Sweet 16 Update - Aug 5

[dan_s]

During the week ending August 4 the Sweet 16 gained 3.91% and it is now up 10.25% YTD. < Fear of Recession is fading and oil prices are going up.

During the week the S&P 500 Index lost 2.71% and is now up 16.63% YTD. < Fear of more Fed interest rate hikes.

If WTI does go over $90/bbl, the Sweet 16 has close to 50% upside from now to year-end, based on my valuation models.

Vital Energy (VTLE) is the only Sweet 16 company that has not announced Q2 results. I expect them to do so on August 8.

Three of our four gassers (AR, CRK and EQT) reported Q2 losses, but investors know that Q2 will be the low point of the year for natural gas prices. There is more "seasonality" to the gassers and lots of funds will rotate money into the gassers as winter approaches. As you all know by now, I am short-term bearish on natural gas prices for this coming winter. I do think the DEC23 NYMEX contract for HH gas will stay over $3.00, but I think there is a high risk that if we have a mild December, gas prices will pull back.

If Comstock Resources (CRK) does pull back below $10, I will be buying a lot of it. Jerry Jones' company has HUGE upside in an area they call the Western Haynesville. Read the profile we sent out a few days ago. Comstock and EQT have incredible long-term "running room" and the long-term outlook for U.S. natural gas in HUGE.

Range Resources (RRC) reported a small profit for Q2, but it has moved over my current valuation of $30.25. I recommend lowering your exposure to natural gas and NGL prices by harvesting the nice gains on EQT and RRC and moving that money into companies that get most of their revenues from crude oil sales.

Callon Petroleum (CPE) reported a $1.74 loss per share in Q2 only because they wrote down the book value of their Eagle Ford assets that were sold July 5. The big impairment charge is a non-cash expense that has no impact on my valuation of CPE. Callon's balance sheet is much stronger thanks to the two transactions that they closed on July 5th. The Company is going to report strong results in Q3 and Q4. If WTI does move over $90/bbl, Callon's PV10 Net Asset Value at the end of this year should be over $100/share just based on their proved reserves (P1). The Percussion Petroleum Acquisition gives Callon a lot of high-quality "running room" in West Texas.

SilverBow Resources (SBOW) reported outstanding Q2 results and I raised my current valuation by $5 to $68/share. The Company only has two analysts covering it that I can find and both of them are basing their price targets on lower production and lower oil prices than I am. I was drawn to this small-cap when I found out that they had HUGE natural gas potential in Webb County, Texas. It also has a lot more oil production upside in the Eagle Ford oil play in South Texas. They have two operated drilling rigs and both of them are drilling for oil. The Company's oil production is expected to double during 2023.

If I was forced to give you my Top Pick, it would be Earthstone Energy (ESTE). Q2 results beat my forecast and when the Wall Street Gang figures out the Company's high-quality "running room" in the Delaware Basin (thanks to the Novo Acquisition) this stock should be a double for us. The deal is set to close on August 15th and Earthstone's Q4 results should be very strong.

Northern Oil & Gas (NOG) is also going to get a big boost from the Novo Acquisition. They are going to be assigned a 1/3rd working interest in all of the Novo assets being acquired by Earthstone and they have formed a Joint Area of Interest with Earthstone in the Delaware Basin, which I love.
Both companies have outstanding teams that can evaluate acquisition opportunities.

I have decided to move Diamondback Energy (FANG) back to the Sweet 16 when I publish my August newsletter. I will probably drop Antero Resources (AR), but I will continue to cover it.

[Fraser921]

If Comstock Resources (CRK) does pull back below $10, I will be buying a lot of it.

Wow on two points;

1. Presently, you don't own it and
2 You will own it! (Move from income to growth strategy)

I think future looks bright if better prices show up.

[Fraser921]

On Callon Eagle Ford write off:

"The big impairment charge is a non-cash expense"

The reason it's a non cash write off is because the cash has already been spent!

So , Eagle Ford assets aren't worth the money that's been invested in them. I wonder who else has the same problem.

[dan_s]

Just think of impairment as taking a lot of DD&A at one time. It has no impact on operating cash flow, which is how I value stocks.

They needed to sell the Eagle Ford assets to fund the Permian acq.,which adds a lot more running room. Plus, the cash paid off a lot of debt. I expect Callon's PV10 Net Asset Value at year end to exceed my valuation.