Sweet 16 Update - Dec 10

[dan_s]

It has been a rough four weeks for the Sweet 16.
After being up 66.11% YTD on 11/12/2022, the portfolio has pulled back 34.41% and is now up just 31.70% YTD.
During the same four weeks the S&P 500 Index has lost 1.23% and is now down 17.45% YTD.

I'm sure some of the selling is due to funds harvesting gains on these extremely profitable companies to offset the losses they've taken on tech stocks. The energy sector is still the only sector in positive territory this year.

All 16 companies in the Sweet 16 are in MUCH BETTER shape than they were a year ago. They all generate free cash flow from operations that has been used to pay off a lot of debt. Eleven of them pay dividends and several are funding aggressive stock repurchase programs.

2022 has been a wild ride for oil prices, which are now back to where they were a year ago. IMO other than FEAR of recession and FEAR of more Covid restrictions in China, there isn't really a fundamental reason to justify the recent pullback ($92.24 on Nov 4 to $71.02 close on Dec 9). Yesterday, I posted comments from RBC Capital on the global oil market which are in line with my take on why oil prices have pulled back. All the "noise" / fear mongering by the media about a recession and lack of liquidity has pushed a lot of the oil paper traders to reduce their long positions. U.S. and OECD petroleum inventories are too low and Biden can't keep draining the SPR. If OECD petroleum inventories based on Days of Consumption keep falling, the price of oil will move higher.

Natural Gas is a much different story and a much different market.
HH natural gas closed out 2021 at $3.73 and closed yesterday at $6.29, despite a rather bearish storage report on Thursday.
Looks like we have two significant winter storms that will move coast to coast over the next week, burning through a lot of space heating fuel. When sub-freezing temperatures, wind and snow move across the Great Lakes region, the "Gassers" (AR, CRK, EQT, RRC, SBOW) will draw more attention.
Eventually, Freeport LNG will come back online adding ~2 Bcf per day of demand.

All 16 companies will report solid Q4 results, especially the ones that have a lot of production hedged. Reported earnings will include some BIG mark-to-mark gains on those hedges. My valuations are based on reasonable multiples of operating cash flow, taking into consideration strength of balance sheet, liquidity, and running room.

Next week we will be publishing a lot of updated profiles on some of our Small-Caps and High Yield companies. We are also going to publish initial profiles on two small-caps that have moved high on my Watch List.

[dan_s]

RBC Capital:
"The oil market retracement is, in our opinion, a function of paper markets selling into low liquidity
air pockets rather than indication of a distressed physical market. Atlantic Basin differentials,
which we deem as the global marginal barrels, are far from strong, but physical barrels are not
indicating signs of fire sale, either. Crack spreads were one of the few stand out bright spots in
the oil complex over recent months and once that market buckled, paper traders began to peel
out of the oil trade."