Callon Petroleum (CPE) - Burkenroad Reports - Fall 2018

November 14, 2018
CALLON PETROLEUM COMPANY
CPE/NYSE

Continuing Coverage:
Callon Digs the Permian Basin

Investment Rating: Market Outperform
PRICE: 9.60$ S&P 500: 2,701.58 DJIA: 25,080.50 RUSSELL 2000: 1,502.51

 Callon leads exploration & production companies in operational
efficiency
 Acquisitions in the Delaware Basin hold the promise of strong future
cash flows
 Balance sheet remains strong despite change in capital structure
 Our 12‐month target price is $16.

Valuation
EPS*
P/E
CFPS
P/CFPS
*Adjusted for nonrecurring ite
2017 A 2018 E 2019 E
$0.63 $0.92 $1.51
15.2x 10.5x 6.3x
$1.30 $1.92 $2.62
7.4x 5.0x 3.7x
ems
Market Capitalization Stock Data
Equity Market Cap (MM): $2,184.78 52‐Week Range: $8.54 ‐ $14.65
Enterprise Value (MM): $3,161.18 12‐Month Stock Performance: ‐6.89%
Shares Outstanding (MM): 227.58 Dividend Yield: Nil
Estimated Float (MM): 226.41 Book Value Per Share: $10.05
3‐Mo. Avg. Daily Volume: 4,377,788 Beta: 1.17
Short Ratio 8.97 EV/EBITDA 9.4x
Company Quick View:

Here is a company that digs deep to get its earnings without getting its hands dirty!
Founded in 1950, Callon Petroleum Company as an independent energy company focusing
on the acquisition, exploration, development, and exploitation of unconventional onshore,
oil, and natural gas reserves in the Permian Basin in West Texas. Callon is headquartered in
Natchez, Mississippi with a technical office located in Houston, Texas and a field office in
Midland, Texas. With an aggressive approach to land acquisition in the Permian Basin and
the goal of maximizing operational efficiency, Callon is primed to succeed in the years to
come.
Company Website: www.callon.com
Analysts: Investment Research Manager:
James Geer Kaylyn McElroy
Kyle Keir
Brendan McNally
Robert Meyer
John Norman

Callon Petroleum Company (CPE) November 14, 2018
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Figure 1: Five‐year Stock Price Performance
Source: Yahoo! Finance
INVESTMENT SUMMARY

Our research team assigns Callon Petroleum Company a Market Outperform rating. The
projected target price is $16.00, an increase of 66.67% from the price of $9.60 as of November
14, 2018.

Callon Petroleum Company is an exploration and production company that specializes in
producing oil and natural gas products in the Permian Basin, in West Texas. Callon uses organic
growth (land acquisitions) to increase its reserves and has increased its number of hydraulic
fracturing rigs from four to five to further increase the number of wells it can drill to boost
production. Currently, Callon operates on almost 90,000 net acres of land, with plans to
acquire more in the future.

Callon maintains growth by capitalizing on economies of scale in its acquisitions for profit
optimization. The operating process and location of its newly acquired land allows for the
exploitation of its existing resources, which minimizes marginal costs. Therefore, we believe
the net present value of the new land is undervalued. Callon’s valuation of the land explains its
bullish investment strategy, this year.

The price of oil has been strong in 2018, and it shows no indication of dropping any time soon.
Given the Company’s recent investments, its competitors within the Permian Basin, and the
market outlook, Callon should be able to profit from its recent acquisition and outperform its
peers.

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Table 1: Historical Burkenroad Ratings and Prices

Report Date Stock Price Rating
12 Month
Target Price
11/14/2018 $9.60 Market Outperform $16.00
11/7/2017 $11.24 Market Perform $12.00
11/6/2015 $8.83 Market Perform $10.00
11/17/2010 $5.27 Market Perform $6.06
3/19/2003 $4.25 Buy $4.25
3/15/2002 $6.60 Buy $6.60
3/12/2001 $12.40 Market Perform $12.40
2/28/2000 $13.19 Buy $13.19
4/16/1999 $10.63 Buy $10.63
INVESTMENT THESIS

Callon Petroleum continues to expand in the Permian Basin despite the land grab in the region
effectively coming to an end. The Company is focused on operational efficiency and utilizes
many tactics to increase its margins. Better margins, in turn, have led to more cash on hand for
future investment. Callon has increased its production by 50% over the past two years, and
with its recent acquisition of land in Ward County, it now boasts more net acres than most of
its peers. This increased production, coupled with Callon’s effective debt and equity financing
to limit risk exposure, leads to a positive outlook for the future of the firm.

Callon leads exploration and production companies in operational efficiency

Throughout 2018, Callon has continued to find more ways to increase its operational efficiency
and reduce cash costs. Since the fourth quarter of 2016, Callon has shown a steady decline in
cash costs per barrel, arriving at the current rate of less than 20% of revenues. Callon’s
operating margin is the best of any publicly traded exploration & production company, and
with Callon increasing the scale of its production, the cost efficiency will only continue to
improve.

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Callon owes its operational efficiency to its commitment to superior field tactics. First, Callon
recycles the water it finds in wells and uses it to fracture further wells, instead of paying
another firm to dispose of the water. Second, the mega pad rigs Callon employs to drill its new
wells dig four wells in the amount of time a standard rig drills one well. Third, Callon has
implemented a wide power infrastructure in its oil fields to connect all locations to local power
grids rather than retrieving power from remote stations. These, among other practices, will
allow Callon to stay at the forefront of operational efficiency and use its cash flows for future
investments.

Acquisitions in the Delaware Basin hold the promise of strong future cash flows

Callon exclusively operates in the Permian Basin of West Texas. Over the past ten years, the
Company has made acquisitions to bolster its hold in the region. The Permian Basin has three
sub‐regions: The Midland Basin, The Delaware Basin, and The Marfa Basin. On September 4,
2018, Callon Petroleum Operating Company, a subsidiary, acquired 28,657 net surface acres
adjacent to their existing land in Ward County in the Southern Delaware Basin. Callon plans on
using its new acreage to build upon their recent success at Spur operating area.

Callon continues to acquire land in the Permian Basin at competitive prices, showing their
commitment to this region. They have developed expertise in the Permian and believe this
acquisition will benefit the Company. This land provides Callon with substantial Proved
Developed Producing value, which combined with their production base, contributes to
positive cash flow in the region. Emerging target zones make this a lucrative investment, and
immediately after the acquisition Callon incorporated Drilling and Completion activities with a
combined Spur operating initiative.

Balance sheet remains strong despite change in capital structure

Callon’s acquisition of land in Ward County was valued at $538.6 million. Historically, Callon
has financed their transactions with a majority equity rather than debt. However, in this
transaction, the Company financed the Ward County Land with $400 million of unsecured
notes due in 2026. By funding this acquisition with majority debt, Callon maintains control of
their current ownership stake in the Company. With the huge growth rates Callon has seen in
the past several years, the company maintained their equity, which may be worth much more
in three years than it is now.

The newly acquired land from this acquisition is adjacent to already operating land. Because of
this, Callon is able to use the same discount rate of 10% which undervalues the net present
value and allows for higher profitability from the acquisition.

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VALUATION

Our research team used the present value‐10 (PV‐10) method to calculate a 12‐month target
price of $16.00 for Callon Petroleum. Further, we conducted a stress test to put upper and
lower bounds on the expectations of Callon’s stock price during the 12‐month period. The
stress test changed the forecasted price of oil up and down by one standard deviation and gave
us a range of $11.92 to $19.28. Table 2 shows our findings based on the current oil and gas
price forecast. The target price our team found is a 65.8% increase from the November 16,
2018 adjusted closing price of $9.65.

PV‐10 Method

The PV‐10 is a Securities and Exchange Commission approved valuation method widely used
industry to accurately value companies within the Oil and Gas industry. The method values a
company’s reserves based on production speed and forecasted price, less lease operating
expense, discounted at a 10% rate. A key underlying assumption for the method is the
forecasted price of oil and gas, which is why we conducted a stress test to cover the extremes
of the price forecast. Other key assumptions are the production rates and how expensive it is
to run that production, which can change over the course of a company’s life as well. The five‐
year net asset value (12‐month price estimate) is our target price of $16.00, and the seven‐year
net asset value, equivalent to the 24‐month price estimate, is $24.10.

Table 2: PV‐10 Method
PV of Cash Flows 3 years    $           1,575,641
PV of Cash Flows 5 years    $           3,288,085
PV of Cash Flows 7 Years    $           5,080,833

Equity Valuation 3 years NAV:    $                         7.47
INDUSTRY ANALYSIS

Callon Petroleum is an exploration and production company (E&P), founded in 1950, which
operates in the Permian Basin located in West Texas. It received its name because it has one of
the greatest deposits of hydrocarbon from the Permian geologic period. The Permian Basin is
comprised of several sub‐regions, including the Midland Basin, Delaware Basin, and the Marfa
Basin. It spans an area of 250 miles wide and 300 miles long.

The oil and gas industry is made up of three different sectors: upstream, midstream, and
downstream. The upstream sector consists of finding the regions to drill, drilling exploratory
wells, and controlling wells that bring gas to the surface. The midstream sector consists of
transporting and storing crude oil.

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The downstream segment consists of refining and processing the crude oil and purifying it into
natural gas. Callon is an upstream company and focuses on horizontal drilling and hydraulic
fracking in West Texas.

Industry Trends

Since the oil price shock in 2015, the Oil and Gas industry has rebounded through conservative
supply policy from the Organization of Petroleum Exporting Countries (OPEC), as well as cost‐
saving improvements throughout the industry. Save the large oil corporations, most E&P
companies retreated from offshore rigs in the Gulf of Mexico to land‐based operations in Texas
and Louisiana, as well as Montana and Wyoming. Hydraulic fracturing and horizontal drilling
have become extremely prevalent in onshore E&P operations, which has increased efficiency
as well as proven reserves for these companies. For example, the Wolfcamp Shale, previously
inaccessible to E&P companies, can now be accessed through “fracking,” and may have as
many as 20 billion barrels of oil equivalent within its rocks. Figure 2 shows the Wolfcamp Shale,
as well as all the other major plays in the U.S., previously inaccessible without hydraulic
fracturing and horizontal drilling.
Figure 2: Map of Major Plays in the United States
Source: The Oil and Gas Year

The U.S. produces over 11 million barrels of crude oil per day, a massive leap from just over 10
million barrels per day in November of 2017. The explosion of viable shale plays has allowed
many specialized players to reap the benefits of increased oil reserves, and there are currently
no signs of this increase in production slowing down. Unfortunately, these new shale plays do
not have the infrastructure to meet the increased supply of oil. As such, E&P companies may
have to invest in midstream operations, or work with midstream providers to increase their
capacities.

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With President Trump calling for the United States’ allies to stop importing oil from Iran, this
increased production will likely find customers in the European Union in the coming months,
as over one million barrels per day will be off the market. Other supply shortages in Libya and
the Canadian tar sands may also drive increased overseas demand in the future.

