Sweet 16 Update - Mar 26

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - Mar 26

Post by dan_s »

Susan and I are back in our home, well rested from a nice vacation to Honduras and Mexico. It was quite cold on March 19th when we left Houston, but the weather was perfect after we arrived in Roatan, Honduras.
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During the week ending March 24 the Sweet 16 gained 3.25%, but the portfolio is still down 16.67% YTD. Permian Resources (PR) is the only S16 stock that is up YTD, just 2.02%.
The S&P 500 Index gained 1.58% and is now up 3.42% YTD. Most investors seem to believe that the bank problems are now contained. Let's hope so. None of the Sweet 16 have been directly impacted by the banking problems.

I do expect most, if not all of the Sweet 16 companies to report better earnings for Q1 2023 than they did in Q1 2022 because 2023 "reported net income" for most of them will include some very large MTM gains on their hedges. Cresent Point (CPG) and Magnolia Oil & Gas (MGY) may be the exceptions.

Q1 2023 Operating Cash Flow will be down YOY, but most of them will still be free cash flow positive. All of them have strong balance sheets and they have no near-term debt problems.

Our four gassers (AR, CRK, EQT and RRC) will struggle a bit with the recent pullback in natural gas prices, but all of them have been through much worse before. There is not a "glut" of natural gas in the U.S. and hot summer weather will bring the utilities back into the futures market soon. I expect all of them to slow down their well completions until natural gas prices rebound to over $3.00. Natural gas storage levels will move closer to the 5-year average by mid-April.

WTI oil prices found support at $65 on Monday and then moved over $71. WTI pulled back to $67 Friday morning before moving over $69 on Friday afternoon. There will be more volatility to come in the futures market, but the fundamentals definitely point to a tight global oil market this summer and much higher oil prices within six months. See notes below.

We have published updated profiles on all of the companies, except for Vital Energy (VTLE) and I will finish that profile this coming week.

I have to prepare for the U.S. Energy Development (USED) webcast on Tuesday at 1PM CT. EPG members can attend the live event if you register with USED. Send an email to Sabrina if you still need to register and she will send you the link.
After the webcast I will focus on updating the oil & gas price decks used in my forecast/valuation models and get started on the March newsletter, which will be a few days late (my goal is to publish it on Monday, April 3).

Conclusion: All of the Sweet 16 entered 2023 with strong balance sheets. They are all more than capable of surviving the recent dip in oil & gas prices. Q1 2023 realized oil and gas prices should be close to what I used in my forecast models. My stock valuations will be lowered a bit in the next newsletter, but nothing drastic. First Call's price targets have barely moved because the Wall Street Gang realizes that the fundamentals are still quite strong for upstream oil & gas companies.

Later this afternoon my Sweet 16 Summary Spreadsheet will be posted to the EPG website under the Sweet 16 tab. You will be able to download it directly from the EPG website. Under Tab 2 you will find my current valuation and First Call's current price target for each stock .
Last edited by dan_s on Sun Mar 26, 2023 1:43 pm, edited 1 time in total.
Dan Steffens
Energy Prospectus Group
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - Mar 26

Post by dan_s »

OilPrice.com: Goldman Sachs Expects Oil Prices To Climb Higher In June
By Irina Slav - Mar 23, 2023

Goldman Sachs expects higher oil prices 12 months from now, analysts from the investment bank said in a note, pointing out a forecast demand increase in China to more than 16 million barrels daily over the period.

The bank is quite bullish on all commodities: earlier this week, its head of commodities, Jeffrey Currie, said that the outflow of capital from the energy industry will result in shortages that will manifest later this year.

"Historically, when you have this kind of scarring event, it takes months to get capital back ... We will still get a supply deficit by June and it will drive oil prices higher," Currie said at the Financial Times Commodities Global Summit, as quoted by Reuters.

