Sweet 16 Update - Feb 2

dan_s · Post by **dan_s** » Sat Feb 02, 2019 9:49 am

The Sweet 16 is now up 17.9% YTD, adding another 2.45% during the week ending 2/1/2019. The portfolio is still trading 76.5% below my "Fair Value Estimate" (See note below).
The Sweet 16 summary spreadsheet has been updated and posted to the EPG website.

At $55.33/bbl, WTI is now more than $10/bbl over the price of oil that I am using in the Sweet 16 forecast/valuation models for the 1st quarter.
> For the year, I am assuming that WTI averages $52.50/bbl for the year. So...if oil keeps going higher, there is SIGNIFICANT upside for these companies.
> On the other hand, Henry Hub natural gas ended the week at $2.73/MMBtu. This compares to the $3.00/MMBtu price that I am using in the forecast models for the 1st quarter.
> My models do assume that HH gas pulls back to $2.50 in Q2 and Q3, so for the year my models assume gas averages $2.75/MMBtu.

Polar Vortex Wave #2 is already on the weather forecasts for this coming week, so I think it is way too early to proclaim that the winter heating season is over. Obviously, EIA is going to report a big draw from storage for the week ending Feb. 1. You can listen to daily weather forecast updates at https://www.weatherbell.com/premium/

A couple things to remember about the four gassers (AR, GPOR, RRC and SWN):
> They also produce a lot of NGLs and NGL prices are tied more to the price of oil than to the price of natural gas. Propane demand got a big boost from Polar Vortex Wave #1.
> They all have a lot of their production hedged at or very close to the gas prices that I am assuming in their forecast/valuation models. Each company's hedges are shown at the bottom of their forecast/valuation models.

On January 29: Continental Resources (CLR) announced details of their "Springboard" drilling program, which has already kicked off. It is a 12 rig development drilling program in the SCOOP area that has the potential to add 400 million BOE of proved reserves this year. They plan to drill 85 horizontal wells in the Springer formation (over 80% oil) and 250 horizontal wells that will land in the Woodford/Sycamore zones. In addition to CLR's 75% average working interest in these wells, they own 17% of the minerals (i.e. "royalties"). They have a new PowerPoint presentation on their website that highlights the program. NONE of CLR's oil is hedged, so it has a lot of upside for us if oil prices keep rising.

Matador Resources (MTDR) announced that they will be focusing most of their attention on a six rig drilling program in the Delaware Basin this year. They are finishing up a successful Eagle Ford drilling program that will add production in Q4 and 1H2019. Most of Matador's Eagle Ford production is now HBP, so they have no drilling requirements in 2019. The company will also be selling their Haynesville assets, assuming they can get a good price. That sale should be enough to fill the gap between their 2019 capex program and their operating cash flow.

Antero Resources (AR) and Pioneer Natural Resources (PXD) will be the first Sweet 16 companies to announce Q4 financial results. They are scheduled to report results on February 13th.

When they report Q4 results, all upstream oil & gas companies are required to include a year-end reserve report that has been reviewed by a 3rd party engineering firm. Since all of these companies use the "Units of Production" method to calculate DD&A expense, these reports will have a significant impact on their reported earnings going forward. The reserve reports are also what the banks use to evaluate their lines of credit. Access to capital is extremely important for upstream companies.

I cannot stress enough that most of these companies will report earnings that include large mark-to-market adjustments on the hedges. PXD has already announced that "Reported Earnings" for Q4 will include a $500 million non-cash gain on their hedges. When the companies report results, focus on cash flow from operations and their year-end proven reserves.

Susan & I will be on the 7th Annual EPG Cruise next week, but I will be checking the market and the EPG Forum a few times during the week. BTW there has been a big improvement in internet access on cruise ships over the last two years.
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Fair Value Estimates ("FVE"): My valuation of each company is what I believe it is worth today. You can see how I calculate the FVE for each company at the bottom of the individual company forecast/valuation models. FVE is based on cash flow from operations X a multiple that I believe is appropriate for the quality of their asset base. Companies with strong balance sheets and lots of high quality drilling inventory ("running room") deserve a higher multiple. Their track record of production growth also is a major factor in the multiple that I use to value the stock. I do compare my valuations to the price targets of other analysts, but I try not to let them influence me too much. First Call's price target for each company can be found on the Sweet 16 Summary Spreadsheet that is updated each week on the EPG website.