Energy Prospectus

The Sweet 16 is off to a rough start, down 5.83% YTD after the first week of trading. The S&P 500 Index had a nice rally on Friday and it is up 1.45% YTD after losing over 19% in 2022.

Today I am going to update my valuations for all of the five "gassers" with the assumption that HH natural gas will average $4.00/MMBtu this year. As I discussed on Friday's webinar, I think it is much too early to know where natural gas will be three months from now, much less for the year. The paper-traders have totally taken out the weather-related risk premium based on two weeks of mild weather. Just look at the weather hitting the West Coast today to see how big weather changes can impact energy demand.

Natural gas prices are set by regional supply and demand fundamentals. Spot prices for U.S. natural gas have been over $25/MMBtu on the West Coast and they are likely to remain high all winter as that region is grossly under-supplied. Spot markets in the Northeast are also in double-digits as those markets compete with imported LNG prices.

Oil prices are determined by global supply and demand fundamentals. Demand for oil is "seasonal" and Q1 is the lowest demand period because 90% of humans live in the Northern Hemisphere. We are still looking at a very tight global oil market.

I have lowered my current valuation for Antero Resources (AR) by $10 to $58.
> AR is going to report strong Q4 results with their realized natural gas price (net of cash settlements on hedges) being just around $4.77/mcf.
> With realized gas prices of $4.70/mcf in 2022, AR generated record profits and operating cash flow. Their balance sheet is in great shape heading into 2023 and FCF will be used to buyback a lot of stock.
> AR is virtually unhedged in 2023.
> TipRanks: "In the last 3 months, 8 ranked analysts set 12-month price targets for AR. The average price target among the analysts is $49.43. The 8 price targets range from $34 to $61."
> AR closed at $28.20 on January 6.
> Assuming HH natural gas averages $4.00 in 2023, AR should generate over $2.2 billion of operating cash flow this year. In 2022 AR's CapEx was approximately $950 million and I expect it to be near that level again in 2023.
> I do expect AR to be able to sell some gas at very high spot market prices this year.

Updated forecast models for all five of the gassers will be posted to the EPG website this afternoon.

I have updated my forecast/valuation model for Comstock Resources (CRK) assuming their realized natural gas prices will average $3.75/mcf in 2023.

CRK closed at $12.68 on January 6. My valuation is reduced by $7 to $33/share.
TipRanks: "In the last 3 months, 4 ranked analysts set 12-month price targets for CRK. The average price target among the analysts is $19.00. The 4 price targets range from $14 to $25."

Comstock is close to a "pure gasser" with 99% of their production being natural gas, primarily from the Haynesville Shale. Haynesville gas is very dry, so Comstock sells very little NGLs.
Record results in 2022:
> Despite having ~50% of their 2022 gas hedged at below market prices, their realized natural gas price (including some NGLs) was ~$4.60/mcf.
> Operating cash flow increased from $908 million in 2021 to over $1,700 million in 2022 (based on my Q4 forecast of $429 million operating cash flow).
> Free cash flow of approximately $700 million in 2022 was used to clean up the balance sheet, which is now in very good shape. Comstock has no near-term debt problems.
> Jerry Jones converted all of his preferred stock to common stock in December. < This is a very good thing for common stockholders.

My updated 2023 forecast (they are virtually unhedged with collars that have very high ceilings):
> Production should increase by 12% to 14% YOY to 1.5 to 1.6 Bcfepd.
> Net Income of $772 million ($2.78/share using 278 million shares after the pfd stock conversion). < TipRanks' average is $3.97 EPS.
> Operating Cash Flow of $1,452 million ($5.22/share), which compares to TipRanks' average of $6.27/share.
> Dividends will stay at $0.125/Qtr, leaving more than $1,300 million to totally cover this year's drilling program.

KEY PART OF MY VALUATION: Comstock holds over 1,600 low-risk / high yield horizontal drilling locations that IMO are worth at least $1 million per location. If the Japanese or Koreans want to buy more U.S. natural gas supply they should call Jerry Jones.

EQT Corp.
My valuation of EQT is reduced by $10 to $52 per share, based on a $4.00 HH ngas price in 2023.

EQT closed at $33.34 on January 6.

EQT's 2022 realized natural gas price in 2022 will end up being approximately $3.16/mcf. So, their operating cash flow will increase by about $500 million YOY in 2023 to approximately $4.2 billion.

Closing of the Tug Hill & XcL Acquisitions have been pushed back (probably to end of Q1 2023). The actual closing date has no impact on my valuation since the Effective Date has not changed.

TipRanks: "In the last 3 months, 13 ranked analysts set 12-month price targets for EQT. The average price target among the analysts is $60.36. The 13 price targets range from $40 to $85. The most recent update is from Goldman Sachs on 12/29/2022, which rates EQT a BUY with $49 price target."