Can S-16 make money if WTI stays at $50?

[dan_s]

A question that I get asked on a repeated basis is "Can U.S. upstream companies make money if oil averages $50/bbl?" or some other commodity price that pops into their head.

Quick answer: Yes, the Sweet 16 are all profitable if oil averages $50/bbl in 2019.

If you download the main Sweet 16 spreadsheet (which is updated each weekend) and click on Tab 1, column O is my EPS estimate for each company based on the WTI price assumptions of $45 in Q1, $50 in Q2, $55 in Q3 and $60 in Q4. Yes, that does average to $52.50/bbl, but close enough.

The more complex answer is: Each company has a different mix of production (oil, natural gas and NGLs) AND they each have different hedging strategies AND there are regional price differentials that need to be considered. The reason you pay BIG BUCKS for your EPG membership is that I consider this stuff in each individual company Net Income & Cash Flow Forecast model. You can also find the individual company forecast models under the Sweet 16 tab on our website.

A profitable upstream company should be trading for 6X to 10X operating cash flow per share. The appropriate multiple depends a lot on the quality of their leasehold and the number of undrilled drilling locations. For example, Concho (CXO) and EOG Resources (EOG) each have over 20,000 premium drilling locations in inventory; making their "real estate" extremely valuable, but not reflected in operating cash flow until it is drilled. As of the January 18th closing prices, the Sweet 16 was trading at just 4.1 X operating CFPS. That is an extremely low multiple for a group of this quality (hence support for my much higher valuations). Our four "gassers" are trading at 1.7 to 2.6 X operating CFPS for 2019 and they are all extremely profitable assuming HH gas averages $2.75/mcf in 2019.