A well in the Monarch area in August 2016 which is being developed as a stacked lateral with a LLS well. Each of the wells was drilled to a lateral length of approximately 10,000'.

We are currently completing a three-well pad with an average drilled lateral length of approximately 9,750' in our Carpe Diem field with two of the wells targeting the upper section of the Lower Spraberry ("ULS") and the third well targeting the LLS. This pad was drilled on 11 wells-per-section spacing, supported by long-term production and pressure data from our previous well density tests. In addition, we plan to drill an additional two LLS wells at Carpe Diem in the third quarter with planned drilled lateral lengths of 10,000' that were increased from a previous planned lateral length of 5,000' after a recently completed partnership agreement with an offset operator.

We continue to build upon our well density tests of the Lower Spraberry in the Monarch area which have been focused on the Carpe Diem field to date. The next step in our progression of this initiative will be a 13 wells-per-section test in the CaBo area that was spud in July 2016, with two wells landed in the LLS and the third landed in the ULS.

Callon recently signed a purchase agreement for the acquisition of an incremental 4% working interest in the CaBo area, increasing our working interest in the area to approximately 75%. The purchase price for the acquired interest is $13 million with an effective date of August 1, 2016. Completion of the acquisition is subject to customary closing conditions. 

WildHorse

During the second quarter, we began our first operated completion in the recently acquired WildHorse area in Howard County, Texas. The well (Silver City Unit A #1H; 100% WI) was completed in the Wolfcamp A with a lateral length of 7,363'. It is the northernmost Wolfcamp A completion to date on our operated acreage, located in our Sidewinder field in northwest Howard County. After a first oil production date on July 3, 2016, the well has produced approximately 48,600 BOE (90% oil) during the first 30 days of production.

We anticipate initiating our operated drilling program in Howard County during the fourth quarter of 2016 with a dedicated one-rig program. The rig will initially drill two-well pads in the Wolfcamp A at our Fairway acreage in central Howard County, before expanding its scope to include our broader footprint and other prospective zones in 2017, including the Lower Spraberry and Wolfcamp B. We currently expect to place our first two-well pad from this program on production in mid-December 2016. Additionally, we are preparing to further increase our drilling activity in the WildHorse area should commodity prices warrant the addition of a third rig to our operated drilling program.

Ranger

The two wells listed in the table above were completed using a new generation completion design employed by the previous operator of our newly acquired Lonesome Draw field, which included shorter stage lengths and higher proppant volumes. We will continue to evaluate the longer-term performance of wells completed with this enhanced design, but early indications include 30-day average peak IPs trending approximately 50% higher versus older generation completions we used in the Ranger area. We plan to incorporate these enhanced completion techniques in two upcoming completions of drilled, uncompleted wells acquired at Lonesome Draw. These wells will be targeting the Wolfcamp A and Upper Wolfcamp B zones and are planned to commence completion operations in August 2016.

Capital expenditures

For the three months ended June 30, 2016, we accrued $21.3 million in operational capital expenditures, including facilities expenditures of $4.0 million, compared to $35.0 million in the first quarter of 2016. Total capital expenditures, inclusive of capitalized expenses, are detailed below on an accrual and cash basis (in thousands):

Operating and Financial Results

The following table presents summary information for the periods indicated:

Total Revenue. For the quarter ended June 30, 2016, Callon reported total revenues of $45.2 million and total revenues including cash-settled derivatives ("Adjusted Total Revenue," a non-GAAP financial measure⁽ⁱ⁾) of $49.2 million, including the $4.0 million impact of settled derivative contracts. The table above reconciles to the related GAAP measure of the Company's revenue to Adjusted Total Revenue. Average daily production for the quarter was 13,451 BOE/d compared to average daily production of 12,440 BOE/d in the first quarter of 2016. Average realized prices, including and excluding the effects of hedging, are detailed below.

Hedging impacts. For the quarter ended June 30, 2016, Callon recognized the following hedging-related items:

Average realized prices, including and excluding the impact of cash settled derivatives during the second quarter, were as follows:

Lease Operating Expenses, including workover expense ("LOE"). LOE per BOE for the three months ended June 30, 2016 was $5.97 per BOE, compared to LOE of $6.15 per BOE in the first quarter of 2016.

Production Taxes, including ad valorem taxes. Production taxes were $2.01 per BOE in the second quarter of 2016, representing approximately 5.4% of total revenue before the impact of derivative settlements.

Depreciation, Depletion and Amortization ("DD&A"). DD&A for the three months ended June 30, 2016 was $13.31 per BOE compared to $13.89 per BOE in the first quarter of 2016, with the decrease in per unit DD&A being attributable to increases in proved reserves relative to our depreciable asset base and assumed future development costs related to undeveloped proved reserves. The decrease in our depreciable base was primarily related to the write-down of oil and natural gas properties during 2015 and the first half of 2016.

General and Administrative ("G&A"). G&A for the second quarter of 2015 was $6.3 million, or $5.15 per BOE, compared to $5.6 million, or $4.91 per BOE, for the first quarter of 2016. G&A, excluding certain non-cash incentive share-based compensation valuation adjustments, ("Adjusted G&A", a non-GAAP measure⁽ⁱ⁾) was $4.3 million, or $3.55 per BOE, for the second quarter of 2016 compared to $4.6 million, or $4.10 per BOE, for the first quarter of 2016. The cash component of Adjusted G&A was $3.6 million, or $2.92 per BOE, for the second quarter of 2016 compared to $4.0 million, or $3.55 per BOE, for the first quarter of 2016.

For the second quarter of 2016, G&A and Adjusted G&A, which excludes the amortization of equity-settled, share-based incentive awards and corporate depreciation and amortization, are calculated as follows (in thousands):

Write-down of Oil and Natural Gas Properties. As a result of the ceiling test limitation, the Company recognized a write-down of oil and natural gas properties of $61.0 million in the second quarter of 2016.

Income (Loss) Available to Common Shareholders. The Company reported a net loss available to common shareholders of $71.9 million in the second quarter of 2016 and Adjusted Income available to common shareholders of $6.1 million, or $0.05 per diluted share.

Capital Budget Update

Following the closing of its recent Midland Basin acquisitions, the Company has completed a review of its operational plans for the balance of 2016. Callon recently returned a second horizontal rig to service after being idled in the first quarter of 2016. The rig will initially be focused on program development of the Wolfcamp A zone in the WildHorse area after drilling two 10,000' lateral wells targeting the LLS at the Carpe Diem field. In addition, the Company has budgeted for investments in facilities, seismic and land to support the longer-term development plans in each of our focus areas, including the potential addition of a third horizontal rig during the first half of 2017.

A breakdown of the Company's anticipated 2016 operational plan and associated expenditures is presented below:

2016 Guidance Update

Hedge Portfolio Summary

The following table summarizes our open derivative positions as of August 8, 2016:

The following tables reconcile to the related GAAP measure the Company's loss available to common stockholders to Adjusted Income and the Company's net loss to Adjusted EBITDA (in thousands):

Discretionary Cash Flow. Discretionary cash flow, a non-GAAP measure⁽ⁱ⁾, for the second quarter of 2016 was $29.0 million and is reconciled to operating cash flow in the following table (in thousands):