Sweet 16 Update - Nov 12
Posted: Sat Nov 12, 2022 12:58 pm
All of the Sweet 16 forecast/valuation models are now updated. They can be viewed and/or downloaded to Excel from the EPG website. Just log on and click on the Sweet 16 tab. The models are valuable tools for your due diligence process. If you take just 30 minutes to study one of the forecast models it will help you understand the potential of each company. Most individual investors don't take much time to understand the companies that they invest in, which is why most individual investor don't make much money in the market. Being smarter than the "herd" can be extremely valuable. My mission is to find companies that have market beating potential. The Sweet 16 is a good place to start looking.
Despite oil and gas prices moving lower last week, the Sweet 16 gained 4.18% during the week ending November 11 and it is now up 66.11% YTD. < I do believe there continues to be a BIG PARADIGM SHIFT away from the belief that this world will soon run on wind and solar. This world runs on oil-based fuels and products that humans will be using for many more years. This Paradigm Shift is why I believe valuation multiples will rise as more money managers trust the long-term need for oil, gas and NGLs. The Sweet 16 closed on Friday at just 3.2 X operating cash flow for 2022 and all 16 companies are trading at single digit PE ratios. There is 80% upside to my current valuation of the portfolio.
The S&P 500 Index took us on a wild ride thanks to the results (or lack of final results) of the mid-term elections, but ended the week up 4.67%. It is still down 16.22% YTD.
> The GOP gaining control of the House IMO will be positive for the overall market because gridlock in Washington DC is better than out-of-control spending.
> Some good news on the inflation front might allow the FED to slow down interest rate increases.
LPI and SM were the only two companies that had somewhat disappointing Q3 results from operations, but they reported strong financial results. We will be sending out my updated profile on LPI on Sunday morning.
My updated valuations are now based on this formula: [(2 X 2022 operating CFPS) + 2023 operating CFPS] / a valuation multiple that I believe is appropriate. My valuation multiples take into consideration balance sheet strength, production growth rate and the quality of their "running room". EOG deserves the highest valuation multiple (7.5) because it gets A+ grade in all three. LPI deserves the lowest multiple (2.5) because of the production decline in Q3, but its per share earnings and operating cash flow are "stunning". NONE of the Sweet 16 have any near-term debt issues and all of them are generating free cash flow.
EOG also pays a nice "regular + special" dividend for 6.3% yield. I expect them to keep raising their dividends since they are now a "free cash flow machine".
CPE, CRK, ESTE and SBOW are all trading at less than half of my valuation. Earthstone Energy (ESTE) is my Top Pick because they are going to report 200% or more of production growth this year and their year-end reserve report is likely to show a PV10 Net Asset Value higher than my valuation of $38/share.
PV10 NAV = (Current Assets + PV10 of their proved reserves - total debt) / number of shares outstanding.
> To be more conservative: include any preferred stock in "total debt" and use the fully diluted number of shares.
Dividend yield and stock buybacks are also nice and may add 0.5 to my valuation multiple, but when I look at an upstream company the primary driver of stock value is production and proven reserve growth.
We sent out an updated profile on EQT this morning. If you are bullish on natural gas (like I am), EQT is a Screaming Buy. AR, CRK, RRC and SBOW are all going to report very strong Q4 and Q1 results if we just have a normal winter. We are burning a lot of ngas for space heating this coming week in Texas.
I am going to highlight Northern Oil & Gas (NOG) on today's podcast. It is an extremely aggressive growth company that is doing it through targeted acquisitions.
Despite oil and gas prices moving lower last week, the Sweet 16 gained 4.18% during the week ending November 11 and it is now up 66.11% YTD. < I do believe there continues to be a BIG PARADIGM SHIFT away from the belief that this world will soon run on wind and solar. This world runs on oil-based fuels and products that humans will be using for many more years. This Paradigm Shift is why I believe valuation multiples will rise as more money managers trust the long-term need for oil, gas and NGLs. The Sweet 16 closed on Friday at just 3.2 X operating cash flow for 2022 and all 16 companies are trading at single digit PE ratios. There is 80% upside to my current valuation of the portfolio.
The S&P 500 Index took us on a wild ride thanks to the results (or lack of final results) of the mid-term elections, but ended the week up 4.67%. It is still down 16.22% YTD.
> The GOP gaining control of the House IMO will be positive for the overall market because gridlock in Washington DC is better than out-of-control spending.
> Some good news on the inflation front might allow the FED to slow down interest rate increases.
LPI and SM were the only two companies that had somewhat disappointing Q3 results from operations, but they reported strong financial results. We will be sending out my updated profile on LPI on Sunday morning.
My updated valuations are now based on this formula: [(2 X 2022 operating CFPS) + 2023 operating CFPS] / a valuation multiple that I believe is appropriate. My valuation multiples take into consideration balance sheet strength, production growth rate and the quality of their "running room". EOG deserves the highest valuation multiple (7.5) because it gets A+ grade in all three. LPI deserves the lowest multiple (2.5) because of the production decline in Q3, but its per share earnings and operating cash flow are "stunning". NONE of the Sweet 16 have any near-term debt issues and all of them are generating free cash flow.
EOG also pays a nice "regular + special" dividend for 6.3% yield. I expect them to keep raising their dividends since they are now a "free cash flow machine".
CPE, CRK, ESTE and SBOW are all trading at less than half of my valuation. Earthstone Energy (ESTE) is my Top Pick because they are going to report 200% or more of production growth this year and their year-end reserve report is likely to show a PV10 Net Asset Value higher than my valuation of $38/share.
PV10 NAV = (Current Assets + PV10 of their proved reserves - total debt) / number of shares outstanding.
> To be more conservative: include any preferred stock in "total debt" and use the fully diluted number of shares.
Dividend yield and stock buybacks are also nice and may add 0.5 to my valuation multiple, but when I look at an upstream company the primary driver of stock value is production and proven reserve growth.
We sent out an updated profile on EQT this morning. If you are bullish on natural gas (like I am), EQT is a Screaming Buy. AR, CRK, RRC and SBOW are all going to report very strong Q4 and Q1 results if we just have a normal winter. We are burning a lot of ngas for space heating this coming week in Texas.
I am going to highlight Northern Oil & Gas (NOG) on today's podcast. It is an extremely aggressive growth company that is doing it through targeted acquisitions.