West Texas Intermediate crude has hovered between $65 and $71 for the majority of the
year, and with the current world landscape, it will likely stay around those levels or even rise,
given overseas demand.

Bargaining Power of Suppliers
Because all E&P companies in the U.S. produce the same products (WTI crude, natural gas,
and natural gas liquids), the companies cannot set prices for products. Instead, their products
are priced based on current commodity prices. The New York Mercantile Exchange sets the
price of WTI crude and natural gas for futures contracts delivering to Cushing Terminal in
Oklahoma and Henry Hub in Louisiana, respectively. Because of the volatility of both oil and
natural gas prices, it is hard for an E&P company to forecast its earnings in the long term.
Further, project valuations and cash flows are often miscalculated because of the fluctuation
of commodity prices.

Contrary to these negative outlooks, however, commodity prices have risen substantially in
the past 12 months, and are indicating a stable, lucrative price for the time being. Figure 3
shows the daily pricing for August and early September of 2018. If prices stay around the
current levels, E&P companies will continue to enjoy higher profit margins and valuable
project valuations.

Figure 3: Daily Oil Price for August and Early September 2018

Source: oilprice.com
$‐
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
$55.00
$60.00
$65.00
$70.00
$75.00

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Bargaining Power of Buyers

Because of the existing infrastructure of the world today, companies in the oil and gas industry
relish in an inelastic demand market. However, this market dynamic does not benefit all
players in the same way. Integrated oil giants move their products from upstream, to
midstream, to downstream within their own operations and deliver refined products to
customers at almost any price, within reason.

E&P companies do not enjoy this luxury, however, and must sell their products to midstream
providers to move the fossil fuels to market. Because of this, E&P companies’ buyers often set
the price for unrefined products, making E&P companies price takers. The discount can be
determined by how long the fuels must be pumped through the midstream pipelines, and the
gravity and sulfur content present before refining. With oil and gas prices hovering around $66,
the discount does not have an adverse effect on most E&P companies, but with the market
being so volatile, those companies should plan accordingly.

Threat of Entry

Players in the upstream business do not have to worry about a threat of entry because of the
high cost of capital required to start a project. New entrants must have the capital to fund
drilling equipment and land as well as extensive industry expertise to successfully find oil
reserves.

Additionally, with competition throughout the Permian Basin, a prospective E&P company
would have trouble finding reserves at a sustainable price and remaining competitive. Because
of these two factors, there is a very low threat of entry unless someone has a large amount of
capital paired with the knowledge needed to succeed. The cost of one acre of land in the
Permian Basin goes for $90,000. This is almost double the cost of one acre elsewhere in Texas,
which can be a huge deterrent for a new entry in the business.

Availability of Substitutes

There are currently no widespread substitutes for oil and gas products. Although solar and
wind power are increasing in prevalence west of the Rocky Mountains, and some battery and
hydrogen‐powered vehicles are in early stages of development, the current infrastructure will
keep oil and gas at the top of the energy sector. Furthermore, as all E&P companies produce
the same products, all players are on equal footing, with little to no outside differentiation.

Competitive Environment

Usually, little competition exists between upstream companies for sales because of a high
demand for oil, especially in a flowing region like the Permian Basin. This lack of competition
for sales is made up for by fierce competition for land in the Permian Basin, as the region has a
history of being the largest oil‐producing region in the U.S. A majority of the land in the basin is
controlled by a few major players, that own huge acreages of land. However, hundreds of
smaller companies operate in the region, which increases competition in the Permian Basin.

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ABOUT CALLON
Founded in 1950, Callon Petroleum Company (CPE/NYSE) is an independent energy company
focusing on the acquisition, exploration, development, and exploitation of unconventional
onshore, oil, and natural gas reserves in the Permian Basin in West Texas. Callon has been
headquartered in Natchez, Mississippi since its formation. Additionally, its technical office and
field office are located in Houston, Texas and Midland, Texas, respectively. As seen in Figure 4,
Callon operates four rigs across 86,000 net acres in the Midland and Delaware Basins.
Callon entered the Permian Basin in 2009 with the acquisition of approximately 8,800 net
acres, moving away from offshore drilling in the Gulf of Mexico. Through the focused execution
of its acquisition and leasing strategy, Callon has increased its footprint to 86,000 net acres.

Figure 4: Callon Areas of Operation
Source: Callon Website
Company History

John S. Callon founded Callon Oil & Gas Company in 1950 and found oil in Mississippi on July
14, 1952. In 1954, John’s brother, Sim C. Callon, joined the Company. The brothers renamed
Callon Oil & Gas Company as Callon Petroleum Company in 1962. After a merger with Pacific
Oil and Gas Development corporation in 1974, Callon Petroleum became public. In the same
year, Callon started a joint venture with Hughes Aircraft to develop geothermal steam leases in
California.

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Fred Callon, the son of Sim Callon, became President and Chief Executive Officer (CEO) of
Callon in 1984, and took the Company private in 1988. In 1994 Callon became public again
following a merger with partners CCP and CN Resources. In 1998, Callon stock moved from the
NASDAQ to the New York Stock Exchange.
Callon ended 2000 with their highest revenues, net income, and oil and gas reserves in history.
Revenues were up almost 50% to $58.1 million, while net income nearly quadrupled from the
previous year to $12.5 million. The Company ended 2000 with estimated proven reserves of
334 billion cubic feet of natural gas equivalent (Bcfe), up 28% from 1999.

In 2009, Callon shifted its production strategy, electing to pursue onshore exploration in the
Permian Basin rather than drilling offshore in the Gulf of Mexico. Callon was able to buy 8,800
acres for $16 million, which is much cheaper than the land would be worth today. The
Company currently focuses 100% of its operations in the Permian Basin of West Texas, with
over 1,500 horizontal drilling locations in the region.

Products

In 2017, Callon Petroleum produced 6,557 thousand barrels of oil (MBbls) and 10,896 million
cubic feet of natural gas (Mmcf). Callon includes natural gas liquids (NGLs) in their accounting
for natural gas production, reflecting the premium paid for its natural gas. Through acquisitions
and production increases, Callon has enjoyed a steady increase in production in the Permian
and Delaware Basins since 2014.

Callon produces the U.S. benchmark oil, West Texas Intermediate (WTI), in both the Permian
and Delaware Basins. WTI is characterized as being a light, sweet crude oil. The American
Petroleum Institute (API) weighs WTI at an API gravity of 39.6, with a sulfur content of 0.24%.
Any API gravity above ten and sulfur content below 2% is considered a quality crude. These
two characteristics make WTI easily produced and refined.

Strategy

Callon Petroleum continues to extend its operations in the Permian and Delaware Basins
through acquisitions while driving down operating costs via larger drilling pads and
investments in pre‐production infrastructure. Because of this, Callon is a fierce competitor in
the West Texas area. Further, Callon is investing in water and chemical recycling programs to
power its horizontal hydraulic rigs. The programs will both improve efficiency in the future and
promote Callon as an environmentally conscious company. Lastly, Callon has strong liquidity
and funds its new ventures with limited leverage; it operates almost entirely within its
operational cash flow. Coupled with Callon’s strong hedging position, the firm’s strong strategy
forecasts growth and production in the years to come.

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Competitive Advantage

Located in the Permian Basin, Callon Petroleum has hundreds of direct competitors in all facets
of their business. Competitors range from integrated multinational oil and gas companies to
smaller, privately held companies. A few small companies control the bulk of the acreage, with
than less than ten producers providing 50% of the output. These multinational, integrated
companies currently provide the largest threat to Callon, as they have a vast amount of
resources at their disposal.

However, Callon is different from these multinational corporations, as it exclusively operates in
the Permian Basin. This competitive advantage better allows the Company to leverage their
region‐specific knowledge and expertise. Because the Permian Basin is one of the most
profitable regions in America, many competitors will flock to the area, as reserves are very
profitable. Callon must continually adapt and strengthen their existing relationships to keep
this competitive advantage.

Latest Developments

On September 4, 2018, Callon’s subsidiary, Callon Petroleum Operating Company, acquired
28,000 net surface acres adjacent to Callon’s Spur operating area in Ward County from Cimarex
Energy Co. for $538.6 million. For this acquisition, in May, the Company announced financing
of $400 million of unsecured notes due in 2026. The newly acquired land acts as a part of a
combined footprint with the Spur operating area where the Company will benefit from
extended lateral lengths and shared infrastructure.

Because of this development, Callon updated its midpoint of net operated horizontal wells
placed on production by 9%, realized drilling and completion efficiencies, and sustained an
increase in non‐operated activities on both legacy and acquired properties. The Company also
reduced the full year 2018 lease operating expenses (LOE) guidance by 4% as incremental
benefits from strategic infrastructure investments are realized.

PEER ANALYSIS

Callon Petroleum is an upstream oil and gas producer operating and exploring in the Delaware
and Midland Basins within the Permian Basin in Texas. Our research team studied Callon’s
peers and competitors to further learn Callon’s position in the exploration and production
(E&P) industry. We chose peers with varying levels of operation within the Permian Basin. Also,
we selected peers with similar small to mid‐size market capitalization. Table 3 displays financial
ratios and growth metrics for Callon and its peers and competitors.

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Table 3: Peer Analysis Data
Company Callon Carrizo Energen Halcon
Diamondb
ack
Apache
EP
Energy
Corp
WPX
Energy
Ticker
Symbol
CPE CRZO EGN HK FANG APA EPE WPX
Market Cap
($MM)
2670 2250 7750 774 1182 17300 468 7510
P/E 18.23 12.66 32.48 ‐‐ 17.57 39.94 ‐‐ ‐‐
Net Sales
($MM)
129 239 349 55 501 1900 319 430
Total Debt 1080 1030 530 625 1300 8700 8010 2180
ROE 7.20 11.20 12.60 33.10 10.90 11.80 (40.3) (10.2)
EPS (TTM) 0.64 1.94 2.35 (0.10) 6.82 1.13 (0.15) ‐‐
ROA 4.80 2.30 8.40 15.20 7.20 3.90 (3.7) (4.8)
Operating
Margin
37.1 32.5 14.9 185.3 50.5 23.5 12.4 3.2
Net Debt/
EBITDA
4.30 2.03 0.84 0.74 1.39 2.35 12.80 3.04
Sales 3yr Avg
Growth
37.76 4.55 (0.66) (28.72) 45.19 (17.02) (28.3) 4.36
Estimated
Comp. Sales
Growth
52.43 43.84 82.25 (64.48) 98.19 14.84 ‐‐ 42.23
EV 3272.6 3999.8 8281.4 1294.9 14084.5 26042.8 4681.1 9826.4
EV/EBITDA 9.8 6.6 10.2 2.4 11.1 6.6 8.4 18.2
Proved
Reserves
(MMBoe)
137.0 261.7 444.0 51.1 335.4 1175.0 392.1 436.2
Production
(MBOE/Day)
22.9k 53.8k 76.1k 27.4k 79.2k 457.3k 82.3k 109.8k
Source: Bloomberg September 18, 2018

Callon has one of the highest enterprise value/earnings before interest, taxes, depreciation and
amortization (EBITDA) ratios among its peers, signaling stronger operating performance than
its competitors. However, Callon has significantly fewer net sales and production numbers than
most of its peers. In terms of market cap, Callon’s direct competitor is Carrizo Oil & Gas. Both
operate within the Permian Basin, yet Carrizo has additional operations in the Eagle Ford Shale
in South Texas. In addition, Callon has a much higher price to earnings (P/E) ratio and return on
assets (ROA), while Carrizo has a higher return on equity (ROE) and enterprise value (EV).
Callon and the majority of its peers have low debt to EBITDA ratios, indicating liquidity within
the companies. Callon’s estimated sales growth is superior compared to its peers, indicating
favorable market growth for the Company. With commodities price on the rise, the future of
Callon is promising.

