Sweet 16 Update - August 1
Posted: Sat Aug 01, 2020 1:13 pm
The Sweet 16 pulled back during the week ending July 31st. Only two stocks were up (CLR and EQT).
During my podcast, which will be on the website later this afternoon, I highlight the EIA's 941 report that shows a MUCH LARGER decline in U.S. oil production in May than what the EIA was telling the market in their weekly reports. After the report came out on Friday WTI did move higher by $0.70, but it might draw a lot more attention on Monday.
As I point out in the podcast, there is very little chance that U.S. oil production will stabilize anywhere close to the 11 million barrels per day as EIA has been telling us.
Four of the Sweet 16 (CXO, EQT, MTDR and OVV) did report Q2 results last week and they were UGLY as I expected. BIG impairment charges and mark-to-market writedowns on hedges will cause all of the upstream companies to report losses in Q2. All commodity prices (oil, gas and NGLs) bottomed in Q2.
The good news is that all of the Sweet 16 were able to generate positive cash flow from operations and most of them are generating free cash flow (FCF).
FCF = operating cash flow - CapEx.
"Adjusted Net Income" is what should be compared to my forecasts.
All of the companies should provide production and expense guidance for the rest of the year, which give me and all analysts more confidence in our forecast/valuation models.
Three companies are trading at less than half of my valuation.
> Callon Petroleum (CPE) because most analysts aren't comfortable with Callon's merger with Carrizo Oil & Gas. I liked the merger when it was announced (Carrizo is a company in our Sweet 16 that I've followed for many years). In addition to knowing both companies very well, Callon has ~95% of their Q2 to Q4 oil production hedged at $43/bbl. Callon should have over $50 million per quarter of FCF from operations locked in. First Call's operating cash flow per share forecast of $1.75 is actually above my forecast.
> Earthstone Energy (ESTE) trades at a deep discount to book value per share just because of its size.
> Talos Energy (ESTE) share price through the summer because it does have hurricane risk. They have a "world class" oil discovery in shallow waters offshore Mexico that will soon be developed.
Ovintiv (OVV) reported a net loss of $16.87/share for Q2 because of non-cash charges for impairment ($3.25 Billion) and mark-to-market writedown on their hedges ($679 million). They generated $304 million of cash flow from operations in Q2 and should continue to generate enough cash to cover their capex. Ovintiv's production mix (48.1% natural gas, 24.5% NGLs and 27.4% crude oil) is a positive because I think natural gas and NGL prices will be much higher heading into year-end. Ovintiv is a large company. In the last 3 months, 14 ranked analysts set 12-month price targets for OVV that range from $9.00 to $17.00. The average price target among the analysts is $11.46. My valuation increased $0.50 to $16.00 based on their guidance.
The Sweet 16 summary spreadsheet was updated this morning. It shows my stock valuation and First Call's price target for each company.
During my podcast, which will be on the website later this afternoon, I highlight the EIA's 941 report that shows a MUCH LARGER decline in U.S. oil production in May than what the EIA was telling the market in their weekly reports. After the report came out on Friday WTI did move higher by $0.70, but it might draw a lot more attention on Monday.
As I point out in the podcast, there is very little chance that U.S. oil production will stabilize anywhere close to the 11 million barrels per day as EIA has been telling us.
Four of the Sweet 16 (CXO, EQT, MTDR and OVV) did report Q2 results last week and they were UGLY as I expected. BIG impairment charges and mark-to-market writedowns on hedges will cause all of the upstream companies to report losses in Q2. All commodity prices (oil, gas and NGLs) bottomed in Q2.
The good news is that all of the Sweet 16 were able to generate positive cash flow from operations and most of them are generating free cash flow (FCF).
FCF = operating cash flow - CapEx.
"Adjusted Net Income" is what should be compared to my forecasts.
All of the companies should provide production and expense guidance for the rest of the year, which give me and all analysts more confidence in our forecast/valuation models.
Three companies are trading at less than half of my valuation.
> Callon Petroleum (CPE) because most analysts aren't comfortable with Callon's merger with Carrizo Oil & Gas. I liked the merger when it was announced (Carrizo is a company in our Sweet 16 that I've followed for many years). In addition to knowing both companies very well, Callon has ~95% of their Q2 to Q4 oil production hedged at $43/bbl. Callon should have over $50 million per quarter of FCF from operations locked in. First Call's operating cash flow per share forecast of $1.75 is actually above my forecast.
> Earthstone Energy (ESTE) trades at a deep discount to book value per share just because of its size.
> Talos Energy (ESTE) share price through the summer because it does have hurricane risk. They have a "world class" oil discovery in shallow waters offshore Mexico that will soon be developed.
Ovintiv (OVV) reported a net loss of $16.87/share for Q2 because of non-cash charges for impairment ($3.25 Billion) and mark-to-market writedown on their hedges ($679 million). They generated $304 million of cash flow from operations in Q2 and should continue to generate enough cash to cover their capex. Ovintiv's production mix (48.1% natural gas, 24.5% NGLs and 27.4% crude oil) is a positive because I think natural gas and NGL prices will be much higher heading into year-end. Ovintiv is a large company. In the last 3 months, 14 ranked analysts set 12-month price targets for OVV that range from $9.00 to $17.00. The average price target among the analysts is $11.46. My valuation increased $0.50 to $16.00 based on their guidance.
The Sweet 16 summary spreadsheet was updated this morning. It shows my stock valuation and First Call's price target for each company.