Sweet 16 Update - June 28

[dan_s]

Our Sweet 16 Growth Portfolio is up 29.2% year-to-date, compared to the S&P 500 Index that is up 6.1% YTD. Gulfport Energy (GPOR), which is up 450.2% since I added it to the Sweet 16 on 1-1-2010, is the only stock in the group that is down slightly (-0.2%) YTD. Hang tough if you own GPOR (see comments below).

Newfield Exploration (NFX) will be officially added to the Sweet 16 on July 1st and Kodiak Oil & Gas (KOG) will be moved to our Small-Cap Growth Portfolio. I remain bullish on KOG and today my valuation model shows the Fair Value at $15.50/share. My only disappointment with KOG is that they have not been reducing their completed well costs as fast as our other Bakken companies. Kodiak’s production should be up more than 35% this year and accelerate into year-end.

NFX has beaten the First Call EPS estimates the last three quarters and, based on my forecast, they should do it again when they report 2nd quarter results. My Fair Value Estimate for NFX is $53.65/share and there is significant upside to that number as we move further into the year. On June 16, Jefferies raised their price target for NFX by $20 to $61/share. For more on NFX, read our profile which can be found under the Watch List tab on the website.

As a reminder, my Fair Value Estimate (“FVE”) for each company is what I believe the company’s break-up value is today. It is slightly different than a “Price Target”, but over time First Call’s price targets tend to move toward my FVE. Remember that First Call’s price targets lag what is going on in the real world. They are an average of all the analysts’ forecasts sent to Reuters and many firms are very slow in updating their forecast models, especially for the smaller companies. You can find my actual FVE calculation for each company at the bottom of the individual company forecasts, which are under the logos for each company (after you click on the Sweet 16 tab).

Each weekend (when I don’t have a kid getting married), I update the Sweet 16 spreadsheet that shows the FVE for each company compared to the current First Call price targets. All of the forecast models have been updated through 6/28/2014 and I will not update them again until 2nd quarter actual results come out.

My FVE calculations now assume WTI crude oil priced at $95/bbl and Henry Hub natural gas at $4.50/mcf for all future periods. I do my best to factor in each company's hedges and regional differentials.

Carrizo Oil & Gas (CRZO) and Continental Resources (CLR) are now within 3% of my valuations. They can definitely go higher, but I need to see 2nd quarter results before I can justify increasing my FVE.

Devon Energy (DVN) was recently added to the Sweet 16 and I think it is a great buy at today’s share price. I believe the market still thinks of Devon as a “gasser” because they are best known for their large stake in the Barnett Shale. However, Devon is now focused on increasing their liquids production and they are going to report some very impressive production and proven reserve growth this year. This is way too good of a company to be trading for under 5X operating cash flow per year. I consider Devon to be a "Core Holding" quality company and a great addition to the Sweet 16.

Gulfport Energy (GPOR) significantly reduced their production guidance after they reported rock solid first quarter results. IMO the market over-reacted. Gulfport is still on-track to increase their production by more than 240% this year, which is the highest increase in the Sweet 16 by a wide margin. GPOR is going to look a lot better to investors by year-end and accumulating the shares on the dips should be very profitable by Christmas. Gulfport and all of our Eagle Ford companies (CRZO, DVN, EOG, MTDR, SN and SM) stand to benefit the most from the Feds recent rulings that will allow the export of condensate. The exporting of condensate has the potential to increase regional oil prices in both South Texas (Eagle Ford) and the Permian Basin.

SM Energy (SM) seems to finally be drawing some attention. It has lagged the pack because the Wall Street gang has a miss-conception about their Eagle Ford acreage. SM did report some disappointing well results in one of their large Eagle Ford blocks way out west, but most of their leasehold in the play is good and they have over five years of low-risk high-quality drilling inventory. Also, last week Comstock Resources (CRK) reported some very good well results in Burleson County, Texas that is just to the north of a large block of acreage that SM owns in northern Washington County, Texas. I now believe SM has HUGE upside in the more than 200,000 acres they hold in East Texas.

CRK is in our Small-Cap Growth Portfolio. My FVE is $36.40/share and there is significant upside potential. You can find our recent profile on CRK under the Watch List tab on the website.

