Sweet 16 Update - Oct 9
Posted: Sat Oct 09, 2021 12:21 pm
Another very good week in a year where the Sweet 16 is crushing the market.
> Sweet 16 increased 19.91% during the week ending October 8 and it is now up 169.28% YTD.
> This compares to a gain of 0.91% for the S&P 500 Index that is now up 16.91% YTD.
Lots of money has rotated into the upstream oil & gas subsector since mid-August. On August 21st the Sweet 16 was up just 59.37%. So, the portfolio as gained 110% in just six weeks. < The reason that I am getting a lot of "love letters" these days.
So, should we be harvesting some of our gains?
That decision is up to each of you, but the Sweet 16 are all still trading at a discount to my valuations. As a group the Sweet 16 is 47% below my current valuation. As a reminder my valuations are as of the date of the individual company forecast/valuation models, which you can view from the EPG website and you can download them to Excel. < All of my current valuations are based on WTI averaging $75/bbl in Q4 2021 and $70/bbl in 2022. I am using natural gas prices of $4.75/MMBtu for Q4 2021 and $3.50/MMBtu for 2022 Henry Hub prices. I do make adjustments for regional differentials and for each companies' hedges.
Those trading above the First Call price targets are CPE, CLR, LPI and RRC. Just remember that First Call price targets are just the average of the analysts' price targets submitted to Reuters and many of them are based on much lower oil & gas prices than we have today.
Those closest to my valuations are LPI (10.6%), CLR (15.1%) and RRC (24.0%). < Discount to my valuation in ( ).
Coterra Energy (CTRA), the Company created by the merger of Cimarex Energy (XEC) and Cabot Oil & Gas (COG) has been added to the Sweet 16. It replaces XEC, which merged into COG before the name change. My initial valuation of CTRA is $32.00 per share, which compares to First Call's price target of $26.73. CTRA closed at $22.27 on October 8.
CTRA also replaces XEC in the "Elite Eight", the largest companies with very strong balance sheets and lots of running room.
I have increased my current valuation of Callon Petroleum (CPE) by $13 to $79 per share. Callon announced the closing of the Primexx Energy Acquisition on October 5th and the Company is now on a clear path to a 2021 exit rate of 115,000 Boe per day (~64% crude oil). My 2022 forecast is based on 120,000 Boepd of production that should generate revenues of approximately $2.2 Billion and operating cash flow of more than $1.4 Billion (over $23/share). If Callon's 2H results match my forecast and their guidance is close to my 2022 model assumptions a reasonable valuation six months from now will be over $100 per share.
CPE closed at $57.96 on October 8 and is up 340% YTD, but I think it has a lot more upside for us.
I have increased my valuation of Comstock Resources (CRK) by $5.75 to $24.00. They announced the sale of their Bakken assets to Northern Oil & Gas (NOG) for $154 million. The sales proceeds will be used to pay down some debt on their revolver and ramp up their drilling program. They should be adding a lot more unhedged gas production in Q1 2022; just in time to harvest some very good gas prices. If actual gas prices in 2022 are close to the current NYMEX strip, CRK should generate over $6.00 per share of operating cash flow next year and a reasonable valuation will be 6X operating CFPS.
Laredo Petroleum (LPI) closed at $90.42 on October 8. I have updated my forecast/valuation model for the accretive asset purchase they announced on September 19 that should close by the end of October. It will add ~4,400 Boe per day of production (59% oil and 23% high value NGLs). I have increased my valuation by $10 to $100 per share. Laredo is based in Tulsa and it has very few analysts covering it. It also has very few shares outstanding, which causes small chances in my model assumptions to have a big impact on my valuation per share. If Laredo's 2022 guidance matches my forecast model assumptions, the valuation could increase to over $160/share. It will continue to be a "High Beta" stock until the Wall Street Gang gains more confidence in the management team.
Antero Resources (AR) and Earthstone Energy (ESTE) are now FINALLY trading over book value per share. GAAP/SEC accounting rules are so conservative for upstream oil & gas companies that no profitable company should ever trade below book value during a period of rising commodity prices.
EQT Corp. (EQT), the largest natural gas producer in North America, is still trading below book value. There is no justification that I can see for the current share price other than the Wall Street Gang is still using low gas and NGL prices in their models. EQT closed the Alta Resources Acquisition on July 21st and they are going to report a BIG INCREASE in their operating cash flow in both Q3 and Q4.
CRK, EQT and TALO are trading at the largest discounts to my valuations.
Talos Energy (TALO) is the only Gulf of Mexico company in the Sweet 16. It will be reporting a decline in production from Q2 to Q3 because of Hurricane Ida related shut-ins. They have not reported any significant damage to their production. If they report that all of their wells are back online and provide solid guidance for Q4, this stock should make a nice run into year end.
I update the Sweet 16 summary spreadsheet each weekend. It contains a lot of valuable information that can help you understand the relative size of each company from EOG Resources (EOG) with a market-cap of $52.9 Billion down to Earthstone Energy (ESTE) with a market cap of $0.975 Billion.
