Energy Prospectus

The Sweet 16 gained 15.37% during the week ending September 17th as the Wall Street Gang is coming around to the fact that energy prices are going higher and maybe a lot higher this winter. The Sweet 16 is now up 115.07% YTD. This compares to the S&P 500 Index that declined 0.68% during the week, but is still up 18.02% YTD. Inflation is good for stocks and VERY GOOD for all commodity based businesses.

15 of 16 stocks were up with EQT Corp. (EQT) being the only exception. It was down $0.56 to $18.83. This makes no sense since EQT is the largest natural gas producer in North America. My current valuation of EQT is $36.00. EQT closed the acquisition from Alta Resources on July 21st and they are going to report strong Q3 and Q4 results. EQT is on track to generate over $6.50/share of operating cash flow THIS YEAR and over $9.00 in 2022. There is NO REASON this stock should be trading at less than 3X 2021 operating cash flow per year. Even First Call's outdated price target is $26.64.

Before we publish the next newsletter, I will be increasing the natural gas and NGL prices that I am using to value our model portfolio companies.
My natural gas price assumptions will increase as follows:
Q3 2021: from $3.50 to $3.90
Q4 2021: from $3.75 to $4.75
Yr 2022: from $3.25 to $3.50
I make adjustments for the regional differentials and each company's hedges. Future NGL prices are really a wild ass guess at this point, but they are definitely going higher. As we discussed on the webinar, the propane shortage is going to be a big news item. Propane is used for space heating and cooking in rural areas across America. There is no way we are going to have enough propane to make it thru a cold winter.

I urge all of you to listen carefully to the replay of our Friday webinar. If you have any questions, please post them here.

The Sweet 16 are all still trading at a deep discount to my valuations, which are based on reasonable oil prices and very conservative natural gas and NGL prices.

So, the question becomes "Do fundamentals matter in a world of investors fixated on 'Story Stocks'"?

There is lots of money invested today in what I call "Story Stocks", whose business models can't possibly justify the current share price / market-cap. Read the following:

"Joby Aviation, which plans to begin an electric air taxi service in 2024, is worth more than Lufthansa, EasyJet or JetBlue. Does that seem right? In this market, why not? Heck, earlier this year, Tesla was worth more than the next nine car manufacturers combined, though now only the next six. Beyond Meat, made with pea protein, is worth more than the entire market for peas eaten globally—like the bumper sticker says: Imagine whirled peas. Do fundamentals even matter? I can go on. Used-car sales platform Carvana is worth more than Volvo, Honda, Ford or Hyundai. Airbnb is worth more than Marriott and Hilton combined. Crypto-exchange Coinbase is worth more than the Nasdaq. I live at the intersection of innovation and disruption, but when companies are worth more than any possible reality, watch out." -Andy Kessler, The Stock Market Fails A Breathalyzer

The current stock prices of most of our Sweet 16 and Small-Cap growth portfolio companies cannot be justified unless I assume oil is going back below $50/bbl or lower and natural gas is going back to $2.50/MMBtu or lower. This is why many of our companies are using free cash flow to fund large stock buybacks (See FANG), pay down debt and start variable dividend programs.

The Wall Street Gang believes that demand for oil and gas is going away. If you watched our webinar on Friday you know that demand for oil won't be impacted by wind and solar and demand for natural gas will go up. See Slide 30, which is based on a new study by the National Renewable Energy Laboratory (NREL) Electrification Futures Study (2021), which is a pro-renewable firm.

Lots of people, including the Wall Street Gang, think that wind & solar will replace oil. However, very little oil is used to generate electricity in this world. You many say "Yes, but when everyone is driving an electric car that will reduce oil demand." The truth is that the number of electric cars will increase, but we are decades away from the number of ICE cars going down. BTW there isn't enough copper or nickel in the world to build all of the new electric cars shown in a lot of forecasts. This is why I am adding Ero Copper (NYSE:ERO) to our Small-Cap Growth Portfolio.

My point of this discussion is that if there is the "Paradigm Shift" starting among investors that demand for natural gas and NGLs exceeds supply TODAY and demand for oil will exceed supply NEXT YEAR. When these facts sink in, there should be a lot of money looking for high quality upstream oil & gas companies very soon.

Our "gassers" are going to draw a lot of attention when snow starts falling in New York.

PS: The slides from our September 17th podcast have been posted to the EPG website. You can download them as a pdf file.

The Sweet 16 closed on Sept 17 at just 3.5 X my operating cash flow per share estimate for 2021. A group of this quality should be trading for over 6X operating cash flow.

Stocks trading at less than 2.5 X operating CFPS are CPE, CRK, OVV and TALO. CRK is the lowest at 2.03, which means the share price needs to double to get close to a reasonable fair value.