Sweet 16 Update - June 28
Posted: Sat Jun 27, 2020 9:26 am
Oil prices pulled back last week and so did the Sweet 16. Pioneer Natural Resources (PXD) was the only stock up slightly on the week.
Since April 10 the Sweet 16 is up 43.49% and the S&P 500 Index is up 7.86%.
Per EIA: For the week ending June 19th U.S. oil production was 11 million barrels per day, which compares to 13 million BOPD in the first quarter. The week to week increase was just GOM production bouncing back from tropical storm Cristobal shut-ins the week before. Lots of companies are bringing back onshore shut-ins, but natural declines in existing wells will offset that increase.
The increase in COVID-19 cases is the reason for the market's pullback last week. EIA reported a slightly larger build in crude oil inventories on Wednesday. The report also shows that refinery utilization continues to drift higher (up to 74.6%) and days of supply of crude oil, gasoline and distillates continues to drift lower. Refinery utilization and inventories still have a ways to go to get back to normal, but they are heading in the right direction.
The active drilling rig count for the U.S. + Canada declined another 5 rigs last week (16 straight weekly decline). We are probably at the bottom of the active rig count for this cycle. Upstream companies will not be adding more drilling rigs this year unless WTI moves quickly over $50/bbl. The industry will remain in "Hunker Down Mode" for the rest of the year, which is exactly what they should be doing.
Three of the Sweet 16 stocks are down since April 10th (my unofficial date for the bottom of this cycle was Good Friday).
> CRK and EQT are down because they are "gassers" and natural gas prices remain depressed since "global warming" is delayed this year.
> Our other gasser, Range Resources (RRC) is up 37.3% since April 10.
> All three gassers have a high percentage of this year's production hedged.
> Concho Resources (CXO) is down 4.6% since April 10, which makes no sense at all. Concho is in much better shape today than it was on Good Friday. Concho has over 80% of their Q2 and Q3 oil hedged at $57.00/bbl, so they have free cash flow from operations of approximately $600 million locked in for the year. First Call's price target of $72.78 compares to my valuation of $75.00 per share.
It has been a wild ride for shareholders of Matador Resources (MTDR) this year. Take a look at the YTD chart to see what I mean. They have reported outstanding well results this year, but the Company has outspent cash flow from operations so far this year and that is a "no no" on Wall Street. They are slowing down the pace of their drilling program, so they should be able to live within cash flow and continue to increase production and proven reserves during 2H 2020. My valuation is $13.00 per share.
Talos Energy (TALO) announced a nice acquisition on June 23. By "nice" I mean they acquired additional interest in properties they already own at a very good price and they will take over operations on several properties. Talo's production will be down about 1,500 Boepd from Q1 to Q2 because of economic shut-ins and a few days that tropical storm Cristobal's impact on the GOM. Talo's production should be up about 13,000 Boepd from Q2 to Q3, barring more hurricane activities in the Gulf. I have updated my forecast/valuation model for the June 23 acquisition. My valuation of $17.10 compares to First Call's price target of $15.43.
2nd quarter "Reported Net Income" for this group will be all over the place because of very large mark-to-market adjustments on their hedges. Hedges are extremely important this year. I put them at the bottom of each company's forecast model and we highlight them in each profile. Continental Resources (CLR) has the most exposure to moves in the price of oil because none of their oil is hedged.
Since April 10 the Sweet 16 is up 43.49% and the S&P 500 Index is up 7.86%.
Per EIA: For the week ending June 19th U.S. oil production was 11 million barrels per day, which compares to 13 million BOPD in the first quarter. The week to week increase was just GOM production bouncing back from tropical storm Cristobal shut-ins the week before. Lots of companies are bringing back onshore shut-ins, but natural declines in existing wells will offset that increase.
The increase in COVID-19 cases is the reason for the market's pullback last week. EIA reported a slightly larger build in crude oil inventories on Wednesday. The report also shows that refinery utilization continues to drift higher (up to 74.6%) and days of supply of crude oil, gasoline and distillates continues to drift lower. Refinery utilization and inventories still have a ways to go to get back to normal, but they are heading in the right direction.
The active drilling rig count for the U.S. + Canada declined another 5 rigs last week (16 straight weekly decline). We are probably at the bottom of the active rig count for this cycle. Upstream companies will not be adding more drilling rigs this year unless WTI moves quickly over $50/bbl. The industry will remain in "Hunker Down Mode" for the rest of the year, which is exactly what they should be doing.
Three of the Sweet 16 stocks are down since April 10th (my unofficial date for the bottom of this cycle was Good Friday).
> CRK and EQT are down because they are "gassers" and natural gas prices remain depressed since "global warming" is delayed this year.
> Our other gasser, Range Resources (RRC) is up 37.3% since April 10.
> All three gassers have a high percentage of this year's production hedged.
> Concho Resources (CXO) is down 4.6% since April 10, which makes no sense at all. Concho is in much better shape today than it was on Good Friday. Concho has over 80% of their Q2 and Q3 oil hedged at $57.00/bbl, so they have free cash flow from operations of approximately $600 million locked in for the year. First Call's price target of $72.78 compares to my valuation of $75.00 per share.
It has been a wild ride for shareholders of Matador Resources (MTDR) this year. Take a look at the YTD chart to see what I mean. They have reported outstanding well results this year, but the Company has outspent cash flow from operations so far this year and that is a "no no" on Wall Street. They are slowing down the pace of their drilling program, so they should be able to live within cash flow and continue to increase production and proven reserves during 2H 2020. My valuation is $13.00 per share.
Talos Energy (TALO) announced a nice acquisition on June 23. By "nice" I mean they acquired additional interest in properties they already own at a very good price and they will take over operations on several properties. Talo's production will be down about 1,500 Boepd from Q1 to Q2 because of economic shut-ins and a few days that tropical storm Cristobal's impact on the GOM. Talo's production should be up about 13,000 Boepd from Q2 to Q3, barring more hurricane activities in the Gulf. I have updated my forecast/valuation model for the June 23 acquisition. My valuation of $17.10 compares to First Call's price target of $15.43.
2nd quarter "Reported Net Income" for this group will be all over the place because of very large mark-to-market adjustments on their hedges. Hedges are extremely important this year. I put them at the bottom of each company's forecast model and we highlight them in each profile. Continental Resources (CLR) has the most exposure to moves in the price of oil because none of their oil is hedged.