Energy Prospectus

We have now updated 8 of the 16 company profiles and I plan to finish the rest of them next week. Profiles for EOG, FANG and OVV are sitting here for my review.
All 16 of the forecast/valuation Excel spreadsheets have been updated and can be downloaded from the EPG website.

The 2nd quarter is the "Rock Bottom" for this oil price cycle (hopefully).
Oil, gas and NGL prices are all moving higher, so the big asset impairment expenses should be behind us. The non-cash mark-to-mark adjustments on hedges will be negative as commodity prices increase, but not as significant as the increased revenues coming from physical sales. So... balance sheets as of June 30, 2020 should be as bad as it gets. However, 11 of the 16 stocks are still trading below book value. On the main Sweet 16 spreadsheet (Tab 1) you can see how Market Cap for each company compares to their book value. "Going Concerns" with this much upside potential (in a normal world) should trade for at least book value considering how ultra-conservative GAAP accounting rules are for upstream oil & gas companies.

Permian Basin natural gas and NGL prices are still way below other areas because of limited pipeline takeaway capacity. Resolution of that problem will be great news for CPE, CXO, FANG, PE and XEC. Midland Basin gas is getting a better price than Delaware Basin gas.

Yesterday I posted Stifel's updated price targets for several Sweet 16 companies. The one that jumps out the most is Cimarex Energy (XEC). Stifel's price target of $70.00 compares to my valuation of $41.50. XEC closed at $26.68 on August 21. XEC produces a lot of natural gas and NGLs + it has a strong balance sheet.

Stifel also loves Diamondback Energy (FANG) giving it a price target of $106.00, compares to my valuation of $62.00. FANG closed at $39.21 on August 21. Diamondback controls Viper Energy Partners (VNOM), which is a solid choice for those of you that are investing for dividend yield.

Stifel's valuation of Callon Petroleum (CPE) is $18.50, which compares to First Call's price target of $12.55. Callon generated $7.40/share of operating cash flow per share in 1H2020 (after their 1 for 10 reverse split) and they should generate at least that much cash flow per share in 2H2020. 100% of Callon's forecast oil production for Q3 and Q4 2020 is hedged at ~$43/bbl. There is upside to my forecast if natural gas and NGL prices continue to move higher. Operating cash flow is more than covering their 2H 2020 capex program.

Earthstone Energy (ESTE), PDC Energy (PDCE) and Talos Energy (TALO) are all trading at less than half of my valuation. Talos does have some hurricane risk next week.

Each weekend I update the Sweet 16 spreadsheet, which shows my current valuation and First Call's price target for each stock.

Finishing up the FANG profile today.

In addition to Stifel's price target on 8/21/2020 of $106.00 there are five other analysts that have updated their price targets since the company announced Q2 results.
Their price targets range from $44.00 to $65.00. FANG closed at $39.21 on August 21. < A wide range of price targets is common this year because some firms are using very low commodity prices. My valuation of $64.00 is based on 2021 realized prices of $47.00/bbl of crude oil, $1.50/mcf of natural gas and $15.00/bbl of NGLs. Natural gas and NGL prices in the Delaware have been extremely low thanks to insufficient pipeline takeaway capacity. Netback prices for gas and NGLs should slowly increase since production has declined and midstream companies are catching up. Plus, HH gas prices are increasing.

Diamondback and Viper Remain Undervalued After Challenging Second Quarter
8/4/20 | Morningstar

Diamondback's second-quarter results were respectable, given the brutal energy environment, and slightly exceeded CapIQ consensus expectations. The firm reported EBITDA of $414 million and production of 294.1 thousand barrels of oil equivalent per day, or mboe/d, compared with CapIQ consensus estimate of $412 million and 292 mboe/d.

Similarly, we think Viper Energy Partners (VNOM) reported decent results given the strength of the Diamondback relationship. Only 14 wells completed during the quarter were linked to Diamondback out of the 134 wells completed on Viper acreage, but those wells had a on average 8.4% royalty interest net to Viper compared with 1.1% for the other 120 wells. We do not expect to change our fair value estimates or narrow moat ratings for Diamondback and Viper. Both firms remain very undervalued as investors continue to not appreciate quality U.S. E&Ps and related royalty firms, in our view.

We think Diamondback has been very responsive to the currently challenging environment, with only six rigs operating currently compared with 20 at the end of March. The firm also curtailed about 5% of its production during the quarter and did not complete any wells during June given unattractive oil prices. We see these moves as preserving value for both Diamondback and Viper shareholders by deferring production to a better pricing environment.

Looking forward, Diamondback and Viper are taking a similarly appropriate stance in this environment. Diamondback plans to operate between five and six rigs for the remainder of the year, consistent with our expectations. 95% of its second-half production is already hedged. Full-year guidance 297.5 mboe/d for Diamondback and 25.7 mboe/d for Viper are reasonable, and Diamondback should live within its cash flows for the year.