Sweet 16 Updates - Feb 3

[dan_s]

In February each year, I roll all of my forecast models forward by a year. My initial focus is on the Sweet 16 forecast models. What I will be doing this week and next week is breaking out 2020 by quarter and adding my initial forecast for 2021 for each of our model portfolio companies.

As I said in my February 1st podcast, FEAR related to the corona virus is pushing oil prices down and demand for oil is always lower in Q1. From what I can gather, the virus causes bad flu like symptoms. Only a tiny percentage of those getting it will die. Regular flu will kill many more people, as it does each year. My guess is that FEAR related to the corona virus will decline sharply this summer. You may recall that the media hyped Ebola a few years ago and within months cable news was on to the next FEAR (Read "Chicken Lickin"). Hyped up fears draw more viewers and more viewers means higher ad revenues. It is always about the money for the cable news networks. I look for oil prices to rebound in a few months, primarily because oil demand spikes each summer.

Antero Resources (AR): I've decided to move AR to the Small-Cap Growth Portfolio because (a) there is almost zero investor interest in the "gassers" these days and (b) I need to make room for Earthstone Energy (ESTE) that deserves a promotion since reporting strong Q4 production growth. You can find my updated forecast model for ESTE on the EPG website.

AR has a very high percentage of their 2020 gas hedged at much higher natural gas prices than we have today, so they should be able to fund the majority of their 2020 capital expenditure budget with cash flow from operations. For now, Range Resources (RRC) will stay in the Sweet 16 as the lone "gasser". Looks like February will be more like winter than January, so there is some hope for higher natural gas demand.

I'm also going to finish updating my forecast for Continental Resources (CLR) today. None of CLR's oil is hedged, but even if their realized oil price averages $50/bbl in 2020 the company should generate free cash flow from operations and fund 12.5% YOY production growth. My valuation is close to Stifel's price target of $58.00/share. CLR is going to report strong Q4 results that should be close to First Calls EPS estimate of $0.49. CLR's cash flow from operations should exceed $3.1 Billion for 2019.

My plan is to publish the next newsletter early next week, so I need to update all of the Sweet 16 forecast models this week. I will be posting them to the EPG website. Just remember that all of my forecast models are "macro driven" Excel spread sheets. You can change the oil, gas and NGL price assumptions at the bottom and the spreadsheets update revenues, earnings, cash flow from operations and stock valuations automatically.