Sweet 16 Update - August 15

[dan_s]

The Sweet 16 was up 4.24% during the week ending August 14, 2015. BTE and DVN were the only two that were down a bit.

The spreadsheet showing my valuation for each company, compared to First Call's price targets, will be available for download from the EPG website on Sunday. All of the individual company forecast models can be downloaded from the EPG website. Remember to focus on cash flow per share. Reported earnings during periods like this are all but worthless. There is a table show hedges in place at the bottom of each forecast model.

CLR and EOG now have almost none of their production hedged. These are both rock solid companies, but they are exposed to these low oil prices.

It has now been a week since all of the companies have released 2nd quarter results, so the First Call price targets have been adjusted for analysts' revised forecast models. For most of the companies my valuation is very close to what First Call is now showing. As a group, the Sweet 16 is trading 71% below my valuation.

Today I took a very hard look at Bonanza Creek (BCEI). My valuation has been adjusted to $21.25, compared to First Call's price target of $20.44. The stock closed Friday at $7.34. The only explanation that I can give is that small-caps really get hammered during these oil price cycles. Wall Street assumes they are all going broke. Here are a few things that may be confusing investors.
1. BCEI uses the Successful Efforts method of accounting which expenses exploration costs currently. Most small-caps use the Full Cost method and they capitalize those costs.
2. BCEI is not accounting for their derivatives as hedges, so cash settlements are reported as "Cash From Investing Activities" on the Cash Flow Statement. During the first two quarters, BCEI has received $50,655,000 in cash settlements for those hedges. Cash from operations, when I add those settlements, is going to be close to $4.00/share this year. This is way too good of a company to be trading at less than 2X cash flow. 70% of BCEI's oil production is hedged for the 2nd half of 2015, so they are somewhat insulated from the recent oil price drop.
3. At June 30, BCEI had liquidity near $500 million. They have no near-term risk of default on anything.
4. BCEI is outspending its cash flow this year (they aren't the only one doing this), but production is on-track to be up 21% YOY. They will have a nice year-end reserve report that should keep the bankers happy.
5. Most of their leasehold is now held by production. Therefore, they will be able to adjust spending if necessary. Even if WTI stays at $40/bbl in 2016, they will generate close to $100 million in cash flow from operations.
None of this means BCEI's share price will go back up. When the market is in "FEAR mode" there are few buyers for a stock that has a chart that looks this bad.

When I get back from the Enercom conference, I plan to make some changes to the Sweet 16. BTE, BCEI and OAS are the three most likely to go. They are now all grossly oversold, but The Sweet 16 is a "Growth Portfolio" and these three seem to be the three most likely to have to "hunker down" for survival if oil prices stay this low.

Newfield Exploration (NFX) and Diamondback Energy (FANG) are leading the pack this year. NFX is a leader in Oklahoma's STACK play and FANG is getting great results in the Permian Basin. We will publish an updated profile on FANG tomorrow. My valuation of FANG did come down a few bucks because of the recent stock offering, but the proceeds do strengthen their balance sheet. Both of these companies are well positioned to scoop up some assets from distressed companies are rock bottom prices.

I urge you all to read our recent profile on Gulfport Energy (GPOR). Even a small increase in natural gas prices could bring a lot of attention to GPOR and RRC. SM Energy and Cimarex at two more Elite Eight that will get a nice boost from higher gas prices.

I will be meeting with many of the Sweet 16 management teams at Enercom in Denver this week. I will post daily reports here.

[dan_s]

We will be sending out updated profiles on BCEI, FANG, CXO and DVN on Sunday. I have been cracking the whip on the interns to get these reports updated and they are doing a great job. CPE is also sitting here for my review. That Small-Cap had a great 2nd quarter. Those of you that own the CPE and GST preferred can sleep at night.