Sweet 16 Update - April 21

[dan_s]

The Sweet 16 is FINALLY up YTD, thank to the recent surge in crude oil prices. However, up 0.62% is crazy low considering that WTI is up over $16/bbl in the last six months and NGL prices are also a lot higher. IMO the Sweet 16 is still trading as if WTI was under $50/bbl.

All of my valuation are based on WTI oil and HH gas averaging $60/bbl and $2.75/mcf for the year. In each company's forecast model, I do my best to adjust realized prices in all future periods for regional price differences, seasonal differences, and hedges in place.

At today's strip prices, I think there is enough cushion in each forecast model to take into consideration West Texas differentials being caused by takeaway capacity limitation. This is an issue that I will be listening carefully for on the individual company Q1 conference calls. Keep in mind that for most of the companies in the Sweet 16 this won't be a big deal because they have secured via contracts with midstream companies most if not all of the takeaway capacity that they need.

I think the issue of shale oil being too light (high API gravity) for the U.S. refiners is a "non-issue" this year, but could be an issue in 2019.

The Sweet 16 closed Friday, April 20 at 44.7% below my valuations and 24.9% below the First Call Price Targets. Keep in mind that FC price targets include a lot of old forecasts and most of the Wall Street firms are still using much lower oil prices than we have today.

Five of the Sweet 16 are still down quite a bit YTD.
> GPOR (-31.11%) and RRC (-19.75%) because of the overall "hatred" on Wall Street of the "Gassers". < They are both going to be profitable this year and they are trading at CFPS multiples way below the Sweet 16 average. GPOR actually trades at the lowest PE ratio of the group.
> XEC (-17.54%), DVN (-14.49%) and NFX (-11.48%) don't make much sense.
Cimarex Energy (XEC) has a rock solid balance sheet, has double digit production growth locked in (although slower growth than last year) and their entire 2018 capex program is covered by cash flow from operations.
Devon Energy (DVN) is a bit more understandable because they are selling a lot of assets to pay down debt, so production will be down YOY. I will probably drop it from the Sweet 16 in my May newsletter because the Sweet 16 is a "Growth" portfolio. That said, my valuation of $50.00/share is based on some rather conservative estimates of what this company should look like at year-end. First Call's price target is $46.15.
Newfield Exploration (NFX) never seems to get the respect that it deserves. Production s/b up 18% YOY in 2018 and it has an outstanding position in the STACK play. IMO this is another example of how Wall Street's love for the Permian Basin makes it overlook some very good companies.

I am working on the next edition of "The View From Houston" newsletter today. It will have more on the Sweet 16 companies. We should publish it on Monday.