Currie is not the only bullish industry observer. Also this week, hedge fund manager Pierre Andurand said oil will rebound and rise to $140 per barrel by the end of the year, noting that the current slump was speculative and came from the banking sector. < Lots of banks were forced to close their long positions in WTI futures contracts a week ago. Once the "smoke clears" a bit, they will re-establish those longs.

A lot of the bullishness around oil prices has to do with China. Chinese energy commodity imports were underwhelming in the first two months of 2023, but they are expected to pick up later this year with potentially record-high crude oil purchases, even though Beijing has set its lowest annual economic growth target in decades.

Average oil imports over the first two months of the year were lower than last year’s but only modestly, by 1.3%. Oil imports during January and February tend to be weaker in China because of the Lunar New Year holidays, anyway.

Yet pretty much every analyst expects Chinese demand for oil to grow in the coming months with a view to that growth rate of 5% set by the government. Besides, there is some new refining capacity coming online this year, which should guarantee stronger crude oil demand and lend a hand to prices.

By Irina Slav for Oilprice.com
Dan Steffens
Energy Prospectus Group
dan_s
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Re: Sweet 16 Update - Mar 26

Post by dan_s »

Earlier from OilPrice.com

Standard Chartered Blames Gamma Hedging For Overdue Oil Selloff
By Alex Kimani - Mar 19, 2023, 4:00 PM CDT

Standard Chartered: Gamma hedging has exacerbated the sell-off in oil futures. < This is what pushed the front month WTI futures contract below $65 on March 20.
> A cross-section of commodity experts are saying that the oil price crash is an overreaction to the banking crisis and that the selloff is overdone.
> Most experts believe that the banking crisis is not systemic nor indicative of a looming financial crisis

The energy sector has emerged as the worst performer among all 11 sectors of the U.S. market in the current week, with energy prices dropping sharply as a spate of bank failures reignited a wave of risk-off selling.

Oil prices have crashed spectacularly, with WTI crude falling from $80.46 per barrel just 10 days ago to the $67 range, while Brent has declined from $86.18 per barrel to the $73 range, levels they last touched in December 2021. On Friday (March 17), things improved slightly, with Brent moving into the $75 range and WTI testing $69.

Commodity analysts at Standard Chartered warn that the oil price crash has been exacerbated by hedging activity–specifically, due to gamma hedging effects, with banks selling oil to manage their side of options as prices fall through the strike prices of oil producer put options and volatility increases. The negative price effect has been exacerbated because the main cliff-face of producer puts currently occupies a narrow price range.

While gamma hedging effects did not cause the initial price fall, they have caused a short-term undershoot, further magnified by the closing out of associated less committed speculative longs. StanChart has worked out the distribution of producer puts based on a survey of 46 U.S. independent producers.

On a brighter note, StanChart’s proprietary bull-bear index rose 32.2 w/w to a mildly bullish +20.1, buoyed by declines in crude inventories (both nationally and at Cushing) relative to the five-year average as well as improvement in demand. The analysts have predicted that oil prices will recover as the global oil surplus dissipates.


Selloff Overdone: A cross-section of commodity experts are saying that the oil price crash is an overreaction to the banking crisis and that the selloff is overdone.
Michael Tran, managing director of global energy strategy at RBC Capital Markets, has told Bloomberg that the oil markets are reacting as if the economy is in a full-blown recession, “This is a (oil) market effectively trading as if the economy is already in a full blown recession. Everybody knows why oil prices are coming off. It’s not an oil market specific issue, it’s a broad macro issue,” he has stated.

Tran sees oil prices climbing in the second half of this year amid China's economic reopening, and heightened demand coming from India. He also anticipates that oil prices will climb in the coming weeks and months once the panic settles within the markets.

The good news at this juncture is that most experts believe that the banking crisis is not systemic nor indicative of a looming financial crisis.

