Sweet 16 Update - Oct 21

[dan_s]

The Sweet 16 Growth Portfolio gained 0.18% for the week ending October 20 and is now up 19.41% year to date.
The S&P 500 Index lost 2.7% during the week and is now up 10.02% year to date.

The War in Israel is the primary "noise" impacting oil prices, pushing the NOV23 NYMEX contract for WTI over $90/bbl briefly before the contract pulled back to close at $88.75 on Friday. The DEC23 contract is now the front month for WTI. It closed at $88.37 on Friday.

Natural gas prices were pulled down by a bearish storage report. EIA reported that the amount of natural gas in storage was 3,626 Bcf on October 13th, 175 Bcf above the 5-year average. AEGIS estimates that storage will be ~3,820 Bcf mid-November when winter heating demand picks up. That volume of gas in storage is within the 5-year range; there is no "glut" of natural gas. The U.S. natural gas market is much larger than it was five years ago. A normal winter and LNG exports averaging more than 13 Bcfpd should drain storage back to near normal levels by April. Strong El Nino winters usually start off mild and then get colder and snowier in Q1. Weather is always the primary driver of natural gas demand.

My forecast/valuation models are now based on Q4 2023 prices of $85/bbl for WTI oil and $3.00/MMBtu for HH ngas. For the year 2024 I am using $90/bbl and $3.25/mcf. If the U.S. puts sanctions on Iran, the oil price could move a lot higher. U.S. LNG export capacity starts ramping up in Q3 2024, which should push HH ngas over $4.00 a year from now.

I have reviewed and updated all 16 forecast models. You can find them on the EPG website under the Sweet 16 tab.

My earnings per share forecasts are based on Adjusted Net Income, which does not include the mark-to-market (non-cash) gains or losses on each company's hedges. First Call EPS forecasts are also based on Adjusted Net Income, because the GAAP accounting rules for hedges are very misleading.

All 16 companies are going to report much better financial results in Q3 than they reported in Q2. If Q4 oil and gas prices are close to my forecasts above, they are going to generate outstanding Q4 results.

Four of the Sweet 16 (CPE, CPG, VTLE and SBOW) are still trading below book value per share. They are all profitable, generating free cash flow and they do not have any near-term debt problems.

Callon Petroleum (CPE) used cash proceeds from their Eagle Ford asset sale to pay down debt, so their balance sheet should be in much better shape at 9/30/2023 than it was at 6/30/2023. CPE closed on Friday at $39.23, which is just 2.15 X my 2023 operating CFPS forecast of $18.28. My $78.00 valuation of CPE is just 3.75 X my annualized operating CFPS forecast. As a profitable pure play on the Permian Basin, it deserves a higher valuation multiple.

The Earthstone Energy (ESTE) merger into Permian Resources (PR) is now expected to close on October 31. Permian Resources is going to report Q3 results on November 7. They will also provide detailed guidance for Q4 2023 and 2024. It is a good bet that more than a dozen energy sector analysts will be on their Q3 conference call.

In my opinion, Permian Resources will be a Prime Takeover target the day after the merger closes. The Company's 2024 production should be approximately 330,000 Boepd (47.4% crude oil, 29.4% natural gas and 23.2% NGLs). What makes it such a prime takeover target is the quality of their "running room" in the Delaware Basin. Today, First Call's price target is $17.36. I expect a lot of analysts to increase their price targets after the Company reports stronger than expected Q3 results and guidance for 2024.
TipRanks' consensus forecast for 2024: $5.5 billion of revenues, $2.13 EPS and $4.54 operating CFPS.
My forecast for 2024 is $5.9 billion of revenues, $2.29 EPS and $5.06 CFPS. In my opinion, 5X operating CFPS is a reasonable price target.

Matador Resources (MTDR) is scheduled to be the first Sweet 16 company to announce Q3 results on October 24, so I am going to highlight it on today's podcast.

[Fraser921]

I anxiously wait, I own MTDR and like what I see.

[dan_s]

I just remembered that Sabrina is traveling today, so it may be Monday before my podcast is posted to the website.

[Fraser921]

Sabrina got it up, Just watched it. Thanks to all

https://www.youtube.com/watch?v=hKoStja4fF4&t=4s

FWIW, MTDR, the model has cash flow (less cap ex) at 3.96 per share 119.147 shares os = cash flow
of 471.8. Cap ex is 472.2....so roughly a break even FCF wise for q 3

Matador had a news release on October 19th

http://investors.matadorresources.com/news-releases/news-release-details/matador-resources-company-increases-quarterly-cash-dividend-020

In it, they raised the dividend 33% from .15 cents to 20 cents
Got borrowing base increased $250 million from $2.25 billion to $2.5 billion,

And had this nugget in it, $530 million was drawn as of September 30, 2023. This used to be $ 560 m at June 30th. Which means, they paid of 30 m of debt in Q3.

So, actual results might be 30 m better , roughly 25 cents per share better than the current model and the net cash flow also covers the 15 cent dividend, fyi. The name looks really good!, I own it.

I like the mostly unhedged upside exposure to Oil and Ng, giddy up!

[Fraser921]

Just re reviewed q 3 MTDR guidance, they have cap ex at 390 so that's some of it. They have production guidance flat qtr 3 over qtr 2 with big gains in q4