Sweet 16 Weekend Update - December 13

[dan_s]

The Sweet 16 Growth Portfolio summary spreadsheet has been updated for the closing prices on December 12, 2014:
> Tab 1 of the spreadsheet is a summary of the EPS and CFPS forecasts for each company
> Tab 2 shows my Fair Value Estimate compared to First Call's Price Target for each company as of 12-12-2014

I spent the last two days updating all of the individual company forecast models.

All 16 companies should report positive 4th quarter earnings. The lone exception may be Sanchez Energy (SN). It is still generating solid cash flows from operations and has more than enough liquidity to survive through 2015 unless oil goes a lot lower. See the press release they issued on 12/10.

"Reported Earnings" in the 4th quarter will include some big gains on derivatives for most of the companies. Some of them may be forced to take big impairment charges or ceiling test writedowns. My forecasts are what companies now call "Adjusted Earnings", so they do not include all of the non-cash stuff. Remember to focus on cash flow per share.

As I have posted here before, the Sweet 16 have all-in cash costs of operations (production taxes, LOE, gathering, processing, transportation and marketing) of $7 to $15 per boe of production. The netbacks are still quite good from an historical perspective.

Rarely a day goes by that I don't get several oil price forecasts from a few of our members. Early this week I got one from a member that said he sees WTI going to $45/bbl and today I got one saying (based on his charts and a palm reader) that WTI would go down to $35/bbl. Here is the truth: NO ONE KNOWS WHERE CRUDE OIL PRICES ARE HEADING! The oil markets are controlled by speculators and they have a lot of different agendas. The physical market is controlled by Saudi Arabia and they can stand the pain for a long time. A $40/bbl drop in price is costing Saudi Arabia $150 million per day. Even for a King, that is real money.

Here is my take:
> If WTI gravitates back to around $60/bbl early in the 1st quarter then the E&P's will keep drilling in their core areas where rates-of-return are still very good. Capital budgets will be cut by 20% to 40% but lower D&C costs will allow them to drill 80% to 90% of the footage they drilled in 2014.
> If WTI goes under $50/bbl, and it looks like it is going to stay there for awhile, most of the E&P companies will move to "Survival Mode" and the active rig count will drop quickly. The E&P companies will only drill the wells they have to drill to hold valuable acreage.
> Actually it does not matter in the long-run, because the lower the price goes the faster supply / demand will rebalance and the faster the price of oil will move back up.
> I think lower fuel costs may increase demand a lot more than expected. Pickup and SUV sales are already going up.

In 2008, when the global economy looked like it was heading over a cliff, the price of oil dipped to $37/bbl for a few days. It quickly rebounded to $65/bbl. Unless we are heading into a deep global recession the demand for oil is going up. IEA: "The outlook for global oil demand growth for 2015 has been cut by 230,000 bbls/day to 900,000 bbls/day on lower expectations for the FSU and other oil-exporting countries. A strong dollar and the lifting of subsidies have so far limited supportive price effects on demand, which is now seen reaching 93,300,000 bbls/day next year, from 92,400,000 bbls/day in 2014".

Everyone seems to agree, the price of oil will remain low through the first half of 2015, unless OPEC decides to put an end to this and cut production. Everyone knows all but a few of the OPEC countries are facing severe financial crisis if oil prices stay low. It will get real interesting if they have to cut social programs. Can you say "Arab Spring 2".

The EIA put out this forecast on December 10: http://www.eia.gov/petroleum/weekly/arc ... _print.cfm

Again: NO ONE KNOWS WERE THE PRICE OF OIL WILL SETTLE IN THE NEXT FEW WEEKS! However, everyone seems to agree it will be higher a year from now.