UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



 

 



 

 



FORM 10-Q

 



 

 



Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For The Quarterly Period Ended September 30, 2016

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to ____________

Commission File Number 001-14039





 

 



 

 



Callon Petroleum Company

(Exact Name of Registrant as Specified in Its Charter)



 

 



 

 







 

 

 

 

 

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

64-0844345

(IRS Employer

Identification No.)



 

200 North Canal Street

Natchez, Mississippi

(Address of Principal Executive Offices)

39120

(Zip Code)



601-442-1601

(Registrant’s Telephone Number, Including Area Code)



Not Applicable

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)



Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes  No  



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  No  



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):





 

 

 

Large accelerated filer

 

Accelerated filer



 

 

 

 

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  No  



The Registrant had  161,041,320 shares of common stock outstanding as of October 28, 2016.



 


 

 

Table of Contents





 

Part I. Financial Information

 



 

Item 1. Financial Statements (Unaudited)

 



 

Consolidated Balance Sheets 

4



 

Consolidated Statements of Operations

5



 

Consolidated Statements of Cash Flows

6



 

Notes to Consolidated Financial Statements

7



 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

19



 

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

30



 

Item 4.  Controls and Procedures

31



 

Part II.  Other Information

 



 

Item 1.  Legal Proceedings

32



 

Item 1A.  Risk Factors

32



 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

32



 

Item 3.  Defaults Upon Senior Securities

32



 

Item 4.  Mine Safety Disclosures

32



 

Item 5.  Other Information

32



 

Item 6.  Exhibits

33



 

 

2


 

 

Table of Contents



DEFINITIONS



All defined terms under Rule 4-10(a) of Regulation S-X shall have their prescribed meanings when used in this report. As used in this document:



·

ARO:  asset retirement obligation.

·

Bbl or Bbls:  barrel or barrels of oil or natural gas liquids.

·

BOE:  barrel of oil equivalent, determined by using the ratio of one Bbl of oil or NGLs to six Mcf of gas.  The ratio of one barrel of oil or NGL to six Mcf of natural gas is commonly used in the industry and represents the approximate energy equivalence of oil or NGLs to natural gas, and does not represent the economic equivalency of oil and NGLs to natural gas. The sales price of a barrel of oil or NGLs is considerably higher than the sales price of six Mcf of natural gas.

·

BBtu: billion Btu.

·

BOE/d:  BOE per day.

·

Btu:  a British thermal unit, which is a measure of the amount of energy required to raise the temperature of one pound of water one degree Fahrenheit.

·

GAAP: Generally Accepted Accounting Principles in the United States.

·

Henry Hub: A natural gas pipeline delivery point that serves as the benchmark natural gas price underlying NYMEX natural gas futures contracts.

·

LIBOR:  London Interbank Offered Rate.

·

LOE:  lease operating expense.

·

MBbls:  thousand barrels of oil.

·

MBOE:  thousand BOE.

·

MMBOE: million BOE.

·

Mcf:  thousand cubic feet of natural gas.

·

MMBtu:  million Btu.

·

MMcf:  million cubic feet of natural gas.

·

NGL or NGLs:  natural gas liquids, such as ethane, propane, butanes and natural gasoline that are extracted from natural gas production streams.

·

NYMEX:  New York Mercantile Exchange.

·

Oil: includes crude oil and condensate.

·

SEC:  United States Securities and Exchange Commission.

·

WTI: West Texas Intermediate grade crude oil, used as a pricing benchmark for sales contracts and NYMEX oil futures contracts.



With respect to information relating to our working interest in wells or acreage, “net” oil and gas wells or acreage is determined by multiplying gross wells or acreage by our working interest therein. Unless otherwise specified, all references to wells and acres are gross.



3


 

 

Table of Contents

Part I.  Financial Information

Item I.  Financial Statements

Callon Petroleum Company

Consolidated Balance Sheets

(in thousands, except par and per share values and share data)



 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

ASSETS

 

Unaudited

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

325,885 

 

$

1,224 

Accounts receivable

 

56,172 

 

 

39,624 

Fair value of derivatives

 

3,502 

 

 

19,943 

Other current assets

 

1,712 

 

 

1,461 

Total current assets

 

387,271 

 

 

62,252 

Oil and natural gas properties, full cost accounting method:

 

 

 

 

 

  Evaluated properties

 

2,593,798 

 

 

2,335,223 

  Less accumulated depreciation, depletion, amortization and impairment

 

(1,901,102)

 

 

(1,756,018)

  Net oil and natural gas properties

 

692,696 

 

 

579,205 

  Unevaluated properties

 

393,875 

 

 

132,181 

Total oil and natural gas properties

 

1,086,571 

 

 

711,386 

Other property and equipment, net

 

12,816 

 

 

7,700 

Restricted investments

 

