Sweet 16 Update - March 7

[dan_s]

The Sweet 16 is up 77.06% YTD. The S&P 500 Index is up 2.29% YTD. Lots of Wall Street Money Managers are rotating money into the high quality upstream oil and gas companies.

I have updated valuations for 11 of the 16 companies in the portfolio for increased oil and NGL prices. I also adjusted the multiple of operating cash flow per share used to value the common stock for several of them. All 16 are going to generate a lot of free cash flow from operations this year and none of them have unmanageable debt. With higher commodity prices, the risk of problems with debt holders is gone. All 16 companies have publicly said they will fund all 2021 capex with cash flow from operations; no more debt this year unless they make a big acquisition. Strong balance sheets, ample liquidity and lots of low-risk high-return drilling locations ("running room") deserve even higher multiples, but I would rather value a stock too low than too high.

I did not update Earthstone Energy (ESTE) and Talos Energy (TALO) because they are going to announce Q4 2020 results and 2021 guidance on March 10 & 11. Since they are both heavily weighted to oil, my valuations will be going up.

I did update Antero Resources (AR) because it produces a lot of NGLs. I did not change the other three gassers (CRK, EQT and RRC). We will be publishing an updated profile on Comstock Resources (CRK) tomorrow (March 8). CRK is up 36% YTD and it does have a lot of upside for us. EQT and RRC both produce a lot of unhedged NGLs, so there is upside to my valuations of $26 and $12.50.

Here are the updated valuations:
AR + $2.40 to $14.40
CPE + $14 to $57 < very low number of shares outstanding, so small changes make a BIG difference in the valuation. If oil goes to $80, CPE could go to $100.
XEC + $3 to $76
CLR + $9.50 to 42.00 < NONE of their oil is hedged after Jan 2021. If oil price hits Goldman Sachs' price target of $80, CLR could go to $100.
DVN + $3 to $36
EOG + $9 to $93 < Largest company in the Sweet 16. Huge upside if oil goes to $80.
FANG + $8 to $108
MTDR + $3 to $27 < It closed at $26.69 on March 5 and I cannot justify a higher valuation unless they increase production guidance. Think about harvesting.
OVV + $8 to $35 < This large-cap does not get the Wall Street attention that it deserves. Lots more upside for us.
PDCE + $9 to $53 < Colorado's perceived "political risk" is the only reason this stock isn't a lot higher. If it starts paying dividends, more funds will buy it.
PXD + $4 to $172 < Already trades at the highest multiple, but deserves more because it has incredibly valuable leasehold and generates $Billions of Free Cash Flow From Operations. Several Wall Street firms have even higher price targets. The high end of Stifel's range was $203 on 1/26/2021.

You can find the updated forecast/valuation models for each company on the EPG website on Monday. It takes a special skill, which I don't have, to put the profiles and models under the company logos on the EPG website, so Sabrina has to do it. I give her Sunday's off.

[dan_s]

I just got an email from Sabrina and she has posted all of the updated forecast/valuation models to the EPG website. You can find them on the home page or under the Sweet 16 tab.

[dan_s]

Note from one of our members / energy sector analysts based in New York:

Prices are running ahead of our projections and price deck now, with WTI at $66.28, but
we assume there will be some slowdown or correction in the climb as OPEC+ brings back
supplies, their next meeting being early April. But further gains lie ahead, with IEA predicting a
rapid inventory drawdown in 2H’21—on top of that already occurring in 1Q’21;

Callon Petroleum (CPE) is one of his Top Picks
-There appears to be plenty of room left in the stocks. CPE just reported a big investor,​
Kimmeridge, which specializes in low cost oil and gas assets, has bought 5.6mm new shares. We
adjust our ‘21E cash flow from $18.47 to $15.00 to allow for the increased shares. This might
boost our 3x multiple to perhaps 3.5x and a ’21 target of $52.50, for 37% upsides. And bulls give
4x with the strong oil price, which would give $60 and 57%.