Sweet 16 Update - Dec 15

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dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - Dec 15

Post by dan_s »

The overall market, oil and gas prices were all down big on Friday and the Sweet 16 got hammered. The portfolio declined 7.3% during the week that ended December 14 and almost all of the decline was on Friday.

IMO the overall FEAR in the market is the primary driver of this selloff because the fundamentals for oil & gas don't justify where these stocks are trading today.

The Sweet 16 is down 33.2% YTD. Since 2001, the first year that I came up with the Sweet 16, the portfolio has only finished two previous years down for the year (2008 and 2014). If the share prices don't rebound, this will be the worst year EVER. The 2014 decline was 24.7% and four stocks actually finished higher for the year.

What's weird and why I think the Sweet 16 is grossly oversold:

> The group is on-track to have higher year-over-year reported earnings. Q4 results should be much better than the market is anticipating. Keep in mind that WTI peaked in Oct. at $75.56.
> All of them will report solid YOY production growth
> Most of them can live within cash flow from operations at $50 oil and still grow production
> Year-end reserve reports should show much higher proved reserves
> FEAR is driving this selloff.

We need the Wall Street Gang to believe that oil has found a floor price in the low $50s.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 15

Post by dan_s »

On December 14th Tudor Pickering Holt ("TPH") published their price targets for several of the stocks that are in our model portfolios.
Here are TPH's price targets (based on conservative oil price forecast):

CDEV = $21
CPE = $16
CRZO = $24
CXO = $165 < They really love it
FANG = $138
OAS = $14
PDCE = $61
PE = $39
SM = $31
XEC = $119
PAA = $27
Dan Steffens
Energy Prospectus Group
bobs
Posts: 221
Joined: Mon Apr 26, 2010 2:32 pm

Re: Sweet 16 Update - Dec 15

Post by bobs »

TPH has a 24 price target for CRZO "based upon conservative oil price forecast" yet when oil was in the mid 70s in early October the CRZO price was in the mid 20s.
Their price forecast must be awfully optimist vs what I would consider "conservative" since oil is now in the low 50s.
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 15

Post by dan_s »

The Carrizo forecast model is under the Small-Cap tab. Download it to Excel. At the bottom change the oil price assumption to $50 for 2019 and look at what it does to their cash flow from operations. Come back and tell the Forum what the CFPS share is.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Dec 15

Post by dan_s »

From the TPH report"

"While CRZO was in favor when portfolio diversification fit market themes, today's environment has focused investors strictly on (i) cash flow vs. capex and (ii) leverage metrics. The latter stands out as potentially problematic if lower-for-longer prices persist, as we model YE'19 Net Debt / EBITDA of 2.4x at strip on our capex assumptions of $620MM for +9% exit/exit growth which results in a ~$75MM outspend (~$100MM outspend in 2020). There is material upside (TPHe 64% to our $24/shr 3P NAV; 3.6x 2020 EV/EBITDA) in the equity from here given underperformance across the space, but we think incremental capital investment will first be attracted to less-levered E&Ps that are already generating sustainable FCF. We see the potential for FCF neutrality to be reached more quickly via a reduction in drilling activity (TPHe would be Eagle Ford given ~2 rigs are optimal for Delaware HBP requirements), but management has emphasized a continued focus on the long-term which it believes will benefit from a short-term outspend."

MY TAKE: If the price of oil crawls back over $60/bbl, there is a lot of upside in CRZO. Of course there is a long list of companies that are in this same boat.
Dan Steffens
Energy Prospectus Group
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