Sweet 16 Update - Aug 24

[dan_s]

During the week ending August 22 the Sweet 16 gained 1.51%, but it is still down 9.52% YTD.
During the week the S&P 500 Index gained 0.29% and is now up 9.95% YTD.

Market Risk goes both ways. The overall market was up big on Friday just because the Wall Street Gang has more confidence in the Fed lowering the interest rate by a quarter of a percent in September. FEAR of recession should be fading, which should rotate more capital into the energy sector.

I spend most of the day yesterday checking all 16 forecast models and updating 9 of them. The valuations are now all based on my 8-12-2025 oil and gas price deck. Also, I am now basing my stock valuations on [(2X 2025 CFPS) + 1X 2026 CFPS] / 3 times a multiple that I believe is reason for each company. I do compare my valuations to the TipRanks' consensus price targets and to TipRanks' consensus forecasts for Revenue, Net Income per share and Adjusted Operating Cash Flow per share (CFPS) just to see if my valuations are "In the ballpark" with what other more highly paid energy sector analysts are saying.

In general, my 2H 2025 forecasts are very close to the TipRanks' consensus and a bit higher to the TipRanks' 2026 consensus forecasts. It looks like a lot of the energy sector analysts are using very conservative oil prices for 2026.

Four of the Sweet 16 closed on August 22 at share prices below book value based on their 6/30/2025 balance sheets.
They are all profitable companies, generating free cash flow, with plenty of "Running Room" and they all pay dividends.
I see nothing that justifies any of the Sweet 16 share prices being below book value.

Civitas Resources (CIVI) at $27.35 is just 45.6% of book value.
> Very Profitable: Net Income per share was $8.93 in 2024 and $3.35 in 1H 2025.
> Based on my forecast they will remain profitable in 2H 2025 and TipRanks' consensus EPS forecast for 2H 2025 is higher than my forecast.
Civitas is a mid-cap with lots of Running Room in the DJ Basin and the Permian Basin.
> Q2 production was 317,000 Boepd in Q2, up ~6,000 Boepd from Q1 and expected to be ~332,000 Boepd in Q3.
> They should close a non-core DJ Basin sale in September and use the $435 million proceeds to pay down debt. Adjusting for the assets being sold, Q4 production should be up slightly.
> Civitas has not provided 2026 production guidance, so I'm using a conservative estimate of 335,000 Boepd in 2026.
> Balance Sheet ratios should be much improved at 9-30-2025. In addition to the sales proceeds, free cash flow over $300 in 2h 2025 should also reduce debt.
> My current valuation of $60.00 compares to TipRanks' consensus price target of $41.42 with a PT range of $30 to $57.
> The most recent price target submitted to TipRanks is $54 from Piper Sandler on 8-14-2025.
> Civitas pays fixed quarterly dividends with annual yield of 6% AND they have a stock buyback underway.

Crescent Energy (CRGY) at $9.94 is 56.3% of book value.
> They might be buying Vital Energy (VTLE), so this one is a "Special Situation" because I need to see the deal terms to revalue the shares.
> Reported Net Income was a loss of $0.80 per share in 2024 and a gain of $0.58 per share in 1H 2025. My full year 2025 forecast is Net Income of $1.07, which compares to TipRanks' consensus of $1.40 EPS.
> Increase production by 34.5% YOY in 2024, primarily because of the merger with SilverBow Resources that closed 7-30-2024.
> Q2 2025 production of 262,875 Boepd 41.0% crude oil, 40.9% natural gas and 18.1% NGLs. < Very good hedges lock in good oil & ngas prices.
> TipRanks consensus EPS forecasts are $0.38/share for Q3 2025, $0.44/share for Q4 2025 and $1.52/share for 2026. My forecasts are lower.
> More important is that my operating CFPS forecast of $6.49, compares to TipRanks' CFPS forecast of $6.77. < There is nothing that justifies CRGY trading at less that 2X CFPS.
> As a standalone company, CRGY should generate over $700 million of free cash flow this year.
> CRGY pays quarterly dividends with annualized yield of 4.8%.

