Sweet 16 Update - August 20

[dan_s]

If you download the Sweet 16 spreadsheet, under tab one you will see that all 16 companies have generated positive earnings per share in the first half of 2017. They are all on-track to generate positive earnings in the second half of the year as well. Most of the companies are now producing more oil, gas and NGLs than they ever have before. BTW they generated those first half profits with realized oil & gas prices at or below where they are today. The Sweet 16 have done a great job controlling their expenses and they have enough cash flow from operations (even at today's oil & gas prices) to fund their drilling programs.

So why is the Sweet 16 down 32.9% year-to-date???????????????

1. I have never seen so much negativity hanging over this sector.
2. FEARs and miss-conceptions are being fed on a daily basis. Terms like "glut" and "lower for longer" are repeated over and over despite the fact that global oil inventories are clearly on steep decline.
> Today oil demand is 1.57 million barrels per day higher than supply PER EIA. I think the gap may be wider.
> When you include the need to refill storage, the U.S. natural gas market is under-supplied by at least 2.0 Bcfpd and the winter heating season is only three months away.
> The U.S. petrochemical industry is growing and demand for NGLs is increasing rapidly.
3. The United States only produces 10% of the world's crude oil supply and the U.S. has to import 45% of the oil it consumes each day. Yet, somehow the market is convinced that the U.S. is now going to supply all the world's future oil demand. FACT: The U.S. cannot produce all of the oil it consumes and it probably never will.

When you break it down, the value of any upstream company is the present value of future production less debt. All of the Sweet 16 have double digit production growth locked in for many years. Proved Developed Producing ("PDP") reserves are only a small fraction of each company's value. Proved Undeveloped Reserves ("PUD") + Probable (P2) & Possible (P3) are many times higher than their PDPs. When you look at a company's year-end reserves in the annual report, remember that the report only values "proven reserves".

I call this part of the oil cycle the "coiled spring"; when commodity and stock prices get out-of-whack with the fundamentals. Look at slide six of my August 19th podcast. U.S. crude oil inventory is now down to 26.7 days of supply. In March we had 34.2 days of supply. Supply under 25 days is considered below normal and below 20 days is considered critical. Our economy relies on a steady supply of oil and we are headed to a "critical" level of inventory, while we are still dependent on places like Venezuela for imports.

In last week's trading, all three of our "gassers" (AR, GPOR and RRC) moved higher. A few analysts on Wall Street are starting to understand the tightness of natural gas supply that is setting up for the coming winter. We are publishing an updated profile on Antero Resources today. Read it carefully.

A final note: Do not confuse "Aggressive Growth" with "High Risk". Some of the most aggressive companies, like CPE and PE are the safest in this market.