Sweet 16 Valuations
Posted: Wed Dec 19, 2018 5:43 pm
Each year after Christmas I start the annual process of rolling forward all of the individual company forecast/valuations models. I will be breaking out 2019 by quarter and coming up with my initial forecast for 2020. The stock price valuations are a multiple of Operating Cash Flow per share [(2018 + 2019 + 2020) divided by 3]. The multiple that I use for each company is a "SWAG" (scientific wild ass guess) of what I think the company would sell for in an arms-length negotiation. Basically, it is my version of Net Asset Value or Break-Up Value per share based on my 40+ of industry financial experience.
The Sweet 16 is a "Growth" portfolio: The companies in the Sweet 16 all have STRONG annual production and proven reserve growth locked in for many years. AND they have a lot of extremely valuable undeveloped leasehold (i.e. - "Running Room"). They definitely deserve to be trading at much higher multiples than where they trade today.
Quarterly production is obviously a BIG FACTOR in the valuation and so are oil, gas and NGL prices.
> There are many regional markets for gas and NGLs, so I am definitely using a lot of "SWAG" to come up with the prices. I start with what they were paid in the first 9 months of 2018.
> For oil prices, I am going to use the following estimates of WTI prices. Keep in mind that I believe that oil prices will drift back to my version of the "Right Price" for oil by mid-2019.
My SWAG at WTI average prices:
$60.00 for Q4 2018 (keep in mind that WTI was over $75/bbl in early October)
2019
$50.00 for Q1
$55.00 for Q2 < OECD crude oil inventories will begin a steady decline in mid-Q2 as refiners ramp up transportation fuel production (happens each year)
$62.50 for Q3
$70.00 for Q4 < IMO 2020 is going to drive up the price of oil
For 2020, Raymond James is forecasting that WTI will average $92.50/bbl (see slide 9 of my Dec 15 podcast). I am going to assume $70/bbl WTI in 2020, primarily because of IMO 2020 and the increasing impact of the sanctions on Iran. Slides 7 & 8 of the Dec 15th podcast will show you how tight the global oil market is going to be twelve months from now.
If you are not familiar with IMO 2020, just Google it. It is a BIG DEAL.
All of the forecast/valuation models are "macro driven". So, you can download them to Excel and change the commodity price assumptions at the bottom and the spreadsheet will "magically" update revenues, earnings, cash flow from operations and the stock price valuation.
Here is your homework: I have rolled forward the forecast model for Continental Resources (CLR) and posted it to the EPG website. Since none of CLR's oil is hedged, it is one of the easiest companies to forecast in the Sweet 16. Download it to Excel and make some changes to the oil & gas price assumptions at the bottom. CLR's gas price might seem a bit high, but that is because they report natural gas and NGLs on a combined basis. In Q3 2018 CLR received $3.77/mcfe for their gas+NGLs. They will be getting a lot more than that in Q4 and Q1 2019. Note that I show First Call's estimates for Revenues, EPS and Operating Cash Flow per share on each forecast model, so you can see how my forecasts compare to the Wall Street Gang's forecasts.
The Sweet 16 is a "Growth" portfolio: The companies in the Sweet 16 all have STRONG annual production and proven reserve growth locked in for many years. AND they have a lot of extremely valuable undeveloped leasehold (i.e. - "Running Room"). They definitely deserve to be trading at much higher multiples than where they trade today.
Quarterly production is obviously a BIG FACTOR in the valuation and so are oil, gas and NGL prices.
> There are many regional markets for gas and NGLs, so I am definitely using a lot of "SWAG" to come up with the prices. I start with what they were paid in the first 9 months of 2018.
> For oil prices, I am going to use the following estimates of WTI prices. Keep in mind that I believe that oil prices will drift back to my version of the "Right Price" for oil by mid-2019.
My SWAG at WTI average prices:
$60.00 for Q4 2018 (keep in mind that WTI was over $75/bbl in early October)
2019
$50.00 for Q1
$55.00 for Q2 < OECD crude oil inventories will begin a steady decline in mid-Q2 as refiners ramp up transportation fuel production (happens each year)
$62.50 for Q3
$70.00 for Q4 < IMO 2020 is going to drive up the price of oil
For 2020, Raymond James is forecasting that WTI will average $92.50/bbl (see slide 9 of my Dec 15 podcast). I am going to assume $70/bbl WTI in 2020, primarily because of IMO 2020 and the increasing impact of the sanctions on Iran. Slides 7 & 8 of the Dec 15th podcast will show you how tight the global oil market is going to be twelve months from now.
If you are not familiar with IMO 2020, just Google it. It is a BIG DEAL.
All of the forecast/valuation models are "macro driven". So, you can download them to Excel and change the commodity price assumptions at the bottom and the spreadsheet will "magically" update revenues, earnings, cash flow from operations and the stock price valuation.
Here is your homework: I have rolled forward the forecast model for Continental Resources (CLR) and posted it to the EPG website. Since none of CLR's oil is hedged, it is one of the easiest companies to forecast in the Sweet 16. Download it to Excel and make some changes to the oil & gas price assumptions at the bottom. CLR's gas price might seem a bit high, but that is because they report natural gas and NGLs on a combined basis. In Q3 2018 CLR received $3.77/mcfe for their gas+NGLs. They will be getting a lot more than that in Q4 and Q1 2019. Note that I show First Call's estimates for Revenues, EPS and Operating Cash Flow per share on each forecast model, so you can see how my forecasts compare to the Wall Street Gang's forecasts.