As of the January 15th closing prices, the Sweet 16 is up 24.62%. The S&P 500 Index is up 0.32%.
The three "gassers" are leading the pack: RRC up 52.24%, EQT up 45.55% and AR up 33.21%. These stocks had pulled back in December because of the mild weather in November, so a strong rebound is justified. Just normal winter weather in Q1 will tighten up the U.S. natural gas and NGL markets thanks to much higher exports than anyone anticipated.
I have updated all of the individual company forecast/valuation models for my new oil and gas price assumptions and I have added a full year forecast for 2022.
WTI $52.50/bbl in 2021 and $60.00 in 2022
Ngas $2.75/mcf in 2021 and $3.00 in 2022
All of the new stock valuations are a multiple of annualized cash flow from operations for the three years 2020 to 2022. The multiple that I use is based on the strength of their balance sheet, quality and amount of their undeveloped acreage ("running room"), and their commitment to generating free cash flow and production growth. I also take a look at several of the most recent energy sector analysts' reports and I show their price targets on the lower right corner of each Excel forecast model.
As a group, the Sweet 16 is trading at a 33.5% discount to my valuations, but the gap is wide.
> XEC and MTDR are now within 10% of my valuations.
> CRK, ESTE and TALO have the most upside in my opinion, but that doesn't mean that the Wall Street Gang will agree. These smaller companies are not covered by many analysts, so they are off the "radar screen". They also have less trading volume, which is a negative for a lot of fund managers.
> CRK and TALO are both going to report significant increases in production from Q3 to Q4.
> Earthstone (ESTE) is the smallest company in the portfolio with a market-cap under $500 million. Their acquisition of IRM that closed on January 7th adds a lot of low-risk high-return development drilling locations.
Only a few of the companies have provided 2021 guidance. If their guidance confirms my 2021 forecast assumptions, I will use a higher multiple to value them. My 2022 forecast has equal weight in the valuation, but I do "risk adjust" the operating cash flow for that year.
The DVN + WPX and the PXD + PE mergers have closed. Their detailed 2021 guidance should draw a lot of attention. These are rock solid companies.
The Sweet 16 summary spreadsheet will be updated on the EPG website this afternoon.
Sweet 16 Update - Jan 16
Sweet 16 Update - Jan 16
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - Jan 16
The Sweet 16's recent run-up is primarily due to less FEAR of oil prices staying below $50/bbl forever. It is also because the Wall Street Herd is now looking for "value stocks". With the Sweet 16 still trading at ~4X 2020 operating cash flow per share, with operating cash flow and free cash flow now expected to go much higher in 2021, there is a lot of value here.
Historically, upstream companies of this quality trade for 6X to 10X operating cash flow per share. NONE of the Sweet -16 should be trading below book value, but 7 of them are (AR, CPE, ESTE, EQT, FANG, PDCE, TALO).
Good Advice from Mitch Zacks' newsletter:
"The stock market is fully valued, trading near 23x forward earnings. The peak in 2000 saw a P/E of 26x. Many investors may wonder how much more upside is possible, just one year into the bull market. But there is a significant difference between today and the late 1990’s: interest rates. I have written before that as long as investors expect interest rates to remain low, they will likely be more willing to pay higher premiums to own equities. In 2021, I think investors will favor equities with more attractive valuations, and will look for companies with the ability to accelerate earnings (i.e., companies with low 2020 comparisons). Finally, to the extent that inflation later in the year could push longer-term interest rates higher, I think we could see some selling pressure in high valuation categories, like Tech. More on that in a future column. Instead of trying to guess how much upside is possible and try to time the market, I recommend staying focused on what matters - key data points and economic indicators that could impact your investments."
The economic indicators for oil, gas and NGLs are much better than they were just a few months ago.
Historically, upstream companies of this quality trade for 6X to 10X operating cash flow per share. NONE of the Sweet -16 should be trading below book value, but 7 of them are (AR, CPE, ESTE, EQT, FANG, PDCE, TALO).
Good Advice from Mitch Zacks' newsletter:
"The stock market is fully valued, trading near 23x forward earnings. The peak in 2000 saw a P/E of 26x. Many investors may wonder how much more upside is possible, just one year into the bull market. But there is a significant difference between today and the late 1990’s: interest rates. I have written before that as long as investors expect interest rates to remain low, they will likely be more willing to pay higher premiums to own equities. In 2021, I think investors will favor equities with more attractive valuations, and will look for companies with the ability to accelerate earnings (i.e., companies with low 2020 comparisons). Finally, to the extent that inflation later in the year could push longer-term interest rates higher, I think we could see some selling pressure in high valuation categories, like Tech. More on that in a future column. Instead of trying to guess how much upside is possible and try to time the market, I recommend staying focused on what matters - key data points and economic indicators that could impact your investments."
The economic indicators for oil, gas and NGLs are much better than they were just a few months ago.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group