Energy Prospectus

The Sweet 16 moved 5.68% lower during the week ending August 4. It felt worse. As a whole, the portfolio is down 29.41% YTD.

As I explained in the podcast, the selloff was primarily focused on the Permian Basin companies because there is a "rumor" going around that PXD and most of the Permian companies are seeing an increase in the gas/oil ratio ("GOR"). They are, but it is not bad news.

PXD goes to great length on their Q2 conference call to explain that this is a good thing and will result in better recoveries and ROR on the wells in the long run. Oil production is tracking right on their type curves and wet gas production (ngas + NGLs) is tracking way above the type curves. So, the additional revenues from gas and NGLs sales is better than their plan.

PXD's share price took the biggest hit. Some of it may be related to the fact that they stopped completing wells for awhile because they had some issues in drilling through high pressure zones and they decided to change their completion "recipe". They are not going to ramp up activity to catch up, so 10-12 fewer wells will be completed this year. 2018 is now shaping up to be a very good year for PXD. Their completion schedule in 2017 is back end loaded, so they will exit this year with production near 310,000 Boepd. This compares to production of 259,087 Boepd in Q2.

FANG is the only Permian company that held up on the week, rebounding almost completely on Friday. FANG is on-track for 75% to 80% YOY production growth, which is almost entirely funded by cash flow from operations. CPE and PE look like great BUYS at the current share prices.

CLR and DVN were up slightly on the week because of VERY GOOD well results in STACK announced by DVN. NFX also has a lot of good news in STACK.

I have updated my forecast models and valuations for all ten companies that reported Q2 results last week. No big changes and they all reported results close to my forecasts.

CRZO, XEC, CLR, GPOR, PDCE and RSPP report Q2 results next week. I will post my initial comments here and update their forecast models ASAP.

CONCLUSION: Unless you think oil, gas and NGL prices are staying low FOREVER, this group is grossly oversold.

Barrons likes CPE, CXO and PE

http://www.barrons.com/articles/after-e ... 1501861904

From John White's Monday morning report - August 7, 2017:

Pioneer Natural Resources (PXD): Increased Gas to Oil Ratios (GOR): PXD reported increasing gas to oil ratios in its 2Q 2017 results, released 8/1/2017. As we understand, this is a very common occurrence with reservoirs producing light sweet crude oil. During the initial production periods, the oil and gas in the reservoir are under high pressure, and this high pressure keeps the natural gas in the crude oil, or “in solution.” In subsequent periods, as the reservoir pressure naturally declines, the natural gas escapes from being in solution and is produced as natural gas.

As the saying goes, “investors don’t like surprises,” and as such PXD, along with several other Midland Basin focused E&Ps, were down sharply on the day. PXD was down about 16% for the week due to other operations issues, but for the Midland Basin focused group we note the GOR increase actually led PXD to increase type curves in the Wolfcamp to account for higher gas/NGL volumes with unchanged oil EUR. That said, we think this issue needs to be monitored on a case by case basis. We talked with one very seasoned reservoir engineer who advised that increasing gas production leads to a more rapid decline in reservoir pressure which leads to declining oil rates and therefore reserves.