Sweet 16 Update - Dec 23

[dan_s]

Best week of the year: For the week ending 12/22/2017 the Sweet 16 was up 7.82%. Still down 15.11% for the year despite all of the companies being in much better shape today than they were a year ago. The portfolio remains heavily weighted to oil.

The spreadsheet showing my current valuation and First Call's price target for each stock will be posted to the EPG website late today.

The Sweet 16 is still trading at a 47.4% discount to my valuation (based on $50 WTI and $3 HH gas).

First Call price targets are drifting slowly toward my valuations. FC targets for FANG and RSPP are slightly higher than my valuations.

Carrizo Oil & Gas (CRZO) will be moved back to the Small-Cap Growth Portfolio on January 1st. It is being replaced by Matador Resources (MTDR). There is nothing wrong with CRZO, it just has the smallest market cap. I am looking closely at a couple more promotions. Callon Petroleum (CPE) may be moved back to the Small-Cap Growth Portfolio as well.

Mother Nature is doing her best to help the gassers (AR, GPOR and RRC), but the natural gas price remains way below any logical explanation that I can come up with. As I said in the podcast, the perception of an over-supply of gas seems to be winning out over the reality of a tighter gas market than we had last year. In addition to this week's Polar Vortex increasing gas demand, supper cold in Ohio and PA may cause some production problems in the Marcellus/Utica. Sub-zero temps can cause wellheads and gathering lines to freeze since there is a lot of moisture in the raw gas stream coming out of the ground. Record cold in North Dakota next week will definitely cause some production problems. When I worked at Hess the guys working in the Williston Basin would tell me about the oil freezing in their cars and trucks.

The Elite Eight (XEC, CXO, CLR, DVN, EOG, NFX, PXD, RRC) got the most love last week because they are the best known companies. Except for RRC, they are all heavily weighted to liquids sales. CXO, CLR, EOG and FANG are all up YTD. FANG (up 23% YTD) is now within 3% of my valuation.

We still have some profiles to update, but I will begin rolling forward all of the forecast/valuation models next week. Only a few companies have provided production guidance for 2018, but I am pretty good at making a SWAG at production. I will breakout 2018 by quarter and take my first shot at 2019.

All 16 companies are expected to report positive "Adjusted Earning Per Share" for the 4th quarter. GAAP earnings will be all over the place because of the mark-to-market non-cash adjustments on hedges. It will be interesting to see how the companies report the HUGE drop in their deferred income tax liabilities now that the GOP Tax Bill has passed. If any of you have seen how this is going to be reported, please post it here. My guess is that it just shows up on the Income Statement as a big credit to Income Tax Expense.

Several Wall Street Firms have raised their oil price targets for 2018. That's part of the reason for the big money flowing into the sector. Unless something changes, the rotation of money into energy has just started. The big funds should "rebalance" early in January.

We are now in the final inning of one of the worst oil price cycles EVER. All of the Sweet 16 companies have production growth locked in and more than enough liquidity to fund their growth plans. The Wall Street Gang will like what they see when they focus on this group.

IEA and EIA are both forecasting a big increase in U.S. oil production. We will see U.S. oil production go over 10 million barrels per day early in 2018, but unless the active rig count does up another 100 rigs drilling for oil, I doubt the U.S. can maintain the recent level of growth. A lot of companies have focused on completing DUC wells in Q4 to get them into their year-end reserve reports. Completions will slow in Q1, partially because of weather problems.

Investors Business Daily: "Diamondback Energy (FANG) broke out in strong volume Wednesday, with Chevron (CVX), Concho Resources (CXO) among those clearing buy points on Thursday. BP and Royal Dutch Shell (RDSA) were among those breaking out in less-impressive trade. Energy stocks are seen as big winners from the tax cuts, while crude prices are holding at two-year highs. U.S. crude inventories fell in the latest week but production hit yet another high. Saudi Arabia reportedly is looking at buying natural gas shale assets in Texas."