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Carrizo Oil & Gas (CRZO/Nasdaq)
Carrizo Oil & Gas is a Houston‐based energy company focused on the exploration,
development, and production of oil and gas. Carrizo’s current operations are focused primarily
on proven, producing oil and gas shales in the Eagle Ford Shale in South Texas and the
Delaware Basin in West Texas. Recently, Carrizo has moved into the Wolfcamp Shale in the
Delaware Basin, where it holds 43,600 net acres. Carrizo takes pride in being an industry leader
in horizontal development drilling, specifically in the Eagle Ford Shale, where it has a 100%
drilling success rate and strong production growth.

Energen Corporation (EGN/NYSE)
Energen Corporation was founded in 1929 and is headquartered in Birmingham, Alabama.
Currently, Energen engages in the exploration, development, and production of oil, natural gas
liquids (NGLs), and natural gas. Energen operates within the Midland Basin, the Delaware
Basin, and the Central Basin Platform areas of the Permian Basin in West Texas and New
Mexico. In 2017, Energen saw a sharp increase in production in the Delaware Basin, moderate
gains in the Midland Basin, and a slight lag in production in the Central Basin.

Halcón Resources Corporation (HK/NYSE)
Halcón Resources is an independent energy company that engages in the acquisition,
production, exploration, and development of liquid‐rich assets in the U.S.. Halcón focuses its
operations solely within the Delaware Basin, with 21,500 net acres in its Monument Draw area,
27,000 net acres in its Hackberry Draw area, and 11,000 net acres in its West Quito Draw area.

Diamondback Energy (FANG/Nasdaq)
Diamondback Energy is an oil and gas company headquartered in Midland, Texas that operates
in the Permian Basin in West Texas. Diamondback began operations in 2007 when it acquired
4,200 net acres in the Permian Basin. It has since expanded its total acreage holdings to
191,000 net acres. Currently, Diamondback is focused on the horizontal development of the
“Wolfberry” formation in the Midland Basin.

Apache Corporation (APA.N/NYSE)
Founded in 1954 and based in Houston, Texas, Apache Corporation is an independent energy
company operating both domestically and internationally. Specifically, the Company operates
in the U.S., Egypt, and the United Kingdom North Sea. Currently, Apache holds 392,000 net
acres in the Delaware Basin. Additionally, Apache operates offshore assets positioned in the
Gulf of Mexico.

EP Energy Corporation (EPE/NYSE)
Founded in 2013, EP Energy is an independent exploration and production company
headquartered in Houston, Texas. EP Energy is positioned in the Permian Basin of West Texas,
the Eagle Ford Shale in South Texas, and Altamont in Northeastern Utah. Currently, the
Company is focused on the Wolfcamp Shale within the Permian Basin.

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WPX Energy (WPX/NYSE)
Founded in 1983, WPX Energy is an oil and natural gas exploration and production company. In
2015, WPX expanded its operations into the Permian Basin of West Texas with its acquisition of
RKI Exploration & Production LLC for $2.75 billion. The Company also operates in the Williston
Basin of North Dakota, where it holds 85,000 net acres.
MANAGEMENT AND PERFORMANCE BACKGROUND

Callon Petroleum’s management team has extensive experience in the Oil and Gas industry
within the Permian Basin. The managing members have employed new drilling infrastructure,
continually lowering operating costs. Additionally, investments in Callon’s recycling programs
to power its rigs will improve efficiency and promote Callon as an environmentally conscious
company.
Board of Directors

Callon’s Board of Directors consists of eight members with varied experiences across the oil
and gas industry. The Board of Directors provides guidance to its management teams and sets
standards for Callon.

L. Richard Flury, the Chairman of the Board, is the former Chief Executive of Gas, Power, and
Renewables for British Petroleum. Matthew R. Bob is President of Eagle Oil and Gas Co. and
the founder of MB Exploration. Major General (Ret.) Barbara Faulkenberry retired from the
U.S. Air Force in 2014 as Major General (2‐stars) after a 32‐year career and. Michael L. Finch is
the former Chief Financial Officer (CFO) of Stone Energy Corporation. Joseph C. Gatto, Jr. is the
Chief Executive Officer (CEO) of Callon Petroleum and was previously the CFO and Treasurer of
the Company. Larry D. McVay is the former Chief Operating Officer (COO) of TNK‐BP Holding,
one of the largest oil producing companies in Russia. Anthony J. Nocchiero is the former Senior
Vice President and CFO for CF Industries, Inc. James M. Trimble is the Principal/Owner of the
private company Tanda Resources LLC.

Return on Invested Capital

A company’s rate of return on invested capital (ROIC) is a measure of its proficiency in
generating profit from its investments.  Therefore, ROIC is the percentage of income gained or
lost, net of dividends paid, compared to the amount of invested capital.  When comparing
peers, ROIC also acts as an indicator of a company’s risk tolerance with its investments.  If a
company has low ROIC volatility over time, it is more fiscally conservative than its competitors.
Table 4 shows that, relative to its peers, Callon Petroleum Company (CPE) has been
conservative with its investments whereas Halcón has employed a more aggressive investment
strategy.  When these seven peers incur large gains or large losses on their investments, CPE’s
ROIC has remained stable.

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Table 4: Peer Group ROIC
Company Callon Carrizo Energen Halcon
Diamond
back
Apache
EP
Energy
Corp
WPX
Energy
Ticker Symbol CPE CRZO EGN HK FANG APA EPE WPX
Market Cap
($MM)
2,670 2,250 7,750 774 1,182 1,730 468 7,510
2018 (Q2) 6.71 16.53 11.02 24.04 10.66 7.82 0.28 (1.22)
2017 5.78 13.15 7.69 52.16 9.62 9.99 0.64 1.89
2016 (3.69) (33.87) (3.43) (35.61) (2.63) (6.00) 7.91 (7.49)
2015 (33.02) (48.49) (14.63) (51.34) (16.30) (72.20) (49.00) (0.81)
2014 4.20 5.70 ‐‐ 1.65 6.67 (11.95) 11.61 4.92
Source: Bloomberg
Joseph C. Gatto, Jr.
President, Chief Executive Officer and Director, (47)
Joseph C. Gatto, Jr. was promoted to CEO by the board of directors in May 2017, following the
death of Fred Callon. He had previously served as President and Chief Financial Officer. Before
joining Callon, Mr. Gatto was a managing director for Barclays and Merrill Lynch, where he was
involved in all phases of mergers & acquisitions (M&A) and capital raising transactions. Mr.
Gatto received his BS from Cornell University and his M.B.A. from the Wharton School of
Pennsylvania.

James P. Ulm, II
Senior Vice President and Chief Financial Officer, (54)
James Ulm, II joined Callon in December 2017 as the Senior Vice President and CFO. He has
been involved with various energy companies for more than 30 years, responsible for finance,
accounting, strategic planning, M&A, business development and risk management. Mr. Ulm
received both his B.S. in Accounting and M.B.A. from the University of Texas.

Gary A. Newberry
Senior Vice President and Chief Operating Officer, (63)
Gary Newberry has been with the Company since April 2010, serving all of his time as Senior
Vice President and Chief Operating Officer. Before Callon, he held management positions for
production and drilling operations in the Rockies, Alaska, and the Permian Basin. Mr. Newberry
received his B.S. in Petroleum Engineering from Marietta College.

Correne S. Loeffler
Vice President, Finance and Treasurer, (41)
Correne Loeffler is the Vice President, Finance and Treasurer for the Company. Prior to Callon,
she served as an Executive Director with JPMorgan, where she spent ten years in the Corporate
Client Banking group. While at JPMorgan, she was Callon’s relationship manager starting in
2013. Ms. Loeffler received her M.B.A. from the University of Texas and her B.A. from Indiana
University.

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Jerry A. Weant
Vice President, Land, (59)
Jerry Weant has been the Vice President of Land for Callon since September 2013. Mr. Weant
held the position of Sr. Staff Landman at Pioneer Natural Resources USA, Inc. before Callon,
and has also held the position of President of Trilogy Operating, Inc. Mr. Weant received a
B.B.A./P.L.M. degree from the University of Texas in Austin in 1980 and has been in the oil and
gas business ever since.

Mitzi P. Conn
Vice President and Chief Accounting Officer, (49)
Mitzi Cohn has been with the Company since June 1993 and has risen to the Vice President and
Chief Accounting Officer. She received her B.S. degree in accounting from Southeastern
Louisiana University and is a member of the American Institute of Certified Public Accountants
and the Mississippi Society of Certified Public Accountants.

Michol L. Ecklund
Vice President, General Counsel and Corporate Secretary, (43)
Michol Ecklund joined the Company in November 2017 as the Vice President, General Counsel
and Corporate Secretary. Before Callon, she was Deputy General Counsel for Operations and
Commercial Law at Marathon Oil Company. Ms. Ecklund received a B.A. degree from Rice
University and a J.D. from Harvard Law School.

Michael J. O’Connor
Vice President, Permian Operations, (61)
Michael O’Connor joined Callon as its Vice President of Permian Operations in April 2016. Prior
to Callon he served for eight years as Engineering Advisor at Devon Energy and 30 years at
ConocoPhillips. Mr. O’Connor received a B.S. in Petroleum Engineering from the University of
Oklahoma and is an active member in the Society of Petroleum Engineers.
SHAREHOLDER ANALYSIS

Currently, Callon Petroleum has 227,567,936 shares outstanding. Of those shares
outstanding, 99% are floating, and 590 institutional investors hold 99% of the total shares
outstanding. During the last quarter: 202 active stakeholders increased their position, 125
active stakeholders decreased their position, and 40 active stakeholders held their position.
Despite being the smallest group of active stakeholders, those that simply held their position
owned the largest number of shares by a wide margin. The investors’ willingness to hold their
position over the long‐term suggests a shared belief that Callon will perform well in the future.