Diamondback Energy (FANG) at $143.28 is 3.1% below book value. < This is unbelievable to me.
> This is a very profitable company that is on pace to generate $5.5 Billion of FREE CASH FLOW in 2025 from total revenues of $15.2 billion.
> Diamondback is primarily a growth company. The dividend yield is only 2.7%, but they are going to aggressively buyback stock with most of their free cash flow.
> STRONG ANNUAL PRODUCTION GROWTH: 16.0% in 2023, 33.5% in 2024 and on pace to 51% YOY growth in 2025.
> My current valuation is $192 per share. TipRanks' consensus price target is $181.
> Three most recently updated price targets submitted to TipRanks August 14 are $185 from Barclays, $211 from Wells Fargo and $222 from Piper Sandler. < These are all very good energy sector analysts.
> The only justification for the current share price being so low that I can come up with is that Diamondback has closed several very large transactions over the last 12 months that make lots of stock analyst become more conservative on their valuations, especially when assets are being acquired from private companies: The "Mega Merger" with Endeavor Energy on September 10, 2024. Followed by an Asset Trade with TRP Energy in December 2024, the Double Eagle Acquisition that closed February 2025 and the Drop Down of minerals and ORRIs to Viper Energy that closed May 1, 2025. The three most recent price target updates are from highly respected energy sector analysts that have done the work to figure out how all of these transaction setup Diamondback with a strong asset base in the Permian Basin.
> Diamondback's Q3 2025 production should be approximately 915,000 Boepd with potential to reach a million Boepd within two years.
> If you are investing for high yield dividends, I recommend that you read our recently updated profile on Viper Energy (VNOM), a publicly traded subsidiary of Diamondback.

SM Energy (SM) at $27.78 is 69.6% of book value.
> SM sits at #3 in Harry's database of 82 public energy companies. Harry's Net Present Value is 2.46 X the current share price. We've compared notes on this one and both of us believe it is a Strong Buy at the current share price.
> My current valuation of $57 is just 3.25 X annualized operating cash flow per share for 2025 & 2026. My valuation multiple will increase if their Q3 results and updated guidance confirm my model assumptions, which I expect them to do since they consistently beat their guidance.
> Generating a lot of operating cash flow: SM's Adjusted Operating Cash Flow per share was $8.55 in 2022, $13.64 in 2023, $15.48 in 2024 and my forecast shows $17.40 in 2025. TipRanks consensus CFPS forecasts are $17.69 for 2025 and $17.01 for 2026, which compares to my 2026 forecast of $17.81.
> The Unita Basin Acquisition that closed October 1, 2024 added 44,000 Boepd with 38,700 bpd of oil. It did add $1.2 billion of debt to SM's balance sheet, but Unita well results have exceeded expectations. With plenty of free cash flow, SM has no problem servicing their current debt level.
> SM's production increased from 197,285 Boepd in Q1 2025 to 209,011 Boepd in Q2. Their production is expected to increase to over 220,000 Boepd by year-end.
> Dividend yield is 2.9% and they are expected to start up a stock buyback later this year.

CRGY and SM are trading at the largest discounts to my valuations of $22 and $57.

My updated Sweet 16 spreadsheet will be posted to the EPG website later today. It shows my current valuation for each stock and the current First Call price targets. Click on tab 2 to see my EPS forecasts for Q3 & Q4 2025 and 2026 for the Sweet 16. Click on tab 3 to see my current forecasts for the companies in our Small-Cap Growth and High Yield Income portfolios. 6 of 10 of the Small-Caps and 3 of 12 of the High Yield stocks are also trading below book value. If you see anything that justifies PAA, a large-cap "Money Machine" trading below book value let me know.

All of the Sweet 16 forecasts and profiles are now updated for Q2 results and detailed guidance from each company.

In the other portfolios we have published updated profiles for REPX, VNOM, OKE and PAA. I hope to finish most of the others by the end of August.

