Sweet 16 Update - July 11
Posted: Sat Jul 11, 2020 3:34 pm
The Sweet 16 is up 48.26% since Good Friday, April 10. It has stalled out primarily because we are in the "Quiet Period" of the quarter.
WTI averaged $27.95/bbl during the 2nd quarter, slightly higher than what I expected. However, Q2 results will be the bottom for this cycle, so get ready for some bad results. When they start reporting quarterly financial results focus on operating cash flow and their guidance. Reported Net Income or "GAAP" means nothing when we are in a period of significant commodity price swings because of non-cash impairment charges and mark-to-market adjustments on hedges.
Hedges are extremely important this year and I break them out in each profile and each forecast model.
As a group, the Sweet 16 is trading at a 70% discount to my fair value estimates. CPE, CRK and TALO are trading at the largest discounts. They are much smaller than the "Elite Eight". Smaller companies always have more risk, primarily because they have less access to capital. They do have more upside potential if they can survive the bottom of a commodity price cycle.
Callon Petroleum (CPE) is trading at less than 1X operating cash flow and it is generating a lot of free cash flow from operations; $50 million free cash flow in the 2nd quarter s/b locked in by their hedges. On May 7, the Company’s bankers completed the spring borrowing base redetermination for Callon's senior secured credit facility resulting in a facility commitment and elected borrowing base of $1.7 billion along with a new secured leverage ratio covenant to temporarily replace the previous total leverage ratio covenant until March 31, 2022. With free cash flow the Company won't need to borrow more money this year.
Last week, Matador Resources (MTDR) announced that they expect to report a realized net gain on derivatives of approximately $44.1 million for the second quarter of 2020. I'm expecting their 2nd cash flow from operations to exceed $86 million. Matador has outspent their cash flow in the first half of 2020, but they keep reporting outstanding well results.
Talos Energy (TALO) does have hurricane risk, but it also has a lot of upside. Last week they got instructions from Mexico on how to unitize their world class oil discover known as the Zama Field. That project could double their production. The government of Mexico knows the importance of getting Zama online, so I don't expect them to block the project.
First Call's price targets are drifting higher and a few (EOG, OVV, PXD) now exceed my valuation. Note that these 3 companies have the most production. Size matters in this business.
My valuations and First Call's price targets can be found on Tab 2 of the Sweet 16 spreadsheet, which is updated each weekend.
WTI averaged $27.95/bbl during the 2nd quarter, slightly higher than what I expected. However, Q2 results will be the bottom for this cycle, so get ready for some bad results. When they start reporting quarterly financial results focus on operating cash flow and their guidance. Reported Net Income or "GAAP" means nothing when we are in a period of significant commodity price swings because of non-cash impairment charges and mark-to-market adjustments on hedges.
Hedges are extremely important this year and I break them out in each profile and each forecast model.
As a group, the Sweet 16 is trading at a 70% discount to my fair value estimates. CPE, CRK and TALO are trading at the largest discounts. They are much smaller than the "Elite Eight". Smaller companies always have more risk, primarily because they have less access to capital. They do have more upside potential if they can survive the bottom of a commodity price cycle.
Callon Petroleum (CPE) is trading at less than 1X operating cash flow and it is generating a lot of free cash flow from operations; $50 million free cash flow in the 2nd quarter s/b locked in by their hedges. On May 7, the Company’s bankers completed the spring borrowing base redetermination for Callon's senior secured credit facility resulting in a facility commitment and elected borrowing base of $1.7 billion along with a new secured leverage ratio covenant to temporarily replace the previous total leverage ratio covenant until March 31, 2022. With free cash flow the Company won't need to borrow more money this year.
Last week, Matador Resources (MTDR) announced that they expect to report a realized net gain on derivatives of approximately $44.1 million for the second quarter of 2020. I'm expecting their 2nd cash flow from operations to exceed $86 million. Matador has outspent their cash flow in the first half of 2020, but they keep reporting outstanding well results.
Talos Energy (TALO) does have hurricane risk, but it also has a lot of upside. Last week they got instructions from Mexico on how to unitize their world class oil discover known as the Zama Field. That project could double their production. The government of Mexico knows the importance of getting Zama online, so I don't expect them to block the project.
First Call's price targets are drifting higher and a few (EOG, OVV, PXD) now exceed my valuation. Note that these 3 companies have the most production. Size matters in this business.
My valuations and First Call's price targets can be found on Tab 2 of the Sweet 16 spreadsheet, which is updated each weekend.