Sweet 16 Update - July 1
Posted: Sat Jul 01, 2023 1:48 pm
Welcome to the 2nd half of 2023.
I believe that a significant "Paradigm Shift" is going to bring a lot more investors back to the energy sector, especially to the high-quality upstream oil and gas companies in our Sweet 16. Why? Here are just a few reasons.
1. Global demand for oil-based products exceeds supply. Last week's EIA Petroleum Report showed a 9.6 million barrel decrease in U.S. crude oil inventories. We should be seeing more large draws from storage.
2. Drawing down the oil in the U.S. Strategic Petroleum Reserve (SPR) should have ended in June. Per EIA, during the 5-weeks ending June 23rd 9,337,000 barrels of oil were taken out of the SPR and moved to commercial inventories. Since Old Joe Biden became president, 289,468,000 barrels of oil have been drained from the SPR. Some was actually shipped to China. Team Biden has announced plans to slowly rebuild the SPR inventory, but I find it hard to believe anything that this administration tells us.
3. Starting today, Saudi Arabia will begin the process of lowering their oil exports by 1 million bpd. Based on Rystad Energy's research, this should push global supply 2.4 million bpd below demand. If demand exceeds supply by even half that amount it should push WTI over $90/bbl by Q4.
4. Fear of Recession should fade. The Fed is beginning to look like the "Boy that Cried Wolf". They have been stoking this fear for over a year.
So far, there is no real evidence that the world is heading to a major recession. If we do have a mild recession it won't have a big impact on oil demand. Oil demand growth in China and India continues to be resilient.
5. Our Sweet 16 should all report positive net income for Q2. Based on my forecast models, Antero Resources (AR) is the only company in the Sweet 16 that might report a small loss for the quarter. They reported net income per share of $0.72 in Q1 and my forecast for Q2 is just $0.03 EPS. With the recent surge in natural gas prices Q3 and Q4 now have move into solid positive territory.
> Q2 will be the low point for 2023 net income for the Sweet 16. Based on my forecasts, Vital Energy (VTLE) has moved back into the lead for most profitable Sweet 16 company based on earnings per share, followed by SBOW, EOG, CPE and MTDR.
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During the week ending June 30th the Sweet gained 6.94%, but it is still down 3.71% year-to-date. Leading the pack was SilverBow Resources (SBOW), that gained 14.4% to $29.12. My current valuation is $65.00.
The S&P 500 Index gained 2.66% last week and is now up 15.91% YTD. The stock market sure is not telling us that a major recession is directly ahead. With higher interest rates, I expected to see a lot of investors moving into bonds.
Two of our large-cap gassers, EQT up 21.58% and RRC up 17.51% still lead the pack. With U.S. natural gas prices down over 51% year-over-year I sure would not have predicted this, however both companies are rock solid and have a lot of upside for us if natural gas prices just get back to $3.00.
Sweet 16 stocks trading at less than half of my current valuation are:
> Vital Energy (VTLE) with 152.5% upside to my current valuation.
> Earthstone Energy (ESTE) with 134.4% upside
> SilverBow Resources (SBOW) with 123.2% upside
> Callon Petroleum (CPE) with 119.6% upside
Vital Energy closed the Driftwood Acquisition on April 3. I expect the Company to report a 5,500 Boepd production increase from Q1 to Q2 and EPS of more than $3.50 for Q2. Vital should also report the closing of an asset package acquisition from Forge Energy II Delaware, LLC (a private company) that will add ~9,500 Boepd of production and a lot more running room.
Earthstone Energy is expected to close the Novo Acquisition in late August that will push their production up to ~132,500 Boepd. In my opinion, ESTE trading at less than 2X operating cash flow is insane. This Company's management team has a very strong track record. TipRanks' operating cash flow forecasts are $8.22 for 2023 and $9.86 for 2024. My CFPS forecast for 2024 is $10.28. On June 20th Neal Dingmann raised his price target to $32.00.
SilverBow Resources is the smallest company in the Sweet 16 with a market capitalization of $659 million. The stock is still trading below book value, which makes no sense. The Company reported $4.18 earnings per share for Q1 and my full year forecast is $11.36 EPS. SilverBow's production guidance is that their oil production will double this year. They also have some high-quality DUC natural gas wells in Webb County that I expect them to complete in Q4 if HH ngas prices go over $3.50. Rising natural gas prices is a BIG DEAL for SBOW.
Callon Petroleum is expected to close the sale of their Eagle Ford Asset Package in July for $655 million. Only $265 million of that cash will be needed to close the Percussion Petroleum Acquisition this month, which will more than replace the production that is being sold. Callon's balance sheet will be in much better shape at the end of July. Callon's 2H 2023 production should average 106,000 Boepd (~60% oil), compared to 99,768 Boepd in Q1 (~60% oil). CPE closed on June 30th at $35.07, which is just 1.79 X my 2023 operating cash flow forecast of $19.55 per share.
If we do see the "Paradigm Shift" in Q3 that I opened this post with, the upstream oil & gas subsector should see some multiple expansion. In my opinion, none of the Sweet 16 should be trading at less than 4X operating cash flow per share and based on Friday's closing prices the portfolio average is 3.37 X operating cash flow per share.
You can find my operating cash flow per share forecasts for each company on the Sweet 16 Summary Spreadsheet that is updated and posted to the EPG website each weekend.
