Callon Petroleum Company

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Callon Petroleum Company

Callon Building
200 North Canal Street
Natchez, Mississippi 39120
U.S.A.
Telephone: (601) 442-1601
Fax: (601) 446-1410
Web site: http://www.callon.com

Public Company
Incorporated: 1950
Employees: 103
Sales: $61.75 million (2001)
Stock Exchanges: New York
Ticker Symbol: CPE
NAIC: 211111 Crude Petroleum and Natural Gas Extraction

Callon Petroleum Company has been searching the Gulf Coast for oil since 1950. In the late 1980s, the company used seismic mapping technology developed by the major petroleum companies to explore shallow water properties on the continental shelf. In the late 1990s, Callon went in search of deepwater finds in cooperation with other oil companies.

Birth of Company: 1950

John S. Callon founded the company that would become the Callon Petroleum Company in 1950. On July 14, 1952, two of his wells struck oil. In 1954, brother Sim C. Callon was brought into the operation, then known as Callon Oil & Gas Company.

Callon Oil & Gas was renamed Callon Petroleum Company in 1962. The company had two major oil finds in Mississippi in the mid-1960s: Quitman Bayou Field in Adams County in 1963 and Clear Springs Field, Franklin County, in 1965.

Sims Callon was company president from 1972 to 1974, when he took the offices of chairman and CEO. Callon Petroleum was privately held until 1974. It became publicly owned towards the end of the year following a merger with the newly formed Pacific Oil and Gas Development Corporation/Pacific Energy Corporation. Shares were traded on the NASDAQ exchange. In the same year, Callon and Hughes Aircraft Company formed a joint venture to develop geothermal steam leases at a property in Sonoma County, California.

Callon renovated a former grocery warehouse in Natchez to use as a headquarters in the late 1970s. The site would eventually house a considerable computer operation dedicated to modeling the company’s new oil and gas properties.

In 1979, the company organized a new division, Callon Royalty Funds, through which investors could buy landowners’ royalties on oil and gas. This division was soon accounting for a quarter of Callon’s total revenues, which were $6.6 million in the fiscal year ending May 31, 1980. Earnings were $1.2 million.

Changes in the 1980s

At age 60, John Callon added the position of chairman to his duties as president and CEO upon the January 1981 retirement of his older brother Sim, then 64 years old. Callon formed a joint venture with Amwar Petroleum, led by Texas International Petroleum CEO Alan M. Warren, in November 1981. Callon was providing capital, while Amwar identified and acquired prospects. In 1982, Callon’s Lockhart Crossing Wilcox Oil Field in Livingston Parish, Louisiana, was the largest onshore oil discovery in the contiguous United States. At 25 million barrels, it equaled Callon’s 1962 Quitman Bayou find.

Fred L. Callon, nephew of the company founder, became president and CEO of Callon Petroleum in 1984. He had worked for the company since 1976 and had visited its rigs as a boy. Before joining Callon Petroleum, he earned an M.B.A. from the Wharton School of the University of Pennsylvania and worked as an accountant for KPMG Peat Marwick.

Callon’s revenues were $34.1 million in 1985, producing, after a $29.4 million writedown in oil and gas properties, a $41.1 million loss. Callon had earned $4.7 million the previous year on revenues of $40.3 million. The 1980s and 1990s were not the best of times for independent producers on the Gulf Coast. Foreign oil was cheap again and natural gas prices were low. Still, Callon stood out as the ranks of its peers thinned.

The price of oil fell from $40 to $11 per barrel in 1985 and 1986. In 1987, the company sold 90 percent of its producing properties and retired all of its bank debt. In the dozen years after 1975, the business had expanded to 27 limited partnerships, which were merged into the publicly traded Callon Consolidated Partnership, L.P. (CCP) in 1987. The Callon family attained ownership of 100 percent of Callon Petroleum’s common stock the next year, and the company was privately owned again.

In the late 1980s, major oil companies like Shell, Exxon, and Mobil began to abandon the Gulf in favor of international deepwater opportunities. Callon grew by acquiring producing properties from them on shore and in shallow water areas. Skillful negotiating was the key to success here; few independents had as much experience operating in the Southeast. Callon spent $213 million acquiring oil and gas properties between 1989 and 1995. A major pension fund, which the company did not reveal, provided three-quarters of the money needed for those acquisitions.

The Black Bay Field, located off the coast of Louisiana in shallow waters, was acquired from Chevron U.S.A. Inc. in 1992. It had been discovered 43 years earlier by Gulf Oil Co. Callon studied the field, reengineered operations, and was able to reduce costs by nearly a third.

In 1993, Callon paid ARCO $31 million for a 94.4 percent working interest in North Dauphin Island Field, located in shallow waters off the coast of Alabama. An advanced, environmentally friendly computerized drilling platform and a 12-mile pipeline were included in the deal.

Public Again in 1994

Callon formed the CN Resources joint venture in 1992 with a group of European companies led by Norway’s Fred Olsen shipping and oilfield construction group. In September 1994, Callon Petroleum Holding Company, CCP, and CN Resources were merged into the Callon Petroleum Company, making it a public company again. “Taking the company public simplified and streamlined our business, gave some critical mass to the company, and put us in a position to take much larger interests in the things that we’re doing,” John S. Callon told the Mississippi Business Journal.

