Sweet 16 Update - July 23

[dan_s]

I was on vacation last weekend, so this is a two-week update.

Since July 9th the Sweet 16 has gained 10.62% and is now up 37.90% YTD. Over the same period, the S&P 500 Index gained 1.31%, but it is still down 16.88% YTD. It has been a tough year for stocks in general because of the Fed tightening, FEAR of a recession, Russia's invasion of Ukraine and lots of other "noise".

Over the last three days I have updated all 16 of my forecast/valuation models for actual oil & gas prices in Q2 2022, lower forecast oil prices in Q3 ($100) and Q4 ($105) and higher forecast natural gas prices in Q3 ($7.00) and Q4 ($7.50). I do expect the volatility for commodity prices to continue, but the global ENERGY CRISIS is real and I believe there is more upside risk for oil prices.

Weather is the primary driving force for U.S. natural gas prices. Unless August weather turns very mild, there is no way that U.S. natural gas storage can build back up to the 5-year average prior to the onset of winter. La Nina now controls the Pacific weather pattern, which means a colder than normal winter is likely for the Eastern U.S. Conditions are becoming more favorable for hurricanes in the Atlantic and four storms are likely to impact the Gulf of Mexico. If a major hurricane shuts down some refineries along the Gulf Coast it could cause regional transportation fuel shortages. I am very concerned about the U.S. diesel inventories that are more than 20% below normal.

Based on my adjusted valuations, the Sweet 16 is trading at a 112% discount to "Fair Value". This group is trading at just 2.3 X my 2022 operating cash flow forecast, which is a deep discount for companies of this quality.

You can find my updated forecast/valuation models for each company in the portfolio under the Sweet 16 tab on the EPG website. They are macro driven Excel spreadsheets, which you can download to your computer. After you download them, you can change the forecast assumptions and the models will automatically update the stock price valuation.

All 16 companies have now confirmed the dates they will release Q2 results. Most of them will release financial results after the markets close on the dates below and then host a conference call for analysts the following morning.

July 25: RRC
July 26: MTDR
July 27: AR, EQT
July 28: CLR
August 1: CRK
August 3: CPE, LPI, MGY, NOG, OVV, PDCE, SBOW, SM
August 4: ESTE
August 5: EOG

I have lowered my valuation of Continental Resources (CLR) by $20 to $93/share just because the Company's BOD is still dealing with the "Take Private" offer from Harold Hamm, the Founder whose family controls 87% of the stock. My valuation is still 46.5% below where the stock closed on July 22. That said, until the situation is resolved, I have to rate CLR a HOLD. In my opinion the "Worse Case" is that the BOD accepts Harold's offer of $70/share. CLR closed at $63.47 on July 22, it pays a nice dividend and I see very little downside risk. If the BOD decides to open a dataroom for competing bids, this one could get VERY INTERESTING.

Callon Petroleum (CPE) is the only Sweet 16 stock that is down YTD and there is nothing that I can find which justifies the current share price. I am expecting the Company to report strong Q2 results. Adjusted Net Income per share should beat the current First Call EPS estimate of $4.30 for the quarter. If Callon's guidance agrees with my forecast model assumptions, the share price should move back over $50 quickly. The 52-week high is $66.48 and the Company is in much better shape today than it was at the beginning of the year. The average of the price targets submitted to TipRanks over the last three months is $78.88; Truist Financial's price target was updated to $95.00 on July 19th.

Earthstone Energy (ESTE) and SilverBow Resources (SBOW) are the smallest companies in the Sweet 16. They are both closing "Transformational Acquisitions" this year that should draw a lot more "love" from the Wall Street Gang in a few months.

Range Resources (RRC) will be the first company to report very strong Q2 results. It will be interesting to see how the market reacts. If HH ngas stays over $8.00, the stock is worth a lot more than my $48.00 valuation.

Hang Tough, the Energy Sector should draw a lot more attention next week.

[Fraser921]

When does your video come out?

Earnings season will be interesting

Will investors punish companies with billion dollar hedge losses?

or will the focus on FCF ?

Will they focus on the future?

One scenario that always bothered me

A company has its earning estimates raised 10 times say from 1.50 to 3.00 and the number comes in at 2.95

The headline will be: company xyz MISSED BY A NICKEL!!

WHEN 3 MONTHS PRIOR THE ESTIMATE WAS 1.50 ergo the stock gets hammered

[dan_s]

My Saturday podcast should be up on the website by 5PM. I recorded it this morning, but Sabrina has to do some magic to get it to a YouTube video.