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Here's Why You Should Hold on to Callon Petroleum (CPE) Now

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Callon Petroleum Company CPE is well poised to grow on the back of strong Permian and Eagle Ford presence. However, balance sheet weakness and increasing lease operating expenses are 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 $1.7 billion, has tremendous growth potential. The stock has rallied 43% in the past three months compared with 15.6% rise of the industry it belongs to.

The company beat earnings estimates in all the last four quarters, with an average of 171.5%.

Callon Petroleum Company Price and EPS Surprise

Callon Petroleum Company Price and EPS Surprise
Callon Petroleum Company Price and EPS Surprise

Callon Petroleum Company price-eps-surprise | Callon Petroleum Company Quote

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 throughout the core of the Permian Basin, which is the highest-producing shale play in the United States. Callon Petroleum entered the basin in 2009 and has been strengthening foothold in the region since then.

Through the Carrizo Oil & Gas acquisition, the company diversified presence beyond the Permian basin. The inclusion of oil-rich acres in the Eagle Ford was commendable, which expanded its upstream presence to 200,000 net acres in the two shale plays. 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.

Since commodity prices have recovered significantly from the 2020 levels, the global economy has started to recover from COVID-induced volatility. The momentum is likely to continue as the vaccine rollouts will possibly help the economy to recover strongly this year, thereby aiding fuel demand. The increase in oil price is likely to aid the bottom line since the majority of the company’s production comprises crude oil. Moreover, the upstream firm expects gross-operated completed wells for this year in the band of 90-100, which will support output.

Notably, the decision of management to shed non-core assets while focusing on more profitable ones is a major positive. It monetized $170 million worth of assets in 2020. Moreover, Callon Petroleum's rising operating efficiency is laudable. The company projects total operational capital expenditure for this year at $430 million, signaling a 12% reduction from 2020 levels.

Downsides

However, there are a few factors that are impeding the growth of the stock lately.

The company expects lease operating expenses in the range of $185-$205 million for 2021, the mid-point of which suggests an increase from $194.1 million in 2020. Rising expenses will likely hurt its profit margin in the coming quarters.

The company’s debt-laden balance sheet is concerning. As of Mar 31, 2021, its total cash and cash equivalents amounted to only $24.4 million, while long-term debt totaled $2,937.2 million. Importantly, it had a total debt to capitalization of 79.3%, significantly higher than the industry average of 39.6%. This can affect the company’s financial flexibility.

For 2021, Callon Petroleum reduced its production guidance to the range of 89-91 thousand barrels of oil equivalent per day (MBoe/d) from the previous estimate of 90-92 MBoe/d due to the announced divestment of Delaware assets. Lower production estimates can affect the company’s bottom line.

To Sum Up

Despite significant growth opportunities, balance sheet weakness and lease operating expenses 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 2021 earnings per share is $5.94, which has witnessed three upward estimate revisions and two in the opposite direction in the past 60 days. The figure indicates a rise of 107.7% from the 2020 level.

Stocks to Consider

Some better-ranked players in the energy space include Earthstone Energy, Inc. ESTE, Braskem S.A. BAK and PHX Minerals Inc. PHX, each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earthstone’s sales for 2021 are expected to jump 87.7% year over year.

Braskem’s bottom line for 2021 is expected to rise 231.3% year over year.

PHX Minerals’ bottom line for 2021 is expected to surge 40% year over year.

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