Sweet 16 Update - June 17

[dan_s]

Since mid-May (the low point of the year) the Sweet 16 has gained over 7%.

Last week was another "roller coaster" for oil prices and the Sweet 16, but the portfolio gained 0.64% and is now down 7.33% YTD.
The S&P 500 Index had a very good week, thanks to the Fed "pause" on interest rate hikes, gaining 2.89% and is now up 14.85% YTD.
There is still lots of "Fear of Recession", but the stock market is telling us that that fear is fading. In my opinion, with full employment in the U.S. I find it hard to believe that we will have a significant recession. Inflation is going to remain an issue for awhile, but inflation does not cause recessions.

During the two years that ended 12/31/2022 the current Sweet 16 gained 263.7%, while the S&P 500 Index gained just 2.2% over the same two year. Sector rotation and profit taking was expected at the beginning of this year. As I have posted here several times, 2023 is setting up just like 2010. In 2H 2010 the Sweet 16, which was down during the first six months, took off and the Sweet 16 finished up 54% for the year.

The Sweet 16 closed Friday, June 16 at an 81.9% discount to my current valuations and a 40.4% discount to First Call's current price targets.

Based on my 2023 forecasts, the Sweet 16 trades at an average PE ratio of 6.43 and at just 3.25 X operating cash flow per share. The average PE ratio in the S&P 500 Index was over 19 the last time I looked.

For upstream oil & gas companies "Cash is King". I value these companies based on what I believe to be reasonable multiples of their operating cash flow. All 16 companies were profitable in 2022 & in Q1 2023 and their balances sheets are in good shape. Based on my forecasts, all 16 companies should be profitable each quarter this year.

Stocks trading below the 3.25 CFPS multiple are: CPE, CPG, ESTE, VTLE (at less than 1X CFPS), NOG, OVV, PR, SBOW and SM

Big Sweet 16 News this past week was the $1.5 billion joint acquisition of Novo Oil & Gas Holdings, LLC (“Novo”), a privately-held Delaware Basin focused E&P company backed by EnCap Investments L.P. (“EnCap”) by Earthstone Energy (ESTE) and Northern Oil & Gas (NOG).
ESTE and NOG provided details of the transaction and updated production guidance for 2023, which I have used to update my forecast/valuation models. I am going to highlight ESTE in today's podcast.

Two of our gassers continue to lead the pack:
EQT Corp. (EQT) is up 17.17% YTD
Range Resources (RRC) is up 13.87% YTD
Permian Resources (PR) is up 11.70% YTD
Northern Oil & Gas (NOG) is up 8.05% YTD.

As Global Warming returns to the Southeast U.S. (over 100F in Houston today) demand for natural gas is rising. If you think natural gas prices will move back over $3.00/Mcf (DEC23 HH NYMEX contract closed at $3.605 on June 16) then you should take a look at Antero Resources (AR) and Comstock Resources (CRK). These two gassers are both down close to 25% YTD and trading as if HH ngas will average $2.50 for the next six quarters.

[dan_s]

This is the first of many more upgrades for ESTE:

Earthstone Energy price target raised to $21 from $18 at Stephens
Jun 16, 2023

"Stephens raised the firm’s price target on Earthstone Energy to $21 from $18 and keeps an Overweight rating on the shares after the company announced the acquisition of Novo Oil & Gas, which the firm views “positively.” Novo was one of three remaining private equity-backed companies with significant drilling inventory in the Northern Delaware Basin, the deal is free cash flow accretive in 2024 and it improves the depth and quality of Earthstone’s inventory, the analyst tells investors." - Published first on TheFly