Sweet 16 Update - August 31

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

Sweet 16 Update - August 31

Post by dan_s »

The Sweet 16 had a good week, but it would have been a lot better if the market had closed on Thursday. Just remember that markets do weird things on the the last day of the month and the Friday before a major holiday. The fundamentals point to higher oil prices.

The Sweet 16 gained 3.31% for the week, but it is still down 26.14% YTD. If I take out the four "gassers" the "Sweet 12" would still be down 14.32% YTD which is insane since WTI oil is up $12/bbl YTD and they are all on-track for good years. FEAR of the U.S. vs China Trade War going on forever is the only thing that justifies the negativity hanging over the sector.

PDC Energy (PDCE) was the big winner for the week. It went from down 15.15% YTD to up 7.02% YTD. Traders seem to love their merger with SRC Energy (SRCI).

From Credit Suisse on 8-27-2019: "PDCE delivers the transaction the market has been asking for (a no premium merger of equals ("MOE") that creates deliverable synergies with a strong balance sheet)… which we believe should be rewarded. PDCE/SRCI is the first merger in recent memory that saw positive market reaction, effectively rewarding SRCI with a takeout premium post-announcement. We believe this merger of equals is a success on multiple fronts: 1) it addresses concerns around PDCE’s inventory depth, which we saw as a key overhang for an otherwise solid growth & return story; 2) accretive to free cash flow and comes with an increased commitment to return a substantial portion of that FCF to shareholders; and 3) is underlined by conservative synergy assumptions, with only G&A savings baked in while leaving operational synergies as future (and rather achievable, in our view) upside. While the PDCE/SRCI merger should encourage other E&P mgmt. teams to follow suit, such attractive, synergistic (financial & operational) combinations are unique in our universe, particularly given SRCI’s strong balance sheet."

Credit Suisse must have missed the Callon Petroleum (CPE) + Carrizo Oil & Gas (CRZO) merger that does all of the above as well. I spent most of the day on August 30 working on the CPE + CRZO Pro Forma forecast/valuation model, so take a few minutes to understand it. I think you will agree that "New Callon" has a lot of upside from the current share price. CPE is trading at less than 2X operating cash flow per share and it has FREE CASH FLOW FROM OPERATIONS locked in. It also has lots of running room in two of America's top oil plays.

We still need to update the profile for Parsley Energy (PE), which also had a very good week. PE went from up 0.69% YTD to up 12.08% YTD. It rocketed past Diamondback Energy (FANG) and now leads the pack.

We will publish the next edition of The View From Houston newsletter next week. I will be dropping Carrizo Oil & Gas (CRZO), Gulfport Energy (GPOR) and Southwestern Energy (SWN) from the Sweet 16.
> Carrizo is merging with Callon.
> Gulfport is going to our Small-Cap Growth Portfolio.
> Southwestern is just being dropped to reduce our exposure to natural gas.

Additions to the Sweet 16:
> Oasis Petroleum (OAS)
> Solaris Oilfield Infrastructure (SOI)
> Talos Energy (TALO)
All three of these companies are generating free cash flow from operations. Talos does have hurricane risk because most of its production comes from platforms in the Central Gulf of Mexico. I was going to wait until Q4 to add it to the Sweet 16, but I think the Wall Street Gang is totally missing the incredible update that Talos has offshore Mexico.
Dan Steffens
Energy Prospectus Group
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