Sweet 16 Update - July 15

[dan_s]

WTI gained $1.56/bbl during the week ending July 15th, but the oil price pulled back on Friday triggering a selloff of the Sweet 16. There is still a lot of FEAR keeping investors on the sidelines. It will take time for the The Big Paradigm Shift to remove the FEAR.

For the week ending July 14th:
> The Sweet 16 gained just 0.16% and it is still down 4.08% YTD.
> Thanks to a bit less Fear of the Fed, the S&P 500 Index gained 2.77% and is now up 17.34% YTD.

A Wild Week in the oil markets with a lot of bullish news to digest:
The AUG23 WTI crude futures contract closed at $75.19 on Friday, $2.08 higher than where it opened on Monday, July 10. WTI moved briefly over $77.00 in early trading on Thursday. This is the 3rd week in a row of a higher close for WTI.
In addition to less Fear of the Fed, supply disruptions are tightening the global oil market with U.S. and OECD Petroleum Inventories already below normal for this time of year.
> Libya’s second-largest oil field is in the process of shutting due to protests, while there’s also a production halt in Nigeria, Bloomberg reported.
> That follows signs that Russian flows are finally starting to decline, with the global market expected to tighten in the second half due to supply cuts from Saudi Arabia and Russia.
> OPEC maintained a positive outlook on world oil demand, raising its growth forecast for 2023 and predicting just a slight slowdown in oil demand growth 2024, driven by strong fuel consumption in China and India.
> IEA also reported that oil supply growth is not keeping up with oil demand growth.
> Cooler-than-expected US inflation numbers also raised hopes that the Federal Reserve may be nearing the end of its rate-hiking cycle, boosting market sentiment.

HH natural gas price closed at $2.54, 6 cents lower than where it opened on Monday.
> My forecasts for 2H 2023 are based on the HH price averaging $2.50 in Q3 and $2.75 in Q4.
> Hot weather will continue to be the primary focus of the paper traders.

Permian Resources (PR) has moved into the Sweet 16 lead, up 14.26% YTD. It jumped over EQT Corp. (up 12.95% YTD) which dropped back to 3rd place behind Range Resources (RRC) that is up 13.23% YTD.

In this weekend's podcast I am going to highlight Vital Energy (VTLE), the most profitable company in the Sweet 16 on a per-share basis. VTLE is down 9.7% YTD despite being on-track for net income of approximately $21/share this year. More importantly, it is once again on-track to generate over $40/share of operating cash flow. The Company closed two accretive acquisitions in Q2 that sets up solid 2H 2023 results and gives them a lot more "running room" in 2024.

EQT and RRC are now approaching my Fair Value estimates. They are both high quality "gassers". U.S. natural gas prices should move up to $3.00 as winter approaches, but IMO the near-term outlook is much better for oil prices (watch my July 8 podcast). Think about harvesting those gains and moving the money to Matador Resources (MTDR), Ovintiv (OVV), or SM Energy (SM) that are solid mid-caps that have a lot of natural gas production but they have a more balanced production mix. Based on my forecasts they have more than 50% upside.

I did see the report of Callon Petroleum (CPE) being fined $1.3 million by the EPA. Callon will be generating close to $1.3 billion in operating cash flow this year, so that fine has no impact on my valuation of $82.50/share.