Sweet 16 Updates - Sept 27

[dan_s]

The week ending September 26 was good for all three of our model portfolios, thanks to WTI oil closing over $65/bbl.

Trading Economics:
"WTI crude rose 1.1% on Friday to settle at $65.70 per barrel, marking its largest weekly gain in over three months, up more than 4%. The rally was driven by escalating geopolitical tensions, as Ukraine’s drone strikes on Russian energy infrastructure prompted Moscow to curb diesel and gasoline exports, creating supply shortages in several regions. Additional support came from mounting pressure by the US and NATO, including threats of sanctions and calls for allies to reduce purchases of Russian oil. At the same time, the resumption of Iraqi Kurdistan oil exports to Turkey is expected to gradually add 230,000–500,000 barrels per day to global markets. Stronger-than-expected US economic data and a weaker dollar also bolstered prices, easing near-term demand concerns and making commodities more attractive."

During the week ending September 26th the Sweet 16 gained 5.39%, but it is still down 4.20% YTD.
The S&P 500 Index lost 0.31% last week, but it is still up 12.96%.

I have seen quite a few articles recently about how overpriced the tech stocks are, so maybe it is time for fund managers are rotating money into the Energy Sector. Because the Upstream oil & gas sub-sector is so capital intensive, if the Fed keeps lowering interest rates those stocks draw more attention.

If WTI just holds at $65/bbl. and HH natural gas moves over $3.25/MMBtu all of our Sweet 16 are trading below fair value. They are all free cash flow positive at those oil & gas prices.

I finished my September newsletter yesterday. Sabrina is formatting it today and it should be in your email on Sunday.

In the Sweet 16, the four "Gassers" (AR, CTRA, EQT, RRC) are the safest bets since Henry Hub natural gas prices should climb up to $4.00/MMBtu by year-end. NOV25 is now the front month NYMEX contract for HH natural gas. It closed at $3.177/MMBtu on Friday. DEC25 closed at $3.818 and the JAN26 contract, which will be front month at the end of November, closed at $4.143/MMBtu on Friday.

CelsiusEnergy's is now forecasting a storage build of 70 Bcf for the week ending September 26, which would be 15 Bcf lower than the average build for that week. A bullish storage report next week should push the NOV25 contract over $3.25. The largest storage builds of the year occur during September through mid-October. Demand for residential space heating starts ramping up by the end of October. Natural gas prices ALWAYS react to weather forecasts in Q4. It has been many years since we've not had a significant hurricane in the Gulf of America ("Knock on wood").

Among the four gassers, Coterra Energy (CTRA) trades at the deepest discount to my valuation. My WAG is that Antero Resources (AR) will make the largest move if we get a spike in gas prices. EQT Corp. (EQT) is by far the largest of our four gassers.

Crescent Energy (CRGY) and SM Energy (SM) continue to trade at less than 50% of my valuations. When the merger of Vital Energy (VTLE) into CRGY closes in Q4, I expect CRGY to start climbing toward my valuation which is $22/share, because some of the Wall Street Gang does not take mergers seriously until they close.

Crescent Energy's post-closing production should be over 400,000 Boepd with a mix of 42.2% crude oil, 36.3% natural gas, and 21.5% NGLs. As the 9th largest independent it definitely deserves more attention. You can find my Proforma forecast/valuation model for CRGY on the EPG website. My CRGY forecast for 2026 is revenues of $5.6 billion that should generate $2.4 billion of operating cash flow ($7.41/share). A company of that size should trade for at least 3X operating CFPS.

If the large generalist funds do start rotating money into the Energy Sector, they will put money into the large companies like EOG, FANG, EQT and DVN. < They closed on Friday at 2025 CFPS multiples of 3.63 for DVN, 4.76 for FANG, 5.87 for EOG and 6.56 for EQT.

Sweet 16 stocks that are still trading below 2X operating cash flow per share are CIVI, CRGY, NOG, SM. I like Northern Oil & Gas (NOG) because of its high dividend yield of ~6.5%, which is the highest yield in the Sweet 16.

If you are investing for dividend yield, check out our High Yield Income Portfolio, which has an average dividend yield of 7.3%. Several companies in that portfolio also have significant upside to my price targets.