Callon Petroleum (NYSE:CPE) is an oil and gas exploration and production company in the midst of a strategy transition towards the onshore development of properties in Texas and Louisiana. The company is looking to quickly increase production over the next few years.

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Permian Basin
Callon Petroleum is most active in the Permian Basin where the company is developing the Wolfberry trend. The company is allocating $34.1 million in capital to this region in 2010, or 51% of its total capital budget. Callon Petroleum just drilled its tenth Wolfberry well and plans to drill a total of 25 wells here in 2010 using a two-rig program.

A typical well in the Wolfberry trend costs $1.5 million to drill and complete and has estimated ultimate reserves (EUR) of 100,000 barrels of oil equivalent (BOE). The company expects to earn a rate of return in excess of 40% on wells here assuming an oil price of $80 per barrel.

Callon Petroleum has spread its development of the Wolfberry trend over the Carpe Diem, Kayleigh and Bloxom projects. Current production from the Permian Basin is 500 BOE per day but the company expects to exit 2010 with production of 1,000 BOE per day. Callon Petroleum estimates that the company has 338 possible well locations assuming 20 acre spacing on its acreage in the Wolfberry.

Another company active in the Wolfberry trend is Linn Energy (Nasdaq:LINE), which just purchased additional properties in the Permian Basin for $352.2 million. The acquisition added 30 million BOE of proved reserves to the company.

Haynesville Shale
Callon Petroleum is also moving into the Haynesville Shale but at a much slower pace of development. The company just reported the completion of a well here with a production rate of 10.5 million cubic feet per day of natural gas. The company plans no further development in the Haynesville Shale until natural gas prices move higher.

Gulf of Mexico Properties
Callon Petroleum is using its legacy Gulf of Mexico properties as a cash cow since the company is not drilling any new wells here. The company has a 15% working interest in the Medusa field located on Mississippi Canyon Blocks 538 and 582. Murphy Oil (NYSE:MUR) is the operator the Medusa field.

Callon Petroleum also has an 11.25% working interest in the Habanero Field, located on Garden Banks Block 341. Royal Dutch Shell (RDS.A, RDS.B) is the operator of the Habanero Field.

Production Growth
Callon Petroleum expects that all this development activity will lead to a strong growth in production over the next few years. The company expects to grow production from 900 BOE per day in 2010 to 4000 BOE per day by 2012.

Callon Petroleum is shifting to the development of onshore oil and gas assets, including the Permian Basin and the Haynesville Shale. This will lead to a rapid growth in production over the next few years. (For related reading, take a look at our Oil And Gas Industry Primer.)

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