3,329 

 

 

3,309 

Deferred financing costs

 

3,431 

 

 

3,642 

Fair value of derivatives

 

57 

 

 

Acquisition deposit

 

32,700 

 

 

Other assets, net

 

1,429 

 

 

305 

Total assets

$

1,527,604 

 

$

788,594 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued liabilities

$

99,026 

 

$

70,970 

Accrued interest

 

5,950 

 

 

5,989 

Cash-settleable restricted stock unit awards

 

8,269 

 

 

10,128 

Asset retirement obligations

 

3,529 

 

 

790 

Deferred tax liability

 

42 

 

 

Fair value of derivatives

 

7,786 

 

 

Total current liabilities

 

124,602 

 

 

87,877 

Senior secured revolving credit facility

 

 

 

40,000 

Secured second lien term loan, net of unamortized deferred financing costs

 

290,085 

 

 

288,565 

Asset retirement obligations

 

1,934 

 

 

4,317 

Cash-settleable restricted stock unit awards

 

7,042 

 

 

4,877 

Fair value of derivatives

 

2,936 

 

 

Other long-term liabilities

 

286 

 

 

200 

Total liabilities

 

426,885 

 

 

425,836 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, series A cumulative, $0.01 par value and $50.00 liquidation preference, 2,500,000 shares authorized: 1,458,948 and 1,578,948 shares outstanding, respectively

 

15 

 

 

16 

Common stock, $0.01 par value, 300,000,000 and 150,000,000 shares authorized, respectively; 161,036,233 and 80,087,148 shares outstanding, respectively

 

1,610 

 

 

801 

Capital in excess of par value

 

1,535,661 

 

 

702,970 

Accumulated deficit

 

(436,567)

 

 

(341,029)

Total stockholders’ equity

 

1,100,719 

 

 

362,758 

Total liabilities and stockholders’ equity

$

1,527,604 

 

$

788,594 



The accompanying notes are an integral part of these consolidated financial statements.





4


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Operations

(Unaudited; in thousands, except per share data)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Operating revenues:

 

 

 

 

 

 

 

 

 

 

 

 

  Oil sales

 

$

49,095 

 

$

30,582 

 

$

117,093 

 

$

94,584 

  Natural gas sales

 

 

6,832 

 

 

3,734 

 

 

14,677 

 

 

9,365 

Total operating revenues

 

 

55,927 

 

 

34,316 

 

 

131,770 

 

 

103,949 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

  Lease operating expenses

 

 

9,961 

 

 

7,194 

 

 

24,229 

 

 

20,728 

  Production taxes

 

 

3,478 

 

 

2,583 

 

 

8,153 

 

 

7,800 

  Depreciation, depletion and amortization

 

 

17,303 

 

 

16,704 

 

 

49,318 

 

 

52,395 

  General and administrative

 

 

7,891 

 

 

4,302 

 

 

19,755 

 

 

22,167 

  Accretion expense

 

 

187 

 

 

142 

 

 

762 

 

 

485 

  Write-down of oil and natural gas properties

 

 

 

 

87,301 

 

 

95,788 

 

 

87,301 

  Rig termination fee

 

 

 

 

 

 

 

 

3,641 

  Acquisition expense

 

 

456 

 

 

 

 

2,410 

 

 

Total operating expenses

 

 

39,276 

 

 

118,226 

 

 

200,415 

 

 

194,517 

  Income (loss) from operations

 

 

16,651 

 

 

(83,910)

 

 

(68,645)

 

 

(90,568)

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

  Interest expense, net of capitalized amounts

 

 

831 

 

 

5,603 

 

 

10,502 

 

 

15,567 

  (Gain) loss on derivative contracts

 

 

(5,135)

 

 

(23,283)

 

 

11,281 

 

 

(17,463)

  Other income, net

 

 

(122)

 

 

(92)

 

 

(299)

 

 

(177)

Total other (income) expense

 

 

(4,426)

 

 

(17,772)

 

 

21,484 

 

 

(2,073)

  Income (loss) before income taxes

 

 

21,077 

 

 

(66,138)

 

 

(90,129)

 

 

(88,495)

     Income tax (benefit) expense

 

 

(62)

 

 

45,667 

 

 

(62)

 

 

38,474 

     Net income (loss)

 

 

21,139 

 

 

(111,805)

 

 

(90,067)

 

 

(126,969)

     Preferred stock dividends

 

 

(1,824)

 

 

(1,974)

 

 

(5,471)

 

 

(5,921)

 Income (loss) available to common stockholders

 

$

19,315 

 

$

(113,779)

 

$

(95,538)

 

$

(132,890)

 Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

$

0.14 

 

$

(1.72)

 

$

(0.85)

 

$

(2.10)

  Diluted

 

$

0.14 

 

$

(1.72)

 

$

(0.85)

 

$

(2.10)

  Shares used in computing income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

136,983 

 

 

66,277 

 

 

112,925 

 

 

63,265 

  Diluted

 

 

137,483 

 

 

66,277 

 

 

112,925 

 

 

63,265 



The accompanying notes are an integral part of these consolidated financial statements.

