Sweet 16 Update - October 17

[dan_s]

The Sweet 16 held up well this week and it should continue to trade more or less in lock step with oil prices. Overall the group is now trading 42% below my Fair Value Estimates.

Newfield Exploration (NFX) continues to lead the pack, up 50% YTD, thanks to the great results they are getting in the Oklahoma STACK. For those of you interested in Gastar Exploration (GST), you should take a look at the latest NFX presentation on their website. NFX is getting strong results with their extended reach laterals in STACK. They have drilled several very good wells that are close to Gastar's leasehold block.

The "gassers" continue to suffer the most (DVN, GPOR, RRC and SWN), but they are all in fairly good shape and the winter heating season is just ahead.

Oil Prices: We've had two rather bearish crude oil storage reports in a row from EIA (which you all should take as "guesses" not actuals), but crude oil prices have held up. The primary reason is that the U.S. active rig count is falling and everyone knows it is going to continue to fall. November is the end of the Shoulder Season for both oil and gas. The refineries are wrapping up their repair work (called "turnarounds") and will soon be drawing hard on their oil in inventory. I am asked at least ten times each week what will make oil prices move higher. My answer is less of it and more demand. If we have two weeks in a row of big draws from U.S. storage and declining rig counts my SWAG is that we will see WTI break over $50/bbl and continue to march back to $60/bbl. I think this will happen in November.

Carrizo Oil & Gas (CRZO) announced a stock offering this week and the share price pulled back. I know selling equity is "dilutive", but the do shore up the balance sheet. IMO this is a buying opportunity. CRZO has good stuff in the Eagle Ford and the Permian.

Devon Energy (DVN) is trading at less than 4X CFPS. This is a great company that will report solid Q3 results. I think Wall Street has lumped it in with the "gassers", but most of their revenues now come from oil sales. Rock solid balance sheet and decades of running room.

FANG and MTDR are within spitting distance of my valuation. I will probably up my valuations after I see Q3 results.

Three of the Sweet 16 report Q3 results in October: SWN (10/22), SM (10/27) and RRC (10/28).

I hope to see a lot of you at Mike Linn's presentation on Thursday, October 22. It should be an interesting Q&A period.

Hang tough, we are now in the 4th quarter of this oil price cycle. With all the crap flying in the Middle East, a meeting of OPEC members in Vienna next week and rapidly falling U.S. oil production, this could get real interesting very soon.

[mkarpoff]

When one of your faves approaches fair value, do you typically replace it with another company in its category as it no longer would seem investment worthy?

[dan_s]

Not necessarily. First I will update my forecast/valuation model for 3rd quarter results and the company's guidance. FANG and MTDR have done a great job and the Permian Basin has the best economics at today's oil prices. There is a good chance I can justify a higher trading multiple for both companies.
I am always looking at other companies for possible upgrades to the Sweet 16.

[dan_s]

Take a hard look at the profile for QEP. It is a strong candidate for the Sweet 16. With a strong balance sheet it deserves to trade at a lot higher multiple than 4X CFPS, which is where it stands today.