Table 5 displays the different styles of investors, the number of investors, and the number of
shares held by investors employing that style. Index investors hold the largest number of
shares of Callon, which indicates that many investors believe Callon to have strong credit and
consider the Company a safe investment. The next two styles of investors, core growth and
core value, each hold approximately 25% of Callon’s outstanding shares. This suggests that
investors see Callon as an investing opportunity, regardless of their investing style.

17
Table 5: Callon Investor Style Breakdown
Investment Style # of Investors % Outstanding Shares Held
Index 39 31.58% 71,876,104
Core Growth 95 25.23% 57,422,903
Core Value 69 23.88% 54,339,919
Hedge Fund 108 14.16% 32,233,178
GARP 68 12.71% 28,934,809
Growth 28 5.24% 11,918,828
Income Value 11 4.71% 10,729,569
Source: Thomson One September 21, 2018

Currently, Callon insider investors own 0.53% of Callon’s total shares outstanding. The last
insider transaction was performed by Callon’s Vice President and Chief Accounting Officer,
Mitzi P. Conn, who sold 15,000 shares on September 18, 2018. Despite the sold shares, Conn
still directly holds 42,062 shares of Callon. Table 6 portrays holdings information about
Callon’s top insider investors, including the individuals’ relationship to Callon, the number of
shares held, and the most recent change in shares held.

Table 6: Top Insider Holders
Holder Name Relationship to Callon
Direct
Holdings
Recent
Change
% Outstanding
Fred L. Callon Former Chairman & CEO 467,455 29,735   0.21%
Gary Newberry Senior VP & COO 260,852 (9,778) 0.11%
Joseph C. Gatto Jr. President, Director & CEO 188,742 (15,760) 0.08%
Larry D. McVay Independent Director 147,432 4,990   0.06%
Anthony J. Nocchiero Independent Director 134,296 4,990   0.06%
Source: Nasdaq.com ‐ Filings as of June 30, 2018

Table 7 exhibits Callon’s top‐ten institutional holders, who own 52.10% of Callon’s total
market share. Additionally, Table 6 displays the investors’ number of shares held, the
percentage of total shares outstanding, recent changes in shares held, and the investment
style of each institutional investor. Currently, Callon’s largest investor is BlackRock
Institutional Trust Company, which holds 9.96% of Callon’s total shares outstanding, and
recently bought 2,930,350 additional shares. Of the top‐ten institutional holders, nine have
recently increased their position in Callon. This faith in Callon indicates that the Company is
positioned well for the future.

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Table 7: Top‐ten Institutional Holders
Investor Name
%
Outstanding
Shales
Held
Recent
Change
Recent
Change
(%)
Investment
Style
BlackRock
Institutional Trust
Company, N.A.
9.96 22,661,930 2,930,350 14.85 Index
The Vanguard Group,
Inc.
8.69 19,780,445 2,376,599 13.66 Index
Dimensional Fund
Advisors, L.P.
7.59 17,261,443 2,256,780 15.04 Core Growth
Wellington
Management
Company, LLP
6.38 14,512,608 (3,824,161) (20.86) Core Value
State Street Global
Advisors (US)
5.49 12,500,986 2,450,122 24.38 Index
Goldman Sachs Asset
Management (US)
3.45 7,862,036 1,170,589 17.49 Core Growth
Luminus
Management, LLC
2.91 6,620,618 2,618,965 65.45 Hedge Fund
Silvercrest Asset
Management Group
LLC
2.68 6,106,366 214,636 3.64 Core Value
Channing Capital
Management, LLC
2.51 5,709,338 2,262,652 65.65 GARP
Glenmede Investment
Management LP
2.44 5,543,836 1,949,736 54.25 Hedge Fund
Source: Thomson One September 21, 2018
RISK ANALYSIS AND INVESTMENT CAVEATS

Companies that operate in the Oil and Gas industry face a multitude of risks, ranging from
commodity prices to government regulation. Callon Petroleum is no different and has to
account for all of these risks if it is to continue to be a sustainable competitor in its market. The
following sections analyze three segments of Callon’s most relevant risks: operational,
financial, and regulatory.

Operational Risks

Oil and Gas Price Risk
Oil and gas prices are extremely volatile, exposing any player in the industry to incredible
amounts of risk in their operations and forecasting future projects. Because exploration and
production companies have no way to differentiate their products, revenues are entirely
dependent on the current commodity prices. Luckily, prices have risen and stabilized at a
highly profitable level for efficiently operated E&P companies, such as Callon.

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Figure 5 shows the gradual increase in oil prices, as well as the short‐term energy outlook of
the future price of oil, according to the U.S. Energy Information Administration. However, E&P
companies have no control over movements of commodity prices and predicting the future
prices of oil and gas is an impossible task.

Figure 5: WTI Crude Oil Price and NYMEX Confidence Intervals (Dollars per Barrel)

Source EIA.gov

Additionally, the gas side of Callon’s revenues are cyclical around the seasons, with prices
increasing in the colder months and shrinking during the spring and summer. Although the vast
majority of Callon’s revenues come from oil, the cyclical nature of the other part of the
business adds further complications to forecasting revenues if prices were to abnormally
increase or decrease.

Reserve Estimation Risk
For the past three years, Callon has used organic growth, as well as a few recent acquisitions,
to widely expand the amount of proven reserves on its books. The future cash flows from these
proven reserves amounts to well over four billion dollars in revenue, let alone the probable
and possible reserves in its listings.

Callon’s Chief Operating Officer, Gary Newberry, is in charge of reporting Callon’s reserves
during every financial period. To do this accurately, and legally, Callon has outsourced its
reserves estimation process to a petroleum and geological firm, DeGolyer and MacNaughton.
DeGolyer and MacNaughton is licensed firm in valuing reserves, future profits, and property
costs with a team with over 33 years of experience in the industry. The reserves reported by
DeGolyer and MacNaughton are used in Callon’s SEC filings, shown in Table 8. Callon also has
an internal committee that acts as a check on the outsourced reserves report and makes sure
that the report is as accurate as possible.

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Table 8: Callon Oil and Natural Gas Reserves
2015 2016 2017
Proved Developed
Oil (MBbls) 22,257 32,920 51,920
Natural gas (MMcf) 38,157 61,871 104,389
MBOE 28,617 43,232 69,318
Proved undeveloped
Oil (MBbls) 21,091 38,225 55,152
Natural gas (MMcf) 27,380 60,740 75,021
MBOE 25,654 48,348 67,656
Total proved
Oil (MBbls) 43,348 71,145 107,072
Natural gas (MMcf) 65,537 122,611 179,410
MBOE 54,271 91,580 136,974
Source: Callon Website

As precise as the reserve estimation process may be, there is no real way to know how much
volume is in the reserves without extracting the oil and gas. Callon assumes that the
estimations are correct when forecasting future production, but actual production numbers
will not be the same as the forecasted numbers. Callon may be slightly over or under its
targeted production, or off by hundreds of thousands of barrels. Because of these
discrepancies, Callon must be constantly aware of the possible effects inaccurate projections
will have on its production and future revenues.

Geographic Risk
Callon strictly operates in the Permian Basin. Although this consolidates operations and
promotes cost efficiency, Callon is entirely dependent on one basin’s reserves. As discussed
above, if the Permian Basin’s reserves are not as vast as projected, Callon’s revenues will be
severely impacted. The Permian Basin also experiences extreme weather from time to time,
including tornadoes and tropical storms. Thus, operating in one basin proves very risky, and
Callon may consider making plays into other nearby basins to hedge this risk.

Environmental Risk
Callon’s main environmental risk is weather. West Texas is exposed to dry lightning, which can
adversely affect their drilling process. Additionally, tornados are prevalent in the Permian
Basin. These tornados could uproot a well, so a company like Callon must take preventative
measures to solidify their structures. Lastly, the area can easily flood due to intense
thunderstorms, which can negatively affect their business.

21
Drilling Practices Risk
Callon has done well to lower its costs, sticking to hydraulic fracking and horizontal drilling.
These methods have been incredibly efficient and given Callon success in the industry.
However, as technology improves, more cost‐effective methods may arise. If Callon does not
switch to new technology, it will miss out on potential profits. However, if the Company does
switch to this new technology, it will have to pay a high up‐front cost for new equipment,
which will negatively affect Callon’s short‐term financial metrics.

Financial Risks

Capital Structure Risk
As of the second quarter of 2018, Callon had a high debt to earnings before income taxes
depreciation and amortization ratio of 4.30 relative to its peers; however, none of its debt
matures before 2023.  In May, the Company signed on $400 million in senior unsecured notes
due 2026 to cover the cost of acquiring 28,000 net acres in the Spur operating area of Ward
County.  Figure 6 details the Company’s debt maturity.

Figure 6: Callon Debt Maturity Summary
Source: Third Quarter Earnings Presentation

As Figure 7 shows, Callon’s capital expenditure is becoming increasingly focused on drilling
and completion (D&C) spending.  While the increased leverage allows for growth, it also
increases the Company’s default risk.  Callon has historically held a low level of debt,
therefore, the recent increase to $1.08 billion will test the Company’s ability to effectively
manage growth.

22
Figure 7: Capital Spending Increasingly Focused on D&C Capital


Credit Risk
Given the capital‐intensive nature of the E&P industry, Callon must continue investing in
various acquisitions and new equipment within the Permian Basin. Although Callon’s
operational efficiencies are improving, leading to higher cash margin growth, Callon needs to
secure other funding from creditors to fulfill these investments. However, the creditors have
total control, so any doubts about Callon or the E&P industry could damage Callon’s ability to
fund its business.

Exposure Risk
Callon is currently employing an aggressive growth investment strategy, which it has matched
by increasing its hedging position of West Texas Intermediate protection to about 70% and
Midland‐Cushing basis differential protection to about 50% in 2H18.  This increase in hedging
protects the Company against decreases in oil prices, however, upside pricing in this sector
would render larger losses in its derivative investments.  Thus, while Callon’s derivative
position is currently high, it plans on decreasing its position in concordance with its long‐term
growth trajectory. Figures 8 and 9 detail the percentage of hedging by instrument over time as
well as the crude oil hedge position by quarter.

23
Figure 8: WTI Instrument Breakout


Figure 9: Crude Oil Hedge Position by Quarter


Regulatory Risks

Environmental Regulation
The main issue Callon faces regarding its environmental regulation is complying with federal,
state and local governmental agencies, such as the Environmental Protection Agency (EPA).
These agencies have required companies like Callon to acquire a permit prior to drilling,
restrict the types, quantities, and concentrations of substances that can be released into the
environment, and limit drilling activities on certain lands. The EPA can impose substantial
sanctions on companies, such as administrative, civil and criminal fines, as well as injunctive
relief. The EPA has identified compliance within the energy extraction industry as one of its
main enforcement initiatives for fiscal years 2017‐2019, hinting that regulations may increase.

