Sweet 16 3rd Quarter Results

[dan_s]

I have FINALLY completed my review of each one of the Sweet 16 individual company forecast/valuations models.

There aren't many changes to report because I do look them over before I finish each newsletter. I do like to make one detailed review before they release quarterly earnings.

3rd Quarter Results are going to be strong thanks to increasing production and increasing commodity prices.

All 16 companies in the portfolio are profitable and all of them are generating strong cash flow from operations. Just keep in mind that GAAP and SEC accounting rules do require mark-to-market adjustments on hedges, so "Reported Earnings" can and will be much different than "Adjusted Earnings". My EPS forecasts are for "Adjusted Earnings" and so are the First Call EPS estimates for all future periods.

The primary thing to judge my forecast models on is how close I am to Cash Flow Per Share from Operations ("CFPS"). Remember, "Cash Flow pays the bills, not Earnings".

Today, the Sweet 16 is trading at a combined 6.5 X CFPS. That is a very low multiple for upstream companies that have this much future production and proven reserve growth locked in.
CXO at 12X CFPS and PXD at 10X CFPS are trading at the highest multiples. They are justified because these two companies hold VERY LARGE positions in the Permian Basin, the world's most important oilfield.

AR, GPOR, NFX, PDCE and RRC are trading at CFPS multiples (under 4X) that would only be appropriate if you think they are heading to Chapter 11 soon. PDCE is unique because of the Prop 112 issue on the Colorado ballot next month. We do need to see how that turns out. The other four are only justified if you think natural gas and NGL prices are going MUCH LOWER and staying low for all future periods.