Sweet 16 Update - March 27

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

Sweet 16 Update - March 27

Post by dan_s »

Laredo Petroleum (LPI) officially joins the Sweet 16 today. It replaces Matador Resources (MTDR), which was up more than 100% YTD, touching my valuation before pulling back a bit. I have moved MTDR to our Small-Cap Growth Portfolio, so I will keep watching it closely. We will be sending out an updated profile on MTDR next week. It still has more upside for us, but I think LPI is at least a double for us from where it closed on March 26.

Here is why I really like LPI:
> It only has 12.5 million shares of common stock outstanding thanks to a 1 for 20 reverse split on 6/1/2020. < Small changes in realized oil, gas and NGL price assumptions and/or their production guidance have a significant impact on the valuation. I believe there is upside to the assumptions that I am using in my model.
> My 2021 earnings per share forecast of $14.60, compares to First Call's EPS forecast of $13.01. The PE ratio is 2.05 based on my forecast and Friday's close.
> My operating CFPS forecast of $32.35, compares to First Call's CFPS forecast of $30.45. I see nothing that justifies this stock trading below 1X CFPS.
> The Company is generating free cash flow that is locked in by their hedges.
> My operating CFPS forecast for 2022 is $43.75, which compares to First Call's CFPS forecast of $36.87 for 2022.
> If LPI's 1H results confirm my forecast model assumptions, a valuation of 3X CFPS will be justified. < MTDR closed Mar 26 at more than 3X my CFPS forecast.

It was a mixed week for the Sweet 16, but 12 of the companies moved slightly higher. Overall, the portfolio was down 1.5% on the week only because I dropped MTDR. LPI is only up 52.1% YTD.

The Sweet 16 is up 64.64% YTD, which compares to the S&P 500 Index that is up 5.82%.

As a group, the Sweet 16 closed on March 26th 46.86% below my Fair Value Estimate.

Pioneer Natural Resources (PXD) reached my previous valuation, so I took another hard look at it. A higher valuation is justified.
> Since March 16th five energy sector analysts have published new reports on PXD. Their price targets range from $178 to $196. KeyBanc is the lowest valuation and I know that Leo Mariani is using an oil price deck that is lower than the rest of the Wall Street Gang because his price targets are the lowest for almost every company that I look at. I use TipRanks to see the most recently updated price targets.
> PXD is the 2nd largest company in the Sweet 16 (behind EOG) with a market cap of $35.7 Billion. Size does matter in this business.
> PXD is generating a lot of free cash flow; ~$3 Billion FCF from operations in 2021 based on my forecast and the midpoint of their capex guidance.
> PXD holds a lot of Tier One drilling locations in the Permian Basin.
> It has a very strong balance sheet and it pays a dividend.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - March 27

Post by dan_s »

Antero Resources (AR) closed Friday at a ~48% discount to its book value as of 12/31/2020.

EQT Corp. (EQT) closed Friday at a ~41% discount to its book value as of 12/31/2020.

Unless you believe the price of natural gas is going to average close to $2.00/MMBtu going forward, there is nothing to justify these to very large "gassers" trading below book value. IMO they are comparable to Range Resources (RRC) that closed March 26 at a 71% premium to their book value as of 12/31/2020.

AR is the 2nd largest producer of NGL's in the U.S. and most of the Wall Street Gang is totally unaware of how high NGL prices have rebounded.
Dan Steffens
Energy Prospectus Group
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