Sweet 16 Update - July 13

[dan_s]

This morning I went over all of my individual company forecast models for the Sweet 16, comparing them to the current First Call EPS forecasts. Since the group is heavily weighted to oil, 2nd quarter results are going to be strong.

RRC, HP and WLL will be the first to release 2nd quarter results the last week of July.

SM Energy (SM) looks very attractive to me at the current share price. The stock is trading at less than 3.5 X my cash flow per share (CFPS) forecast for 2013, which compares to 5.6 X for the group. In my opinion, companies the quality of the Sweet 16 should be trading for at least 6X CFPS. We recently published a profile on SM.

You can find the current CFPS multiple for each company on the Sweet 16 Forecast spreadsheet, which I update each weekend and post under the Sweet 16 Tab. Others trading at CFPS multiples under 4X are EXXI, KOG, UNT and WLL.

Energy XXI (EXXI) is on a fiscal year that ends in June. Therefore, their quarterly report will include a fiscal year-end reserve report. I am expecting EXXI to report a significant increase in production. EXXI has been the most disappointing pick in the Sweet 16, down 11% since being added to the portfolio on 10/24/2011. It has a solid balance sheet and some high impact projects, but it also has the most hurricane risk. All of their production is offshore in the central Gulf of Mexico. The Wall Street crowd is in love with the shale plays and Energy XXI has none of that. However, it is now using horizontal drilling technology to increase production in the Gulf. A strong year-end reserve report would help this one.

Bonanza Creek (BCEI) leads the pack, up 44% YTD - still trading more than 36% below my Fair Value Estimate.

Gulfport Energy (GPOR) has been a HUGE winner for us, up 338% since being added to the Sweet 16 on 1-1-2010. If it hits my production forecast, it should be going a lot higher. [Increasing production by GPOR will also be good news for Markwest Energy Partners (MWE), one of the midstream MLPs in our High Yield Income Portfolio.]

Range Resources (RRC) and Unit Corp. (UNT) have the most exposure to natural gas. RRC is approaching my Fair Value Estimate but it still has upside. The company has an extremely valuable position in the Marcellus Shale, North America's Crow Jewel for natural gas reserves. Wall Street lumps Unit in with the onshore drillers but it is an E&P company that has a drilling division. Most of Unit's revenues come from the sale of oil & gas. Read our recent profile and you will see why I like it so much.

For those of you that are active traders, I recommend Kodiak Oil & Gas (KOG). It bounces around in a channel and I know several EPG members making a nice profit by "buying the dips". It is heavily weighted to oil and IMO a prime takeover target.

[bearcatbob]

Selling Aug KOG $8 puts for ~$.25 looks good to me. Worst case - you own KOG at $8.

[dan_s]

I have made a lot of money selling Put Options over the years BUT only do it if you don't mind getting "put to" at the strike price.

Sell "in the money" Puts is also a great way to buy stocks at a discount.

[bearcatbob]

I have made a lot of money selling Put Options over the years BUT only do it if you don't mind getting "put to" at the strike price.

Sell "in the money" Puts is also a great way to buy stocks at a discount.

Oh yeah - you have to be willing to own the underlying stock at the put strike price.

Bob

[prince_jake_33]

I hold this stock and want to buy more so I am selling 10$ puts. If they go down in value I cover for a profit and do it again. I buy the lower cost puts for a nickel or dime so that I put up only 2 or 3$ per share in a vertical spread.

[dan_s]

I have made a lot more money selling options vs buying them. The reason is that the "time premium" erodes in your favor. If the share price doesn't move at all, you still make money.