Sweet 16 Update - Nov 9

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

Sweet 16 Update - Nov 9

Post by dan_s »

By now you should have received an email with a link to the updated Sweet 16 Main Spreadsheet. The Sweet 16 gained 5.03% last week, but it is still down over 19% YTD. These stocks have a long way to go before they are even close to fair value.

Under Tab 1:

> Note that I have updated the Market-Cap and Balance Sheet columns for each company.
a) A profitable going concern should NEVER be trading below book value. As of Friday's closing price, 9 of the Sweet 16 are trading below book value.
b) I say "NEVER" because if the companies are following SEC and GAAP accounting rules (which they must do unless their external auditors want to go to jail) they must write down ("impair") their assets to fair value at the end of each quarter.
c) "Impairment" does mean that they have abandoned the assets. The companies still own them and if oil & gas price go back up the assets still have a lot of value, BUT accounting rules don't allow the companies to reverse the impairment charges (one of several GAAP rules to confuse investors).

> Under the columns marked "Year 2019 Earnings Per Share" the first three quarters are Reported EPS or GAAP earnings per share". For the companies that have a high percentage of their production hedged, reported EPS is a worthless number. Focus on operating cash flow per share. For example, AR and RRC reported losses in Q3 because of non-cash impairment charges and/or adjustments on the value of their hedges. Both companies are generating solid cash flow from operations AND rising natural gas prices really help those two.

> On the far right side of the spreadsheet you can find my updated operating cash flow per share ("CFPS") estimate and the multiple of CFPS that the stock is trading for as of Friday's closing price shown in column P. As a group, the Sweet 16 is trading for 3.2 X operating CFPS. A group of companies this strong should be trading for at least 6X CFPS.

Under Tab 2:

> The "Elite Eight" are highlighted in yellow. These are the larger companies that IMO have the lowest risk.

> Only three stocks (PE, PXD and TALO) are up YTD. In my opinion, all of these companies are in much better shape today than they were on 1/1/2019. Remember that WTI dipped to almost $40/bbl on Christmas Eve, 2018.

> In Columns K and L are my updated valuations and First Call's target prices for each company. Just keep in mind that First Call's target prices don't fully reflect Q3 results until a month after the companies announce results and fresh guidance.

> Proven Reserves as of 12/31/2018 are shown on the far right columns just to give you an idea of the size of the companies and their asset mix between gas and liquids.
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CPE, PE and PDCE are all in the process of closing large strategic mergers or acquisitions.
> Callon is having some trouble with a large shareholder, but I think they will get the merger with Carrizo (CRZO) closed. Regardless, the stock is trading way below fair value.
> PE will get their takeover of Jagged Peak (JAG) closed in Q1 2020.
> PDCE will get their merger with SRC Energy (SRCI) closed by year-end. PDCE will have over 200,000 Boepd of production when the merger closes.
We will be publishing updated profiles on each company by the end of November with Pro Forma forecast models attached. I've already updated each stand alone forecast model.

Diamondback Energy (FANG) is the only company that reported slightly disappointing Q3 results. The "disappointment" was the result of terrible realized natural gas and NGL prices. With a lot more pipeline takeaway capacity coming on-line in Q4 and Q1, commodity prices in West Texas will improve. They already have.

Encana Corp. (ECA) is going to relocate their headquarters to Denver. The company, to be renamed Ovintiv, will be incorporated in Delaware and trade on the New York Stock Exchange and the Toronto Stock Exchange under the symbol “OVV,” according to a filing on Thursday. The Wall Street Gang loves crap like this and more attention to this grossly undervalued stock is a good thing.

Solaris Oilfield Infrastructure (SOI) is the only non-upstream company. It is a "cash flow machine" that pays a nice dividend.

Talos Energy (TALO) is the only offshore company. It has HUGE upside in shallow water offshore Mexico, which I expect Netherland, Sewell & Associates, Inc. to confirm by year-end.

BIG PICTURE: The global oil market is much tighter than Wall Street thinks it is. U.S. production growth has stopped and will probably go on decline in early 2020. Mother Nature has decided to give natural gas and propane prices a nice boost by starting winter a few weeks early. The Middle East is still a mess and Trump isn't going to remove sanctions from Iran.
Dan Steffens
Energy Prospectus Group
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