Sweet 16 Update - May 13

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Sweet 16 Update - May 13

Post by dan_s »

The Sweet 16 lost 1.51% during the week ending May 12 and is now down 14.73% YTD.
The S&P 500 Index lost 0.32% and is now up 7.41% YTD.

All four of our gassers (AR, CRK, EQT, RRC) and SBOW were the only Sweet 16 stocks that were up last week. Since we live in a world that is "Climate the Same", investors know the demand for natural gas from gas-fired power plants will be going way up in June. I think we have seen the lows for natural gas prices. All of the gassers were profitable in Q1 and I expect them to remain profitable. I expect HH gas prices to move over $2.50 by the end of June.
> Antero Resources (AR) is the only Sweet 16 company that might report a small Q2 loss, thanks in part to low NGL prices. AR is in good shape financially and they will survive a few quarters of low gas prices.
> Comstock Resources (CRK) reported much higher realized gas prices ($3.06/mcf) than my forecast because they sold 21% of their Q1 gas directly to LNG exporters at a premium price. CRK is the only Sweet 16 company that has very little liquids production. CRK continues to report outstanding well results in East Texas. They hold some extremely valuable leasehold that should draw a lot more attention to the company when ngas price go back over $3.00 in Q4.
> EQT Corp. (EQT) is the largest natural gas producer in North America and it has a lot of gas hedged this year over $4.00.
> Range Resources (RRC) now leads the Sweet 16, up 5.44% YTD. It was oversold last year. Range holds massive proven reserves in Appalachia.

All 16 companies were profitable in 2022 and they all reported profits in Q1 2023. Eight of them (AR, CPE, CPG, ESTE, VTLE, PR, SBOW, SM) are currently trading below book value and there is nothing that I can see to justify that. None of them have near-term debt maturities which they can't meet. They all generate lots of operating cash flow.

Callon Petroleum (CPE) and Vital Energy (VTLE) were the two most profitable companies on a per share basis in the portfolio last year and (based on my forecasts), Vital will lead the pack this year again and CPE will be in the top five most profitable companies.

EOG Resources (EOG) is the largest company in the Sweet 16.

Crescent Point Energy (CPG) is the only Canadian company in the Sweet 16. They reported outstanding Q1 results and they recently close an acquisition that locks in strong production growth this year.

The Sweet 16 closed on May 12 at a 96.5% discount to my current valuations and at a 57.8% discount to First Call's price targets.

SilverBow Resources (SBOW) trades at the largest discount to my current valuation of $78.00, which is just 3.5 X annualize operating cash flow per share. SilverBow is currently running a two rig drilling program and both rigs have been moved to oil-prone areas. They've told me that they expect to double their oil production year-over-year. The Company's liquid sales (oil + NGLs) s/b ~65% of their 2023 revenues. SilverBow is a very profitable company that reported $15.51 earnings per share in 2022 and $4.18 earnings per share in Q1 2023. It is also generating ~25% YOY production growth. If you don't own SBOW, I recommend that you read the recent profile we published on the company.

We have published updated profiles on MGY, NOG and SBOW. I hope to get the rest of them updated next week. I will also be updating all of the forecast models for the companies in our Small-Cap Growth Portfolio.
Dan Steffens
Energy Prospectus Group
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