Energy Prospectus

It will become "official" on January 1st:
Devon Energy (DVN) and Pioneer Natural Resources (PXD) will be moved from the Sweet 16 to the High Yield Income Portfolio. I have very HIGH confidence in my forecast/valuation models for both companies since I have been following them for over a decade.

DVN closed today at $38.26.
> Based on its most recent "Fixed + Variable" quarterly dividend of $0.84, the annualize yield is 8.8%.
> Based on my 2022 forecast (using realized prices* of $70/bbl oil, $3.70/mcf ngas and $30.00/bbl NGL) Devon's operating cash flow should increase from $7.37/share in 2021 to $11.09/share in 2022, which should result in higher quarterly dividends.
> My valuation of $60.00 compares to First Call's price target of $51.27
> TipRanks: "In the last 3 months, 18 ranked analysts set 12-month price targets for DVN. The average price target among the analysts is $53.39. The price targets range from $35 to $65."

PXD closed today at $172.65
> Based on its most recent "Fixed + Variable" quarterly dividend of $3.02, the annualized yield is 7.0%.
> Based on my 2022 forecast (using realized prices* of $72/bbl oil, $3.70/mcf ngas and $30.00/bbl NGL) Pioneer's operating cash flow should increase from $27.65/share in 2021 to $40.36/share in 2022, which should result in higher quarterly dividends.
> My valuation of $255.00 compares to First Call's price target of $226.85
> TipRanks: "In the last 3 months, 20 ranked analysts set 12-month price targets for PXD. The average price target among the analysts is $230.60. The price targets range from $200 to $276."

* "Realized Prices" for oil, gas and NGLs in all of my forecast models includes regional differentials and adjustments for each company's hedges.
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My High Yield Income Portfolio priorities are:
1. Annual yield that is both sustainable and should go up based on my forward-looking forecasts.
2. Strong Balance Sheet with a reasonable amount of debt and no near-term debt problems.
3. Upside to the share price. < DVN and PXD would be at the top of the list for this.
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I have dropped Oasis Midstream Partners (OMP) because is an MLP that is being acquired by Crestwood Equity Partners. I wanted to reduce the number of MLPs anyway just because most of our members aren't interested in MLPs. MLPs are not appropriate for IRA accounts. The five MLPs remaining are BSM, BKEPP, MMP, MPLX and PAA. They are all solid companies that should be raising their quarterly distributions in 2022.

Speaking only for myself, I hope you keep up coverage of C Corp pipelines. Usually, they are not bought for growth but for total return. But I was able to pick up Equitrans Midstream (natural gas in West Virginia) at $6.50 per share, yielding 8% 2x covered by cash flow in January and within five months it was $11.25 per share. That works for most people. ETRN is slightly below $10 with a Morningstar target of $15, priced at 6x forward earnings. Yield about 5%. Their new Mountain Valley 300 mile, 42 inch diameter natural gas pipeline will be completed late in 2022 (due to regulatory pettiness excerbated by Biden's appointee to the panel) and then add up to $330 million per year in incremental cash flow on top of the existing $1.1 billion in cash flow from the company's existing 950 miles of natural gas pipeline in West Viriginia. The MV pipeline has five co-owners including EQT, the major natural gas producer founded in 1885. One of their contracted customers is Duke Energy in North Carolina who will use the natural gas to convert their 7 coal-fired plants in North Carolina by 2030. The MV pipeline will connect with a Williams line in Virgina to take the gas further south. I think a dividend hike in early 2023 would not be a surprise. (28 hedge fund managers currently own ETRN) (40 hedge fund managers own Plains All American, the C Corp being PAGP).

73% of the nations 241 coal-fired electric generating plants are now 30 years old and were designed for 40 year useful life. In 2020, 36 coal plants were closed and replaced by natural gas. The questions looms large whether we will continue to use natural gas only to replace coal and retiring nuclear plants (which would be unwise) or focus on "all of the above" energy promoted by Senator Joe "Patrick Henry" Manchin. In the Toyota sponsored Canadian panel
discussion that Dan sent us this week, one commentator stated while EV battery stocks are recklessly priced, the most undervalued energy sub-sector is nuclear. The nation is ready for a the Next Generation of Nuclear Power and that does not mean nuclear fusion. Lightbridge Fuel LTBR, a small advanced nuclear research company with 12 employees in Virginia has just received a key patent for a nuclear fuel rod assembly that uses a fissionable fuel that operates 1000 degrees cooler than uranium and which, when shut down, cools to room temperature in 50 seconds, eliminating the core meltdown risk, to wit "The China Syndrome." They are working to develop Small Modular Reactors employing that safer, fast shut-down technology with the Southern Company and Exelon. America has been placing Small Nuclear Reactors on US Navy ships for 60 years without incident. Why not on land with a new safer fuel and quick shut down capacity? Japan and France are leading in SMR development. These SMRs are projected to be capable of serving 260,000 houses from one site. To solve that NIMBY (Not in my Backyard) problem, I offer my backyard. But I haven't told you the price.

President Trump signed an Executive Order in January, 2021 to advance SMR development and it is one of the Executive orders Joe Biden has not rescinded.

When EV battery prices start going up instead of down due to the Great Inflation upon us -- contrary to everyone's belief EVs will get cheaper and cheaper --we may see a retrenchment in the price of Tesla which is priced to perfection when EV batteries go up in price. BYD, a vertically integrated company that makes their own microchips, is strong competition for Tesla and is now about $35 priced at 80x earnings. Next year, they plan to sell 1.2 million BEVs and PHEVs, only the 2nd company after Tesla to sell over one million electric vehicles. This is just a guess, but why wouldn't BYD want further vertical integration by buying Ero Copper at $15 and 7x trailing earnings. As the Toyota panelist told us, there have been no new major copper discoveries in the last decade and now copper inventory is at a 47 year low. It seems to be one of metals poised for an upsurge. (Dan, can you do a profile on ERO?)

By 2030 we will be an "all of the above" global economy and hydrogen power will be a part of it for heavy Class 8 trucks, heavy machinery, buses, trains (Canadian National railroad has already switched their locomotives to hydrogen). Until then, every new technology derives its parts and power
from fossil fuels something the Dems don't understand. There really is no free lunch.

For common sense insight into Climate Change, read "False Alarm" by Swedish climalogist Bjorn Lamborg who argues a 2 degree rise in global temperature over 80 years is totally managable by the adoption of new technologies and nothing to cause hysteria. Barack Obama has 80 years to move from
his $12 million mansion on the beach at Martha's Vineyard as if he is really worried about his own prognostications. Al Gore lives in alone in a 11,000 square foot mansion in Nashville that uses 21x new energy than the average American home. This is the typical behavior of Soviet style central planners, poverty for
the masses and billions for the Great Leaders. Read Soviet history and you will recognize the tactics the Left use today. The mid 1960s little treatise:
"Soviet Economic Power" by Campell is an excellent, easy to ready primer on the Conmand Economy versus the Market Economy, Thankfully, Elon Musk
has been taking shots to the Command Economy for its innept capital allocation compared to risk-taking entreprenaurs.

We did publish an updated profile on Ero Copper (NYSE: ERO) last week. You can find it under the Small-Cap tab on our website. We also sent it out via email on December 14 or 15.
I will keep covering the midstream C-Corps and MLPs in our High Yield Income Portfolio. Since there is "just one of me" I don't have the time to look at new ones.