Sweet 16 Update - June 15

[dan_s]

During the week ending June 14 the Sweet 16 lost 3.03% and it is now up 4.48% YTD. The S&P 500 Index gained 1.77% and is now up 13.54% YTD.

Since June 7 the WTI oil price gained 3.87% to close at $78.45/bbl on June 14. Henry Hub natural gas lost 1.27% to close at $2.881/MMBtu on June 14.

My Q2 forecasts are based on $78/bbl WTI and $2.25/mcf HH ngas. I expect all 16 companies to report Q2 Adjusted Net Income that is higher than what they reported for Q1 2024. Most of them will report higher production.

Keep in mind that "Reported" or "GAAP" net income includes mark-to-market adjustments on hedges. Due to the significant increase in natural gas prices since the end of Q1, the companies that have a lot of gas hedged will report large MTM non-cash losses on their natural gas hedges. Oil prices are just slightly higher since Q1, so the MTM adjustments on oil hedges should be small. Each company's hedges can be found on my individual forecast models for each company. You can find them under the Sweet 16 tab on the EPG website.

SilverBow Resources (SBOW) leads the pack, up 31.02% YTD, followed by Diamondback Energy (FANG) up 19.92% YTD, SM Energy (SM) up 18.34% YTD and Magnolia Oil & Gas (MGY) up 11.98% YTD. None of Magnolia's production is hedged.

As you can tell from my previous posts, I love the merger of SilverBow into Crescent Energy (CRGY) that is expected to close in September. If natural gas prices do firm up over $3.00/mcf, CRGY should draw a lot of attention later this year. Post-merger production should be ~254,000 Boepd (44% natural gas, 37.5% crude oil & 18.5% NGLs). Most of its production will be coming from the South Texas Eagle Ford / Austin Chalk play. South Texas has much better pipeline access to Gulf Coast refineries and LNG export facilities, so they will be getting good prices for all of their production and MUCH BETTER natural gas prices than the Permian Basin companies. My 2025 forecast for CRGY using a $3.25/mcf average realized natural gas prices shows CRGY generating close to $1.5 billion of operating cash flow with 50% of that being free cash flow. CRGY still trades below book value, which is super cheap; 85% below my valuation of $22.00/share. First Call's price target is $18.60.

APA Corp. (APA) is down 18.9% YTD. APA's merger with Callon Petroleum (CPE) closed on April 1, 2024, so Q2 results will include a ~21% increase in production and ~$470 million increase in revenues per my forecast model.

APA closed at $27.85 on June 14. My valuation is $48.00. TipRanks: "In the last 3 months, 18 ranked analysts set 12-month price targets for APA. The average price target among the analysts is $37.35." The 18 price targets range from $27 to $57, which is an extremely wide gap for a company of this size and quality. If APA's Q2 results confirm my forecast model assumptions, the analyst that have price targets in the lower half of the range should increase their price targets. APA should generate 2024 operating cash flow of approximately $4.2 billion ($11.82/share) and free cash flow of approximately $1.5 billion this year.

EOG Resources (EOG) is down 8.71% YTD, which makes no sense. EOG is the largest company in the Sweet 16 with production over 1 million Boepd. It produces close to 1,860,000 mcfpd of natural gas with 725,000 mcfpd hedged at $3.07/mcf through 2025. They get a premium for their Trinidad gas. EOG's realized natural gas price in Q1 2024 net of cash settlements on their hedges was $2.59/mcf, which was $0.49/mcf higher than the average price for HH ngas during Q1. EOG has an outstanding marketing department that consistently gets higher prices for all of their production. Size matters in this business.

EOG has a pristine balance sheet and an incredible inventory of high-value development drilling locations. EOG pays a base dividend of $0.91/quarter (~3% yield) and I expect them to pay a special dividend in Q4 since free cash flow should be close to $6 billion this year.

Vital Energy (VTLE) continues to trade at the deepest discount to my valuation of $105/share. My valuation is based on just 3.25 X annualize operating cash flow per year. I don't see anything that justifies a lower valuation multiple. My 2024 forecast is actually lower than what TipRanks is currently showing.

This coming week I will be focused on updating the profiles for companies in our Small-Cap Growth and High Yield Income portfolios.