Forecasting is hard work

[dan_s]

My goal is to have all of the Sweet 16 forecast/valuation models updated through 2020 by January 1st.

I am working on Centennial Resource Development (CDEV) right now and I wanted to share how difficult it is to forecast upstream companies these days. As Yogi Berra once said, "Forecasting is difficult, especially if it is about the future." He actually said that with a straight face.

In the last 3 months, 15 ranked analysts set 12-month price targets for CDEV. The average price target among the analysts is $23.23. < Their valuations range from $16.00 to $30.00 per share.
On December 20th & 21st three highly respected analysts sent new forecasts to Reuters (First Call). They all rated it a BUY, but had much different valuations.
> Gabriel Daoud at Cowen & Co. values CDEV at $16.00 per share.
> Subash Chandra at Guggenheim values CDEV at $23.00 per share.
> Paul Grigel at Macquarie values CDEV at $17.00 per share.

CDEV is trading today at $10.91/share and First Call's 12-month price target is $22.74.

If I assume oil stays at $45/bbl through 2020 (heaven forbid!), my valuation of CDEV would still be near $20/share.

CDEV is on-track to increase production by 90% year-over-year in 2018 (based on the midpoint of their guidance). What makes forecasting it difficult is that they have back off previous production guidance for 2019 and 2020.

Forecasts for upstream companies are easy if I have accurate production guidance and accurate commodity prices. The problem today is that commodity price forecasts are all over the place and all I can do is guess at their production for the next two years. My forecasts assume that oil prices will drift higher from here and that WTI will be back to $65/bbl by Q4 2019. I am assuming much lower natural gas prices (HH average of $2.75 full year 2019) from where I think they will be. The oil, gas and NGL prices "realized" by each company must take into consideration regional differentials (very large in the Permian Basin through mid-2019) and their hedges. CDEV does have good takeaway contracts with pipelines, so they should get decent liquids prices. For CDEV, I am lowing the YOY production growth by 50% of what they put out two months ago.

My updated profiles for AR, CPE, CDEV and CLR will be posted to the EPG website later today. Remember, all of the forecast models are macro driven, so you can put your own production and commodity price forecasts in for future periods and the models will magically update for you.