Sweet 16 Update - Jan 15

[dan_s]

I was on vacation Jan 9-15 in Puerto Vallarta, Mexico and you guys did a great job moving oil & gas prices higher. Thanks to your hard work (and sector rotation) the Sweet 16 gained 8.52% during the week and is now up 18.77% YTD.

The S&P 500 Index is off to a slow start, down 2.17% YTD. The large-caps in the S&P 500 Index will be fighting the Fed all year, so a lot of money is rotating into commodities, which do a lot better with high inflation. I do believe this is the beginning of a "Commodity Super Cycle" that will push up valuations for our high-quality upstream oil & gas companies. The Sweet 16 closed on January 14 at a forward PE ratio of just 6.35, which is just a third of the PE ratio of the S&P 500 Index.

Before leaving on vacation, I updated the forecast/valuation models for CPE, CLR, ESTE, EOG, FANG, LPI and OVV. My task this coming week is to update the other 9 forecast models by breaking out 2022 by quarter and adding my initial 2023 forecast to the valuations. I will be commenting here on each company as I finish updating my models.

My valuations are based on operating cash flow per share annualized for 2021 to 2023. I double weight 2022 CFPS and multiple the annualized cash flow per share number by a valuation multiple that I think is appropriate for each company. My valuation multiples are based on balance sheet strength, production growth potential ("running room") and realized commodity prices that consider regional differentials and each company's hedges. I do compare my valuations to the price targets of other energy sector analysts, which I get from TipRanks and other direct sources.

The Sweet 16 is my "Flag Ship" portfolio, so it is always my top priority.

New additions MGY (up 17.81%), MTDR (up 22.75) and NOG (up 15.89%) are all off to a great start.

Earthstone Energy (ESTE) leads the pack up 31.9% and I have increased my valuation to $26/share.
ESTE closed at $14.43 on Jan 14. I love this management team that has a strong record of success.
It is the smallest company in the Sweet 16, but it is growing rapidly through acquisitions. Production increased 13.8% in 2020, 60.2% in 2021 and my forecast is for 88% production growth in 2022 to 46,000 Boepd. After they close the Chisholm Acquistion in Q1 2022, the Company's growth should be fully funded by operating cash flow over $500 million this year.

Our five "gassers" (AR, CRK, CTRA, EQT and RRC) are off to a bit of a slower start (up an average of 14.5% YTD), but they are all in great shape and will be reporting strong Q4 results and big increases in proven reserves in February. CRK trades at the largest discount to my valuation of $20.00.

My Sweet 16 Summary Spreadsheet will be updated and posted to the EPG website early on Sunday. Note that the valuations highlighted in yellow have been updated.