Sized does matter in the upstream oil & gas business. For those of you new to the sector, the "Elite Eight" should be your core holdings. They have less risk just because of their size.
> Sweet 16 increased 19.91% during the week ending October 8 and it is now up 169.28% YTD.
> This compares to a gain of 0.91% for the S&P 500 Index that is now up 16.91% YTD.
Lots of money has rotated into the upstream oil & gas subsector since mid-August. On August 21st the Sweet 16 was up just 59.37%. So, the portfolio as gained 110% in just six weeks. < The reason that I am getting a lot of "love letters" these days.
So, should we be harvesting some of our gains?
That decision is up to each of you, but the Sweet 16 are all still trading at a discount to my valuations. As a group the Sweet 16 is 47% below my current valuation. As a reminder my valuations are as of the date of the individual company forecast/valuation models, which you can view from the EPG website and you can download them to Excel. < All of my current valuations are based on WTI averaging $75/bbl in Q4 2021 and $70/bbl in 2022. I am using natural gas prices of $4.75/MMBtu for Q4 2021 and $3.50/MMBtu for 2022 Henry Hub prices. I do make adjustments for regional differentials and for each companies' hedges.
Those trading above the First Call price targets are CPE, CLR, LPI and RRC. Just remember that First Call price targets are just the average of the analysts' price targets submitted to Reuters and many of them are based on much lower oil & gas prices than we have today.
Those closest to my valuations are LPI (10.6%), CLR (15.1%) and RRC (24.0%). < Discount to my valuation in ( ).
Coterra Energy (CTRA), the Company created by the merger of Cimarex Energy (XEC) and Cabot Oil & Gas (COG) has been added to the Sweet 16. It replaces XEC, which merged into COG before the name change. My initial valuation of CTRA is $32.00 per share, which compares to First Call's price target of $26.73. CTRA closed at $22.27 on October 8.
CTRA also replaces XEC in the "Elite Eight", the largest companies with very strong balance sheets and lots of running room.
I have increased my current valuation of Callon Petroleum (CPE) by $13 to $79 per share. Callon announced the closing of the Primexx Energy Acquisition on October 5th and the Company is now on a clear path to a 2021 exit rate of 115,000 Boe per day (~64% crude oil). My 2022 forecast is based on 120,000 Boepd of production that should generate revenues of approximately $2.2 Billion and operating cash flow of more than $1.4 Billion (over $23/share). If Callon's 2H results match my forecast and their guidance is close to my 2022 model assumptions a reasonable valuation six months from now will be over $100 per share.
CPE closed at $57.96 on October 8 and is up 340% YTD, but I think it has a lot more upside for us.
I have increased my valuation of Comstock Resources (CRK) by $5.75 to $24.00. They announced the sale of their Bakken assets to Northern Oil & Gas (NOG) for $154 million. The sales proceeds will be used to pay down some debt on their revolver and ramp up their drilling program. They should be adding a lot more unhedged gas production in Q1 2022; just in time to harvest some very good gas prices. If actual gas prices in 2022 are close to the current NYMEX strip, CRK should generate over $6.00 per share of operating cash flow next year and a reasonable valuation will be 6X operating CFPS.
Laredo Petroleum (LPI) closed at $90.42 on October 8. I have updated my forecast/valuation model for the accretive asset purchase they announced on September 19 that should close by the end of October. It will add ~4,400 Boe per day of production (59% oil and 23% high value NGLs). I have increased my valuation by $10 to $100 per share. Laredo is based in Tulsa and it has very few analysts covering it. It also has very few shares outstanding, which causes small chances in my model assumptions to have a big impact on my valuation per share. If Laredo's 2022 guidance matches my forecast model assumptions, the valuation could increase to over $160/share. It will continue to be a "High Beta" stock until the Wall Street Gang gains more confidence in the management team.
Antero Resources (AR) and Earthstone Energy (ESTE) are now FINALLY trading over book value per share. GAAP/SEC accounting rules are so conservative for upstream oil & gas companies that no profitable company should ever trade below book value during a period of rising commodity prices.
EQT Corp. (EQT), the largest natural gas producer in North America, is still trading below book value. There is no justification that I can see for the current share price other than the Wall Street Gang is still using low gas and NGL prices in their models. EQT closed the Alta Resources Acquisition on July 21st and they are going to report a BIG INCREASE in their operating cash flow in both Q3 and Q4.
CRK, EQT and TALO are trading at the largest discounts to my valuations.
Talos Energy (TALO) is the only Gulf of Mexico company in the Sweet 16. It will be reporting a decline in production from Q2 to Q3 because of Hurricane Ida related shut-ins. They have not reported any significant damage to their production. If they report that all of their wells are back online and provide solid guidance for Q4, this stock should make a nice run into year end.
I update the Sweet 16 summary spreadsheet each weekend. It contains a lot of valuable information that can help you understand the relative size of each company from EOG Resources (EOG) with a market-cap of $52.9 Billion down to Earthstone Energy (ESTE) with a market cap of $0.975 Billion.
Sized does matter in the upstream oil & gas business. For those of you new to the sector, the "Elite Eight" should be your core holdings. They have less risk just because of their size.