Sweet 16 Update continued - Sept 16

[dan_s]

During the week ending September 15 the Sweet 16 lost 5.11% and is now up 14.62% YTD.
It was a wild ride in the overall market and the S&P 500 Index lost 0.19% and is now up 16.91% YTD.

The price of WTI has increased for three weeks in a row and is now up 15.3% in the last month and 8.4% higher than it was a year ago. The Sweet 16 is now heavily weighted to oil, so last week's pullback makes no sense. All I can say is "Buy the Dip", because the supply/demand fundamentals point to higher oil prices. Natural gas prices should also trend higher just because winter is approaching.

As I posted yesterday, the big pullbacks for SilverBow Resources (SBOW) and Vital Energy (VTLE) seem way overdone to me. They both announced "Transformative" acquisitions that give them a lot more "running room". In my opinion, the equity offerings to fund the acquisitions are good things for them since they both needed more outstanding stock to increase their public float. Companies of this size that use 100% debt to fund growth is risky business.

I took a hard look at Callon Petroleum (CPE) this morning and I'm keeping my valuation at $84.50, which is 119% above the current share price.
> Callon is one of the most profitable companies in the Sweet 16. < Ignore the big non-cash impairment charge in Q2, which has no impact on my stock valuation. I value companies based on operating cash flow, not reported net income.
> My valuation is just 4X annualized operating cash flow per share and operating CFPS should be going up in 2024.
> My operating CFPS forecast for 2023 is $18.48, which compares to TipRanks' CFPS forecast of $18.22.
> My operating CFPS forecast for 2024 is $21.93, which compares to TipRanks' CFPS forecast of $20.31.
> Per TipRanks: Mizuho Securities analyst Nitin Kumar CFA (rated 5 Star by TipRanks) reiterated a Buy rating on Callon (CPE) on September 6 and set a price target of $59.00. My valuation is higher just because I am basing my 2024 forecast on $90 WTI after Q3 2023.
> Callon closed an Eagle Ford asset sale and a Permian Basin acquisition on July 5th. They sold more current production than they acquired, but they added a lot more running room in Permian Basin. Production will be down ~5% in Q3, but increase nicely in Q4 to an exit rate over 107,000 barrels per day.
> Cash proceeds from the Eagle Ford sale paid off a lot of debt. Callon's balance sheet will be in much better shape on 12-31-2023 than it was on 12-31-2024.
> I expect that their year-end PV10 Net Asset Value will exceed my valuation of $84.50.

Magnolia Oil & Gas (MGY) is now down 1.75% YTD. This company is heavily weighted to oil and none of their production is hedged. MGY pays a nice dividend and it has steady growth locked in. They recently announced a nice acquisition that adds more value. My current valuation is $30/share.

I love the merger of Earthstone Energy (ESTE) into Permian Resources (PR). It is heavily weighted to oil with a lot of high-quality running room in the Delaware Basin. My updated price target for PR is $21/share. Size matters in this business and the Wall Street Gang will value PR at a higher multiple when the merger closes. Mark Lear at Piper Sandler recently raised his price target to $19.00.

First Call's price target for Comstock Resources (CRK) increased last week to $13.55. If you are long-term bullish on natural gas prices (like I am), CRK is a very attractive stock at the current price.

Q2 results, which were good for all but the three gassers (CRK, EQT and RRC), will be the low point of the year. Q3 results will be better for all 16 companies and if WTI stays over $90, Q4 results will be GREAT.

You've heard the saying "Don't Fight the Fed". Well think of Saudi Arabia as the central bank for oil prices and "Don't Fight Saudi Arabia", which want's higher oil prices.

[dan_s]

My To Do List.
This week I will finish my review of four profile updates for these companies in our High Yield Income Portfolio:
> Black Stone Minerals (BSM), which offers the highest dividend yield in our High Yield Income Portfolio.
> Civitas Resources (CIVI)
> Coterra Energy (CTRA)
> Devon Energy (DVN)

On Thursday, September 21st we have a live webinar at 10AM CT. My guest will be Cam Taylor, CEO of ROK Resources (ROK.V and ROKRF). ROK is a recent addition to our Small-Cap Growth Portfolio. I have confidence that it will be reporting strong production growth over the next three quarters.

On Tuesday, September 26th we have a live webinar at 10AM CT. My guest will be Daniel Earl, CEO of Solaris Resources (SLS.TO), which is one of my Top Picks for copper.

You must register on the EPG website if you wish to participate in the live webinars.