Sweet 16 Update - July 16

[dan_s]

The Sweet 16 was up 2.24% for the week ending 7/15/2016. It is now up 32.73% YTD, compared to the S&P 500 Index, which is now up 5.77% YTD after two strong weeks for the overall market.

The Sweet 16 are rock solid mid-cap and large-cap upstream companies that have more than enough cash flow from operations and liquidity to fund their growth plans. This is where most of your money in the oil & gas sector should be invested unless you are "swinging for the fences". < PLEASE be clear about this. Small-caps have much more risk, primarily because they have less access to the capital markets during times of uncertainty. See "PS" below.

13 of the 16 companies moved higher last week. Continental Resources (CLR) is now up 100% YTD.

Gulfport Energy (GPOR), PDC Energy (PDCE) and Range Resources (RRC) pulled back a bit last week.
> GPOR and RRC were down because of the dip in natural gas prices, which will not last long.
> PDC Energy (PDCE) was down for no reason at all and I think it is a great buy at today's share price. For a company with $2.5 Billion market-cap, it is somewhat off the Wall Street radar screen. Read this: http://finance.yahoo.com/news/why-pdc-e ... 12325.html

Among the larger companies, Devon Energy (DVN) now appears to have the most upside. Their non-core asset sales will bring in more than $3 Billion in cash and that money can be used to accelerate their development drilling in STACK, which has good economics at $40/bbl oil and "great economics" at $50/bbl oil. Devon is one of our "Elite Eight" and I consider it a "Core Holding" quality company that is selling at a discount to the peer group.

Most encouraging to me is that First Call's prices targets for all sixteen companies have increased since last week. First Call's price targets are the average of analysts' predictions submitted to Reuters. Analysts take a hard look at their forecast models before companies release quarterly results. They do not want to look stupid when actuals come out, so increased price targets right before and right after quarterly results come out are the most important. First Call's price targets for XEC, CXO, FANG, PE and PXD now exceed my valuations.

There are now 11 companies in our Small-Cap Growth Portfolio and five of them deserve promotion to the Sweet 16. The only reason they aren't in the Sweet 16 today is because none of the current members deserve a demotion. I have taken a VERY HARD look at each company and you can download an updated profile on each company from our website.
> Callon Petroleum (CPE), a pure play on the Permian Basin.
> Laredo Petroleum (LPI), another pure play on the Permian Basin with a unique development plan they call the "Earth Model". LPI is really more of a "Mining Company", because they are in full fledged development mode, "harvesting" oil & gas with production corridors.
> Matador Resources (MTDR) is heavily weighted to the Permian Basin, but they also have a significant Eagle Ford presence.
> RSP Permian (RSPP): You can guess this one on your own. With a market-cap over $3.5 Billion it is "The next FANG".
> Synergy Resources (SYRG) is a Wattenberg company. Of this group, it is trading at the deepest discount to my valuation.

My weekly podcast will be posted to the website by Saturday evening.

[dan_s]

PS: Obviously, I cannot follow all of the upstream companies. My brain would explode. If fact, I'm close to thinking I try to follow way too many already. The point is that there may be some real "gems" out there which I have yet to discover. That's why we have an open Forum here so you can post your best ideas. PLEASE feel free to share your Top Picks with our members, but don't say "I bought it so you should too". Give us some good reasoning to justify considering it.

PPS: I have taken a hard look at EQT Corp. (EQT) and there is a very good chance that I will add it to the Sweet 16 after I use their Q2 results to confirm my forecast mode. I want more exposure to natural gas. It compares quite favorably to AR, RRC and GPOR.