Sweet 16 Update: Thursday, October 11

[dan_s]

Since the S&P 500 Index has declined by 157 points since last Friday's close, a decline of 5.88% in four trading days, I decided to update the main Sweet 16 spreadsheet a day early.

You can download the Sweet 16 spreadsheet from the EPG website to Excel or just view it on the website. The new spreadsheet will be on the website this evening.
> Tab 1: shows my up-to-date forecasts for Q3, Q4 and 2019 + a lot of other good stuff.
> Tab 2: shows my valuation and First Call's price target for each company as of the date on the top of the spreadsheet.

Since Friday, October 5 the Sweet 16 has declined 6.31% and is now down 2.99% YTD.
> All 16 companies have been very profitable during the first nine months of 2018
> There is nothing to indicate that they won't all be profitable in Q4. WTI would need to drop below $50/bbl very soon for any of them to report a Q4 loss. < This will not happen.
> Oil, natural gas and NGL prices are all much higher than they were at the beginning of the year. WTI closed at $70.97 today, which compares to a closing price of $50.62 on 10/11/2017

Now this will really surprise you: Since Friday, the First Call price targets on 15 of the Sweet 16 have INCREASED. The only one that did go up was MTDR, which stayed the same.

First Call's price targets are slightly higher than my valuations for: CPE, ESTE and PE

As I have posted here many time, the Reuters / First Call price targets include many analysts valuations that are more than six months old. I am able to see the most current reports and I am most interested in the ones that have been updated since the companies most recent quarterly results.

Three companies are down BIG year-to-date. I have gone over their numbers carefully, many times, and I cannot come up with any justification for the poor performance.
> Cimarex Energy (XEC) is down 22.50% YTD < I have seen reports that they have higher than average exposure to the Permian Basin takeaway capacity issue, but that is a short-term problem that I have taken into consideration in my valuation
> Gulfport Energy (GPOR) is down 18.26% YTD < This "gasser" is one of the most profitable companies in the Sweet 16, it is on-track for 23% YOY production growth AND it has free cash flow.
> Newfield Exploration (NFX) is down 20.14% YTD < Piss poor IR department, but the company should be getting a lot more credit for what they have in STACK

All of my valuations are based on $65 WTI for all future periods and what I believe are conservative natural gas and NGL prices.

Here is what SHOULD help. Keep in mind that "should" and "will" are two totally different words. In this crazy upside down market you never know.
1. IEA's "OIl Market Report" comes out tomorrow and it should highlight a very tight global oil market.
2. Q3 results are going to be GOOD to VERY GOOD for all 16 companies.
3. On November 4th the full force of U.S. sanctions against Iran will be in place. < There is NO WAY that the other members of OPEC can make up for lost oil from Iran.
4. The winter heating season is rapidly approaching and natural gas in storage will be 15% to 16% below the 5-year average. My SWAG is that a cold December sends ngas prices a lot higher.
5. President Trump will eventually work out some kind of a trade agreement with China. China cannot win the "Tariff War" and they know it.

If profits matter, the Sweet 16 will be fine. They are all in MUCH BETTER shape than they were a year ago.

[jb2257]

There seems to be some concern about the levels of debt with the oil sector considering the rise in interest rates. Can you let us know which companies in the Sweet 16 might have a problem? Thanks, Dan.

[dan_s]

Look under Tab 1 on the Sweet 16 spreadsheet. Column G shows total debt, but remember that all debt is not the same. For example, your credit card debt is not the same as your home mortgage.

NONE of the Sweet 16 have any trouble servicing their debt at this time. Keep in mind that all of these companies survived an extended period of much lower commodity prices than we have today.

[jb2257]

I appreciate your explanation regarding the debt question. CLR has pulled back 12 pts. from the highs and I am wondering if this might be a good entry price since I missed the first run up. Any thoughts on the sector or are these just going down with the overall market?

[dan_s]

I sure don't see a drop in oil prices with the full force of sanctions against Iran just weeks away.

My valuation of CLR is $90/share, assuming $65/bbl WTI for all future periods. Pull up the forecast model for CLR (under the Sweet 16 tab on our website) and you can see how I come up with the valuation. All of the forecast models our website are macro driven, so you can go to future periods and put in whatever oil, gas and NGL price you wish at the bottom to see how it impacts EPS, CFPS and stock valuation. See what happens if you put in $75 oil price for 2019.

First Call's target price for CLR is $75.82.

[jb2257]

Thanks Dan. I appreciate all your your analysis. Have a great weekend.

[dan_s]

In this weekend's podcast (slide 2) I point out that WTI closed at $50.24/bbl on October 12, 2017. Yesterday, WTI close 42% higher at $71.51/bbl.

The Sweet 16 are all doing quite well, but you sure wouldn't know it by their share prices.