Shares of U.S. exploration and production company Callon Petroleum (CPE 2.72%) rose nearly 14% as trading got underway on Oct. 1. The stock started to give back those initial gains almost immediately, however, with the advance down to 8.5% or so by 10 a.m. EDT. The early boost of excitement was driven by an update on the company's finances.
Callon announced that it sold a royalty interest to an entity controlled by private equity investor Kimmeridge Energy for $140 million. In addition, Callon sold Kimmeridge a $300 million note. The proceeds from these transactions were used to reduce the company's borrowing on a credit facility by roughly 33%. That's all very good news for Callon, which ended the second quarter with a troublingly high financial debt-to-equity ratio of 7.3 times.
The company also announced that its borrowing base was affirmed at $1.7 billion. Given the agreements noted above, though, that figure was adjusted slightly to $1.6 billion. Still, this is a positive outcome given the impact that low oil and natural gas prices are having on the energy sector this year. There was a very real risk, not unique to Callon, that the borrowing base could have been lowered much more.
It would be hard to suggest that Callon released great news today, being that it initiated the Kimmeridge Energy transactions because it is, basically, trying the best it can to muddle through a painful industry downturn. Still, it wouldn't be fair to say that any of this was bad news, either, since it shows that management is doing what needs to be done to survive. All in, investors were probably right to give the stock a boost, but there's still a long way to go before Callon can call an all clear.