Sweet 16 Update - Dec 17

[dan_s]

The Sweet 16 was down 5.69% for the week ending December 16. It is now up 51.22% year-to-date. This compares to the S&P 500 Index that was down 0.07% for the week and is up 10.48% YTD.

Noble Energy (NBL) and RSP Permian (RSPP) were the only two stocks up for the week. Gulfport Energy (GPOR) lead the declines. It was down $7.81 (26.5%) for the week as the market over-reacted (IMO) to their big SCOOP acquisition and stock offering. GPOR is the only stock in the Sweet 16 that is down YTD. If natural gas prices move higher, so will GPOR.

I have updated my forecast/valuation model for GPOR and posted it to the EPG website. My assumption is that their SCOOP acquisition closes in February, 2017. The deal will be immediately accretive to cash flow from operations and push their daily production to more than 180,000 BOE per day. Gulfport's revenues should jump to over $1.2 Billion in 2017. Operating cash flows should be $650 to $700 Million next year.

Highlights: As of December 13, 2016, Gulfport entered into a definitive agreement with Vitruvian to acquire approximately 46,400 net surface acres with multiple producing zones, including the Woodford and Springer formations, in Grady, Stephens and Garvin Counties, Oklahoma. Given the potential for numerous producing intervals across this high-quality position, Gulfport has identified approximately 1,750 gross drilling locations, composed of only Woodford and Springer zones with significant upside potential through infill drilling and additional prospective zones present on the acreage. The acquired properties are located primarily in the over-pressured liquids-rich to dry gas windows of the play and include approximately 183 Mmcfepd of net production for October 2016. The transaction also includes 48 producing horizontal wells and an additional interest in over 150 non-operated horizontal wells. Four rigs are currently operating on the acreage and Gulfport currently intends to maintain a four rig cadence in the play during 2017 and add an additional two rigs at the beginning of 2018. Based on the estimated internal reserve report prepared by Vitruvian as of September 30, 2016 and audited by Netherland, Sewell & Associates, Inc., the estimated proved reserves attributable to the acreage are approximately 1.1 Tcfe (P2 reserves may be triple this amount). The acquisition is expected to close in February 2017, subject to the satisfaction of certain closing conditions.

Most Wall Street firms will not update their forecast models for GPOR until the deal closes. My valuation of GPOR is $40/share, compared to First Call's price target of $34.15. Keep in mind that all of my forecast models assume natural gas will average only $3.00/MMBtu in 2017. The NYMEX strip is much higher than that today.

To learn more about SCOOP, go to the Continental Resources (CLR) website. Look at their SCOOP/STACK presentation dated 11/29/2016. CLR is the operator of several of the wells in the GPOR acquisition.

Our other two "gassers", Arena Resources (AR) and Range Resources (RRC) also pulled back a bit with gas prices last week. The winter storm raging across the Great Lakes today is going to cause a BIG DROP in natural gas storage levels, which should get a reaction from Wall Street.
Go to https://www.wunderground.com/us/il/chic ... 90.1.99999 and check out the 10-day forecast for Chicago.
With over 100% of their 2017 gas hedged, changes in the NYMEX gas price should have no impact on the Arena Resource's stock price, but all of the "gassers" tend to move in lock step with gas prices. Buying AR and RRC on the dips should be a good plan if you agree with me that ngas and NGL prices will firm up in the first quarter.

Diamondback Energy (FANG) also announced a major acquisition last week that more than doubles their footprint in the Permian Basin. Diamondback's daily production will be ~48,000 BOE per day at year-end and should ramp up to ~80,000 BOE per day by the end of 2017. FANG trades at a high multiple of cash flow from operations that is justified by its' high growth potential. I have updated my forecast/valuation model for FANG and posted it to the EPG Website.

On December 13, Continental Resources (CLR) reported a new record well in the Oklahoma STACK play:
> The Angus Trust 1-4-33XH flowed at 4,642 Barrels of Oil Equivalent ("BOE") per day (45% crude oil) in a 24-Hour Initial Production Test
> CLR raised their expected 2016 Production Exit Rate to 213,000 to 218,000 Barrels of Oil Equivalent per Day (+5,000 BOEPD)
My valuation of CLR is $65.00, but there is definitely upside to that number as they keep reporting outstanding well results in STACK and SCOOP
Keep in mind that CLR and EOG don't have any of their oil hedged, so they will get full benefit of rising oil prices.

I am expecting SM Energy (SM) to soon report the sale of their interest in an Eagle Ford AMI that is operated by Anadarko Petroleum (APC). Anadarko has been shopping the deal for months and I think bids are due soon. A good sales price will shore up SM's balance sheet and help fund an aggressive Permian Basin drilling program.

Crude oil prices spiked to over $54 on Monday when Russia and several other Non-OPEC companies agreed to cut production by 550,000 BOPD, but pulled back on Wednesday when the Fed raised interest rates. The strong U.S. dollar is putting pressure on oil and all commodities. Oil was up more than a $1.00/bbl on Friday. As I said in my weekly podcast, I expect oil to flop around in the low $50s until Saudi Arabia and several other OPEC members announce significant production cuts in January. It is definitely in OPEC's best interest to comply with the agreement to cut 1,200,000 barrels per day that was announced November 30. Natural gas and NGL prices will flop around on weather reports and storage reports. Regardless of what Mother Nature does this winter, the U.S. natural gas market is going to be MUCH TIGHTER than it was a year ago. Demand is expected to go up by at least 3.0 Bcfpd in 2017.

Year-end proven reserve reports will have a BIG IMPACT on reported earnings in 2017. A lot of the proven reserves written off at the end of 2014 and 2015 because of low commodity prices will be added back with higher oil & gas prices at the end of 2016 combined with improving well level economics (lower completed well costs + increasing EURs). More proven reserves lowers the DD&A rate. DD&A expense is the biggest expense line item on upstream company income statements.

My valuations are based on cash flows, not reported earnings. However, Wall Street will react to big improvements in YOY reported earnings.

Small-Caps have more RISK than the Large-Caps. I recommend keeping most of your "investments" in Core Holding Quality companies like our "Elite Eight". It is fine to make some bets on high quality small-caps, just so you understand the risks.

[dan_s]

My Sweet 16 spreadsheet has been updated and is available for viewing or downloading to Excel from the EPG website. It shows my current valuation of each company's common stock and I show First Calls price target for each stock as of the date of the report.

As a group, the Sweet 16 closed on December 16th at a 28% discount to my valuation.