Stock Analysis

Is Callon Petroleum (NYSE:CPE) Using Too Much Debt?

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NYSE:CPE
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Callon Petroleum Company (NYSE:CPE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Callon Petroleum

What Is Callon Petroleum's Net Debt?

The image below, which you can click on for greater detail, shows that Callon Petroleum had debt of US$2.87b at the end of June 2021, a reduction from US$3.35b over a year. Net debt is about the same, since the it doesn't have much cash.

debt-equity-history-analysis
NYSE:CPE Debt to Equity History September 14th 2021

How Healthy Is Callon Petroleum's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Callon Petroleum had liabilities of US$813.8m due within 12 months and liabilities of US$2.98b due beyond that. Offsetting these obligations, it had cash of US$3.80m as well as receivables valued at US$200.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.59b.

This deficit casts a shadow over the US$1.47b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Callon Petroleum would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Callon Petroleum's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Callon Petroleum wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to US$1.4b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Callon Petroleum managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at US$66m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$1.3b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Callon Petroleum .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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What are the risks and opportunities for Callon Petroleum?

Callon Petroleum Company, an independent oil and natural gas company, focuses on the acquisition, exploration, and development of oil and natural gas properties in Permian Basin in West Texas.

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Rewards

  • Trading at 42.2% below our estimate of its fair value

  • Became profitable this year

Risks

  • Earnings are forecast to decline by an average of 11.5% per year for the next 3 years

  • High level of non-cash earnings

  • Has a high level of debt

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