Callon Petroleum Company Annual Report 2007

Plain-text annual report

TO OUR SHAREHOLDERS Callon Petroleum Company 2007 Annual Report to Shareholders 1 Louisiana Mississippi Alabama Texas TO OUR SHAREHOLDERS Brazos Galveston d n a s I l h g H i n o r e m a C t s e W n o r e m a C t s a E l d n a s I h s r a M . o S l d n a s I e n e g u E l a o h S p h S i Garden Banks Entrada Matagorda Island Mustang Island No. Padre Island CORPORATE PROFILE C allon Petroleum Company is engaged in the exploration, development, acquisition and operation of oil and gas properties in the Gulf Coast region. The majority of Callon’s properties and operations are concentrated in Louisiana and the Gulf of Mexico. At December 31, 2007, Callon owned working interests in a total of 104 blocks/leases covering 212,000 net acres. As of December 31, 2007, the Company’s estimated net proved reserves totaled 263.6 billion cubic feet of natural gas equivalent (Bcfe), and included 24.5 million barrels of oil (MMbo) and 116.5 billion cubic feet of natural gas (Bcf). ON THE COVER: Crude oil and natural gas from the Company’s Entrada Field, shown in the foreground, will be produced via a sub-sea tie-back to ConocoPhillips/Devon’s Magnolia tension leg platform, seen here in the distance on the adjacent block. 2 TO OUR SHAREHOLDERS D uring 2007, a signiﬁ cant milestone in your Company’s growth was reached, when in April we increased our working interest in the Entrada Field, located in the Deepwater Region of the Gulf of Mexico, from 20% to 100% by acquiring the interest held by BP Exploration and Production Company (BP). In this one landmark transaction, the largest in your Company’s history, we doubled our proved oil and natural gas reserves to 49.3 million barrels of oil equivalent (MMboe) compared to 12/31/06. With anticipated ﬁ rst production in early 2009, Callon’s total production is expected to double at that time. Successfully completing this project and realizing the expected level of growth in production and cash ﬂ ow will have a far-reaching favorable impact on the Company. Entrada Field – History The Entrada Field, which is in 4,650 feet of water, is in an area known for large hydrocarbon discoveries, including Kaskida (800 feet of net pay), the Auger Field (341 MMboe cumulative production), Serrano/Oregano/Macaroni (47 MMboe cumulative production), Habanero/Llano (58 MMboe cumulative production), S E V R E S E R D E V O R P ) 0 1 - V P ( E U L A V $535 MILLION $1.6 BILLION E S A E R C N I % 8 9 1 and Magnolia (29 MMboe cumulative production). Entrada was 12.31.06 12.31.07 originally discovered in 2000 by drilling two discovery wells and seven delineation wells at Garden Banks Block 782. The Company’s independent petroleum engineers have estimated Entrada’s net proved reserves at 17.5 million barrels of crude oil (MMbo) and 87.1 billion cubic feet of natural gas (Bcf), or 32.0 MMboe. In addition, the ﬁ eld’s probable reserves, net of royalties, are estimated to be 17.6 MMbo and 42.2 Bcf (24.6 MMboe), representing a total proved and probable net reserve base of approximately 56.6 MMboe. When the discovery wells were drilled, we owned a 20% working interest in Entrada, with Vastar (subsequently acquired by BP) holding the remaining 80%. In April 2007, we acquired BP’s interest for a purchase price of $150 million plus an additional $40 million payable after the achievement of agreed production milestones. 1 Entrada Field - Path to First Production Since the acquisition of BP’s interest, we have been working diligently on the development of the Entrada Field and expect initial daily production to be 22,500 barrels of oil (Bbls) and 36 million cubic feet of natural gas (MMcf). In September 2007, we signed a production handling agreement with ConocoPhillips and Devon Energy Corporation. This agreement provides for the processing of our oil and gas production from our Entrada wells through their Magnolia tension leg production platform (TLP) located approximately ﬁ ve miles from Entrada. Using this existing TLP saves us an estimated $500 million in development costs and provides a faster timetable to ﬁ rst production. In November 2007, we contracted with Diamond Offshore Drilling, Inc. 264 Bcfe for their semi-submersible rig Ocean Victory to drill and complete our two planned development wells. The Ocean Victory was the rig used to drill the two discovery wells at Entrada and recently received upgrades and refurbishments to increase its drilling efﬁ ciency and capability. In April 2008, we sold a 50% working interest in the Entrada Field to CIECO Energy (US) Limited, a subsidiary of Tokyo-based ITOCHU S E V R E S E R D E V O R P 146 Bcfe E S A E R C N I % 1 8 Corporation. CIECO agreed to pay Callon a total cash consideration of 12.31.06 12.31.07 $175 million, comprised of $155 million at closing and an agreement to fund half of the $40 million contingent payment due to BP in the future. Additionally, CIECO will pay Callon $2.50 per barrel of oil equivalent (Boe) for every Boe produced after cumulative gross ﬁ eld production has reached 30 MMboe through December 31, 2018. CIECO also provided a development loan of $150 million to Callon for the ﬁ nancing of Company’s share of the estimated $300 million of gross development costs. 