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Callon Petroleum (CPE) Initiated At 'Buy' By Brean Capital, $6 PT

 December 06, 2012 01:57 PM

(By Balaseshan) Brean Capital analyst Jeff Connolly initiated coverage of Callon Petroleum Co. (NYSE: CPE) with a "buy" rating and $6 price target.

Connolly said Callon is an independent exploration and production company with operations in the Permian Basin, Gulf of Mexico, and Haynesville Shale. The company is divesting its legacy Gulf of Mexico assets to increase its exposure to oily onshore plays.

The analyst likes CPE because it is trading below our group's average EV/EBITDA and price/cash flow ratio multiples and has a number of catalysts on deck. He is watching for: drilling results from the company's Borden County acreage, increasing production, and acquisitions/divestitures.

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Connolly's $6 price target equals 85% of his $7.00 per-share net asset value estimate, which assumes midcycle benchmark NYMEX oil and gas prices of $85/Bbl and $4.00/Mcf, respectively. He looks for Callon Petroleum to continue to transition to oily onshore plays.

While management has not released its capital budget for 2013, the analyst expects it will spend about $140 million for drilling, primarily in the Midland Basin.

Connolly estimates a combination of vertical and horizontal drilling will boost production 40% to 2,243 MBOE (6,146 BOEPD) in 2013 from his estimate of 1,611 MBOE (4,400 BOEPD) in 2012.

CPE is trading up 4.37% at $4.54 on Thursday. The stock has been trading between $3.80 and $7.95 for the past 52 weeks.

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