24
Another issue that Callon faces is the number of people in this country that are against
fracking, which is one of the main extraction processes the Company uses. Callon must
continue to monitor public sentiment regarding fracking in the future, as an increase in public
support for anti‐fracking causes could adversely affect public relations.
FINANCIAL PERFORMANCE AND PROJECTIONS

Over the past several years, Callon Petroleum positioned the Company for increased
profitability. Having a break‐even price of approximately $25 a barrel and a cost of finding of
oil at $10‐12 a barrel, Callon has been able to withstand low oil prices in the past and will
continue to do so going forward.

In determining our target price, we used the present value‐10 (PV‐10) method, which requires
a variety of assumptions to complete. These assumptions could vastly alter the outcome of
our target price. Production and the cost of oil are the two most important variables in our
model, so a slight change in the price of oil and its trending direction at West Texas
Intermediate would drastically change Callon’s future profitability. We received our oil price
projections through 2027 from the Burkenroad Reports Energy Forecast and used those
forecasts to value Callon’s reserves with the PV‐10 method.

Another critical assumption we used was historical data and future guidance from Callon’s
published reports. Historical data trends drove our projections in forecasting Callon’s accounts
on the income statement, balance sheet, and statement of cash flows for the next nine years.
Incorrect guidance or anomalies in costs would alter our profit margin projections and
financial statements as a whole.

The last assumption in our model is that Callon will not complete any significant acquisitions
or become an acquisition target.
Investing

Callon Petroleum has taken on $600 million in debt and equity to finance their new acquisition
of land in the Permian Basin, which will provide a positive net present value for its operating
income. Coupled with the upward trending oil price forecast, Callon’s increased productivity
yields drastic increases in net operating income within the term of the debt and beyond.  We
have projected Callon’s capital expenditures to be $560 million in 2018, and $582 million in
2019, representing a increase of 3.9%. With Callon’s recent acquisition adjacent to their
proved producing wells, we believe Callon will increase capital expenditures to achieve more
production. When the outlook on the price of oil is bullish, E&P companies profit from
investing in their production.

Despite the cash investment on their debt, the optimistic view on future oil prices means that
investing in capital expenditures is a smart decision for their future.

25
Financing
The Company’s net operating cash flows cover its cash outflows leading to a net increase in
cash and cash equivalents. The model shows Callon on track to increase its net operating
income nearly five‐fold by 2024 largely due to the increasing oil price forecast. If the price of
oil stays consistent with forecasted levels, Callon will not need to take on more debt or
borrow on its credit facility to repay its current notes.
SITE VISIT

Our research team visited the Callon Petroleum technical office in Houston, Texas on
September 28, 2018. Upon arrival, our team met with Joseph P. Gatto, the Chief Executive
Officer, Gary Newberry, the Senior Vice President and Chief Operating Officer, Mark Brewer,
the Director of Investor Relations, James P. Ulm, II, the Senior Vice President and Chief
Financial Officer (CFO), and Kate Schilling, the Senior Investor Relations Analyst. Our
discussion began with Callon Petroleum’s management team describing an overview of the
Company’s history, providing insight into Callon’s transition from offshore to onshore drilling,
and outlining the future of the Company.

During our site visit, Mark Brewer, the Director of Investor Relations, distributed copies of the
October 2018 investor presentation. During the presentation, Mr. Brewer emphasized Callon’s
industry leading operating margins. Through the first half of 2018, Callon achieved the highest
standardized adjusted earnings before interest taxes depreciation amortization and
exploration per barrel of oil equivalent (EBITDAX/Boe) operating margin across publicly traded
exploration and production (E&P) companies of $41.52/Boe. In addition, the cash margin
growth assists increased operational efficiency. Callon’s per unit cash operating costs
decreased 10% over the last two years.

Callon’s management team has concentrated all of its operations in the Permian Basin.
Operating in this region has allowed Callon to vastly increase its production of barrels of oil
per day. Management stated that, in 2009, Callon produced 5,000 barrels per day, operating
only in the Gulf of Mexico. Currently, Callon produces 40,000 barrels per day.

When speaking with CFO, James P. Ulm, II, our team inquired about Callon’s recent acquisition
of 28,000 net acres in the Spur operating area of Ward County. In this acquisition, Callon
signed on $400 million of senior unsecured notes due in 2026, increasing its total debt to $1.8
billion. In the past, Callon has held a low level of debt. Mr. Ulm discussed the details of the
deal, including a 60% debt and 40% equity split. As such, Callon needs sustainable capital in
order to continue its strong growth. With interest rates rising, Callon secured its long‐term
debt at the right time.

When asked if Callon planned to move into the midstream area in the coming years, Mr. Ulm
stated that the Company currently has no plans to move into the midstream area.
Management has decided that the Company is better off using midstream partners instead of
building its own pipelines, even if it has to pay a premium for midstream services.

26
To combat rising midstream service premiums, Callon uses a mix of midstream service
providers to ensure it is paying the lowest possible prices. Ultimately, moving into the
midstream area is an additional level of complication the Company would have to assume.
Site Visit Photo
INDEPENDENT OUTSIDE RESEARCH

Our team met with Professor Kenneth Carroll to gain his insights into Callon Petroleum from
teaching his course, Energy Financial Modeling.  Professor Carroll used to work for Johnson
Rice & Co., where he provided equity research to companies in the Oil and Gas industry.
Professor Carrol uses Callon Petroleum as his model company and has studied the Company
extensively. He reported that there are several negative externalities that threaten West
Texas Intermediate oil prices and, therefore, Callon’s business and profitability.  In August, The
U.S. announced sanctions against purchasing oil from Iran.  The U.S. oil prices increased
accordingly with the new notion that global supply would decrease.  However, the U.S.
instilled new sanctions allowing nine countries, including China, immunity from the previous
ban. The Saudis’ reaction has been to increase their oil production to keep the supply at the
same level.  This political volatility created global uncertainty which has brought the WTI oil
price down.  If America keeps pumping at the same rate, and the Saudis keep up their supply,
the price will likely not increase by a significant amount.  The Saudis’ overcompensation for
Iran’s loss means that the WTI could significantly decrease if the Saudis manage to cover the
global market demand.

Unfortunately, Callon is not in a position to withstand a large drop in oil prices.  Callon’s debt
position exudes an optimism for the market that is not consistent with the current outlook.
While Professor Carroll does not believe that Callon will go bankrupt, he believes that the past
acquisition took on too much debt, and that it dilutes the Company’s current equity.

27
The Company is growing at an above average rate, but it is doing so by taking on large
amounts of debt with very little liquidity.  Fortunately, unlike many other comparable
companies, Callon does not carry any floating rate debt beyond its credit facility.  Although,
given the company’s debt‐to‐equity ratio, current assets, and credit facility, a decrease in oil
prices to or below $25 per barrel would render Callon unable to repay its debts despite the
low finding cost of $10 to $12 per barrel.

Another consideration that Professor Carroll highlighted is that because the SEC requires E&P
companies to value projects with a fixed 10% discount rate, the actual discount rate is likely
different, misguiding project net present values.  This valuation could have an effect in
misrepresenting earnings per share as well as skewed financing decisions.

Shell is a midstream provider for Callon and trades mostly in crude volumes based on Callon’s
product make up.  An analyst at Shell confirmed that Callon has a very good credit rating and
always makes its trades on time and in full.

After speaking with analysts that cover Callon, we determined that Callon is a reliable and
productive business partner and is in a position to continue their success. However, as global
tensions rise, the price of oil is uncertain. With Callon’s recent acquisition funded by 60% debt,
the Company is exposed to a greater risk if oil at WTI continues to drop at its current rate.

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ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE

The Altman Z‐Score is a measure of a public company’s default risk. Edward Altman built this
indicator in 1968 as a means to determine whether manufacturing companies were viable.
Since then, the Z‐Score has become popular as a means for evaluating loans. Tests on the Z‐
Score have shown to provide 72% reliability when predicting default up to two years in
advance. Although popular and reliable, keep in mind that the Z‐Score only measures five
factors and does not adjust over time. Also, consider that Altman intended this indicator for
large‐cap manufacturing companies.
The Z‐Score is a linear discriminant model, which compares working capital, retained earnings,
earnings before interest and taxes, and sales to total total assets as well as the market value of
equity to total liabilities. As a linear discriminant model, the three classifications are low,
moderate, and high default risk represented by greater than 3.00, between 2.99 and 1.80, and
less than 1.80, respectively.
Callon Petroleum has a Z‐Score of 1.71 according to our forecasts, which is high compared to
historical levels, although still in the distress zone of below 1.80. This low score can be
attributed to the nature of the company. Callon is a mid‐cap exploration and production
company, which relies heavily on oil prices, hedging, and debt financing to fund its operations.
Callon uses its highly leveraged position to compete for growth through acquisitions.
Historically, Callon’s Z‐Score has been low and even negative during some years, however, its
stock price continues to grow gradually. The Company’s recent financing funded a land
acquisition on a promising area of the Permian Basin. Once the Company fully capitalizes on the
new land, it should be able repay its debts without having to refinance (oil prices permitting).
Thus, Callon’s Z‐Score should increase as its default risk decreases.
Table 9: Callon Z‐Scores
2010 2011 2012 2013 2014 2015 2016 2017 2018
-0.20 1.02 0.52 0.91 0.46 -0.57 2.24 1.87 1.71
Distress
Zone
Distress
Zone
Distress
Zone
Distress
Zone
Distress
Zone
Distress
Zone
Grey
Zone
Grey
Zone
Distress
Zone

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PETER LYNCH EARNINGS MULTIPLE VALUATION

Peter Lynch, an American investor and mutual fund manager, cemented his legacy as a savvy
investor with his publication of the book One Up on Wall Street. Lynch stipulates that the
theoretical stock price of a company should be 15 times the earnings per share ratio and uses
this simple equation to value his investments. Based on the ratio, if a company’s stock price
exceeds its EPS by more than 15 times, it is an overpriced stock that could be subject to
collapse. Conversely, a stock price below this EPS line is undervalued, and would likely be a
good investment.
According to Lynch’s equation, Callon’s stock price is overvalued, seeing as it exceeds its EPS by
over 15 times since 2012 (see Figure 10). As a result, Lynch would recommend selling the stock.

Figure 10: Peter Lynch Analysis

Source: Yahoo! Finance

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WWBD?
What Would Ben (Graham) Do?

