Sweet 16 Update - Dec 11

[dan_s]

Since November 24 the Sweet 16 has taken us on quite a ride, which began with the Black Friday (Nov 26) oil price drop.
> When the market closed on November 24 the Sweet 16 was up 139.69% YTD.
> When the market closed yesterday on December 10 the Sweet 16 is ups 142.80% YTD, showing us how strong this group is.

The Sweet 16's 3.11% gain over the last two weeks compares to the S&P 500 Index's gain of 3.12% over the same period. The S&P 500 Index is up 25.45% YTD, one of the best years ever for equity investors.

As I have posted many times on this board, oil price declines caused by FEAR seldom last long.
> I now believe that the FEAR released by the government on Black Friday was designed to lower oil prices since Team Biden's SPR oil release "scheme" didn't have the impact they hoped for.
> FEAR of the Omicron Variant seems to have faded. It may be more contagious than the Delta Variant, but it seems to be less deadly. Dr. Fauci ("The Boy that Cried Wolf") has clearly lost his audience as well.

As I will point out in today's podcast, inventories of oil-based refined products are much lower than they were back in early 2020. Fuels used for space heating, including natural gas, are below the 5-year average. Propane is "dangerously" low. OECD oil-based inventories are getting close to just 27 Days of Consumption (30 DOC is considered normal), which is very bullish for oil prices. Demand exceeds supply, which means low oil prices are not sustainable.

The Earth's human population is increasing by over 220,000 per day. Covid-19 and all of the variants have had almost no impact on the rate of population growth. As long and the population is growing, demand for oil-based products is growing. It is that simple.

Demand for oil is seasonal. In four months (mid-April) demand for oil will increase by ~2 million BOPD. By Q3 2022 OPEC+ will be out of spare production capacity. This is why we are seeing triple digit oil price forecasts from some of the Wall Street Gang. Goldman Sachs is sticking with their opinion that Brent should be $90/bbl today. On November 29th, Marshall Atkins at Raymond James predicted that we'd see WTI spike to $110/bbl within six months.

All five on the "gassers" (AR, CRK, CTRA, EQT and RRC) have pulled back with the price of natural gas, but all five are going to report strong Q4 results. Old Man Winter and La Nina have a nice Christmas present coming for the gassers.

As you may have noticed, my attention has shifted to the companies in our Small-Cap Growth Portfolio. Four of them deserve promotions to the Sweet 16, but I will wait until January 1st to make it official. We have recently published updated profiles on MTDR, MGY, NOG and ROCC. I urge all of you to read those profiles carefully and look closely at my forecasts for 2022.

Time for a few changes: Earthstone Energy (ESTE) and Talos Energy (TALO) will be moving to the Small-Cap Growth Portfolio. Devon Energy (DVN) and Pioneer Natural Resources (PXD) will be moving to our High Yield Income portfolio. All four have been winners for us this year and all four are still trading at discounts to my valuations. TALO is trading at a 180% discount to my valuation of $28.00. These moves are not an indication that I think any less of these four companies. I just like to make a few changes to the Sweet 16 each year.

All of the Sweet 16 are now generating lots of free cash flow from operations, they will all report strong Q4 results and they will all report significant increases in the PV10 value of their proven reserves. None of them have near-term debt issues.

There is still a lot of upside in the Sweet 16:
> As a group it is trading at a 67% discount to my current valuation.
> As a group it is trading at a forward-looking PE ratio, based on my 2022 forecasts, of just 5.5X. None of them are trading at a PE ratio over 8.7X. The S&P 500 is trading at a PE ratio over 21.

[dan_s]

The Sweet 16 Summary Spreadsheet has been posted to the EPG website home page. There you can find my current valuation for each company in the portfolio and see how my valuations compare to First Call's price targets.

You can also find my Q4 2021 Adjusted Net Income forecasts for each company. "Adjusted Net Income" is what you should compare to First Call's EPS forecasts.

Also, under Tab 1 take a hard look at my Operating Cash Flow Per Share forecasts in column R. Companies of this quality should be trading for 6X to 8X operating cash flow. So, 6X operating CFPS is a reasonable 12-month price target.

[KGardiner]

Dan, Regarding the possible move of CTRA, DVN and PXD into the High Yield portfolio,
I've been trying to make sense of what the 2022 estimated dividend for these companies would be.

My best guesses for 2022 are:

CTRA $1.80
DVN $3.36
PXD $14.56

My certainty on these guesses is LOW.
Am I in the ballpark?

Thanks
Kevin

[dan_s]

You are in the ballpark. We will need to see their capex budget for 2022 to get a better idea of what their FCF might be.

From my friends at Stifel
My current valuation of CTRA is $32.00

Coterra Energy Inc. (CTRA, $20.37, Buy; Target $26.00)
Room for Buyback to Complement 2022 Peer-Leading Dividend - Michael S. Scialla
With a top-tier 2022 dividend yield of 9% (nearly 2x our peer group average of 5.3%) and solid balance sheet (YE21 net debt/EBITDA of 0.6x vs peer average of 1.1x) CTRA is well-positioned to lead our bellwether peer group in returning capital to shareholders next year. In our view, a meaningful share buyback program could complement this plan. After accelerating its first variable dividend to 4Q21 from 1Q22, the company is set to return 49% of its 2021 FCF to investors, the highest in our group.