Callon Shifts Strategy to Onshore Exploration

Callon Petroleum has provided details regarding its strategy shift to diversify its asset base to onshore in order to increase visible growth potential, including a 2010 capital budget of $61.7 million and its first acquisition in the North Louisiana Haynesville Shale play.

"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 points out. "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." He adds that the company made two transformational acquisitions in the fourth quarter of 2009 extending its operations onshore into the Wolfberry oil play in the Permian Basin and the Haynesville Shale natural gas play. As a result, the company now has a multi-year drilling inventory of opportunities for growing reserves and production.

"Even though it is early in 2010, we have already made significant progress towards improving our liquidity position, securing the financial resources needed to fund our growth plan and to create visible growth potential for our shareholders," he concludes.

Onshore Shale Gas

Callon has acquired a 70% operating interest in a 577-acre Haynesville Shale Unit in Bossier Parish, Louisiana, at a cost of $3 million. The Unit is in the core of the play offset by wells having demonstrated initial production rates of approximately 20 million cubic feet of natural gas per day (MMcf/d). In 2010 Callon plans to drill and complete two horizontal wells. The first well is planned to spud by mid-year. The Unit will be developed with up to seven horizontal wells. The company estimates the gross ultimate gas recovery to be 6.4 billion cubic feet of natural gas per well at an estimated cost of $9.0 million to drill and complete.

Onshore Permian Basin

As previously announced on September 10, 2009, Callon made its initial entry into the Permian Basin by acquiring net proved reserves of 1.6 million barrels of oil equivalent and current net production of 350 barrels of oil equivalent per day (Boe/d). The company's primary target in the Permian Basin is the Wolfberry trend, which is a proven, low-permeability oil play. There are 22 producing wells and 148 drilling locations based on a 40-acre spacing development. Callon plans to commence drilling in February and drill up to 16 Wolfberry wells in 2010 and add additional rigs in 2011 and 2012. The estimated gross ultimate recovery is between 80,000 and 100,000 barrels of oil per well at an estimated cost to drill and complete of $1.5 million. The company believes additional upside exists from the potential to reduce drilling spacing to 20 acres, providing an additional 160 drilling locations. Callon has controlling interest and will operate.

U.S. Gulf of Mexico

The company's U.S. Gulf of Mexico (GOM) assets are located in the deepwater region and shallow waters of the outer continental shelf.

Production from the company’s two deepwater fields, Habanero and Medusa, in 2009 averaged 3,000 net Boe/d, or more than half of Callon's total GOM production.

At the Medusa Field, eight wells averaged 2,000 Boe/d net to Callon in 2009. Most of the producing wells are still producing from their primary completion and have significant proven reserves behind pipe in the existing wellbores. The Medusa Field has a proven reserve life of seven years and is 89% oil. The field is operated by Murphy, and Callon has a 15% working interest.

At the Habanero Field, two wells averaged 1,000 Boe/d net to Callon in 2009. Callon believes there are significant proven reserves located up-dip of the existing wells that will be accessed by side tracking the wells following depletion of the current productive zone. Habanero is operated by Shell and Callon has an 11.25% working interest.

Callon's GOM shelf assets averaged 14.0 MMcf/d of net gas equivalent production in 2009. The company is evaluating options for monetizing the shelf assets, although Callon may retain its shelf operations if no viable alternatives exist.

The company's GOM operations will generate the majority of Callon's operating cash flow in 2010. With minimal offshore capital requirements, this cash flow will be used to fund the onshore transition and growth strategy.


The company previously announced its 2009 year-end reserves. At December 31, 2009, Callon's estimated net proved reserves were 58 billion cubic feet of natural gas equivalent (Bcfe), a reserve growth of 6% over year end 2008. The company added net proved reserves of 15.0 Bcfe in 2009 resulting in a reserve replacement rate of 127%.

2010 Capital Budget

The company's Board of Directors has approved a $61.7 million capital budget for 2010. Thirty-three percent or $20.0 million of the budget has been allocated to development drilling in the Permian Basin, 24% or $14.5 million has been allocated to shale gas development, 9% or $5.7 million will be spent in the Gulf of Mexico which includes plugging and abandonment costs, 13% or $8.0 million has been approved for additional leasehold acquisitions and the remaining 21% or $13.5 million has been reserved for capitalized costs. The 2010 capital budget can be fully funded with operating cash flow and available cash.