Sweet 16 Update - Jan 16

[dan_s]

I have FINALLY FINISHED updating all 16 forecast/valuation models for the adjustments that I made to my oil and gas price deck. I have also lowered NGL prices a few dollars per barrel.

For 2023 I am using average prices of $85/bbl for WTI oil and $4.00/MMBtu for Henry Hub natural gas prices. I expect oil prices to drift over $100/bbl in 2H 2023 because the global oil market is much tighter than investors realize. As FEAR of recession fades this summer, it will become clear that oil demand exceeds supply. Natural gas prices are set by regional supply/demand and all of the energy traders seem to believe that winter ended at the beginning of January. It did not.

Based on my new forecasts CPE, CRK, ESTE, SBOW and VTLE closed on January 13 at less than half of my valuations. My valuation of SBOW is now $84.00, which compares to its last trade at $27.37. SilverBow is listed as a "gasser", but its revenues are split evenly between liquids and natural gas.

Earthstone Energy (ESTE) remains my Top Pick because it is going to report strong production growth.

Laredo Petroleum has changed its name to Vital Energy (VTLE). It has a very low number of shares, so wild price swings will continue. It will report strong Q4 results. It is the most profitable company in the Sweet 16.

Permian Resources (PR) and Magnolia Oil & Gas (MGY) are closest to my valuations of $12.50 and $30.00 respectively, but they could surprise me with their 2023 guidance. PR could have a lot more upside for us, because I am using a very conservative multiple since the company is still digesting the merger with Colgate.

Antero Resources (AR) should be the first company to report Q4 results.

Due to the MLK holiday, there was light trading in the oil and gas futures markets.

Trading Economics:
"WTI crude futures steadied just below $79 per barrel on Monday as investors weighed an improving demand outlook in China against the prospect of an economic slowdown in other major economies. The US oil benchmark rallied more than 8% last week as China’s reopening from Covid curbs raised hopes for a boost in economic activity and mobility, with analysts forecasting oil demand in the top crude importer will likely hit a record this year. Easing inflation expectations in the US also bolstered bets for less aggressive interest rate hikes from the Federal Reserve, fueling a rally in risk assets. Meanwhile, investors remain cautious about fears of a global recession, with major US banks increasing their reserves to protect against deteriorating economic prospects this year. Investors now look ahead to market outlook reports from OPEC on Tuesday, followed by the EIA on Thursday." < All that's needed to more oil prices higher is less FEAR of a recession. Global oil demand will move quite a bit higher in Q2, as it does every year.

"US natural gas futures were trading around $3.6/MMBtu, recovering from an over 1-1/2-year low of $3.3 hit in the previous week as investors poured money back into the commodity amid prospects of a recovery in demand as temperatures should move towards more seasonal levels later this month. Still, any significant rebound is likely unsustainable if unseasonably warm weather sticks and domestic output continues to soar. US natural gas production is expected to grow more than 2% this year to a record daily average of 100.3 billion cubic feet, the Energy Information Administration said. Adding to the bearish tone, the Freeport LNG export plant in Texas, forced to go offline in June following a fire, again delayed the restart to the second half of January, leaving more supply on the domestic market. Traders worry the plant will only be back online during the first or second quarter due to the need for further work to satisfy federal regulators."