Sweet 16 Update - July 9

[dan_s]

The Sweet 16 declined by 2.64% during the week that ended July 8. It is still up 27.28% YTD.
The S&P 500 Index gained 1.55% during the week, but is still down 18.19% YTD.

WTI oil went on a wild ride during the holiday shortened week. It spiked to $111.57 inter-day on July 4 in light trading, dropped to $95.48 inter-day on July 6 and ramped up to close at $104.80 on July 8. There is a lot for "noise" about a recession that might lower oil demand, but the fact is this world is short oil and there is no more spare supply coming from OPEC+. The cartel is tapped out, OECD petroleum inventories are too low, demand exceeds supply and we are draining the Strategic Oil Reserve. Over 5 million barrels of SPR oil was shipped to Europe and Asia, with close to a million barrels going to China. IMO, that should outrage all Americans.

The International Energy Agency (IEA) will release their July "Oil Market Report" next week. It will draw a lot of attention.

Henry Hub natural gas prices were pulled lower by the oil price early in the week until a bullish storage report came out on Thursday. The AUG22 futures contract closed at $6.064/MMBtu on July 8. All of the Sweet 16 forecast/valuation models have now been updated based on the assumption that HH ngas will average $6.00 in Q3, $7.00 in Q4 and $5.00 in 2023. I expect all five of our "gassers" (AR, CRK, EQT, RRC and SBOW) to report very strong Q2 results.

SilverBow Resources (SBOW) announced the closing of the Sundance Acquisition on July 5 and they provided updated guidance for 2022 and 2023. I have updated my current valuation to $100.00, which compares to First Call's price target of $70.50. I do expect SilverBow to get a lot more "love" from the Wall Street Gang because they are going to announce strong Q2 results and their increased size and running room should put them on more analysts' watch lists.

Callon Petroleum (CPE) is the only Sweet 16 company that is down since the beginning of the year. It is down 18.9% and I can't find anything to justify the current price. In the last 3 months, 7 ranked analysts have submitted 12-month price targets to TipRanks for CPE. The average price target among the analysts is $88.00 and their price targets range from $68.00 to $145.00. My current valuation is $123.00.
> Based on my forecast, Callon should beat First Call's EPS forecast for Q2 of $4.40 and report operating cash flow of ~$471 million ($7.66/share).
> Callon is free cash flow positive; over $800 million FCF for 2022 based on my forecast and their guidance.
> The Company's production s/b up ~10% year-over-year in 2022 and continue that growth rate in 2023.
> It has no near-term debt problems and lots of high-quality drilling inventory.

Earthstone Energy (ESTE) pulled back and is now trading below book value. Nothing justifies the selloff. They are going to announce very strong Q2 results and the Company is on pace to end this year with production approaching 100,000 Boepd. Earthstone is a well-funded "Aggressive Growth" company with a rock-solid management team. It will take a big decline in oil & gas prices to justify the current share price. Aggressive Growth companies seem to be out-of-favor with investors these days, but growth companies have generated most of the Sweet 16's largest gains over the last 20 years. For you new members, I published the first Sweet 16 Growth Portfolio in 2001.

Each week I update the Sweet 16 main spreadsheet that compares my stock valuations to First Call's price targets. FC price targets are lower than my current valuations, but most of them have stayed the same or drifted a bit higher in June and July despite the recent volatility in the oil market and the pullback in ngas prices since the Freeport LNG facility shutdown.

The Sweet 16 main spreadsheet has two tabs. On the first tab to the far right (column V) I now show when I expect each company to release Q2 results.
> AR, EQT, MTDR, RRC and SM are expected to release results the last week of July.
> The others should all release Q2 results early in August.
> They are all going to announce STRONG Q2 RESULTS and lots of FREE CASH FLOW FROM OPERATIONS.

My podcast will be posted to the EPG website on Saturday afternoon.