Energy Prospectus

The updated Sweet 16 spreadsheet will be up on the EPG website on Saturday morning.

Callon Petroleum (CPE) it the only stock that moved higher during the week ending June 12. It is still trading at deep discount to my valuations, which actually needs to be increased since oil prices have already moved well above what I'm using in my forecast models for Q2 and Q3. CPE is now up 196% since April 10 when the "Fear Meter" set a new record. When stocks get as oversold as CPE was it just takes a little less FEAR to start a rally.

Last week we had to deal with FEAR of the Dr. Fauci's nightmare of a "Second Wave" of COVID-19. Maybe it is just me, but I never had any confidence in the guy. Anyone who says he is a "expert" and lets New York send infected people go back to crowded nursing homes is not an infectious decease expert.

This FEAR isn't going away, but it should: CNN loves this virus as it has created the new standard for "Click Bait". When people started getting tired of watching BLM riots, they rolled out the trusty killer virus fear and it worked. Get used to it. Maybe the brats running Antifa will become the media's new Top Story. I sure miss Global Warming.

By now we should all know that SARS-COV-2 will infect a lot of people but it is no match for a healthy immune system. Only a tiny percentage of those who get COVID-19 will die and that is only because in a high percentage of cases they had a previous illness that compromised their immune system. Smart doctors now know how to treat COVID-19 and 90% of those infected never go to the hospital. Therefore, it is not going to overwhelm the heatlhcare system and there is no need to shutdown the economy again. Demand for oil will continue to rise.

We also have to deal with the new FEAR that upstream companies are going to run out and reverse all of their previous shut in wells. Yes, they will and they should bring back on wells that can generate positive cash flow, but it will not generate a big surge in U.S. oil production. Plus, it is a bit harder than turning a few valves. Our base level of oil production capacity is now on steady decline because 200 rigs drilling for oil isn't even close to what we need to hold production flat and half of the wells being drilled aren't being completed. NONE OF THE UPSTREAM COMPANIES ARE GOING TO RAMP UP DRILLING PROGRAMS UNLESS THEY HAVE A DEATH WISH. THE WALL STREET GANG WILL PUT THEM IN THE PENALTY BOX IF THEY DO.

After CPE, Comstock Resources (CRK), Earthstone Energy (ESTE), Ovintive (OVV) and PDC Energy (PDCD) are trading a the deepest discounts to my valuations.

Next week, my top priority will be getting the rest of the Small-Cap Growth Portfolio company profiles updated. We will be sending out an update on Denbury Resources (DNR) on Saturday morning. It now looks a heck of a lot better than it did back in March. InPlay Oil, Lonestar Resources, Penn Virginia and Ring Energy are all works in progress.

My weekend podcast will be on the EPG website Saturday afternoon.

Comments below are from Matt Marshall at Aegis Energy.

WTI flirted with $40 a few times this week, but it showed its vulnerability to demand issues late in the week. We are concerned about a “second wave” of COVID-19 cases and further demand deterioration. We are further concerned that prices in the upper $30s could bring back previously shut-in supply, and perhaps encourage the completion of some DUC inventory.

It’s a pleasant surprise to see oil prices rise to these levels, but do not discount the possibility of prices moving lower in the short term.

Natural gas (July contract) traded in a 10-cent band between $1.72 and $1.82, ending the week near those lows. Weather played a part, but the interesting correlation was with crude oil. As oil moved lower, gas tended to rise. We suspect the market is considering some associated gas could return (from shut-ins).

Past November, this gas market could be in short supply. But through the summer, we are cautious and encouraging more swaps than option structures to aggressively hedge.