Sweet 16 Update - October 29

[dan_s]

For the week ending 10/28/2016 the Sweet 16 declined 8.83% and it is now up 40.23% YTD. The S&P 500 Index is up just 4.04% YTD.

The Sweet 16 spreadsheet which shows my valuation and First Call's price target for each company will be posted to the EPG website later today.

Antero Resources (AR) was the only stock up slightly on the week as they reported outstanding 3rd quarter results. I have increased my valuation to $47.00, compared to First Call's price target of $33.71. It takes awhile before FC price targets are adjusted, but I will be stunned if the price target is not increased by quite a bit. Antero has more than 100% of their natural gas production hedged for 2016 & 2017 at very good prices, so their realized gas price is quite high ($4.30/mcf for Q3).

Realized prices = (Revenue from physical sales + Cash settlements on hedges during the quarter) / Volume sold

Antero's 3rd quarter production exceeded my forecast and so did the production of Range Resources (RRC). I have increased my valuation of RRC by $2.70 to $50.70/share, which compares to First Call's price target of $47.92.

Antero and Range both have outstanding leasehold in the Marcellus/Utica gas + NGL play. They are both ramping up production to over 2 BCFE per day in 2017. You can find my updated forecast models for both companies on the EPG website under the Sweet 16 tab. Check out the production growth and production mix at the bottom of my forecast models.

If you agree with me that natural gas prices are heading higher this winter, now is a good time to add more AR and RRC to your portfolio.

Despite the falling share prices last week, the First Call price targets for most of the companies in the Sweet 16 continue to inch higher. Most of them are "within the margin of error" compared to my valuations. The largest gaps are AR, DVN, GPOR and PDCE.

Devon Energy (DVN) has been "in transition" all year, selling $3.2 Billion of non-core assets. The process is now over and they can focus on development of their STACK leasehold, which has incredible upside (even at today's oil price). With so many moving parts this year, it makes it difficult for Wall Street analysts to get a handle on their forecasts for future periods. This is why First Call's price target of $48.01 is so far below my valuation of $61.00. Devon is a first class outfit with lots of running room in North America's top oil & gas plays. Now is a good time to add this large-cap before Wall Street figures it out.

Gulfport Energy (GPOR) has more difficulty getting their Marcellus/Utica gas to better markets than AR & RRC, but I take that into consideration in my valuation of $45.00. 3rd quarter production is up more than 10% quarter-over-quarter and should continue to ramp up in Q4. Approximately 50% of their 2017 forecast natural gas production is hedged at $3.08/MMBtu, so strong cash flows from operations are locked in for 2017, more than enough to fund their growth plans.

PDC Energy (PDCE) is a "Growth Machine" and the only reason I can see for it trading so far below my valuation is because most of PDC's production comes from the Wattenberg Field in Colorado. PDC's production will be up more than 40% YOY in 2016 and I am forecasting 57% YOY growth in 2017. They recently acquired a new core area of growth in the Delaware Basin (a sub-basin of the Permian Basin) that should draw more Wall Street attention. Wall Street is head-over-heals in love with the Permian Basin. PDCE currently trades at a multiple of cash flow from operations way below the average for the Sweet 16 and I am forecasting that CFPS will go from $7.70 in 2016 to $10.45 in 2017.

This coming week, all but Concho Resources (CXO) will be reporting Q3 results. I will be updating my forecast / valuation models as fast as I can and posting my initial comments to this board.

I am most eager to see SCOOP/STACK well results from CLR, DVN, NFX and XEC. Well level economic in the STACK are as good or better than in the Permian Basin.

The Sweet 16 is our "Flag Ship Portfolio" and my top priority as quarterly results come out. I will try to squeeze in updates on several of our other model portfolio companies, but new information will be coming at me "out of a fire hose", so be patient. I will get all of the forecast models and most of the profiles update by Thanksgiving.

I spend a lot of my time getting host companies for our luncheons in Dallas and Houston. Yesterday, Lonestar Resources (LONE) agreed to host a luncheon for us in Dallas on December 14th. I am hoping to get Yuma Energy (YUMA), which recently announced a strategic merger, to host a luncheon for us in Houston in mid-November.