Sweet 16 Update - Jan 30

[dan_s]

The last week of January was a wild week of trading. The Sweet 16 lost 4.96% during the week with more than the entire decline happening on Friday. There was heavy selling into the close across all sectors. The S&P 500 Index finished the month down 1.11% after being up the entire month before Friday afternoon.

Commodity prices were fairly stable all week. Very little news for any of the companies. The first batch of Q4 results will be coming out February 16 & 17.

From Trading Economics: "WTI crude oil prices lost 0.3% on Friday to $52.20 a barrel amid demand concerns and slow vaccine rollouts, which outweighed a cut in Saudi Arabian oil supply and falling US oil inventories. A Reuters survey found that OPEC oil output rose in January after OPEC+ agreed to an easing of supply curbs, but the amount was less than agreed. On the policy side, Joe Biden urged Congress members to pass a new stimulus package, while the GameStop trading frenzy triggered alarms. During the week, both Brent and WTI crude oil prices fell less than 1%."

All of my forecast/valuation models are based on Q1 2021 assumptions of $45/bbl for WTI oil and $2.75/mcf for HH gas. The oil price has moved up a lot faster than I expected thanks to Covid Vaccine Optimism, Saudi Arabia's surprise oil production cut at the last OPEC+ meeting and falling above ground U.S. and OECD inventories. Natural gas is lower than I expected because of mild weather, but it now looks like February will be colder than average and LNG exports continue to be very high. By the end of February the natural gas storage level should be much closer to the 5-year average. All of our "gassers" (AR, CRK, EQT, RRC, GDP and SBOW) have a lot of upside if natural gas and NGL prices hold up this year anywhere close to where they are now.

AR, CPE, CLR, MTDR and RRC were up slightly for the week. Earthstone Energy (ESTE) went slightly negative for the YTD, so it looks like a great buying opportunity to me. My valuation is $10.00 and First Call's price target of $7.81 has been drifting higher. As I have posted here many times, First Call price targets are at best a lagging indicator, but in the last few weeks leading up to quarterly earnings releases the direction that they are moving is a sign of what is to come. Since last Saturday 13 of the Sweet 16 saw their First Call price targets raised. First Call's price targets for XEC, DVN and PXD have moved over my valuations.

Monday's Webinar: After my opening presentation I will take questions on the individual companies.

After the webinar on Monday, I plan to spend the rest of the week updating all of my forecast/valuation models for the companies in our High Yield Income Portfolio. That portfolio is focused on sustainable high dividend payouts (average of 8.5% annual yield as of the date of my newsletter) whereas the Sweet 16 and Small-Cap growth portfolios are focused on companies that should generate increasing share prices. The Sweet 16 have all survived "Pandemic World" and are in very good shape heading into a period of rising oil prices.

Production mix and hedging strategies are extremely important these days. Higher gas and NGL prices in Q4 should more than offset slightly lower oil prices from Q3 to Q4 for most of the companies. Antero Resources (AR) is the largest producer of NGLs.

Talos Energy (TALO) is trading at less than half of my valuation and they are going to report a large increase in production from Q3 to Q4. The Feds short-term ban on drilling permits won't impact Talos' operations. On 1/26/2021 Stifel rated TALO a BUY with a price target of $16.00 and an estimated Net Asset Value of $20.82/share. At today's share price you are getting the HUGE upside of the Zama Project for free. The Zama Project is not in my valuation of $19.00.

Earthstone Energy (ESTE) and Goodrich Petroleum (GDP) will be hosting webinars for us.

This morning we sent out a link to the Aegis Hedging Solutions webinar replay that is focused on the U.S. natural gas market. I urge all of you to watch it carefully. EVERYTHING now points to an under-supplied U.S. natural gas market in 2H 2021. The gas market is MUCH DIFFERENT than the oil market, so it is important for you to understand what's just a few months away.