Sweet 16 Update - July 2

[dan_s]

We are now exactly half the way through 2016, so let's see how the Sweet 16 is doing.

The Sweet 16 is beating the crap out of the S&P 500 despite having to deal with low oil & gas prices. One reason for this is because fund managers rebalance their portfolios at the beginning of each year. Since Energy is a major sector in the market and it was down big last year, fund managers rotated a lot of money into energy stocks. Since the Sweet 16 are all top shelf companies, they captured a lot of that money. With oil & gas prices moving higher during the 2nd half of this year, the Upstream Oil & Gas companies are going to draw even more attention. In the final year of the last big oil price cycle (2010), the Sweet 16 doubled its gains from the first three quarters in the 4th quarter. The stars are aligning for that to happen again.

The Sweet 16 was up 3.23% for the week ending July 1 and it is now up 33.05% year-to-date. The S&P 500 Index is up just 3.21% YTD.

All 16 stocks are up. There are zero fund managers out there which are batting 1,000.

Our four leaders are:
Continental Resources (CLR) up 97.52% YTD
Range Resources (RRC) up 80.74% YTD
Parsley Energy (PE) up 47.26% YTD
SM Energy (SM) up 42.78% YTD < SM is still trading at a big discount to my valuation of $48.00.

As a group, the Sweet 16 is still trading 25% below my valuations.

By now you should know that I am extremely bullish on the outlook for natural gas prices. July & August are going to be extremely hot for the eastern half of the U.S. Gas fired "peaking plants" across the South are all on-line now to meet electrical demand for air conditioning. With U.S. natural gas production now on steady decline, we should see the amount of gas in storage return to the 5-year average within a few months. Keep in mind that with U.S. demand for gas going up each year, the utilities need to have more gas in storage at all times. The front month contract for natural gas on NYMEX (August) closed at $2.98/mmbtu today. When gas was under $1.70/mmbtu back in February, I bet none of you would have bet that gas would be testing $3.00 in July. I now think there is a 50% chance that we see natural gas trading for more than $4.00 by year-end.

The Eagle Ford oil play is where natural gas production is falling the fastest. To see that gas production is falling in ALL of the major U.S. basins, go to the EIA Drilling Productivity Report.

My TOP PICK for those of you that believe natural gas prices are going higher is Gulfport Energy (GPOR). Read our profile on the company and you will see why. Hint: Gulfport's production mix is 85.4% natural gas, 9.5% NGLs and only 5.1% crude oil. My current valuation of GPOR is $46.00, but if natural gas is trading at $4.00/mmbtu by Christmas my valuation will spike to near $60.00/share. GPOR closed at $31.67% on July 1.

Another TOP PICK this week is Devon Energy (DVN). The company has been able to sell several large non-core asset packages for total proceeds near $3 Billion. The sales are going to shore up their balance sheet. It has HUGE upside in the STACK PLAY and it produces a lot of high btu gas (over 1.5 Billion Cubic Feet per Day). My valuation is $56.00 and I can justify a much higher multiple after the asset sales close in a few months.

Cimarex Energy (XEC) is approaching my valuation of $125.00/share, but this is another company that will get a big boost from an improving gas price. XEC has a SUPER STRONG balance sheet, so it deserves a high multiple. XEC, DVN, NFX and CLR all have big exposure to SCOOP & STACK.

Updated profiles on all 16 companies can be downloaded from our website.

Enjoy the 4th of July. The USA is 240 years old.

[dan_s]

The Sweet 16 spreadsheet has been posted to the EPG website. It shows my valuation for each stock compared to the First Call price targets.