Sweet 16 Update - August 11

[dan_s]

For the week ending August 10, the Sweet 16 moved 0.36% lower. It is now down 1.03% YTD, which is puzzling since liquids prices are in much better shape than they were on January 1st and the outlook for natural gas sure looks good to me. The Sweet 16 is heavily weighted to oil.

The Permian Basin takeaway capacity issues are the primary FEAR that hangs over this group. The Sweet 16 has a lot of exposure to the Permian Basin. However, most of the companies have pipeline capacity for most of their production and they have hedges in place to ease the pain of the big oil price differentials in West Texas. Low natural gas prices are causing some real pain, but our Permian companies get most of their revenues from liquids sales.

I have now updated all of the Sweet 16 forecast/valuation models for Q2 results and updated guidance from the companies. You can find my valuation for the common stock of each company and the current First Call price target for each company on Tab 2 of the main Sweet 16 spreadsheet.

If you read my posts yesterday about PDC Energy (PDCE) you know that it is important to know which SEC approved accounting method each company is using and it is ESPECIALLY IMPORTANT during periods that include big changes in commodity prices. Getting into the boring details of the differences between the "Full Cost" and "Successful Efforts" accounting methods is beyond the scope of this post. Just remember that (a) Successful Efforts is more conservative, (b) "Adjusted Earnings" are what you should be comparing to my forecasts and (c) always focus most of your attention on Cash Flow From Operations.

Cimarex Energy (XEC) is down 26.2% YTD and it is the biggest drag on the portfolio, so I took an extra hard look at it.
1. It is one of the most profitable companies in the Sweet 16 ($5.68 EPS in 2017 and on-track for $6.55 EPS in 2018).
2. Cash Flow From Operations: $12.67 per share in 2017 and on-track for $14.76 per share in 2018.
3. Production Growth: 18.5% YOY growth in 2017 and on-track for 11.8% YOY growth in 2018 (includes impact of the Ward County, TX sale to CPE).
4. So why is the stock price down?
> Cimarex has been listed as one of the companies with the most exposure to the Permian Basin takeaway issue.
> Some analyst seemed to view the company's sale of producing assets in Ward County, Texas as a red flag; I don't. The sale shores up an already strong balance sheet and more than fills the gap between cash flow from operations and their CapEx budget.
> Some analysts still view Cimarex as a "gasser", despite the fact that more than 83% of Q2 revenues came from oil & NGL sales.
> They don't seem to get much credit for their Mid-Continent position, primarily STACK.
> My valuation of XEC is $154.00, which compares to First Call's price target of $124.65
> Since XEC released Q2 results, three Wall Street firms have submitted new valuations to Reuters / First Call. Their valuations range from $110 to $175.

Newfield Exploration (NFX) is another company that lots of Wall Street analysts still few as a "gasser" and it also doesn't seem to be getting much "love" for its outstanding results in STACK.

All three of our real "gassers" (AR, GPOR and RRC) are down YTD and all three are trading below book value despite being profitable and on-track for double digit production and proven reserve growth. These companies have no operations in the Permian Basin and most of their revenues come from the Marcellus/Utica gas plays where natural gas and NGL prices are firming up. GPOR is also reporting strong well results in SCOOP.

Speaking of natural gas, all of you should check out Joe Bastardi's winter weather forecast here: https://www.weatherbell.com/premium/

We have updated the profiles for AR, CPE, CDEV, CLR and RRC. The updated profile on PDCE is going out via email today.

We should send out profiles on ESTE, FANG, MTDR and PXD next week. The rest of them will be updated by the end of August.

In addition to putting my final touches on the profile updates, I will be updating the rest of our Small-Cap Growth Portfolio and High Yield Income Portfolio models next week.

My weekly podcast will be sent out on Sunday afternoon.

The most current information I have on the Sweet 16 companies is on the EPG website under the Sweet 16 Tab. After you log on and click on the Sweet 16 tab, just click on the link for each company. We have lots of good stuff on the EPG website and I am updating it almost daily.