Sweet 16 Update - July 8

[dan_s]

During the week ending July 7:
> The Sweet 16 lost 0.53% and is now down 4.24% YTD. 6 of 16 are up YTD with EQT (+17.38%) and PR (+16.28%) leading the pack.
> The S&P 500 Index lost 1.34%, but it is still up 14.57% YTD. Good year for the overall market tells me that the Wall Street Gang does not think a global recession is coming soon.

During the two years ending December 31, 2022 the current Sweet 16 portfolio gained 263.7%. As I have posted here numerous time, 2H 2023 results for this group should be very good and I expect market beating results over the next six months.

For the Sweet 16, net income will be down from Q1, but I expect all but AR to report profits and AR's loss will be only a few cents per share. They are all generating solid operating cash flow and most of them are generating free cash flow. Q2 should be the low point for the year for each company. The Wall Street Gang knows this, so lower Q2 results should be fully baked into the current share prices. Most oil & gas investors are more optimistic about oil & gas prices in 2H 2023.

The Big News last week came from Callon Petroleum (CPE) that closed two large transactions that improved their balance sheet and added a lot of high-quality "running room" in the Permian Basin. They sold their Eagle Ford assets, so the more concentrated asset base should lower their expenses. I have increased my valuation of CPE to $82.50/share. I urge all of you to download my updated forecast model to Excel and go over it line-by-line. Callon is going to generate close to $20 operating cash flow per share this year (compared to $25.61/share in 2022). A valuation of 4X operating CFPS is not unreasonable.

Sweet 16 still trading below book value (with nothing to justify it): AR, CPE, CPG, ESTE, VTLE and SBOW

Sweet 16 that pay dividends: CRK, CPG, EOG, EQT, MGY, MTDR, NOG, OVV, PR, RRC, SM (those with a base dividend over 4%: CRK, CPG, NOG)

Sweet 16 that get the majority of their revenues from natural gas and NGL sales: AR, CRK, EQT, RRC

I was interviewed for a podcast based in Washington DC last week and the interviewer was surprised when I told him that all-in cash expenses (including interest expenses and income taxes) for all of the upstream companies that I follow were under $25/boe of production. The average investor has no idea how profitable and how much operating cash flow that these companies generate at current oil & gas prices. Even our "gassers" have all-in expenses under $1.50/mcf. Comstock Resources (CRK) has the lowest cash operating expenses per mcf because it has flowing Haynesville and Deep Bossier wells with very high flow rates. CRK is the closest to a "Pure Gasser" in the Sweet 16. I am long-term bullish on U.S. natural gas prices, so adding CRK at today's low price should be "wise" and you get a decent dividend while waiting for ngas prices to move higher.

Comstock is now selling a lot of gas directly to LNG export companies at a premium to HH gas prices.

The Sweet 16 closed on July 7 at a 73% discount to my current valuation and at a 36% discount to First Call's current price targets.

First Call's price targets are just the average of the analysts' price targets submitted to Reuters. Their database does include some price targets that are over six months old. My opinion is that the direction of the First Call price targets is more important than the actual target. Rising FC price targets mean that recently revised price targets have been increased. I often quote TipRanks' price targets because their database only includes reports that are less than 3 months old and they list the most recent updates.

Today's podcast will focus on why Raymond James and several other top shelf energy sector teams (Rystad, Goldman Sachs and UBS) think the global oil market is going to get VERY TIGHT over the next few months.