5


 

 

Table of Contents

Callon Petroleum Company

Consolidated Statements of Cash Flows

(Unaudited; in thousands)





 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(90,067)

 

$

(126,969)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

  Depreciation, depletion and amortization

 

 

50,560 

 

 

52,583 

  Write-down of oil and natural gas properties

 

 

95,788 

 

 

87,301 

  Accretion expense

 

 

762 

 

 

485 

  Amortization of non-cash debt related items

 

 

2,371 

 

 

2,342 

  Deferred income tax (benefit) expense

 

 

(62)

 

 

38,474 

  Net loss on derivatives, net of settlements

 

 

27,105 

 

 

7,635 

  Non-cash expense related to equity share-based awards

 

 

(253)

 

 

(300)

  Change in the fair value of liability share-based awards

 

 

6,045 

 

 

4,759 

  Payments to settle asset retirement obligations

 

 

(895)

 

 

(3,047)

  Changes in operating assets and liabilities:

 

 

 

 

 

 

     Accounts receivable

 

 

(16,444)

 

 

(7,278)

     Other current assets

 

 

(251)

 

 

31 

     Current liabilities

 

 

19,815 

 

 

6,455 

     Acquisition deposit

 

 

(32,700)

 

 

     Change in other long-term liabilities

 

 

86 

 

 

100 

     Change in other assets, net

 

 

(1,671)

 

 

421 

  Payments to settle vested liability share-based awards related to early retirements

 

 

 

 

(3,538)

  Payments to settle vested liability share-based awards

 

 

(10,300)

 

 

(3,925)

     Net cash provided by operating activities

 

 

49,889 

 

 

55,529 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(122,698)

 

 

(175,699)

Acquisitions

 

 

(302,057)

 

 

(2,849)

Proceeds from sales of mineral interests and equipment

 

 

22,923 

 

 

348 

    Net cash used in investing activities

 

 

(401,832)

 

 

(178,200)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on senior secured revolving credit facility

 

 

217,000 

 

 

130,000 

Payments on senior secured revolving credit facility

 

 

(257,000)

 

 

(66,000)

Issuance of common stock, net

 

 

722,715 

 

 

65,546 

Payment of preferred stock dividends

 

 

(5,471)

 

 

(5,921)

Payment of deferred financing costs

 

 

(640)

 

 

     Net cash provided by financing activities

 

 

676,604 

 

 

123,625 

Net change in cash and cash equivalents

 

 

324,661 

 

 

954 

  Balance, beginning of period

 

 

1,224 

 

 

968 

  Balance, end of period

 

$

325,885 

 

$

1,922 



The accompanying notes are an integral part of these consolidated financial statements. 









 

6


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

INDEX TO THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





 

 

 

1.

Description of Business and Basis of Presentation

7.

Fair Value Measurements

2.

Oil and Natural Gas Properties

8.

Income Taxes

3.

Acquisitions

9.

Asset Retirement Obligations

4.

Earnings Per Share

10.

Equity Transactions

5.

Borrowings

11.

Other

6.

Derivative Instruments and Hedging Activities

 

 



Note 1 - Description of Business and Basis of Presentation



Description of business



Callon Petroleum Company is an independent oil and natural gas company established in 1950. The Company was incorporated under the laws of the state of Delaware in 1994 and succeeded to the business of a publicly traded limited partnership, a joint venture with a consortium of European investors and an independent energy company partially owned by a member of current management. As used herein, the “Company,” “Callon,” “we,” “us,” and “our” refer to Callon Petroleum Company and its predecessors and subsidiaries unless the context requires otherwise.



Callon is focused on the acquisition, development, exploration and exploitation of unconventional onshore, oil and natural gas reserves in the Permian Basin in West Texas. The Company’s operations to date have been predominantly focused on horizontal drilling of several prospective intervals, including multiple levels of the Wolfcamp formation and, more recently, the Lower Spraberry shale in the Midland Basin. Callon has assembled a multi-year inventory of potential horizontal well locations and intends to add to this inventory through delineation drilling of emerging zones on its existing acreage and acquisition of additional locations through working interest acquisitions, acreage purchases, joint ventures and asset swaps. 



Basis of presentation



Unless otherwise indicated, all dollar amounts included within the Footnotes to the Financial Statements are presented in thousands, except for per share and per unit data.



