S&P Assigns 'B' Rating to Callon Petroleum (CPE); Outlook is Stable

September 13, 2016 2:55 PM EDT

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S&P Global Ratings assigned its 'B' corporate credit rating to Callon Petroleum Co. (NYSE: CPE). The outlook is stable.

At the same time, we assigned a 'B+' issue-level rating to the company's proposed $350 million senior unsecured notes with a recovery rating of '2', indicating our expectation of substantial (in the upper half of the 70% to 90% range) recovery in the event of a payment default.

The company will use the proposed unsecured notes to refinance its existing $300 million second-lien facility and for general corporate purposes.

"The ratings on Callon Petroleum Co. reflects our assessment of the company's weak business risk, aggressive financial risk, and adequate liquidity," said S&P Global Ratings credit analyst David Lagasse. "The ratings incorporate the copany's limited scale of operations, lack of geographic diversity, and the benefits from its high percentage of crude oil production, expected to be close to 80%," he added.

In addition the ratings reflect our expectation that CPE will be able to successfully grow average production to 16,000 to 19,000 barrels (bbl) a day over the next 12 months while maintaining moderate debt leverage and adequate liquidity. Finally, the ratings incorporate the company's exposure to volatile commodity prices and the capital intensity of the exploration and production (E&P) industry which can lead to greater variability in operating and financial performance.

The stable outlook on Callon Petroleum Co. reflects our expectation that the company will maintain solid financial measures including FFO/debt above 20% and at least adequate liquidity over the next two years despite volatile commodity prices.

We could lower the rating if we expected CPE's FFO/debt to fall below 12% for a sustained period and/or liquidity weakened considerably, which would most likely occur if the company's operational performance declines or the company finances a large acquisition with debt.

We could raise the rating if CPE broadened its geographic diversity and increased its production and reserves to levels more consistent with 'B+' peers while maintaining FFO/debt above 20%.

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