Sweet 16 Update - April 10

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

Sweet 16 Update - April 10

Post by dan_s »

I take a five day vacation and the Sweet 16 pulls back 15.11%. What's up with that?

15 of the 16 companies declined last week because of soft oil & gas prices. The Sweet 16 is still up 56.29% YTD, compared to the S&P 500 Index that is up 9.92% YTD. Laredo Petroleum (LPI), added to the Sweet 16 on 3/27/2021 was the only stock that was up on the week.

AR and EQT are still trading way below book value and there is nothing that I can see to justify their current share prices. Recently ngas prices have pulled below my forecast, but these companies have a very high percentage of the their dry gas hedged. Higher NGL prices should more than make up for the lower dry gas prices.

Oil Prices had a rough week:
WTI crude futures remained below $60 per barrel on Friday for the fifth consecutive session, after touching an over two-year high of $67.98 during the second week of March, amid oversupply concerns and fears that extended restrictive measures in Europe, slow vaccine rollouts and rising COVID-19 cases in top consumers India and Brazil could further hit the recovery in fuel demand. Last week, major oil producers agreed to increase output by 350,000 barrels per day in May, 350,000 bpd in June and 400,000 bpd in July. Meanwhile, talks between the US, Iran and other powers aiming to revive the 2015 nuclear deal continue, amid prospects that Tehran may see some sanctions lifted.

Devon Energy (DVN) and Pioneer Natural Resources (PXD) should be attractive to any of you that like dividends.

From Matthew DiLallo a top analyst at The Motley Fool on 4-10-2021
A new framework
Pioneer Natural Resources (PXD) initiated a new long-term variable dividend policy earlier this year to direct its capital allocation strategy. The framework would see the company distribute up to 75% of its free cash flow after paying its base dividend to shareholders each year. That would ensure investors receive the majority of any windfall from higher oil prices in the future.

The company's base plan is to invest enough capital to maintain its current production rate and pay its fixed quarterly dividend. It can currently fund its current dividends based on the cash flow produced at an average oil price of around $33 a barrel. It would then earmark up to 75% of any excess cash generated by higher oil prices toward the variable dividend. The other 25% would go toward debt reduction, share repurchases, and incremental production growth.

Pioneer Natural Resources would pay its base dividend in arrears. For 2021, the company intends to cap its variable payout at 50% of its free cash flow, with those payments coming on a quarterly basis in 2022. It will use the rest of the money to repay debt and fund incremental drilling activity.

The company is largely following the variable dividend blueprint laid out by Devon Energy (DVN) . The main difference is that Devon Energy pays its variable dividend based on its free cash flow in the prior quarter, rather than letting it build up over a year. Devon declared its first variable dividend earlier this year, which -- at $0.19 per share -- was almost double its base quarterly payout of $0.11 per share. That gives a glimpse of the upside potential of Pioneer's payout.

Adding fuel to the strategy
Pioneer has become an even more attractive oil stock following a recent deal that will enhance its ability to pay variable dividends. It's acquiring privately held DoublePoint Energy for $6.4 billion in cash, stock, and the assumption of debt and other liabilities. < You can find my updated ProForma forecast/valuation model for PXD on the EPG website.

The transaction does a few important things for Pioneer Natural Resources:

It's an excellent strategic fit, as DoublePoint holds 97,000 high-quality net acres that directly offset or overlap Pioneer's existing position.
The deal will immediately be accretive to all of Pioneer's key financial metrics, including earnings, cash flow, and free cash flow per share.
Pioneer anticipates that it can achieve an additional $175 million in annual cost savings by joining forces with DoublePoint Energy.
Those last two features mean the deal will enhance Pioneer's variable dividend program. The deal's accretive nature implies that the company will produce more free cash flow this year than it would have without acquiring DoublePoint, suggesting a higher variable dividend. Meanwhile, the incremental cost savings will enhance Pioneer's ability to generate free cash flow in 2022 and beyond. Thus, it should increase Pioneer's future variable dividend payments.

A gusher of dividends even if oil prices fall
Oil companies tried to create value for their shareholders in the past by allocating their cash flow windfalls at higher prices into drilling more wells and buying back stock. Unfortunately, that strategy never paid off.

Now Pioneer is launching a new plan aimed at enabling investors to cash in on higher oil prices via its new variable-dividend program. That strategy, which it's enhancing with the DoublePoint Energy deal, should enable the company to generate attractive total returns -- and pushes Pioneer Natural Resources to the top of the list of oil stocks to buy these days.
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DVN and PXD are both in our "Elite Eight".
Dan Steffens
Energy Prospectus Group
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