Energy Prospectus

The Sweet 16 had another strong week and is now up 117.03% YTD, which compares to the S&P 500 Index gain of 13.08% YTD. Wall Street continues to rotate money into this oversold sector and now very profitable sector.

I will be taking a hard look at the forecast/valuation models for CRK, EQT and RRC today in light of the significant spike in natural gas prices.

If you have not yet listened to our June 7 webinar hosted by Talos Energy (TALO), I highly recommend that you do so.

I will have more comments later today.

Nice job, Dan! I see you are a guest this week on another blog $ 100 oil. I will be there!

I have updated my forecast/valuation model for EQT Corp (EQT) and I am increasing my valuation by $7 to $32.

EQT closed at $23.02 on June 11. At that price it is still trading at less than 70% of book value and there is no justification for this large-cap to be trading at any discount to book value since more than $2 Billion in impairment charges taken in 2019 and 2020 have pushed the book value of their oil & gas producing properties way below fair value.

EQT announce the acquisition of Alta Resources on May 6th. From May 7 to May 24 six well known energy sector analysts have rated it a BUY with price targets of $24 to $28 per share. Since May 24 the outlook for natural gas and NGL prices has improved quite a bit.

I have updated my forecast/valuation model for Comstock Resource (CRK) and I am increasing my valuation by $4.65 to $16.00 per share.

CRK closed at $6.60 on June 11. All of the 12 analysts' reports included in the Reuters' database are dated before April 21 and their price targets are clearly based on much lower natural gas prices than we have today. First Call's price target of $7.47 is just the average of the 12 price targets included in the Reuters's database.

This is how "The Rich Get Richer": Jerry Jones, owner of the Dallas Cowboys holds controlling interest in Comstock (~75% of the common stock). If natural gas prices stay over $3.00, his stake in Comstock should be worth over $3 Billion in less than a year.

CRK has a strong balance sheet and lots of running room.

June 10, 2021 9:18 AM EDT

RBC Capital analyst Brad Heffern upgraded Range Resources (NYSE: RRC) from Sector Perform to Outperform with a price target of $20.00 (from $15.00).

The analyst comments "We are upgrading RRC to Outperform from Sector Perform based on our updated commodity price forecast and in particular for RRC, its exposure to a more bullish NGL macro. We also see RRC shares trading at an attractive valuation with a marked discount to its peers. The NGL price tailwind could accelerate RRC's debt reduction quicker than investor expectations and allow the company to reach its leverage target by mid-2022, a catalyst for shareholder returns."

I have updated my forecast/valuation model for Range Resources (RRC). My valuation increases by $5 to $22 per share.

I have been following and modeling RRC for over a decade. I have an extremely high level of confidence in my forecast model for this one. Their production and line-by-line income statement guidance is accurate and tends to be conservative. They have an outstanding marketing group that gets them the best prices for their natural gas and NGLs.

Range is in MUCH BETTER shape today than it was a year ago. Their debt issues have been resolved. They are on track to generate $430 to $450 million of free cash flow from operations this year and much more in 2022 if natural gas prices average $3.00.

Regarding Comstock's recent increased valuation to $16.00 per share.

Would you know what the non-core acreage Comstock has on the books that they can potentially sell (i.e. Eagle Ford) and estimated value? I thought it might be close of 9,000 acers, but I am not sure and could not validate. It would help accelerate the deleveraging process if they can sell.

Mike;
Comstock's South Texas leasehold is not in the Tier One area of the Eagle Ford. I'm sure it has some value, but they have not mentioned anything about trying to sell it. Try sending the question to Ron Mills, their IR guy.
Based on my forecast, Comstock should generate close to $900 million of operating cash flow this year, which compares to the high end of their D&C capex budget of $560 million. Free cash flow of $340 million will be used to pay down debt this year. If ngas prices remain high, they may bring on another operated drilling rig in Q4.
CRK should be a double for us if natural gas prices stay over $3.00, which is a safe bet today.

Thanks Dan

Dan, CRK does not produce much LNG, For my own education, why and/or should they? Would it help them from a strategic standpoint?

CRK is a Haynesville Shale company. The Haynesville is "Dry Gas" with very little NGLs. The good news is that Haynesville wells come online at extremely high rates, over 20,000 mcf per day and payout quickly with gas at $3.00.

It is not up to Comstock. They can't control the mix that comes out of ground.

AR, EQT and RRC have a lot of leasehold in the "Wet Gas" area of the Marcellus Shale. Natural gas that is produced by oil wells in the Permian Basin, DJ Basin and Williston Basin also is wet gas with lots of liquids.

They don't produce LNG as their gas is dry. They wouldifthey could.
The advantage that CRK has is their proximity to Henry Hub and the distance from their well's to markets.
Someone in North Dakota or Canada has a longer distance to ship the product.

They have some debt and higher prices helps the tremendously

CRK's debt is not a problem because (a) the Company is generating over $300 million of free cash flow from operations this year and (b) the owner of the Dallas Cowboys has a lot banker friends.

Hello Dan...

For my own knowledge, in your pricing models to arrive at your "Target Price" how come you add the current year forecast Cashflow per share (before CapEx) "twice" + 2022, then divide by 3 x multiple.

Regarding CRK: I contacted Ron Mills per above on the non-core assets:

In the Bakken, they don’t have any acreage, since their ownership there consists only of wellbore interests, all of which are non-operated and in run off mode.
In the Eagle Ford, they have interests in ~7,950 net acres, which are not currently in development.

In terms of monetizing non-core assets, that is definitely something they do look at to further accelerate deleveraging. Given the higher cost structure of those properties, their potential market value is sensitive to commodity prices. Through much of 2020 when oil prices were much lower, the amount a third party might have been willing to pay probably wouldn’t have been very attractive. Now that oil prices have moved up to current levels, there is a greater possibility that buyers could be willing to pay a higher, more attractive price.

Bottom-line: they would consider non-core asset sales outside of the Haynesville.

I double value the 2021 operating cash flow in all of my valuations. Just because there is more risk to the 2022 forecast and a dollar today is worth more than a dollar a year from now.