The Sweet 16 is heavily weighted to oil and I highly recommend you all stay focused on companies that are increasing oil production. The “smart way” to get exposure to natural gas is to own companies that have a lot of gas production, but don’t need high gas prices to succeed. This is another reason I like SM Energy. Others that produce a lot of natural gas and NGLs are NFX, XEC, DVN, EOG, RRC and UNT.

I took a very hard look at Unit Corp. (UNT) today and I increased my valuation to $94.40/share. This is shaping up to be best year in Unit’s fifty year history and 2015 looks even better.

Oasis Petroleum (OAS), Whiting Petroleum (WLL) and Triangle Petroleum (TPLM) are my top picks for the Bakken / Three Forks play in North Dakota.

Concho Resources (CXO) is my top pick in the Permian Basin.

Bonanza Creek Energy (BCEI) is my top pick for the Niobrara play in Colorado and Wyoming.

You can find my valuation for each company under the Sweet 16 tab on the website. Just click on the “Sweet 16 Forecasts” link. Remember, you must log on first to see the current report.

[mikelp]

Dan: as a new member, I've already made money with my EPG membership in the short time since I joined. The Sweet 16 updates and EPG email alerts are very helpful. Also watching the High Yield Income portfolio ideas and have incorporated many into my income portfolio. Keep 'em coming!

[dan_s]

Mike:
This is why you pay me the Big Bucks! I work 60 hours a week on this stuff and try to remain current on all of our model portfolio companies, but my primary focus in the Sweet 16.

I am working on LINN Energy (LINE) today and will send out a profile and updated forecast model this afternoon. I have been saying for over six months that LINE and LNCO will move to the upper $30s by the end of this year. I still think so and now believe the lower $40s are within range. Annual yield on both is over 9%, so they are excellent for your Dividend Growth Machine.

[dan_s]

IMO this deal is a Win-Win for Devon Energy and LINN Energy. - Dan

NEW YORK (TheStreet) - Devon Energy's (DVN_) transformation into a pure-play onshore oil and gas driller is complete, with the company's $2.3 billion sale of non-core assets to upstream master limited partnership (MLP) Linn Energy (LINE_). Devon Energy, unlike peers such as Occidental Petroleum (OXY_), Marathon Oil & Gas (MRO_) and Hess (HES_), was able to affect its turnaround under CEO John Richels without the hand of a vocal activist investor.

On Monday, Devon Energy said its non-core asset sale consisted of properties in the Rockies, the onshore Gulf Coast and the Mid-Continent regions of the U.S. would raise $1.8 billion after taxes. In total, Devon has raised $5 billion in recent months from asset sales in the U.S. and Canada, and the spinoff of its EnLink Midstream (ENLK_) business.

The asset sales do two things, both for the company and its investors. It rationalizes Devon Energy's operations, which had been discounted by investors amid production shortfalls and balance sheet troubles. They also are helping Devon Energy identify ways to grow its oil and liquids production volumes in coming years.

My valuation of Devon Energy (DVN) = $100.30/share.

[dan_s]

Devon Energy's non-core asset sale to Linn Energy on Monday may perhaps be the company's most straightforward deal in recent memory. It also may prove a pivotal moment in Devon Energy's transformation, with the company stating on Monday it is now no longer in turnaround mode.

"With the sale of our remaining non-core assets, the portfolio transformation that we announced late last year is now complete," CEO Richels said in a Monday statement. ""In a short period of time we transformed our portfolio through three significant steps: the accretive Eagle Ford entry, the innovative creation of EnLink Midstream, and the sale of our non-core properties," he added.

Devon Energy once was among the largest independent drillers by revenue in the United States, with a portfolio tilted towards natural gas production and operations spanning onshore drilling fields, the offshore Gulf of Mexico and international operations in Canada and overseas. Now, the company is concentrated in onshore basins in North America, and has diversified away from natural gas.

This is why I decided to add DVN to the Sweet 16: On Monday, Devon Energy forecast nearly 60% of its production would come from liquids by year-end, and gave a forecast of oil production growth rates in excess of 20% in coming years.