Sweet 16 Update - Feb 2

[dan_s]

The Sweet 16 lost 5.43% during the week ending January 31st, primarily due to the big drop in natural gas prices and Trump Tariff noise.
The Sweet 16 is up 3.60% YTD.

Most of the NGas price drop last week was just due to the roll forward from the FEB25 to the MAR25 contract. The U.S. has more than enough NGas in storage to make it through March. Once we get passed the first quarter the NGas contracts will roll UP each month. The DEC25 NYMEX contract closed at $4.35/MMBtu on Friday. DEC 25 will be the front month contract at the end of October. BTW real winter weather returns to ChicagoLand after February 10th. Hang on to those Gassers.

The "Bidding War" for NGas will begin in Q3 when it becomes clear that storage is not filling fast enough. A repeat of what happened in Q3 2022 looks more likely to me each week.

The S&P 500 Index lost 1.27% last week, but is still up 2.70%. The Deep Seek AI "noise" caused the tech sector selloff. In my opinion, the big AI stocks are all priced to perfection.

Just in case you haven't noticed, there is an incredible amount of political "noise" impacting commodity and stock prices. The bad news is that the "noise" and the volatility is likely to continue. The good news is that Trump's tariff on Canadian oil & gas is only 10%. My "hope" is that the price of WTI oil goes up enough, so the tariff is no big deal for our Canadian Upstream companies. I'm also trying to figure out how the U.S. is going to physically enforce the tariffs.

Looking past the "noise": I have updated my forecast models for CTRA, CRGY, FANG and OVV for the BIG transactions that they closed last week. All four are going to generate a lot of free cash flow in 2025. In my opinion, Crescent Energy (CRGY) has the most upside and Diamondback Energy (FANG) is a "Screaming Buy" up to $175/bbl.

Diamondback is a "World Class" upstream company. Companies of this size and quality don't go "On Sale" often. Viper Energy (VNOM) also looks very good. In case you missed the news, Diamondback dropped down $4 billion worth of minerals and royalties into Viper for $1 billion in cash and the rest in more shares of Viper. Read my notes about all of these companies.

Civitas Resources (CIVI) leads the pack, up 13.76% YTD.
CIVI sold off in Q4 2025 when lots of shareholders in the stock had a knee jerk reaction to the BOD's decision to pay just their base dividend in December and use the variable portion to buy back stock. Since the share price was way below book value, the decision made sense to me.
FEAR based selloff almost always reverse, which is why I put CIVI in the Sweet 16.

The "Right Price" for CIVI is over $70/share. It traded up to $78 in May and it is in better shape today. It is generating over $250 million of free cash flow PER QUARTER
Civitas is a solid company that increased production by more than 62% in 2024 and it generated over $32/share of operating cash flow and it should repeat that in 2025. CIVI should have a price target of AT LEASE 3X CFPS.

Northern Oil & Gas (NOG), SM Energy (SM) and Veren (VRN) are down slightly YTD. All three are trading at less than 50% of my valuations.
> SM Energy (SM) is one of my Top Picks and it is #4 in Harry's latest ranging of 84 energy companies.
> NOG announced a dividend increase last week. NOG's yield is now over 5%. It is going to report ~10% quarter-over-quarter production increase in Q4 2024.
> VRN is one of HFI Research's Top Picks.

All 16 companies are profitable, have no near-term debt problems, and they are generating more than enough operating cash flow to fund their growth strategies AND pay dividends. Antero Resources (AR) is the only Sweet 16 company that does not pay dividends. 98.4% of AR's production is natural gas and NGLs. AR will be the first company to announce Q4 results on February 12.