Sweet 16 Update - Feb 24

[dan_s]

The Sweet 16 had a good day on Friday as the price of oil and the overall stock market finish strong in the afternoon. WTI crude oil finished at $63.58 on 2/23 thanks to a bullish storage report on Thursday and an unplanned supply outage in Libya. EIA reported a decline in U.S. crude oil inventories when the "experts" were predicting a build. Keep in mind that this is the time of year when U.S. and OECD crude oil inventories must build to insure refineries have enough feedstock to meet the spike in demand for gasoline and diesel that is now just a few weeks ahead.

The Sweet 16 finished the week 1.62% higher, but it is still down 8.2% YTD.

11 of the 16 companies have reported Q4 results. All eleven were profitable in Q4 and profitable for the year, despite having MUCH LOWER liquids prices than we have today. Not a single company in the Sweet 16 had realized oil prices over $50/bbl in 2017, yet they all were profitable and in they are in MUCH BETTER shape than they were a year ago. If WTI stays over $60/bbl these companies are all going to have great years and they are "Strong Buys" at today's share prices.

As a group, the Sweet 16 is trading at 37.8% below the First Call price target and it is good bet that FC price targets will be going up.

Proven reserves have increased (most of them by quite a bit) and balance sheets are in good shape.

All three of the "gassers" (AR, GPOR and RRC) are trading below book value, which is insane. If you know anything about GAAP/SEC accounting rules for upstream companies, you should know that a profitable upstream oil & gas company that is a going concern should never trade below book value. That's because they are required to "impair" their fixed assets that do not meet stringent valuation tests at year-end.

Devon Energy's (DVN) results were somewhat disappointing but still OK. Cimarex Energy (XEC) had good Q4 results, but they announced a much more conservative drilling program than I was expecting. Cimarex if probably the most conservative company in the Sweet 16.

Gulfport Energy (GPOR) and Diamondback Energy (FANG) had the most encouraging results and guidance.

Gulfport has the lowest PE ratio in the Sweet 16 and it will continue to report positive earnings quarter-after-quarter no matter what gas prices do because they have 80% of the 2018 gas hedged at $3.05/mcf. I have never seen Wall Street so negative on natural gas. It is quite a "head scratcher" considering natural gas storage is so far the 5-year average. Gas traders keep hearing from EIA that we have massive natural gas reserves (which we do), yet we are going to end the winter heating season with a bid deficit in ngas storage.

The Sweet 16 shows my valuations for each company compared to First Call's price target for each company. It takes First Call a few weeks to digest all of the new analysts' reports, so the thing I watch most at this point in the quarter is the movement of the FC price targets to see if they are moving closer or away from my valuations.