The interim consolidated financial statements of the Company have been prepared in accordance with (1) GAAP, (2) the SEC’s instructions to Quarterly Report on Form 10-Q and (3) Rule 10-01 of Regulation S-X, and include the accounts of Callon Petroleum Company, and its subsidiary, Callon Petroleum Operating Company (“CPOC”). CPOC also has subsidiaries, namely Callon Offshore Production, Inc. and Mississippi Marketing, Inc.



These interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The balance sheet at December 31, 2015 has been derived from the audited financial statements at that date. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2016.



In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring adjustments and all intercompany account and transaction eliminations, necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the periods indicated. Certain prior year amounts may have been reclassified to conform to current year presentation.



Recently issued accounting policies



In March 2016, the Financial Accounting Standards Board issued accounting standards update No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The standard is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, and will allow companies to estimate the number of stock awards expected to vest. The guidance in ASU 2016-09 is effective for public entities for annual reporting periods beginning after December 15, 2016, including interim periods therein. Early adoption is permitted and is to be applied on retrospective basis. The Company is currently evaluating the method of adoption and impact this standard may have on its financial statements and related disclosures.





 

7


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 



In August 2016, the Financial Accounting Standards Board issued accounting standards update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The objective of the standard is to reduce the existing diversity in practice of several cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The guidance in ASU 2016-15 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted and is to be applied on retrospective basis. The Company is currently evaluating the method of adoption and impact this standard may have on its financial statements and related disclosures.



Recently adopted accounting policies



In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent amounts on the balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent on the balance sheet. The guidance in ASU 2015-17 is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. As of September 30, 2016, the Company adopted this ASU, which does not have a material impact on its financial statements.



Note 2 – Oil and Natural Gas Properties



The Company uses the full cost method of accounting for its exploration and development activities. Under this method of accounting, the cost of both successful and unsuccessful exploration and development activities are capitalized as oil and gas properties. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals, interest capitalized on unevaluated leases, other costs related to exploration and development activities, and site restoration, dismantlement and abandonment costs capitalized in accordance with asset retirement obligation accounting guidance. Costs capitalized also include any internal costs that are directly related to exploration and development activities, including salaries and benefits, but do not include any costs related to production, general corporate overhead or similar activities.



Under full cost accounting rules, the Company reviews the carrying value of its proved oil and natural gas properties each quarter. Under these rules, capitalized costs of oil and natural gas properties, net of accumulated depreciation, depletion and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of unevaluated properties, net of related tax effects (the full cost ceiling). These rules require pricing based on the preceding 12-months’ average oil and natural gas prices based on closing prices on the first day of each month and require a write-down if the net capitalized costs of proved oil and natural gas properties exceeds the full cost ceiling. At September 30, 2016, the average realized prices used in determining the estimated future net cash flows from proved reserves were $38.92 per barrel of oil and $2.53 per Mcf of natural gas. For the three months ended September 30, 2016 no write-down of oil and natural gas properties was recognized as a result of the ceiling test limitation. For the nine months ended September 30, 2016, the Company recognized a  write-down of oil and natural gas properties of $95,788 as a result of the ceiling test limitation.



Note 3 - Acquisitions 



Acquisitions were accounted for under the acquisition method of accounting, which involves determining the fair value of the assets acquired and liabilities assumed under the income approach.



8


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

2016 acquisitions



On August 3, 2016, the Company entered into a definitive purchase and sale agreement for the acquisition of an additional 4.0% working interest (3.0% net revenue interest) in the Casselman-Bohannon fields for total cash consideration of  $13,000, excluding customary purchase price adjustments. Following the completion of this acquisition the Company will own approximately 75.3% working interest (58.5% net revenue interest) in the Casselman-Bohannon fields. The following table summarizes the estimated acquisition date fair values of the net assets to be acquired in the acquisition:







 

 

 

Evaluated oil and natural gas properties

 

$

6,492 

Unevaluated oil and natural gas properties

 

 

6,508 

  Net assets acquired

 

$

13,000 



On May 26, 2016, the Company completed the acquisition of 17,298 gross (14,089 net) acres primarily located in Howard County, Texas from BSM Energy LP, Crux Energy LP and Zaniah Energy LP, for total cash consideration of $220,000 and 9,333,333 shares of common stock for a total purchase price of $329,573,  excluding customary purchase price adjustments (the “Big Star Transaction”). The Company acquired an 81% average working interest (61% average net revenue interest) in the properties acquired in the Big Star Transaction.



