Sweet 16 Update - May 7

[dan_s]

The Sweet 16 was down 4% for the week, but is now up 23.89% year-to-date. Compared to the S&P 500 Index, which is up just 0.65% YTD, this group is doing quite well.

All of the Sweet 16 companies have now reported 1st quarter results. First quarter results were no pretty because oil prices hit the low point for this cycle. Since dipping to $26/bbl in February, WTI has now rebound to $44/bbl and it is becoming quite clear that global supply / demand for oil are heading back to a balance. 2nd quarter results should be much better.

Except for Antero Resources (AR), all of the companies reported big Q1 losses. The majority of the losses were caused by big asset writedowns, called "impairment". GAAP accounting rules cause big swings in quarterly reported earnings, which are quite confusing to most investors. Mark-to-market adjustments on hedges are even more confusing. STAY FOCUSED ON CASH FLOW FROM OPERATIONS. As simple as I can make it, the value of any company is the net present value of future cash flows less debt. All of the Sweet 16 have lots of running room in inventory.

The impairment write downs should be done for this cycle. Remember, the companies still own the assets and if oil & gas prices improve, the proven reserve write downs will be reversed at year-end. That will lower DD&A rates going forward and increase reported earnings.

All of the Sweet 16 reported solid Q1 operating results and most of them raised their production guidance. Thanks to that, plus an improving outlook for commodity prices, my valuations for each company increased. You can find my forecast model for each company under the Sweet 16 tab on the EPG website.

Monday's newsletter, The View From Houston, will focus on the Sweet 16.

We will be publishing updated profiles on each company over the next two weeks.

I have not had much time to focus on the small-caps and the companies in our High Yield Income Portfolio. Other than GST and SYRG, the small-caps all seem to be doing fine. I do see that all of our midstream MLP have moved higher since the last newsletter.

The Sweet 16 summary spreadsheet, which shows my valuation for each company compared to First Call's Price Targets, will be on the website late today. FANG is now the only company trading at my valuation.