Sweet 16 Update - Sept 17

[dan_s]

The Sweet 16 was down 7.55% for the week ending September 16. The Sweet 16 is up 38.97% YTD, compared to the S&P 500 Index that is up just 4.66% YTD.

All 16 stocks were down for the week. However, First Call's Prices Targets for most of them were raised. My valuations don't change because of week-to-week changes in commodity prices. If you want to see how commodity prices impact the valuations, you can download the forecast models from the EPG website and change the oil, gas and NGL prices used in the future periods and the spreadsheet will automatically adjust the stock price valuation. < Learn how to use the valuable tools on our website.

Crude oil prices drifted lower during the week, which put pressure on the entire energy sector. IEA's Oil Market Report summary lead off with this comment: "Global oil demand growth is slowing at a faster pace than initially predicted. For 2016, a gain of 1,300,000 bbls/day is expected – a downgrade of 100,000 b/d on our previous forecast due to a more pronounced 3Q16 slowdown. Momentum eases further to 1,200,000 b/d in 2017 as underlying macroeconomic conditions remain uncertain."

Although the IEA report also noted that Non-OPEC production continues to decline, the BEARS latched on to the slightly lower demand forecast. Note that IEA does not say demand is falling, they just say that the rate of demand growth has slowed a bit. Demand for hydrocarbon based liquid fuels increases by over a million barrels per day year-after-year.

You should all read this: https://www.iea.org/oilmarketreport/omrpublic/

EIA's weekly storage report looked bullish (a decline in crude oil storage), but it did not slow down the BEARS.

All three of our "gassers" (AR, RRC, GPOR) pulled back even though the outlook for increasing natural gas and NGL prices continues to improve. Lower oil prices are actually bullish for gas & NGLs because the #1 reason for falling gas & NGL production is from steep declines in the oil shale plays. The longer oil prices stay down, the less chance of increased drilling in the Eagle Ford, Bakken, DJ Basin and Permian Basin. These areas (plus SCOOP & STACK in Oklahoma) are being developed for oil, but they also produce a lot of "associated gas" that is rich in NGLs.

Lower oil prices also puts more pressure on OPEC and Russia to agree on some type of plan to curb production. Oil below $50/bbl is unsustainable because the capital necessary to develop the future supplies this world will need will not be available at less than $50/bbl.

Speculation on my part: Upstream capex budgets are set in November & December. OPEC may be wanting to keep oil prices low until year-end to keep pressure on Non-OPEC upstream company boards to keep capex budgets low.

In addition to the "gassers", the best BUYS look like Devon Energy (DVN), Newfield Exploration (NFX), Noble Energy (NBL), PDC Energy (PDCD) and SM Energy (SM). I like SM now because 2/3's of their production is natural gas and NGLs. They also have a lot of leasehold in a good part of the Permian Basin.

VERY IMPORTANT FACT TO UNDERSTAND: Oil prices are set on a global market. Natural gas and NGL prices are set on regional markets. The North American natural gas market is rapidly tightening, a recipe for much higher gas prices within just a few months.

[dan_s]

You can download the Sweet 16 spreadsheet from the EPG website. It shows my valuation for each stock and the First Call price target for each stock.

[dan_s]

Cimarex Energy (XEC) - Update from Wells Fargo Equity Research:

"Cimarex Energy offers differentiated exposure to the Permian and STACK regions and within each, Cimarex’s acreage and operational expertise has proven to be among the best in class. We forecast 7% and 14% production growth in 2017E and 2018E, respectively, and view substantial upside to NAV as Cimarex executes on downspacing tests currently under way. We are initiating coverage with an Outperform rating and a valuation range of $145-155 per share based on our net asset value estimate of $150.68 per share. Our EPS estimates for 2016 and 2017 are $0.56 and $3.58, respectively."

My valuation is $150/share, with significant upside if their STACK down-spacing tests are successful (will add a lot more low-risk / high-value locations in STACK). DVN, NFX and CLR are all watching carefully what Cimarex is doing in STACK. Cimarex is one of the most respected upstream companies with an outstanding technical team. They also have decades of experience in the Mid-Continent regions. They know these rocks.