Sweet 16 Update - Aug 13

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - Aug 13

Post by dan_s »

This is the "Year of the Roller Coaster Ride" as FEAR and GREED fight it out. If not for the FEAR of a recession, the portfolio would be up more than 100% YTD.

For the week ending August 12 the Sweet 16 gained 13.57% and is now up 57.33% YTD. It is still trading at an 88% discount to my "Fair Value Estimates" and at less than 3X 2022 operating cash flow; an extremely low valuation multiple for companies of this quality.
I have been publishing the Sweet 16 Growth Portfolio since 2002 and there has only been a few double-digit weekly moves. I really don't know what the portfolio will do next week, but all 16 companies are in great shape. All of them are generating a lot of free cash flow from operations, have lots of "running room" and none of them have near-term debt problems.

The S&P 500 Index gained 2.83% during the week, but it is still down 10.2% YTD.

The Sweet 16 Summary spreadsheet has been posted to the EPG website home page.

We have published updated profiles for AR, CRK, CLR, ESTE, EQT, EOG, MGY, MTDR and RRC. The other 7 profiles are here waiting for my final review. They will all be published in the next few days.

The "Gassers" continue to lead the pack and I expect that to continue. Natural gas inventories are tight and there is nothing that I can see which will allow the utilities to build inventories sufficient for them to safely make it through a colder than normal winter. Miss La Nina and Old Man Winter, with a little help from the LNG exporters are likely to push HH ngas prices over $10/MMBtu within four months.
AR up 130.06% YTD
CRK up 115.20% YTD and still trading at less than half of my current valuation.
EQT up 111.78% YTD
SBOW up 98.40% YTD
RRC up 91.31% YTD.
If you heat your home with propane, I highly recommend that you fill up your tank early and don't wait for it to approach empty before you call your supplier for a refill. Propane inventories are 10% below where they should be at this time of year. Home heating oil inventories are even lower.

Crude oil prices are determined by the global market's fundamentals and there continues to be a lot of "noise" that is very confusing for the paper traders that control the NYMEX Strip. Just remember that the Strip is not a forecast and the "noise" (not the fundamentals) is why it is in backwardation (front month higher than the out months). The global oil market is extremely tight, OECD inventories are very low and OPEC+ is out of spare capacity. That combination is why Goldman Sachs is forecasting that Brent will go to $125/bbl this coming winter.

EOG Resources (EOG) gets an A+ for safety just because of its size and their new dividend policy. EOG's annualized dividend yield is now over 8%. We posted the updated profile to the EPG website late yesterday. PDC Energy (PDCE) also pays a very high dividend.

Callon Petroleum (CPE) is the only one down YTD (-12.76%) at $41.22. I will be reviewing our profile on the company today.
TipRanks: On 8/9/2022 Scott Hanold at RBC Capital (a 5 Star analyst) submitted a new report on CPE. He rates CPE a BUY with a price target of $72.00. So far, Neal Dingmann at Truist Financial and Derrick Whitfield at Stifel Nicolaus have not adjusted their price targets of $95 and $124.

Of the profiles that I've reviewed so far, Comstock Resources (CRK) and Earthstone Energy (ESTE) appear to have the most near-term upside.
> Comstock is almost a pure "gasser" with 98% of their revenues from the sale of dry gas. If HH ngas averages more than $8.00/MMBtu over the next three quarters, the Company could generate close to $2 billion of operating cash flow and $1.3 billion of FCF during the nine months ending 3-31-2023. Those numbers are more than double the cash flow they generated for the full year of 2021.
> Eventually the Wall Street Gang will figure out that Earthstone is now in the 100,000 Boepd Club. If you have not read our updated profile on ESTE, I highly recommend that you do soon. The Company's CEO, Robert Anderson made a very good presentation at the EnerCom Conference last week and I expect to see several of the analysts that attended the conference to upgrade the stock now that the Company has closed the Titus Acquisition.

I will be highlighting our Small-Cap Growth Portfolio in today's podcast.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Aug 13

Post by dan_s »

I spent about four hours working on Callon Petroleum on Saturday. The updated profile has been posted to the EPG website home page.

I first looked at Callon's actual results for the last twelve months and then carefully reviewed and updated my forecasts for the next six quarters.

CPE is the only stock in our Sweet 16 Growth Portfolio that is down year-to-date (-12.76%), so I took a hard look at it on Saturday. The only two things I can find that might justify the pullback (other than overall market weakness) are:
> CPE was the top preforming stock in last year's Sweet 16 (up 259% in 2021). So, this year's weakness may just be investors harvesting their profits and moving on to other more promising upstream companies. < Lots of investors "rebalance" their portfolios at the beginning of each year, which is a wise move.
> Second quarter results were slightly lower than expected, but still solid: $5.64 earnings per share and $6.41 operating cash flow per share. The Company did generate $125.6 million of free cash flow from operations during the quarter.

Here is why I still think CPE has more upside for us:
1. Callon has reported solid net income of $845 million ($13.69 per share) over the 12 months ending 6-30-2022, which is in the top quartile of the Sweet 16 for that period. Operating cash flow over the period has been $1,367 million ($22.14 per share) and they had free cash flow each quarter.
2. The Company's production has increased from 88,981 Boepd in Q2 2021 to 100,685 Boepd in Q2 2022, primarily because of the Primexx Acquisition that closed 10-1-2021. Production did decline slightly in Q2 due to some operational issues that have been resolved.
3. Based on the mid-point of the Company's fresh production guidance, Callon should ramp up production to over 108,000 Boepd by year-end. Note that my full year 2023 forecast is based on only a 3,000 Boepd increase to 111,000 Boepd (63% oil, 19% NGLs and 18% natural gas), which I believe is conservative.
4. Per my forecast, Callon is on-track to generate close to $1.7 billion of operating cash flow and $700 million of free cash flow this year and over $1.9 billion operating cash flow in 2023 using realized commodity prices of $90/bbl oil, $4.25/mcf of ngas and $40/bbl for NGLs. Today, only ~25% of their 2023 oil production is hedged, primarily with collars that have ceilings of $87 and $90. ~70% of their ngas is hedged with collars that also have decent ceilings.
5. My current valuation of $100 per share is just 4X annualized operating cash flow per share. That is a conservative multiple for a company of this size and quality.

Callon still has some work to do on their balance sheet, but over the last 12 months they have reduced their leverage ratio from 3.46X to 1.67X EBITDA (see slide 4 of the Company's recent presentation). Their goal is to get the leverage ratio down to 1.0 X EBITDA, which they should be able to do early in 2023.

I do expect Callon's reserve report at year-end 2022 to show a PV10 Net Asset Value of just their proved reserves to exceed the current share price.

Bottomline: There is nothing that I see which justifies CPE trading at just 1.5 X annualized operating cash flow per share of $27.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Aug 13

Post by dan_s »

Here are the four most recent analysts' price targets for CPE:
> 8/9/2022 RBC Capital = $72
> 8/4/2022 Siebert Williams Shank = $60
> 7/22/2022 Stifel Nicolaus = $124
> 7/19/2022 Truist Financial = $95

CPE closed at $41.22 on August 12.
Dan Steffens
Energy Prospectus Group
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