Energy Prospectus

The Sweet 16 gained 7.32% during the week ending April 13, 2018, but it is still down 2.38% YTD. The S&P 500 Index is down 0.65% YTD.

The situation in Syria contributed to the spike in oil prices last week as WTI pushed through a major resistance level at $66.66 and closed on Friday at $67.33/bbl. IEA also confirmed on Friday that the oil "glut" is over and OECD inventories of crude oil and refined products are already below the 5-year averages on a days of supply basis. As I sit here writing this on Sunday afternoon, all of the technicals point to oil prices moving higher on Monday. Supply & Demand are tight and we are moving into the months when demand always spikes.

According to a report by Bloomberg, Saudi Arabia wants to push the price of crude up from its current level of $65-$70 to near $80 a barrel. The Middle Eastern nation needs that price to boost the valuation of its national oil company, Saudi Aramco, which it plans to take public next year. Hitting its desired sell price would provide the Kingdom with the funds needed to jump-start an investment strategy that would wean its economy off petrol dollars over the next decade.
https://www.fool.com/investing/2018/04/ ... stock.aspx

The Sweet 16 is trading at a 47% discount to my valuations and 28% below the current First Call price targets.
There is a lag in the First Call price targets. They are based on Wall Street analysts forecast/valuation models that are submitted to Reuters. Several major Wall Street firms including Credit Suisse and JPMorgan have increased their oil price forecasts. The Wall Street Herd moves as one, so you can expect price targets for these companies to go a lot higher when they release strong Q1 results.

What is surprising to me is that some of the largest and most profitable members of the Sweet 16 are responsible for it being in negative territory:
> Cimarex Energy (XEC) is down 22.97% YTD. My valuation is $160.00/share and First Call's price target is $137.06. This company has a super strong balance sheet, mid-teens annual production growth in the Permian Basin & STACK play. It has lots of running room.
> Devon Energy (DVN) is down 22.97% YTD. I probably will drop DVN from the portfolio because it is selling off a lot of assets to reduce debt and production will be down this year. That said, the stock is grossly under-valued. My valuation (based on $60 WTI) is $50/share.
> Gulfport Energy (GPOR) is down 23.82% because it is a "gasser", but it is one of the most profitable companies in the Sweet 16. $2.38 EPS in 2017 with $3.45 operating cash flow per share last year. Operating CFPS should be over $4.00 this year.
> Newfield Exploration (NFX) is down 17.89% YTD. NFX reported 2017 EPS of $2.12 and operating cash flow per share of $5.28. Production should be up ~18% this, primarily from their outstanding position in STACK. IMO it is a PRIME TAKEOVER TARGET.

The Sweet 16 spreadsheet that shows my current valuation and the current First Call price target for each company will be available on the EPG website on Monday morning.

I will also be dropping RSP Permian (RSPP) from the Sweet 16 because it is merging with Concho Resources (CXO) to make a SUPER PERMIAN BASIN company. RSPP will stop trading in Q3 when the deal closes.

Continental Resources (CLR) leads the pack because (a) it is unhedged and (b) it will generate double digit production and proven reserve growth for many years while in generates over $1 Billion per year of FREE CASH FLOW if WTI stays over $60/bbl. My $78.00/share valuation will go a lot higher if WTI pushes over $70/bbl, which might happen a lot sooner than I thought it would.

I will be opening our Dallas luncheon on Tuesday, April 17 with an Oil & Gas Market Update.

The Motley Fool:

Devon Energy has had a rough year so far, tumbling nearly 20% since January after reporting disappointing fourth-quarter results due to production problems outside of its control. That slump came even though the U.S. oil and gas giant quickly addressed those issues and then surprised investors by announcing plans to send them more cash this year by increasing the dividend 33% and authorizing a $1 billion share-buyback program.

Those repurchases could be just the catalyst needed to get Devon Energy's stock moving in the right direction -- similar programs from rivals have fueled big-time gains for their investors in the past year. Furthermore, that buyback is likely just the first step toward unlocking shareholder value. Devon is also planning to sell as much as $5 billion in assets to focus only on its best ones, which would also give it more cash to buy back its beaten-down shares. In addition, the company expects to generate $2.5 billion in free cash flow through 2020, and that's assuming oil averages $60 a barrel. Given its focus on drilling higher-margin wells, Devon should produce an even larger windfall of excess cash if the Saudis can push crude toward $80. These factors could give it a massive cash war chest to buy back stock in the coming years, which would move the needle for the $17.5 billion oil company.

Concho Resources' announcement March 28 that it had agreed to buy RSP Permian for $9.5 billion has led pundits to speculate on who will be next to pair in the hot Permian Basin of West Texas and New Mexico. Back in January, analysts had pegged RSP Permian as a top takeout candidate for 2018. But there were two other names that were high on their list.

One was Callon Petroleum, which analysts at Tudor, Pickering, Holt said had solid assets and the potential for net asset value upside. They did warn that the stock market probably needed multiple quarters of solid execution for the equity to get back on track.

Lots of my favorite small-caps are mentioned in this detailed article on takeover targets.
https://www.forbes.com/sites/clairepool ... 345f7d5061