Sweet 16 Update - July 25

[dan_s]

The Sweet 16 lost 7.11% last week and is now down 14.38% YTD.

The falling oil price and the "Quite Period" has been killing the entire sector. Buyers have moved to the sidelines waiting for some sign of stability in the oil price and sellers are dumping with no regard for production mix or hedges.

The share prices today make no sense unless you believe that WTI is going sub-$40 and is going to stay there for a LONG TIME.

The most ridiculous sell off is Laredo Petroleum (LPI). It has 100% of this years oil production hedged at $80.99/bbl and 60% of this year's natural gas production hedged at $3.00/mcf. Therefore, price movements below those levels have almost no impact on this year results. The market cap is now below book value, which is crazy cheap. My Fair Value Estimate is $19.00/share.

Bonanza Creek (BCEI) is also trading below book value. My FVE is $31.30 and First Call's Price Target is $27.03. Early this month, Canaccord Genuity rated it a BUY with a $29 valuation.

This is a repeat of what happened in early 2009. The small-caps get hammered because hedge funds are dumping them and individual investors panic, especially during the Quite Period because they think "something must be wrong".

2nd quarter results are going to be good for all of these companies. Quarterly results will be coming out next week with CXO, RRC and SM reporting. All of the rest will report results the first week of August. Some new information should calm investors. Keep in mind that lease operating expenses + production taxes are under $10/boe for these companies, so cash flows from operations are still decent at today's oil price (plus they are getting nice cash payments on those hedges).

My take on the oil price is that the recent drop is all "Headline Driven". The Greek Debt Crisis, Iranian Nuke Deal, and worries about the Chinese economy really don't impact oil supply/demand. Iran will not put anymore oil on the market until mid-2016 and this world will need it all by then. All the baloney you hear about the millions of barrels of oil they have in storage ready to hit the market is nonsense. 2/3s of that oil is sour crap that no one will buy. That stuff sells on a different market than Brent and WTI. By early 2016 this world will be burning up 95 million barrels PER DAY of refined products.

The U.S. dollar moving higher does have an impact on oil prices and it can be blamed for maybe $3/bbl.

I will be updating the Sweet 16 forecast models as fast as I can after the companies release results. Each of the Sweet 16 have been assigned to an intern to update the profiles. We will be sending them to you as soon as we get them updated.

The Sweet 16 spreadsheet will be updated on the EPG website on Sunday.

PS: I will be traveling this week, but I will be checking the market and this board at least once a day.