Energy Prospectus

I think we can all agree that this is "The Year of the Roller Coaster Ride". Volitale oil prices are the primary driver for all three of our model portfolios. This year's version of the Sweet 16 is heavily weighted towards oil because I thought it would be a rough year for our gassers. That has been the case with HH natural gas prices selling at an average price of around $2.50 through September 30th. Last week the near-term outlook for U.S. natural gas and NGL prices has improved. For 2H 2024 the outlook for U.S. natural gas prices looks extremely bullish.

For the week ending October 6th the Sweet 16 portfolio lost 5.74% (almost the same as it gained the previous week) and it is now up 8.76% YTD.
For the week, the S&P 500 Index gained 0.54% and is now up 12.22%.
It has been a good year for stocks, despite rising interest rates, the relentless forecasts of a recession just ahead and all of the nonsense coming out of Washington, DC.

Our three gassers (CRK, EQT and RRC) posted gains for the week, but CRK is still the worst performing stock in the Sweet 16, down 16.56% YTD. On the other hand, EQT (up 26.49% YTD) and RRC (up 32.01% YTD) are in the top quartile after PR (up 40.64% YTD) and ESTE (up 34.36% YTD).

The merger of Earthstone Energy (ESTE) into Permian Resources (PR) is now expected to close on October 31st. It is an all-stock merger (tax free) and Earthstone shareholders will receive 1.446 shares of PR for each of their ESTE shares. If you hold ESTE, there is nothing you need to do. The PR shares should show up in your account the next day. Once the merger closes, PR is a "Screaming Takeover Target" in my opinion.

Looking forward, if natural gas prices stay over $3.25, Comstock Resources (CRK) should report strong Q4 and FY 2024 results that beat my forecast. I do expect all 16 companies to report Q3 Adjusted Net Income that beats my forecasts that are based on $80 WTI and $2.50 HH ngas.

Public companies are required to report "GAAP Net Income" or "Book Net Income" that is often misleading for upstream oil & gas companies because of the accounting rules for hedges. Just remember that what should be compared to First Call's earnings per share estimates and my forecasts are "Adjusted Net Income" that does not include misleading non-cash items like the mark-to-market adjustment on hedges.

On Friday I posted a list of the Sweet 16 showing how much of their production is natural gas and NGLs. They will all benefit from rising natural gas prices. The only pure oil company in any of our profiles is Hemisphere Energy (HMENF).

SilverBow Resources (SBOW) deserves some attention because ~70% of their Q4 2023 production is expected to be natural gas and NGLs. Plus, it has significant natural gas upside in Webb County, Texas.
> SilverBow pulled back after announcing a stock offering (at $37/share) a couple of weeks ago. The selloff was way overdone in my opinion.
> The Company will be using the cash proceeds to partially fund the Chesapeake South Texas Acquisition that is expected to close in November. This transaction is a "Game Changer" for a company of this size. From 54,904 Boepd of production in Q2 and ~57,000 Boepd in Q3, SilverBow's production should jump to just under 100,000 Boepd in December. 2024 production is expected to increase to at least 105,000 Boepd (28.6% crude oil, 50.3% natural gas and 21.1% NGLs).
> If natural gas prices go where I expect them to go ($4.00 by Q4 2024), this stock should be at least a double for us.
> TipRanks: "In mid-August (when natural gas prices were much lower), 3 ranked analysts set 12-month price targets for SBOW. The average price target among the analysts is $54.67. The three price targets submitted range from $50 to $59."
> My current valuation of SBOW is $78.00/share. < Just 3.5 X annualized operating cash flow per share.

Callon Petroleum (CPE) and Vital Energy (VTLE) are both down YTD (-9.30% and -8.15% respectively). They are now both pure plays on the Permian Basin and they are both trading at less than 50% of my current valuations.
> On a per share basis, VTLE should finish the year with the highest EPS. CPE will also finish the year near the top of the pack for EPS.
> Callon's balance sheet is now in good shape as they used cash proceeds from their Eagle Ford sales to pay off all near-term debt issues.
> I expect both of them to report Adjusted Net Income that exceeds First Call's EPS estimates.
> Exxon's acquisition of Pioneer Natural Resources (PXD) should put CPE and VTLE on more "Potential Takeover" lists.

The PXD sale to Exxon should draw more attention to FANG, MTDR and SM.

My Q3 forecasts were based on $80 WTI and $2.50 HH natural gas prices. Actual realized oil, gas and NGL prices in Q3 should all be higher than my forecasts. I expect all 16 companies to report Q3 financial results that are much better than what they reported in Q2, which were good.

For Q4 my forecasts are based on $90 WTI and $2.75 HH natural gas prices. At the end of October, before I write my next newsletter, I will adjust my forecasts if I believe that different commodity prices seem appropriate. For now, just know that the higher natural gas prices offset most of the decline in the oil price. All 16 companies will benefit from higher ngas prices.

If the Republicans pick a good Speaker for the House, I expect oil prices to rebound. The Global Oil Market is tight and appears to be significantly under-supplied in Q4. In my opinion, the only fundamental reason for last week's decline in the oil price is the ~7% rise in the U.S. dollar since early July.

My updated Sweet 16 spreadsheet will be posted to the EPG website this afternoon.

BTW First Call's price targets moved slightly higher for more than half of the group. RBC Capital raised their oil price deck on October 6th.