Sweet 16 Update - Jan 29

[dan_s]

The Sweet 16 rebounded during the week ending January 28, gaining over 9%. It is now up 13.54%.
The S&P 500 Index is down 7.02%, primarily because of the FEAR of what the Fed will do next to fight inflation. There is no "Quick Fix" for inflation and supply chain problems caused by the idiots in Washington.

The Wall Street Gang is rotating money into commodity-based companies. All of the Sweet 16 are now free cash flow positive and they should report strong Q4 "Adjusted Net Income". Their year-end reserve reports should support my valuation. If their 2022 guidance confirms my forecast model assumptions, they will deserve higher valuation multiples of operating cash flow than I am using today. The "Big Paradigm Shift" (that OPEC+ is already out of spare capacity) is just starting to sink in.

Team Biden's Inflation "package" is the foundation for a multi-year Commodity Super Cycle. Crude oil is at the top of the list.

Leading the Sweet 16 are:
EOG Resources (EOG), up 23.49% < largest company with a market-cap of $64.2 billion
Matador Resources (MTDR), up 22.56%
PDC Energy (PDCE), up 21.69%
Earthstone Energy (ESTE), up 21.12% < smallest company with a market-cap of $708 million. ESTE is still trading below book value, which is really insane since it is going to report significant production growth quarter-after-quarter. My valuation is $26.00.

Two of our five "gassers" are the only stocks down YTD, which is odd since natural gas and NGL prices are higher than what I am using in my forecast models.
EQT Corp. (EQT) is down 3.07% < 75% below my current valuation of $37.00.
Comstock Resources (CRK) is down 1.85% < 152% below my current valuation of $20.00. Based on Comstock's year-end reserve report the company's PV10 net asset value of just their proved reserves is over $14/share.

My forecast/valuations for each company in the Sweet 16 are up-to-date and they can be downloaded to Excel from the EPG website. Just log on and click on the Sweet 16 tab to find them. Note that my valuations are based on oil and gas prices that are lower than current commodity prices.

I am finishing the next edition of The View From Houston newsletter today. It will be sent via email to all active EPG member on Monday, January 31.

[mrbill]

Hello Dan, glad you are back. Will try to keep this simple. CRK gives me that "should I stay or should I go" feeling. Fundamentals look great, but I want some growth. Rest of my EPG portfolio are champs.
mrbill

[uberCOAT]

I think CRK's share price is not moving with the broader NG move because wall street sees their leverage ratio still a little high. I think once that gets below 2.0x we should start to see the price react to Dan's "fair value" price. It will get there.

[Fraser921]

I like trading the name. Buy at 7 and let it go at 8. Wash, rinse, repeat. They would be making tons of cash if they didn't hedge the upside away. So to be honest, I have the same feelings as you Mr Bill. They always put a good presentation on with earnings. I like the CEO and how he talks. Reminds me of a preacher in a tent.

I like that Jerry Jones is behind them and I also like they are in the Haynesville. The only thing that holds me back are the hedges. The ceo was honest enough to admit he had some regret. That earns my respect. They will have some plus and minus in q4 but 2022 is looking to be a winner.

My stake in this name isn't large but NG is going up and that's what they sell. I'm going to keep adding on weakness.

But if you are bullish on oil and NG why not buy an unhedged name over a hedged one. If I was nervous about downside, I'd get out.

[dan_s]

CRK has NO near-term debt problem and their P1 asset base PV-10 of $6.8 billion more than supports their debt load.

I do consider hedges in all of my stock valuations. Net of cash settlements on hedges, CRK generated free cash flow in 2021 and they will generate a lot more FCF in 2022.

[allen46]

I'm totally illerate when it comes to this type of communication. My question is can you recalculate all of the Sweet 16 with 2022 energy prices at %85 for oil and $4.5 for NG? I would love to see this as i believe it is closer to reality than your prices. If so please make sure I can see it.

[uberCOAT]

Allen46:

You can do this yourself, by downloading the model and changing the price forecasts.

[dan_s]

allen46
The higher oil and gas prices would add 5% to 10% to my current valuations.

I highly recommend that you download one of the Excel forecast models and adjust the commodity price assumptions at the bottom to see how the models automatically update revenues, EPS, operating cash flow per share and the stock valuation. The forecast models are valuable tools, but only if you use them.

Keep in mind that I do adjust for regional price differentials and each company's hedges.

[uberCOAT]

https://seekingalpha.com/news/3793407-e ... 543187.376

Earthstone Energy to buy Midland Basin assets in $860M deal