The Sweet 16 Growth Portfolio summary spreadsheet has been updated and posted to the website:
> 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 12-27-2014
Note that on Tab 1 of the spreadsheet, I now show my 2015 Cash Flow Per Share (CFPS) forecast for each company in column T.
I have also posted updated Net Income & Cash Flow Forecast models for GPOR, OAS, RRC and SM. You just need to log onto the website, click on the Sweet 16 tab and then click on the individual company logos to see my current forecast model for each company.
All of the Sweet 16 should report solid Q4 results
"Reported earnings per share" will be significantly different than my 4th quarter forecasts because Q4 results are going to include big gains on the hedges that these companies have in place. Some of the companies may also report ceiling test write-downs or impairment charges. These non-cash items can distort actual results, so I recommend focusing on cash flow per share, not earnings. Remember, "Cash pays the bills".
For the holiday week, the Sweet 16 drifted lower by ~1.4%. The group is now trading at 4.3X my 2015 CFPS forecast. Companies of this quality normally trade in the 6X to 8X CFPS range. Companies like EOG and RRC, which hold huge reserves, should trade at much higher multiples.
Devon Energy (DVN) is a high quality large-cap that has completed a transition to a much more balanced production profile. It is trading under 4X CFPS and I think it has upside to my forecast.
We still have lots of family in our home but I will be checking in later, so post your questions here and I will respond.
Sweet 16 Update - December 27
Sweet 16 Update - December 27
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - December 27
Rosetta Resources (ROSE) is moving up to the Sweet 16 on January 1st. See profile under the Watch List Tab.
Bonanza Creek (BCEI), Sanchez Energy (SN) and Matador Resources (MTDR) will be moving to our Small-Cap Growth Portfolio. All three appear to have at least 30% YOY production growth coming in 2015, so these moves are just because of their market cap.
Possible additions to the Sweet 16 include:
> Antero Resources (AR)
> Baytex Energy (BTE)
> Cabot Oil & Gas (COG)
> Diamondback Energy (FANG)
> Southwestern Energy (SWN)
> Ultra Petroleum (UPL)
The question we need to all ask ourselves is "Where will the prices for oil and gas be 6-12 months from now?" All of the analysts reports I'm getting have oil prices rebounding during the 2nd half of 2015.
Bonanza Creek (BCEI), Sanchez Energy (SN) and Matador Resources (MTDR) will be moving to our Small-Cap Growth Portfolio. All three appear to have at least 30% YOY production growth coming in 2015, so these moves are just because of their market cap.
Possible additions to the Sweet 16 include:
> Antero Resources (AR)
> Baytex Energy (BTE)
> Cabot Oil & Gas (COG)
> Diamondback Energy (FANG)
> Southwestern Energy (SWN)
> Ultra Petroleum (UPL)
The question we need to all ask ourselves is "Where will the prices for oil and gas be 6-12 months from now?" All of the analysts reports I'm getting have oil prices rebounding during the 2nd half of 2015.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Sweet 16 Update - December 27
Dan and others
Hedging financial risks....how likely are the payoffs to energy companies as they deliver the oil at almost 50% of the original hedged value contracts?
Supply glut....since most of the energy companies are expecting to increase production in 2015 (despite their lower cap ex) assuming world demand doesn't grow how can prices strengthen?
Rising oil prices....wont supply in the US ramp up if for some reason prices firm up to $70 +/- which could put a lid on higher prices?
I don't have in depth knowledge of the industry but the above are basic economic issues which are concerns that perhaps have been previously discussed.
Hedging financial risks....how likely are the payoffs to energy companies as they deliver the oil at almost 50% of the original hedged value contracts?
Supply glut....since most of the energy companies are expecting to increase production in 2015 (despite their lower cap ex) assuming world demand doesn't grow how can prices strengthen?
Rising oil prices....wont supply in the US ramp up if for some reason prices firm up to $70 +/- which could put a lid on higher prices?
I don't have in depth knowledge of the industry but the above are basic economic issues which are concerns that perhaps have been previously discussed.
Re: Sweet 16 Update - December 27
Hedges:
The hedges are "derivatives", they derive their value from the under-lying commodity.
Actual production is sold in the field at prevailing prices (based on marketing contracts tied to an index)
The derivatives are financial transactions that are settled based on the strike price compared to the index price on the settlement day or an average over the contract period. For example, if a company has a Put contract for WTI crude oil with a strike price of $90 and WTI closed at $60 on the settlement date, the company gets $30/bbl X the number of bbls hedged.
