Sweet 16 Update - Feb 6

[dan_s]

The Sweet 16 gained 12.4% during the week ending February 5, 2021 and it is now up 25.31% YTD. The S&P 500 Index is up 3.48% YTD.

At $18.17 Matador Resources (MTDR) is now above my valuation. During 2020 the company outspend their cash flow from operations during the first three quarters. I can't justify raising my valuation until I'm convinced they can generate free cash flow from operations.

Talos Energy (TALO) is still trading at less than half of my valuation and it is expected to report big production growth in Q4 and Q1. Talos is an offshore company and most of its production comes from properties in the federal offshore areas. Biden's ban on new drilling permits on federal lands will not impact Talos' 2021 or 2022 plans. If Team Biden does make the ban permanent the increase in oil & gas prices will more than offset the impact on Talos. The increase in fuel prices will also piss off a lot of voters.

The outlook for the four "gassers" (AR, CRK, EQT, RRC) brightened up as the artic blast over the next two weeks is going to drain a lot of gas from storage. We have enough gas in storage to get through the remainder of this winter, but it is next winter where the gas market will be extremely tight. The NYMEX strip for Jul21 to Dec21 closed on Friday at $2.94 to $3.13. If Comstock Resources (CRK) gets an average realized price for their 2021 gas of $2.60/mcf (including cash settlements on their hedges) the company's 2021 adjusted net income should be $0.87/share with operating cash flow of $2.95/share. < This compares to First Call's 2021 forecast of $0.68 EPS and $2.69 operating CFPS. Nothing justifies CRK trading at less than 2X CFPS.
> ~98% of Comstock's production is natural gas and NGLs. Most of it is dry gas from the Haynesville.
> ~43% of their 2021 forecast gas production is hedged with Swaps at $2.53/MMBtu
> Their physical gas sales are close to Henry Hub prices.
> Stifel's price target on 1/26/2021 was $8.20

AR, EQT and RRC are all Marcellus/Utica shale companies. Appalachia did have some midstream problems in the 4th quarter that reduced gas prices in the region, but they have been resolved.

Continental Resources (CLR) and Devon Energy (DVN) will be the first two companies to release Q4 results on February 16.

None of CLR's oil is hedged. When I updated my forecast model for CLR on January 6th First Call's Q1 2021 EPS forecast was $0.03. Today the First Call EPS forecast for Q1 is $0.12 with a range of $-0.06 to $0.45. If CLR's average realized oil price is $52/bbl in Q1 their EPS will be at the high end of that range. Based on my forecast model, CLR will generate close to $3Billion of operating cash flow in 2021, which compares to their 2021 capital expenditure budget of $1.3 Billion. On 1/26/2021 Stifel's price target was $26.00.

First Call's price target for DVN of $23.01. Included in the FC average is Stifel's 1/26/2021 updated price target of $34.00. My valuation of $22.00 will be going up after they provide detailed guidance for 2021. Devon's merger with WPX closed on January 7. Mergers of this size need some time to clear up, but there is no doubt that Devon deserves to be in the "Elite Eight" and trade for a much higher multiple of operating cash flow.

If you decide to take your profits on MTDR, moving the proceeds to CLR and DVN would be wise.

If commodity prices hold up, all of my valuations will be going up for the Sweet 16 at the end of this month because I will be dropping 2020 results from my valuation equations.