The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed. Any such adjustments to the preliminary estimates of fair value could be material. The following table summarizes the estimated acquisition date fair values of the net assets to be acquired in the acquisition:







 

 

 

Evaluated oil and natural gas properties

 

$

96,194 

Unevaluated oil and natural gas properties

 

 

233,387 

Asset retirement obligations

 

 

(8)

  Net assets acquired

 

$

329,573 



The following unaudited summary pro forma financial information for the three and nine months ended September 30, 2016 has been presented for illustrative purposes only and does not purport to represent what the Company’s results of operations would have been if the Big Star Transaction had occurred as presented, or to project the Company’s results of operations for any future periods. The pro forma financial information was prepared assuming the Big Star Transaction occurred as of January 1, 2015. The pro forma adjustments are based on available information and certain assumptions that management believes are reasonable, including those pertaining to revenue, lease operating expenses, production taxes, depreciation, depletion and amortization expense, write-down of oil and natural gas properties, accretion expense, interest expense and capitalized interest. 





 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

2016

 

2015

 

2016

 

2015

Revenues

 

$

55,927 

 

$

41,501 

 

$

140,937 

 

$

119,561 

Income from operations

 

 

16,651 

 

 

(17,644)

 

 

(68,753)

 

 

(25,339)

Income available to common stockholders

 

 

19,315 

 

 

(43,720)

 

 

(88,886)

 

 

(55,896)



 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.14 

 

$

(0.43)

 

$

(0.79)

 

$

(0.57)

Diluted

 

$

0.14 

 

$

(0.43)

 

$

(0.79)

 

$

(0.57)



From the date of the acquisition through the period ended  September 30, 2016, the properties associated with the Big Star Transaction have been comingled with our existing properties and it is impractical to provide the stand-alone operational results related to these properties.



On May 16, 2016, the Company completed the following transactions (collectively, the “AMI Transaction”) for an aggregate net cash purchase price of $33,012,  excluding customary purchase price adjustments. Key elements of the AMI Transaction include:



·

Formation of an area of mutual interest with TRP Energy, LLC (“TRP”) in western Reagan County, Texas, through the joint acquisition from a private party of 4,745 net acres (with a 55% share to Callon) north of the Garrison Draw field; and

·

Callon’s simultaneous sale of a 27.5% interest in the Garrison Draw field to TRP.



The following table summarizes the acquisition date fair values of the net assets acquired, including customary purchase price adjustments: 

9


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 







 

 

 

Evaluated oil and natural gas properties

 

$

15,951 

Unevaluated oil and natural gas properties

 

 

17,069 

Asset retirement obligations

 

 

(8)

  Net assets acquired

 

$

33,012 



On January 18, 2016, the Company completed the acquisition of an additional 4.9% working interest (3.7% net revenue interest) in the Casselman-Bohannon fields for an aggregate cash purchase price of $10,183,  including customary purchase price adjustments. The following table summarizes the acquisition date fair values of the net assets acquired, including customary purchase price adjustments:







 

 

 

Evaluated oil and natural gas properties

 

$

5,527 

Unevaluated oil and natural gas properties

 

 

4,656 

  Net assets acquired

 

$

10,183 



Subsequent event 



On October 20, 2016, the Company completed the acquisition of 6,904 gross (5,952 net) acres primarily located in Howard County, Texas from Plymouth Petroleum, LLC and additional sellers that exercised their “tag-along” sales rights, for total cash consideration of $340,686, excluding customary purchase price adjustments (the “Plymouth Transaction”). The Company funded the cash purchase price with the net proceeds of an equity offering (see Note 10 for additional information regarding the equity offering). The Company acquired an 82% average working interest (62% average net revenue interest) in the properties acquired in the Plymouth Transaction. In September 2016, in connection with the execution of the purchase and sale agreement for the Plymouth Transaction, the Company paid a deposit in the amount of $32,700 to a third party escrow agent, which was recorded as Acquisition deposit on the balance sheet as of September 30, 2016.







Note 4 - Earnings Per Share



The following table sets forth the computation of basic and diluted earnings per share:





 

 

 

 

 

 

 

 

 

 

 

 

(share amounts in thousands)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

Net income (loss)

 

$

21,139 

 

$

(111,805)

 

$

(90,067)

 

$

(126,969)

Preferred stock dividends

 

 

(1,824)

 

 

(1,974)

 

 

(5,471)

 

 

(5,921)

Income (loss) available to common stockholders

 

$

19,315 

 

$

(113,779)

 

$

(95,538)

 

$

(132,890)



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

136,983 

 

 

66,277 

 

 

112,925 

 

 

63,265 

Dilutive impact of restricted stock

 

 

500 

 

 

 

 

 

 

Weighted average shares outstanding for diluted income (loss) per share

 

 

137,483 

 

 

66,277 

 

 

112,925 

 

 

63,265 



 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

$

0.14 

 

$

(1.72)

 

$

(0.85)

 

$

(2.10)

Diluted income (loss) per share

 

$

0.14 

 

$

(1.72)

 

$

(0.85)

 

$

(2.10)



 

 

 

 

 

 

 

 

 

Stock options (a)

 

 

15 

 

 

15 

 

 

15 

 

 

15 

Restricted stock (a)

 

 

25 

 

 

159 

 

 

25 

 

 

159 



(a)

Shares excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.







