Callon (CPE) Dips To 52-Week Low: What's Ailing The Stock?

Callon Petroleum’s (NYSE:CPE) shares slipped to a 52-week low of $5.18 in yesterday’s trading session, to close a tad higher at $5.22. Apprehensions regarding the recently announced Carrizo (NASDAQ:CRZO) buyout are currently weighing on investors’ sentiments. As it is, Callon is grappling with cash flow crunch, stretched balance sheet and rising operating costs, which are hindering the stock’s performance. Evidently, shares of the company have dipped 19.6% so far this year, underperforming the industry’s decline of just 1.6%.

Consequently, the Zacks Consensus Estimate has been witnessing a downtrend. EPS estimates for the current quarter and year have deteriorated by 2 cents and 9 cents, respectively, over the past 60 days. Let’s take a closer look at the aspects that have pushed Callon to a tight spot.

Firstly, its pricey deal to acquire Carrizo has not gone down too well with investors. In addition to paying a hefty premium of 25% to snap up Carrizo’s properties, the $3.2-billion deal also incorporated the assumption of $1.7-billion debt, further stretching Callon’s balance sheet. On top of that, it will lose its Permian pure-play status on acquiring Carrizo’s Eagle Ford shale play properties. Some investors and analysts are skeptical about this change in status quo. The addition of a new region will also expose Callon to execution risks as the company is not much familiar with these assets.

Markedly, Callon has not witnessed a single year of positive free cash flows since 2010. The inability to generate positive free cash flow is forcing the company to rely on debt and equity capital for financing future growth projects. As of Mar 31, 2019, Callon carried a debt load of $1.32 billion, whereas cash and cash equivalents amounted to just $10.5 million.

The company’s rising operating costs remain a concern. During 2018, its total operating expenses rose nearly 46% year over year to $328.1 million. For full-year 2019, lease operating expenses per barrel of oil equivalent are expected in the range of $5.50-$6.50, whose upper limit is much higher than the 2018 level of $5.76. The rising expenses will hamper the company’s profit margin in the coming quarters.

In view of Callon’s already weak financials and other headwinds, the company’s decision to pay a premium with shares to assume Carrizo's debt load and scattered assets has been met with tepid response from investors.

While the agreement is expected to generate more than $100 million of free cash flow and annual cost-saving synergies in the range of $100-$125 million, only time will tell if the deal is able to pay big dividends to Callon down the road. Currently, management’s main focus should be to capture the deal synergies to best advantage and ensure that the free cash flow finds way to its shareholders.

Zacks Rank and Key Picks

Callon currently carries a Zacks Rank #3 (Hold). Investors interested in the same industry can consider Approach Resources Inc. (NASDAQ:AREX) and Comstock Resources, Inc. (NYSE:CRK) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Approach Resources managed to surpass earnings estimates in three out of the trailing four quarters, with an average positive surprise of 12.67%.

Comstock’s y/y sales growth is projected at 117.3% in 2019.

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