Note 10 — Entrada Project Wind-Down

     Effective January 1, 2010, Callon Entrada Company (“CEC”), a variable interest entity, was deconsolidated from the Company’s consolidated financial statements because the Company no longer had the power to direct the activities that most significantly affected CEC’s economic performance, which was the liquidation of the surplus equipment related to the Entrada project. During May 2011, the Company entered into a final project wind-down agreement (the “Agreement”) with CIECO Energy LLC (“CIECO”), its former joint interest partner in the Entrada deepwater project. The Agreement, effective as of April 29, 2011, provided for the extinguishment of all existing agreements and commitments between the parties as it related to the past development of the Entrada project. The Agreement included a formal extinguishment of the non-recourse credit agreement between CEC and CIECO and the assignment to CEC of CIECO’s 50% rights to the remaining assets including primarily the unsold, residual equipment and all engineering data related to the Entrada project. When combined with CEC’s existing 50% ownership of these assets, this Agreement results in CEC’s full ownership of all remaining assets. Also, as a result of this Agreement, which included both the assignment of the rights to the Entrada assets and the proceeds from the ultimate sale of such assets, the Company gained the power to direct the activities related to the sale of the remaining assets, and therefore became the primary beneficiary of CEC. Therefore, as Callon became its primary beneficiary, CEC was consolidated in the Company’s consolidated financial statements, effective April 29, 2011.

     At June 30, 2011, the Company estimated the fair values of the assets acquired to be $11,349 and liabilities assumed of CEC to be $3,972 as a result of this Agreement. The assets acquired consisted primarily of the Entrada surplus equipment and the liabilities assumed consisted of deferred tax liabilities associated with the basis difference of the equipment. The total net assets acquired of approximately $7,377 were recorded at June 30, 2011 as a $3,688 gain and $3,689 as an adjustment to the Company’s full cost pool of oil and gas properties. The gain recognition was required as a result of the Company acquiring CIECO’s former 50% share of the assets and the full cost pool adjustment was required to reflect the Company’s 50% share of the assets held by the Company prior to the deconsolidation of the CEC subsidiary in 2010. The gain of $3,688 increased the Company’s fully diluted earnings per share by $0.09 and $0.10, respectively, for the three and six-months ended June 30, 2011.

     With respect to the deferred tax liability, the Company utilized a portion of its deferred tax asset and recognized an income tax benefit equal to $3,972. During the period from the acquisition date through June 30, 2011, the Company sold certain of the acquired assets for $3,658. The remaining unsold assets were recorded on the Company’s balance sheet at June 30, 2011 as $296 in Other current assets and $7,395 included in Other property and equipment, net. The Company is actively marketing these assets. Also in connection with this Agreement, CEC agreed to pay to CIECO approximately $438, which represented the net balance of joint interest billings due to CIECO and which had been previously accrued. The agreement also included joint releases of each party from any further liabilities or obligations to the other party in connection with the Entrada project.

     During the quarter ended September 30, 2011, the Company sold Entrada surplus equipment with carrying values of $778 for $1,211. As disclosed above, 50% of the proceeds received in excess of the carrying value of the assets, or $217, were recorded as a gain on sale of assets, while the remaining 50% was recorded as an adjustment to the full cost pool. Also during the current quarter, the Company determined that certain unsold equipment with carrying values of $690 had become impaired due to the limited market for these assets, and consequently the Company reduced these assets’ carrying value to $348. The $342 reduction in carrying value was recorded as a $171 loss with the remaining as an adjustment to the Company’s full cost pool. As of September 30, 2011, the remaining unsold assets had carrying values of $6,570 and are included in the Company’s balance sheet as a component of Other property and equipment, net.