Sweet 16 Update - Sept 17

Sweet 16 Update - Sept 17

Postby dan_s » Sat Sep 17, 2022 9:26 am

During the week ending September 16, 2022 the Sweet 16 lost 6.54%, but it is still up 52.25% YTD and trading at a discount of 93.3% to my Fair Value Estimates, which have now all been updated. Q3 results won't be as good as Q2, but they are still going to be VERY GOOD. All 16 companies are generating free cash flow from operations. Our five gassers (AR, CRK, EQT, RRC and SBOW) should report better results in Q3.
This was a rough week for the stock market in general. The S&P 500 Index lost 4.07% and is now down 18.73% YTD.


I am updating all of the individual forecast/valuation models for the Sweet 16 companies this weekend. Half of them are updated already and you can find them on the EPG home page or under the Sweet 16 tab. It is best to download them to Excel, where you can change the forecast assumptions to see how it impacts net income, operating cash flow and stock valuation. They are all "macro driven" spreadsheets that update automatically when you make changes to anything in the forecast periods.

If you forgot your password or need help finding something on the website, send an email to Sabrina at energyprospectus@gmail.com and she will get it for you.

All of my stock valuations are based on a multiple of operating cash flow that I think is appropriate.
> All 16 companies are "free cash flow positive", which means they are funding all of their capital expenditures with operating cash flow.
> All of them have strong balance sheets and no near-term debt problems.
> All of them have paid off quite a bit of their debt this year.
> Ten of them pay dividends (CLR, EQT, EOG, MGY, MTDR, NOG, OVV, PDCE, RRC, SM).
> Several of them are aggressively buying back their stock. Stock buyback programs are noted on the forecast models.
> All of them have lots of "running room"; lots of valuable development drilling locations and active drilling programs.
> Based on Friday's closing prices, the Sweet 16 is trading at just 2.75 X 2022 operating cash flow per share.
>> LPI trades at 1.38 X CFPS and EOG trades at 5.43 X CFPS. < Size does matter in this business.

The Sweet 16 Summary spreadsheet will be posted to the EPG website later today, after I finish updating all of the forecast models.

Upstream companies with this much going for them should be trading at much higher multiples of CFPS. In a "normal market" (whatever that is), companies of this strength should be trading for 6X to 10X CFPS.

There won't be a podcast this weekend because I need to finish the newsletter (goal is to publish it Tuesday morning) and we have a live webinar on Thursday, September 22. You must register for the webinar if you want to be on the live event.
Last edited by dan_s on Sat Sep 17, 2022 1:05 pm, edited 1 time in total.
Dan Steffens
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Re: Sweet 16 Update - Sept 17

Postby dan_s » Sat Sep 17, 2022 11:57 am

SilverBow Resources (SBOW) closed on September 16 at $32.87. My valuation is $105/share.

Here is a note that I received from Neal Dingmann at Truist Financial on September 15. Neal is one of the sharpest financial analysts that covers the energy sector. IMO he is the only sharp analyst that covers SilverBow. My comments in blue.

"We believe the company’s continued focus on growing scale remains the optimal investment
with investor interest continuing to grow. Additionally, in a somewhat homogeneous E&P
landscape, we appreciate SBOW’s strategy which we think should differentiate them from
the rigid cash payout formulas most others are embracing."


Current Dorado Details, Per the Company
• Production of 30 mmcfpd (two wells currently producing), on 7,500 net acres < ~15 mmcfpd is a FANTASTIC GAS WELL!
• Recent Austin Chalk well on the position is best performing well to date in Webb County
• $50mm of capital spent to date ($40mm in 3Q22, includes drilling)
• >50 locations in the Austin Chalk and Eagle Ford < Lots of running room.

Updating Estimates, Reiterating $62 Price Target
We are updating our production, capital, and EBITDAX estimates after the announcement,
with our $62 price target remaining unchanged. Our $62 price target is derived from
two equally weighted methodologies, with the first being our ’23 EV/EBITDAX multiple of
3.0x (versus peer multiple of 3.3x) applied to our 2023E EBITDAX estimate of $695MM
(consensus of $708MM) and the second being a FCF/EV Yield assumption of 15.0%.

Potential Catalysts
• Additional accretive acquisitions near its existing position
• Further Austin Chalk success and inventory expansion
• Stable rig/frac operational program driving incremental cash flows
-------------------------------
EOG Resources (EOG), the largest company in the Sweet 16, is also reporting outstanding well results in Webb county.

SilverBow is on track to report ~29% YOY production growth in 2022 and follow that with 35% to 40% production growth in 2023. All of their D&C expenditures should be fully funded by operating cash flows going forward.

Operating Cash Flow:
> 2021 Actual = $213.9 million, $13.34/share
> 2022 Forecast = $400.2 million, $17.94/share
> 2023 Forecast = $610.6 million, $27.14/share assuming HH ngas averages $5.00/MMBtu in 2023
Dan Steffens
Energy Prospectus Group
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Re: Sweet 16 Update - Sept 17

Postby Fraser921 » Sat Sep 17, 2022 3:24 pm

I really like the SBOW opportunity. The NG strip for 2023 is 5.75 so we are looking good there.
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Re: Sweet 16 Update - Sept 17

Postby dan_s » Sun Sep 18, 2022 2:15 pm

Note from Credit Suisse Research Team

Increasing US natural gas price forecasts. We are raising our 2022 US natural gas price forecast to $7.05/MMBtu (from $5.60) on much higher than expected 3Q22 actuals (bidweek Henry Hub $8.20 vs. CSe $5.50) and an increase to our 4Q22 forecast to $8.00 (up from $5.00 prior). Factoring in the prolonged shutdown of the Freeport LNG facility (~2 Bcfd of feedgas demand, expected to be partially back online by mid-November), we show storage inventories building to ~3.4 Tcf heading into this winter withdrawal season, ~7% below the five-year average which should provide continued support to near-term prices, though rising US supply could be a headwind: our bottoms-up model shows 4Q22 dry gas production >100 Bcfd (~2% above EIA). Our 4Q22 price forecast is ~10% below the current futures strip. Assuming LNG exports recover toward full capacity in 2023 (~12.5 Bcfd), moderate supply growth (~4% YoY, modestly above EIA) and relatively stable Power sector demand, we see the US gas market ~1.0 Bcfd undersupplied next year and raise our 2023 price forecast to $5.25, up from prior CSe $4.00 but below the current 2023 futures curve of ~$6.50/MMBtu. We’ve maintained our long-term, normalized US natural gas price forecast of $3.50/MMBtu.
-----------------------------
IMO Credit Suisse is being extremely conservative assuming a long-term gas price of $3.50. I firmly believe that there has been a significant "Structural Change" in the U.S. natural gas market (after 14 years of being over-suppled). If we have a cold winter (even just a normal winter) we could see ngas move back toward the energy equivalent of 1/6th the price of oil.
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