Sweet 16 Update - July 9

[dan_s]

The Sweet 16 was down 2.56% last week and is now up 30.49% year-to-date.
This compares to the S&P 500 Index that finished the week strong (thanks to an upbeat jobs report). It is now up 4.21% YTD.

The Sweet 16 spreadsheet can be found on the EPG website. It shows my valuation for each company compared to First Call's price target for each company.

Despite the down week for the Sweet 16, First Call's price targets for 14 of the 16 companies moved higher and the other two stayed the same. First Call's price targets change when analysts submit new forecasts to Reuters. First Call's price targets for XEC, CXO, PE and PXD are now higher than my valuations. As a group, the Sweet 16 is 27.86% below my valuation.

As I posted yesterday, I want to increase the portfolio's exposure to natural gas because I think gas and NGL prices will be much higher by year-end.
> U.S. natural gas in storage is moving back toward the 5-year average. Weekly injections to storage have been significantly below the 5-year average for nine weeks in a row.
> During those nine weeks, the surplus to the 5-year average has narrowed by 240 Bcf. For the week ending July 1, the injection was 39 Bcf compared to the 5-Yr ave. of 78 Bcf.
> The U.S. natural gas market has grown to an estimated 83 Bcf per day in 2016, about 8 Bcfpd higher than it was five years ago. So, we need more gas in storage at all times to provide "insurance" against unplanned supply outages and spikes in demand.
> Demand is increasing for power generation, exports (LNG and pipeline), industrial demand.
> Canada has less gas to send to the U.S. and the big northern cities will need to draw more from storage this coming winter.
> July & August are going to be HOT (Global Warming???), so I expect to see some very bullish weekly storage reports coming just ahead. Demand for natural gas is very seasonal and the summer season is becoming more important since more and more of our electricity comes from gas fired power plants.

We now have three "GASSERS" in the Sweet 16:
> Antero Resources (AR) is the safest bet because they have more than 100% of their gas production for 2016 and 2017 hedged at over $4.00/mmbtu already. Antero recently made a big acquisition from Southwestern Energy (SWN) that I think will turn out to be a HOME RUN for the company. Terms of the deal were negotiated when gas and NGL prices were lower than where they are today and MUCH LOWER than where I think they are heading.
> Range Resources (RRC) merger with Memorial Resource Development (MRD) is a "Match Made in Heaven". In addition to creating a Power House of a gas company, it gives RRC even better access to gas and NGL markets than it had before. RRC has a great management team and a fantastic marketing group. They always seem to get the best prices for their production.
> Gulfport Energy (GPOR) has the biggest gap to my valuation ($46.00/share, compared to FC price target of $35.11). This is my Top Pick for gas because with the stars coming in alignment for gas and GPOR expected to report solid Q2 results, I think it will draw a lot more attention and upgrades from the Wall Street gang.

You can find our recent profiles on each Sweet 16 company on the EPG website under the Sweet 16 tab.

The rest of the Sweet 16 get most of their revenues from liquid sales, but they all have some natural gas production. XEC, DVN, NFX and SM will all get a nice revenue boost when gas prices move over $3.00/mmbtu this quarter. The January, 2017 contract for natural gas closed at $3.395/mmbtu on July 8, so I think it is a fairly safe bet that we see gas prices over $3.50 by Christmas.

The Sweet 16 will begin reporting 2nd quarter results the last week of July. Many of them will provide Operations Updates before they release earnings. I will adjust my forecast models if necessary and comment on them here.

Enjoy the summer and say something nice to a policeman, fireman or someone in the military when you get the chance. We get to live pretty darn good in this great country thanks to them.

PS: Those of you in the Houston area >>> We have a luncheon at the Hess Club on July 19. PLEASE REGISTER if you plan to attend and bring a friend.

[dan_s]

The International Energy Agency's monthly Oil Market Report will come out this week. It always gets a lot of attention.