In 1994, Oil & Gas Journal pronounced Callon Petroleum the country’s 146th largest publicly traded oil and gas exploration and production company. The Callon family owned about a third of the company’s common stock after the reorganization, while Olsen-controlled companies owned another third.

Going public gave Callon the capital to exploit advances in exploration and production technology while pursuing aggressive policies for expansion. The once prohibitively expensive tools of 2-D and 3-D seismic mapping technology, originally developed by the major oil companies, began to drop considerably in price after 1985. In 1995, contractors were charging $40,000 per square mile for 3-D seismic mapping of onshore sites, and $100,000 in shallow waters, noted the Mississippi Business Journal. Callon was applying 3-D seismic mapping to shallow water areas that had never been probed in this way.

In June 1995, Callon agreed to buy oil and gas holdings in southeast Alabama from Scott Paper Co. for $12 million, which included interests in more than two dozen oil and gas fields, as well as ownership of a Scott subsidiary, the Escuhbia Oil Company.

Callon’s total reserves were split 60-40 between oil and natural gas. Unusual among its peers, the company was carrying practically no debt after a $30 million public offering of convertible preferred stock in November 1995. Callon acquired its first deepwater leases in the Gulf of Mexico in 1996. Revenues were $43.6 million in 1997, and the company began listing its shares on the New York Stock Exchange in April 1998.

Going Deeper in the Late 1990s

Callon ventured out of its traditional shallow waters in the late 1990s, partnering with Shell Oil and Murphy Exploration & Production Company to probe deeper in the Gulf of Mexico. Its first two prospects, recorded the Mississippi Business Journal, turned out to be its largest discoveries to date.

In February 1998, Callon announced a deepwater natural gas find, its second, at the Habanero prospect, located 2,000 feet under the ocean’s surface. Callon was only able to venture this far in partnership with major oil companies due to the expense and expertise required. The company also was drilling on the continental shelf, at depths of up to 500 feet, and in shallow ten-foot waters. The payoffs for the risk of drilling in deep water were the greater size of the reserves and the chance to drill in relatively virgin territory.

At the same time as Callon was making this important find, oil and natural gas prices seemed to be rising. However, company officials felt their stock was undervalued. One possible factor was the relatively short lifespans of underwater wells compared to those on land.

Company Perspectives:

The Company’s operations and experience are geographically concentrated in the offshore waters of the Gulf of Mexico—one of the most active and prolific basins in the world. We employ a strategy of drilling a balanced portfolio of exploration and development prospects within the Deep-water and Shelf Regions. In the Deepwater Region, we target reserve deposits in excess of 100 Bcfe [“billion cubic feet equivalent,” a measurement whereby one barrel of oil is equivalent to 6,000 cubic feet of natural gas] at well depths up to 25,000 feet. In the Shelf Region, we focus on low to moderate-risk exploration prospects which, if successful, can be brought online in less than a year and provide early cash flow.

The year 1998 ended up being a difficult one for the oil and natural gas industry. Producers like Callon took advantage of lower drilling costs resulting from the slump. In 1999, Callon reduced its drilling budget about 15 percent to $55 million; most of this was targeted at shallow-water prospects. Still, the company boosted proved reserves 100 percent during the year.

Fifty in 2000

The year of Callon’s 50th anniversary started out as another difficult one. The company’s share price fell 30 percent after three dry holes, two of them in deep water, were discovered in the first quarter. Nevertheless, the company had success with four out of six deepwater wells drilled. Callon’s exploration budget for 2000 was $35 million for the continental shelf and $48 million in deepwater. Callon did not operate any of its own deepwater fields. Murphy Oil Corp. operated two, and Shell Oil Co. and Vastar Resources Inc., part of BP plc, operated one each.

Callon ended 2000 with record revenues, net income, and oil and gas reserves. Revenues were up nearly 50 percent to $58.1 million, while net income nearly quadrupled to $12.5 million. The company ended the year with estimated net proved reserves of 334 billion cubic feet of natural gas equivalent (Bcfe), up 28 percent from year-end 1999.

Callon opened an office in Houston in early 2001 to house technical staff dedicated to shelf and deepwater development. Revenues rose to $61.8 million, though net income of $1.8 million was a fraction of the company’s 2000 record. The results of two new drilling operations—Medusa, which was scheduled to be online by the end of 2002, and Habanero, which was expected to begin production in the second half of 2003— remained to be seen.

Principal Subsidiaries

Callon Petroleum Operating Company.

Principal Competitors

Apache Corporation; COHO Energy, Inc.; Nuevo Energy; Parker & Parsley; Stone Energy.

Key Dates:

1950:: John S. Callon forms an oil and gas company.
1952:: Two Callon wells strike oil on July 14.
1954:: John Callon’s brother Sim C. Callon joins the company.
1962:: The firm is renamed Callon Petroleum Company.
1974:: Callon merges with Pacific Energy and goes public.
1981:: Sim Callon retires.
1984:: Fred Callon succeeds John Callon as CEO.
1987:: Twenty-seven partnerships are merged into Callon Consolidated Partnership.
1988:: The Callon family takes company private again.
1994:: Callon Petroleum merges with partners and goes public.
1998:: Callon stock migrates from the NASDAQ to the New York Stock Exchange.
2000:: Deepwater success produces record earnings.
2001:: A Houston office is opened to house new technical staff.