Sweet 16 Update - Oct 3

[dan_s]

Despite oil and gas prices moving lower during the week, half of the Sweet 16 stocks moved higher during the week ending October 2. We may be seeing some fund managers rotating money to this oversold sector. The Sweet 16 is trading at less than half of my Fair Value Estimate for the group.

On October 1, Callon Petroleum (CPE) announced an asset sale that will improve their balance sheet ratios and improve their liquidity. With ~85% of their 2H 2020 oil hedged at $43/bbl, the Company is generating FCF from operations. Based on my forecast, which is close to First Call's operating CFPS forecast, Callon is on-track to generate over $14.00/share of operating cash flow. Plus, it now looks like Q3 production will exceed what I have in my forecast.

The really BIG NEWs is the Devon Energy (DVN) + WPX Energy (WPX) stock-for-stock merger that was announced on Monday. DVN closed at $9.60 on Friday, October 2. The Wall Street Gang loves the deal, which means we may see more consolidation announced before year-end. Since the merger was announced, five energy sector analysts have published fresh reports with price targets of $15 to $18. I've created a stand alone forecast/valuation model for WPX and "Post Merger" model for Devon which I posted to the EPG website this morning. You can view it and download it directly from the EPG Home Page. Post Merger, Devon's production in 2021 should be ~580,000 BOE per day (52% crude oil, 29% natural gas and 19% NGLs). It will be one of the Top Five independents in the U.S., which is sure to make it a "Hedge Fund Favorite". Plus, it already pays a very nice dividend (4.5% annual yield) that is going to be increased with a "variable kicker" in 2021 based on FCF from operations.

EOG Resources (EOG) is down 22% since April 10, which makes no sense at all. My valuation of $69.00 compares to Stifel's current price target of $87.00. EOG controls some of the most valuable real estate on Earth with current production of ~695,000 BOE per day (highest in the Sweet 16). This stock trading below book value is insane and it pays a nice dividend (~4.3% annual yield). EOG should generate over $500 million of FCF from operations this year and over $2 Billion in 2021 if WTI averages $50/bbl.

Natural gas prices are doing what they often do in October as the amount of gas in storage continues to grow. My view that the U.S. natural gas market will become very tight over the next six month has not changed. The Sweet 16 with the most exposure to rising natural gas and NGL prices are CRK, EQT, RRC, XEC, OVV and EOG. Comstock Resources (CRK) has the most upside.

Tropical Storm Gamma does not appear to be a threat to the Central Gulf of Mexico, so we should be nearing the end of anymore tropical storm activity impacting offshore U.S. production facilities. All of Talos Energy's (TALO) production is in the Central GOM. As hurricane risk goes down, TALO should go up. First Call's price target is $15.22.