Sweet 16 Update - March 30

[dan_s]

The first quarter ends with our Sweet 16 Growth Portfolio up 14.2% YTD and up 3.5% for the week ending March 29th. There was some quarter-ending profit taking on Friday despite a nice move higher for crude oil. WTI closed on Friday at $60.18/bbl, which is the 3rd breach of strong resistance at $60/bbl.

Barclays expects higher oil prices in Q2: On March 28, Barclays wrote in a note that it expects Brent crude oil and US crude oil to average around $73 and $65 per barrel in the second quarter of 2019. At those levels, US crude oil and Brent crude oil prices would be 18.4% and 14.4% higher than their average closing prices in Q1 2019 so far. Moreover, the company expects that OPEC and Russia will continue with their agreed-upon supply cuts even beyond June 2019. Again, based on Barclays’ price expectation, the Brent-WTI spread will contract in Q2 2019, a factor that might limit US crude oil exports’ rise.

However, news reports suggest that Russia is reluctant to extend production cuts at the June meeting. On March 29, a Reuters poll suggested that analysts expect OPEC and non-OPEC members’ supply cuts along with US sanctions on Iran and Venezuela will mitigate the risk from US oil production and the slowing global economy.

At the end of the 1st quarter, Southwestern Energy (SWN) and PDC Energy (PDCE) lead the pack, up 37.54% and 36.69%. Although my valuations are much higher than where they closed on Friday, they both face some headwinds. SWN is a "gasser" and few investors are interested in gas in April & May. A hot start to summer could change that as more and more areas now rely on gas fired power plants for electricity and AC units are already on in South Texas. PDC Energy is primarily in the Colorado DJ Basin that has some risk of Democrats passing a bill that would significantly hamper oil & gas development drilling in that state. Personally, I think Colorado Senate Bill 19-181 will face a lot of legal challenges and will not be nearly as impactful as many people believe it will.

If you agree with Barclays that oil prices are going higher, Continental Resources (CLR) and EOG Resources (EOG) look very cheap at today's prices. Most of their oil is unhedged. This are rock solid "Core Holding" quality companies that are trading at a discount to the break-up value.

Carrizo Oil & Gas (CRZO) is in discussions with SM Energy (SM) to see if they can work out a merger that I think would be a "win-win" for all shareholders. Oasis Petroleum (OAS) has also been mentioned in some M&A discussions.

The next edition of The View From Houston will be published next week.