JONE: Going into "Hunker Down" mode

[dan_s]

Jones Energy, Inc. (JONE) (“Jones Energy” or “the Company”) today provided its 2015 year-end reserves, an operations update, estimated financial results for the fourth quarter and full year 2015, and its initial 2016 capital budget plan and guidance.

Highlights
• Proved reserves at year-end 2015 were 101.7 MMBoe based on SEC pricing1; proved oil reserves were 25.4 MMBbl
• Cleveland proved reserves were 80.6 MMBoe at year-end 2015
• PV-10 value of proved reserves was $470 million at SEC prices1
• Mark-to-market hedge value of $264 million incorporating strip pricing as of February 10, 2016
• Liquidity of approximately $420 million as of December 31, 2015
• Initial 2016 capital budget of $25 million, primarily for workovers
• Estimated full year 2015 production of approximately 25.1 MBoe/d (above top end of guidance); estimated oil production for the full year of approximately 7.1 MBoe/d (top end of guidance)
• Estimated production for the fourth quarter of 2015 of approximately 23.6 MBoe/d (above top end of guidance); estimated oil production for the fourth quarter of 2015 of approximately 6.0 MBoe/d (in-line with guidance)
• Estimated Cleveland production for the fourth quarter of 2015 of approximately 17.7 MBoe/d

Jones Energy Founder, Chairman, and CEO, Jonny Jones stated, “2015 was a year that saw our company meet or beat every goal we laid out for ourselves resulting in estimated production growth approaching 10% while simultaneously dropping capital spending by roughly 60%. Despite the incredible cost savings we created this past year, the commodity price environment has become even more challenging during the past few months. As a team, we believe the responsible decision as capital allocators is to hold off on drilling new wells at this time. Our valuable hedge position has continued to afford us the luxury of allowing service costs and commodity prices to rebalance before deploying additional drilling and completion capital. We will be patient in an effort to make sure that our capital investments create an acceptable return for our shareholders.” Mr. Jones went on to say, “Our year-end proved reserves reflect the strength of our Cleveland well economics as we maintained high levels of proved reserves despite the significant drop in prices. We continue to believe that our multi-year hedge book and significant liquidity have Jones Energy well prepared to weather current market conditions and positioned to seize opportunities to create shareholder value.”

[dan_s]

This is the right move for JONE, but their preliminary production forecast for 2016 is a drop of 35% to 40% YOY assuming no new wells. They should have no problem generating enough cash flow from operations to cover their capex budget of $25 million (just enough for some workovers).

Hedges in place for 2016 cover:
> 85% of oil at $82.74/bbl
> 100% of natural gas at $4.44/mcf

If oil prices do rebound to more than $50/bbl, JONE can easily ramp up drilling activity again.

I may drop them from the Small-Cap Growth Portfolio just because production will be on such steep decline and I need to make room for some new ones.

[dan_s]

I have updated my forecast model for JONE, based on their new 2016 guidance, and posted it to the EPG website.

My valuation drops to $6.25, compared to First Call's price target of $5.60.

I have a very good relationship with an analyst at Stifel. He sends me all of their reports on energy stocks each day. Their revised 2016 CFPS for JONE is $1.55. So this small-cap is now trading for less than 1X CFPS. Cash flow from operations will be $60 to $100 million for 2016 (locked in by hedges), compared to a capital budget of $25 million.

As I'm sure I will post here several hundred more times: "Small-Caps get HAMMERED in commodity price cycles". This happens because Wall Street assumes they will all go bankrupt. This is why NOW is the time to double your due diligence to find those that won't. Those that survive have HUGE upside when oil prices rebound.

My job is to give you the tools.