Sweet 16 Update - Sept 26

[dan_s]

I am a day late on this one because Susan & I took a three day "Casino Trip" over to Biloxi, Mississippi and we just flew back early Sunday morning. As usual we made a nice "donation" to the Beau Rivage (MGM) casino, but we had a very good time. The weather was great.

For the week ending Sept 24 the Sweet 16 gained 15.41% and is now up 130.48% YTD. The S&P 500 Index gained 0.6% and is now up 18.62%. Good year for stocks in general and very good year for the upstream oil & gas stocks that were so grossly oversold in 2020.

As I posted a few days ago, I have updated my valuation for all 16 companies using higher natural gas and NGL prices. All 16 companies sell a mixture of crude oil, natural gas and natural gas liquids (NGL), so they are all getting a revenue boost from higher ngas and NGL prices. Very few companies hedge their NGLs, so that has been a major contributing factor in my increased stock valuations. For oil prices, all of my models assume that WTI will average $70.00/bbl in Q3 (now locked in) and $75.00/bbl in Q4. I will be discussing my outlook for oil and ngas prices on today's podcast.

Talos Energy (TALO) is the only valuation that I lowered (from $30.00 to $26.50) because of the impact of Hurricane Ida on the Gulf of Mexico production. TALO closed at $13.67 on Sept 24th, but I think it may pullback when they report the impact of Ida on their production facilities and Q3 production. Talos has not published a detailed damage report, but I do know that Ida took a lot of their production offline for several weeks. Dealing with hurricanes is part of doing business offshore and Talos has a very experienced team. They will recover some of the lost revenues thanks to higher commodity prices and I do expect their production to ramp back up in Q4.

The Wall Street Gang is tweaking their forecasts and price targets in anticipation of solid Q3 results that will start being released at the end of October. Eleven of the Sweet 16 saw slight increases in First Call's price targets. EOG and PXD saw very small decreases in their FC price targets and CRK, ESTE and TALO were unchanged, primarily because they are the smaller companies with less coverage.

CRK, ESTE and EQT are still trading at less than half of my valuations. CRK and EQT are "gassers" and ESTE is the smallest company in the portfolio that is growing rapidly thanks to a series of very good acquisitions. I should move ESTE back to the Small-Cap Growth Portfolio because MGY and MTDR, both much larger companies, deserve to be promoted to the Sweet 16.

Ovintiv (OVV) is a large-cap that looks like a great BUY at the current share price. It is trading at a 92.5% discount to my valuation of $60.00 and I really like their production mix.

Cimarex Energy (XEC) is expected to merge into Cabot Oil & Gas (COG) next week. It should draw a lot of Wall Street attention. The timing and impact of this "merger of equals" could not be much better. Post-Merger the "NewCo" will be our 5th "gasser".

The Sweet 16 as a group is trading at just 3.64 X 2021 operating cash flow per share. 6X to 8X is more appropriate for companies of this quality. Trading below the group's average are AR, CPE, CRK, ESTE, EQT, LPI, OVV, PDCE and TALO. EQT Corp. is the largest natural gas producer in the U.S. and it definitely deserves a much higher share price. EQT closed the Alta Resources Acquisition on July 21, 2021 so they are going to report large production increases in Q3 and Q4. Based on my forecast model, EQT should generate more than $1.3 Billion of free cash flow from operations in 2021 and double that amount in 2022, based on an average HH natural gas price of $3.50/MMBtu.

I will be posting an updated Oil & Gas Market Update podcast late today.