 



10


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

Note 5 - Borrowings



The Company’s borrowings consisted of the following at:





 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

Principal components

 

 

 

 

 

 

Senior secured revolving credit facility

 

$

 

$

40,000 

Secured second lien term loan

 

 

300,000 

 

 

300,000 

  Total principal outstanding

 

 

300,000 

 

 

340,000 

Secured second lien term loan, unamortized deferred financing costs

 

 

(9,915)

 

 

(11,435)

  Total carrying value of borrowings

 

$

290,085 

 

$

328,565 



Senior secured revolving credit facility (the “Credit Facility”)



On March 11, 2014, the Company entered into the Fifth Amended and Restated Credit Agreement to the Credit Facility with a maturity date of March 11, 2019.  JPMorgan Chase Bank, N.A. is Administrative Agent, and participants include several institutional lenders. The total notional amount available under the Credit Facility is $500,000. Amounts borrowed under the Credit Facility may not exceed the borrowing base, which is generally reviewed on a semi-annual basis. As of September 30, 2016,  the Credit Facility’s borrowing base was $385,000. The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties. 

 

Effective July 13, 2016, the Credit Facility’s borrowing base was increased to $385,000 and the Company’s capacity to hedge oil and natural gas volumes was effectively increased with a change in the capacity calculation to a percentage of total proved reserves from proved producing reserves. In addition, the interest rate for borrowings under the Credit Facility was increased 0.25% across all tiers of the pricing grid, resulting in a range of interest costs equal to LIBOR plus 2.00% to 3.00%. There were no modifications to other terms or covenants of the Credit Facility.



As of September 30, 2016, there was no balance outstanding on the Credit Facility. For the quarter ended September 30, 2016, the Credit Facility had a weighted-average interest rate of 2.92%, calculated as the LIBOR plus a tiered rate ranging from 2.00% to 3.00%, which is determined based on utilization of the facility. In addition, the Credit Facility carries a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the borrowing base.



Secured second lien term loan (the “Term Loan”)



On October 8, 2014, the Company entered into the Term Loan with an aggregate amount of up to $300,000 and a maturity date of October 8, 2021. The Royal Bank of Canada is Administrative Agent, and participants include several institutional lenders. The Term Loan may be prepaid at the Company’s option, subject to a prepayment premium. The prepayment amount would be (i) 102% of principal if the prepayment event occurred prior to October 8, 2016, (ii) 101% of principal if the prepayment event occurred on or after October 8, 2016,  but before October 8, 2017, and (iii) 100% of principal for prepayments made on or after October 8, 2017. The Term Loan was secured by junior liens on properties mortgaged under the Credit Facility, subject to an intercreditor agreement.



As of September 30, 2016, the balance outstanding on the Term Loan was $300,000 with an interest rate of 8.5%, calculated at a rate of LIBOR (subject to a floor rate of 1.0%) plus 7.5% per annum. The Company elected a LIBOR rate based on various tenors, and was incurring interest based on an underlying three-month LIBOR rate, which was last elected in July 2016.



Restrictive covenants



The Company’s Credit Facility and Term Loan contain various covenants including restrictions on additional indebtedness, payment of cash dividends and maintenance of certain financial ratios. The Company was in compliance with these covenants at September 30, 2016.



Subsequent events



On October 3, 2016, the Company closed the sale of $400,000 aggregate principal amount of 6.125% senior unsecured notes due 2024 (the “Senior Notes”) at an issue price of 100% of the aggregate principal amount of the Senior Notes. The Notes will mature on October 1, 2024, unless redeemed in accordance with their terms prior to such date. The net proceeds of the offering, after deducting initial purchasers’ discounts and estimated offering expenses, were approximately $391,270. The Senior Notes are guaranteed on a senior unsecured basis by the Company’s wholly-owned subsidiary, Callon Petroleum Operating Company, and may be guaranteed by certain future subsidiaries. Interest on the Senior Notes is payable semi-annually.



11


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

On October 11, 2016, the Term Loan was repaid in full at the prepayment rate of 101% using proceeds from the sale of the Senior Notes, which is expected to result in a loss on early extinguishment of debt of $12,851 (inclusive of $3,000 in prepayment fees and $9,851 of unamortized debt issuance costs).



Note 6 - Derivative Instruments and Hedging Activities



Objectives and strategies for using derivative instruments



The Company is exposed to fluctuations in oil and natural gas prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil and natural gas production. The Company utilizes a mix of collars, swaps, puts, calls and similar derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.



Counterparty risk and offsetting



The use of derivative instruments exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument; see Note 7 for additional information regarding fair value.



The Company executes commodity derivative contracts under master agreements with netting provisions that provide for offsetting assets against liabilities. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.



