Sweet 16 Update - October 15

[dan_s]

It has been two weeks since my last Sweet 16 Update because I was in Iceland last weekend and did not get home until late Tuesday night.

The Sweet 16 is up 1.3% since October 1. It is up 49.31% year-to-date, compared to the S&P 500 Index that is now up just 4.36%.

All 16 companies are up YTD. I have been publishing a Sweet 16 since 2001 and only one year prior to this year have all 16 companies finished the year up.
Leading the pack are:
CLR up 125.33% < grossly oversold late in 2015
SM up 97.86% < Congrats to those of you that listened to me on this one when it was not doing so well early in the year.
PE up 95.39%
RSPP up 73.02%

In the near-term, I believe the three "gassers" (AR, GPOR and RRC) have the most upside. They are also trading at rather large discounts to my valuations and the Wall Street Gang is just beginning to figure out how tight the U.S. gas market is going to be this winter. BTW the almost summer like heat across Texas and the South this coming week will keep gas demand for power generation much higher than normal for this time of year. Joe Bastardi said months ago that we'd have an "endless summer" in the eastern U.S. this year, but it looks now like the weather will flip to a colder November with snow in parts of New England on Thanksgiving.

All of the Sweet 16 will report much better results in Q3 than they did in Q2. The best news is that those very confusing non-cash impairment charges should now be behind us. There will still be some big swings in mark-to-mark valuations of hedges. Just ignore them since they are non-cash items and one of the stupidest GAAP accounting rules. Always focus on cash flow from operations. "Cash pays the bills, not reported earnings".

If oil & gas prices are higher at year-end, the companies will report big increases in proven reserves since higher prices extend the economic lives of their properties. Higher proven reserves causes lower DD&A rates, which (when combined with reduced asset book bases) causes lower DD&A expense and higher reported earnings. Therefore, quarterly comparisons to the prior year should be outstanding in 2017.

AR and RRC will be the first two companies to report Q3 results on October 25 & 26. These are both Marcellus/Utica companies, so pay attention to what they say about that area's market for gas and NGLs.

I will update my forecast/valuation models as soon as I can after each company releases Q3 results.

One last thing, I was going to add EQT to the Sweet 16 in the newsletter that comes out on Tuesday but I've not had time to look at it closely. It is a high quality "gasser" and definitely looks good. My forecast model for it can be found on the EPG website under the Small-Cap tab. EQT would replace NBL, even though I think NBL is grossly undervalued by the market.

XEC and PE are getting close to my current valuations, but these are such incredible companies I don't want to remove them. They both deserve to trade at high multiples.

The Sweet 16 Spreadsheet has been posted to the EPG website. It shows my current valuation for each stock compared to First Call's price target.

[dan_s]

Texas Members

We have two luncheons coming up. Dallas on October 20 and Houston on October 26. PLEASE register if you plan to attend.

Our membership has declined by over 100 during this price cycle and getting new people to our luncheons is one of the best ways to attract new members.
So, PLEASE invite a friend to join you.

Plus, big crowds at our luncheons makes it easier for me to get companies to host the events. YOUR ATTENDANCE IS VERY IMPORTANT.

[dan_s]

Laredo announces updated 2017 oil hedges, including more collars. This increases estimated 2017 oil production hedged from 62% to
75% and lowers the weighted average floor price from $57.01 to $55.82 per barrel.

Antero lowers model well costs in the Marcellus and Utica ($7.8 million vs. $8.1 million in Marcellus; $8.9 million vs. $9.4 million in Utica
Condensate windows; $9.4 million vs. $9.9 million in Utica Wet/Dry Gas windows).

[dan_s]

Comments below from Raymond James, October 14

Concho continues to optimize field development on
its Southern Delaware acreage as it drills longer
laterals, shortens cycle times, and lowers completion
costs, thus improving IRRs. Earlier this year, the
company high-graded its position through
acquisitions and swaps, adding and consolidating
~12,000 and ~21,000 net acres, respectively.

CXO has an attractive Midland acreage position
(~150,000 net acres), including the newly acquired
acreage in Andrews, Ector, and Martin counties (TX).
We believe the market is currently undervaluing the
company’s core Midland position and see potential
for NAV upside as CXO commences a large scale
development program utilizing long laterals and
optimized completions.

Newfield (NFX) raised it STACK SXLs (super extended
laterals) type curve to 1.1 MMboe, up from the
previous 950 Mboe type curve. Newfield aims to
potentially achieve further upside with regard to
resource recovery by optimizing lateral placement,
drilling longer laterals, and testing emerging
completion technology (i.e., diverters).

[jb2257]

Can you tell me what's going on with RRC and why it is trading so poorly? I am trying to be patient with that one but it seems like it should not be dropping that much before earnings unless there is some negative surprise.

[mkarpoff]

Gassers are ugly ugly

[setliff]

today natty is down--as natty goes so goes gpor. rrc and all the other gassers.

[dan_s]

AR and RRC report Q3 results next week, so I will have more data to work with. RRC always includes some good stuff on the Marcellus/Utica market.

Mother Nature is now in charge of the gas price. Forecasts are for a big shift to winter weather coming mid-November.