Callon Petroleum Company (CPE)

A major shift in financial strength occurred when CPE arranged to sell 50% interest in its Entrada field this month (Feb 2008). The balance sheet will be rejuvenated and interest expense reduced materially. Also, the deal includes low interest financing for $150 million to meet Callon’s share of the development costs of that field.





Callon’s stock (CPE), with already good technical performance, has been mired down due to perceived risk of its biting off Entrada from BP in 2007, adding to its already extensive oil and gas well developments and well recompletions in the deep waters of the Gulf of Mexico. Of course a very high PE and PEG contributed to investors being wary.





I see Callon rising into the low $20 range in early to mid 1008 and continuing to rise at a market beating pace based on EPS growth. EPS growth is a function of oil and gas prices and Callon’s operating costs. Interest expense has been a significant cost at 22% of earnings before tax. Depending on taxes from the 50% Entrada sale and how Callon uses it’s cash and new line of credit, it is possible to reduce interest expense by about $.13 per share per quarter in the short term. The potential in reduction of interest is material to CPE, with current pre-Entrada deal analyst EPS estimates for 2008 at $.76.





Callon has swung the energy deal of 2008, though the year is young at this writing. Now they need to produce from Entrada. That is the risk of investing in this industry. CPE is experienced and the testing of Entrada’s reserves has left me with comfort to invest in CPE for the long term.