Sweet 16 Update - May 24

[dan_s]

I have "officially" added Laredo Petroleum (LPI) to the Sweet 16. It replaces Whiting Petroleum (WLL).

The Sweet 16 spreadsheet with my updated valuations will be posted to the website this afternoon.

Whiting is oversold and trading well below my valuation, but I think it will be quite awhile before it is back in good graces on Wall Street. Bad timing on the merger with Kodiak and (more important) the fact that they did not hedge a lot more of their production prior to the merger, will keep it down for much longer. It is always more difficult for me to pick the stock I need to drop when I add a new one.

Keep in mind what happened to Rosetta Resources a few weeks after I dropped it. Whiting is definitely a possible takeover target for a large-cap.

You can find an updated forecast model for LPI under the Small-Cap tab on the website. We will publish an updated profile on the company this next week. My Fair Value Estimate is $19.00, compared to First Call's Price Target of $14.74. LPI has 100% of their 2015 oil production hedged at $80.99/bbl, so I have a HIGH level of confidence in my 2015 forecast for this one.
> Approximately 50% of their 2016 oil production is hedged at $81.84/bbl
> LPI is a pure play on the Permian Basin and it has strong production and reserve growth locked in.

First Call's price targets for most of the Sweet 16 have increased since they released first quarter results. That is a very good sign.

The Sweet 16 is up 18.2% YTD, compared with the S&P 500 Index that is up 3.3%.

The group has been trading in a rather tight range for the last few weeks. I think the market is waiting on some direction for oil & gas prices. The next OPEC meeting is just two weeks away. Memorial Day weekend is the beginning of the annual rise in demand for transportation fuels. All indications I see are that supply / demand for crude oil will tighten considerably in the next few months. Natural gas prices have drifted higher and Boone Pickens says we may see $6.00/mcf for gas this winter. I'm not quite that optimistic, but the North American gas market is definitely going to tighten over the next twelve months.

I will have more on the companies in the Sweet 16 in the next edition of The View From Houston that will be published this week.

[dan_s]

Several of the Sweet 16 were listed in a report by RBC Capital Markets as possible takeover targets. IMO they are all possible takeover targets.

"Corporate M&A Market Still Sluggish for E&P Companies. The corporate M&A appetite continues
to appear slow for E&P companies. Even with the recent NBL/ROSE merger, there has not been an
acquisition that has helped buoy E&P valuations and bid/ask spreads on deals continue to appear wide.
Companies have been affected by the downturn of oil prices which has put a greater focus on cost
reductions instead of M&A over the last quarter. Additionally, many companies have tapped the capital
markets to resolve their capital needs this year which is diluting the chances of a near-term M&A activity
rebound. However if oil prices continue to rebound M&A activity may start to pick up again. We would
expect to see consolidation in the Eagle Ford, Permian & Marcellus, as these plays lend themselves to
economies of scale. Our favorite ideas currently are APA, CXO, DVN, EOG, EPE, NFX, PXD, and WLL."