After a brutal fall Callon Petroleum (NYSE:CPE) has clawed its way up. CPE stock already has tripled off the March lows, jumping from 38 cents to $1.30 now. Callon isn’t necessarily an outlier.
The markets are on a winning streak lately. While the novel coronavirus has dealt a stiff blow to the overall economy, traders are looking past the current problems toward future profitability. In fact, sentiment has turned up enough that even left-for-dead sectors, like energy, are attracting interest again.
For traders with perfect timing, Callon has already been a big winner. However, Callon stock started the year off around $4 per share, so it’s still down sharply year-to-date. The company’s fortunes are a race against the clock at this point. While the company is actually generating profits at the moment, it faces a huge debt load.
A Closer Look at CPE Stock
A piece of good news for Callon’s shareholders is that the company is profitable, and to a meaningful degree. This separates Callon from many of its weaker peers that are already in bankruptcy or are on death’s door.
For the first quarter of 2020, for example, Callon reported both earnings and net income of $212 million. That’s in one quarter, not the full year. And, I’d remind you, that was also right around when the price of oil briefly crashed to $0 per barrel while the virus was doing its worst.
It’s encouraging that even in that miserable operating environment, Callon still remained strongly in positive territory on both net income and EBITDA.
Adjusted earnings per share, for example, came out to 12 cents. At first glance, that makes CPE stock, at $1.30, seem like an incredible steal. Needless to say, if the company can earn 12 cents per quarter, it’d be pulling in something like 50 cents per year, which would put the stock at a less than 3 P/E ratio. So what’s the catch here?
Debt Remains the Real Problem
Our Chris Markoch recently detailed the serious issues that CPE stock faces. For one, the company made a big debt-fueled acquisition late last year. Unfortunately, that deal went off a few months too soon. Oil was still up over $50/barrel then and thus Callon paid too high a price for Carrizo Oil and Gas.
That deal brought Callon’s overall debt load to more than $3 billion. While the company doesn’t have to start repaying principal until 2023, it’s still a jarring amount of money. The company’s $200 million of quarterly profitability looks significantly less impressive in comparison.
Callon has also slashed costs this year, which is logical given the oil price environment. However, in cutting drilling, Callon is lowering future production, which will give them less firepower with which to attack the debt in coming years. Long story short, while Callon is surviving for now, it ultimately still needs higher oil prices to succeed.
CPE Stock Verdict
There’s some merit to the speculative case for Callon stock. Ironically, the company’s size is both a strength and a weakness here. Many oil stocks trading at a dollar per share are on the brink of bankruptcy. It’d take a miracle for them to survive.
Callon, by contrast, is actually a fairly large enterprise, despite its tiny share price. That’s because of its chunky share count. The company could easily do a reverse stock split to get the share price up to a more reasonable number without impacting liquidity too much. So don’t let the $1.30 share price fool you, Callon is not a traditional penny stock.
Can the company ultimately turn things around? The answer to that probably depends on whether or not the coronavirus continues picking up steam or not. Shale oil producers need more demand — more cars on the road, more jets in the air, and so on.
In a world with a glut of oil, independent shale producers like Callon are not in a great position. However, in a normal economy, if Callon can make it through this down-stretch first, it could offer huge returns for shareholders.
There’s one other potential bright spot. Chevron’s (NYSE:CVX) recent move to acquire Noble Energy (NASDAQ:NBL) suggests that mergers and acquisitions are back in play in the energy space. After a long drought, companies are looking to make deals.
Callon could benefit as larger companies look to consolidate the shale producers and reduce redundant costs. It’s no sure thing by any means, but this is not a bad speculative play if you’re looking to take a shot on a distressed energy stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
