Sweet 16 Update - Dec 28

[dan_s]

The updated Sweet 16 spreadsheet has been posted to the EPG website. Just log on and you can view and/or download it directly from the Home Page.

The Sweet 16 portfolio gained 2.01% last week and its been up each week in December, but it is still down 10.97% YTD.
If I remove the two gassers (AR and RRC) it is down 3.71% YTD, which is crazy since oil is up approximately $18/bbl since the beginning of the year.

Under Tab 1 you can find my Q4 earnings per share forecast for each company, based on $55/bbl WTI and $2.40/mcf Henry Hub natural gas.
> I do adjust each company's forecast for regional price differences and the impact of their hedges.
> I don't anticipate any impairment or ceiling test writedowns in the 4th quarter, but that is always possible.
> The companies with lots of their oil hedged are likely to have non-cash mark-to-market writedowns on their hedges.
> Impairment and MTM adjustments on hedges don't impact cash flow from operations.
> All 16 companies have strong cash flow from operations. Operating CFPS for 2019 is shown in column T.
> Most of the Sweet 16 are generating free cash flow from operations and growth in 2020 will be fully funded by cash flow from operations.

Upstream companies of this quality should be trading at 6 to 8 times operating cash flow per share. As of the December 27, 2019 closing prices, the Sweet 16 is trading at 3.59 X CFPS, so there is lots of upside for these stocks if oil stays over $60/bbl. Unless you believe WTI is going back under $50/bbl, there is nothing that justifies any of these companies trading under 4X operating CFPS. The outlook for ethane and propane prices has improved, which will give AR and RRC a nice revenue boost.

Callon Petroleum (CPE) has closed its merger with Carrizo Oil & Gas (CRZO) and it will show a super strong balance sheet at year-end since it was an all-stock merger. My current valuation of CPE is $13.25.

Under Tab 2 of the spreadsheet, you can find my valuation of each stock and First Call's price target for each stock. Keep in mind that First Call's price targets are just the average of all of the analysts' reports submitted to Reuters. Most of reports in Reuters database are based on much lower oil prices than we have today. Some of the reports are over six months old. At the bottom of each individual companies' forecast model I show several recent analysts' price targets.

Continental Resources (CLR) and EOG Resources (EOG) are heavily weighted to oil and don't have any of their oil hedged.
As proof that upstream companies can generate profits and free cash flow from operations at 2019 oil & gas prices:
> CLR is on-track to generate $2.05 EPS and $8.38 operating CFPS in 2019. Based on the company's guidance, it should generate over $1 Billion of FCF from operations in 2020.
> EOG is on-track to generate $4.89 EPS and $13.25 operating CFPS in 2019. EOG should generate close to $3 Billion FCF from operations in 2020.

I am going to highlight CLR on my Dec 28th podcast, which should be up on the website this evening.

On December 16th Stifel published an update on the upstream companies that they follow.
Below are Stifel's current price targets for the Sweet 16 stocks they rate.

$ 8.30 > Callon Petroleum (CPE) note that this is their pre-merger valuation. Stifel rated CRZO a BUY with a price target of $18.00/share.
$105 > Cimarex Energy (XEC)
$ 58 > Continental Resources (CLR)
$173 > Concho Resources (CXO)
$116 > EOG Resources (EOG)
$143 > Diamondback Energy (FANG)
$ 22 > Matador Resources (MTDR)
$ 9.10 > Oasis Petroleum (OAS)
$ 30 > Parsley Energy (PE
$ 52 > PDC Energy (PDCE)
$261 > Pioneer Natural Resources (PXD)

If you'd like to see Stifel's 40 page report, send me an email and I will forward it to you. dmsteffens@comcast.net

[dan_s]

There is "hope" for the gassers. After winter storm Gage moves out, the door will be open for much colder weather in the Great Lakes Region.
Watch the Saturday Summary here; https://www.weatherbell.com/premium/