Sweet 16 Update - Feb 22

[dan_s]

All of the Sweet 16 companies that announced Q4 results last week (XEC, CXO, FANG, OVV, PE, PXD and SOI) met or beat my forecast. They all provided updated 2020 guidance, which increases the confidence level that I have in my forecasts. All of these forecast/valuation models have been updated.

Except for OVV, they are all heavily weighted to their operations in the Permian Basin.
> OVV has changed its name from Encana to Ovintiv. See my previous post on this company. IT HAS A LOT OF UPSIDE from where it is trading today.
> SOI is an oilfield services company that provides equipment and logistical services for handling frac sand at well site. SOI is not a sand company and it is a cash flow machine that should be increasing their dividends this year.

I have lowered my valuations on FANG and OVV slightly, but they are still trading well above any reasonable valuation. I raised my valuations on the other five.

FEAR of the coronavirus and what it is doing to China's demand for oil is the only thing holding back WTI from moving over $60/bbl.
MY TAKE is that this FEAR will fade just as all other pandemics fears (SARS, MERS, Ebola, Aids, Swine Flu, Bird Flu, etc. etc.) have in the past.
"Mainland China noted a significant fall in the number of new coronavirus cases, with 397 reported on Saturday. The total number of cases in mainland China increased to 76,288 and there have been 2,345 deaths." - https://www.aljazeera.com/news/2020/02/ ... 43953.html

Just keep in mind how this compares to the world population.
> There are over 7.76 Billion people on this planet with over 1.437 Billion in China. 76,288 / 1,437,000,000 = 0.00003221 or only 0.003221 % of China's people have the coronavirus and 97% are expected to totally recover..
> In the last two winters combined over 95,000 people have died from the seasonal flu just in the U.S. Global estimates are that ~400,000 people die each year from seasonal flu.
> The Media Hype over the coronavirus is ignoring that the recovery rate is quite good. The last number I saw was that over 11,000 of those hospitalized in China have fully recovered and been released from the hospital. FEAR = Higher Ratings. Just keep this in mind whenever you watch the news.
> The death rate is less than 3% and much lower outside of China. Most of the deaths are older people that weren't in good health to begin with.
Take a look at this: https://www.worldometers.info/world-population/

The civil war in Libya has taken enough oil supply off the market to offset all demand lost from China.

The most pleasant surprise in Q4 results has been that natural gas and NGL prices in West Texas have started to normalize. All seven companies that have reported Q4 results (listed above) have reported higher NGL prices than what I was using in my forecasts. The oil price differential in the Permian Basin has gone positive now that new pipelines are in service.

CLR and EOG have the most exposure to oil prices. NONE of their oil is hedged, which is just one reason that their Q4 results will be very good.

Callon Petroleum (CPE) completed their merger with Carrizo on December 20. I think their year-end reserve report and 2020 guidance will draw a lot more attention to this grossly oversold stock. My Pro Forma model for 2019 (assuming the merger closed on 1-1-2019) shows EPS of $1.44 and operating cash flow per share of $2.78. CPE closed at $2.85 on Feb. 21. If you can find other profitable companies with lots of running room trading at PE ratios under 2, please tell us about them.

Parsley Energy (PE) and PDC Energy (PDCE) have also closed significant mergers that are not priced into the stock.

Talos Energy (TALO) expects to close their acquisition of affiliates of ILX Holdings that are producing ~19,000 Boepd (65% oil) on February 28.
Even if WTI averages $50/bbl in 2020 (which it won't unless the coronavirus turns into the "Black Death"), Talos is going to generate over $100 million of free cash flow from operations this year. The share price has pulled back because of a dispute that the company is having with Pemex over the development of the Zama oil discover. Zama is under blocks in Mexico's share of the Gulf of Mexico. Zero production from Zama is included in my forecasts for 2020 and 2021.
MY TAKE: The dispute with Pemex will be resolved and the share price will spring back. TALO should be trading a lot higher than 2X CFPS. Talos will release Q4 results on March 11, which should also draw more interest to this stock.

I will be updating my forecast models for all of the Sweet 16 within two days after they release Q4 earnings.
Release dates:
Feb 25: CPE, MTDR, OAS
Feb 26: CLR, PDCE
Feb 27: EOG, RRC

Matador Resources (MTDR) will be hosting a luncheon for us at The Hess Club on April 8.

All ladies get in FREE to our Hess Club luncheon on Wednesday, February 26.

[dan_s]

Over 14,000 people in China have fully recovered from the coronavirus.

https://www.aljazeera.com/news/2020/02/ ... 43994.html

"Despite the number of infections reaching almost 75,000 on Wednesday, some reassuring news is finally emerging out of China - that a growing number of people can and do survive the illness.
On Monday, the World Health Organization chief, Tedros Adhanom, had also said that based on Chinese medical data, four out of five patients in mainland China have only mild symptoms and are expected to recover."