Sweet 16 Update - May 1

[dan_s]

All four of the Sweet 16 that announced Q1 results last week (AR, CLR, OVV and RRC) beat my forecast, primarily because of much higher natural gas and NGL prices than I used in my forecast models. Winter Storm Uri lowered their production, but it was more than offset by much higher commodity prices. I have updated my models and raised my valuation for all four companies.

The main Sweet 16 spreadsheet is updated each weekend. I shows my current stock valuation compared to First Call's price targets as of the date on the spreadsheet.

For the week ending April 30 the Sweet 16 gained 11.86% and is now up 64.56% YTD. The S&P 500 Index was up less than 0.1% on the week and up 11.32% YTD.
After being the worst sector last year, the Energy Sector is #1 YTD. The Sweet 16 is still trading at more than a 50% discount to my valuations and the companies keep beating my forecasts.

Natural Gas and NGL prices are set by regional supply & demand and the North American region is MUCH TIGHTER than it was just a few months ago. It should stay tight all year. I urge all of you to read carefully the first three pages of the Range Resources (RRC) we sent out via email today. There are charts that show how much tighter the macro environments for gas and NGLs are today. The U.S. petrochemical industry is booming.

Thanks to higher prices, Antero Resources (AR) operating cash flow increased from $273.3 million in Q4 2020 to $503.2 million in Q1 2021. My updated valuation is now $19.50, which is more than double where the stock closed on Friday. ~92% of AR's 2021 natural gas is hedged at $2.76/MMBtu, which today is a negative. However, their NGL realized price increased from $22.01/bbl in Q4 2020 to $29.87/bbl in Q1 2021, increasing the Company's revenues by $112.6 million quarter-over-quarter. AR is no on track to generate over $900 million of free cash flow from operations THIS YEAR. That is $3/share of free cash flow per share for a stock trading for $9.00. When I was working at Hess this would have but AR on our list of "Screaming Takeover Targets". To get a better understanding of how dangerously low U.S. propane inventories are going to be heading into the next winter, I urge all of you to listen to the replay of AR's Q1 conference call (see slides 7 to 9).

AR is trading for ~1.7X my 2021 operating cash flow forecast of $5.25, which compares to TipRanks' OCFPS forecast of $4.09. < I am now using TipRanks for comparison to Wall Street's forecast estimates for revenues, net income and operating CFPS because they use more current forecasts than those used by First Call. A company of this quality should be trading for AT LEAST 4X operating CFPS.

All of the other 12 companies will announce Q1 results next week, beginning with Diamondback Energy (FANG) on Monday. The Company pre-announced Q1 production and realized commodity prices that were MUCH higher than my forecast model. FANG's realized ngas price is Q4 was $0.97/mcf and in Q1 it was $2.64/mcf. Realized NGL prices also moved 50% higher QoverQ.

[dan_s]

Have you noticed that time moves faster the older you get? We are already 1/3rd of the way thru 2021.

Here are the leaders of the Sweet 16 pack:
> Callon Petroleum (CPE) up 184.12% YTD and still 52.4% below my valuation.
> Laredo Petroleum (LPI) up 105.79% YTD and still 28.3% below my valuation.
> PDC Energy (PDCE) up 77.84% YTD and still 45.2% below my valuation.
> Cimarex Energy (XEC) up 76.49% and still 45.0% below my valuation.

Comstock Resources (CRK) is the worst preforming stock and it is up 25.63% YTD.

I think CRK has a lot of upside for us because only 48% of their Q1 2021 ngas was hedged with SWAPs at $2.56/MMBTU and I expect them to report strong Q1 results next week. I heard a rumor that CRK was able to sell some gas for $55/mcf during winter storm Uri. I don't know how much, but if it was a decent volume just for a few days it could result in a blow out quarter. If Comstock's Q1 results confirm my forecast model assumptions and they stick to their preliminary production guidance, my valuation will increase to approximately $12/share just because I drop 2020 results out of the valuation calculation.