Valuations

[dan_s]

I finished up the profiles on Callon Petroleum (CPE) and PDC Energy (PDCE) today. It is amazing to me that these stocks are still trading as if oil is under $50/bbl.

All of the Sweet 16 generated strong cash flow from operations in 2017 and none of them had realized liquids prices close to where oil and NGLs are selling today. Not one sold their oil in 2017f for $50/bbl. Q1 2018 results are going to be outstanding for this group. Yet, the Sweet 16 is down YTD. The only explanation is that investors do not believe today's oil price is sustainable despite a much tighter oil market. IEA, which IMHO is trying to talk down oil prices as long as they can, even admits that demand for oil will exceed supply in the second half of 2018. See: https://www.iea.org/oilmarketreport/omrpublic/

CPE and PDCE have YOY production growth for 2018 of 35% ad 25% respectively locked in. They have strong cash flow from operations today and strong balance sheets. Making them PRIME TAKEOVER TARGETS is the fact that they both control large blocks of low-risk development acreage.

As a group, the Sweet 16 is trading for 6X 2018 cash flow from operations. Upstream companies with this much running room should be trading for 8X to 12X CFPS.

The "Wall Street Herd" can change directions quickly. My forecast is that in April, OECD oil inventories are going to drain quickly as refiners suck hard on the crude oil inventories to ramp up gasoline and diesel production. The Wall Street energy analysts have definitely raised the commodity prices used in their forecast/valuation models because I can see it when I look at the revenue and cash flow estimates now being submitted to Reuters. All it takes is a few leaders of the "Herd" to change their opinion.