Sweet 16 Update - Dec 1

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - Dec 1

Post by dan_s »

I am doing this on Friday evening because the "Boss Lady" (Miss Susan, our Cruise Director) tells me that I have several "Honey Do" projects that must be done tomorrow. Plus, we are leaving on vacation on Sunday.

The Sweet 16 was down another 1% during the week ending November 30, but I do see some encouraging signs.
> The larger companies are drawing some bids from the bargain hunters. XEC, CXO, CLR, EOG, FANG, GPOR, MTDR and PXD were all up. Six of them are in the "Elite Eight".
> Had it not been for Friday's selloff, the portfolio would have had a good week.

There is literally nothing that I can think of that justifies the three gassers (AR, GPOR and RRC) being down. I took a hard look at RRC early in the week and I raised by valuation $1 to $33/share AND I think my valuation is conservative. The outlook for natural gas and NGLs is MUCH BETTER than it was a month ago and RRC and AR hold some of the most valuable natural gas assets on this planet. If any of you can think of any reason for these stocks being down, I would be interested in hearing it.

RRC is going to generate approximately $4.30 operating cash flow per share in 2018 and more than $4.50/share in 2019 if natural gas averages $3/mcf. First Call's operating CFPS forecast is $4.74 in 2019. There is no justification that I can think of for RRC to be trading for less than 4X operating CFPS. AR closed on Friday at 2.35 X CFPS for 2018 and GPOR closed at 1.73 X CFPS for 2018. GPOR is the most profitable company in the Sweet 16 with a PE ratio of less than 4. The average PE ratio of the S&P 500 is 22.

Another positive sign is that the First Call price targets for the Sweet 16 have barely moved since the beginning of November. By now, a lot of the analysts' reports that Reuters uses to come up with the First Call price targets have been updated for Q3 results. First Call's price target for Antero Resources (AR) actually went UP this week.

I finished updating the last of the Sweet 16 profiles today. We will be sending out the updated profile on Parsley Energy (PE) on Saturday morning. My valuation of $42.00 compares to First Call's price target of $40.35. PE closed on November 30 at $20.13. They have a lot of their oil hedged and they have firm pipeline takeaway capacity for all of their oil through 2019. Plus, they are getting Gulf Coast prices on a lot of their oil.

Keep in mind that there is some stuff that should ease the pain of low oil prices in Q4:
> Oil prices were high for most of October
> Most of these companies have hedging programs that will help. BTW the companies with lots of their oil hedged will report HUGE mark-to-mark gains on their hedges in Q4.
> Natural gas prices should be much higher for the quarter. They all sell a mix of gas, ngls and oil.

OPEC+ meets on Dec. 6 and a production cut is expected.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 1

Post by dan_s »

Each weekend I update the main Sweet 16 Spreadsheet. It includes my up-to-date valuation on each stock and First Call's current price target for each company.

There is also lots of other good information under Tab 1, including my earnings per share forecasts for 2019. Take a look at column S and you will see that the Sweet 16 is now trading at a PE ratio of less than 10 based on my 2019 forecasts. The S&P 500 Index currently trades at a forward PE ratio of 22. This sector is grossly oversold.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 1

Post by dan_s »

Special Report from Credit Suisse
Rare Buying Opportunity for Bellwether E&P: EOG Resources (NYSE: EOG): Upgrade to Outperform

■ Arguably one of the best run E&P companies for a valuation near peers.
Despite its much stronger balance sheet, robust FCF generation, & superior
cash flow per debt-adjusted share outlook vs. peers, EOG has
underperformed large-cap E&Ps by ~3% QTD in conjunction with the oil
price meltdown. Notably, this has left its shares trading near peers on 2019-
20 EV/DACF at current futures strip prices (vs. its historical premium to group
of ~2.5x turns). While we acknowledge the sharp drop-off in 4Q completion
activity poses a risk to 1Q19 volumes, we believe this is already well-flagged
by the market with consensus forecasting 1Q19 oil production up just ~9
MBbld QoQ (below recent trend of ~25 MBbld). Thus, we are upgrading EOG
from Neutral to Outperform and maintaining our target price of $128/share.

■ Bulletproof balance sheet, robust FCF generation, and superior cash
flow per debt-adjusted share growth outlook. Assuming current futures
strip prices, we estimate EOG’s YE19-20 net debt/EBITDX ratio is just ~0.3x
and 0.1x, well below the large-cap E&P avgs of ~2.0x and 1.7x. And we
forecast EOG is one of just a few E&Ps that can still generate robust FCF
next year (CSe ~$1.1bn) at current strip prices, insulating it from the
capex/production cuts we may see from its peers if the current futures strip
holds. EOG should deliver cash flow per debt-adjusted share growth of ~24%
per annum (2017-22), well above the peer average of ~17%.

■ Shares now appear attractively priced…finally. After years of trading at a
wide premium to peers, EOG is now trading at 2019-20 EV/DACF multiples
of ~7.2x and ~6.1x assuming current futures strip prices, near the large-cap
E&P averages of ~6.6x and ~5.9x despite the aforementioned attributes.
EOG shares also appear quite compelling when comparing it to its historical
average multiple of ~9.5x and premium to the group of ~2.5x.

Maintaining target price of $128, which is based on a conservative
normalized 2019E DACF multiple of ~8.0x, below its historical average.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 1

Post by dan_s »

Credit Suisse is Bullish on Cimarex Energy (XEC)
Strategic REN Acq. Increases Focus on Permian

■ Accretive strategic Delaware acquisition at an attractive valuation. XEC
announced the acquisition of Resolute Energy (REN) for a stock/cash deal of
$1.6bn, valuing REN at ~4.2x 2019 EBITDX (consensus) and ~$18,000/acre
(assuming ~$35k/flowing Boed given a lower 45% oil mix). This is at a
discount to XEC’s pre-deal valuation of 6.3x on 2019 at strip prices, and
average Delaware transaction value of ~$28,600/acre since 2017. REN
brings 21,100 net acres in Reeves County with 3Q18 production of ~35
MBoed (45% oil, 72% liquids). The asset “fits like a glove” with XEC’s
existing position in Reeves, and enables XEC to apply learnings from its
extensive spacing tests to optimally develop the acquired assets. While the
acquisition was a surprise, we like the fact that it’s cash flow positive, and a
bolt-on with operational synergies that imply increased capital allocation to
the Permian going forward.

Deal is accretive on all metrics, assuming G&A & interest cost savings.
We believe the transaction will prompt a reallocation of capital within their
legacy portfolio rather than adding meaningful capex going forward. The FCF
from the asset plus G&A/interest synergies (we assume ~$35MM/annum)
lowered XEC’s 2019 EV/EBITDX valuation from 6.3x to 5.8x, and 2020
EV/EBITDX from 5.2x to 5.1x, based on strip prices. This compares to
Permian peer average of 6.8x and 5.2x for 2019 and 2020, respectively. We
also see the deal modestly accretive on P/NAV with XEC now trading at
0.70x vs. 0.72x pre-deal at strip prices. However, we continue to see XEC’s
debt-adjusted CF per share growth of 16% lag peers at ~23% on average.
We are raising pro forma 2019-20E CFPS estimates by ~9% to $19.84 and
$26.20, respectively. We are raising PT from $104 to $100 based on a blend
of 5.75x normalized 2019 EBITDX and 0.65x NAV at CS price deck.
Risks: Oil prices, well costs, infrastructure constraints.
Dan Steffens
Energy Prospectus Group
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