Sweet 16 Update - July 30

[dan_s]

If you like roller coaster rides, then you enjoyed last week's movement of the Sweet 16.

The Sweet 16 finished the week ending July 29 up 0.54% and it is now up 30.33% YTD. The S&P 500 Index was down slightly and is now up 6.35% YTD.

Very encouraging to me is that the First Call Price Targets for all sixteen companies went up for the 2nd straight week. IMO the "Wall Street Gang" knows this sector is over-sold and that oil & gas prices are going higher into year-end. The recent pull-back in oil prices was more FEAR driven than reality driven. Yes, there was a small increase in U.S. crude oil inventories announced on Wednesday, but it was because of increased imports. U.S. oil production is falling and that is not going to change because a few more drilling rigs have been put to work. The active rig count would need to DOUBLE before we see U.S. oil production going up again.

For the 100th time this year, let me remind you all that weekly production numbers published by EIA are just educated guesses on their part. THEY DO NOT HAVE ANY WAY TO KNOW WHAT ACTUAL U.S. PRODUCTION IS FROM WEEK TO WEEK. The companies themselves do not even know exactly what their production is from week to week. They have a much better idea than IEA does, but production numbers are NEVER known for sure until about 30 days after month end. Why do you think it takes companies so long to report quarterly results?

Pioneer Natural Resources (PXD) and Range Resources (RRC) are the only two companies that have reported Q2 results. PXD's results were "A+" and RRC's were a sold "B". If they are all this good, I will be pleased.

Q2 results will be pouring in next week and I will update my forecast models ASAP after each company releases results. I'm sure we will get a lot of lively discussions here on the Forum. All you have do to post a question or comment is log on with the same Username and Password you use on the EPG website.

I often mention our "Elite Eight". These are the larger companies in the Sweet 16 that I have followed closely for at least five years and most of them for over a decade. I have a very high level of confidence in my forecast models for all of them. They are highlighted on the Sweet 16 spreadsheet, but if you are new to the group, they are CXO, CLR, DVN, EOG, NFX, PXD, RRC, XEC. AR and FANG are very close to qualifying, but I had to draw the line somewhere.

I am going to talk a bit more about the U.S. natural gas market on this weekend's podcast (which I will finish on Sunday this week) because I think it will draw a lot of attention if we start seeing weekly storage reports in the teens week after week. In case you missed it, the net increase last week in U.S. natural gas in storage was 17 Bcf, which compares to the 5-year average build of 50 Bcf.

We have had draws from storage in August before and if we do this year, you will all see a big spike in gas prices. Regardless, it should be crystal clear to everyone by now that we are going to see a much tighter gas market when winter arrives. For twelve weeks in a row, the net increases to storage have been SIGNIFICANTLY lower than the 5-year average. BTW hurricane season is just ahead and several "waves" are already being tracked offshore West Africa that are heading our way. We still get a lot of our gas from the Gulf of Mexico.

I know some of you are "concerned" when these companies report big GAAP losses for the quarter. I just want you to look at what PXD's share price did after they reported a GAAP loss of $268 million ($1.63/share), which was a much larger loss per share than what First Call was expecting. The share price spiked UP and finished Friday up more than $12/share from Wednesday's closing prices. How can that possibly happen????????????
1. Because fund managers know to ignore GAAP results, which include confusing non-cash things like "mark-to-market adjustments on hedges" and "impairment charges".
2. The big money managers (which control share prices) know to focus on cash flow from operations and well results.
3. The value of an upstream energy company (any company for that matter) is not what it did last year or even the most recent quarter, but what cash flows it will generate in the future. PXD has decades of running room in arguably the best oil play on the planet outside of Saudi Arabia.
4. PXDs' cash flow from operations increased by $140 million from Q1 to Q2 and they should generate over $1.6 Billion cash flow from operations this year.

I was very encouraged by what both PXD and RRC had to say about improving NGL prices. For those of you that own SM, this is a very important topic. All of the Sweet 16 produce some NGLs, but some produce a lot of them. Take the time to know what the product mix is for the upstream companies you own. I show it at the bottom of each forecast model.

I will update the forecast models ASAP and I will post my initial comments for each company soon after they release Q2 results.

The Sweet 16 is always my top priority, but I will check on our other model portfolio companies as I have time. All of you should have the bulk of your energy sector money in companies like these (BIG, solid cash flow and plenty of running room).

Check out Joe Bastardi's weekend weather outlook at www.weatherbell.com Joe is not always right, but he is the best long-range weather forecaster I've found.