Sweet 16 Update - Jan 11

[dan_s]

The 2025 version of the Sweet 16 is up 7.41% YTD, while the tech heavy NASDAQ Composite index is down 1.67% YTD. A lot of money rotated into the Energy Sector last week.

I do expect this trend to continue since most of the large-cap tech stocks are priced to perfection and our model portfolio companies are trading at single digit PE ratios based on my 2025 forecast. The Sweet 16 average forward-looking PE ratio is 8.53 based on January 10th closing prices. SM Energy (SM) and APA Corp. (APA) trade at the lowest PE ratios of 4.57 and 4.96 respectively.

The Sweet 16 is also trading at just 5.09 X 2024 Adjusted Operating Cash Flow per share AND I expect their CFPS to increase this year as oil and gas prices have now moved over the prices that I'm using in my 2025 forecasts. Upstream companies of this quality deserve to trade at close to 8X operating CFPS. All 16 companies are free cash flow positive. Antero Resources (AR) is the only company that does not pay dividends. It is up big because a lot of its natural gas sells at a premium to HH gas prices.

The share prices for all 16 companies are up YTD, with the leaders being:
> SM Energy (SM) up 11.41% and still trading at an 82.2% discount to my current valuation.
> Devon Energy (DVN) up 10.03%. It was oversold in December, and it will get a big revenue boost from rising natural gas prices.
> Antero Resources (AR) up 9.33%, which was added back to the Sweet 16 on 1-1-2025.
> Coterra Energy (CTRA) up 8.77%, one of our four gassers (AR, CTRA, EQT and RRC)

The outlook for U.S. natural gas prices has significantly improved thanks to back-to-back winter storms. I just looked at the Chicago forecast for the remainder of January and it is now quite clear that U.S. natural gas in storge will go below the 5-year average by January 17th and the deficit should grow to close to 100 Bcf by the end of January. A Bidding War for NGas supply is becoming more likely. We could see a repeat of 2022. In August 2022 the front month NYMEX contract SEP22 spiked to more than $9.25/MMBtu.

Sweet 16 companies that produce more than 50% natural gas and NGLs on a Boepd basis:
EQT 99.6% < Appalachia
AR 98.4% < Appalachia
RRC 98.2% < Appalachia
CTRA 83.9% < Most of their ngas comes from Appalachia and the Anadarko Basin in Oklahoma
OVV 64.7% < Widespread production with core areas in the Permian in west Texas and Anadarko in west-central Oklahoma; and Montney in northeast British Columbia and northwest Alberta
CRGY 59.1% < My top pick for Ngas because South Texas has plenty of pipeline access.
VRN 57.7% < Canada
MGY 57.0% < South Texas with none of their production is hedged. I expect them to increase dividends.
EOG 53.8% < Largest company in the Sweet 16 with a market-cap over $73 billion. Also increasing dividends.
PR 53.6% < Pure play on the Permian Basin, where natural gas prices will remain approximately $1.50/mcf below HH gas prices. PR is going to report a significant production increase in Q4 2024.
SM 53.1% < Eagle Ford and Permian Basin. One of Harry's Top Picks and I agree.
DVN 52.5% < One of my Top Picks. It operates in Delaware, Eagle Ford, Anadarko, Williston, and Powder River Basins. The company was founded in 1971 and is headquartered in Oklahoma City, Oklahoma.

The outlook for WTI oil prices has also improved.
Trading Economics: "WTI crude oil futures advanced 3.6% to settle at $76.57 per barrel on Friday, levels not seen since October, as fresh U.S. sanctions on Russia's oil sector, sparked concerns about global supply disruptions. The U.S. Treasury's sanctions target Russian oil producers Gazprom Neft and Surgutneftegas, as well as over 180 vessels, oil traders, and energy officials, aiming to restrict Russia’s oil trade and escalate geopolitical risks. Additionally, colder U.S. weather has heightened demand for heating fuels, further supporting oil prices. Analysts from Goldman Sachs and UBS predict that supply constraints, including those from Iran, and a global economic slowdown could cause oil prices to fluctuate throughout 2025. The oil benchmark recorded a weekly gain of 3.5%."

Fear of "Drill Baby Drill" will fade. U.S. and OECD petroleum inventories are much lower than normal. In my opinion, the forecasts of an oil supply surplus coming in Q1 were being used to reduce inflation in an effort to get the Fed to reduce interest rates, which worked. There is not going to be an oil supply "glut" anytime soon and more likely a supply shortage in Q2. Trump will enforce sanctions on Iran; it is time to crush Iran's economy and force a change of direction for the global sponsor of terrorism.

None of our model portfolio companies will release Q4 2024 results until mid-February. The upstream companies must get 3rd party reserve reports before they can announce year-end financial results. Some of them will release Q4 operating results, but audited financial reports require more time than usual at year-end.

[1960]

Will you be posting an updated forecast and profile for Vital?
Thank you

[dan_s]

I updated it on 12-27-2024. My adjusted valuation was $58/share.

VTLE closed on January 10th at $35.64, up 20.36% YTD.

I will refresh it later this morning and post it to the website under the Small-Cap tab.

I just moved BTE and VTLE to our Small-Cap Growth Portfolio to make room for AR and RRC, two large-cap gassers.

Vital is a very profitable company, with revenues over $1 Billion in 2024, the highest in the company's history. The Company's revenues should keep going up in 2025.

[1960]

Thank you,

Vic

[dan_s]

Vic;
VTLE is currently trading at less than 50% of book value per share. There is nothing that I can see which justifies the share price being so low.
Vital is a pure play on the Permian Basin. I like the Point Energy Acquistion that closed in September.

[1960]

Thanks for the update.