Sweet 16 Update: Sept 1

[dan_s]

I spent most of my weekend updating all 16 forecast/valuation models using my new oil & gas price deck.
All 16 companies reported solid Q2 results and most of them beat my forecasts. All of them are generating strong operating cash flow. All of them are free cash flow positive and all but Vital pay dividends.

As of August 30th stock prices, the Sweet 16 is up just 4.26% YTD, not including dividends. Oil price volatility is frightening a lot of investors away from the sector. Even at $70/bbl oil, these companies are very profitable. Completed well costs have come down ~15% and they all have high-quality "Running Room".
> In my opinion, the Sweet 16 is trading at a 55% discount to "Fair Value".
> The portfolio trades at an average of 3.68 X Adjusted Operating Cash Flow per share. A valuation of at least 6X CFPS is more appropriate for a group of this quality. Size does matter, which is why FANG and EOG trade at multiples of 6.22 and 6.20.
> Of the large-caps, Devon Energy (DVN) is the best value, trading at just 4.3 X CFPS.

Vital Energy (VTLE) trades at the lowest multiple in the Sweet 16 at just 1.37 X CFPS. Harry and I discussed it yesterday. We believe our models are conservative and we cannot find any reason for VTLE to be trading at such a discount. It is trading at less than half of its book value. Check your email for Harry's detailed analysis of Vital.
Vital has been aggressive in the acquisitions market the last two years. I believe that management is building the company for an eventual sale. It is a pure play on the Permian Basin and there are few takeover targets of this size still available. If Diamondback Energy's goal is to ramp up production to over a million Boepd, the acquisition of Vital would make that goal achievable in 2025. Vital's production will be close to 140,000 Boepd when they close the Point Energy Acquisition this month. TipRanks' consensus price target is $54.67. One of TipRanks' highest rated energy sector analysts recently adjusted his price target to $83/share.

Harry van Neck is the "Petroleum Economist". His work is a big help to me, and I highly recommend that all of you sign up to keep getting his weekly updates. We need to compensate him for his hard work. Maintaining a detailed database of 80+ public companies is a very time consuming task.

For Growth + Income the best picks are CRGY, DVN, FANG, NOG, PR and VRN. They all pay nice dividends of 4.5% to 6.0%. PR and FANG have the highest dividend yield. CRGY trades at the largest discount to my valuation.

My updated Sweet 16 Summary Spreadsheet will posted to the EPG website under the Sweet 16 tab by 6PM CT. It shows my current valuation and First Call's price target for each stock. Tab 3 provides details for the companies in our Small-Cap and High Yield Income portfolios.

This coming week I hope to finish my review of profile updates for all of the Small-Caps and most of our High Yield companies. Later this month I will be taking a hard look at some companies that are high on Harry's valuation summary.

Our next Houston luncheon is set for September 17. We will be back at Tanglewood again and then our Q4 luncheons will be back at Maggiano's. We have confirmed luncheons for October 1, November 13 and December 9 at Maggiano's.

[KGardiner]

Dan and Harry,

I'd love to hear your perspective on the expected impact of an early 2025 recession on the oil and gas markets. It seems to me unemployment and jobs data is nearing a tripping point where no amount of Fed rate cuts will stop a recession. Also, credit defaults are starting to rise.

Given that the energy markets have repeatedly priced in a recession starting in June 2022, and given that producers would drop more rigs, it doesn't seem to me that there is a lot more downside in the energy sector. Energy still has the lowest valuation of the S&P 500. Would there be a rush to the Energy sector? https://finviz.com/groups.ashx?g=sector&v=120&o=pe#google_vignette

Obviously the High Yield portfolio would do better in a recession, and perhaps the Gassers as well.

Thoughs?

Kevin

[dan_s]

We've been told a global recession is just around the corner for over three years. FEAR of a recession is not a real recession. Post Labor Day there is a short period of lower oil demand, but it will pick back up as the temperature goes down.

Our High Yield Income Portfolio is the safest of the three model portfolios.

OPEC+ is going to increase output quotas by 180,000 bpd TOTAL starting in October. That is a rounding error. Risks to supply are much higher than that.

I am expecting news that Venture Global's Plaquemines, Louisiana LNG export facility is taking gas by the end of September to give support for U.S. natural gas prices. The "Right Price" for HH ngas does not start with a $2.