Sweet 16 Update - March 17

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Sweet 16 Update - March 17

Post by dan_s »

Despite a nice comeback on Friday, the Sweet 16 finished the week ending March 16 down 1.56%. The portfolio is down 7.82% YTD.

All of the Sweet 16 forecast models are now up-to-date and the profile for Cimarex Energy (XEC) is the only one we still need to update. The MBA Student Intern assigned to Cimarex has gone missing (i.e. Spring Break) and I have shifted most of my attention to the companies in our Small-Cap Growth Portfolio. I promise to get it updated this coming week.

If WTI averages $60/bbl and HH natural gas averages $2.75/mcf all of the Sweet 16 are going to have very good years in 2018. As a group they are trading at 6.1X by 2018 operating cash flow per share forecast for the group. Individual share prices range from 2.5X CFPS for GPOR to 9.5X CFPS for CXO. All of the companies that get the majority of their production from the Permian Basin trade above the CFPS midpoint. Wall Street is head-over-heals in love with the Permian and it shows in the share prices.

Companies with this much running room should be trading for 8X to 12X operating cash flow per share.

The "gassers" remain out of favor, but the outlook for gas and NGLs is quite good. See my post under The View From Houston tab.

All three of the "gassers" (AR, GPOR and RRC) are trading below book value. Any of you that know anything about GAAP accounting rules for upstream companies know that it should be impossible because upstream companies must "mark-to-market" their assets each quarter. Since they all have fresh 3rd party reserve reports to back them up, none of these companies should be trading below book value unless they are heading toward Chapter 11. AR, GPOR and RRC all have a very high percentage of their gas hedged at very good prices, especially AR.

Newfield Explorations (NFX) also trades at a very low multiple of CFPS because (a) the Wall Street Gang still perceives that NFX is a gasser and (b) their IR department does a crappy job of telling the company's story. NFX gets over 80% of their revenues from liquids sales. Top line revenues should increase from $1.8 Billion in 2017 to $2.3 Billion in 2018. Operating cash flow this year should fund their entire capital program of $1.3 Billion. Operating cash flow in 2018 is forecast (by First Call) to be $6.33/share. A company with this much running room, funding all growth with operating cash flow, should be trading for AT LEAST 6X CFPS.

The main Sweet 16 spreadsheet will be updated and posted to the EPG website later today. It shows my valuation compared to First Call's price targets for each company.
Dan Steffens
Energy Prospectus Group
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