Focus on the Sweet 16

[dan_s]

The next edition of The View From Houston will be sent out on Monday. Most of the newsletter will focus on the Sweet 16 since I've had very little time to look at the small-caps.

The Sweet 16 is my primary focus. I am extremely selective on the companies I put into this "Flag Ship" portfolio. These are all Core Holding quality companies that have strong positions in some of American's top oil and gas plays. They also have access to capital markets and more then enough liquidity to survive. This is where I recommend you invest most of your hard earned money. As money rotates back into the energy sector, these are the companies that fund managers like.

The Small-Caps, like Gastar, are high risk / high reward plays. I picked them because they have good assets, but they may lack access to capital markets and have liquidity issues at the depths of the oil price cycle. If they survive, the upside is HUGE and this is where you have a chance at 5X to 10X type returns. However, small-caps are not where you invest your retirement money. DO NOT PUT ALL YOUR EGGS IN ONE BASKET. GPOR was once in this group and in 2010 it went up over 2,400%.

Gastar: Their North Stack leasehold block is an extremely valuable piece of real estate. Do not confuse a liquidity problem with insolvency. NFX paid Chesapeake $470 million for leasehold in Stack this week that is probably on par with Gastar's North Stack block. Pulling South Stack off the market disappointed investors, but I think it is the right move. Drilling activity is moving toward that block rapidly and if oil prices go higher, there will be a lot more interest in that 26,000 acre block in six months. It is too early to tell what the Holiday Road well will do and investors need to understand that when you pump that much fluid and sand into a well, it takes 60-90 days to clean up. The well went on-line April 11.

You may have noticed that I am raising my valuations for the Sweet 16. That is because first quarter actuals give me a higher level of confidence in my forecast models. D & C costs continue to come down and so do operating expenses. Plus, I am raising the WTI oil prices used in my forecasts as follows:
Q2 from $35 to $40
Q3 from $40 to $50
Q4 from $50 to $60
2017 stays at $60

Before you think I am "way out on a limb", take a look at Raymond James price forecast ($60 for Q3, $65 for Q4 and $75 for 2017). Raymond James presented their forecast at our luncheon on April 25. The slides they spoke from can be downloaded from our website. RJ says WTI will be $50 by June 30 and ramp to $70 by the end of September. That will take the Sweet 16 a lot higher from where they trade today. David Purcell at TPH is holding with his forecast of $80 WTI by year-end. David is a very well respected analyst.

I have also increase my natural gas price forecast (Henry Hub) to $2.00 for Q2, $2.20 for Q3 and $2.50 for Q4. I am assuming $3.00 for 2017 and if Mother Nature just gives us a normal summer and normal winter, I think we will see $4.00 gas prices in 2017.

For each company, I adjust for regional price differences and their hedges. You can download all of my individual company forecast models to Excel and change the commodity prices in the forecast periods yourself. The forecast models are "macro driven" so they will automatically update earnings, cash flows and valuations for you.

Keep this in mind:
> This world runs on hydrocarbon based liquid fuels, most of which are made from crude oil. Demand increases by 1.2 to 1.5 million barrels per day each year and supply is falling.
> OPEC produces ~40% of this world's oil and they CANNOT meet global demand on their own.
> Oil and natural gas are two totally different markets
> All oil price cycles over-shoot the mark and lead to a supply shortage. This one is on track to end up with BIG SHORTAGE and there is almost no excess capacity in the world. OPEC cannot save us.