Ben Graham, known as “the father of value investing,” and a mentor to Warren Buffet,
developed a method using eight hurdles to determine whether or not a stock is undervalued.
According to Graham, a stock is attractive if a stock passes four of his eight hurdles, listed
below.
1.       Earnings to price yield that is twice the yield of a ten‐year U.S. Treasury bond.
2.       Price to earnings ratio that is half of the stock’s highest P/E ratio in the last five years.
3.       Dividend yield that is half the yield of a ten‐year U.S. Treasury bond.
4.       Stock price that is less than 1.5 times the book value per share.
5.       Total debt is less than book value.
6.       Current ratio of two or more.
7.       Earnings growth of 7% or more over the last five years.
8.       Stable earnings growth.
We found that Callon Petroleum passes three of the eight hurdles, detailed below.
#4.  Callon’s current $9.90 stock price is less than .5 times Company’s book value per share.
#5.  Callon’s total debt is less than the book value of the Company.
#7.  Callon’s compound annual growth rate is more than 7%.
Callon failed five of the eight hurdles as follows.
#1.  Callon’s EPS yield of 6.08% is less than twice the yield on a ten‐year U.S. Treasury.
#2.  Callon’s current P/E ratio of 16.4 is above half of the stock’s highest P/E ratio in the last
five years.
#3.  Callon does not issue dividends.
#6.  The Company’s current ratio is 0.6
#8.  Callon has not demonstrated stable earnings growth in the past five years.

As shown in Figure 11, the Company passes three of the eight hurdles, Graham would likely
not consider the possibility of investing in Callon.

Figure 11: Ben Graham Dial

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Earnings per share (ttm) 0.60$ Price: 9.90$
Earnings to Price Yield 36108 9.90$ 6.08%
10 Year Treasury (2X) 6.23%
P/E ratio as of 2013 (653.0)
P/E ratio as of 2014 8.4
P/E ratio as of 2015 (2.2)
P/E ratio as of 2016 (19.7)
P/E ratio as of 2017 21.7
Current P/E Ratio 16.4
Dividends per share (ttm) ‐$ Price: 9.90$
Dividend Yield 0.00%
1/2 Yield on 10 Year Treasury 1.56%
Stock Price 9.90$ 9.90$
Book Value per share as of 6/30/18 10.82$
150% of book Value per share as of 6/30/18 16.23$
Interest‐bearing debt as of 9/30/18 1,053,528$
Book value as of 9/30/18 2,288,308$
Current assets as of 9/30/18 188,975$
Current liabilities as of 9/30/18 333,132$
Current ratio as of 9/30/18 0.6
EPS for year ended 2017 0.56$
EPS for year ended 2016 (0.78)$
EPS for year ended 2014 0.65$
EPS for year ended 2017 0.56$ ‐172%
EPS for year ended 2016 (0.78)$ ‐79%
EPS for year ended 2015 (3.77)$ ‐680%
EPS for year ended 2014 0.65$ ‐6600%
Stock price data as of November 14th, 2018
NO
CALLON PETROLEUM (CPE)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
NO
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
YES
Hurdle # 3: A Dividend Yield of at least 1/2 the Yield on 10 Year Treasury
NO
Hurdle # 4: A Stock Price less than 1.5 BV
YES
Hurdle # 5: Total Debt less than Book Value
YES
Hurdle # 6: Current Ratio of Two or More
NO
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
NO
Hurdle # 8: Stability in Growth of Earnings

32
Annual and Quarterly Earnings
In thousands
For the period ended
Operating revenues
Oil sales
Gas sales
2015 A
125,166$
12,346
2016 A
177,652$
23,199
2017 A 31‐Mar A 30‐Jun A 30‐Sep A 31‐Dec E 2018 E 31‐Mar E 30‐Jun E 30‐Sep E 31‐Dec E 2019 E
322,374$ 115,286$ 122,613$ 142,601$ 122,441$ 502,941$ 128,393$ 140,059$ 176,508$ 187,938$ 632,898$
44,100 12,154 14,462 18,613 12,153 57,382 13,794 13,932 15,918 19,266 62,910
2019 E2018 E
Total operating revenues
Costs and expenses:
Lease operating expenses
Production taxes
Depreciation, depletion and amortization
137,512
27,036
9,793
69,249
200,851
38,353
11,870
71,369
366,474 127,440 137,075 161,214 134,595 560,324 142,187 153,991 192,426 207,205 695,808
49,907 13,039 13,141 18,525 15,151 59,856 16,232 17,968 19,787 21,086 75,073
22,396 8,463 7,539 10,263 8,734 34,999 9,477 10,380 11,550 12,346 43,754
115,714 35,417 38,733 48,257 40,482 162,889 43,775 47,933 53,115 56,666 201,488
General and administrative
Settled share‐based awards
Accretion expense
Gain on sale of other property and equipment
Rig Termination Fee
Acquisition expense
28,347
660
3,075
27
26,317
958
3,673
27,067 8,769 8,289 9,721 9,435 36,214 10,074 11,017 12,257 13,044 46,392
6,351
677 218 206 202 4,479 5,105 859 841 815 800 3,315
2,916 548 1,767 1,435 3,750
Impairment of oil and gas properties
Total operating expenses
Income (loss) from operations
Other (income) expenses:
Interest expense
208,435
346,622
(209,110)
21,111
95,788
248,328
(47,477)
11,871
225,028 66,454 69,675 88,403 78,281 302,813 80,418 88,139 97,523 103,942 370,022
141,446 60,986 67,400 72,811 56,314 257,511 61,769 65,852 94,902 103,263 325,787
2,159 460 594 711 711 2,476 711 711 711 711 2,844
Unrealized gain on mark‐to‐market derivative instruments, net
(Gain) loss on early extinguishment of debt
Loss on derivative contracts (28,358)
12,883
20,233 18,901 4,481 16,554 34,339 1,496 56,870 (3,579) (3,679) 228 187 (6,843)
Interest and other (198) (637) (1,311) (211) (703) (1,657) (2,571)
Total other (income) expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net Income (loss) before Medusa Spar LLC
(7,445)
(201,665)
38,474
(240,139)
44,350
(91,827)
(14)
(91,813)
19,749 4,730 16,445 33,393 2,207 56,775 (2,868) (2,968) 939 898 (3,999)
121,697 56,256 50,955 39,418 54,107 200,736 64,638 68,821 93,963 102,365 329,786
1,273 495 481 1,487 524 2,987 569 623 693 741 2,625
120,424 55,761 50,474 37,931 53,583 197,749 64,069 68,198 93,270 101,624 327,160
Preferred stock dividends (7,895) (7,295) (7,295) (1,824) (1,824) (1,823) (1,823) (7,294) (1,824) (1,823) (1,823) (1,823) (7,293)
Net income (loss) (248,034)$ (99,108)$ 113,129$ 53,937$ 48,650$ 36,108$ 51,760$ 190,455$ 62,245$ 66,374$ 91,446$ 99,801$ 319,867$
Net income (loss) per common share:
Basic
Adjustment for nonrecurring items
Adjusted basic
Diluted
Adjustment for nonrecurring items
Adjusted diluted
Weighted average shares outstanding:
Basic
Diluted
SELECTED COMMON‐SIZE AMOUNTS (% of oil and gas sales)
Net income (loss)
YEAR‐TO‐YEAR CHANGE
Operating revenues
Interest expense
Total operating expenses
Net income (loss)
(3.77)$
1.95$
(1.82)$
(3.77)$
(2.49)$
(1.28)$
65,708
65,708
19.66%
50.36%
20.61%
‐152.07%
‐180.37%
‐9.45%
20.85%
22.08%
12.90%
116.04%
205.15%
‐646.41%
‐930.35%
(0.78)$
0.74$
(0.04)$
(0.78)$
(0.47)$
(0.78)$
126,258
126,258
19.10%
35.53%
13.10%
‐23.64%
‐49.34%
46.06%
41.86%
3.06%
‐7.16%
‐43.77%
‐28.36%
‐77.30%
‐60.04%
0.56$ 0.27$ 0.23$ 0.17$ 0.25$ 0.92$ 0.30$ 0.31$ 0.43$ 0.47$ 1.51$
0.08$ 0.02$ 0.06$ 0.12$
0.63$ 0.29$ 0.29$ 0.29$ 0.25$ 0.92$ 0.30$ 0.31$ 0.43$ 0.47$ 1.51$
0.56$ 0.27$ 0.23$ 0.17$ 0.24$ 0.90$ 0.29$ 0.31$ 0.43$ 0.47$ 1.51$
0.08$ 0.02$ 0.06$ 0.12$
0.64$ 0.29$ 0.29$ 0.29$ 0.24$ 0.90$ 0.29$ 0.31$ 0.43$ 0.47$ 1.51$
201,526 201,921 210,698 210,698 210,836 210,836 210,976 211,112 211,250 211,380 211,380
202,102 202,588 211,465 211,465 211,536 211,536 211,676 211,812 211,950 212,080 212,080
13.62% 10.23% 9.59% 11.49% 11.26% 10.68% 11.42% 11.67% 10.28% 10.18% 10.79%
31.57% 27.79% 28.26% 29.93% 30.08% 29.07% 30.79% 31.13% 27.60% 27.35% 28.96%
7.39% 6.88% 6.05% 6.03% 7.01% 6.46% 7.09% 7.15% 6.37% 6.30% 6.67%
38.60% 47.85% 49.17% 45.16% 41.84% 45.96% 43.44% 42.76% 49.32% 49.84% 46.82%
30.87% 42.32% 35.49% 22.40% 38.46% 33.99% 43.78% 43.10% 47.52% 48.17% 45.97%
82.46% 56.63% 66.59% 90.53% 13.86% 52.90% 11.57% 12.34% 19.36% 53.95% 24.18%
30.13% 0.79% 8.20% 59.37% 14.77% 19.93% 24.49% 36.74% 6.81% 39.17% 25.42%
62.13% 44.96% 47.76% 69.17% 10.78% 40.77% 23.60% 23.75% 10.07% 39.98% 23.70%
2.85% 68.44% 28.91% 33.92% 15.45% 33.79% 14.88% 32.91% 26.08% 38.26% 28.11%
‐81.81% ‐30.83% 0.85% 60.14% 54.23% 14.68% 54.57% 19.70% 0.00% 0.00% 14.86%
‐9.38% 35.31% 19.02% 66.21% 21.96% 34.57% 21.01% 26.50% 10.32% 32.78% 22.19%
‐397.93% 89.11% 183.87% 131.69% 4.23% 82.06% 1.28% ‐2.30% 30.34% 83.37% 26.51%
‐214.15% 19.05% 54.12% 136.67% 146.47% 68.35% 15.40% 36.43% 153.26% 92.81% 67.95%

