Sweet 16 Update - June 30

[dan_s]

The Sweet 16 finished the week up 2.56% and up 9.07% since the OPEC+ announcement on June 15th.

"OPEC+" includes the cartel members and another group of oil exporting countries that is primarily lead by Russia. Saudi Arabia, Kuwait, UAE and Russia are the only four counties with any meaningful amount of remaining production capacity. Their is a "myth" going around that Russia has been holding back production and could bring a lot more oil to market. That is not true. At most, the Russian lead group can bring 500,000 BOPD to market and the real number is probably a lot less. Regardless, the announced plan to increase the world's oil supply by a million barrels per day will be offset by continuing declines in Venezuela, Libya, Angola, Nigeria and soon to come Iran. U.S. and total OECD oil inventories will continue to fall. This is why the price of oil has spiked up since the June 15th announcement.

Last week EIA reported that U.S. crude oil inventories declined by 9.9 million barrels, the largest decline in several years. OECD oil inventories will continue to decline rapidly because we are now in the highest demand period of the year for transportation fuels. Demand for oil increases by more than a million barrels per day from Q2 to Q3 each year. The global economy is doing well, so the increase in demand should be even larger this year.

The Sweet 16 is a rock solid group of upstream companies. They were all profitable in the first quarter and will report even stronger results in Q2.

Each weekend an updated Sweet 16 spreadsheet is posted to the EPG website. It shows my valuation for each company (today's break-up value) and First Call's price target for each company. It also shows the earnings per share that I expect each company to report each for each quarter in 2018 and for full-year 2019.

I believe First Call's price target will be going up after the companies announce Q2 results. In August the Wall Street Gang will "mark-to-market" the oil, natural gas and NGL prices that they use to value these companies. Some of the Gang is still valuing upstream companies based on $50/bbl oil. Raymond James and a handful of other firms have already increased their WTI oil price forecast to $70/bbl for the second half of this year. Others will soon follow.

Continental Resources (CLR) is now up 22.26% YTD and it continues to lead the pack. Making up the Top Four are PDC Energy (PDCE) up 17.29%, EOG Resources (EOG) up 15.31% and Antero Resources (AR) up 12.37% YTD.

The Sweet 16 is heavily weighted to oil and heavily weighted to companies that have core areas in the Permian Basin. The later has hurt the portfolios performance recently because of FEAR that Permian Basin oil will be sold at lower prices thanks to limited pipeline takeaway capacity. In my opinion, that FEAR is over-blown and each of the companies will address it on their quarterly conference calls. Some will address it on the Operations Updates, which will start coming out next week. See what SM Energy (SM) said about it in their recent Operations Update.

[dan_s]

I now expect oil prices to open lower on Monday, July 2 and then look for "reality" to set it. Trump's tweets cannot magically create more oil supply. Demand for oil based products is going way up in Q3 and OECD inventories will continue to fall.