Sweet 16 Update - Sept 29

[dan_s]

For the week ending 9-29-2018 the Sweet 16 moved up 1.1% and is now up 1.02% year-to-date.

The price of oil is up more than 22% YTD and the outlook for both natural gas and NGLs is also much brighter, however investors remain "fearful". The Wall Street Gang has started to get it and they have started to adjust their oil price forecasts. There is still a lot of negativity about the perceived "glut" of natural gas.

The price of oil is firming up and a test of the upper limit of Phase 4 ($75/bbl) seems to be setting up.
> OPEC met in June and said they would push up production to the quotas set in their original agreement. In August, OPEC's production was 337,000 barrels per day UNDER the quota.
> As I said at today's luncheon, this tells me and most of the other oil sector analysts, that they cannot meet the quotas
> Saudi Arabia's claims of having additional production capacity are gradually becoming harder and harder to believe.
> At this point, there is no evidence that President Trump is going to back off from the sanctions on Iran, which go into full force on November 5th.
> A month ago, many analysts predicted the sanctions would only take ~500,000 barrels of oil off the market. Each week more countries, including China & India, have cut back on taking oil from Iran. No matter what any of these countries say publicly, they know the civilized world will be better off with regime change in Iran. If they stick together behind Trump's leadership, regime change can happen relatively quickly. Iran knows they cannot survive much longer with oil sales dropping like a rock. Putin will not let Russia go down with Iran.
> Venezuela is much worse than most people realize. I think their oil exports may go to zero.

The Wall Street Gang feels more comfortable in the early stages with the large-cap well-know names.
> Continental Resources (CLR) is up 28.9% YTD
> EOG Resources (EOG) is up 18.2% YTD

Making me feel good about my own analysis, all three of this years additions are up:
> Centennial Resource Development (CDEV) is up 10.97%
> Earthstone Energy (ESTE) is up 7.57%
> Matador Resources (MTDR) is up 6.17%

The Sweet 16 is a long way from trading at a reasonable valuation. As a group, the portfolio is trading 55.7% below my "Fair Value Estimates" based on $65/bbl WTI for all future periods and $2.75 ngas for 2H2018 and $2.50 ngas for 2019.

AR, ESTE, GPOR and RRC are all trading below book value. If you are familiar with how conservative GAAP accounting for upstream companies is, you should know that all profitable upstream companies with double digit production growth (which all 4 companies have) should never trade below book value. The only explanation is that the Wall Street Gang is stuck in the "paradigm" that the U.S. has a "glut" of natural gas despite what the EIA storage reports are telling us. All I can say is that BIG GAINS happen when there is a "paradigm shift" and the "herd" changes direction.
At least one analyst sees it coming: https://www.barrons.com/articles/natura ... yptr=yahoo

The Sweet 16 Spreadsheet is update each weekend. It shows my current valuation for each company compared to First Call's price target for each company. You can view it on our website and download it to Excel. The individual company forecast models are all up-to-date.