Sweet 16 Update - July 2

[dan_s]

The last half of June was rough on the Sweet 16. On June 11th the Sweet 16 closed up 82.77% YTD. On July 1st it close up 29.92%, which is still good when compared to the S&P 500 Index that is now down 19.74% YTD. Bear Markets force fund managers to sell off even their most profitable stocks to fund redemptions.

I spent the last three days taking a hard look at all 16 companies. The only fundamental change is the pullback in natural gas prices, which is all because of the Freeport LNG export facility shutdown. With less gas being exported (~2 Bcf per day), there is more natural gas available for storage. This lowers the FEAR level that utilities will not be able to get sufficient gas in storage before the next winter heading season arrives. I believe the drop in price of the natural gas futures contracts is overdone. It still looks like storage will be much lower than the 5-year average when winter arrives. Plus, we use a lot more natural gas for space heating and power generation than we did five years ago. We need about 4 Tcf of gas in storage to make it through a cold winter.

FEAR has caused a lot of wealthy investors to pull money out of hedge funds. I believe those redemptions were the primary reason these extremely profitable companies were sold off at the end of a quarter.

Because I have lowered the natural gas prices used in the forecasts for 2H 2022 and 2023, all of the stock valuation are now slightly lower. Comstock Resources (CRK) is the closest one to a pure play on dry gas and my valuation only declined by $2 to $37.00. All of the gassers (AR, CRK, EQT, RRC and SBOW) are going to report outstanding Q2 results. Keep in mind that even if natural gas averages $5.00/MMBtu for the remainder of this year it will be the best year in more than a decade for natural gas and NGL prices.

Callon Petroleum (CPE) is the only Sweet 16 company that is down YTD; -16.89%. As I posted here yesterday, there is nothing to justify the selloff. My valuation is $123.00 and First Call's price target has held at around $82.00. Callon is going to report outstanding Q2 results of Adjusted EPS of approximately $4.58 and Adjusted Operating Cash Flow per share of $7.66. On July 1st CPE closed at just 1.27 X my operating CFPS forecast for 2022.

Nothing has changed in the global oil market. This world is short oil and there is no Quick Fix, even if Putin pulls out of Ukraine tomorrow. OPEC+ is out of spare production capacity. There are no more wells being choked back. Biden can fly to Saudi Arabia and beg for more oil, but his pleading will fall on deaf ears. Why should the Arabs help the man that has been at war with the fossil fuels industry since the day he took office? Also, Libya is basically in a Civil War that takes most of their exports offline. OPEC+ production has been below their official quotas for 8 months in a row.

Q3 is the highest demand quarter of the year for oil-based products. The 4th of July weekend will deplete our fuel inventories even more.

U.S. and OECD petroleum inventories, including the Strategic Petroleum Reserves, are lower than they've been in almost 20 years. We use a lot more oil-based fuels and products than we consumed 20 years ago. The U.S. has a rising national security risk if this trend continues and our leadership is out of schemes to fix it. They've actually discussed banning more offshore drilling. It is hard to make up any dumber things they can do!

As a group the Sweet 16 is trading at an average PE ratio of 8.13 based on my 2022 forecasts. More stunning to me is that it is trading at just 2.35 X operating cash flow per share. CPE, LPI and SBOW closed on July 1 at less than 1.5 X operating CFPS. All of these companies are generating a lot of free cash flow and none of them have a debt problem.

In June we added 22 new EPG members, the best month in over 3 years. So, I am going to spend time on today's podcast going over the Sweet 16 Summary Spread Sheet.

[uberCOAT]

RBC is calling for lower NG prices in 2023 – “Next year, in all scenarios we expect US natural gas prices to fall in 2023 due to more domestic natural gas production, less LNG exports and domestic demand growth, and incrementally more natural gas in storage".

Yet we have research from Goehring & Rozencwajg stating the gas crisis is coming to America - “Given the underlying fundamentals that have now developed in US gas markets, we believe prices are about to surge and converge with international prices within the next six months”

Two very different viewpoints.

[dan_s]

Keep in mind that RBC's "lower price" of $4.26 to $5.29 is a much higher price for U.S. gas than we had for 13 years (2009 to 2021). All of our gassers will be extremely profitable if ngas stays in that range. In a tight gas market, the weather will cause several price spikes above that range each year.

Goehring & Rozencwajg forecast is based on the Marcellus rolling over. If so, it will be very difficult for U.S. production to keep up with rising demand for U.S. natural gas. Assuming we don't go into a deep recession, I think natural gas demand in the U.S. will increase by ~3% per year.

The Haynesville is the only basin with significant near-term supply upside. Associated gas from the Permian, DJ Basin and Eagle Ford has some upside if oil prices stay high.

[Garyb1958]

https://seekingalpha.com/article/452165 ... 65210.3982
Hope this link works.Good read much inline what Dan has been saying