Sweet 16 Update - Sept 14

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

Sweet 16 Update - Sept 14

Post by dan_s »

It was a good week for the Sweet 16 despite the pullback in the oil price on Thursday & Friday. For the week, the Sweet 16 was up 5.28%.

The three additions on September 1st helped.
> Oasis Petroleum (OAS) is up 19.23% since being added.
> Solaris Oilfield Infrastructure (SOI) is up 1.02%
> Talos Energy (TALO) is up 16.75%

The main Sweet 16 spreadsheet has been updated and posted to the EPG website.
Under Tab 1 on the left side of the spreadsheet you can see how each company's market-cap compares to its Net Book Value (NBV). NBV is just Total Assets - Total Debt.
As I have posted here many times, an upstream company should never have a market-cap below NBV because SEC / GAAP accounting rules require upstream companies to write down or "impair" their assets if market value is below the capitalized cost of those assets. Yet, here we are with 7 of the Sweet 16 trading below NBV.

Accounting rules and the auditors are required to take a hard look at the carrying value of assets each quarter. So, either the auditors are not doing their job or we have seven companies that are now trading well below their break-up value.

On the right side of the Tab 1 spreadsheet you can see how the current share price compares to my estimated operating cash flow per share ("CFPS"). A profitable upstream company that has solid production and proven reserve growth locked in should (IMO) never trade for less than 4X operating CFPS. Yet, eleven of the Sweet 16 are trading for less than 4X CFPS for 2019 AND their CFPS should be higher in 2020. AR, OAS and RRC are now trading at less than 2X operating CFPS.

Oil Price: Each of you needs to decide where YOU think oil and gas prices are heading next year. I think the price of oil will be going a lot higher unless we have a significant global recession. I think the FEAR being caused by the U.S. vs China Trade War is over-blown, but you need to decide for yourself. I am assuming that WTI averages $60/bbl in 2020 (it has averaged more than $57/bbl so far this year). If you think oil prices will be over $60 next year, then the companies that have none of their oil hedged (CLR and EOG) are "Screaming Buys" at today's share price. They will generate a lot of free cash flow in oil prices hold up. You can find a summary of each company's hedges at the bottom of the individual company forecast/valuation models.

Natural Gas Price: The NYMEX strip for natural gas has moved up about $0.30/mcf since late August. Natural gas in storage is still below the 5-year average and the winter heating season is rapidly approaching. A cold start to winter could push the gas price briefly over $3.00, which seemed to be "wishful thinking" just a few weeks ago. Gas prices are set on regional markets, so it is very important to know where your companies are selling their gas. Permian Basin gas prices are terrible and likely to stay very low, but there is "hope" that new pipelines will allow access to better markets within a few months. Our two remaining "gassers" (AR and RRC) have nothing in the Permian Basin and the gas prices in the Appalachian Region (Marcellus & Utica) have improved. Companies that have direct access to the Gulf Coast Region are also getting decent prices for their gas these days. The NYMEX strip price is tied to the Henry Hub, Louisiana spot price.

Under Tab 2 of the spreadsheet you can see how my stock valuations compare to First Call's price targets for each company. My valuations are what I believe each company's "break-up value" is today. Wall Street's "price targets" take market sentiment into consideration. I think you will agree that market sentiment is extremely negative for this sector.
Dan Steffens
Energy Prospectus Group
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