Sweet 16 Update - Oct 6

[dan_s]

The Sweet 16 portfolio gained 2.3% during the week ending October 5, 2018. It is now up 3.32% YTD. The Wall Street Gang is finally starting to realize that upstream oil & gas companies are VERY PROFITALBE at today's oil & gas prices.

With oil, gas and NGL prices much higher than they were twelve months ago, all of the Sweet 16 should be trading at 52-week highs. However, there is still a lot of FEAR and confusion out there in the market. Here are a few issues we are dealing with.

1. The Sweet 16 is heavily weighted to oil
2. The Sweet 16 is heavily weighted to companies that get most of their production from the Permian Basin.
3. "Trump's Tweets", noise from OPEC and the general "myth" that upstream companies need $100 oil to make money.
4. EIA has mislead the market all year that we have a "glut" of natural gas in this country. < I will address this one at our luncheon on Tuesday.

Brent crude is in the $80s (closing at $83.97 on Friday), but WTI closed at $74.29 on Friday. In addition to the big discount to Brent, Permian Basin crude is selling for a $10 to $15 discount to WTI because of the takeaway capacity issue. This a real problem, but IMO it has been overblown.
> Most of the Sweet 16 do have firm takeaway capacity on existing pipelines, so none of their oil is stranded and they are getting decent prices.
> Midstream companies are building new pipelines and the problem will be fully resolved within a year

All three of the gassers (AR, GPOR and RRC) have draw some new buyers, but all three are still trading below book value. Because GAAP/SEC accounting rules are so conservative, a profitable upstream company should never trade below book value. All three of our gassers are profitable and their hedges lock in solid cash flow through 2019. RRC is the safest bet and GPOR has the most upside if gas price firm up. < I now think we see $4.00 gas by Christmas.

Cimarex Energy (XEC) has bounced off the low, but still trades at a deep discount to my $150/share valuation. First Call's price target is $121/share.

PDC Energy (PDCE) is on HOLD until we see if Colorado voters are dumb enough to pass Proposition 112. If it does not pass, PDCE and SRCI will go to STRONG BUYS.

Newfield Exploration (NFX) has a strong position in STACK and it has no exposure to the Permian Basin. Why it is down 10.2% YTD is definitely a "head scratcher". The only reason that I can see is that their IR department is terrible. For a company of this size it is way off the radar screen.

None of Continental Resources (CLR) oil is hedges, so it has the most exposure to rising oil prices. EOG Resources (EOG) has ~32% of their oil hedge through year-end. Going into 2019 they will be totally unhedged.

Each weekend we update the Sweet 16 main spreadsheet, which you can download from the EPG website. It shows my valuation compared to First Call's price target for each company.

First Call price targets are the average of all analysts' reports submitted to Reuters. Many of the reports are older than six months and they are based on much lower oil prices than we have today. For example, I looked at EOG on Friday and half of the reports on Reuters were dated prior to the date that EOG released Q2 results. Several were dated in 2017. Just take the First Call numbers with "a grain of salt."

I will be working most of the day on Saturday, so post questions here if you have any questions.

Go Astros!