Sweet 16 Update - March 19

[dan_s]

I had to pinch myself, the Sweet 16 is up three weeks in a row! Amazing how that happens when oil prices firm up a bit. The group was so grossly oversold in February that we are just now getting back to the reality that the U.S. oil & gas industry is not going to die.

The Sweet 16 was up 6.22% last week and it is now up 11.08% year-to-date. This compares to the S&P 500 Index that is now up 0.28% YTD.

14 of the 16 are now up YTD. The only two down YTD are Devon Energy (DVN) and SM Energy (SM).

Devon is making a major change in focus this year. They are going "all in" on the STACK play in Oklahoma which is close to their headquarters in Oklahoma City. They recently paid $2 Billion for a large stake in STACK and they are hoping to sell several large non-core asset packages and a pipeline to pay for it. If they do get close to their asking prices for the packages, the share price should move rapidly toward my valuation of $40.50/share. First Call's price target is $33.97.

SM Energy has doubled off the low for the year, but it is still trading at a ridiculously low 2.4 X my forecast of cash flow from operations per share for 2016. The Sweet 16, as a group, now trades at 9.9 X CFPS for 2016. SM is also the only Sweet 16 company that is trading below book value per share.
> The company's management team has presented at three energy conferences since they reported 2015 results and they will present at another one on March 21. The slides that they are going to speak from are available on the SM website and I urge all of you to go through them. After each of their previous presentations, the share price has moved higher. This one has a very compelling story.
> My valuation of SM is $43.80/share and I believe there is upside beyond that.
> I have a very high level of confidence in my forecast model for SM. I have beaten it to death because the share price looks so out of whack.
> Compared to the current First Call forecast, which estimates CFPS of $9.45 for 2016, my forecast model is extremely conservative. My forecast shows $7.60 CFPS in 2016. Stifel forecasts cash flow per share of $7.98 for 2016.
> The company's production will decline 15% to 20% this year, but they will still produce ~146,000 boepd in 2016 and they have the potential to ramp up production during the second half of this year because they have lots of running room in the Eagle Ford, Bakken/Three Forks, Permian Basin and the Powder River Basin (which is a area that is off the Wall Street radar screen).

XEC, FANG and PXD are approaching my valuation, but they are all rock solid companies that deserve to trade at high multiples. They have large leasehold blocks in several of America's top producing regions.

Keep in mind that my valuations assume the following WTI oil prices:
$30/bbl for Q1 2016
$35/bbl for Q2
$40/bbl for Q3
$50/bbl for Q4
$60/bbl for 2017
My forecasts assume natural gas will average $1.70/mmbtu for Q1 & Q2 and then ramp to $2.70 by year-end. My gas price assumptions make very little difference in the forecast models because the three "gassers" (AR, GPOR and RRC) all have a lot of their production hedge at much better prices anyway.

All of the Sweet 16 forecast models are now updated and you can download them from the EPG website.

We will be sending out via e-mail over the next two weeks a lot of updated profiles, including a few new ones.