Sweet 16 Update - Feb 17

[dan_s]

Finally the Sweet 16 is getting some LOVE!

During the week ending February 16 the Sweet 16 gained 7.76% and it is now down just 0.81% YTD. Nine of the stocks are now up YTD. A week ago, all 16 companies were in the red. Finally, investors are noticing that upstream companies are very profitable when WTI is over $75/bbl. Higher than expected NGL prices are offsetting some of the pain from lower natural gas prices.

The S&P 500 Index lost 0.44%, but it is still up 4.64% YTD. Fear of the Fed (no interest rate cuts coming soon) and realization that some of the high-flying tech stocks are trading at insanely high valuations caused a selloff on Tuesday. Nice to see some money rotating to the energy sector. All 16 companies in the portfolio are going to report solid Q4 2023 results.

Diamondback Energy (FANG) leads the pack (up 15.7%) thank to the big merger with Endeavor Energy Resources (a private company) that will make Diamondback the 3rd largest oil producer in the Permian Basin. In my opinion, post-merger FANG will be more valuable than PXD, which is in the process of selling to ExxonMobil for $60 Billion. This merger will also draw a lot of attention to Viper Energy (VNOM), the most heavily weighted to oil minerals company in our High Yield Income Portfolio.

MTDR, PR and VTLE are other pure plays on the Permian Basin that I am sure are being looked at by large-caps that might want to get in on the M&A activity in North America's most important oil basin. A merger of MTDR into PR would draw a lot of attention.

See my earlier post about high much Vital Energy (VTLE) trades below Fair Value. Vital is following the same strategy that made Earthstone Energy such an attractive takeover target. They closed 6 acquisitions in 2023 and another small acquisition (~1,850 Boepd from Granite Resources) on February 5th. Vital's production has grown from 80,416 Boepd in Q1 2023 to 113,400 Boepd in Q4 2023. What now looks like a conservative estimate, Vital's total production should increase by more than 20% year-over-year in 2024. The Company's production mix is good with approximately 46% crude oil, 25% high-value NGLs and 29% natural gas. My valuation is $100/share.

EOG Resources (EOG) and EQT Corp. (EQT), two of the "Elite Eight" are down 12.3% and 10.2% YTD. EQT is a large-cap "gasser", so that pullback makes sense, but EOG being down double digits make no sense to me. EOG has a pristine balance sheet, generates a lot of free cash flow (over $4.7 billion FCF in 2023), pays a nice "Base + Variable" dividend ($2.41/share for Q3) and it has a lot of high-quality "Running Room".

EQT and MGY announced Q4 2023 results last week.
This week I expect the following companies to release Q4 results and updated guidance:
Feb 20: FANG, EOG, MTDR
Feb 21: RRC, SM, VTLE
Feb 22: NOG

I will be recording a podcast this afternoon, but it may not be posted to the website until Sunday afternoon since Sabrina is traveling this weekend and she is the person that turns the podcasts into YouTube videos.