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Related Issuers
Rating Action:

Moody's downgrade's Callon Petroleum's PDR to Caa1-PD/LD; stable outlook

01 Dec 2020

New York, December 01, 2020 -- Moody's Investors Service ("Moody's") downgraded Callon Petroleum Company's (Callon) Probability of Default Rating (PDR) to Caa1-PD/LD from B3-PD, Corporate Family Rating (CFR) to Caa1 from B3, and ratings on its senior unsecured notes to Caa2 from Caa1. The limited default (LD) designation was appended to the PDR following the exchange of senior unsecured notes for new 9.0% senior secured second lien notes due 2025. The Speculative Grade Liquidity (SGL) rating remains SGL-3. The outlook has been revised to stable from negative.

"Callon Petroleum's asset monetization transactions and debt exchanges have reduced its debt principal," stated James Wilkins, Moody's Vice President. "However, we expect the company's credit metrics will remain weak until demand for refined products and oil prices recover and there remains the potential that the company will engage in further debt exchanges."

Downgrades:

..Issuer: Callon Petroleum Company

.... Probability of Default Rating, Downgraded to Caa1-PD /LD from B3-PD

.... Corporate Family Rating, Downgraded to Caa1 from B3

....Senior Unsecured Notes, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: Callon Petroleum Company

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The downgrade in Callon's PDR to Caa1-PD/LD reflects Moody's expectation the company may engage in further debt exchanges which could be considered defaults. Moody's considers Callon's exchange of $389 million of debt at a significant discount to par as a distressed exchange, which is a default under Moody's definition. Moody's has appended the PDR with an "/LD" designation indicating a limited default, which will be removed after three business days. The company issued $217 million of new 9.0% senior secured second lien notes due 2025 and approximately 1.7 million warrants in exchange for $389 million of senior unsecured notes, reducing the principal amount of debt by $172 million.

The CFR considers Callon's success in managing through the difficult market environment in 2020, but also the expectation that it will not generate significant positive cash flow in 2021 while oil supply continues to exceed depressed demand levels, leverage will remain high and its credit metrics will remain weak. The company has guided its 2021 operational capital expenditures will be between $375 million and $400 million (down from $500 million - $510 million estimated for 2020) as it limits capital expenditures to internally generated cash flow, and it will experience a year-over-year decline in production volumes due to a combination of a reduced capital program focused on generating sustainable free cash flow and recent asset sales.

Callon's scale has benefited from acquisitions and a track record of organically growing production and reserves prior to 2020. Following the December 2019 Carrizo acquisition, Callon has larger and more diversified operations focused on two shale plays in the Permian Basin and the Eagle Ford Basin. The Permian Basin acreage is in the early stages of development and will require significant capital to develop, while the acquired Eagle Ford assets, which are also predominately oil producing assets, are more mature assets. The company has competitive unit costs, strong operating margins, and a high proportion of oil in its production volumes.

Callon's senior unsecured notes ($1.5 billion principal amount as of September 30, 2020, pro forma for the exchanges) were downgraded to Caa2 from Caa1 as a result of the one notch downgrade in the CFR and the addition of senior secured second lien debt to the capital structure. The unsecured notes are contractually subordinated to the secured debt ($517 million of senior secured second lien notes due 2025 and borrowings under the secured revolving credit facility).

Callon's SGL-3 rating reflects its adequate liquidity, supported by cash flow from operations, modest cash balances, as well as its revolving credit facility. The revolver had a $1.6 billion borrowing base, $24.1 million of letters of credit and $995 million of borrowings as of September 30, 2020, pro forma for its asset monetization transactions, leaving $581 million available on the revolver. The revolver has two financial covenants - a minimum current ratio of 1x and a maximum secured leverage ratio of 3x - with which Moody's expects the company to remain in compliance through 2021. In 2022, the company will cease being subject to the secured leverage ratio and will be subject to a maximum leverage ratio of 4.0x. Callon has no upcoming debt maturities until 2023.

The stable outlook reflects the low and volatile commodity price environment and Moody's expectation that Callon will maintain adequate available borrowing capacity under its revolver.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be downgraded if liquidity weakens, RCF/debt falls below 10% or capital efficiency weakens significantly. The ratings could be upgraded in a more supportive oil and gas price environment if Callon maintains adequate liquidity, RCF/debt above 15% and a leveraged full cycle ratio greater than 1x.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Callon Petroleum Company, headquartered in Houston, TX is an independent exploration and production company with operations in the Permian Basin and the Eagle Ford Shale in Texas.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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