Citi On Callon Petroleum: Needs More Inventory For Meaningful Upside

The analysts noted the strong balance sheet provides some protection against weakening commodity prices and projected YE'16 Net Debt/EBITDAX at 2.1x with organic de-leveraging to 0.9x by YE'18 on NYMEX.

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"With our activity assumptions, we estimate Callon Petroleum has 12 years of overall drilling but only ~5–7 years in its two highest return areas (Monarch and WildHorse). We tend to favor names that have core inventory lives of at least 10 years and think that stocks begin to trade at a discount when inventory falls below ~6–8 years as investors impute some reinvestment risk," the report read.

Citi applied a 5 percent discount to Callon Petroleum's NAV, because of the inventory concerns, and proposed a $12 price target on its stock. The analysts noted that, despite the high quality and strong balance sheet, they remain neutral until more valuation upside and inventory depth is seen.