Sweet 16 Update - Feb 13

[dan_s]

The Sweet 16 portfolio gained 14.4% during the week ending February 12, 2021 and it is now up 39.7% YTD. Much of the weekly gain came on Friday as oil prices spiked, primarily due to spiking oil prices. Lots of money is rotating into this sector and that should continue as we move closer and closer to the end of this pandemic. Lots of upstream companies are still trading way below historical valuations for companies of this quality.

"WTI crude oil prices gained 2.5% to $59.65 a barrel on Friday and booked the ninth positive day in the last ten, as hopes of a stimulus bill in the US nudged sentiment higher. Brent gained 2.4% to $62.61, with prices driven mainly by cuts in supply, as the OPEC ratcheted down expectations for global oil demand to recover in 2021, cutting its forecast to 110 thousand barrels per day to 5.79 million bpd. During the week, WTI crude oil prices soared 5%." - Trading Economic 2/13/2021

WTI is up $7.43/bbl since the end of January.

There was also news that Iran is much closer to obtaining weapons grade uranium. Team Biden needs to be very careful with Iran.

On Friday, I increased my stock valuations for Callon Petroleum (CPE), Continental Resources (CLR) and EOG Resources (EOG).
> With the risk of bankruptcy removed, CPE deserves a higher multiple of operating cash flow to value the stock. If their 2021 guidance verifies my forecast model assumptions, my valuation will be going over $30.
> CLR and EOG don't have any of their oil hedged and they both produce a lot of oil.

Comstock Resources (CRK) is close to a pure gasser with 98% of their production being ngas, mostly dry gas from the Haynesville. It closed Friday at a 57% discount to my valuation of $8.50. Stifel's price target is $8.20 on 1/26/2021 which is before the recent spike in gas prices. Comstock should report a big increase in production from Q3 to Q4 when they release Q4 results on Feb 17.

Old Man Winter is going to push natural gas in storage below the 5-year average in February. If LNG exports hold up, which they show every indications of doing, draws from storage should continue well into April, making it very difficult and maybe impossible to refill storage before the 2021-2022 winter. 2H 2021 gas prices could go a lot higher. I am expecting BIG price target increases for AR, CRK, EQT and RRC.

Companies announcing Q4 results next week: AR, CRK, CLR, DVN, EQT, OVV, PXD. I will be updating my forecast/valuation models as quickly as I can.

Matador Resources (MTDR) and Ovintiv (OVV) have moved above my valuations. Cimarex Energy (XEC) is very close. This is not a reason to sell, but I will be taking a hard look at each company after they provide Q4 results, year-end reserve reports and 2021 guidance.

Talos Energy (TALO) moved 6 cents lower last week, the only Sweet 16 stock down on the week. Biden's executive order to halt new drilling permits on Federal lands won't impact Talos' plans for 2021 or 2022 since most of their properties are already held by production and they hold approved drilling permits on the blocks that are not HBP. Talos has confirmed that they will report a big increase in production from Q3 to Q4.

Starting Tuesday night, I will be up to my neck in work our model portfolio companies start releasing Q4 2020 results and guidance for 2021. Check the EPG Forum each day for my comments on Q4 results.

The updated Sweet 16 Spreadsheet will be posted to the EPG website this afternoon.