I believe that a significant "Paradigm Shift" is going to bring a lot more investors back to the energy sector, especially to the high-quality upstream oil and gas companies in our Sweet 16. Why? Here are just a few reasons.
1. Global demand for oil-based products exceeds supply. Last week's EIA Petroleum Report showed a 9.6 million barrel decrease in U.S. crude oil inventories. We should be seeing more large draws from storage.
2. Drawing down the oil in the U.S. Strategic Petroleum Reserve (SPR) should have ended in June. Per EIA, during the 5-weeks ending June 23rd 9,337,000 barrels of oil were taken out of the SPR and moved to commercial inventories. Since Old Joe Biden became president, 289,468,000 barrels of oil have been drained from the SPR. Some was actually shipped to China. Team Biden has announced plans to slowly rebuild the SPR inventory, but I find it hard to believe anything that this administration tells us.
3. Starting today, Saudi Arabia will begin the process of lowering their oil exports by 1 million bpd. Based on Rystad Energy's research, this should push global supply 2.4 million bpd below demand. If demand exceeds supply by even half that amount it should push WTI over $90/bbl by Q4.
4. Fear of Recession should fade. The Fed is beginning to look like the "Boy that Cried Wolf". They have been stoking this fear for over a year.
So far, there is no real evidence that the world is heading to a major recession. If we do have a mild recession it won't have a big impact on oil demand. Oil demand growth in China and India continues to be resilient.
5. Our Sweet 16 should all report positive net income for Q2. Based on my forecast models, Antero Resources (AR) is the only company in the Sweet 16 that might report a small loss for the quarter. They reported net income per share of $0.72 in Q1 and my forecast for Q2 is just $0.03 EPS. With the recent surge in natural gas prices Q3 and Q4 now have move into solid positive territory.
> Q2 will be the low point for 2023 net income for the Sweet 16. Based on my forecasts, Vital Energy (VTLE) has moved back into the lead for most profitable Sweet 16 company based on earnings per share, followed by SBOW, EOG, CPE and MTDR.
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During the week ending June 30th the Sweet gained 6.94%, but it is still down 3.71% year-to-date. Leading the pack was SilverBow Resources (SBOW), that gained 14.4% to $29.12. My current valuation is $65.00.
The S&P 500 Index gained 2.66% last week and is now up 15.91% YTD. The stock market sure is not telling us that a major recession is directly ahead. With higher interest rates, I expected to see a lot of investors moving into bonds.
Two of our large-cap gassers, EQT up 21.58% and RRC up 17.51% still lead the pack. With U.S. natural gas prices down over 51% year-over-year I sure would not have predicted this, however both companies are rock solid and have a lot of upside for us if natural gas prices just get back to $3.00.
Sweet 16 stocks trading at less than half of my current valuation are:
> Vital Energy (VTLE) with 152.5% upside to my current valuation.
> Earthstone Energy (ESTE) with 134.4% upside
> SilverBow Resources (SBOW) with 123.2% upside
> Callon Petroleum (CPE) with 119.6% upside
Vital Energy closed the Driftwood Acquisition on April 3. I expect the Company to report a 5,500 Boepd production increase from Q1 to Q2 and EPS of more than $3.50 for Q2. Vital should also report the closing of an asset package acquisition from Forge Energy II Delaware, LLC (a private company) that will add ~9,500 Boepd of production and a lot more running room.
Earthstone Energy is expected to close the Novo Acquisition in late August that will push their production up to ~132,500 Boepd. In my opinion, ESTE trading at less than 2X operating cash flow is insane. This Company's management team has a very strong track record. TipRanks' operating cash flow forecasts are $8.22 for 2023 and $9.86 for 2024. My CFPS forecast for 2024 is $10.28. On June 20th Neal Dingmann raised his price target to $32.00.
SilverBow Resources is the smallest company in the Sweet 16 with a market capitalization of $659 million. The stock is still trading below book value, which makes no sense. The Company reported $4.18 earnings per share for Q1 and my full year forecast is $11.36 EPS. SilverBow's production guidance is that their oil production will double this year. They also have some high-quality DUC natural gas wells in Webb County that I expect them to complete in Q4 if HH ngas prices go over $3.50. Rising natural gas prices is a BIG DEAL for SBOW.
Callon Petroleum is expected to close the sale of their Eagle Ford Asset Package in July for $655 million. Only $265 million of that cash will be needed to close the Percussion Petroleum Acquisition this month, which will more than replace the production that is being sold. Callon's balance sheet will be in much better shape at the end of July. Callon's 2H 2023 production should average 106,000 Boepd (~60% oil), compared to 99,768 Boepd in Q1 (~60% oil). CPE closed on June 30th at $35.07, which is just 1.79 X my 2023 operating cash flow forecast of $19.55 per share.
If we do see the "Paradigm Shift" in Q3 that I opened this post with, the upstream oil & gas subsector should see some multiple expansion. In my opinion, none of the Sweet 16 should be trading at less than 4X operating cash flow per share and based on Friday's closing prices the portfolio average is 3.37 X operating cash flow per share.
You can find my operating cash flow per share forecasts for each company on the Sweet 16 Summary Spreadsheet that is updated and posted to the EPG website each weekend.