Sweet 16 Update - Dec 9

[dan_s]

The Sweet 16 moved down 2.89% during the week ending December 8. Big dips in the oil price (which rebounded on Thursday and Friday) and the gas price are the reason.

All for the S-16 were slightly lower, but the largest dips were in the three gassers (AR, GPOR and RRC) thanks to a bearish natural gas storage report on Thursday. Obviously, the weather has turn more bullish for natural gas. We should see triple digit weekly draws from storage for at least the next four weeks. It is all up to Old Man Winter now. My SWAG is that gas in storage is 200 to 300 Bcf below the 5-year average at year-end.

My valuations all assume $50/bbl WTI and $3.00/MMBtu Henry Hub gas for 2018. The January NYMEX contract for natural gas closed at $2.79 on Friday, which is amazing since storage as of December 1 was 264 Bcf below where it was a year ago and 36 Bcf below the 5-year average. By year-end it is all but certain that storage will be less than it was a year-ago when gas was trading for over $3.70. Big swings in the gas price during December are common.

Credit Suisse updated their oil price forecast on December 7. If you want to see the report, send an email to Sabrina at energyprospectus@gmail.com

As a group, the Sweet 16 is trading 31% below the First Call Price Targets and 58% below my valuations. My valuations are what I think the company would sell for if it was put up for sale and arms length bidding happened. FC price targets are where Wall Street analysts think the share price will be in 12-months. There is a difference in the two methods.

I do think we will see some big TAKEOVERS in the first quarter. We are at that point in the oil price cycle.

It takes at least a month before the FC price targets fully reflect the most recent quarterly results, so they should all be updated by now. The main Sweet 16 spreadsheet shows my valuation for each company compared to FC price targets on tab 2.

This is the time of year when some investors and fund managers do "tax loss selling" to offset gains in other parts of their portfolios. Be aware of this, as it can cause some nice buying opportunities on good companies. The small-caps have the biggest exposure to tax loss selling.

All 16 companies should report positive "Adjusted Earnings" for Q4 and all of them have strong cash flow from operations. There is a lot of Fake News out there that says upstream companies cannot make money at $50 oil. The good ones can and they are.

The only one that should report a GAAP loss for the year is PDCE because it took a big non-cash impairment charge in Q3. First Call's price target is $60.33 for PDCE and I think the price target will be going up after the company reports STRONG Q4 results. Based on my forecast, PDCE is going to crush the current First Call Q4 EPS forecast of $0.11/share.

All of the Sweet 16 forecast models are up-to-date. The group is trading at 8.6 X operating cash flow per share. You can see what multiple of CFPS each company is trading for on the main spreadsheet (tab 1 far right) or at the bottom of each individual forecast model. CRZO and GPOR are both trading at less than 4X CFPS, which is ridiculously low for companies with positive earnings and double digit annual production growth. CXO, EOG, FANG, PE and PXD are all trading at more than 12X CFPS.

I am currently focused on updating all of the profiles for the companies in our Small-Cap Growth Portfolio. We published updated profiles on GDP, ESTE and SM last week.