Sweet 16 Update (Q3 Results) - Nov 7

[dan_s]

I have updated all 16 of the individual company forecast/valuation models. Just log on to the EPG website and click on the Sweet 16 to view the forecasts and/or download them to Excel. Once in Excel you can play with the production forecasts and commodity prices at the bottom to see how it impacts 2020 EPS, operating CFPS and stock valuation. All of the forecasts are macro driven spreadsheets that update automatically when you change the assumptions at the bottom. Make it a point to learn how to use them.

The only disappointing Q3 result came from Diamondback Energy (FANG), but it was mainly due to the terrible natural gas and NGL prices that they received in West Texas. Diamondback cannot control commodity prices, but they did get much lower prices than their peers. The market's reaction was to oversell the stock. Diamondback is still one of the most profitable companies in the Sweet 16 and it is a "Screaming Buy" under $80/share. Panic selling creates buying opportunities.

We sent out updated profiles on XEC, ECA, PXD and RRC already. CLR's updated profile should go out tomorrow.

The "gassers", AR and RRC are still out of favor, but the near-term outlook for gas has improved.

Callon Petroleum (CPE) and PDC Energy (PDCE) are trying to close strategic mergers that will make them much larger companies.

Encana (ECA) will be moving to the U.S. and changing their name.

The price of oil has firmed up and should go a lot higher if Team Trump can close Phase One of a trade deal with China.

They call them "cycles" for a reason and this oil price cycle ended on Christmas Eve, 2018. The U.S. vs China Trade War caused a brief delay, but signatures on Phase One of a trade agreement should move WTI back into the upward drifting trading channel.

I will be updating all of the Small-Cap and High Yield Income portfolio company forecasts by the end of next week. Half of them have already been updated.

[dan_s]

Let me add that there is a "False Paradigm" on Wall Street that upstream oil & gas companies cannot make money at $55/bbl WTI. If you've been paying attention to my posts the last two weeks you know that every company in our Sweet 16 and our Small-Cap Growth Portfolio did quite well in Q3. In fact, most of them are in much better shape today than they were a year ago. Most of them are now funding all of their growth with cash flow from operations and some of them have started aggressively buying back their stock. Some of them have started paying dividends.

Note that they have been doing well despite terrible natural gas and NGL prices in West Texas because of production in the Permian Basin exceeding pipeline takeaway capacity. Those marketing problems have been solved and natural gas prices are rising. Commodity prices in West Texas should be moving toward index prices in Q4.

There has also be a lot of BS (some posted here) that banks were going to slash credit facilities and force these companies into Chapter 11.
1. Banks do not win by forcing a company into Chapter 11; it would be stupid for them to do so. If a company is able to pay the interest on their debt, banks will work with them. NONE of our model portfolio companies have a liquidity problem. We cover it in each profile that we publish.
2. Credit Facilities are "asset back loans". Year-end reserve reports for all of these companies are going to show more than enough proven reserves to support their debt.

Half of the Sweet 16 are trading below book value. A profitable upstream company that is generating solid cash flow from operations and has lots of running room (which all of the Sweet 16 do) should NEVER trade under book value. Why? Because GAAP account rules force them to write down their assets to current value. Balance sheets for upstream companies are VERY CONSERVATIVE because of accounting rules for Full Cost and Successful Efforts companies. Under Tab 1 of the main Sweet 16 spreadsheet you can see which companies are currently trading below book value.