Sweet 16 Update - Sept 4

[dan_s]

For the week ending September 3, 2021 the Sweet 16 gained 10.38% and is now up 99.47% YTD.
The S&P 500 Index was also up 0.69% and is now up 20.75% YTD.

The Sweet 16 is still trading 78% below my current valuation and 31% below the current First Call prices targets.

West Texas Intermediate (OCT21) closed at $69.12 on Friday: "After initially rising to above $70 a barrel on Friday crude oil fell more than 1% during the afternoon as a weaker dollar and supply disruptions were not enough to outweigh investors' concerns about the pace of economic recovery. The US economy added 235K jobs in August of 2021, the lowest in 7 months and well below forecasts of 750K likely due to a surge in COVID-19 infections. Meanwhile, roughly 1.7 million barrels per day of oil production remains offline in the Gulf of Mexico after Hurricane Ida damaged offshore platforms. On Wednesday EIA data showed US crude inventories fell for a 4th straight period. Still, for the week, crude gained 0.8%." - Trading Economics.

Henry Hub Natural Gas (OCT21) closed at $4.697 on Friday: The front month NYMEX contract had the highest closing price since February, 2014. "US natural gas futures continued to march higher in the first week of September, trading above $4.6 per million British thermal units for the first time since December 2018 buoyed by Hurricane Ida production shut-ins and stronger demand. Natural gas production in the US Gulf of Mexico remained offline while energy firms evaluated the aftermath of Hurricane Ida. The demand is likely to remain strong as hot weather is expected to stay through early September. Meanwhile, natural gas prices in Europe surged to above $18 per mmBtu as Europe is facing a shortage. Russia, Europe’s biggest gas supplier, has declined to book big additional flows through pipelines in Ukraine ahead of the completion of the controversial Nord Stream 2 pipeline to Germany." - Trading Economics

The natural gas price in Asia hit $18.46/MMBtu on the JKM Index. < The recent surge in natural gas prices is supported by the "Paradigm Shift" among traders that demand for US LNG exports will remain very high all winter. The gas shortage in Europe is definitely a major concern as winter is just a few months away and they don't have enough gas supply to make through a normal winter.

It was a mixed week within the Sweet 16 portfolio with 10 of the 16 stocks up. The five gassers were all up more than 10% ( AR + 17.63%, CRK + 18.26%, EQT + 10.26%, RRC + 13.87% and XEC + 12.24%). I am now listing Cimarex Energy (XEC) as a gasser because I am now 99% sure that their merger into COG will close at the end of September. Post-Closing the combined NewCo (which will be renamed) will have a production mix of approximately 74% natural gas, 12% NGLs and 14% crude oil. My current valuation of XEC is $109/share, but it will be going up after the merger closes if natural gas prices stay over $4.50 heading into October.

Laredo Petroleum (LPI) was also up 13.13% during the week, but it is still trading just 2.08 X my operating cash flow per share forecast for 2021 of $28.49. LPI is a "high beta stock" because it has a low number of shares outstanding and a small change in the forecasts for production and/or commodity prices has a big impact on my stock valuation, which is now $80.00. LPI leads the pack, up 201.42% YTD. This one is not for the "faint of heart". The Day Traders love high beta stocks like this, so big moves up and down are likely. If you think oil & gas prices are going to hold up, buy the dips.

On September 3rd Talos Energy (TALO) and Talos International Holdings SCS announced that they have submitted Notices of Dispute to the Government of Mexico over decisions taken by Mexico's Ministry of Energy ("SENER"). This is the first step in a long process to resolve their differences over who should operate the Zama Field Development. Just remember that my current valuation for TALO of $30.00/share has nothing in it for Zama.
Details of the notice: https://finance.yahoo.com/news/talos-en ... 00875.html

Talos did have to shut in most of their Gulf of Mexico production due to Hurricane Ida, but I don't have details yet. My forecast/valuation model for TALO does anticipate a dip in production from Q2 to Q3 each year due to annual tropical storm activity. Higher realized natural gas prices than I used in the model should offset a large percentage of the revenues lost to lower production.

Callon Petroleum (CPE) was down slightly on the week, but it is still up 155.85% YTD and I think it has a lot more upside for us since it is trading at less than 2X my 2021 operating cash flow forecast of $17.48/share. I expect the Primexx Acquisition to close by the end of September, which should put Callon on pace to end 2021 with production over 115,000 Boe per day. This compares to the Company's Q2 production of 88,981 Boe per day. The Wall Street Gang has a very wide range of opinions on CPE's valuation ($37 to $64 in August reports filed with Reuters), but when the smoke clears post acquisition in Q4 I think their price targets will end up in the $60 to $70 range.

Sweet 16 is still trading at less than half of my valuation are CRK, ESTE, OVV and TALO.

AR, ESTE and EQT are all trading below book value, which is insane for companies that are generating lots of free cash flow and have lots of running room. SEC accounting rules are so conservative that no upstream oil & gas company that is a "Going Concern" should ever trade below book value.

My Sweet 16 summary spreadsheet will be posted to the EPG website home page on Saturday afternoon. I update it each weekend. I highly recommend that you download it to Excel and take the time to understand the information that it contains.

[dan_s]

Whenever you look at the price targets for any stock remember that First Call's price targets are just the average of all reports on file with Reuters and some of the price targets are very old. Some are over six months old.

Also remember that the Wall Street Gang analysts have to value upstream companies using their firm's official commodity price deck. Here is a note that I received from Wells Fargo this morning. "Our new/old WTI oil price per bbl forecasts for 2021, 2022, and 2023 are $63.56/$58.79, $59/$58and $58/$58, respectively. Our new/old Brent oil price per bbl forecasts for 2021, 2022, and 2023 are$66.60/$61.83, $62/$61, and $62/$62, respectively."