Sweet 16 Update - March 6

[dan_s]

Thanks to the surge in oil prices on Friday, CPE, MTDR and OVV all moved over my valuation in the March 4 newsletter. The Wall Street Gang has finally decided to move a massive amount of money into high quality upstream oil & gas companies. There are not as many good companies as there used to be and the Sweet 16 are high quality companies that are going to generate a lot of free cash flow if oil stays over $65/bbl.

Yesterday we sent out an updated profile on Continental Resources (CLR). I increased my valuation by $9.50 to $42.00. There is more upside for CLR because none of its liquids are hedged and it produces a lot of oil.

Today I will be taking a hard look at the 12 companies that get most of their revenues from oil and NGL sales. NGL prices are actually going up faster than oil prices. Antero Resources (AR) is the largest producer of NGLs in North America. Ovintiv (OVV), EOG and XEC sell a lot of NGLs.

I have increased the oil price deck that I am using in my forecast/valuation models to the following.
Keep in mind that WTI averaged less than $39/bbl in Q4.
2021
Q1 = $55
Q2 = $60
Q3 = $65
Q4 = $65
2022 = $65

I actually think that in "Post-Pandemic World" we will see much higher oil prices this summer. Morgan Stanley's top energy sector analyst now thinks that $80/bbl is possible in Q3.

I am increasing my valuation of Callon Petroleum (CPE) by $24 to $57.
Why?
> My previous valuation was based on an operating CFPS multiple of only 2X. I have increased it to 3X and there is clearly upside to that if their Q1 results confirm my forecast assumptions.
> Callon only has 40 million shares outstanding, which is very small for a company of this size. Raising my oil and NGL price assumptions has a big impact on the per share numbers.
> My updated forecast for 2021: revenues of $1,293 million, net income of $316 million ($7.89/share) and operating cash flow of $769 million ($19.24/share). Free cash flow should be over $330 million this year.
> First Call's price target of $18.47 is based on old forecasts that are based on much lower commodity price assumptions.
> Callon's trading volume has been very high, drawing lots of attention to it. Any decent analyst will see outstanding numbers for this one.
> Risk: Callon's Q1 production will be down from Q4 2020, but EPS should easily top the First Call estimate of $1.03 per share.

Updated forecast valuation models for Antero Resources (AR), Callon Petroleum (CPE) and Cimarex Energy (XEC) have been posted to the EPG website. After you logon you can download them directly from the EPG Home Page.

Late on Sunday I will post an updated Sweet 16 spreadsheet with all of the updated valuations.

[dan_s]

I took a hard look at Matador Resources (MTDR) on Sunday morning.

MTDR closed at $26.69 on March 5, up 121.3% YTD.
In the last 3 weeks four respected energy sector analysts have adjusted their price targets to $16 to $28 with the last two on March 3 at $28.
I have updated my valuation to $27, but I can't justify any higher until the company raises their production guidance.
It is always up to you, but now may be a good time to harvest this profit and move to another company with more upside.

MTDR will stay in the Sweet 16 until I can find a replacement.