Sweet 16 Update - October 12

dan_s · Post by **dan_s** » Sun Oct 13, 2019 8:34 am

The main Sweet 16 spreadsheet has been updated and posted to the EPG website.

The spreadsheet has two tabs.

On Tab 1 you can see in columns E to H that a lot of the Sweet 16 are currently trading at a deep discount to their book value. GAAP (Generally Accepted Accounting Principles) and SEC rules are extremely conservative for upstream oil & gas companies. Therefore, the only justification for an upstream company's market-cap being less than book value is if the outlook for commodity prices is extremely negative. All 16 companies have solid cash flow from operations at today's oil & gas prices; more than enough to service their debt and continue funding their growth plans.

On Tab 2 you can see how each company's share price compares to my valuation and to First Call's price target.

Callon Petroleum (CPE) is going to report good Q3 results and should soon report that their shareholders have approved the merger with Carrizo Oil & Gas (CRXO). The post-merger outlook for CPE looks very good; even at $55 oil.

Concho Resources (CXO) is the "Poster Child" for the Parent/Child well problem in West Texas. There is no reason for it to be trading below book value.

EOG Resources (EOG) was recently mentioned in an article about companies that would be hurt by the Democrat's plan to ban all fracking. The Democrats are making a lot of crazy promises that will never be kept even if they are elected and this one is at the top.

WTI averaged more than $56/bbl in Q3, compared to $59/bbl in Q2. With most of them reporting higher production and lower operating expenses, Q3 results will be close to what they reported in Q2. "Reported Net Income" / GAAP should include some large gains on their hedges in Q3.

Oil and gas price differentials in West Texas have improved and will be even better in Q4. Gas and NGL prices for the Permian Basin companies will still be quite low in Q3, but should rebound in Q4 and the pipeline bottleneck issue should be gone in 2020. Increased pipeline access to Mexico should help natural gas prices in West Texas.