Financial statement presentation and settlements



Settlements of the Company’s derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See Note 7 for additional information regarding fair value.



Derivatives not designated as hedging instruments



The Company records its derivative contracts at fair value in the consolidated balance sheets and records changes in fair value as a gain or loss on derivative contracts in the consolidated statements of operations. Cash settlements are also recorded as gain or loss on derivative contracts in the consolidated statements of operations.



The following table reflects the fair value of the Company’s derivative instruments for the periods presented:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Balance Sheet Presentation

 

Asset Fair Value

 

Liability Fair Value

 

Net Derivative Fair Value

Commodity

 

Classification

 

Line Description

 

09/30/2016

 

12/31/2015

 

09/30/2016

 

12/31/2015

 

09/30/2016

 

12/31/2015

Natural gas

 

Current

 

Fair value of derivatives

 

$

29 

 

$

 

$

(233)

 

$

 

$

(204)

 

$

Natural gas

 

Non-current

 

Fair value of derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

Current

 

Fair value of derivatives

 

 

3,473 

 

 

19,943 

 

 

(7,553)

 

 

 

 

(4,080)

 

 

19,943 

Oil

 

Non-current

 

Fair value of derivatives

 

 

54 

 

 

 

 

(2,936)

 

 

 

 

(2,882)

 

 

 

 

Totals

 

 

 

$

3,559 

 

$

19,943 

 

$

(10,722)

 

$

 

$

(7,163)

 

$

19,943 



12


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

As previously discussed, the Company’s derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheet. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:





 

 

 

 

 

 

 

 

 



 

 

September 30, 2016



 

Presented without

 

 

 

As Presented with



 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

3,591 

 

$

(89)

 

$

3,502 

Long-term assets: Fair value of derivatives

 

 

57 

 

 

 

 

57 



 

 

 

 

 

 

 

 

 

Current liabilities: Fair value of derivatives

 

 

(7,875)

 

 

89 

 

 

(7,786)

Long-term liabilities: Fair value of derivatives

 

$

(2,936)

 

$

 

$

(2,936)







 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



 

Presented without

 

 

 

As Presented with



 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

19,943 

 

$

 

$

19,943 



For the periods indicated, the Company recorded the following related to its derivatives in the consolidated statement of operations as gain or loss on derivative contracts:



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended September 30,

 

Nine Months Ended September 30,



 

 

2016

 

 

2015

 

 

2016

 

 

2015

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on settlements

 

$

4,252 

 

$

9,399 

 

$

15,467 

 

$

23,863 

Net gain (loss) on fair value adjustments

 

 

699 

 

 

13,758 

 

 

(26,904)

 

 

(6,787)

  Total gain (loss)

 

$

4,951 

 

$

23,157 

 

$

(11,437)

 

$

17,076 

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

(161)

 

$

390 

 

$

357 

 

$

1,235 

Net gain (loss) on fair value adjustments

 

 

345 

 

 

(264)

 

 

(201)

 

 

(848)

  Total gain

 

$

184 

 

$

126 

 

$

156 

 

$

387 



 

 

 

 

 

 

 

 

 

 

 

 

Total gain (loss) on derivative contracts

 

$

5,135 

 

$

23,283 

 

$

(11,281)

 

$

17,463 



13


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

Derivative positions



Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2016:  





 

 

 

 

 

 



 

For the Remainder of

 

For the Full Year of

Oil contracts

 

2016

 

2017

Swap contracts (WTI)

 

 

 

 

 

 

  Total volume (MBbls)

 

 

184 

 

 

  Weighted average price per Bbl

 

$

58.23 

 

$

Swap contracts combined with short puts (WTI, enhanced swaps)

 

 

 

 

 

 

  Total volume (MBbls)

 

 

 

 

730 

  Weighted average price per Bbl

 

 

 

 

 

 

     Swap

 

$

 

$

44.50 

     Short put option

 

$

 

$

30.00 

Collar contracts combined with short puts (WTI, three-way collars)

 

 

 

 

 

 

  Volume (MBbls)

 

 

184 

 

 

  Weighted average price per Bbl

 

 

 

 

 

 

     Ceiling (short call option)

 

$

65.00 

 

$

     Floor (long put option)

 

$

55.00 

 

$

     Short put option

 

$

40.33 

 

$

Collar contracts (WTI, two-way collars)

 

 

 

 

 

 

  Total volume (MBbls)

 

 

184 

 

 

438 

  Weighted average price per Bbl

 

 

 

 

 

 

     Ceiling (short call)

 

$

46.50 

 

$

59.05 

     Floor (long put)

 

$

37.50 

 

$

47.50 

Call option contracts (short position)

 

 

 

 

 

 

  Total volume (MBbls)

 

 

 

 

670 

  Weighted average price per Bbl

 

