Sweet 16 Update - Dec 14

[dan_s]

The updated Sweet 16 main spreadsheet has been posted to the EPG website. It shows my current valuation and First Call's price targets for each company.

You may recall that on December 24, 2018 the WTI oil price dipped to $42.50/bbl. That was the low point for the year. On December 13, 2019 WTI moved briefly over $60/bbl before pulling back a bit to close at $59.88/bbl, up 2.2% on the day. It was the highest closing price since the mid-September missile attack on Saudi Arabia's oil facilities pushed oil to more than $63/bbl.

The BIG NEWS on Friday was the verbal agreement confirmed by Team Trump and China that they have a Phase One Trade Agreement. It won't be signed until early January, so we have that FEAR hanging over the oil market.

With oil $17/bbl higher than where it was a year ago, it is hard to believe that the Sweet 16 is down almost 20% YTD. If I take out the two gassers (AR and RRC) it is still down 13.5% YTD. I've never seen companies of this quality trading at such low multiples.

Three of the Sweet 16 are involved in big mergers that should close soon:
> Callon Petroleum (CPE) is merging with Carrizo Oil & Gas (CRZO)
> Parsley Energy (PE) is merging with Jagged Peak (JAG)
> PDC Energy (PDCE) is merging with SRC Energy (SRCI)

I like all three of these deals because (a) size does matter in this business and (b) they are heavily weighted to oil. I have posted "Pro Forma" forecast models for CPE, PE and PDCE to the EPG website under the Sweet 16 tab. CPE has a good chance to be a double for us if WTI firms up over $60. Based on my post-merger forecast for 2020, Callon should generate $1.49 EPS and $3.41 operating cash flow per share next year if WTI averages $60. The current share price is nowhere near that level.