Sweet 16 Update - Feb 10

[dan_s]

At midday on Friday (2/9) all of the Sweet 16 were down big, then they all rallied into the close. Seven closed higher for the day. My HOPE is that noon on Friday marked the low for this selloff.

The Sweet 16 is down 14.7% YTD despite oil prices holding up rather well. WTI closed at $59.06/bbl on Friday (2/9), down from the peak of $66.14/bbl on 1/26. The only fundamental reason for the oil price decline is the ~5% increase in the U.S. dollar. EIA reported an increase in U.S. oil production and crude oil inventories the last two weeks, but those increases were expected. The global economy is expanding which will result in a surge in demand for refined products. My SWAG is that demand for oil will increase by AT LEAST 2.0 million barrels per day from Q1 to Q2. U.S. shale oil production cannot keep up with surging global demand.

First Call's price targets on 9 of the 16 companies increased last week because Wall Street has raised the liquids prices that they are using in their valuations.

Pioneer Natural Resources (PXD) is the only Sweet 16 company to announce Q4 results. PXD's Q4 results were much better than First Call's estimates and my forecast. The stock price initially moved higher, but pulled back with the rest of the market as program selling caused fund managers to "throw the babies out with the bath water". PXD's realized prices in the 4th quarter were $52.81 for crude oil, $21.64 for NGLs and $2.84 for natural gas. In addition to their production exceeding my forecast, the NGL price they received was 15% above what I used in my forecast. Higher NGL prices are going to a give a lot of the Sweet 16 a nice revenue boost. You can find each companies' production mix at the bottom of the individual forecast models.

PXD's reported earnings included a BIG adjustment for the impact of the GOP Tax Plan on their deferred tax liability (over $600 million). More meaningful to my valuations is the lower income tax expense going forward. Lower income taxes also has an impact on reported proven reserves. Lower tax expense extends the economic life of producing wells and thus increases EURs. Higher proven reserves at year-end lowers the DD&A expense ratio going forward, thus increasing reported earnings. Higher proven reserves also makes the debt holders very happy.

Reporting Q4 results this coming week:
AR on 2/13
XEC on 2/15
FANG on 2/14
GPOR on 2/14

I will be updating the individual forecast models as soon as I can after reviewing their year end reports.

Final Thoughts:
> Stock Market sell offs suck, but they do reduce the risk of owning stocks. "Corrections" are necessary from time-to-time.
> Unless their is a fundamental reason for a global economic slowdown, which I don't see, then demand for energy should increase (a lot) this year.
> Except for PDCE, which took a big non-cash impairment charge in Q3, all of the Sweet 16 are going to report positive earnings for 2017. These companies were profitable last year despite the prices paid for their liquids being much lower than were they are today.
> IEA's monthly Oil Market Update comes out next week.