Sweet 16 Update - Jan 28

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

Sweet 16 Update - Jan 28

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The Sweet 16 gained 1.54% during the week ending January 27th and it is now up 3.81% YTD.

The S&P 500 Index gained 2.55% last week and is now up 6.02%. This is very bullish for our stocks because it tells me that the FEAR of a Major Recession is fading. It is also helping our IRA accounts bounce back from a terrible 2022 for the general market.

Except for Range Resources (RRC) up 1.08% YTD, the other four gassers (AR, CRK, EQT and SBOW) are down, after leading the Sweet 16 last year. I have updated all of the forecast models, assuming the HH natural gas prices average $4.00/MMBtu this year. All five of them will announce strong Q4 results and they will all be profitable in 2023. Keep in mind that these companies survived many years of natural gas prices under $3.00.

Comstock Resources (CRK) is down 9.92% because it is the closest one to a pure gasser. I have lowered my valuation to $24.00, but I think investors will be surprised to see that they will remain free cash flow positive this year. I am eager to hear if they've gotten some supply contracts directly with a few of the Gulf Coast LNG exporters.

I took a hard look at SilverBow this morning. It closed at $26.68 on Friday. I lowered my valuation by $3 to $81.00.
> SilverBow is the smallest "gasser", but their production mix is 73% natural gas, 16% crude oil and 11% natural gas. About 50% of their revenues are from liquid sales.
> All of their production comes from South Texas, where they get better gas and NGL prices than the Permian Basin companies.
> They are shifting their drilling program to focus on increasing their oil production.
My updated forecast for 2023 (lower than TipRanks updated forecast) for 2023:
> Production of 68,350 Boepd (the midpoint of SilverBow's recently updated guidance)
> Revenues of $810 million (TipRanks' forecast is $943 million)
> Net Income of $230.4 million, $10.24 per share (TipRanks' forecast is $14.82 per share)
> Operating cash flow of $507 million, $22.53 per share (TipRanks' forecast is $25.26 per share)
> It will remain free cash flow positive in 2023
Conclusion: I see nothing to justify the share price being less than 1.2 X CFPS

Under Tab 1 of the Sweet 16 summary spreadsheet, I have updated columns R & S to Operating Cash Flow per Share based on my 2023 forecasts.
> All of my stock valuations are based on what I believe to be a fair multiple of their annualized operating cash flow.
Based on the January 27th closing prices, the Sweet 16 trades at just 2.65 X 2023 CFPS. < This is way too low for companies of this quality, which are all profitable and free cash flow positive.

Best values based on operating cash flow:
> SBOW at 1.18 X CFPS
> VTLE at 1.22 X CFPS
> ESTE at 1.70 X CFPS
> CPE at 1.79 X CFPS

Leaders of the pack:
> Matador Resources (MTDR) gained 5.61% last week and is now up 17.54% YTD. The Wall Street Gang loves their $1.6 billion acquisition of Advanced Energy that will add 25,000 Boepd (74% oil) when it closes in April.
> Callon Petroleum (CPE), my pick for biggest comeback of the year, is up 16.66%
> Permian Resources (PR) is up 15% YTD. I expect my valuation (now $12.50) to go way up when I get their updated 2023 guidance.
> Northern Oil & Gas (NOG) is up 12.33%. They are going to report strong quarter-after-quarter production growth this year.

Download the Sweet 16 Summary Spreadsheet from the EPG website.
> All 16 companies will announce strong Q4 results starting with AR, CRK, EQT and MGY on February 15th
> The global oil market is tight and will get a lot tighter this summer with the Chinese economy coming back.

I will finish the newsletter this weekend and we will publish it on Monday.

If I have time on Sunday, I will record a podcast.
Dan Steffens
Energy Prospectus Group
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