Callon Petroleum Company CPE is well poised to grow on the back of strong Permian presence and production surge. However, rising costs 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 $1 billion, has an expected earnings growth rate of 18% for the next five years.
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 solely focused on the 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. It had entered the basin in 2009 with around 8,800 net acres and has been strengthening its hold 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.
In third-quarter 2019, net production volume averaged 37,837 Boe/d, reflecting a jump from the year-ago period’s 34,913 Boe/d. Moreover, Callon Petroleum has upwardly revised its 2019 production guidance to the range of 39.2-39.6 thousand barrels of oil equivalent per day (Mboe/d) from 38-39.5 Mboe/d. This estimated figure indicates a significant improvement from the year-ago reported figure of 32.9 MBoe/d. With higher production volume, the company will likely generate more profits.
Callon Petroleum’s revised deal to acquire Carrizo Oil & Gas has recently received green signal from investors. The acquisition is expected to boost its footprint in the prolific Permian Basin. Moreover, with the inclusion of oil-rich acres in the prolific Eagle Ford, the company will be able to diversify presence beyond the Permian basin. Also, the deal is expected to generate more than $100 million of incremental free cash flow in 2020.
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 2018, its total operating expenses rose nearly 46% year over year to $328.1 million. Also, for full-year 2019, lease operating expenses per barrel of oil equivalent are expected in the range of $5.75-$6.25, whose midpoint is much higher than the 2018 level of $5.76. Rising expenses will likely hurt the company’s profit margin in the coming quarters.
As of Sep 30, 2019, Callon Petroleum had cash and cash equivalents of only $11.3 million, and a debt load of $1.2 billion. Low cash balance and high debt load are reflective of weakness in the company’s financial flexibility, which can affect its growth projects.
Volatility in crude pricing scenario is hurting Callon Petroleum’s operations, as oil accounts for 78% of the upstream energy player’s total production volume. With dampened global economic growth outlook, oil price is not expected to significantly improve anytime soon. Hence, the company’s profit level is not likely to revamp in the short term.
To Sum Up
Despite significant production growth opportunities, increasing costs 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 2019 earnings per share is 73 cents, which has witnessed eight upward estimate revisions and two in the opposite direction in the past 60 days. Notably, the company missed estimates just once in the trailing four quarters, with a positive earnings surprise of 4.3%.
Callon Petroleum Company Price and EPS Surprise
Callon Petroleum Company price-eps-surprise | Callon Petroleum Company Quote
Stocks to Consider
Some better-ranked stocks in the energy sector include Antero Midstream Corporation AM, Phillips 66 PSX and CNX Resources Corporation CNX, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Antero Midstream’s bottom line for the current quarter is expected to skyrocket 130% year over year.
Phillips 66’s 2019 earnings per share have witnessed nine upward estimate revisions and no downward movement in the past 60 days.
CNX Resources’ 2019 earnings per share have witnessed four upward estimate revisions and no downward movement in the past 60 days.
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