Sweet 16 Update - October 24

[dan_s]

The Sweet 16 pulled back with oil prices last week, dropping 6.6%. The Sweet 16 is now down 5.8% YTD, compared to the S&P 500 Index which is up 0.8% YTD. West Texas Intermediate (WTI) has pulled back into the $44-$47 trading range. I expect the Sweet 16 to trade in lock step with oil prices through November. In December, the market should start paying more attention to natural gas prices. WTI should get support from improving weekly crude oil storage reports as the refiners ramp up heating oil production in November and from the declining active rig count. I do expect the number of rigs drilling for oil to drop below 500 by year-end.

3rd quarter results will not be good, but they should be the low point for the cycle (hopefully). Ignore "Reported Earnings", which include lots of non-cash items like impairment and mark-to-market adjustments on hedges. Focus on cash flow from operations. Remember, cash pays the bills, not earnings.

The "gassers" continue to weigh on the portfolio, but that should change by Christmas. It is not discussed much during shoulder season, but natural gas production in the U.S. is also falling due to a sharp decline in well completions. The national weather service is coming around to Dr. Joe Bastardi's winter forecast that December - March will be quite cold (with a lot more snow) in the SE quarter of the U.S. (a region that burns a lot of gas for space heating).

Laredo Petroleum (LPI) has 100% of their 2015 oil production hedged at more than $80/bbl. Pick it up on the dips.

Continental Resources (CLR) and EOG Resources (EOG) have none of their 2nd half oil hedged. You can see how much production each company has hedged at the bottom of the forecast models (available on the EPG website).

Newfield Exploration (NFX), up 45% YTD, leads the pack because of their exposure to the STACK play in Oklahoma where they are getting outstanding results. Those of you that own Gastar Exploration (GST) should read carefully what NFX says about STACK in their Q3 press release on November 3. NFX has completed several horizontal STACK wells very close to Gastar's leasehold block.

Southwestern Energy (SWN) is grossly oversold unless you think natural gas prices are going to remain depressed forever. All of the Marcellus / Utica producers will get higher prices for their gas in early 2016 as several midstream projects are completed allowing them to get their products to better markets. GPOR and RRC will also benefit. I think SWN's break-up value is at least $25/share. I am surprised a large-cap does not make a run at the company.

SM Energy (SM) and Range Resources (RRC) will report 3rd quarter results this coming week. The rest of the Sweet 16 (except for PE) will report Q3 results November 3-6. I will update my forecast models and post comments here as soon as I can.

[dan_s]

The Sweet 16 spreadsheet, showing my valuation compared to First Call's Price Target for each company, has been updated and posted to the EPG website.