This Is What Sent Callon Petroleum Companys Stock Down Double Digits

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Callon Petroleum Company's stock price dropped double digits when the market opened up this morning. That sell-off came as a result of the company pricing 9 million new shares of common stock after the market closed on Monday. That brought in $59 million in cash to the company's coffers, which it plans to use to pay down its credit facility, saving the rest for a rainy day.

So what: With a market cap just south of $400 million, this offering represented a major dilution to existing shareholders. Those 9 million new shares, which could grow by another 1.35 million if underwriters exercise all of their options to buy new stock, would boost the share count by about 18%. So, while $59 million might not sound like a lot of money to some oil companies, it's a big chunk of change for the tiny Callon Petroleum Company.

By bringing in the additional equity the company is boosting its balance sheet and liquidity, as it had roughly $315 million in outstanding debt, including about $15 million drawn on its $250 million credit facility. So this offering will enable it to pay down that facility and have some excess cash that it can use as a cushion to fund either its capital program or future acquisitions.

Now what: With the price of oil stabilizing over the past month we've seen a number of oil companies take advantage of the market stabilization to raise capital. Because the industry doesn't know what to expect from the price of oil right now, companies are building excess liquidity to ensure they can withstand whatever the market sends their way. Unfortunately, in Callon's case it's issuing a substantial amount of shares at the wrong point in the cycle, as its stock is 45% off its 52-week high. However, it, and its peers, really don't have a choice, as the market downturn caught everyone off guard -- which is forcing the company to take actions to ensure it makes it through to the eventual recovery.

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