Doug Bartole, the CEO of InPlay Oil will be joining me on our August 26th webinar. You must register on the EPG website if you wish to attend the live webinar. I highly recommend that you do attend, because InPlay has recently closed a transformational acquisition that has significantly increased my valuation and Delek Group Ltd. becoming InPlay's largest shareholder is going to have a SIGNIFICANT impact on this Canadian Junior's future.

[mrbill]

Is the Permian Land controlled by VTLE anything "special" or just average/ordinary?

[Petroleum economist]

There are two reasons for the low valuation of Civitas: (1) a weakish balance sheet and (2) a lack of reserves with a consequential falling production. Civitas in 2025 is trying to find a balance between the two issues.

Balance sheet
At the end of Q2 the Civitas equity ratio (=equity/balance sheet total) was a lowish 44.1%. The debt/EBITDA ratio on an annual basis was a high 1.7-1.8. Both ratios indicate that the balance sheet needs reinforcement.
The Q2 long-term debt ($ 4.5 B) is too high and requires on an annual basis $ 420-430 M of interest payments. The interest payments are seriously impacting the net profit (for context: my estimate for 2025 net profit is $ 520-550 M).

As far as the budget sheet is concerned the sale of the DJ basin assets for $ 435 M thus is a step in the right direction.

Reserves and production
Civitas lacks reserves. 2024 proven reserves (798 M BoE) are equivalent to only 6.8 years of 2025 production. The low RRR (0.40 over the period 2019-202$) provides limited hope on autonomous additions.
As a consequence, production is falling. Q2 2025 production (317 K BoE/d) was -7.5% below the 343 K BoE/d in Q2 2024.
Civitas did not announce the production associated with the DJ basin assets sales, but the market put the loss of production at approx. 10 K BoE/d.

The sale of the DJ basin assets thus will accelerate the fall in production in 2025 and will reduce reserves.

[dan_s]

Mr. Bill

Vital's Permian Basin leasehold is good, but not great. If you go to their website and look at slide 8 of their presentation you will see that they plan to complete 25 horizontal development wells during 2H 2025 that should give them a nice revenue boost.

If Crescent Energy does acquire Vital it will be after a detailed evaluation of their leasehold's potential. KKR has a lot of influence over Crescent Energy, so I expect them to be heavily involved in the negotiated terms of any deal.

Vital's problem is that the GAAP/SEC accounting rules for upstream companies that use the Full Cost Accounting Method cause them to mark-to-market their oil & gas assets based on a "Ceiling Test" that has resulted in big impairment charges the last three quarters. The rules do not consider how much of Vital's production is hedged at good prices that lock in free cash flow. If WTI oil prices just stabilize, Vital should be reporting decent net income going forward. Crappy natural gas prices in the Permian Basin don't help.

A CRGY + VTLE merger would establish a good size company with ~400,000 Boepd of production with headquarters in Houston. I've always thought that Vital having headquarters in Tulsa was a negative.

[dan_s]

Harry;

To get to the midpoint of Civitas' recently updated production guidance of 321,000 to 331,000 Boepd (midpoint of ~326,000), the Company's 2H 2025 production needs to increase from 317,000 Boepd in Q2 to close to an average of 338,000 Boepd during 2H 2025. I'm fairly sure that their production guidance that was updated on August 8th is net of the DJ Basin assets being sold in September, but to be safe I am only using an average of 333,500 Boepd in 2H 2025, which adds up to a full year production average of 323,752 Boepd.

I think Civitas has more "Running Room" than you are giving them credit for. The GAAP rules for what can be included in "Proved Reserves" are very conservative, so the Company's annual drilling programs should just keep replenishing proved reserves each year by moving 2P and 3P reserves into 1P.

I agree that the balance sheet needs some work, but servicing their debt is not a problem since they are generating close to $4.6 billion in annual revenues and close to $2.5 billion of operating cash flow after interest payments. Based on my forecast, free cash flow after dividends should be $491 million in 2025.