Sweet 16 Update - Mar 3

[dan_s]

The Sweet 16 was up 0.1% for the week ending March 2. All three of the "gassers" (AR, GPOR and RRC) lead the way.
Maybe investors finally noticed they all made money in 2017 and will make even more in 2018.
I am assuming that HH natural gas will average $2.75/MMBtu in 2018. That's about where the NYMEX strip is today.

All three companies had solid EPS in 2017:
AR = $1.95 < More than 100% of their 2018 and 2019 natural gas is hedged at $3.50
GPOR = $2.38
RRC = $1.36

All three are trading at less than 4X operating cash flow per share and all three are expected to increase production by more than 10% YOY in 2018.

I am speaking to an investment club ("The Rebels") that meets near the Hess Club on Saturday morning. I will have more to say about the Sweet 16 on Sunday afternoon. I still need to update the forecast/valuation models for PDCE and RSPP. Both had solid Q4 results.

[dan_s]

PDCE and RSPP both look very strong heading into 2018.

All of the Sweet 16 forecast/valuations models have now been updated. We will be sending out an updated profile on RSPP in the morning. My valuation is now $52.00 and I could easily justify a much higher valuation since it trades at a much lower multiple of operating cash flow than the other pure plays on the Permian Basin.

Cimarex Energy (XEC), Devon Energy (DVN) and Newfield Exploration (NFX) are all down more than 20% YTD. They all have drilling and completion programs that should be fully funded by cash flow from operations this year. Devon has said publicly that they will generate over $1Billion of free cash flow that will be used to pay down debt. So, here are three solid companies doing exactly what Wall Street said that they wanted; "living within cash flows". Yet the shares sold off.

Maybe investors really want "Aggressive Growth" of both production and proven reserves.
> Cimarex expects YOY production growth of approximately 13.5% (down from 18.5% YOY growth in 2017)
> Devon expects YOY production growth of approximately 4.5% compared to a YOY decline of 11% in 2017 because of asset sales
> Newfield's guidance is for approximately 18% production growth in 2017, compared to a YOY decline of 3.8% in 2017 also because of asset sales late in 2016.

Antero Resources (AR) up 5.2% YTD and PDC Energy (PDCE) up 6.5% lead the pack.
> Antero has more than 100% of their natural gas hedged at $3.50/MMBtu for both 2018 and 2019 and they have more than 20% annual production growth locked in.
> PDC has 25% YOY production growth locked in, trades at an insane 4.4X operating cash flow, has a strong balance sheet and lots of running room. PDC was the only Sweet 16 company that reported a loss in 2017 because it uses the Successful Efforts method and FAS 21 caused them to take a non-cash impairment charge in Q3 2017.

Thanks to higher liquids prices and strong hedges by our three "gassers", Q1 2018 results are going to be VERY STRONG for all of the Sweet 16.