Energy Prospectus

The Sweet 16 moved up 4.7% for the week ending February 16, but it is still down 9.8% YTD. Considering that WTI closed at $61.64 on Friday (compared to a close of $53.99 on 2/19/2017) it is rather hard to believe that the Sweet 16 is off to such a slow start and most of the companies are trading near the bottom of their 52-week range.

Four of the Sweet 16 (AR, XEC, FANG and PXD) have released Q4 results and CLR issued a detailed update. All of them reported solid Q4 results. Cimarex Energy (XEC) was the only mild disappointment for me because their production guidance for 2018 was a bit lower than I was using in my model. Cimarex has an extremely conservative management team, so my guess is that actual results will exceed their guidance.

Continental Resources' (CLR) update was outstanding, but I lowered my valuation to $75.00/share because the company does not have any of their oil production hedged. Therefore, I thought the valuation multiple I was using s/b lowered (now 10X CFPS) to account for the added commodity price risk. If you are bullish on oil prices moving higher, than you might see the fact that they are unhedged as a good thing. CLR closed at $53.33 on Friday, so there is lots of upside. BTW if WTI averages $60 for the year, CLR should generate more than $1Billion of free cash flow in 2018.

Antero Resources (AR) has more than 100% of forecast natural gas production for 2018 hedged at $3.50/MMBtu. They are also the largest producer of NGLs. The Company's realized NGL price increased by $4.77/bbl from Q3 to Q4. NGL prices continue to move higher as this winter has drained propane inventories way down and industrial demand for NGLs is way up. Antero's production mix is 72.5% natural gas, 25.9% NGLs and 1.6% crude oil. Their guidance is for 20% YOY production growth in 2018.

All of the companies that I follow are reporting much better NGL prices.

First Call's price target for Pioneer Natural Resources (PXD) now exceeds my valuation of $215/share. Their Q4 results were "stunning". The Company also announced that they will soon be selling all of their assets outside of the Permian Basin. My Wild Ass Guess is that these assets will sell for close to $3Billion and PXD will use its strong balance sheet to gobble up some smaller Permian Basin companies.

Eight more Sweet 16 will report Q4 results next week: CXO, CLR, DVN, GPOR, MTDR, NFX, PE and RRC.

I will be updating my forecast/valuation models as fast as I can, but with new information "coming out of a fire hose" it is hard to keep up.

PS: All of these companies are getting a HUGE boost from the GOP Tax Plan rate cuts.

In the last few months there has been a surge in U.S. shale oil production. EIA is basing their higher U.S. oil production forecast on this trend continuing. EIA weekly production estimates are based on formulas, not actual data. Their formulas are heavily weighted to the trend leading up to the period that they are estimating. There is some logic in that, but I think it may be misguided now because:

1. Publicly traded upstream companies always ramp up completions heading into year-end to (a) get as many wells into their year-end reserve reports and (b) to beat the bad weather that they know is coming in January.
2. It also makes sense that they focus on completing the best wells in their DUC inventory.
3. If I'm right, U.S. oil production growth will slow in February and March.

Read this: https://spearsresearch.com/insider?utm_ ... kedIn_2.16

Key Point: The Tier One drilling locations in every oilfield ever discovered are only a small percentage of the leasehold. Soon after the Tier One leasehold is drilled out, peak production follows. The Bakken and Eagle Ford have probably already seen peak production. The Permian and SCOOP/STACK are the only remaining significant growth areas.

"The number of rigs drilling for oil will need to increase by 15% each year just to hold production flat." < Eventually, this is impossible.

The updated Sweet 16 spreadsheet has been posted to the EPG website. On it you can compare my valuation for each company to the current First Call price target. BTW FC price targets have been going up since the first of the year because Wall Street firms are increasing their oil price decks.