Sweet 16 Update - Dec 18

[dan_s]

"Blame it on the Fed"
The Sweet 16 lost 18.17% during the week ending December 17th and it is now up "only" 124.63% YTD.
The S&P 500 Index lost 2.43% during the week and is now up 23.02% YTD.

EQT Corp (EQT) was the only Sweet 16 stock that was slightly higher week-to-week.

On Thursday, December 16 Earthstone Energy (ESTE) announced a BIG acquisition that will close in Q1 2022. The "Chisholm Acquisition" will push Earthstone's production up to 46,000 Boe per day (53% crude oil) in 2022 (the mid-point of Earthstone's guidance), which compares to their actual production of 25,536 Boepd in Q3 2021. I have updated my forecast/valuation model based on the Company's detailed guidance, which you can find on their website. My valuation increases by $2 to $23/share. First Call's price target also increased slightly to $17.66. < Keep in mind that First Call's price targets are just the average of all of the Wall Street Gang's price targets submitted to Reuters. Most of their forecasts have not been updated for the acquisition and some do not even include Earthstone's strong Q3 results.

This is the only update that I could find: On December 17 RBC Capital analyst Scott Hanold raised the price target on Earthstone Energy (NYSE: ESTE) to $19.00 (from $18.00) while maintaining an Outperform rating.

You can download my updated forecast model for Earthstone from the EPG website. Note that my forecast for 2022 is based on realized prices (net of cash settlements on their hedges) of $65.00/bbl of oil, $3.70/mcf of natural gas and $30.00/bbl of NGLs. Using those numbers, my forecast shows Earthstone generating 2022 revenues of approximately $776 million, Adjusted Net Income of $233.4 million ($2.17/share) and operating cash flow of $531.3 million ($4.95/share). If 2022 actual results match my forecast, a reasonable 12-month price target for ESTE is 6X 2022 operating cash flow; 6X $4.95 = $29.70.

As a group, the Sweet 16 closed on December 17 at an 80.77% discount to my valuation and a 45.83% discount to the current First Call price targets.

I will be making several changes to the Sweet 16 "official" on January 1st.
Being promoted from our Small-Cap Growth Portfolio will be:
> Matador Resources (MTDR)
> Magnolia Oil & Gas (MGY)
> Northern Oil & Gas (NOG)

I was going to put ESTE back into the Small-Cap portfolio and replace it with Ranger Oil Corp. (ROCC), but Earthstone's big acquisition has changed my mind. ROCC is trading at less than half my current valuation, so make sure you read my recent profile on the company.

As of today, the three companies moving out of the Sweet 16 will be:
> Talos Energy (TALO) going to the Small-Cap Growth Portfolio despite my current valuation of $28.00/share. I am still very high on TALO. This move is strictly because of its market-cap being less $1 Billion.
> Devon Energy (DVN) and Pioneer Natural Resources (PXD) will be moving to our High Yield Income Portfolio.

Coterra Energy (CTRA) is also a candidate for the High Yield Income Portfolio. However, heading into the first quarter I don't want to move one of my favorite "gassers" out of the Sweet 16. Coterra's Q4 results will be the first full quarter since the COG + XEC merger formed the company. Based on my forecast, Q4 results will be "STUNNING" and so will their year-end reserve report and their next quarterly dividend.

If you watched our webinar on December 16th, you know that I believe we are going to see very good oil, gas and NGL prices continue in 2022. It is "MY TAKE" that all of the recent "noise" (the FED's next move, Team Biden's SPR oil release scheme, OPEC+ supply increases and negotiations with Iran) is keeping a lid on oil prices for a few months. In Q2 2022 it will become clear that we have a global energy crisis. Just take a look at the spike in coal prices and the Bidding War between Asia and Europe for natural gas. OECD oil inventories are much too low for oil prices to fall and when we get the seasonal spike in oil demand (starts in April each year) the bids for oil supply will go up.

All of the Sweet 16 are going to report solid Q4 results and big increases in their proved reserves (P1). They are all going to commit to "live within operating cash flow" and return more free cash flow to shareholders in the form of dividends and share buybacks.

This weekend I will be updating my forecast and profile for SM Energy (SM) which will be sent out via email on Monday. This former Sweet 16 company has made a lot of progress in 2021.

[dan_s]

The updated Sweet 16 Summary spreadsheet has been posted to the EPG website home page.

I shows my current valuation for each stock as compared to First Call's price targets. You should down load it to Excel and check out all of the valuable information which is updated on a regular basis.