Callon Petroleum diversifies with onshore focus

Callon Petroleum is shifting gears. The oil and gas company is changing its strategy to incorporate onshore US assets, namely the Haynesville Shale in Louisiana and oil wells in the Permian Basin. 

Formerly, the company focused on its two deepwater Gulf of Mexico fields: Habanero and Medusa. And while the company continues to harvest some 3,000 barrels of oil equivalent from these fields, Callon has made a major shift, reflected in its 2010 capital budget. 

“We’ve been working on this strategy shift over the past 18 months, developing the plan, working to find the right assets and building the right team to set the foundation for our plan to diversify our asset base,” Fred Callon, Chairman and CEO said. “The cash flow generated from our two deepwater fields with quality, long-lived reserves will be reinvested into onshore conventional oil and shale gas properties.” 

Onshore Acquisitions in 2009 

Callon made a pair of "transformational acquisitions" in the last quarter of 2009. By extending its onshore properties in the Wolfberry oil play in Texas’ Permian Basin and in the Haynesville Shale natural gas play in Louisiana, the company has made an about face. 

Now, the company plans a multi-year drilling program in hopes of growing its reserves and production. 

Haynesville Shale 

For a price of $3 million, Callon purchases a 70 percent operating interest in a 577-acre Haynesville Shale unit in Louisiana. Initial production rates for the unit show a promising 20 million cubic feet of natural gas per day. 

With development plans calling for a total of up to seven horizontal development wells, Callon plans to drill and complete two horizontal wells in the Haynesville Shale structure this year. Recovery estimates for the unit are 6.4 billion cubic feet of natural gas per well at a cost of $9 million. 

Permian Basin 

In Texas, Callon bought into a producing Permian Basin field with approximately 1.6 million barrels of oil equivalent and a daily production rate of 350 barrels of oil equivalent. 

Here, Callon is zeroing in on the low-permeable oil play of the Wolfberry trend. Development plans call for adding 148 wells to the already existing 22 production wells. In 2010 alone, the company plans to drill and complete 16 Wolfberry wells, adding additional drilling rigs in 2011 and 2012 to step up the process.
The company estimates recovery from the field to range between 80,000 and 100,000 barrels of oil per well at a cost of $1.5 million for each one. Should the company add another 20 acres to its 40-acre development, another 160 drill sites will be added. 

Budgetary Changes 

Callon's change in strategy is evident in its 2010 budget, announced today. Of the $61.7 million the company has allotted to spend in 2010, 33 percent ($20 million) is going to its Permian Basin assets and 24 percent ($14.5 million) is going to develop its Haynesville Shale asset. 

That doesn't mean, however, that the company is ignoring its offshore fields in the Gulf of Mexico. In fact, the majority of the company's operating money will come from its Gulf of Mexico fields. Callon is planning on spending $5.7 million or 9 percent of its budget on these assets. 

Furthermore, the company has earmarked 13 percent ($8 million) for obtaining additional leases.

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