Energy Prospectus

The Sweet 16 is now up 101.2% since April 10 (the date I picked as the bottom for the Covid-19 oil price cycle).

As I point out in my Dec 5 podcast we've moved through three oil price cycles since late 2014.
> The one caused by Saudi Arabia's failed attempt to gain market share, which bottomed in early 2016 and ended with WTI in the $65-$75 range in 2018.
> The U.S. vs China Trade War cycle in 2019 that ended with the signing of the Phase One trade agreement, which pushed WTI to $65/bbl in early January, 2020.
> The Covid-19 pandemic cycle that began mid-January and should end within six months. < This one has caused the most damage to the oilfield services sector, which is why it is likely to overshoot and push oil prices a lot higher.
In the podcast, I show the October 5th oil price forecast from the Raymond James energy sector team based in Houston. That forecast was based on a viable vaccine for Covid-19 not being available until late Q2 2021. If the new vaccines are made available for widespread use and they work, that should push RJ's oil price forecast forward for at least a quarter. That means we have a shot at seeing WTI oil price over $60/bbl within six months.

As you can see at this website https://longforecast.com/ the Economy Forecast Agency surveys and models for the oil price have moved significantly higher over the last 30 days. They are now showing a survey average forecast of $53.30/bbl for WTI by the end of December and $60.11/bbl by the end of February. If that comes to pass, the Sweet 16 should move a lot higher because my valuations are based on WTI averaging $50/bbl for the year 2021.

Comstock Resources (CRK) is the only Sweet 16 down since April 10, but it is up slightly since I added it to the portfolio on May 16th. For a company of this size it is "off the radar screen" despite the fact that Jerry Jones owns the controlling interest. ~98% of Comstock's production is dry gas from the Haynesville Shale. They should report positive net income in Q4 on a small increase in production and a realized gas price of $2.50/mcf including settlements on their hedges. Based on guidance provided by the company, 2021 production should be up 9% to 10% and generate ~$1.00 earnings per share and over $3.00 operating cash flow per share. IMO the stock deserves a price of at least 4X operating cash flow per share.

The other gassers (AR, EQT and RRC) pulled back on last week's bearish ngas storage report, but winter is just getting started.
This website https://www.celsiusenergy.net/p/intraday-weather.html provides an estimate of how each day's weather impacts natural gas demand. Just keep in mind that much higher LNG exports should offset a warmer winter heating season.

Callon Petroleum (CPE) is up 161.6% since April 10, but still 35% below my valuation of $18.00. The big move last week up was a big short covering rally. This stock was extremely oversold. The same thing happened to Laredo Petroleum (LPI), which is a leading candidate to replace Parsley Energy (PE) in the Sweet 16.

As Wall Street gains more confidence in the oil price rebound money managers will rotate more money into these oversold companies. The "Elite Eight" because of their size and high trading volume will get a lot of that repositioning money.

Under Tab 1 of the updated Sweet 16 spreadsheet (now on the website home page) under column S on the Excel spreadsheet you can see that the Sweet 16 is trading at a forward looking PE ratio of 8.73. That compares to the S&P 500 forward PE ratio of 26.22. As an example, based on Friday's closing price CPE is trading at a PE ratio of 4 based on my 2021 forecast EPS.

We will be sending out an updated profile on InPlay Oil (IPOOF) Monday morning. Read it and then watch the replay of the webinar that they hosted for us on November 19. InPlay will be reporting a nice increase in production from Q3 to Q4 and some very nice new well results.

Note received on December 7th from Stephens, Inc., an equity research team. Posted here because they cover several of our Sweet 16, which they recommend near the bottom.

INVESTMENT CONCLUSION:
The roller coaster we experienced last week was a friendly reminder
of the system’s fragility. The OPEC+ decision was not what the market
expected, though it was considerably better than the worst case
scenario. We dodged a bullet and the market responded positively. On
our numbers, ’21 supply increased and while we still believe in a $50
world (modeling ’21 is 2+ MMbopd undersupplied), with the looming
threat of Iran (’22 concern in our opinion), the small probability of a $60
world in ’22 we saw early last week evaporated. The monthly OPEC
+ meetings, combined with positive Asian demand and vaccine data
points help underpin positive near-term sentiment. By our calculations,
stocks reflect ~$46 oil, which is not an insignificant level, though barring
major negative headlines we would not be surprised to see continued
relative strength in the sector (sector rotation, healthier oil environment,
reinflation trade, etc).

KEY POINTS:
Vaccine delays + budget announcements could throw a proverbial
wrench into performance in 1Q21, though based on our current outlook
($45 oil in ‘21/$50 in ’22) we continue to advocate a net long position (a
’22 group EV/EBITDA multiple of 4x-5x plus a 10%-15% FCF yield is an
attractive combination). We recognize incremental equity appreciation
hinges on oil and while headwinds are present we do believe if actors
continue to make prudent and rational choices, oil has a path to $50.
Based on our analysis, $45 oil is a clear cut point for the U.S. operator
(we believe U.S. remains the marginal oil producer in the world and U.S.
volumes are needed though growth is not), and as you move beyond
$45 the health of industry improves considerably as operators should
be able to repay upcoming maturities (see page 6 for incremental details
on FCF vs. debt maturities). The world is different, access to capital
remains constrained (we believe this combined with debt maturities and
eventual inventory scarcity governs U.S. spending decisions), investor
focus has shifted to FCF/shareholder returns and ESG is here to stay.

Based on our current outlook and a myriad of scenarios + variable
weightings we recommend investors look at the following E&P names:
PXD, DVN, PDCE, FANG, MTDR, SM, and APA. We also note that the
mineral/royalty group offers attractive yields (see page 7 for FCF yields
at strip and our deck) and are reiterating our OW ratings on FLMN,
KRP, and VNOM.