Sweet 16 Update - May 21

[dan_s]

The Sweet 16 Growth Portfolio was up 2.63% for the week ending May 20 and the group is now up 28.88% year-to-date. This compares to the S&P 500 Index that is up just 0.41% YTD.

Leading the pack are Continental Resources (up 78.24% YTD), Range Resources (up 64.08% YTD) and SM Energy (up 48.98% YTD). We have published updated profiles on CLR and RRC. We will publish an updated profile on SM next week.

Overall the Sweet 16 is still trading at a 23.5% discount to my combined valuation. The only company trading above my valuation is Diamondback Energy (FANG), but the First Call price target has really jumped since they released Q1 result to $94.93. I probably need to give more value to Diamondback's stake in Viper Energy Partners LP (VNOM). A high percentage of Diamondback's drilling program is focused on leasehold where Viper has a royalty interest. We are going to publish a profile on Viper in June.

You can see my valuation for each company compared to First Call's price target on the Sweet 16 summary spreadsheet, which will be posted to the EPG website on Sunday. I update it each weekend.

Devon Energy (DVN): On May 19th Johnson Rice upgraded DVN to Accumulate. Devon is a company "in transition" with several large asset packages up for sale. Their goal is to raise $2 Billion. With oil prices improving, I think they will top that amount. My advice is to accumulate DVN on the dips because it is going to look a lot better by the 4th quarter. Devon has the largest leasehold position in the STACK play that has HUGE upside. Watch the STACK video at http://digitalgate.tv/EPG-NavPort%20Pre ... y2016.html

Stocks trading at the largest discount to my valuation are: SM, PDCE, GPOR, AR and CRZO

First Call's price targets on all 16 companies have moved higher since they released Q1 results. This is a very good sign.

With oil and gas prices moving higher, those very distortive non-cash impairment charges should be over. There are several GAAP / SEC accounting rules for upstream oil & gas companies that, in my opinion, only confuse investors. Impairment and mark-to-market adjustments on hedges are way at the top of the list. This is why Wall Street came up with the term "Adjusted Earnings". Just be aware that when actual earnings are reported by the companies, it is Adjusted Earnings that should be compared to EPS forecasts. My advice is to focus on Cash Flow From Operations. Cash pays the bills, not earnings. All of the Sweet 16 are now generating solid cash flow from operations.

My plan is to send out updated profiles on SM, FANG, AR, CRZO and DVN this coming week.

Why oil prices are heading up: http://oilprice.com/Energy/Oil-Prices/O ... Think.html This article, which I wrote for OilPrice.com, had over 36,000 hits as of Friday morning. Investor interest in the oil & gas sector is definitely increasing.

I think WTI will be over $50/bbl very soon and I am expecting oil to make a big move up in the 3rd quarter. Raymond James energy team believes we will see WTI hit $70 by September 30. To their credit, their detailed analysis of the oil markets and their full year price forecast that was published February 4 has been dead on. In my opinion, Raymond James has the best energy sector team on Wall Street.

We are now in the "fun part" of this oil price cycle. Oil prices never move up in a smooth straight line because the speculators/daytraders are in charge of short-term prices. However, the fundamentals of supply/demand always win out and they are pointing to a much tighter oil market in just a few months.

Natural gas and NGL prices will remain under pressure through the summer, but there is definitely "light at the end of the tunnel" for the gassers. I predict Ngas prices over $3.00/mcf by Christmas.

[dan_s]

Newfield Exploration (NFX) is my Top Pick for the STACK play. They are marketing their ~35,000 acre position in the Eagle Ford, so they can focus on more SCOOP and STACK development drilling where they are getting FANTASTIC results.

http://www.bloomberg.com/news/articles/ ... o.headline