Sweet 16 Update - March 23

[dan_s]

The Sweet 16 pulled back a bit last week, primarily the result of the mid-week dip in crude oil prices and overall market weakness. Many on Wall Street are saying we are overdue for a correction, which is keeping new money on the sidelines.

The Sweet 16 is now up 10.7% YTD, compared to the S&P 500 which is up 9.2%. I am expecting very impressive first quarter results from the S-16, which should draw more attention to this sector. An improving natural gas market in North America is sure to draw more interest as well.

Harold Hamm's high profile divorce caused CLR to pull back last week. IMO the divorce will take a long time to work out and will not impact CLR operations. However, a forced stock sale could pressure the price. You are on your own to determine if this is buying opportunity or not, but CLR is a very high quality company with incredible production & reserve growth locked in. I really like their new SCOOP project in Oklahoma.

As we have discussed already, EXXI is the only real disappointment in the portfolio this year. I will be watching it closely to see if it needs to be removed. It still looks like a very cheap stock to me (trading at less than 4X CFPS), but the Sweet 16 is a "growth" portfolio, so I need to see strong production growth from EXXI soon.

First Call's price targets for all of the Sweet 16 continue to move higher, drifting toward my Fair Value Estimates. My valuations are higher for all 16 companies (even though I am still assuming $85/WTI for the forecast models). Keep in mind that First Call's Price Targets are an average of all the analysts' forecast models that are submitted to Reuters. It often takes months after year-end before analysts get around to updating their forecast models. Plus, some firms require their analysts to use outdated commodity price decks. Therefore, during a period of rising oil and gas prices their EPS forecasts will be conservative. The largest increases in First Call price targets since Q4 results came out are HP and GPOR.

Range Resources (RRC) is the only one getting close to my Fair Value Estimate. It is also the only "gasser" in the portfolio. I am getting more and more bullish on natural gas prices, so RRC is definitely a keeper. RRC has the largest leasehold position in the Marcellus Shale, an extremely valuable asset.

I now have seven interns working on company profiles for us. They are graduate students at Rice, SMU and Wharton. All of them are fantastic young people. Right now I have them working on profiles for companies in our Small-Cap Growth Portfolio and our Income Portfolio. Keep an eye on your e-mails for our new profiles.

EnerJex Resources (ENRJ), one of our Small-Cap Growth Portfolio companies is hosting a luncheon for us on Wednesday in Houston. I hope to see many of you there.

Sabrina and I will be checking out the software for my on-line chat sessions next week. If all goes well, the first one will be schedule in early April.