The Sweet 16 finished the week down another 7.64% and it is now up 74.43% YTD. The S&P 500 Index gained 0.83% during the week and is now up 18.95% YTD.
The Sweet 16 was basically flat on the week until Friday afternoon when most of the week's decline happened. FEAR of the Delta Variant is driving the negativity. Oil prices are having trouble getting back over $70/bbl, but the supply/demand fundamentals still show demand exceeding supply. Natural gas prices pulled back on milder weather forecast, but we are heading to a winter heating season with gas in storage way below the 5-year average.
CLR, DVN, PDCE and PXD were the only stocks to post small gains on the week.
We published updated profiles on AR, CLR, PDCE and RRC during the week and we will publish several more next week. XEC and PXD are sitting here for my review.
Q3 oil and natural gas prices are still above what I am using in my forecast models, so my valuations remain the same. As a group the Sweet 16 closed on Friday at just 3.0 X 2021 operating cash flow per share. CPE, CRK, LPI and TALO are all trading at less than 2X operating cash flow per share.
Sweet 16 Update - August 14
Sweet 16 Update - August 14
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - August 14
Dan any color as to your highest conviction picks? We should open at some very favorable levels for the elite 8
Re: Sweet 16 Update - August 14
I like the gassers (AR, EQT, CRK, RRC and XEC) because the US gas market is going to be very tight this winter. Propane inventories are too low to handle a cold winter. OVV and DVN also produce a lot of gas and NGLs. DVN's dividends should be going up.
No telling where oil prices are going to settle with so much global "noise". US military weakness and clear lack of leadership at many levels is not giving oil traders any confidence to go long. That said, US and OECD oil inventories are very low and should support higher oil prices than where they sit this morning.
Keep in mind that all those "Bad Hedges" we hated a few weeks ago do dampen the impact of falling oil prices today.
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Note from Adam Rozencwajg received this morning
Looking Ahead to a Tight Oil Market
08/ 18/ 2021
“Over the longer-term, ESG-led activist investors have all but ensured non-OPEC production will fall dramatically, leaving OPEC with increased market share and pricing power.”
Over the past 18 months, oil markets experienced their largest dislocation in history. Because of COVID-19 restrictions, demand collapsed, and inventories swelled. Prices fell to a previously unthinkable -$37 per barrel in April 2020 as traders were forced to pay to have crude taken off their hands. At the same time, producers rushed to shut-in production and curtail drilling activity. While investors panicked, we turned to our models and concluded the market would tighten much faster than anyone thought possible. We doubled our oil and gas exposure through 2Q 2020 and have enjoyed the rebound ever since.
Our bullish thesis was based on much stronger-than-consensus demand estimates and ongoing challenges with non-OPEC+ production. We made several predictions – some that were quite radical at the time – and concluded the crude oil market would shift into deficit by summer 2020, causing inventories to normalize as soon as mid-2021.
Since we first made our prediction last spring, inventories have indeed fallen at the fastest rate on record. After peaking at 178 mm bbl above 10-year seasonal averages, US core petroleum inventories are now 34 mm bbl below 10-year averages – the lowest reading in nearly two decades. On a global basis, inventories peaked at 388 mm bbl above seasonal averages last June and as of May 2021 are only 40 mm bbl above average. Given recent trends, we believe global inventories are likely turning negative relative to seasonal averages, in line with our original predictions.
Global oil markets are very tight. WTI and Brent both trade for $75 per barrel and the 12-month backwardation (an indication of physical tightness) is approaching its widest reading in years. Oil related equities have been strong performers as well, with the XOP ETF rising nearly 70% over the first half of 2021.
Despite the price action in both oil and oil-related equities, investors remain bearish. Shares outstanding of the XOP (a good proxy for generalist investor fund flows) increased less than 10% during the first half of 2021 despite the strong underlying performance. Investors today are fixated on two things: OPEC+ spare capacity and competition from EVs. While these factors need to be monitored, investors are ignoring how tight oil markets have become and how much tighter they will get as we progress through the rest of 2021 and 2022. Over the longer-term, ESG-led activist investors have all but ensured non-OPEC production will fall dramatically, leaving OPEC with increased market share and pricing power.
No telling where oil prices are going to settle with so much global "noise". US military weakness and clear lack of leadership at many levels is not giving oil traders any confidence to go long. That said, US and OECD oil inventories are very low and should support higher oil prices than where they sit this morning.
Keep in mind that all those "Bad Hedges" we hated a few weeks ago do dampen the impact of falling oil prices today.
---------------------------------------
Note from Adam Rozencwajg received this morning
Looking Ahead to a Tight Oil Market
08/ 18/ 2021
“Over the longer-term, ESG-led activist investors have all but ensured non-OPEC production will fall dramatically, leaving OPEC with increased market share and pricing power.”
Over the past 18 months, oil markets experienced their largest dislocation in history. Because of COVID-19 restrictions, demand collapsed, and inventories swelled. Prices fell to a previously unthinkable -$37 per barrel in April 2020 as traders were forced to pay to have crude taken off their hands. At the same time, producers rushed to shut-in production and curtail drilling activity. While investors panicked, we turned to our models and concluded the market would tighten much faster than anyone thought possible. We doubled our oil and gas exposure through 2Q 2020 and have enjoyed the rebound ever since.
Our bullish thesis was based on much stronger-than-consensus demand estimates and ongoing challenges with non-OPEC+ production. We made several predictions – some that were quite radical at the time – and concluded the crude oil market would shift into deficit by summer 2020, causing inventories to normalize as soon as mid-2021.
