Sweet 16 Update - Nov 25

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dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - Nov 25

Post by dan_s »

Susan says we are done putting up Christmas decorations (for today), so I decided to post my Sweet 16 update a couple of days early since I will need to focus on the newsletter on Saturday.
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Since my last Sweet-16 update on November 13th the portfolio is down 0.86%, but it is up 157.89% YTD.
With all the "noise" coming from Team Biden these days, including their big announcement of a 50 million barrel release from the Strategic Petroleum Reserve, I'm pleased to see the portfolio holding up so well. With the HUGE YTD gain we can expect to see some investors harvesting their gains.

Since November 13th the S&P 500 Index is up 0.5% and it is up 25.17% YTD. This has been a very good year for stocks. Inflation and very low bond yields are good for stocks. Higher taxes and rising interest rates will be a headwind next year.

I have taken a hard look at each company's forecast/valuation models and we have published updated profiles on all of them except for Earthstone Energy (ESTE) that will be coming out by Saturday morning. Based on my valuation models, the Sweet 16 still has a lot of upside for us. Q3 results were good and Q4 results will be even better. Q1 2022 results could be STUNNING.

Why so much upside?

> The Sweet 16 is trading at a forward-looking PE ratio (based on my 2022 forecasts) of just 5.81, which compares to the S&P 500 Index average PE ratio of more than 21. The lowest PE ratio belongs to Comstock Resources (CRK) at 2.91 followed closely by Laredo Petroleum (LPI) at 3.19. The highest PE ratios belong to Antero Resources (AR) at 9.44 and Pioneer Natural Resources (PXD) at 8.61. Profitable public companies that are generating lots of free cash flow, have strong balance sheets and lots of running room should not trade at under 10 PE ratios.

> Note that the PE ratios above are based on my forecasts of "Adjusted Net Income" per share, which are comparable to First Call's EPS forecasts. As I have posted here many times, "Report New Income" or "GAAP Net Income" is a worthless number thanks to the misleading rules for hedge accounting and impairment.

> All of these companies use the "Units-of-Production" method to calculate DD&A expense. When year-end Proved Reserves (P1) go up the UoP rate goes down, increasing net income.

> Even more important as an indicator of potential share price appreciation is that the Sweet 16 is trading at just 2.9 X 2022 operating cash flow per share. A group of this quality should be trading at 6X to 8X operating cash flow. Based on my forecast model, Laredo Petroleum (LPI) is going to generate $40.46 operating cash flow per share in 2022, which compares to its current share price of $68.31. I think Laredo's year-end reserve report could push the share price over $100.

> The Sweet 16 is trading at a 59% discount to my current valuation.

> Coterra Energy (CTRA), Devon Energy (DVN) and Pioneer Natural Resources (PXD) are now all paying "variable dividends" tied to their free cash flow and all three are going to generate A LOT OF FCF at current oil, gas and NGL prices. CLR, EOG, FANG, OVV and PDCE also pay dividends that should go higher next year.

> As of today, I plan to move Earthstone Energy (ESTE) and Talos Energy (TALO) back to our Small-Cap Growth Portfolio on January 1st to make room for Matador Resources (MTDR) and one other company (MGY, NOG or ROCC). I am doing this just because of their size. ESTE and TALO both have market-caps under $1 billion. I believe both of them could be doubles for us in 2022. My valuation of ESTE is $21 and my valuation of TALO is $28.

Final Comments:
The global oil, gas and NGL markets are tight and in some areas they are extremely tight. For example, propane inventories are so tight that the space heating fuel is already being rationed in some areas of the U.S. Natural gas inventories in Europe and Asia are not enough to get them through another winter like they had last year. I think there is more upside risk to the commodity prices I'm using in my forecasts.
It is going to be very interesting to see how OPEC+ responds to Team Biden's SPR release. I am expecting the cartel to teach Old Joe and his band of idiots that they are in control of oil prices. This is not going to end well for the Democrats. Working people (voters) are not going to put up with "WOKE Capitalism/Socialism" much longer.
OPEC, Russia and China have no fear of Biden. To them he is a weak old man.

Enjoy the holiday, eat some Turkey and watch some football. My newsletter should arrive in your email on Monday morning.
Dan Steffens
Energy Prospectus Group
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