Sweet 16 Update - November 16

[dan_s]

The Sweet 16 finished the week about where it started. Ten stocks were up slightly and six were down. DNR took a big hit early in the week, selling off when they did not elect to convert to an MLP as many analyst thought might be announced at their Analyst Day on Monday. I was there.

IMO DNR is a "Screaming Buy" under $18. My Fair Value Estimate is $30. They have 8% to 12% production growth locked in for at least the next five years and it is heavily weighted to oil, much of it selling at a premium to WTI. DNR will start paying a $0.25/year dividend in 2014 and they plan to ramp it up each year as their free cash flow grows.

First Call's Price Targets for all sixteen companies in the portfolio have moved higher since they announced 3rd quarter results. That is a very encouraging sign for me and something I watch carefully. I want to make sure other analysts are seeing what I see. Big increases for CXO, XEC, CLR, EOG, GPOR and SM. If you don't own SM, I urge you to read our profile on the company. It has significant growth locked in in several of the high profile basins.

I have updated my forecast/valuation models for all the companies. As a group, the Sweet 16 closed on Friday 38.9% below my Fair Value Estimate. CLR and CXO are now within 10% of "Fair Value", but those two definitely deserve to trade at high multiples. They hold some of the most valuable acreage on the planet. So does EOG.

EXXI and UNT are still trading at less than 4X 2013 CFPS. Strange, since both have rock solid balance sheets and growth locked in. This is proof that companies not in the shale plays get little attention from the Wall Street crowd. I am expecting solid results for the next two quarters from both of them. RRC and UNT have the most exposure to natural gas, but they also have a lot of revenues from liquid sales.

GPOR closed on Friday at 23X my 2013 CFPS forecast. Why? Because they are expecting more than 300% production growth in 2014.

This weekend I will be updating all of my forecast models for companies in our Small-Cap Growth Portfolio. I will post them under the Watch List Tab. Several are already there. I updated CRZO, SN and TGA today.

[dan_s]

I have double check my forecast models for each company in the Sweet 16 and compared them to First Call's EPS forecasts. I have been modeling all of these companies for several years, so I have a very high level of confidence in my forecasts.

An updated spreadsheet that shows my valuations compared to First Call's Price Targets has been posted under the Sweet 16 Tab.

My forecasts for 2014 assume $90/bbl WTI and $3.50/mcf, adjusted for each companies' hedges and differentials.

My valuations are more than 10% higher than First Call's target for: XEC, DNR, EOG, EXXI, GTE, OAS, ROSE, SM, UNT, WLL

Companies where my valuation is below the First Call price target: CXO, CLR, GPOR