Since we first made our prediction last spring, inventories have indeed fallen at the fastest rate on record. After peaking at 178 mm bbl above 10-year seasonal averages, US core petroleum inventories are now 34 mm bbl below 10-year averages – the lowest reading in nearly two decades. On a global basis, inventories peaked at 388 mm bbl above seasonal averages last June and as of May 2021 are only 40 mm bbl above average. Given recent trends, we believe global inventories are likely turning negative relative to seasonal averages, in line with our original predictions.
Global oil markets are very tight. WTI and Brent both trade for $75 per barrel and the 12-month backwardation (an indication of physical tightness) is approaching its widest reading in years. Oil related equities have been strong performers as well, with the XOP ETF rising nearly 70% over the first half of 2021.
Despite the price action in both oil and oil-related equities, investors remain bearish. Shares outstanding of the XOP (a good proxy for generalist investor fund flows) increased less than 10% during the first half of 2021 despite the strong underlying performance. Investors today are fixated on two things: OPEC+ spare capacity and competition from EVs. While these factors need to be monitored, investors are ignoring how tight oil markets have become and how much tighter they will get as we progress through the rest of 2021 and 2022. Over the longer-term, ESG-led activist investors have all but ensured non-OPEC production will fall dramatically, leaving OPEC with increased market share and pricing power.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - August 14
Dan thanks for posting. The review is reassuring. I bought more shares of my E and P positions after the 2nd quarter results were so promising. Unfortunately we are presented with another buying opportunity today. Most middle east crises result in increased oil prices. Some traders must be factoring in the economy turning down and the inflation edge E and P companies present is now in disfavor. Another example of the switch away from inflation hedges can be seen in the precious metal as well as interest rates which have dropped too.
It is tough to hold with the prices falling, but hard to sell with oil demand increasing and supplies not keeping up.
It is tough to hold with the prices falling, but hard to sell with oil demand increasing and supplies not keeping up.
Last edited by farrell90 on Thu Aug 19, 2021 6:53 pm, edited 1 time in total.
Re: Sweet 16 Update - August 14
NG was actually up today 3.872 in after hours at 656 PM. The names were hammered again. Most have hedges so I don't understand the volatility except for program trading or short sellers. The names all move the same regardless of fundamentals.
If this follows thru tomorrow, I expect the names will bounce back.
MGY & CLR said they are buying back shares. They will be taking advantage of these selloffs.
MGY is buying 1 % of its shares per qtr. The ceo said in last earnings call>>>
I hope, the focus now, because we believe there'll be large amounts of our stock available for sale over the next couple of years, is on share repurchases. The share -- when you model the share repurchases at a reasonable price into the model, it has a dramatic effect on our earnings, our cash flow per share and all those things
if we grow the production profitably at 5% or 6% a year, and we buy-in 4% of the stock each year, so you could have sort of 10% area dividend growth. And we think for many investors, that's an attractive outcome, especially for me.
If this follows thru tomorrow, I expect the names will bounce back.
MGY & CLR said they are buying back shares. They will be taking advantage of these selloffs.
MGY is buying 1 % of its shares per qtr. The ceo said in last earnings call>>>
I hope, the focus now, because we believe there'll be large amounts of our stock available for sale over the next couple of years, is on share repurchases. The share -- when you model the share repurchases at a reasonable price into the model, it has a dramatic effect on our earnings, our cash flow per share and all those things
if we grow the production profitably at 5% or 6% a year, and we buy-in 4% of the stock each year, so you could have sort of 10% area dividend growth. And we think for many investors, that's an attractive outcome, especially for me.
Re: Sweet 16 Update - August 14
Thanks for taking the time to answer Dan. I picked up some some optionality in AR and EOG looked very cheap with a 62 handle. Open interest in WTI is very very low at this point
Re: Sweet 16 Update - August 14
Spectacular calls on the equities and the products in August Dan. I have sold a small amount but holding bulk of EOG AR. I assume at this point your top picks are CRK ESTE? Any other co's you'd highlight
Re: Sweet 16 Update - August 14
I will be working on my next newsletter this weekend and publishing it early next week.
All of my valuations for the upstream companies are based on a multiple of operating cash flow per share that I believe is "reasonable". My current valuations for the Sweet 16 can be found on the Sweet 16 main spreadsheet which you can find under the Sweet 16 tab on the EPG website.
The current valuations are based on "annualized" operating cash flow of (2X 2021 CFPS + 1X 2022 CFPS)/3. After I get each company's Q3 results and fresh guidance I will update my valuation models and use a new formula that gives more weight to future earnings of (2021 CFPS + 2022 CFPS)/2. This will push the valuations of companies that have the highest amount of future production unhedged (CLR, EOG) to go higher. It should also push the "Gassers" (AR, CRK, EQT and RRC) much higher. AR is going to get a big revenue boost from higher NGL prices.
I really like Coterra Energy (CTRA) and I think the Wall Street Gang will too once they have time to focus on it.
All of my valuations for the upstream companies are based on a multiple of operating cash flow per share that I believe is "reasonable". My current valuations for the Sweet 16 can be found on the Sweet 16 main spreadsheet which you can find under the Sweet 16 tab on the EPG website.
The current valuations are based on "annualized" operating cash flow of (2X 2021 CFPS + 1X 2022 CFPS)/3. After I get each company's Q3 results and fresh guidance I will update my valuation models and use a new formula that gives more weight to future earnings of (2021 CFPS + 2022 CFPS)/2. This will push the valuations of companies that have the highest amount of future production unhedged (CLR, EOG) to go higher. It should also push the "Gassers" (AR, CRK, EQT and RRC) much higher. AR is going to get a big revenue boost from higher NGL prices.
I really like Coterra Energy (CTRA) and I think the Wall Street Gang will too once they have time to focus on it.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - August 14
I like CTRA too, formerly know as COG, as one of the few gassers not to cap their profits with crap hedges