Sweet 16 Update - July 21
Posted: Sat Jul 21, 2018 10:27 am
All of the Sweet 16 forecast models have been updated except for PXD and RRC, which I will finish this morning. Then I will be working on the newsletter.
If you have been following my posts all week, you know that I have been updating all of the forecast models and comparing my numbers with recent analysts' reports submitted to Reuters. For most of the Sweet 16, my valuations are within the range of valuations submitted to Reuters (First Call).
I stress to all of you that it is important to focus primarily on cash flow from operations (find the RED BOX on each forecast model). GAAP/SEC accounting rules for upstream oil & gas companies create some wild quarter-to-quarter swings in "Reported Earnings", primarily because of the required mark-to-market adjustments on hedges. These rules were a knee jerk reaction to the Enron case (IMHO) and all they do is confuse most investors. My earnings forecasts are what Wall Street now calls "Adjusted Earnings". Basically, they ignore the BS accounting rules for hedges and impairment in an effort to focus on the current period operating results of a company.
Also very important are:
> Production growth
> Production mix (crude oil, natural gas and NGLs)
> Proven reserve growth
> Drilling inventory / "running room"
> Balance sheet strength
> Debt terms, especially maturity dates
> Liquidity. Does the company have enough cash flow from operations + access to capital (credit facility borrowing base) to fund their growth plans?
The Permian Basin Takeaway Capacity issue is getting a lot of coverage and will be a big topic in all Q2 announcements. In all of the analysts reports that I have looked at, it has a minor impact on the valuations of even the Permian Basin "pure plays". NONE of the oil production will be stranded. Only companies that don't have takeaway contracts and hedging programs will feel the full brunt of the Midland price differentials. Companies that can get their oil to the LLS market (Gulf Coast) are getting a premium to WTI.
All of the Sweet 16 are solid and in much better shape today than they were a year ago.
If you have been following my posts all week, you know that I have been updating all of the forecast models and comparing my numbers with recent analysts' reports submitted to Reuters. For most of the Sweet 16, my valuations are within the range of valuations submitted to Reuters (First Call).
I stress to all of you that it is important to focus primarily on cash flow from operations (find the RED BOX on each forecast model). GAAP/SEC accounting rules for upstream oil & gas companies create some wild quarter-to-quarter swings in "Reported Earnings", primarily because of the required mark-to-market adjustments on hedges. These rules were a knee jerk reaction to the Enron case (IMHO) and all they do is confuse most investors. My earnings forecasts are what Wall Street now calls "Adjusted Earnings". Basically, they ignore the BS accounting rules for hedges and impairment in an effort to focus on the current period operating results of a company.
Also very important are:
> Production growth
> Production mix (crude oil, natural gas and NGLs)
> Proven reserve growth
> Drilling inventory / "running room"
> Balance sheet strength
> Debt terms, especially maturity dates
> Liquidity. Does the company have enough cash flow from operations + access to capital (credit facility borrowing base) to fund their growth plans?
The Permian Basin Takeaway Capacity issue is getting a lot of coverage and will be a big topic in all Q2 announcements. In all of the analysts reports that I have looked at, it has a minor impact on the valuations of even the Permian Basin "pure plays". NONE of the oil production will be stranded. Only companies that don't have takeaway contracts and hedging programs will feel the full brunt of the Midland price differentials. Companies that can get their oil to the LLS market (Gulf Coast) are getting a premium to WTI.
All of the Sweet 16 are solid and in much better shape today than they were a year ago.