Energy Prospectus

Since Good Friday, April 10, 2020 the Sweet 16 is up 110.4%. During the same time the S&P 500 Index is up 31.3%.
More than 2/3rds of the S-16 gain has happened in the last four weeks because of "Vaccine Optimism". Several senior members of the Wall Street Gang have raised their oil price forecasts for 2021 and raised the Energy Sector to "Equal Weight". On December 8th Goldman Sachs' global head of commodities research, Jeffrey Currie forecast that Brent would rise to $65/bbl within 12 months. Goldman Sachs is one of the leaders of the herd, so when Jeffrey Currie says something they listen.

Matador Resources (MTDR) leads the pack, up 314.3% since April 10. At $13.30 it is approaching my valuation of $15.00.

Antero Resources (AR) is a close 2nd, up 308.7% since April 10. At $5.15 it still has lots of upside to my valuation of $9.00. AR is one of our "gassers". The recent pullback in natural gas prices has very little impact on the Company's revenues because ~93% of their Q4 ngas is hedged at $2.87/MMBtu and ~97% of their 2021 ngas is hedged at $2.80/MMBtu. Plus, AR gets a nice premium for their high btu gas. The reason I remain bullish on AR is because they are the #2 producer of NGLS in the U.S. (~205,000 bbls per day) and very little of it is hedged. NGL prices are rising and expected to go a lot higher in 2021. The speaker at our December 18th webinar will update us on the strong NGL market.

Comstock Resources (CRK) is the only Sweet 16 that is down since April 10. It is a "gasser" with 98% of their production being natural gas and NGLs from the Haynesville shale. Haynesville gas is "dry", meaning it has very little NGLs. That said, if Comstock's realized gas is $2.70/mcfe in 2021 the company should generate over a $1.00 earnings per share and over $3.40 of operating cash flow per share. Per TipRanks: "In the last 3 months, 3 ranked analysts set 12-month price targets for CRK. The average price target among the analysts is $8.05." My valuation is $11.00 because (a) I'm bullish on natural gas prices and (b) a company with this much running room in one of the nation's premier natural gas plays should trade for at least 4X operating cash flow.

As I posted earlier this week, Talos Energy (TALO) is a "Screaming Buy" up to $10.00. The stock offering they announced last week is not a reason to sell. A stronger balance sheet is a good thing and this company has lots of upside.

Unless you believe that oil, gas and NGL prices are going to pull back to where they were in the 2nd quarter, there is no reason that any of the Sweet 16 should be trading below book value per share. They've all been forced by SEC accounting rules to take big writedowns on their assets, but they still own those assets. Therefore, their book value is actually lower than their true value based on today's oil & gas prices.
Under Tab 1 of the Sweet 16 Summary Spreadsheet, which I update each weekend, you can see how each company's market-cap compares to their book value. Here are the ones trading for less than 50% of book value as of 12/11/2020 based on their September 30, 2020 audited balance sheets:

Company: Market-cap / Book Value in $millions
Antero Resources (AR): $1,384 / $6,971 < 500% upside just to get back to book value!
Callon Petroleum (CPE): $582 / $1,204
EQT Corp. (EQT): $3,845 / $8,729
Talos Energy (TALO): $673 / $1,282 < Book value will increase with the equity sold last week.

There is no reason for a "Going Concern" to trade below book value and all of these companies will be profitable in 2021 based on my forecast/valuation models.

Parsley Energy (PE) goes away when it merges with Pioneer Natural Resources (PXD) in a stock for stock deal that should close in January. I will announce the replacement for PE before Christmas. PXD is getting close to my valuation of $130/share, but the Wall Street Gang loves the company and hedge fund managers rotating money into the oversold sector will favor the larger companies.

Continental Resources (CLR) and EOG Resources (EOG) have the most exposure to rising crude oil prices.

AR, CRK, EQT and Range Resources (RRC) have the most exposure to rising natural gas and NGL prices.

The Sweet 16 Summary Spreadsheet will be updated on the EPG website this afternoon.

I highly recommend that all EPG members take the time to review the information on the spreadsheet. You can download it from the EPG website to Excel on your own computer.

You can also find updated profiles and forecast/valuation models for each company under the Sweet 16 tab. The models are "macro driven", so you can download them and change the production volumes and commodity price assumptions at the bottom of each spreadsheet to see how revenues, net income and operating cash flow are impacted. IMO these spreadsheets are the most valuable tool that we provide to EPG members. I spend a lot of time making them as accurate as I can.

The Sweet 16 is our "Flagship" and in my opinion they are the safest upstream bets.
Because of their size and lots of low-risk / high-value development drilling locations the "Elite Eight" (highlighted) under Tab 1, are the companies that will get the most love from money managers that will be rotating money from over-valued sectors into this grossly oversold sector. Goldman Sachs' forecast of $65 oil gives them the "cover" they need to put money into the sector.

Under Tab 2 you can see my current valuation for each stock compared to First Call's current target price. I check my valuations several times each month. My valuations are based on a "reasonable" multiple of operating cash flow per share. The companies with strong balance sheets, lots of low-risk drillable inventory and that are generating free cash flow should be trading for AT LEAST 6X operating cash flow. Based on my 2020 operating cash flow per share forecasts (now locked in) the Sweet 16 closed on December 11th at just 3.84 X operating cash flow per share. You can find each company's operating cash flow per share multiple under Tab 1 in column U on the spreadsheet. Keep in mind that my 2021 cash flow forecasts are much higher.

The Sweet 16 is up BIG in the last four weeks just because of less FEAR, thanks to the vaccine optimism. Solid Q4 results and 2021 guidance should take the portfolio to the next level.

This pandemic will end at some point, regardless of the success of vaccines. At some point civilized nations must move on and even California and New York must stop the shutdown nonsense. Asia has moved on and their demand for oil is now back to pre-pandemic levels. It looks like China wants to stockpile as much cheap oil as they can while it is still "on sale". As I pointed out on last Saturday's podcast, this "Pandemic driven oil price cycle" is likely to overshoot the mark and result in MUCH HIGHER oil prices next summer. It is definitely putting OPEC+ back in control of global oil supply and we know they want higher oil prices.

Thx. Really informative. It looks like you will have to raise values on some companies with all the $ rotating into the sector. Do you take the rotation into acct when you compare fair value to actual trading price?

Good question.
If you look at the multiples of operating cash flow that I use to value each company, you will see that they are much lower than what was "normal" a few years ago. I do take FEAR into consideration. Some might call it a Risk Adjustment. There has been a huge amount of FEAR in this sector since 2014.
> FEAR of OPEC's desire to gain market share,
> FEAR of the U.S. vs China Trade War,
> FEAR of the Green New Deal,
> FEAR of Covid-19 and
> The cumulative fear of "Peak Demand" for oil based products. < Most of us will be dead before this happens.

In my Saturday podcast, that will soon be up on the EPG website, I point out that the Sweet 16 is trading at a very low multiple of operating cash flow. To answer your question: Yes, I will be increasing the valuation multiples when I "feel" that the Wall Street Herd is comfortable recommending upstream oil & gas to their clients. It has already started. Goldman Sachs comments on December 8th opened the gates. Several Wall Street firms have already raised their oil price forecasts.

PS: I do see some "FEAR of President Biden", but like all FEARs it is probably way overblown. If he bans fracking on federal lands, it will raise oil prices. He might lift the sanctions on Iran, but I don't see that happening until after the next Iranian elections in the summer. Plus, it will upset the balance of power in the Middle East.