 

 

 

 

 

     Call strike price

 

$

 

$

50.00 

Swap contracts (Midland basis differentials)

 

 

 

 

 

 

  Volume (MBbls)

 

 

368 

 

 

  Weighted average price per Bbl

 

$

0.17 

 

$



 

 

 

 

 

 

Natural gas contracts

 

 

 

 

 

 

Swap contracts (Henry Hub)

 

 

 

 

 

 

  Total volume (BBtu)

 

 

552 

 

 

  Weighted average price per MMBtu

 

$

2.52 

 

$

Collar contracts combined with short puts (Henry Hub, three-way collars)

 

 

 

 

 

 

  Total volume (BBtu)

 

 

 

 

1,460 

  Weighted average price per MMBtu

 

 

 

 

 

 

     Ceiling (short call option)

 

$

 

$

3.71 

     Floor (long put option)

 

$

 

$

3.00 

     Short put option

 

$

 

$

2.50 



Subsequent event



The following derivative contract was executed subsequent to September 30, 2016:







 

 

 

 

 

 



 

For the Remainder of

 

For the Remainder of

Oil contracts

 

2016

 

2017

Collar contracts (WTI, two-way collars)

 

 

 

 

 

 

  Total volume (MBbls)

 

 

 

 

1,095 

  Weighted average price per Bbl

 

 

 

 

 

 

     Ceiling (short call option)

 

$

 

$

57.79 

     Floor (long put option)

 

$

 

$

47.50 

















14


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

Note 7 - Fair Value Measurements



The fair value hierarchy included in GAAP gives the highest priority to Level 1 inputs, which consist of unadjusted quoted prices for identical instruments in active markets. Level 2 inputs consist of quoted prices for similar instruments. Level 3 valuations are derived from inputs that are significant and unobservable, and these valuations have the lowest priority.



Fair value of financial instruments



Cash, cash equivalents, and restricted investments. The carrying amounts for these instruments approximate fair value due to the short-term nature or maturity of the instruments.



Debt. The carrying amount of the Company’s floating-rate debt approximated fair value because the interest rates were variable and reflective of market rates. 

 

Assets and liabilities measured at fair value on a recurring basis



Certain assets and liabilities are reported at fair value on a recurring basis in the consolidated balance sheet. The following methods and assumptions were used to estimate fair value:



Commodity derivative instruments. The fair value of commodity derivative instruments is derived using an income approach valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative liabilities. The Company believes that the majority of the inputs used to calculate the commodity derivative instruments fall within Level 2 of the fair value hierarchy based on the wide availability of quoted market prices for similar commodity derivative contracts. See Note 6 for additional information regarding the Company’s derivative instruments.



The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

Fair value of derivatives

 

$

 

$

3,559 

 

$

 

$

3,559 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

Fair value of derivatives

 

 

 

 

(10,722)

 

 

 

 

(10,722)

  Total net assets

 

 

 

$

 

$

(7,163)

 

$

 

$

(7,163)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Classification

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

Fair value of derivatives

 

$

 

$

19,943 

 

$

 

$

19,943 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

Fair value of derivatives

 

 

 

 

 

 

 

 

  Total net assets

 

 

 

$

 

$

19,943 

 

$

 

$

19,943 



Assets and liabilities measured at fair value on a nonrecurring basis



Acquisitions.  As discussed in Note 3, the Company completed four acquisitions during the nine months ended September 30, 2016. The Company determined the fair value of the assets acquired using the income approach based on expected future cash flows from estimated reserve quantities, costs to produce and develop reserves, and oil and natural gas forward prices. The fair value measurements were based on Level 2 and Level 3 inputs.



Note 8 - Income Taxes



The Company typically provides for income taxes at a statutory rate of 35% adjusted for permanent differences expected to be realized, which primarily relate to non-deductible executive compensation expenses and state income taxes. As a result of the write-down of oil and natural gas properties in the latter part of 2015 and first half of 2016,  the Company incurred a cumulative three year loss. Because of the impact the cumulative loss has on the determination of the recoverability of deferred tax assets through future earnings, the Company assessed the ability to realize its deferred tax assets based on the future reversals of existing deferred tax liabilities. Accordingly, the Company established a valuation allowance for a portion of the deferred tax asset. The valuation allowance was $139,633 as of September 30, 2016. 



15


 

 

 

 

Callon Petroleum Company

Notes to the Consolidated Financial Statements

(All dollar amounts in thousands, except per share and per unit data)

Table of Contents

 

 

 

 

Note 9 - Asset Retirement Obligations



The table below summarizes the Company’s asset retirement obligations activity for the nine months ended September 30, 2016:  



 

 

 

Asset retirement obligations at January 1, 2016

 

$

5,107 

Accretion expense

 

 

762 

Liabilities incurred