Sweet 16 Update - July 10
Posted: Sat Jul 10, 2021 9:34 am
During the week ending July 10 the Sweet 16 declined 9.43%, while it is up 124.86% YTD. The S&P 500 Index was up 0.46% and is now up 16.33% YTD.
Some of the gassers (AR, XEC, EQT, RRC) did move slightly higher, thanks to a very bullish natural gas storage report on Thursday.
Laredo Petroleum (LPI) and Talos Energy (TALO) pulled back the most. Laredo provided an operations update that was basically in line with my forecast for 2021 and they provided preliminary guidance for 2022 which increases the confidence level in my forecast. My current valuation for LPI adjusted to $85.00, but there is definitely more upside if WTI stays over $70/bbl. My forecast for 2022 shows earnings per share of $26.91, operating CFPS of $37.48 on revenues of $1,124 million. For a company of this size, LPI has a very low number of shares outstanding, just 16.1 million. If the Sabalo Energy acquisition plays out as expected, a valuation of 6X operating cash flow ($225 in 2022) is a reasonable 12-month target price.
Talos Energy took a hit when they announced that Pemex, the national oil company of Mexico, will take over operations of the Zama Oilfield. The change in operatorship will likely push back first oil production because Talos had a development plan ready to go. Zama is estimated to contain close to a billion barrels of recoverable oil. My valuation of $30 is based on 2021 and 2022 operating cash flow, so Zama had no impact on my current valuation. At current commodity prices, Talos is going to report strong 2H 2021 results. There is a lot more to Talos than Zama, including a big oil discovery at Puma West.
Comstock Resources (CRK) is up 46% YTD but it is far off the pace of the other gassers. AR is up 179% YTD, EQT is up 71% YTD and RRC is up 153% YTD.
Now might be a good time to add more CRK to your portfolio.
> Based on my forecast, CRK should report Q2 Adjusted Earnings Per Share of $0.25 to $0.30, which compares to First Call's estimate of $0.16 EPS.
> The Company reported operating CFPS of $0.87 in Q1 and I am forecasting an increase in Q2 to $0.93 with a full year 2021 forecast of $4.05 CFPS.
> Approximately 70% of their Q2 2021 natural gas was hedged at $2.51, but the volume of unhedged gas will increase in 2H 2021.
> Looking forward to 2022 with a realized gas price of $3.00/mcf: Revenues should increase to $1.7 Billion, EPS of $1.89 and operating CFPS of $4.64.
> CRK deserves a lot more attention as a valuation of at least 4X operating CFPS is justified.
Read our recent profile on CRK, which can be downloaded from the EPG website.
EQT Corp (EQT) trails AR and RRC because it is "in transition" of closing the acquisition of Alta Resources. In case you missed it here is the press release:
May 6, 2021 /PRNewswire/ -- EQT Corporation (NYSE: EQT) today announced that it has entered into a purchase agreement with Alta Resources Development, LLC (Alta), pursuant to which EQT will acquire all of the membership interests in Alta's upstream and midstream subsidiaries for approximately $2.925 billion, subject to customary closing adjustments. The transaction is expected to close in the third quarter of 2021, with an effective date of January 1, 2021. Note that with higher gas and NGL prices since the deal was announced, the impact should be better than highlights below.
Transaction Highlights:
> Attractive valuation with high-margin and robust free cash flow generation
> Projected annual free cash flow of $300-$400 million
> Projected annual adjusted EBITDA of $550-$600 million
Purchase price implies an ~18% unlevered free cash flow yield(1)
> Low leverage acquisition accelerates EQT's path back to investment grade metrics
> Immediately reduces leverage; improving 0.3x by year-end 2022
Establishes a leverage profile comfortably below 2.0x target
> Accretive to free cash flow per share
> Projected to increase free cash flow by 55%, or $2.0 billion, through 2026
Free cash flow per share improves by more than 15% through 2026
> Adds highly prolific inventory with superior well economics in the core of the Northeast Marcellus
> Integrated midstream assets and mineral ownership drive high margin operated development
Direct exposure to the geologic core through non-operated position
President and CEO Toby Rice stated, "Today marks another major milestone for EQT as we continue on our path to becoming the operator of choice for all of our stakeholders. The acquisition of Alta's assets represents an attractive entry into the Northeast Marcellus while accelerating our deleveraging path, providing attractive free cash flow per share accretion for our shareholders and adding highly economic inventory to EQT's already robust portfolio. In addition to increasing our long-term optionality, we believe this transaction accelerates both our path back to investment grade metrics and our shareholder return initiatives. We look forward to applying our differentiated modern operating model to maximize the prolific value embedded in these premier assets."
As I discussed in the webinar on Friday, the "Stars Are Aligned" for much higher natural gas and NGL price heading into the next winter. AR and EQT are still trading below book value, which makes no sense. AR is the largest producer of NGLs and EQT is the largest producer of dry gas. The Alta Resources Acquisition will put EQT on a path to a 2021 production exit rate of 5.7 Bcfe per day, up from 4.6 Bcfepd in Q1 2021.
As discussed on Friday's webinar, Continental Resources (CLR) has the most exposure to oil prices. NONE of their oil is hedged after May, 2021. It is now on pace to generate $3.6 Billion of operating cash flow this year ($9.93/share). Free cash flow of $2.2 Billion will allow them to reach all of their debt reduction goals earlier than expected and increase their dividends.
Ovintiv (OVV) is also going to have a vastly improved balance sheet heading into 2022.
With higher natural gas prices, the Cimarex Energy (XEC) merger with Cabot Oil & Gas (COG) now looks much better.
Range Resources (RRC) will be the first of the Sweet 16 to announce Q2 financial results on July 26.