2 ITOCHU Corporation is one of the oldest and most highly respected international trading houses in Japan and has oil and gas operations throughout the world. We are excited about our new partner and look forward to a long-term relationship with CIECO Energy as a strong strategic partner for your Company. Operations Overview Callon Petroleum is not new to the Deepwater Region of the Gulf. We acquired our ﬁ rst Deepwater leases over 10 years ago. In 2003, our ﬁ rst two Deepwater discoveries began producing at our Habanero and Medusa Fields, where we are partners with Shell and Murphy Oil, respectively. These properties helped balance our asset portfolio across the Shelf, Deepwater and onshore areas, as each area has unique risk and reward proﬁ les. Currently our Medusa and Habanero properties produce a combined gross total of 20,500 Bbls of oil and 25 MMcf of gas per day, while two of our important Shelf properties, located on West Cameron Block 295 and High Island Blocks 165 / 130, add additional gross production of 300 Bbls and 40 MMcf per day to our overall daily production. In 2007, we invested approximately $124 million in drilling new wells and recompleting Deepwater wells in our existing ﬁ elds and limited exploration prospects. In 2008, we plan to continue to drill development wells and pursue a limited exploration program as we continue to focus on the development of our Entrada Field. Liquidity for Growth During the year, we sold certain non-core, non-operated royalty and mineral interests in legacy onshore properties for $61.5 million. The divested properties were located in 15 different states and represented less than 2% of our estimated proved reserves at the time. This transaction was an opportunistic way to accelerate the realization of value of these non-strategic assets and capitalize on high commodity prices. 3 TO OUR SHAREHOLDERS Using the initial cash proceeds from the Entrada working interest sale to CIECO, plus cash on hand, we repaid in full the $200 million “bridge” loan arranged by Merrill Lynch Capital Corporation to ﬁ nance our acquisition of BP’s 80% interest in Entrada. We believe we will have sufﬁ cient cash on hand, cash ﬂ ow from operations and borrowing capacity to fund our capital development plan and operations without having to raise additional ﬁ nancing in 2008. In summary, the Entrada transaction and its expected strong production are the catalysts for taking Callon Petroleum Company to the next level in production, reserves and cash ﬂ ow growth. Looking forward, we plan to continue to pursue a diversiﬁ ed crude oil and natural gas asset mix within the Gulf of Mexico region. We will also continue to monitor attractive Deepwater, Shelf and onshore opportunities to balance our Entrada asset. On behalf of all our employees, we thank you for your continued support and conﬁ dence. Fred L. Callon Fred L. Callon Chairman 4 4 a CORPORATE DATA Form 10-K The Company’s annual report on Form 10-K, excluding exhibits, has been incorporated into this Annual Report. Extra copies of the Form 10-K may be obtained upon written request to B. F. Weatherly at the address above. Common Stock Dividend Policy It is anticipated that all available funds will be reinvested in the Company’s business activities. Therefore, the Company does not anticipate paying cash dividends on its common stock for the foreseeable future. Market for Common Stock Effective April 22, 1998, the Company’s Common Stock began trading on the New York Stock Exchange under the symbol “CPE.” Notice of Annual Shareholders’ Meeting The Annual Meeting of Shareholders will be held Thursday, May 1, 2008 at 9:00 a.m. in the Grand Ballroom of the Country Inn & Suites, 111 Broadway, Natchez, MS 39120. Information with respect to this meeting is contained in the Proxy Statement sent to shareholders of record on March 20, 2008. The 2007 Annual Report is not to be considered a part of the proxy soliciting materials. Callon Home Page www.callon.com The Company has a homepage on the internet, www.callon.com. It contains news releases, corporate governance materials, the annual report, recent investor presentations, stock quotes and a link to our SEC ﬁ lings. Board of Directors Fred L. Callon Chairman and Chief Executive Ofﬁ cer B.F. Weatherly Executive Vice President and Chief Financial Ofﬁ cer L. Richard Flury Former Chief Executive Gas, Power & Renewables British Petroleum plc (Retired) Larry D. McVay Former Chief Operating Ofﬁ cer TNK-BP Holding British Petroleum plc Joint Venture (Retired) John C. Wallace Chairman, Fred. Olsen Ltd. London, England Richard O. Wilson Offshore Consultant Houston, Texas Officers of the Company Fred L. Callon Chairman and Chief Executive Officer B.F. Weatherly Executive Vice President and Chief Financial Ofﬁ cer Mitzi P. Conn Corporate Controller Robert A. Mayﬁ eld Corporate Secretary Thomas E. Schwager Vice President, Engineering and Operations H. Clark Smith Chief Information Ofﬁ cer Rodger W. Smith Vice President and Treasurer Stephen F. Woodcock Vice President, Exploration Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane, Plaza Level New York, NY 10273 (718) 921-8200 Legal Counsel Haynes and Boone, LLP Houston, Texas Simon, Peragine, Smith & Redfern New Orleans, Louisiana Independent Registered Public Accounting Firm Ernst & Young LLP New Orleans, Louisiana Banks Union Bank of California N.A. San Francisco, California Regions Bank Jackson, Mississippi Corporate Offices Callon Headquarters Building 200 North Canal Street Natchez, Mississippi 39120 Callon Petroleum Company 1200 Enclave Parkway, Suite 225 Houston, Texas 77077 2007 Annual Report This Annual Report and the statements contained in it are submitted for the general information of the shareholders of Callon Petroleum Company. The information is not presented in connection with the sale or the solicitation of any offer to buy any securities, nor is it intended to be a representation by the Company of the value of its securities. If you have questions regarding this Annual Report or the Company, or would like additional copies of this report, please contact our Investor Relations Department at 200 North Canal Street, Natchez, MS 39120 (601) 442-1601. Security analysts and investment professionals should direct inquiries to B. F. Weatherly, Executive Vice President and CFO, Callon Petroleum Company, 200 North Canal Street, Natchez, MS 39120, (601) 442-1601, (601) 446-1410 (fax). TO OUR SHAREHOLDERS CALLON PETROLEUM COMPANY 200 North Canal Street Natchez, Mississippi 39120 www.callon.com 4

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