Sweet 16 Update - May 28

[dan_s]

For the week ending May 27 the Sweet 16 gained 30.72% and is now up 75.25% YTD.
The S&P 500 Index also had a good week, gaining 5.39%, but it is down 12.76% YTD.

The five gassers continue to lead the pack. This is going to be "The Year of The Gassers" as no one (and I mean NO ONE) expected natural gas prices to triple since the first of the year. Double digit gas prices are one heat wave away.
AR up 155.66%
CRK up 155.25% < I remember when many EPG members questioned my judgement on CRK.
EQT up 122.05%
RRC up 102.86%
CTRA up 86.95%
Gains like those above happen for us when we see the Paradigm Shift coming before the Wall Street Gang does. The Wall Street Gang is still undervaluing the gassers, so hang tough. All of them have plenty of upside. We have just finished one quarter of the "Mother of All Bidding Wars" for gas supply.

Sweet 16 trading at the deepest discount to my valuations are CPE, ESTE, LPI and NOG.

Sweet 16 still trading at less than 3X 2022 operating cash flow per share are CPE, CRK, ESTE, LPI, NOG, OVV and PDCE. It is insane for companies of this quality to be trading at less than 5X operating cash flow.

I still have two Sweet 16 profiles that need to be updated this weekend: PDCE and OVV

[dan_s]

I have updated my forecast/valuation model for PDC Energy (PDCE) for the detailed guidance, which they provided on May 26.

PDCE closed at $77.99 on May 27. My valuation increases by $19 to $140/share.

TipRanks: "In the last 3 months, 10 ranked analysts set 12-month price targets for PDCE. The average price target among the analysts is $99.55."

On May 27, 2022 (after the Company's updated guidance) Siebert Williams Shank & Co analyst Gabriele Sorbara reiterated a Buy rating on PDC Energy (PDCE) today and set a price target of $137.00. The company’s shares closed last Friday at $76.26, close to its 52-week high of $79.39. According to TipRanks.com, Sorbara is a 5-star analyst with an average return of 16.1% and a 48.4% success rate. Sorbara covers the Utilities sector, focusing on stocks such as Continental Resources, Magnolia Oil & Gas, and Matador Resources.

Why is my valuation so high?
> PDC has a strong balance sheet and, based on my forecast, they should generate ~$2 billion of free cash flow this year.
> The Company has lots of low-risk / high-return drilling inventory ("running room")
> I like their production mix of approximately 33% oil, 40% natural gas and 27% high value NGLs. More exposure to gas prices is a good thing this year.
> With close to $30/share of operating cash flow, a company of this quality should trade for 5X operating cash flow.
> Increasing dividends and an aggressive stock repurchase plan adds more value for long-term investors.

On 5/23/2022 Stifel Nicolaus' rated PDCE a BUY with a price target of $126.00.

[Fraser921]

>I remember when many EPG members questioned my judgement on CRK

That's why we pay you the bug bucks. Job well done!

75 % ytd return for 2022 after 100 % + for 2021. Things don't get better than this.

The Dems have no issues to run on so look for windfall profit taxes to advance.

[Garyb1958]

Why would oil and Gas companies or any other company want to produce anything if the government is going to take all your profits? Dan what happened the last time the Government did this?

[dan_s]

IMO the chance of a Windfall Profits Tax passing is near zero. Jimmy Carter did it in 1980 and the taxes were passed on to consumers. At least 10% of the Dems will vote against it. < BTW I was a Windfall Profits Tax expert in the early 80s, which got me a good job at Hess in 1983.

Common sense should tell the Dems that raising taxes on companies that produce any commodities that are critical to our standard of living is dumb. It would be like raising taxes on farmers because grocery prices are going up. Whatever is heavily taxed gets you less of it.

However, Team Biden has done a lot of really dumb stuff since taking over.

In spite of the Windfall Profit Tax in 1980 to 1986, the upstream oil and gas companies made a lot of money during that period. Accountants and Lawyers made a lot of money and the WPT extended higher gasoline prices.

What Team Biden should do, which they won't do is:
> Approve the Keystone XL pipeline to send the message that the War on Fossil Fuels is over.
> Speed up other pipeline approvals. Lack of pipeline access is the primary reason that natural gas prices will soon be in double digits.
> Open federal lands for drilling (including all of Alaska) and speed up well permitting.
> Focus on ways to build more natural gas fired power plants, which will reduce carbon emissions much faster than wind and solar.
> Focus on building more nukes, the long-term solution to carbon emissions.
> Focus on ending the war in Ukraine instead of pumping more weapons into the country.
> Focus on solving the mess in Venezuela, which has massive heavy oil reserves we can refine into diesel. Plus, it is a humanitarian disaster (I have been there).
> Quit pissing off Saudi Arabia. We need them on our side.

[Garyb1958]

Thanks Dan, excellent post and I agree. Perhaps when people are paying 6 bucks a Gal for gas, 8 bucks a gal for heating oil, 600 for electric bill and there grocery bill triples maybe people will wake up. Not holding my breath, just when I think people can't get any dumber they do.

[dan_s]

Joe Biden will go down in history as the worst president ever. What have they done right? IMO the exit from Afghanistan should have been grounds for impeachment.