The Sweet 16 Summary Spreadsheet with all of my current valuations and First Call price targets updated will be posted to the EPG website this afternoon.
Some of the gassers (AR, XEC, EQT, RRC) did move slightly higher, thanks to a very bullish natural gas storage report on Thursday.
Laredo Petroleum (LPI) and Talos Energy (TALO) pulled back the most. Laredo provided an operations update that was basically in line with my forecast for 2021 and they provided preliminary guidance for 2022 which increases the confidence level in my forecast. My current valuation for LPI adjusted to $85.00, but there is definitely more upside if WTI stays over $70/bbl. My forecast for 2022 shows earnings per share of $26.91, operating CFPS of $37.48 on revenues of $1,124 million. For a company of this size, LPI has a very low number of shares outstanding, just 16.1 million. If the Sabalo Energy acquisition plays out as expected, a valuation of 6X operating cash flow ($225 in 2022) is a reasonable 12-month target price.
Talos Energy took a hit when they announced that Pemex, the national oil company of Mexico, will take over operations of the Zama Oilfield. The change in operatorship will likely push back first oil production because Talos had a development plan ready to go. Zama is estimated to contain close to a billion barrels of recoverable oil. My valuation of $30 is based on 2021 and 2022 operating cash flow, so Zama had no impact on my current valuation. At current commodity prices, Talos is going to report strong 2H 2021 results. There is a lot more to Talos than Zama, including a big oil discovery at Puma West.
Comstock Resources (CRK) is up 46% YTD but it is far off the pace of the other gassers. AR is up 179% YTD, EQT is up 71% YTD and RRC is up 153% YTD.
Now might be a good time to add more CRK to your portfolio.
> Based on my forecast, CRK should report Q2 Adjusted Earnings Per Share of $0.25 to $0.30, which compares to First Call's estimate of $0.16 EPS.
> The Company reported operating CFPS of $0.87 in Q1 and I am forecasting an increase in Q2 to $0.93 with a full year 2021 forecast of $4.05 CFPS.
> Approximately 70% of their Q2 2021 natural gas was hedged at $2.51, but the volume of unhedged gas will increase in 2H 2021.
> Looking forward to 2022 with a realized gas price of $3.00/mcf: Revenues should increase to $1.7 Billion, EPS of $1.89 and operating CFPS of $4.64.
> CRK deserves a lot more attention as a valuation of at least 4X operating CFPS is justified.
Read our recent profile on CRK, which can be downloaded from the EPG website.
EQT Corp (EQT) trails AR and RRC because it is "in transition" of closing the acquisition of Alta Resources. In case you missed it here is the press release:
May 6, 2021 /PRNewswire/ -- EQT Corporation (NYSE: EQT) today announced that it has entered into a purchase agreement with Alta Resources Development, LLC (Alta), pursuant to which EQT will acquire all of the membership interests in Alta's upstream and midstream subsidiaries for approximately $2.925 billion, subject to customary closing adjustments. The transaction is expected to close in the third quarter of 2021, with an effective date of January 1, 2021. Note that with higher gas and NGL prices since the deal was announced, the impact should be better than highlights below.
Transaction Highlights:
> Attractive valuation with high-margin and robust free cash flow generation
> Projected annual free cash flow of $300-$400 million
> Projected annual adjusted EBITDA of $550-$600 million
Purchase price implies an ~18% unlevered free cash flow yield(1)
> Low leverage acquisition accelerates EQT's path back to investment grade metrics
> Immediately reduces leverage; improving 0.3x by year-end 2022
Establishes a leverage profile comfortably below 2.0x target
> Accretive to free cash flow per share
> Projected to increase free cash flow by 55%, or $2.0 billion, through 2026
Free cash flow per share improves by more than 15% through 2026
> Adds highly prolific inventory with superior well economics in the core of the Northeast Marcellus
> Integrated midstream assets and mineral ownership drive high margin operated development
Direct exposure to the geologic core through non-operated position
President and CEO Toby Rice stated, "Today marks another major milestone for EQT as we continue on our path to becoming the operator of choice for all of our stakeholders. The acquisition of Alta's assets represents an attractive entry into the Northeast Marcellus while accelerating our deleveraging path, providing attractive free cash flow per share accretion for our shareholders and adding highly economic inventory to EQT's already robust portfolio. In addition to increasing our long-term optionality, we believe this transaction accelerates both our path back to investment grade metrics and our shareholder return initiatives. We look forward to applying our differentiated modern operating model to maximize the prolific value embedded in these premier assets."
As I discussed in the webinar on Friday, the "Stars Are Aligned" for much higher natural gas and NGL price heading into the next winter. AR and EQT are still trading below book value, which makes no sense. AR is the largest producer of NGLs and EQT is the largest producer of dry gas. The Alta Resources Acquisition will put EQT on a path to a 2021 production exit rate of 5.7 Bcfe per day, up from 4.6 Bcfepd in Q1 2021.
As discussed on Friday's webinar, Continental Resources (CLR) has the most exposure to oil prices. NONE of their oil is hedged after May, 2021. It is now on pace to generate $3.6 Billion of operating cash flow this year ($9.93/share). Free cash flow of $2.2 Billion will allow them to reach all of their debt reduction goals earlier than expected and increase their dividends.
Ovintiv (OVV) is also going to have a vastly improved balance sheet heading into 2022.
With higher natural gas prices, the Cimarex Energy (XEC) merger with Cabot Oil & Gas (COG) now looks much better.
Range Resources (RRC) will be the first of the Sweet 16 to announce Q2 financial results on July 26.
The Sweet 16 Summary Spreadsheet with all of my current valuations and First Call price targets updated will be posted to the EPG website this afternoon.