Sweet 16 Update - August 7

[dan_s]

The Sweet 16 declined by 6.36% during the week ending August 6 and is now up 82.07% YTD. The decline in the price of oil ($73.70 to $67.83) was the primary driver. Natural gas prices increased $0.23 during the week and the outlook for gas prices continues to look extremely bullish for the coming winter. The S&P 500 Index gained 1.1% during the week and is up 18.12% YTD.

AR, XEC, CLR, DVN, EQT, FANG and PXD did move higher, but the pullbacks of CPE and LPI more than offset those gains.

All 16 companies reported solid Q2 results and Q3 results will be even better, especially for the "gassers" (AR, CRK, EQT and RRC).

Cimarex Energy (XEC) is at the top of my list of Strong Buys because their merger with Cabot Oil & Gas (COG) really looks good thanks to the big improvement in the natural gas and NGL markets. I urge all of you to read carefully what I posted about the merger on Thursday evening to this Forum. The combined company should be able to generate $2 Billion of free cash flow from operations next year assuming a realized natural gas price of just $3.00/mcf in 2022. My $123/share valuation of XEC looks conservative if natural gas averages more than $4/MMBtu thru the winter. If the US has a cold December, we will see much higher gas prices than the current strip because there are going to regional gas shortage this winter.

Callon Petroleum (CPE) declined by ~17% after they announced a large acquisition on the same day that WTI was on decline. FEAR combined with bad timing is a recipe for a selloff.

The Primexx Acquisition looks accretive to me as it will add 18,000 Boepd of production in Q4 and set the company up for a very strong 2022. My 2022 forecast assumes 128,000 Boepd of production (approximately 64% crude oil, 19% NGLs and 17% natural gas). With realize prices of $65/bbl for oil, $22/bbl for NGLs and $3/mcf for ngas), Callon should be able to generate $1.4 Billion of operating cash flow, $23/share next year. The deal took the Wall Street Gang by surprise and they don't like surprises during a very busy week of quarterly results. When they have time to update their models, I expect most of them to raise their price targets. On August 4th Siebert Williams Shank & Co analyst Gabriele Sorbara maintained a Buy rating on Callon (NYSE:CPE) Petroleum Company setting a price target of $64.

Laredo Petroleum (LPI) also took a hit of ~13% last week, but it is still up 143% YTD. Like all of the companies that hedged a high percentage of their production, they reported a big loss. The GAAP accounting rules that require mark-to-market adjustments to hedges are extremely misleading. Laredo did report Q2 results slightly below my forecast, but they are still on track to generate over $28/share of operating cash flow this year. On a BOE basis their production will be down from Q2 to Q3 because of two large "transformative" deals they closed on July 1. However, thanks to a much better production mix, their revenues and operating cash flow will be much higher in Q3 and they should report steady production growth going forward. With higher realized prices (net of lower cash settlements on their hedges) in 2022, Laredo should generate operating cash flow of more than $660 million, over $38/share.

I really like Devon Energy's (DVN) new variable dividend policy. Their $0.49/share/quarter dividend equates to an annual yield of 7.2% AND BASED ON MY FORECAST THE DIVIDEND SHOULD GO UP QUARTER AFTER QUARTER. The dividend yield alone should draw a lot more attention to this super strong large-cap.

Pioneer Natural Resources (PXD) also has a very good variable dividend policy that could push their dividend yield to double digits based on the August 6 closing price.

I have updated my forecast/valuation models for each company and posted them the EPG website. All 16 profile update assignments have been given to our super sharp team of MBAs. The updated profiles for Antero Resources (AR) and Range Resources (RRC) are sitting here for my review, so they will be sent out on Monday.

My podcast will be on the EPG website on Sunday instead of Saturday because Sabrina, who has to format it for YouTube, is driving home from Florida today. She stayed at the Beau Rivage Casino in Biloxi last night so I hope she didn't piss away more money than she spent on her kids at Disney World. Susan & I love the Beau Rivage, a MGM casino that gives us free rooms because we "contribute" lots of money to their casino each trip.

My podcast will focus on why I believe that this recent dip in the price of oil won't last long.

[dan_s]

FEAR is the only thing putting pressure on oil prices.

"After rising to above $70 a barrel earlier in the session, WTI crude futures settled at $68.3 a barrel on Friday, as a stronger dollar capped the upward momentum. For the week, the US benchmark dropped more than 8%, the biggest since October 2020, as the rapid spread of the Delta variant of COVID-19 globally clouded the demand outlook. Daily new virus cases in the US have climbed to a six-month high, with more than 100,000 infections reported nationwide; while there were 125 new virus cases in China on Friday, the highest since mid-January. On Thursday however, the oil markets attempted a rebound after cross-border hostilities between Israel and Iran accelerated as both sides engaged in rocket exchange after a tanker off the coast of Oman was attacked last week." - Trading Economics after the markets closed on 8-6-2021

US and OECD petroleum inventories are below 30 days of supply and they will continue to fall through August.

[dan_s]

VERY BULLISH OUTLOOK FOR NATURAL GAS PRICES

"Natural gas futures traded above $4.1 per million British thermal units, the highest since December 2018, supported by strong demand for US exports of liquified natural gas as global gas continues to trade above US prices. Natural gas prices in Europe rose to near $14/MMBTU for the first time on record while in the UK cost was also near $14/MMBTU, the highest since 2005. In Asia, the spot price of LNG climbed above $15/MMBTU. Buyers in Europe have struggled to replenish tanks that are at the lowest for this time of year in a decade and Russia is limiting exports to the continent. Also, Brazilian imports surged to record levels as droughts added to the competition by curtailing power output from hydroelectric dams. As for storage, the Energy Information Administration reported a 13 Bcf injection into inventories for the week ending July 30th, below expectations of a 21 Bcf increase." - Trading Economic after the markets closed on 8-6-2021