Sweet 16 Update - Oct 13

[dan_s]

Thanks to the announcement that the U.S. will (finally) enforce the sanctions that Trump had on Iran, adding a new list of companies that will be penalized if they help Iran sell oil, it should be a very interesting week for the Sweet 16 and all of our model portfolio companies. Israel is expected to make airstrikes within Iran soon.

Volatility of the oil price last week kept many investors on the sideline. On Monday, October 7th WTI spiked to over $77/bbl early in the day only to drop to $72/bbl on Wednesday before finishing at $75.56 on Friday. HH natural gas (NOV24) began the week at $2.82/MMBtu, dipped below $2.60 on Thursday thanks to the large storage build reported by EIA, before finishing the week at $2.63. The DEC24 futures contract closed at $3.05 on Friday.

With very little news, the Sweet 16 gained 0.55% during the week and it is now up 3.61% YTD. The S&P 500 Index gained 1.34% and is now up 21.56%, with the majority of gains in the tech and defense sectors. If oil & gas prices do firm up, I expect fund managers to harvest some gains and rotate the money into the energy sector. All of our Sweet 16 companies are going to report solid Q3 results based on lower oil & gas prices for the quarter than we have today.

Refinery maintenance should be coming to an end soon, which should increase demand for crude oil. U.S. gasoline and distillate inventories are 4% and 9% below normal for this time of year, so the refiners have some work to do. Lots of diesel will be consumed cleaning up and rebuilding after the two hurricanes that ravaged the Southeast.

On Wednesday, October 9th APA Corp. (APA) did provide some Q3 information. Their realized oil & gas prices and production volumes firmed up my forecast. APA is now on pace to generate $4.1 billion of operating cash flow, which should generate about $1.4 billion of free cash flow for 2024. They are also selling some non-core assets for $950 million in a transaction expected to close in December. APA still has some work to do on their balance sheet, but they should be in good shape at year end. The acquisition of Callon Petroleum that closed on April 1, 2024 has transformed APA into one of the top oil producers in the Permian Basin. On October 10th Neal Dingman updated his price target to $36.00.

Magnolia Oil & Gas (MGY) has been the surprising leader of the Sweet 16, up 27.01% YTD. Following closely is Diamondback Energy (FANG), up 25.72% YTD.

HFI Research sent out a note on Thursday telling their subscribers to sell Baytex Energy (BTE) and move the funds to Veren (VRN). Their reasoning is that Baytex has more exposure to falling oil prices and Veren is oversold. Baytex has the most exposure to oil prices in the Sweet 16, but that might end up being a major plus for the Company. Both stocks are trading below book value at ~70% discounts to my valuations. In my opinion, they are both oversold.

Crescent Energy (CRGY) has been drawing more attention since being added to the S&P Small-Cap 600 index. I expect it to draw a lot more attention when it reports big quarter-over-quarter production growth in Q3 and Q4. For the year, the Company's production is going to be up more than 36% YOY to ~260,000 Boepd heading into 2025. My valuation of $22.00 is only 3.75 X annualized operating cash flow per year. My 2025 forecast, which is very close to the TipRanks' consensus forecast, shows revenues of $3.9 billion generating over $6.25 operating cash flow per share next year. TipRanks' 2025 CFPS forecast is $6.86. Crescent Energy will be announcing Q3 results on October 31st.

[dan_s]

Geopolitical risk to oil supply is quite high.

Just reported: "The United States will send a Terminal High Altitude Area Defense battery to Israel, along with the troops needed to operate it, the Pentagon said Sunday, even as Iran warned Washington to keep American military forces out of Israel. According to an April report by the Congressional Research Service, the Army has seven THAAD batteries. Generally each consists of six truck-mounted launchers, 48 interceptors, radio and radar equipment and requires 95 soldiers to operate. The THAAD is considered a complementary system to the Patriot, but it can defend a wider area. It can hit targets at ranges of 150 to 200 kilometers (93 to 124 miles).

[mrbill]

"Israel is expected to make airstrikes within Iran soon." No big deal?

[dan_s]

Statement by Pentagon Press Secretary Maj. Gen. Pat Ryder on the Deployment of a THAAD Battery to Israel

Oct. 13, 2024

At the direction of the President, Secretary Austin authorized the deployment of a Terminal High-Altitude Area Defense (THAAD) battery and associated crew of U.S. military personnel to Israel to help bolster Israel’s air defenses following Iran’s unprecedented attacks against Israel on April 13 and again on October 1. The THAAD Battery will augment Israel’s integrated air defense system. This action underscores the United States’ ironclad commitment to the defense of Israel, and to defend Americans in Israel, from any further ballistic missile attacks by Iran. It is part of the broader adjustments the U.S. military has made in recent months, to support the defense of Israel and protect Americans from attacks by Iran and Iranian-aligned militias.

This is not the first time the United States has deployed a THAAD battery to the region. The President directed the military to deploy a THAAD battery to the Middle East last year following the October 7th attacks to defend American troops and interests in the region. The United States previously deployed a THAAD battery to Israel in 2019 for training and an integrated air defense exercise.

[ChuckGeb]

I wonder if the well equipped troops are required to get approval to fire from Obama before responding to an attack?

[Cliff_N]

Dan, Crescent Energy call letters are CRGY. Did you mean Coterra Energy Inc. (CTRA)?

[dan_s]

My bad. I corrected it above.