Sweet 16 Update - May 16

[dan_s]

The Sweet 16 Summary Spreadsheet has been updated and will be available on the website later today. It shows my up-to-date valuation for each company, compared to the First Call Price Targets for each company.

I have updated all of the Sweet 16 forecast models, which you can find on the website. You can download them to Excel. These are for EPG members only, so you must log on to see the current forecast models.

All of our forecast models are "macro driven". That means (once you download them to Excel) you can change the forecast production volumes and commodity prices at the bottom to see how the changes impact EPS and CFPS. Just remember to consider each company's hedges and the regional oil & gas price differentials (which I try to do in each forecast model). Building these forecast models is hard work, which is why you pay me the Big Bucks to do it for your. You should all be using these tools.


This week I will focus on getting all of the Sweet 16 profiles updated. I just finished working on the profiles for CLR and SM.

SM Energy (SM) is still my Top Pick for 2014. The share price is up 45% YTD, but I think it has AT LEAST 50% more upside from here. Take a look at the range of the 2015 EPS forecasts submitted to First Call (-$1.96 to $1.31) and I think you will agree with me that a bunch of analysts who work for big Wall Street firms just don't get this one. Granted, during periods of wild swings in commodity prices it is difficult to forecast an upstream company's profits, but some of the forecasts submitted to First Call for SM are ridiculous. I looked at the lowest one and it is (a) outdated and (b) obviously does not consider the hedges SM has in place.

SM is a fairly large company (produced over 186,000 boe per day in the first quarter) that gives excellent production guidance and a high percentage of their 2015 production is hedged at very good prices. 49% of their 2015 crude oil production is hedged at over $90/bbl.

One explanation for the wide variance in forecast EPS for SM and a lot of the companies we follow, is that GAAP accounting rules for the upstream companies are difficult to understand for the young Wall Street analysts assigned to these firms. That is why I keep harping on you guys to focus on cash flow per share and just ignore EPS. SM reported EPS of $9.86 in 2014 and this year they are on-track to break even. On the surface that looks bad. However, cash flow per share this year will be around $14.00/share (compared to $21.10/share in 2014). A company of this quality should trade for AT LEAST 6X CFPS. You should receive the SM profile by e-mail on Sunday, May 17. I urge you all to read it carefully.

Continental Resources (CLR) decided to cash out their crude oil hedges last November. They got $433 million cash for them, but Harold Hamm probably regrets that move now. That is all "water under the bridge" now. CLR is still a great company with HUGE potential reserves. Their SCOOP/STACK area in Oklahoma just keeps looking better. CLR now believe they have 3 billion barrels of recoverable oil (net to their interest) in SCOOP.

CLR should generate $5.25 to $5.50 cash flow per share this year. < Compare to the $14.00 CFPS that SM is going to generate in 2015.

If you read my last newsletter, you know the outlook for natural gas prices is setting up to be much brighter heading into 2016. I am not the only analyst that sees this coming, which is why gas prices are creeping higher. The January NYMEX contract for natural gas closed at $3.42/mmbtu on Friday and I now believe we have a good chance of seeing it trade at more than $4.00 by mid-December. A hot summer is going to create a lot of demand for gas as the U.S. depends more on gas fired power plants for electricity.

Sweet 16 with the most exposure to natural gas are: GPOR, RRC, XEC, DVN, NFX, SM and EOG.

Oasis Petroleum (OAS) and Whiting Petroleum (WLL) are both almost pure plays on the Bakken / Three Forks play in the Williston Basin (North Dakota and Montana). The Bakken companies have been hammered because the price differential in North Dakota is over $10/bbl. The differential should narrow as more takeaway capacity comes on-line and the crude oil inventory at Cushing, Oklahoma continues to fall.

In my opinion, OAS is grossly oversold. They issued some equity and restructure their debt during the first quarter. Neither of these companies are at risk of going bankrupt and they both hold some very valuable oil reserves. I have dropped Whiting from our Elite Eight, replacing it with SM Energy.

Early next week, I will finish profiles on BCEI, MTDR and WLL. They are sitting here waiting on my review.

On Wednesday, May 20th I will be on an Energy Roundtable for Jim Puplava's Financial Sense Newshour. The program will air on Saturday, May 23. Joining me on the panel will be Robert Rapier and Kurt Wulff. This program will be for Jim's premium subscribers only, but I should get the link for EPG members as my "compensation" for being on the program.

Here is the link to my April 30th interview with Jim: http://www.financialsensenewshour.com/b ... 5d7v5a.mp3