It’s been a tough year for oil and natural gas exploration companies. A plunge in oil demand and prices on the back of the novel coronavirus pandemic forced many in this space to curtail production, run huge losses and even close shop. Callon Petroleum (NYSE:CPE) is no exception: year-to-date, CPE stock is down about 75%.
Callon’s fortunes may change soon.
There is reason to believe that oil prices will rebound in the second half 2020 back to where they were before Covid-19 emerged. If so, this rebound in oil prices – coupled with restored production and new capital spending – could spark a huge rally in CPE stock.
To be sure, there are enormous risks to this bull thesis. But those risks seem priced in. Potential upside on the back of an oil price rebound does not.
So, for risk-seeking investors, CPE stock offers a highly levered way to play a potential second half rebound in oil.
Here’s a deeper look.
A Rebound in Oil?
After plunging amid the onset of the Covid-19 pandemic, oil prices rebounded strongly over the past few months as global demand firmed up, and OPEC+ members have cut production.
This oil price rebound should persist in the second half of 2020.
Consumer mobility in the U.S. was steadily increasing before a rise in Covid-19 cases throughout June and July created chop in this increasing mobility trend. Industrial economic activity was on a similar uptrend before July, but has since paused. This choppiness in consumer mobility and industrial economic activity will persist for the next few months.
But, I also think it’s conceivable that sometime in October or November, we get a Covid-19 vaccine. So does Dr. Anthony Fauci. If we do, the outlook for consumer mobility and industrial economic activity – and, by extension, oil demand – will meaningfully improve.
Concurrently, OPEC+ member nations will remain committed to production cuts until oil demand actually rebounds.
The result is that, in the last few months of 2020, we will have an outlook for rising demand against the backdrop of supply cuts – a dynamic which will help push oil prices higher.
Oil stocks – and in particular, CPE stock – will rise alongside oil prices.
CPE Stock Offers Big Upside Potential
Back when oil prices were $50+ in early 2020, CPE stock traded north of $3. If oil prices rebound back to those $50+ levels by the end of the year, CPE stock could rebound back to $3.
The logic is fairly simple.
In early 2020, Callon Petroleum was hit by a double headwind of plunging oil prices and curtailed production. Those falling oil prices forced the company to reduce production to preserve cash.
In the second half of 2020, that double headwind could turn into a double tailwind.
That is, as oil prices rebound, Callon Petroleum will bring some of its production back online. So, in the third and fourth quarter, Callon’s numbers will be boosted by both higher oil prices and more oil output.
This double tailwind will converge on significantly depressed CPE stock – shares trade just a hair above 14% of book value – to spark a huge rebound in the shares.
Bottom Line on CPE Stock
CPE stock is not for the faint of heart. There’s a ton of debt on the balance sheet, and the bull thesis is predicated on one oil prices rebounding.
If that doesn’t happen, CPE stock will plunge to near zero, liquidity risks become highlighted and investors flee for the exits.
But, if oil prices do rebound, then CPE stock could easily rise 100%+ from here.
So, the best (and arguably) only way to look at CPE stock is as a high-risk, high-reward play on rebounding oil prices in the second-half of 2020.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
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