Sweet 16 Update - Dec 27

[dan_s]

The Sweet 16 gained 9.24% during the week ending December 24 and is now up 133.87% YTD. This is the best year for the Sweet 16 since 2001. The primary reason is that it was grossly oversold in 2020.

The S&P 500 Index gained 2.80% during the week and is now up 25.82% YTD.

This week I will be lowering the Henry Hub natural gas prices used in my forecast models to $4.25/MMBtu for Q4 2021 and $3.50/MMBtu for the year 2022. Since all of our gassers (AR, CRK, CTRA, EQT and RRC) have a lot of their gas hedged, it won't have much of an impact on my valuations. They should all be reporting big mark-to-market gains on their natural gas hedges in Q4.

Scrolling thru the next ten day forecast maps here ( https://weather.com/maps/tendayforecast ) you can see that January weather is expected to be colder as sub-freezing temperatures move eastward. LNG exports from the US will remain at maximum capacity (~12.5 Bcf per day) as Europe's natural gas prices remain firmly over $50/MMBtu.

The commodity prices used in each forecast/valuation model are adjusted for regional differentials and estimated cash settlements on each company's hedges.

First Call's price targets for the Sweet 16 continue to drift higher. As a group, the Sweet 16 is trading at a 74.6% discount to my Fair Value Estimate and a 41.2% discount to First Call's price target. CRK, ESTE, OVV and TALO are all trading at less than half of my valuations. Ovintiv (OVV) is the largest company in this group with proved reserves (P1) over 2 billion BOE (~59% liquids) and it pays a nice dividend.

All 16 companies should be reporting solid Adjusted Net Income and lots of Free Cash Flow from operations for Q4. Year-end reserve reports should also show big increases in the PV10 value of proved reserves. All publicly traded upstream companies are required by the SEC to include 3rd party reserve reports in their 10-K (annual report). The reserve reports must be audited by 3rd party reserve engineering firms and they must include an estimated present value discounted at 10% ("PV10") for the P1 reserves. Net Asset Value (NAV) is a very important number for upstream oil & gas companies because it is the primary basis for the bank loans and used by the Wall Street Gang to value companies.

Based on my 2022 forecasts for Adjusted Net Income, the Sweet 16 has a forward PE ratio of 5.3 and none of them have a PE ratio over 10. You can find each company's forward PE ratio under column Q of the Sweet 16 summary spreadsheet that has been posted to the EPG website home page.

On January 1, 2022 the following changes will be made to the Sweet 16:
> Devon Energy (DVN) and Pioneer Natural Resources (PXD) will be moving to our High Yield Income Portfolio
> Talos Energy (TALO) will be moving to our Small-Cap Growth Portfolio. My valuation of TALO remains at $28.00/share.
> Magnolia Oil & Gas (MGY), Matador Resources (MTDR) and Northern Oil & Gas (NOG) will be moving from our Small-Cap Growth Portfolio to the Sweet 16