33
Annual and Quarterly Earnings
In thousands
OTHER
2015 A 2016 A 2017 A 31‐Mar A 30‐Jun A 30‐Sep A 31‐Dec E 2018 E 31‐Mar E 30‐Jun E 30‐Sep E 31‐Dec E 2019 E
2019 E2018 E
Production ‐ gas (MMcf)
Production ‐ oil (MBbls)
Production ‐ equivalent units (MBoe)
Production ‐ gas MMCFe(daily)
Production ‐ oil MBbls (daily)
Production ‐ Mboe (daily)
Gas as % of total production
YY change in production
QQ change in production
Depreciation, depletion and amortization per Mboe
Prodcution Taxes per Mboe
Lease operating expense per Mboe
Average price of gas
Average price of oil
4,312
2,789
3,508
11.81
7.64
9.61
20%
70.11%
259.76%
19.74$
2.79$
7.71$
2.86$
44.88$
7,758
4,280
5,573
21.25
11.73
15.27
23%
58.88%
229.93%
12.81$
2.13$
6.88$
2.99$
41.51$
10,896 3,240 3,839 4,144 4,024 15,247 4,274 4,654 5,159 5,473 19,559
6,557 1,851 1,995 2,521 2,104 8,471 2,251 2,465 2,745 2,924 10,385
8,373 2,391 2,635 3,212 2,775 11,012 2,963 3,240 3,605 3,836 13,645
29.85 36.00 42.19 45.04 43.73 41.74 47.49 51.14 56.07 59.49 53.55
17.96 20.57 21.92 27.40 22.87 23.19 25.01 27.09 29.84 31.79 28.43
22.94 26.57 28.95 34.91 30.16 30.15 32.92 35.61 39.18 41.70 37.35
22% 23% 24% 22% 24% 23% 24% 24% 24% 24% 24%
639.34% 30.11% 30.37% 54.83% 13.72% 799.46% 23.92% 22.98% 12.24% 38.26% 793.56%
50.24% ‐71.44% 10.20% 21.89% ‐13.60% 31.52% ‐73.09% 9.36% 11.25% 6.42% 23.90%
13.82$ 14.81$ 14.70$ 15.03$ 14.59$ 14.78$ 14.77$ 14.79$ 14.73$ 14.77$ 14.77$
2.67$ 3.54$ 3.18$ 3.20$ 3.15$ 3.27$ 3.20$ 3.20$ 3.20$ 3.22$ 3.21$
5.96$ 5.45$ 5.21$ 5.77$ 5.46$ 5.47$ 5.48$ 5.55$ 5.49$ 5.50$ 5.50$
4.05$ 3.75$ 3.77$ 4.03$
49.16$ 62.28$ 61.46$ 59.75$

34
Annual and Quarterly Balance Sheets
In thousands
As of
Current assets:
Cash and cash equivalents
Accounts receivable
31‐Dec‐15 A
1,224$
39,624
31‐Dec‐16 A
652,993$
69,783
31‐Dec‐17 A 31‐Mar A 30‐Jun A 30‐Sep A 31‐Dec E 31‐Dec‐18 E 31‐Mar E 30‐Jun E 30‐Sep E 31‐Dec E 31‐Dec‐19 E
27,995$ 18,473$ 509,146$ 12,129$ 54,869$ 54,869$ 71,820$ 38,124$ 11,076$ 17,750$ 17,750$
114,320 122,411 111,964 168,753 124,051 124,051 133,961 143,488 177,351 190,973 190,973
2019 E2018 E
Fair market value of derivatives
Other current assets
Total current assets
Oil and gas properties, full‐cost accounting method:
Evaluated properties
Less accumulated depreciation, depletion and amortization
19,943
1,461
62,252
2,335,223
(1,756,018)
103
2,247
725,126
2,754,353
(1,947,673)
406 4,210 11,569 4,289 4,289 4,289 4,289 4,289 4,289 4,289 4,289
2,139 2,078 7,689 3,804 3,804 3,804 3,804 3,804 3,804 3,804 3,804
144,860 147,172 640,368 188,975 187,013 187,013 213,873 189,704 196,520 216,815 216,815
3,429,570 3,598,868 3,814,242 4,305,189 4,409,837 4,409,837 4,555,437 4,701,037 4,846,637 4,992,237 4,992,237
(2,084,095) (2,119,599) (2,158,225) (2,208,066) (2,248,548) (2,248,548) (2,292,324) (2,340,257) (2,393,371) (2,450,037) (2,450,037)
Net evaluated properties
Unevaluated properties excluded from amortization
Total oil and gas properties
579,205
132,181
711,386
806,680
668,721
1,475,401
1,345,475 1,479,269 1,656,017 2,097,123 2,161,289 2,161,289 2,263,113 2,360,780 2,453,266 2,542,200 2,542,200
1,168,016 1,174,385 1,144,138 1,385,529 1,385,529 1,385,529 1,385,529 1,385,529 1,385,529 1,385,529 1,385,529
2,513,491 2,653,654 2,800,155 3,482,652 3,546,818 3,546,818 3,648,642 3,746,309 3,838,795 3,927,729 3,927,729
Other property and equipment, net
Deferred tax asset
7,700 14,114 20,361 21,173 21,514 21,738 21,738 21,738 21,738 21,738 21,738 21,738 21,738
52 26 26
Restricted investments
Deferred Financing Costs
3,309
3,642
3,332
3,092
3,372 3,382 3,393 3,413 3,413 3,413 3,413 3,413 3,413 3,413 3,413
4,863 4,588 5,749 6,406 5,698 5,698 3,241 784 (1,673) (4,130) (4,130)
Fair value of derivatives
Acquisition deposit 46,138
2,299
900 28,500
Other assets, net
Total Assets
Current liabilities:
Accounts payable and accrued liabilities
Asset retirement obligations ‐ current
305
788,594$
70,970$
790
384
2,267,587$
95,577$
2,729
5,397 5,524 5,322 5,552 5,552 5,552 5,552 5,552 5,552 5,552 5,552
2,693,296$ 2,835,519$ 3,507,326$ 3,708,736$ 3,770,232$ 3,770,232$ 3,896,460$ 3,967,501$ 4,064,345$ 4,171,118$ 4,171,118$
162,878$ 187,267$ 193,981$ 251,754$ 195,613$ 195,613$ 265,625$ 266,784$ 268,488$ 271,628$ 271,628$
1,295 2,784 2,284 4,464 3,503 3,503 3,668 3,827 3,976 4,121 4,121
Accrued Interest
Cash‐settled restricted stock unit awards
5,989
10,128
6,057
8,919
9,235 18,491 11,351 27,325 16,253 16,253 22,070 22,166 22,308 22,569 22,569
4,621 4,081 1,781 2,422 2,422 2,422 2,422 2,422 2,422 2,422 2,422
Fair market value of derivatives 18,268 27,744 25,912 35,948 47,167 47,167 47,167 47,167 47,167 47,167 47,167 47,167
Total current liabilities 87,877 131,550 205,773 238,535 245,345 333,132 264,958 264,958 340,952 342,366 344,361 347,906 347,906
6.125% senior notes, due 2024
6.375% senior unsecured notes due 2026, net of unamortized deferred financing costs
Senior secured revolving credit facility
Second lien term loan facility
40,000
288,565
390,219 595,196 595,374 595,552 595,729 595,729 595,729 595,729 595,729 595,729 595,729 595,729
392,907 392,799 392,799 392,799 392,799 392,799 392,799 392,799 392,799
25,000 75,000 65,000 140,000 140,000 125,000 125,000 125,000 125,000 125,000
Asset retirement obligations ‐ long‐term 4,317 3,932 4,725 7,717 7,782 5,428 10,737 10,737 11,243 11,728 12,187 12,629 12,629
Cash‐settled restricted stock unit awards
Fair value of derivatives
Deferred tax liability
Other long‐term liabilities
Total liabilities
Stockholders' equity:
4,877
200
425,836
8,071
28
90
295
534,185
3,490 2,392 1,900 2,818 2,818 2,818 2,818 2,818 2,818 2,818 2,818
1,284 2,942 11,136 15,440 15,440 15,440 15,440 15,440 15,440 15,440 15,440
1,457 1,950 2,431 3,917 91 91 1,100 2,395 3,818 5,330 5,330
405 465 665 6,165 6,165 6,165 6,165 6,165 6,165 6,165 6,165
837,330 924,375 1,257,718 1,420,428 1,428,737 1,428,737 1,491,246 1,494,440 1,498,318 1,503,816 1,503,816
Preferred stock, $.01 par value
Common Stock, $.01 par value
16
801
15
2,010
15 15 15 15 15 15 15 15 15 15 15
2,018 2,019 2,275 2,276 2,276 2,276 2,276 2,276 2,276 2,276 2,276
Capital in excess of par value 702,970 2,171,514 2,181,359 2,182,599 2,472,155 2,474,748 2,476,175 2,476,175 2,477,648 2,479,121 2,480,641 2,482,114 2,482,114
Retained earnings (deficit)
Total stockholders' equity
Total liabilities and stockholders' equity
(341,029)
362,758
788,594$
(440,137)
1,733,402
2,267,587$
(327,426) (273,489) (224,837) (188,731) (136,971) (136,971) (74,725) (8,351) 83,096 182,896 182,896
1,855,966 1,911,144 2,249,608 2,288,308 2,341,495 2,341,495 2,405,213 2,473,061 2,566,028 2,667,302 2,667,302
2,693,296$ 2,835,519$ 3,507,326$ 3,708,736$ 3,770,232$ 3,770,232$ 3,896,460$ 3,967,501$ 4,064,345$ 4,171,118$ 4,171,118$

35
Annual and Quarterly Balance Sheets
As of
Current assets:
31‐Dec‐15 A 31‐Dec‐16 A 31‐Dec‐17 A 31‐Mar A 30‐Jun A 30‐Sep A 31‐Dec E 31‐Dec‐18 E 31‐Mar E 30‐Jun E 30‐Sep E 31‐Dec E 31‐Dec‐19 E
2019 E2018 E
Accounts receivable 28.8% 34.7% 31.2% 96.1% 81.7% 104.7% 92.2% 22.1% 94.2% 93.2% 92.2% 92.2% 27.4%
1698.2%
421.2%
96.1%
1371.3%
401.6%
332.9%
935.8% 2824.0% 2782.6% 2670.5% 3276.4% 787.0% 3203.8% 3052.8% 2518.7% 2409.3% 717.5%
367.1% 1160.8% 1208.1% 1300.8% 1605.8% 385.7% 1591.6% 1533.1% 1274.9% 1226.9% 365.4%
318.7% 921.5% 834.7% 859.4% 1029.4% 247.3% 974.4% 899.7% 720.0% 668.7% 199.1%
Accounts payable and accrued liabilities 51.6% 47.6% 44.4% 146.9% 141.5% 156.2% 145.3% 34.9% 186.8% 173.2% 139.5% 131.1% 39.0%
Asset retirement obligations ‐ long‐term 3.1% 2.0% 1.3% 6.1% 5.7% 3.4% 8.0% 1.9% 7.9% 7.6% 6.3% 6.1% 1.8%
SELECTED COMMON SIZE BALANCE SHEET AMOUNTS (% of total assets)
Total current assets
7.9%
296.1%
73.4%
16.8%
32.0%
121.5%
35.6%
29.5%
5.4% 5.2% 18.3% 5.1% 5.0% 5.0% 5.5% 4.8% 4.8% 5.2% 5.2%
127.3% 126.9% 108.8% 116.1% 117.0% 117.0% 116.9% 118.5% 119.2% 119.7% 119.7%
50.0% 52.2% 47.2% 56.5% 57.3% 57.3% 58.1% 59.5% 60.4% 60.9% 60.9%
43.4% 41.4% 32.6% 37.4% 36.7% 36.7% 35.6% 34.9% 34.1% 33.2% 33.2%
Total current liabilities 11.1% 5.8% 7.6% 8.4% 7.0% 9.0% 7.0% 7.0% 8.8% 8.6% 8.5% 8.3% 8.3%
Senior secured revolving credit facility 5.1% 0.0% 0.9% 2.6% 0.0% 1.8% 3.7% 3.7% 3.2% 3.2% 3.1% 3.0% 3.0%
Asset retirement obligations ‐ long‐term 0.5% 0.2% 0.2% 0.3% 0.2% 0.1% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Total liabilities
Total stockholders' equity
54.0%
46.0%
23.6%
76.4%
31.1% 32.6% 35.9% 38.3% 37.9% 37.9% 38.3% 37.7% 36.9% 36.1% 36.1%
68.9% 67.4% 64.1% 61.7% 62.1% 62.1% 61.7% 62.3% 63.1% 63.9% 63.9%

