Energy Prospectus

For the week ending Oct 15 the Sweet 16 declined by 14.22%, but it is still up 155.06% YTD.
On the other hand, the S&P 500 Index increased by 2.13% and is now up 19.04%. < A very good year for stock investors.

The reason for the Sweet 16 pullback is just lack of information. We are in the "quite period" for energy stocks as upstream companies are one of the last to report quarterly earnings. Why? Because It takes upstream companies well into the next month to determine their actual production for the last month of a quarter and there are some crazy accounting rules (i.e. - mark-to-market valuations of hedges) that take the auditors longer to check. AR, EQT and RRC are the only companies that will report Q3 results in October. Some will report operational updates ahead of earnings.

Only four companies (DVN, OVV, PDCE and RRC) moved higher last week. Laredo Petroleum (LPI) posted the largest decline, from $90.42 to $74.51 during the week. LPI is by far the "highest beta" stock in the Sweet 16 because of its very low share count. The Day Traders tighten up their stop loss orders when it runs up and a few big sellers can cause a cascade of a selloff. Take a look at the YTD chart to see what I mean. There wasn't any news to blame for last week's pullback and as I have posted here many times there is a lot more upside potential for LPI than my current valuation of $100.

I've started looking ahead to 2022 and on the main Sweet 16 spreadsheet (Tab 1) I have updated columns R and S to show how the stocks are trading in relation to my 2022 operating cash flow forecast. Keep in mind that my 2022 forecasts are based on WTI oil averaging $70/bbl and HH natural gas averaging $3.50/mcf for the full year. Obviously, those commodity prices look conservative today. The NGL prices I am using for next year will be way too low if we have a cold winter because of the propane supply problems in the US. I do adjust for regional differential and for each company's hedges.

Based on my forecast models:
> The Sweet 16 as a group is trading for just 3.21 X 2022 operating cash flow. Companies of this quality should trade for 6X to 8X operating CFPS.
> CRK, LPI and TALO are trading at less than 2X my operating CFPS estimates for 2022.
> Trading at the highest multiples are EOG at 5.59X, PXD at 4.85X, CLR at 4.53X and DVN at 4.23X. "Size Matters" in this business and IMO all four should move to 8X operating CFPS. CLR and EOG have very little of their production hedged.

Keep in mind that Q3 GAAP results ("Reported Earnings") will include large mark-to-market adjustments for hedges. These are "non-cash" items that are not included in "Adjusted Earnings", which are what should be compared to my EPS forecasts for the quarter and what should be compared to First Call's EPS estimates. Earnings per share is a very misleading number for upstream oil & gas companies during periods of big moves in commodity prices.
For each company, the KEY stats to focus on are operating cash flow, free cash flow and production. Production guidance is extremely important as investors are now starting to look beyond 2021. Several of the Sweet 16 are going to start paying very large "variable dividends".

Under Tab 2 of the main Sweet 16 spreadsheet, which can be downloaded from the EPG website home page later today, you can see how my current "Fair Value Estimates" compare to the current First Call Target Prices. Just remember that First Call price targets are always behind the curve and just the average of old price targets submitted to Reuters. Most of the Wall Street Gang is still not using oil and gas prices anywhere close to where commodity prices are today. Even fewer are aware of the big spike in NGL prices.

During the past week I did increase my current valuations for Earthstone Energy (ESTE) + $1.00 to $19.50 and Talos Energy (TALO) + $1.50 to $28.00.
> Earthstone announced an accretive acquisition that will close in November and the company will report significant increases in production for Q3 and Q4. ESTE is trading for just 2.78X my 2022 operating cash flow per share forecast. If WTI stays over $80/bbl, ESTE could be a double for us in six months.
> Thanks to Hurricane Ida, Talos Energy will report a decline of ~10,000 Boepd from Q2 to Q3, but production has rebounded and will ramp up sharply into year-end. Despite the impact of the hurricane, Talos should be FCF positive this year and VERY FCF positive in 2022. TALO is trading for just 1.45X my 2022 operating CFPS forecast of $8.66. The average of the 2022 CFPS forecasts submitted to TipRanks is $7.54. Plus, all of Talo's production is sold into the Gulf Coast market where they get premium prices.

When Q3 results are announced I will update my forecast/valuation models as fast as I can and post my comments here. There is only one of me and during the first week of November, 13 of the 16 will announce Q3 results. I will be up to my ears in fresh information. I will get all of them updated by November 6.

Macro View: I now believe the BIG PARADIGM SHIFT is starting to spread among the Wall Street Gang and investors. The Sweet 16 is up BIG this year because it was so grossly oversold at the end of 2020. These stocks are still trading at a discount to realistic valuations. Post-Pandemic World is already "Short Energy Supply". The Green New Deal has not and will not deliver as promised. Even the EIA now forecasts that this world will need 25% more oil supply by 2050 than we have today. Natural gas demand will go up even faster. America and Canada are blessed to have abundant energy reserves, we just need smarter leaders that can quit acting like children.

Trading Economics: "WTI crude futures settled 1.2% higher at $82.3 a barrel on Friday, a fresh 7-year high and booked a 3.6% gain on the week, as shortages of natural gas in Europe and Asia continued to boost demand for oil and supply tightness persist. The IEA said on Thursday the energy crunch is expected to boost oil demand by 500,000 bpd. On the supply side, the EIA said that crude oil output in the US is going to drop in 2021 more than previously forecast, primarily because of Hurricane Ida. EIA thinks it will bounce back in 2022."

Trading Economics: "Natural gas futures went down to $5.5 per million British thermal units on Friday, as demand for next week is seen lower-than-expected as the weather will likely remain mild until the end of October. Still, gas prices remain elevated and not far from a seven-year high of $6.5 early hit earlier in the month, amid strong demand during the winter heating season and depleted inventory levels, especially in Europe and Asia. The EIA forecasts that natural gas prices at the US benchmark Henry Hub will average $5.67 per million British thermal units between October and March, the highest winter price since 2007–2008."