Sweet 16 Update - March 23

[dan_s]

During the week ending March 22, our Sweet 16 Growth Portfolio gained 2.68% and is now up 11.06% year-to-date. Not bad for less than 3 months!
The overall market is also doing well. The S&P 500 Index was up 2.44% for the week and up 9.41% year-to-date.

Since February 2nd, when the Sweet 16 closed down 9.63% YTD, the portfolio has gained 20.69%, compared to a 5.76% advance for the S&P 500 Index. A lot of money has rotated into these high-quality upstream companies.

With the Fear of Recession fading, it is clear lots of money managers have rotated out of the Tech Sector and into the Energy Sector. As I have posted many times, only a severe global recession would cause demand for oil to decline. IEA has increased their 2024 oil demand forecast three times since mid-2023 and my guess is that we will see IEA raise their demand forecast at least three more times this year. They have a long history of under-estimating oil demand. If the Fed does lower interest rates, I expect WTI to move over $90/bbl quickly.

Diamondback Energy (FANG) got the rally going when they announced a block buster merger with Endeavor (a private company), but now 2 of the Sweet 16 have move ahead of FANG. Here are the four leaders of the pack today. As I predicted last week, PR has taken the lead. Q1 will be the first full quarter of results since their merger with Earthstone Energy, a former Sweet 16 company.

> Permian Resources (PR) at $17.15 is up 26.10% YTD < my valuation is $21.50 <<< 3.78 X my 2024 CFPS forecast.
> SM Energy (SM) at $48.70 is up 25.77% YTD < my valuation is $62.00 <<< 3.44 X my 2024 CFPS forecast.
> Diamondback Energy (FANG) at $194.70 is up 25.55% YTD < my valuation is $200.00 <<< 6.46 X my 2024 CFPS forecast.
> Matador Resources (MTDR) at $67.86 is up 19.35% YTD < my valuation is $83.00 <<< 3.73 X my 2024 CFPS forecast.

High-quality upstream companies with lots of "Running Room" in the Permian Basin, deserve to trade for at least 5X operating cash flow.

SilverBow Resources (SBOW) at $34.67 is up 19.22% and I expect it to move onto the leader board because it is drawing a lot of attention due a recent unsolicited merger proposal from Kimmeridge Energy valued at $2.1 billion. Last week Riposte Capital, another large shareholder of SBOW, has publicly supported the proposal.
> SBOW generated $18.00/share of operating cash flow per share in 2023. My CFPS forecast is $23.95 for 2024, which compares to TipRanks' CFPS forecast of $21.22 for 2024.
> SilverBow's BOD will be wise to drag out the negotiations, because other potential buyers need time to evaluate the company and make competing offers. SilverBow has the upper-hand in the negotiation process.
> Take the time to read our recent profile on SilverBow and review my forecast model for the Company. You will see that they are not in financial trouble.
> SilverBow closed the Chesapeake South Texas Acquisition on November 30th, and they reported a 21.2% production increase from Q3 to Q4 2023. They will report another large production increase in Q1 2024.
> The Company is free cash flow positive and on a clear path to ~50% year-over-year production growth in 2024.
On March 4th Neal Dingmann, a highly respected energy sector analyst, updated his report for TipRanks. Neal's price target is $59.00/share.

Big moves in any sector of the market are caused by "Paradigm Shifts". The Wall Street Gang are gaining confidence in the fact that this world still runs on fossil fuels and will for several more decades. Demand for oil, gas and even coal are going up. Net Zero is a fantasy and one-by-one countries will abandon the Paris Climate Accord simply because they can't afford it. China and India are clearly not going to support that nonsense. The only thing green about the Green New Deal is the pile of money the U.S. government is printing to spend on it.

On today's podcast I will highlight our Small-Cap Growth Portfolio and walk you through my updated forecast for ROK Resources, which hosted our webinar on Thursday.