Sweet 16 Update - Sept 23

[dan_s]

It was another good week for the Sweet 16, up 2.51% for the week ending 9/22/2017.

Antero Resources (AR) was the only stock down slightly. It is a "gasser" and they also announced a $1Billion Deleveraging Program, which you'd think the market would like. Antero is in good shape and should have a strong Q4.

Each week, after the markets close on Friday, I take a hard look my valuations for the Sweet 16. I compare them to First Call's price targets and I consider any company specific announcements that might change the assumptions that I use in my forecast/valuation models.
> These are all solid and profitable companies.
> My valuations are based on the assumptions that WTI crude oil will be $50/bbl and Henry Hub natural gas will be $3/mcf for all years beyond 2017.
> I do adjusted "realized" oil, gas and NGL prices for regional difference and each company's hedges, which you can find at the bottom of each forecast model or on the companies' websites
None of my valuations changed this week.

The Sweet 16 is our "Flagship Portfolio". I have a HIGH level of confidence in my forecast models for these companies, primarily because I have followed them all for several years; most of them for over five year.

Within the Sweet 16, I have highlighted the "Elite Eight". These are the larger companies that Wall Street is more familiar with. As the FEAR is lifted from the upstream sector, Wall Street fund managers will feel more comfortable putting money into these "safe" companies. Historically, the Elite Eight have traded closer to my valuations. Today NFX and RRC appear to have the most upside.

You can see my valuation for each of the Sweet 16 stocks on the Sweet 16 spreadsheet, which you can view and download to Excel from the EPG website. You must log on to see it.

The stocks trading at the largest discounts to my valuations are:

> Carrizo Oil & Gas (CRZO): It is profitable and generating solid cash flow from operations. They recently announced the sale of their Utica assets and their DJ Basin (Niobrara) assets are on the market. They are "in transition" to a pure Texas company with core areas in the Eagle Ford and the Permian Basin. Based on my forecast, cash flow from operations should be sufficient to fund most, if not all of their growth after 2017. A much higher percentage of their production should be liquids in 2018. Strong well results should draw more attention.

> Gulfport Energy (GPOR): It is a "gasser" and the market is still fearful of where gas prices are heading. Production s/b up ~50% year-over-year in 2017 and another ~30% in 2018. They've reported very strong well results in SCOOP so far. More of that should increase the share price. If natural gas prices do spike this winter, this stock should go a lot higher.

> Antero Resources (AR): This company is one of the Top Five natural gas producers in North America and it has 20% annual production growth locked in. It is all about Wall Street's perception of the U.S. natural gas market for AR and for Range Resources (RRC).

> PDC Energy (PDCE): I could easily justify a much higher valuation than $80/share. PDC is a bit off the Wall Street radar screen and for some reason Wall Street is not keen on the DJ Basin companies. PDC has more than 40% annual production growth locked in for 2017 and 2018. It is building a second core area in the Permian Basin. Based on my forecast, their entire capex program will be funded by cash flow from operations in 2018.

The Sweet 16 is still down 25% YTD despite the fact that all of these companies are in much better shape today than they were a year ago. All oil cycles do end and the rebound phase of this cycle should be very profitable for Sweet 16 shareholders. Hang tough, the party is just getting started.