Sweet 16 Update - Sept 3

Sweet 16 Update - Sept 3

Postby dan_s » Sat Sep 03, 2022 10:59 am

For the week ending 9/2/2022 the Sweet 16 declined by 10.09% and is up 58.56% YTD. The S&P 500 Index lost another 5.72% and is now down 17.66% YTD.

We are in a BEAR MARKET that over-reacts to all the "noise" in the world. Oil price are under pressure from the FEAR of a recession, Covid lockdowns in China, Europe on the losing end of the "Sanctions War" with Russia and a strong U.S. dollar, which is going up primarily because the Euro is tanking.

YTD the U.S. Dollar Index is up 13.87%, which is a HUGE increase for any currency. It is at the highest point since early 2002. The "Good News" for oil prices is that if Europe survives the winter, the U.S. dollar should decline (since we are going deeper into debt each day), putting upward pressure on the oil price.

The price of natural gas pulled back on Friday, IMO just because it has gotten a bit ahead of the supply/demand fundamentals. Today there is not a gas shortage in the U.S. and Sept/Oct is the "Shoulder Season" when storage builds are the largest of the year. However, we are on-track to begin the winter with over 300 Bcf less gas in storage than the 5-year average AND Freeport LNG is expected to be back online in November, increasing demand by ~2 Bcfpd by year-end. My forecast models are based on HH ngas averaging $8.00 in Q3 and $9.00 in Q4. An early cold wave before Thanksgiving should push HH ngas over $10.00 and a colder than normal winter could set a new 25-year high price over $14.00 in Q1 2023. All five of the Sweet 16 gassers (AR, CRK, EQT, RRC, SBOW) lead the pack (up 78% to 137% YTD) and CTRA (a large-cap gasser in our High Yield Income Portfolio) are in great shape.

Continental Resources (CLR) still has not decided if it will accept Harold Hamm's offer of $70/share. It is getting annoying but deals of this size take time and the BOD needs to do what is best for all shareholders. IMO CLR is worth over $90/share, so "what's best for us" is to open a data room and see if they can get a higher bid.

All 16 companies reported outstanding Q2 results and Q3 results should also be very good.
> All balance sheets are in good shape with zero near-term debt problems.
> All 16 companies are free cash flow positive; continuing to paydown debt. Most of them have stock buybacks underway and 9 of them pay dividends.

As I pointed out in the newsletter the larger companies (EOG, CLR, EQT, OVV and AR) are the "Safe Bets", but the small-caps have more share price upside. Size does matter in this business.

I remain extremely bullish on Earthstone Energy (ESTE) which closed at $14.64 on Sept 2, up 33.8% YTD.
This is KEY: The Company expects to close the Titus Acquisition this month. It will push Earthstone's production over 95,000 Boepd (up from 35,509 Boepd in Q1 and 77,125 Boepd in Q2) and put them on a path to 100,000 Boepd by year-end. Per TipRanks' database, the consensus forecasts for 2023 are:
> Revenue of $2.1 billion (compared to my forecast of $2.258 billion)
> Net Income per share of $6.47 (compared to my forecast of $5.28)
> Operating cash flow per share of $10.11 (compared to my forecast of$10.39) < this is key to my stock valuation.
> Price target of $26.50 (compared to my current valuation of $35.00)

I will be recording my Oil & Gas Market Update podcast this afternoon. If you have any questions about individual companies, post them here and I will answer them on the podcast.
Dan Steffens
Energy Prospectus Group
Posts: 30137
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Sept 3

Postby Cliff_N » Sat Sep 03, 2022 1:39 pm

Appreciate any updates on CPE. Since it is the only stock down about 6% since January 1, 2021. I have done well with stock since March 2020, but may be switching to a few others. Suggestions?


Posts: 18
Joined: Sun Jul 24, 2022 4:09 pm
Location: Seabrook, TX

Re: Sweet 16 Update - Sept 3

Postby dan_s » Sat Sep 03, 2022 5:49 pm

Callon should report about a 2,500 Boepd increase in production from Q2 to Q3 and adjusted net income of over $4.00 per share in Q3. They are on-track for operating cash flow of $1.6 billion and free cash flow of $650 million this year.

Updated price targets for CPE on 8/29/2022 are
$124 for Stifel
$90 for Truist Financial

If you are going to sell CPE, I recommend moving the money to ESTE, which is going to report a big increase in production when they close the Titus Acquisition.
Dan Steffens
Energy Prospectus Group
Posts: 30137
Joined: Fri Apr 23, 2010 8:22 am

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