Sweet 16 Update - Sept 19

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

Sweet 16 Update - Sept 19

Post by dan_s »

The Sweet 16 rebounded last week along with the price of oil. 13 of the 16 companies get the majority of their revenues from the sale of crude oil.

Concho Resources (CXO) is a perfect example of how out-of-favor the upstream sub-sector is with the Wall Street Gang.
> CXO closed at $48.09 on Friday, September 18.
> It is down 8.82% since April 10 (Good Friday, which I mark as the low point for this cycle). The Sweet 16 is up 40.31% and the S&P 500 Index is up 18.99% since April 10.
> In the last 3 months, 16 ranked analysts set 12-month price targets for CXO that range from $63 to $99. The average price target among the analysts is $72.67.
> My valuation is $76.00.

From TipRank on Friday, September 18
CXO is a Top Pick of Credit Suisse


"First on the list, Concho Resources, is a major hydrocarbon exploration and exploitation company in the Permian Basin of West Texas. The company has exploration rights on 800,000 acres of ground in the region, and extracts both oil and natural gas. Concho is a one of the area’s largest unconventional shale producers, and has proven reserves in excess of 1 billion barrels of oil equivalent. The proven reserves are split, 2 to 1, between crude oil and natural gas.

Concho has shown great resilience during the corona crisis. While earnings fell by a third in the Q1, they quickly returned to normal levels in Q2. The second quarter results, reported in July, showed a top line of $474 million in revenues, and EPS of $1.13. That EPS result was 242% above expectations. Furthermore, Concho generated $689 million in cash from operations last quarter, well above the forecast – and of that total, $238 million was considered free cash flow, giving the company sound liquidity.

Credit Suisse’s Bill Janela explains why this stock is a top pick: “We believe concerns around federal acreage exposure are overblown for CXO and have been more than taken out of its stock price given recent relative underperformance. CXO’s asset quality and depth would allow it to easily reallocate activity; we estimate loss of well permits on Fed acreage would only reduce its NAV by <5%.”

To this end, Janela rates this stock an Outperform, and his $70 price target suggests an impressive 45% upside potential for the coming year.

Overall, Concho gets a Strong Buy analyst consensus rating, based on 17 reviews of which 16 are Buys and only 1 is a Hold. Shares are selling for $48.18, and the $72.44 average price target implies a 50% one-year upside for the stock."

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If you listened to our Webinar on Friday, during Q&A Don Simmons and I discussed how insane it is for upstream companies with strong balance sheets, lots of running room and currently generating free cash flow ("FCF") to be trading for low single digit multiples of operating cash flow per share. Don's company, Hemisphere Energy (HME.V and HMENF) is trading for just over 1X FCF per share. At $40/bbl WTI Hemisphere will generate over $5 million of FCF from operations in 2H 2020, the majority of which will be used to pay down debt.

The Sweet 16 (some of the strongest upstream companies in the U.S.) is currently trading for an average of less than 3X my 2020 operating cash flow per share estimate, which at this point is pretty much locked in. The Sweet 16 is trading for less than 2X my 2021 operating cash flow per share estimate, which is based on $50/bbl WTI and $2.50/mcf HH gas prices. You can find my 2020 CFPS estimate for each company on the far right of the Sweet 16 main spreadsheet under Tab 1.
Multiples of operating CFPS range from: 0.41 for Callon Petroleum (CPE) to 6.98 for Pioneer Natural Resources (PXD).

I have NEVER seen high quality companies trade at such low multiples of operating cash flow. At some point the market will move on from "Crazy Pandemic World" and when it does, there will be a shortage of oil. In a normal world, upstream companies of this quality trade for 6X to 8X operating cash flow per share. In a world short on oil, the multiples will be higher.
Dan Steffens
Energy Prospectus Group
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