Flash Alert

[dan_s]

The Sweet 16 stocks have had very little movement during the last couple weeks. The portfolio as a group is up just 5.9% YTD after being up more than 18% at the end of February. This compares to the S&P 500 Index, which is up 4.5% YTD.

When you consider that oil and natural gas prices are much higher today than they were at the beginning of the year, it is confusing why the E&P sector has generated such meager returns. FEAR and GREED drive the stock market and right now FEAR seems to be in control. The continued high unemployment rate in the U.S. has everyone on Wall Street worried. The fact that most Americans have lost faith in the government sure doesn't help. With QE2 coming to an end, investors are wondering "what's next?".

What we need to remember is that the U.S. economy is no longer the overwhelming driver of global oil prices the way it was a decade ago. The technicals indicate support for oil at $100/bbl and very strong support at $96/bbl. Global supply/demand fundamentals for oil are very strong.

Frankly, I have been surprised that natural gas prices have held up so well. 2nd quarter natural gas prices are above what I have in my forecast models so they should give a boost to most of the companies in our Sweet 16. CRZO and XEC have the most to gain by higher NG prices.

Mitcham Industries (MIND) should be reporting very strong first quarter results on Monday, so keep an eye on that one.

You will notice that I have added some columns to the spreadsheet under the second tab that show my "Fair Value" estimate and the currrent First Call 12-month target price for each stock in the portfolio. Every stock in the Sweet 16 is now trading well below my Fair Value estimate.

PetroBakken (PBKEF), a subsidiary of PetroBank, is now paying a 8 cent per month dividend so the annual yield is over 6% based on the June 3 closing price. It is a nice place to park some money. I believe PetroBakken is now trading at more than 50% below Fair Value. It is going to have very strong 2nd half results and the dividends are rock solid.

Our two South American companies, Gran Tierra (GTE) and Petrominerales (PMGLF) are going to report very strong 2nd quarter results. Both are almost prue plays on oil (GTE does have a small amount of natural gas production) and they are selling their oil at a premium to WTI.

Denbury Resources (DNR) and Gulfport Energy (GPOR) are selling a high percentage of their oil into the Gulf Coast market at more than a $10/bbl premium to WTI. I think the market is missing this. At least it appears that way in the forecasts I have seen.

TransGlobe Energy (TGA) was added back to the Sweet 16 on May 25, replacing Newfield Exploration (NFX). There is nothing wrong with NFX. In fact, I consider it one of my core holdings but I see a lot more upside in TGA.

I hope to see many of your at next Wednesday's luncheon in Houston.



Daniel M. Steffens, President
Energy Prospectus Group
Houston, Texas