Sweet 16 Updates - April 18
Posted: Sat Apr 18, 2020 5:02 pm
For the week ending April 17 the Sweet 16 was down 2.33%. It was up double digits the last two weeks and it was up on Friday when Trump and Texas announced that shut-in rules will start being eased so Americans can begin returning to work. The reduction in travel restrictions will be the key to oil demand.
Range Resources (RRC) up 24.00% and Cimarex Energy (XEC) up 14.31% were the bright spots. MTDR, PDCE, PXD and TALO also inched higher. The traders are coming around to the idea that natural gas prices are likely to be much higher by year-end. RRC and XEC both produce a lot of gas and they have a lot of their oil hedged. RRC actually moved over my valuation. Because their bankers have reaffirmed their credit facility, I've increased the multiple of operating cash flow used to value the stock. My valuation of RRC is now $5.50.
Callon Petroleum (CPE) down 13.73% and Oasis Petroleum (OAS) down 17.65% were the worst of the ten "downers". Although both companies are generating enough cash flow from operations to service their debt, they are probably going to be out of compliance with their debt covenants when Q1 results are released in May. They will have lots of company and the bankers need to decide how they want to deal with the situation. IMO the banks would be foolish to force these companies into Chapter 11 because debt holders never win in bankruptcy (lawyers do). Hopefully, all of the upstream companies will get some short-term support from the Feds. and the bankers.
Let me be CRYSTAL CLEAR, all but a few of the Sweet 16 or any upstream oil companies can survive if WTI stays under $30/bbl for more than six months. Oil traders know this, which is why the July NYMEX contract for WTI closed on April 17 more than $11.00/bbl than the May contract. I've never seen the strip this steep. This is life in "Crazy Coronavirus World".
Just to give you an idea of how "Crazy" it is these days: In the last 3 months, 18 ranked Wall Street analysts set 12-month price targets for Ovintive Inc. (OVV). The average price target among the analysts is $9.60, but the price targets range from $2.14 to $25.00 per share. To say investors are getting "mixed messages" is an under-statement! Ovintive's production mix is approximately 45% natural gas, 25% NGLs and 30% crude oil. If natural gas prices do ramp up to close to $3.00/MMBtu then price targets in the upper half of that range are reasonable. My valuation of $12.50 will go a lot higher if natural gas prices do end up near EIA's natural gas price forecast for 2021 ($2.98/MMBtu).
Hedges and production mix are extremely important this year. They are shown at the bottom of each forecast model.
Comstock Resources (CRK) definitely deserves a promotion to the Sweet 16. I will probably make a few changes the portfolio after Q1 results come out.
This week I will finish reviewing a few more profile updates (ENLC and VNOM are sitting here for my final review) and then I will focus on the next newsletter. So, many companies are announcing updates to drilling programs and production guidance that it is difficult to keep up.
First quarter results are going to have some BIG non-cash item on the income statements, primarily "Impairment" and "Mark-to-Market Adjustments" to hedges. The GAAP accounting rules for upstream companies are very misleading and don't do investors a favor. "Adjusted Net Income" is what you should compare to my forecasts, but the most important number is Cash Flow from Operations. Just remember that "cash pays the bills, not earnings."
Well Completions are grinding to a halt. U.S. oil and gas production will be declining sharply this summer.
Range Resources (RRC) up 24.00% and Cimarex Energy (XEC) up 14.31% were the bright spots. MTDR, PDCE, PXD and TALO also inched higher. The traders are coming around to the idea that natural gas prices are likely to be much higher by year-end. RRC and XEC both produce a lot of gas and they have a lot of their oil hedged. RRC actually moved over my valuation. Because their bankers have reaffirmed their credit facility, I've increased the multiple of operating cash flow used to value the stock. My valuation of RRC is now $5.50.
Callon Petroleum (CPE) down 13.73% and Oasis Petroleum (OAS) down 17.65% were the worst of the ten "downers". Although both companies are generating enough cash flow from operations to service their debt, they are probably going to be out of compliance with their debt covenants when Q1 results are released in May. They will have lots of company and the bankers need to decide how they want to deal with the situation. IMO the banks would be foolish to force these companies into Chapter 11 because debt holders never win in bankruptcy (lawyers do). Hopefully, all of the upstream companies will get some short-term support from the Feds. and the bankers.
Let me be CRYSTAL CLEAR, all but a few of the Sweet 16 or any upstream oil companies can survive if WTI stays under $30/bbl for more than six months. Oil traders know this, which is why the July NYMEX contract for WTI closed on April 17 more than $11.00/bbl than the May contract. I've never seen the strip this steep. This is life in "Crazy Coronavirus World".
Just to give you an idea of how "Crazy" it is these days: In the last 3 months, 18 ranked Wall Street analysts set 12-month price targets for Ovintive Inc. (OVV). The average price target among the analysts is $9.60, but the price targets range from $2.14 to $25.00 per share. To say investors are getting "mixed messages" is an under-statement! Ovintive's production mix is approximately 45% natural gas, 25% NGLs and 30% crude oil. If natural gas prices do ramp up to close to $3.00/MMBtu then price targets in the upper half of that range are reasonable. My valuation of $12.50 will go a lot higher if natural gas prices do end up near EIA's natural gas price forecast for 2021 ($2.98/MMBtu).
Hedges and production mix are extremely important this year. They are shown at the bottom of each forecast model.
Comstock Resources (CRK) definitely deserves a promotion to the Sweet 16. I will probably make a few changes the portfolio after Q1 results come out.
This week I will finish reviewing a few more profile updates (ENLC and VNOM are sitting here for my final review) and then I will focus on the next newsletter. So, many companies are announcing updates to drilling programs and production guidance that it is difficult to keep up.
First quarter results are going to have some BIG non-cash item on the income statements, primarily "Impairment" and "Mark-to-Market Adjustments" to hedges. The GAAP accounting rules for upstream companies are very misleading and don't do investors a favor. "Adjusted Net Income" is what you should compare to my forecasts, but the most important number is Cash Flow from Operations. Just remember that "cash pays the bills, not earnings."
Well Completions are grinding to a halt. U.S. oil and gas production will be declining sharply this summer.