Sweet 16 Update - June 19
Posted: Sat Jun 19, 2021 10:36 am
This is what they call "Market Risk" as investors took some risk off in response to the Fed's announcement that it will be raising interest rates soon to head off inflation. The fundamentals for this group are still VERY STRONG and they are all trading below my valuations that are based on oil & gas prices below the current strip prices. The Feds announcement raised the U.S. Dollar index. See: https://www.marketwatch.com/investing/index/dxy
The Sweet 16 lost 10.75% during the week ending June 18, but it is still up 106.28% YTD. We were due for a pullback. The S&P 500 Index lost 2.15% during the week, but is still up 10.93%. Pullbacks to support levels are OK during a bull market. Buy the dips.
West Texas Intermediate (WTI) closed at $71.64/bbl and Henry Hub natural gas closed at $3.22/MMBtu on June 18. These commodity prices compare to $65.00/bbl and $3.05/MMBtu that I am using for 2H 2021 in all of my forecast models.
The fact that oil prices rebounded off the $70/bbl support level is bullish, especially considering the almost 3% rise in the U.S. Dollar. CME Group comments after the market closed on Friday were bullish as traders are coming around to the belief that oil demand is rising fast and supply will not be able to keep up with demand at least through the end of 2021. We are still not completing enough new wells to offset the decline of existing wells. Looks like the EIA 941 report (our first look at actual production) will show a decline in U.S. oil production from March to April and flat in May, based on EIA's weekly estimates.
The "Big Kahuna" for oil prices should happen over the next three months as OPEC is now estimating that oil demand will absorb more than half of their excess production capacity by the end of Q3 2021.
Only three of the Sweet 16 (ESTE, LPI and TALO) were up during the week. I did update my valuation of ESTE to $16.00 during the week. LPI is getting close to my valuation, but it is still a BUY because if their Q2 results and fresh guidance confirm my forecast assumptions (expected) then I will increase the multiple of operating cash flow used to value it. I updated my valuation of TALO to $25.00 after our June 7 webinar.
The outlook for natural gas and NGL prices is as good if not better than the outlook for oil prices. The NYMEX strip for natural gas is now way above what I am using in my forecast models and the West Texas differential to Henry Hub gas prices is all but gone. This is very bullish for all of our Permian Basin companies.
AR and EQT are still trading way below book value and there is nothing that I can see to justify where they are trading. CRK is trading above book value, but it is still 159.7% below my valuation of $16.00/share.
Ovintiv (OVV) is up 100% YTD, but still 56.7% below my valuation of $45.00. They recently announced that proceeds from recent asset sales will be used to pay off near-term debt. The redemption of their 2021 and 2022 notes represents approximately $1.1 billion of debt retirement for Ovintiv. Once redeemed, over $50 million of annualized interest expense will be removed from the Company's cost structure. The Company's next debt maturity is not until July of 2024.
As a group, the Sweet 16 is now trading at a 50.7% discount to my valuation. Q2 results are going to be good and the outlook for Q3 is VERY GOOD.
The Sweet 16 lost 10.75% during the week ending June 18, but it is still up 106.28% YTD. We were due for a pullback. The S&P 500 Index lost 2.15% during the week, but is still up 10.93%. Pullbacks to support levels are OK during a bull market. Buy the dips.
West Texas Intermediate (WTI) closed at $71.64/bbl and Henry Hub natural gas closed at $3.22/MMBtu on June 18. These commodity prices compare to $65.00/bbl and $3.05/MMBtu that I am using for 2H 2021 in all of my forecast models.
The fact that oil prices rebounded off the $70/bbl support level is bullish, especially considering the almost 3% rise in the U.S. Dollar. CME Group comments after the market closed on Friday were bullish as traders are coming around to the belief that oil demand is rising fast and supply will not be able to keep up with demand at least through the end of 2021. We are still not completing enough new wells to offset the decline of existing wells. Looks like the EIA 941 report (our first look at actual production) will show a decline in U.S. oil production from March to April and flat in May, based on EIA's weekly estimates.
The "Big Kahuna" for oil prices should happen over the next three months as OPEC is now estimating that oil demand will absorb more than half of their excess production capacity by the end of Q3 2021.
Only three of the Sweet 16 (ESTE, LPI and TALO) were up during the week. I did update my valuation of ESTE to $16.00 during the week. LPI is getting close to my valuation, but it is still a BUY because if their Q2 results and fresh guidance confirm my forecast assumptions (expected) then I will increase the multiple of operating cash flow used to value it. I updated my valuation of TALO to $25.00 after our June 7 webinar.
The outlook for natural gas and NGL prices is as good if not better than the outlook for oil prices. The NYMEX strip for natural gas is now way above what I am using in my forecast models and the West Texas differential to Henry Hub gas prices is all but gone. This is very bullish for all of our Permian Basin companies.
AR and EQT are still trading way below book value and there is nothing that I can see to justify where they are trading. CRK is trading above book value, but it is still 159.7% below my valuation of $16.00/share.
Ovintiv (OVV) is up 100% YTD, but still 56.7% below my valuation of $45.00. They recently announced that proceeds from recent asset sales will be used to pay off near-term debt. The redemption of their 2021 and 2022 notes represents approximately $1.1 billion of debt retirement for Ovintiv. Once redeemed, over $50 million of annualized interest expense will be removed from the Company's cost structure. The Company's next debt maturity is not until July of 2024.
As a group, the Sweet 16 is now trading at a 50.7% discount to my valuation. Q2 results are going to be good and the outlook for Q3 is VERY GOOD.