Sweet 16 Update - July 24

[dan_s]

Last week was quite a "Roller Coaster Ride" for oil prices, but the Sweet 16 held up well finishing the week up 0.05% to be up 90.06% YTD. After the big drop in the market on Monday, the S&P 500 Index bounced back and moved 2.26% higher to +17.46% YTD.

The front month NYMEX contract for HH natural gas (AUG21) closed at $4.025 on July 23rd, so it is no surprise that all four of our "gassers" (AR, CRK, EQT and RRC) all finished higher on the week. EQT lead the way with a weekly gain of almost 10%. AR, EQT and RRC will announce strong Q2 financial results next week and their updated guidance and outlook for gas and NGL prices should draw a lot of attention from the Wall Street Gang. AR and EQT are still trading below book value, which is insane.

EQT Corp (EQT) is the largest producer of natural gas in the U.S. and I expect it to move a lot higher after they close the acquisition of Alta Resources. If EQT's Q2 results and updated guidance confirm my forecast assumptions, I will increase the multiple of operating cash flow used to value it. Since July 1st five analysts have increased their price targets for EQT to $26 to $33 (average of $28.40), but none of them are using gas prices close to the NYMEX strip to value it.

Earthstone Energy (ESTE) is also trading slightly below book value and it now has ~55% year-over-year production growth locked in for 2021 and my forecast is for another 30% YOY production growth in for 2022.

Ovintiv (OVV) will also announce Q2 results next week (7/27). OVV is the 3rd largest company in the Sweet 16 behind EOG and PXD and it closed on July 23 trading at just 2.3 X my 2021 operating cash flow per share forecast. The most recent analysts' reports on OVV all rate it a BUY with price targets of $43, $44 and $48. OVV closed on July 23 at $27.35, up 90.46% YTD. My valuation is $56.

For those of you wanting to get more exposure to natural gas and NGLs, OVV should be on your list. Their production mix is approximately 36% crude oil and plant condensate, 49% natural gas and 15% NGLs. Only 10% of their 2H2021 ngas is hedged with Swaps at $2.51 and another 64% with Collars that have ceilings of $3.36. Less than 20% of their 2022 ngas is hedged at an average of $2.80. None of their NGLs are hedged.

"US natural gas futures extended gains to trade near $4 per million British thermal units, the highest since December 2018 on expectations of growing demand for air-conditioning amid forecasts for hotter than expected weather over the next two weeks. Natural gas futures have also been supported by strong demand for US exports of liquified natural gas as global gas continues to trade above US prices. Gas demand has been rising from China, Europe, Brazil, where droughts added to the competition by curtailing power output from hydroelectric dams, Canada and Pacific Northwest. Particularly in Europe, buyers on the continent have struggled to replenish tanks that are at the lowest for this time of year in a decade." - Trading Economic 7-23-2021 after the markets closed.

I will be on vacation in Mexico next week, but I will comment on AR, EQT, OVV and RRC Q2 results.

[dan_s]

I have updated the Sweet 16 summary spreadsheet that shows how their current share prices match up with my valuations and First Call's price targets. Also, the spreadsheet shows the date that I expect each company to announce Q2 results.

It will be posted to the EPG website homepage this afternoon.

I am working on the podcast now.