Energy Prospectus

I spent today going over all of my Sweet 16 company forecast models. I just sent the updated S-16 spreadsheet to Kim for posting to the website. If you look at it carefully, you will notice some great buys at the current share prices.

I have broken out my 2011 EPS forecasts by quarter and the spreadsheet shows our members the first look at my 2012 forecasts.

We are now 1/3 of the way through 2011:
> The Sweet-16 is up 16.8% YTD, compared to the S&P 500 which is up 9.6%
> The portfolio has been trading in a narrow range for the last couple months, which is somewhat surprising considering the strong move in oil prices.
> If oil prices hold and natural gas prices can just stay over $4.00, the Sweet-16 is going to do very well during the 2nd half of this year. Over the years, the Sweet-16 has not done much during the 2nd quarter (primarily because I’ve had more natural gas in the mix) but the stocks are all currently trading well below my Fair Value estimates, so this year could be an exception. Once Wall Street has a chance to digest 1st quarter results they should be able to see the great values in this space.
> Earnings and cash flow forecasts have been going up across the board for all of the S-16.
> GPOR leads the pack, up 56.9% YTD and I still consider it a Top Pick
> PetroBank (PBG.TO) is down 16.6% YTD which makes no sense. It is heavily weighted to oil and now trading at 3.2 X my CFPS estimate (lowest of the pack). Based on my conversations with the company, they expect to show significant progress on two of the their oil sands projects this year. If so, I believe the share price will take off.
> CRZO and PMG are both going to have explosive earnings growth this year as they are rapidly increasing their liquids production
> Every company in the group still looks very good to me. DNR, PXP and XEC look rock solid and great buys at their current share prices.

NFX and PTEN have already reported 1st quarter results. Both were in-line with my forecast models. BEXP, CLR, DNR, PXP and XEC all report 1st quarter results next week. I intend to listen to their conference calls and update my forecasts as soon as possible. If I see something exceptional we will put out a Flash Alert to the Premium Members.

Something that is very important to keep in mind as more 1st quarter results come in.

The large increase in oil prices from 12/31/2010 to 3/31/2011 will cause large mark-to-market adjustments for those of our companies that have lots of their oil hedged. It makes no difference at what price they hedged. The Balance Sheet write-down of the assets will cause distortion of the quarterly income statement. Newfield is a perfect example. They reported a loss for the first quarter, when in fact they had a strong quarter. "Cash Flow pays the bills, not earnings."

I have written on numerous occasions how distortive these "Post Enron" accounting rules are. They confuse investors.

Mark-to-market adjustments on hedges are not included in the EPS estimates provided by First Call (primarily because analysts agree how stupid the accounting rules are). This adds to the confusion when bottom line results are compared to the First Call EPS estimates.

The thing to do is take advantage of this screw-up.

CLR and DNR are going to report strong cash flow from operations this quarter. If their share price dips they become "Screaming Buys". Both are going to have very strong cash flow this quarter. Both are trading way below my Fair Value estimates.

I worked on BEXP, CLR and DNR today. All three are going to report very strong 1st quarter results.

Denbury Resources (DNR) is a "Screaming Buy" up to $24/share. My Fair Value estimate is $32/share.

Buy DNR on all dips related to the dips in the oil price. DNR has 90% of 2011 natural gas hedged with collars that have $6.20/mcf floor and they have 80% of 2011 oil hedged with collars that have $100/bbl ceilings. Therefore, moves in the NYMEX oil price have no significant impact on their revenues and cash flows.

I consider DNR one of the safest bets on Wall Street. It has very long-lived oil reserves. The amount of oil hedged gradually declines as they move forward. There is table with a summary of current hedges at the bottom of my forecast model which you can find under the Sweet 16 tab.

Thanks Dan - I did a buy write for May 22 calls at a net debit of $21.

Bob