Sweet 16 Update - June 13

[dan_s]

You may recall that two months ago Trump gave Iran's Supreme Leader 60 days to agree to end all nuclear enrichment. Today is Day 61.
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Most of the Sweet 16 and our other model portfolio companies are up this morning, but not as much as I expected. Overall market weakness is causing lots of fund managers to pull money back to the sidelines. When the panic selling stops and the oil price stays elevated by the significant political risk premium, which will remain, our Sweet 16 companies will draw a lot more "love" from the Wall Street Gang.

If WTI oil stays over $70/bbl, which I expect it do, then the Elite Eight (DVN FANG EPG EQT OVV PR RRC SM) should be getting a lot more attention from general investors. EQT is the closest to being a pure "Gasser", so I'm somewhat surprised that it is up over 2% this morning. Weather forecasts for July do indicate that more demand for electricity from gas-fired power plants is just a few weeks away.

If you believe that "Leverage works both ways", then Civitas (CIVI) looks good to me. If WTI oil price averages $70/bbl in Q3 and Q4 2025, my valuation of CIVI goes to $70/share and they should generate close to $800 million of free cash flow. That level of free cash flow will solve the Company's only problem, which is a bit too much debt. CIVI was trading around $33 this morning.

FANG, MTDR, NOG, PR and SM have the most exposure to crude oil prices. At the time of this post SM was trading at $27.13. If WTI oil averages $70/bbl in Q2 and Q3 2025, my valuation of SM Energy (SM) will go over $60/share. SM has less of a debt problem than CIVI and it will generate close to $700 billion of free cash flow this year.

This is why I urge all of you to learn how to use my Excel forecast/valuation models, which you can download from the EPG website. Once you download a forecast model to your computer, you can change the oil, gas and NGL price assumptions for future periods and the stock valuation will update automatically. They are all "macro drive spreadsheets".

PLUS, all of the price targets for the Sweet 16 are now based on very conservative multiples. A political risk premium for oil should also increase the valuation multiples for all of the upstream companies with all of their assets in the U.S. and Canada.

Here is a bonus for you: Vital Energy (VTLE), a former Sweet 16 company, has a serious leverage problem that will be fixed if WTI stays over $70/bbl. Today, VTLE is trading for less than 1X operating cash flow per share.

[dan_s]

Civitas Resources (CIVI) closed today at less than 50% of book value. If WTI oil stays over $70/bbl, it makes CIVI a "Screaming Buy" up to $42, which was First Call's price target last week.

Crescent Energy (CRGY) and SM Energy (SM) also closed today below book value. Both of them are Strong Buys.