What's going on with this market?

[dan_s]

The Energy Prospectus Group was founded in February, 2001 and I have been generating a Sweet 16 Portfolio since the first issue. Over the last 14 years the energy sector has been out of favor many times. EACH TIME (including 2008 when the price of oil dipped to $37/bbl) the Sweet 16 has bounced back and moved higher. I doubt this recent pullback will be an exception.

BUT: If you believe the price of oil is going a lot lower you should sell.

My forecasts and valuations for the Sweet 16 are based on fundamentals. Unless I see a major shift in the fundamentals for the individual companies or energy prices I don't change my valuations. I do use production guidance provided by the companies and I try to use oil, gas and NGL prices that are adjusted for regional differentials and each company's hedges. Over the year's most of my forecasts have been fairly close.

TODAY I do not see a significant shift in the supply/demand fundamentals for crude oil. If you go to our home page and look at the 5-year chart for WTI you can see for yourself that the trend is for higher prices. You will also see that the price has flopped around quite a bit. It would be nice if commodity prices went up in a steady straight line, but they don't. The bias for ALL COMMODITY PRICES is for them to move higher. Partly because of inflation, but mostly because of this world's ever increasing demand for food, energy and more "stuff". Everyone seems to want a higher standard of living and that means more energy.

See the chart at the bottom of http://omrpublic.iea.org/

As I have posted here many times, September is a "soft month" for oil & gas demand. Demand ALWAYS goes up in the 4th quarter and this year is not going to be an exception. I believe crude oil prices will firm up during the 4th quarter.

The Sweet 16 are rock solid companies that are going to report strong 3rd quarter results. Upstream companies with strong production and proven reserve growth increase in value. That may be why the Sweet 16 has such a strong record of beating the S&P 500 Index.

The energy sector is now in an "out-of-favor" period. I do not know how long it will last, but I am 99.9999% sure it will end. At least it ALWAYS has in the past. I am expecting it to end when the energy sector companies start reporting very strong Q3 results. Keep in mind that, because of weather, the 3rd quarter is when most E&P companies have the largest increases in production (especially those in North Dakota).

I don't handle anyone's money other than my own and some of my father's. What you buy, when you buy it and when you sell it is up to you. You should only invest in what you feel comfortable with. My job around here is to present you with some ideas, companies that I have screened and that I believe are solid. Do your own due diligence and only invest in what you understand and feel good about. I own a lot of these stocks myself just because I've worked in this industry for over 35 years and I believe in the fundamentals of this business.

The Sweet 16 are all high quality companies. In 14 years, I think this is the best overall group we've had in the portfolio.

Sorry, it this sound like I am preaching. I know some of you have had "difficulty" watching your portfolios go down in value. I feel your pain, but I also believe that eventually the fundamentals trump the market's emotions.

[Jacobpilot]

Patience is a virtue.

[jb2257]

So many of these have gone down so much that I feel it's too late to sell. I'm just puzzled by the fact that oil goes down everyday while we have this Middle East conflict going on at the same time. Maybe it's ISIS selling the stolen oil for $30/barrel. These companies should be a screaming buy for anyone that focuses on fundamentals, but I guess they're looking at all the broken charts.

[dan_s]

The primary reason for weakness in the oil price is the stronger U.S. dollar (compared to other major currencies). We definitely need oil prices to stabilize before these stocks can go back up. Keep in mind that they will be fine if oil stays at $90/bbl. Even if I take WTI to $80/bbl in my forecast models, the Sweet 16 is still trading at a discount to break-up values IMO.

I am getting very bearish on natural gas prices for 2015 & 2016. Only a VERY COLD winter will support gas prices in 2015.

Low gas prices and related power prices are great news for the U.S. economy in general.

[prince_jake_33]

Dan Thank you for the encouragement. As Winston Churchill stated, We will prevail from our darkest hour. Our elected leaders and appointed leaders must realize that we must all work together for the sake of our grand and great grand children

[dan_s]

Something to keep in mind is that most of the E&P companies now have active hedging programs. These dips in oil & gas prices don't hurt them as much as they used to.

Mark-to-market adjustments on 9/30 for oil hedges will be huge, so reported earnings will beat First Call forecasts. We all know these are non-cash adjustments, but many investors over-react to reported earnings.

The sand companies (EMES and HCLP) sure bounce back today.

[setliff]

hmmm, dollars up crudes up, brent/wti gap narrowing. don't understand it all, but I love it.

[mikelp]

From my lurking on various energy boards and threads, it is looking like the pain indicator, the bearish sentiment indicator, hearing "just sell it and get out now" indicators.... could be showing signs that the energy sector is overdue for a rally. Just remember the advice of Louis Winthorpe III, from "Trading Places": "Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series - they don't know what pressure is. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans [or crude oil] and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?"

[dan_s]

Actually, the main reason individual investors loose money in the market is because they cannot handle the pullbacks.

There are always going to be "pullbacks", "corrections" and "shifts between sectors". I believe the fundamentals win out in the end. The fundamentals for oil are very strong. The U.S. and Canada are the ONLY countries in the world with meaningful crude oil production growth. The Middle East and North Africa are on fire. OPEC is not going to flood the market with oil to regain market share, because they can't.

EPG was founded in 2001 and there have been several periods when the energy sector was out of favor. During each "pullback" I get a lot of very painful e-mails from our members. The run-ups are fun, but many of us can't stand it when our portfolios are going down day after day. Those of us that lived through the butt kicking in 2008 know real pain. In 2008, GPOR traded under $3.00/share. Look where it is today.

This is why I stick with companies that I know have double digit production growth locked in and solid balance sheets. This is a capital intensive business. Drilling inventory and access to capital is essential to growth for E&P companies.

This is why I posted here that when GST pulled back because they issued more equity it was a buying opportunity. You do not want to own E&P companies that are funding growth with debt. Debt can be a killer in this business. BTW Gastar is now forecasting 60% production growth in 2015. Oasis Petroleum (OAS) is on-track to grow production 27% from Q2 to Q4. Believe me, the market will notice and reward growth like this.

I have turned quite bullish on the onshore drillers because it seems that every E&P company I look at is planning to add more rigs. Read this: http://finance.yahoo.com/news/must-know ... 11675.html Next week I will profile PDS and PTEN.

[ChuckGeb]

Dan, Your commentary is so on point and is definitely reassuring to see in print. Every time things go south I get those feelings of despair as the market turned in late 2008. It's funny how I made back everything lost in the downturn with the buys made in January February and March 2009 when the market capitulated and then turned. I just kept falling back on sound fundamentals and the belief that if prosperity were ever to return that the sound oil and gas stocks would rebound. It gets lonely when the sky is falling. Keep up the good work.

[crudeboy]

Here are some thoughts that help me in the down turns:

Will the sweet 16 be worth more in 5-10 years than today?

As the value of the stocks disappear did the oil & gas in the ground go anywhere?

What would Harold Hamm be worth today if he had unloaded every time oil went down?

Was I smart to have sold KOG at $1.50 after I made 50%?