Commodity hedges are much like Calls and Puts on stocks. [The concern that the counter-parties to the hedge will not pay are not founded in reality. Compared to the financial derivatives on stocks, they are minor in comparison to the global financial markets.]
VERY IMPORTANT POINT: Production taxes are paid on actual oil & gas prices, not on the hedged price. Since production taxes (also called "severance taxes") are a big part of the variable expenses of E&P companies, this is a big deal. Variable expenses in the shale plays are now running $10 to $12 per bbl produced, so cash flows are still very good.
Shale production will go up in the U.S. again next year, but oil production in almost all of the other areas of the world is on decline. In fact, for the last five years North America has been the only continent with increasing production. Remember, only 10% of the world's oil supply comes from the U.S., so balancing supply/demand is not all on us.
There are two sides to the supply/demand equations. Lower prices for any commodity increases demand. There are now people that can afford fuel that could not before. Keep an eye on Pickup and SUV sales. With gasoline under $2.00/gallon (it is $1.79/gallon in Oklahoma today), consumers will be less concerned with fuel economy. Also, the extra cash (from lower fuel costs) will give consumers the money to buy a new pickup.
Your point that $70/bbl oil will keep supply going up is a good one. Yes, the E&P companies don't need $100/bbl oil to make it. Finding and development costs have come down a lot in the shale plays. As companies move to more pad development drilling (that avoid costly rig moves) the cost per horizontal foot will continue to come down. Fuel costs are a big part of drilling and completion costs, so completed well costs are down 10% to 20% from where they were just six months ago. Rig rates are also coming down.
I doubt we see $100/bbl for at least two years (unless their is more violence in the Middle East or North Africa that causes a supply disruption), but I do think there is a very good chance we see WTI back over $70/bbl within six months. I believe this move by Saudi Arabia to lower oil prices is political, an attempt to bring Russia and Iran to the negotiating table and stop their aggression. it is working and it will not take long at today's oil price to crush the economies of those two nations.
The hedges are "derivatives", they derive their value from the under-lying commodity.
Actual production is sold in the field at prevailing prices (based on marketing contracts tied to an index)
The derivatives are financial transactions that are settled based on the strike price compared to the index price on the settlement day or an average over the contract period. For example, if a company has a Put contract for WTI crude oil with a strike price of $90 and WTI closed at $60 on the settlement date, the company gets $30/bbl X the number of bbls hedged.
Commodity hedges are much like Calls and Puts on stocks. [The concern that the counter-parties to the hedge will not pay are not founded in reality. Compared to the financial derivatives on stocks, they are minor in comparison to the global financial markets.]
VERY IMPORTANT POINT: Production taxes are paid on actual oil & gas prices, not on the hedged price. Since production taxes (also called "severance taxes") are a big part of the variable expenses of E&P companies, this is a big deal. Variable expenses in the shale plays are now running $10 to $12 per bbl produced, so cash flows are still very good.
Shale production will go up in the U.S. again next year, but oil production in almost all of the other areas of the world is on decline. In fact, for the last five years North America has been the only continent with increasing production. Remember, only 10% of the world's oil supply comes from the U.S., so balancing supply/demand is not all on us.
There are two sides to the supply/demand equations. Lower prices for any commodity increases demand. There are now people that can afford fuel that could not before. Keep an eye on Pickup and SUV sales. With gasoline under $2.00/gallon (it is $1.79/gallon in Oklahoma today), consumers will be less concerned with fuel economy. Also, the extra cash (from lower fuel costs) will give consumers the money to buy a new pickup.
Your point that $70/bbl oil will keep supply going up is a good one. Yes, the E&P companies don't need $100/bbl oil to make it. Finding and development costs have come down a lot in the shale plays. As companies move to more pad development drilling (that avoid costly rig moves) the cost per horizontal foot will continue to come down. Fuel costs are a big part of drilling and completion costs, so completed well costs are down 10% to 20% from where they were just six months ago. Rig rates are also coming down.
I doubt we see $100/bbl for at least two years (unless their is more violence in the Middle East or North Africa that causes a supply disruption), but I do think there is a very good chance we see WTI back over $70/bbl within six months. I believe this move by Saudi Arabia to lower oil prices is political, an attempt to bring Russia and Iran to the negotiating table and stop their aggression. it is working and it will not take long at today's oil price to crush the economies of those two nations.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group