Sweet 16 Update - Sept 9

[dan_s]

During the week that ended Sept 8 the Sweet 16 declined by 1.76% and it is now up 19.73%.
During the week the S&P 500 Index declined by 1.51% and it is now up 16.10%.

Rising oil prices are great news for the Sweet 16, but all stocks are subject to overall "Market Risk". Rising prices for transportation fuels will cause more inflation, which stokes the FEAR of the Fed, which stokes the Fear of Recession. The fundamentals will drive these stock prices higher. Saudi Arabia + Russia are now in control of the global oil price and they clearly want higher prices. What Biden has done to our relationship with Saudi Arabia will go down in history as one of the dumbest things every done by a U.S. president.

This week I took a hard look at two companies in the portfolio.
> I raised my valuation of Magnolia Oil & Gas (MGY) by $1.00 to $30.00
> I raised my valuation of Range Resources (RRC) by $4.75 to $35.00

Magnolia is unhedged, so rising oil prices increase their free cash flow, which should allow them to pay higher dividends. They also announced a nice bolt on acquisition in their Giddings Field in South Texas. It will add ~5,000 Boepd (70% oil) when the deal closes in mid-Q4.

I decided to raise the valuation multiple for Range Resources (RRC) to 6X annualized operating cash flow. Range holds a lot of Tier One leasehold in Appalachia (Marcellus and Utica shale plays), it has a strong balance sheet, no near-term debt problems and it generates a lot of free cash even at today's low natural gas prices. Per TipRanks, out of the most recent five updated analysts' reports 3 of the them rate it a BUY with price targets of $38 and Piper Sandler rates it a BUY with price targets of $41. UBS is the only recent SELL and they give it a price target of $28. In the last 3 months, 13 ranked analysts set 12-month price targets for RRC. The average price target among the analysts is $35.77.

Note from one of our new members: "EOG acquired around 400,000 acres in Ohio (bigger than their stake in the Permian) and will be picking up rigs. I’m not sure how many at this moment. Also PR is lucrative as well, friend of mine who is superintendent over there just texted me today how excited they are to merge with Earthstone after Thanksgiving."

EOG is come up with the right completion "recipe" in an area of the Utica Shale in Ohio that is oil prone. EOG is calling it another "Core Area" for them, which means it is a BIG DEAL.

This is a reminder that EPG is a networking group and we have hundreds of members that have decades of experience and lots of contacts in the oil & gas industry. Some of my best investment ideas have come from other EPG members.

Callon Petroleum (CPE), Crescent Point Energy (CPG) and Vital Energy (VTLE) still trade below book value. They are all profitable, generate free cash flow and they have plenty of "Running Room". Nothing that I can see justifies their current share prices. Vital Energy is starting to get more analysts covering it. If you are not familiar with these three "Value Stocks", read our recent profiles on them.

Based on the September 8th closing prices, the Sweet 16 trades at an average multiple of 2023 operating cash flow of 3.97X.
Trading below the average are:
CPE at 2.16X
CPG at 2.70X
ESTE at 2.87X < Merging into PR to create a "Delaware Basin Powerhouse". My current valuation of PR is now $21.00.
VTLE at 1.35X < a "Screaming Buy"
NOG at 2.96X < This one will benefit from the ESTE/PR merger.
OVV at 3.63X < Share price down 6.69% YTD because it is "gassy". Still on pace to report EPS of $7.13 and operating CFPS of $13.04 this year.
SBOW at 2.09X < Despite the share price being up 48.97%
SM at 3.18X

EOG Resources (EOG) is the largest company in the portfolio and it trades at 7.03X operating CFPS. It deserves an even higher multiple. This is a reminder that "Size Matters" in this business. When the merger of ESTE into PR closes, it will also deserve to trade at a much higher multiple.

The updated Sweet 16 Summary Spreadsheet will be posted to the EPG website this afternoon.
Leading the pack: PR up 52.23%, SBOW up 48.94%, ESTE up 44.76% and NOG up 39.10%.
Only two stocks down YTD: CRK down 9.99% and OVV down 6.69%. My current valuation are $15.00 for CRK and $65.00 for OVV.

Q3 results are going to better than Q2 results for all 16 companies and Q4 results are going to be fantastic if oil & gas prices move up to my predictions of $90 for WTI and $2.75 for HH natural gas.

My weekly podcast will be posted late today.

[ChuckGeb]

EOG revealed their liquids rich 395M acre Ohio Utica Combo play last November in the 2022Q3 conference call. Is this what the "new member" is reporting or something new? I haven't seen anything reported. They were recently in NY at the Barclay's Barcap Energy conference and didn't mention anything new.

[dan_s]

He is just talking about EOG's total leasehold position in Ohio. 400,000 acres in a nice big block.