36
Annual and Quarterly Statements of Cash Flows
In thousands
Cash flows from operating activities:
Net income (loss)
Adjustments:
2015 A
(240,139)$
69,891
2016 A
(91,813)$
73,072
120,424$ 55,761$ 50,475$ 37,930$ 53,583$ 197,749$ 64,069$ 68,198$ 93,270$ 101,624$ 327,160$
118,051 36,066 39,387 48,977 40,482 164,912 43,775 47,933 53,115 56,666 201,488
2019 E2018 E
Writedown of oil and natural gas properties
Accretion expense
Gain (loss) on sale of properties
208,435
660
95,788
958 677 218 206 202 4,479 5,105 859 841 815 800 3,315
22 (102) (80)
Amortization of non‐cash debt related items
Amortization of deferred credit
3,123 3,115 2,150 453 588 708 708 2,457 2,457 2,457 2,457 2,457 9,828
Non‐cash loss on early extinguishment of debt 9,883
Deferred income tax expense (benefit) 38,474 (14) 1,273 495 481 1,487 (3,826) (1,363) 1,009 1,295 1,423 1,511 5,238
Unrealized gain on derivative contract 38,135
Net loss on derivatives, net of settlements
Loss on sale of other property and equipment
Noncash charge ‐ stock compensation plans
Non‐Cash Expense related to equity share‐based awards
Change in the fair value of liability share‐based awards
Payments to settle asset retirement obligations
6,658
221
6,612
(3,258)
558
6,953
(1,471)
10,429 (3,978) 8,572 25,102 29,696
62
8,254 1,131 1,627 1,708 1,427 5,893 1,473 1,473 1,520 1,473 5,940
3,288 1,012 (463) 879 1,428
(2,047) (366) (207) (507) (131) (1,211) (188) (197) (206) (214) (805)
Changes in current assets and liabilities:
Accounts receivable (4,761) (30,055) (44,495) (8,067) 10,447 (56,764) 44,702 (9,682) (9,910) (9,527) (33,864) (13,621) (66,922)
Other current assets (20) (786) 108 61 (5,611) 3,885 (1,665)
Current liabilities 8,001 25,288 30,947 12,938 4,123 47,740 (67,213) (2,412) 75,829 1,255 1,845 3,401 82,331
Change in other long‐term liabilities
Change in long‐term prepaid
Payments to settle vested liability share‐based awards related to early retirements
Payments to settle vested liability share‐based awards
80
(3,538)
(3,925)
96
(10,300)
121
(4,650)
(13,173) (3,089) (1,901) (4,990)
Other long‐term liabilities
Other assets, net
Cash provided (used) by operating activities
Cash flows from investing activities:
Capital expenditures
338
86,852
(227,292)
(840)
118,567
(190,032)
87 200 5,500 5,787
(1,528) (507) (182) (709) (1,398)
229,891 92,215 107,764 116,036 74,211 390,226 179,374 113,727 120,375 154,097 567,574
(419,839) (111,330) (187,040) (156,982) (104,648) (560,000) (145,600) (145,600) (145,600) (145,600) (582,400)
Acquisition expenditures
Acquisition deposit
Proceeds from sale of mineral interests and equipment
(32,245)
377
(654,679)
(46,138)
24,562
(718,456) (38,923) (6,469) (550,592) (595,984)
45,238 900 (28,500) 27,600
20,525 3,077 5,249 8,326
Cash provided (used) by investing activities (259,160) (866,287) (1,072,532) (149,353) (218,932) (674,725) (104,648) (1,147,658) (145,600) (145,600) (145,600) (145,600) (582,400)
Borrowings on credit facility
Payments on credit facility
Payments on senior secured credit facility, net
181,000
(176,000)
217,000
(257,000)
(300,000)
25,000 80,000 85,000 105,000 75,000 345,000 (15,000) (15,000)
(190,000) (40,000) (230,000)
(30,000) 30,000
Payments and extinguishment of debt
Payments of preferred stock dividends (7,895) (7,295) (7,295) (1,824) (1,823) (1,824) (1,823) (7,294) (1,824) (1,823) (1,823) (1,823) (7,293)
Proceeds from issuance of debt, net 400,000 200,000 400,000 400,000
Debt issuance cost
Issuance of common stock 175,459 1,357,577
8,250
288,357 7 288,364
Payment of deferred financing costs
Tax withholdings related to restricted stock units
Cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
172,564
256
968
(10,793)
1,399,489
651,769
1,224
(7,194) (8,664) (1,296) (9,960)
(1,118) (560) (1,029) (215) (1,804)
217,643 47,616 601,841 61,672 73,177 784,306 (16,824) (1,823) (1,823) (1,823) (22,293)
(624,998) (9,522) 490,673 (497,017) 42,740 26,874 16,950 (33,696) (27,048) 6,674 (37,120)
652,993 27,995 18,473 509,146 12,129 27,995 54,869 71,820 38,124 11,076 54,869
Cash and cash equivalents at end of period 1,224 652,993 27,995 18,473 509,146 12,129 54,869 54,869 71,820 38,124 11,076 17,750 17,750

37
Ratios
Productivity Ratios
Receivables turnover
2015 A
3.94
2016 A
3.67
2018 E 2019 E
3.98 1.08 1.17 1.15 0.92 4.70 1.10 1.11 1.20 1.13 4.42
Oil and gas turnover 0.03 0.03 0.04 0.01 0.01 0.01 0.01 0.04 0.01 0.01 0.01 0.01 0.04
Working capital turnover 3.13 3.05 3.56 0.57 0.57 0.56 0.45 4.23 0.47 0.45 0.56 0.60 4.00
Net fixed asset turnover 0.19 0.18 0.18 0.05 0.05 0.05 0.04 0.18 0.04 0.04 0.05 0.05 0.19
Net fixed asset turnover (Production) 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total asset turnover 0.35 0.18 0.27 0.05 0.04 0.04 0.04 0.30 0.04 0.04 0.05 0.05 0.33
# of days sales in accounts receivable 105.17 126.81 113.86 86.45 74.33 96.30 84.79 80.81 84.79 84.79 84.79 84.79 100.18
# of year's costs in evaluated properties 33.72 38.59 29.64 25.06 24.55 22.49 27.46 27.07 25.66 24.45 23.00 22.21 24.78
# of days costs in operating payables 92.47 139.16 125.90 138.61 89.38 138.08 150.00 117.43 150.00 150.00 150.00 150.00 151.95
Liquidity Ratios
Current ratio 0.71 5.51 0.70 0.62 2.61 0.57 0.71 0.71 0.63 0.55 0.57 0.62 0.62
Quick ratio 0.46 5.49 0.69 0.59 2.53 0.54 0.68 0.68 0.60 0.53 0.55 0.60 0.60
Cash ratio 0.46 5.49 0.69 0.59 2.53 0.54 0.68 0.68 0.60 0.53 0.55 0.60 0.60
Cash flow from operations ratio 0.99 0.90 1.12 0.39 0.44 0.35 0.28 1.47 0.53 0.33 0.35 0.44 1.63
Working capital ‐25,625 593,576 ‐60,913 ‐91,363 395,023 ‐144,157 ‐77,945 ‐77,945 ‐127,079 ‐152,662 ‐147,841 ‐131,091 ‐131,091
Financial Risk (Leverage) Ratios
Total debt/equity ratio 1.17 0.31 0.45 0.48 0.56 0.62 0.61 0.61 0.62 0.60 0.58 0.56 0.56
Debt/equity ratio (excluding deferred taxes) 1.17 0.31 0.45 0.48 0.56 0.62 0.61 0.61 0.62 0.60 0.58 0.56 0.56
Total LT debt/equity ratio 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80
LT debt/equity (excluding deferred taxes) 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80
Interest coverage ratio (Earnings = EBIT) ‐8.91 ‐3.00 66.51 133.58 114.47 103.41 80.20 105.00 87.88 93.62 134.48 146.24 115.55
Interest coverage ratio (Earnings = EBI) ‐10.73 ‐3.00 65.92 132.50 113.66 101.32 79.47 103.80 87.08 92.74 133.50 145.19 114.63
Total debt ratio 0.54 0.24 0.31 0.33 0.36 0.38 0.38 0.38 0.38 0.38 0.37 0.36 0.36
Debt ratio (excuding deferred taxes) 0.54 0.24 0.31 0.33 0.36 0.38 0.38 0.38 0.38 0.38 0.37 0.36 0.36
Profitability/Valuation Measures
Gross profit margin 29.98% 45.37% 54.81% 61.98% 62.16% 58.58% 58.67% 60.25% 57.80% 57.20% 62.11% 62.48% 60.25%
Operating profit margin ‐152.07% ‐23.64% 38.60% 47.85% 49.17% 45.16% 41.84% 45.96% 43.44% 42.76% 49.32% 49.84% 46.82%
Return on assets ‐68.32% ‐8.46% 11.04% 2.56% 2.17% 1.53% 2.16% 15.97% 2.59% 2.75% 3.76% 4.10% 26.36%
Return on equity ‐126.87% ‐9.50% 11.68% 2.96% 2.43% 1.67% 2.31% 15.09% 2.70% 2.80% 3.70% 3.88% 21.10%
Earnings before interest margin ‐164.69% ‐17.72% 38.84% 47.83% 49.25% 44.68% 41.98% 45.87% 43.54% 42.82% 49.33% 49.82% 46.85%
EBITDA margin ‐85.89% 18.65% 71.40% 76.52% 78.34% 75.99% 72.45% 75.83% 74.73% 74.35% 77.29% 77.53% 76.19%
EBITDA/Assets ‐29.95% 3.30% 19.43% 3.53% 3.39% 3.40% 2.61% 22.54% 2.77% 2.91% 3.70% 3.90% 25.42%

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Callon Petroleum (CPE) - Burkenroad Reports - Fall 2018

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