Whereas the U.S. government has ruled out a bailout for SVB, its Swiss peer has been more lucky after the troubled lender was offered a lifeline after the Swiss National Bank agreed to loan the struggling lender up to 50B francs ($54B). The bank also announced public tender offers by Credit Suisse International to repurchase certain OpCo senior debt securities for cash of up to ~3B francs. Previously, the Saudi National Bank, which owns almost 10% of Credit Suisse, declared that it would not provide further support to the group, days after the bank disclosed ‘material weakness’ in its financial statements just weeks after reporting a net loss of £6.6 billion for FY 2022.

As a Global Systemically Important Bank, the plight of Credit Suisse has been a much bigger concern for the global markets due to the sheer scale of its balance sheet and much bigger potential for contagion from the bank’s global reach. But the fact that shares of Credit Suisse and those of European banks have recovered swiftly suggests that the markets do not view the banking crisis as being systemic or likely to unravel on a wider scale. As UBS Wealth chief investment officer Mark Haefele has said, the swift action by the FDIC to guarantee deposits and by the Fed to lend to banks that require funds will solve liquidity-related risks for U.S. banks and also for the U.S. branches of foreign banks.

The broader market is also in a bullish mood. < S&P 500 Index moved higher last week and close up 3.42% YTD on March 24.

For the third straight week, investors have been net buyers of fund assets including exchange traded funds (ETFs) and traditional funds. For the seven-day period ending March 15, market participants pumped $88.4B of net capital into the fund market with money market funds taking in $108B. Interestingly, the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) attracted the most significant cash at $1.4B, while SPDR Gold Trust (NYSEARCA:GLD) came in second after pulling in $501M.

By Alex Kimani for Oilprice.com
Dan Steffens
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Re: Sweet 16 Update - Mar 26

Post by Fraser921 »

Oh my! I had to look that up:

https://www.investopedia.com/terms/d/deltagamma-hedging.asp
dan_s
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Re: Sweet 16 Update - Mar 26

Post by dan_s »

A colder than normal April could push natural gas prices higher.

“Looking ahead to April, the latest forecasts indicate around 370 total degree days for the month,” analysts from Tudor Pickering and Holt analysts said.
This is 17% below the five-year average. The “focus continues to shift gears to the latest in power burn, with demand continuing to outpace norms this week (plus-3.7 Bcf/d versus the five-year average), but moderating relative to month-to-date results (plus-4.3 Bcf/d versus the five-year average),” TPH said, according to naturalgasintel.
Dan Steffens
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dan_s
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Re: Sweet 16 Update - Mar 26

Post by dan_s »

This is why the long-term outlook for our gasser is bright.

EIA: U.S. To Remain Net Energy Exporter Through 2050
Joel Acosta // Researcher, Washington DC
March 21, 2023

The Energy Information Administration’s 2023 Annual Energy Outlook (AEO) projects U.S. energy production to remain high, exports to grow, and natural gas consumption to remain stable as renewable energies integrate onto the grid through 2050. The combination of increased energy efficiency, including upgrades from simple cycle natural gas turbines to combined cycle natural gas turbines, and increased renewables result in a projected 25-38 percent reduction in energy-sector related CO2 emissions below 2005 levels by 2030. In 2022, the United States tied Qatar as the world’s largest exporter of liquified natural gas, and the EIA expects U.S. energy exports to grow with the increased demand for LNG through 2050. In the last year alone exports grew 9 percent, and international demand is expected to continue into the future, keeping U.S. production at historic highs. LNG growth along the Gulf Coast is already preparing for an increase in export capacity with 169 million metric tons being brought online by 2027, and an additional 54.5 million tons of capacity in line for review this year. This growth is expected to continue: EIA projects LNG exports in 2050 to total between 27 to 28 billion cubic feet per day – more than 2.5 times capacity in 2022. Even in the Low Uptake case, LNG exports increase 2.3 times over their 2022 levels. Looking at long-term trends, the EIA’s Annual Energy Outlook projects a steady place for natural gas in energy generation, increased renewable generation, reduced energy-related CO2 emissions, and historic highs of energy exports.

Energy exports are extremely important to keeping the U.S. trade deficit from getting out of control.
Dan Steffens
Energy Prospectus Group
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