Sweet 16 Update - April 15

[dan_s]

Since the market is closed today and because I will be driving to Dallas for Miss Drake's birthday (5 years old and born on Easter), I decided to update the Sweet 16 main spreadsheet today.

In the short trading week that ended April 14, the Sweet 16 gained another 4.51% and is now up 56.12%.
The S&P 500 Index lost another 2.01% and is now down 7.84%. The Fed's tightening will keep pressure on the market all year.

The Big Paradigm Shift should keep upward pressure on the oil & gas upstream companies and the midstream companies all year. This world has an Energy Crisis (thanks to the Green Bad Deal, the Paris Climate Accord Wackos and Mr. Putin) and the crisis will get much worse as next winter approaches. Phase Two of the Mother of all Bidding Wars for space heating fuels will be worse than Phase One.

At the beginning of my webinar presentation on Thursday I showed the updated oil and gas price deck that I am now using in my forecast/valuation models. I have updated the valuations for all of the "gassers" (AR, CRK, CTRA, EQT and RRC) and for ESTE. I will update the other ten next week and post comments here and my updated forecast models to the EPG website.

The "gassers" are leading the pack this year with CRK up 106.3% and AR up 101.6% YTD; our first two "doubles" for the year. < CRK is still my Top Pick among the five gassers.
EQT is up 94.2%, RRC is up 81.7% and CTRA is up 54.8%. They all have more upside for us.

The Sweet 16 is still trading at an average operating cash flow per share multiple of 3.36X. That is VERY LOW for companies of this quality.
Based on CFPS: Laredo Petroleum (LPI) at 1.71X CFPS and Earthstone (ESTE) at 2.18X CFPS look extremely cheap to me.

EOG Resources (EOG) at 5.62X CFPS and Magnolia Oil & Gas (MGY) at 5.06X CFPS should be valued closer to 8X operating CFPS.

A few clarifications from Q&A at the end of the webinar.

Someone asked what I thought about AR's Q1 results.
> AR will release Q1 results and updated guidance on April 27
> I expect them to report Adjusted Net Income of $217.1 million ($0.71/share).
> You can see how I arrive at the estimated EPS on the forecast model for AR under the Sweet 16 tab on our website.
> AR does have ~52% of their natural gas hedged for 2022, so GAAP or "Reported Net Income" will include a large non-cash market-to-market adjustment on their hedges. Ignore Reported Net Income for upstream companies that have a lot of production hedged. Focus on Operating Cash Flow.
> I expect AR to report operating cash flow of $485.7 million for Q1 and $2.700.4 million ($8.85/share) for the full year. Their previously announced capital program for 2022 is $740 to $775 million, so AR is on pace to generate close to $2 Billion of free cash flow from operations this year.
> The current share price is just 4X operating CFPS. That is a very low valuation multiple for a company of this size and quality.
> AR produces a lot of NGLs and they may report a much higher realized NGL price than what is in my forecast.
> Antero Midstream (AM) is also going to report strong Q1 results.

Someone asked what I thought about ESTE trading below book value.
> Simple answer: That is insane!
> Earthstone PV10 net asset value of just their proved reserves (P1) based SEC pricing guidelines (extremely conservative) is probably double the current share price when the BigHorn assets are included.
> Earthstone is the smallest company in the Sweet 16 so it has less analysts' coverage and it will take time for the Wall Street Gang to figure out the true impact of the BigHorn Acquisition
> ESTE should be at least a double for us by year-end.
> This is why you pay Big Bucks for your EPG membership. My "mission" to find gems like ESTE before the Wall Street Gang figures it out.

The Sweet 16 main spreadsheet has two tabs. Under Tab one on the far right side of the spreadsheet I show dates when I expect each company to release Q1 results. Q1 results are very important because they confirm my modeling assumptions AND the companies all provide updated guidance for the remainder of the year.

Most of the Wall Street Gang is still using much lower oil, gas and NGL prices to generate their price targets. It will take most of them more time to figure out how tight the U.S. gas market is. If LNG exports remain near U.S. export capacity, there is NO WAY that ngas storage can be refilled to a safe level before the next winter arrives. U.S. ngas production has not increased YOY and demand is way up.

Hang Tough: We are just in the first half of The Big Paradigm Shift Rally.