• Callon Petroleum Company (NYSE: CPE) shares have jumped 60 percent year-to-date, and are trading close to the high end of their 52-week range of $4.09 - $9.65.
• RBC Capital Market’s Kyle Rhodes initiated coverage of the company with a Sector Perform rating and a price target of $9.
• Although the company can achieve robust oil production growth and has several ways to boost NAV, Rhodes believes many of the positives are already reflected in its current valuation.

Analyst Kyle Rhodes mentioned that Callon Petroleum is a “pure-play Permian story” with prospective catalysts that could help it originally grow its core inventory and add an upside of $1.50-$3.00 per share. He added, “CPE plans to drill its first Middle Spraberry & Wolfcamp "D" wells and initiate a Lower Spraberry (LS) downspacing pilot before YE15.”

Rhodes believes that Callon Petroleum faces “reasonably low” geologic risk, in view of the robust performance of offset industry wells. Although early, offset industry operators have also reported solid downspaced LS results.

“We believe success would provide a meaningful organic boost to CPE’s core drilling inventory and could be worth a combined $1.50–3.00/share of upside to our NAV,” the analyst added.

“We expect organic oily production growth of 57%/21% in 2015/2016, respectively, driven solely by Callon’s
high-graded two-rig Permian program,” the RBC report stated. Rhodes expects Callon Petroleum to add a third rig around the end of 2016, generating 16 percent production growth in 2017.

Oil production is expected to comprise nearly 80 percent of Callon Petroleum’s product mix, making the company one of the more oil-levered E&Ps in the space. Rhodes expects this to result in cash flow growth of 32 percent in 2016 and 48 percent in 2017.

“CPE should be able to accomplish this growth with only a modest cash flow outspend and should continue to delever the balance sheet organically through 2017,” the report added.

Although Callon Petroleum holds high-quality core Permian acreage, it may be tough for the company to add scale in an “accretive manner.”

“We like Callon for its strong oil production growth and numerous possible paths to NAV accretion. However, we believe the company's current valuation already bakes in some success for its upcoming catalysts and a limited acreage position caps upside potential,” Rhodes commented.

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