Sweet 16 Update - July 11

[dan_s]

The Sweet 16 dropped 4.1% last week and is now down 1.5% YTD, compared to the S&P 500 Index that is up 0.9% YTD.
> NFX, MTDR and SM lead the pack this year.
> BCEI, OAS and RRC are down big. RRC is a world class "gasser" and I think it is a "Screaming Buy" at today's price. See the last sentence.

You all know by now that it was a rough week for the energy sector. WTI dropped about $7/bbl because oil traders are being bombarded with "the sky is falling" stuff. The noise in Europe over what to do about Greece and the belief that Mr. Kerry (after dozens of "deadlines" being extended) will get Iran to sign a deal that lifts sanctions that now prevent Iran from selling all of their oil top the list of concerns. Big moves in the Chinese stock market added more for oil traders to worry about. EIA and IEA reports encouraged the bears and NYSE computer problems did not help.

1. IMO the situation in Greece, no matter how it turns out, will have no impact on oil demand. I think there is very little chance of them getting kicked out of the Euro Zone, but even if it does happen I don't think it will impact overall demand for refined products in Europe. The Greek economy was terrible before and it will be terrible in the future. Socialism sounds good to lots of people, but it doesn't work in the real world. The silver lining here may be that we take our own national debt problem seriously.

2. The chance of any deal being signed with Iran next week is probably 50%. Even if Mr. Kerry does get a deal signed, the delay now gives the Republican controlled Congress 60 days to beat it to death. I think there is very little chance that Iran brings a lot more oil to the market this year. By mid-2016 we may need every drop. If the U.S. walks away from negotiations, the price of oil should snap back to $60.

3. The weekly crude oil storage report from EIA showed another small build in U.S. crude oil inventory, but it was from higher imports. The EIA also adjusted their U.S. production forecast for May to a decline of 50,000 barrels per day from April to May. Yes, they are still adjusting their forecast for May since the most current "actual" information is for April. BTW April production numbers will be adjusted a few more times as operators file late and amended reports. This is a reminder that EIA data for recent periods and their forecasts are nothing more than scientific wild ass guesses ("SWAGs"). As I posted earlier, Raymond James continues to believe IEA demand numbers are way too low and I agree with RJ. FYI there are a lot of "guestimates" in the EIA's weekly storage reports for both oil and gas. They have a big number in there for field level storage and pipeline fill that is a pure WAG. They have no way of actually knowing field level storage.

4. Friday's active rig count report from Baker Hughes shows 645 rigs drilling for oil in the United States (+1 for the week), which is down from 1,609 in October. What I found interesting is the mix. Rigs drilling directional & horizontal wells dropped by 12 and the number of rigs drilling vertical wells increased by 13. The Canadian active rig count did go up by 30, but that is more of a seasonal thing. Today, there are only 169 rigs drilling in Canada.

5. The IEA's monthly "Oil Market Report" had a bearish tone. Bullish (for me at least) was that IEA is still showing a big increase in global demand for refined products during the second half of this year. Their "forecast" of refined product demand for Q2 was 93,130,000 million barrels per day (yes it is still a forecast) and they are now forecasting demand to be 94,970,000 million barrels per day in Q4. My SWAG is that U.S. oil production will drop by AT LEAST 500,000 barrels per day during this period. [Exxon's long range forecast is global demand will be going over 100 million barrels per day by 2020.]

Back to the Sweet 16:

2nd quarter results will start coming out the last week of July. They should be fairly good for this group. MTDR was up this week because they gave the market a glimpse of what to expect. NFX was also up this week. I have seen NFX mentioned in several articles about takeover targets. Most of the Sweet 16 are prime takeover targets and I do think the M&A activity will pick up after Q2 results are finalized.

I did lower my valuation for BCEI, but I will hold off on making other changes until I see Q2 results and see how oil prices settle out.

I still think oil prices are following a very similar path to what happened in 2009. After a drop from $147/bbl to $35/bbl during the 2nd half of 2008, WTI flopped around the bottom for four months, testing the low three time. I think we are now in our 3rd test of the low during this cycle. From April, 2009 it took WTI 12 months to get back to $80/bbl (right at the long-term trend line). During those 12 months, the price of oil pulled back 3 times. I am sure we will see several big swings in the price of oil this time around. However, market forces are working. Supply is coming down and demand is going up, both because of lower prices. Eventually, WTI will be back at the trend line. I am sticking with the Boone Pickens' forecast that we see $70/bbl WTI by year-end.

For a little ray of sunshine: All eyes are on the oil price these days, but I think North America's natural gas market will be a lot tighter by year-end.

[dan_s]

Matt DiLallo: Newfield Exploration (NYSE:NFX) takes the cake as the best-performing energy stock this year among S&P 500 companies. Through the first six months of the year, its stock was up nearly 36%, easily outperforming the basically flat index.

Newfield's strong 2015 showing was initially fueled by the company's solid fourth-quarter 2014 report at the end of February. That report, as well as the company's outlook to boost production 8% in 2015 while cutting capex by 40%, sent shares soaring by double digits. It then took advantage of its higher stock price to raise $815 million of equity capital, which it subsequently used to repay its credit facility. On the heels of its equity offering, it also announced a debt offering whereby it raised $700 million. That cash was used to pay off higher yielding debt that matured sooner. These were moves that really bolstered its balance sheet and liquidity, giving it plenty of financial flexibility to weather the weakness of commodity prices.

Aside from the increased financial flexibility, the other big driver for Newfield Exploration in 2015 has been its premier position in the promising STACK and SCOOP plays of the Anadarko basin. The play is turning out to be a significant growth engine for the company as production is expected to be up 45% year over year. Meanwhile, well costs are coming down, which are improving Newfield's returns.

Newfield's combination of balance sheet strength and a returns-driven growth engine has earned it a lot of praise from analysts this year. Its stock has been upgraded to the buy list by several notable analysts and these upgrades have attracted new buyers. Those buyers have fueled a rising stock price, which is why Newfield Exploration is the best-performing energy stock through the first half of 2015.

My valuation for NFX is $62.50/share. I believe it is one of the "prime takeover targets" in the Sweet 16. - Dan

For more: http://www.fool.com/investing/general/2 ... lnk0000001