Citi Needs to See Callon Petroleum Increase In Inventory For More Upside

Although Citi likes the high quality, small cap oil exposure which Callon Petroleum Co (NYSE: CPE) provides, an analyst at the firm still initiated the stock with a Neutral rating and $12 price target Thursday. One of the reasons the analyst was hesitant to give Callon a higher rating was the lack of inventory that would provide meaningful upside. The mix of positives and negatives in the report led the sell-side firm to stand waiting on the sidelines until more upside and inventory depth presents itself.Citi stated, "With our activity assumptions, we estimate CPE has 12 years of overall drilling but only ~5-7 years in its 2 highest return areas." Typically, Citi likes to see names that have core inventory lives of around 10 years, where stocks will then trade at a discount near the six to eight year term mark. Despite the slightly favorable skew in risk/reward scenario, inventory had a large effect on valuation, given the upside case in Callon showed net asset value of around 20 percent, whereas the downside scenario decreased net asset value around 15 percent.The mixed report and initiation of a Neutral rating seemed to have a negative effect on Callon, as shares ended down 4 percent Thursday.