Energy Prospectus

An updated Sweet 16 spreadsheet with my current valuations for each company will be on the EPG website Saturday morning.

I have updated all 16 of the forecast/valuation models and I have update 10 of 16 profiles. We will be sending out via email updated profiles on AR and NFX on Saturday morning.

Updated profiles on MTDR and CXO are sitting here for my final review. I need to spend a lot of time on CXO because I want to assume that the merger with RSPP will close late Q3. It will take me several hours to complete the consolidation. Stuff like this is why you guys pay me the BIG BUCKS for EPG membership.

As of May 18th close, the Sweet 16 is up 5.65%. This compares to the S&P 500 Index that is up just 1.47%. On April 6 the Sweet 16 was down 9.7% YTD, so it has made quite a comeback over the last six weeks. I have been telling you that the oil markets were getting very tight. Now the "Wall Street Gang" is starting to believe it. We still have a long way to go.

The Sweet 16 is 46% below my current valuations (based on $65/bbl WTI and $2.75/mcf HH gas).

This oil price cycle has been one of the worst EVER. So, there is lots of FEAR among investors. Trust me, there is support at $70/bbl for WTI and STRONG SUPPORT at $67/bbl. We are in Stage 4 of the Rebound Phase and all of the bia is to the upside now. June/July is the peak of demand for transportation fuels and OECD inventories of all major refined products (gasoline, diesel and jet fuel) are way below where they should be. Refiners have a lot of work to do so demand for crude oil is VERY HIGH.

Four of the Sweet 16 (XEC, GPOR, NFX and RRC) are down YTD. They are all down because Wall Street is down on the "gassers". XEC and NFX get most of their revenues from liquid sales. All four companies were profitable in 2017 and all four had good Q1 results.

DVN and RSPP will be dropped from the Sweet 16 in the next newsletter. I was going to write the newsletter this weekend, but I still need to take a hard look at each company that is in the running for promotion to the Sweet 16. CDEV is in first place for a promotion today. The next newsletter will be published on May 28.

WTI was down a bit on Friday because the June NYMEX contract closed today. July will become the "Front Month" on Monday.

Venezuela is the big supply problem. The dictator is a joke and needs to be hung. Believe me, life in Venezuela for the average citizen is terrible. Pray for them.

Your homework assignment is to go to our website and download the Sweet 16 spreadsheet to Excel.

1. Open Tab 1: "EPS Forecast"
2. Find the 3 companies that have a Market Cap (column E) that is lower than Net Book Value (column H)
3. Tell us why it is possible for a profitable public company to trade below Book Value.

On Tab 2 of the spreadsheet you can find my current valuation for each stock compared to First Call's price target for each stock.

Concho Resources (CXO) + RSP Permian (RSPP)

This morning I updated my forecast/valuation model for Concho to include the assumption that the merger with RSP will close on 9/30/2018.
> In addition to the combined production (~320,000 Boepd in Q4 / 65% crude oil ) I assumed increased G&A for merger related expense.
> I also threw in some expenses for severance packages
> I increased interest expense to include the RSP debt being assumed by Concho
> I added some "cushions" to reduce the cash flow from operations that I use to get to CFPS < The key number in all of my valuations.
Results in my valuation for CXO of $186/share

Then, I want to Reuters / First Call and found that five Wall Street firms have sent in new forecasts for CXO since the merger was announced.
Their valuations range from $175 to $217 and they average $189.60/share.

Although this merger is large ($9.5 Billion) it should be easy to close since both companies are pure plays on the Permian Basin. RSP's leasehold fits nicely with what CXO already had. When things settle down, there should be significant cost savings in the field and in the back office.

This is what Reuters / First Call now shows for Concho's operating cash flow per share:
2016A = $9.86
2017A = $11.51
2018E = $15.01 < My forecast is $15.63
2019E = $18.98 < My forecast is $19.36
2020E = $27.14
2021E = $36.82

An upstream company with this much running room (over 25,000 low-risk high-return development drilling locations), a super strong balance sheet and funding all of their growth with cash flow from operations - should trade at 10X to 12X operating cash flow per share.
Post-Closing, CXO will be about the same size as PXD. PXD closed at $209.64 on May 18, which is 10.2 X my 2018 cash flow per share estimate of $20.55.

Based on my forecast, CXO's Q4 post-closing CFPS s/b $4.30: $4.30 X 4 X 10.2 = $175.44 < Just another way to compare my valuation to "reality".

If WTI stays at $70/bbl, Concho is going to be generating a lot of FREE CASH FLOW post-closing. They will be positioned to do some very shareholder friendly stuff.

PLUS: Concho is now a PRIME TAKEOVER TARGET for a major like Exxon or Shell.

I just finished my review of our updated profile on Matador Resources (MTDR), which was prepared by one of our Top Shelf MBA Student Interns from SMU.

This company was promoted to the Sweet 16 on 1-1-2018 after spending a year in our Small-Cap Growth Portfolio. They continue to impress me.
> Despite the low oil price environment, Matador increased production 11.4% YOY in 2016 and 39.9% YOY in 2017.
> Q1 2017 production exceed their guidance and they are now on-track for AT LEAST 22% YOY production growth in 2018.

Matador announced the sale of 7,000,000 shares of common stock last week and (of course) the share price dipped. Why strengthening the balance sheet causes a stock to drop always amazes me. Don't focus on the dilution; focus on what they are doing with the money.

1. Matador is moving to become a pure play on the Permian Basin where it has six operated rigs drilling in the Delaware Basin
2. The stock is trading at just 7.4 X my operating cash flow per share estimate for 2018. Most of the other Permian companies are trading at 9X to 11X operating CFPS.
3. It has a strong balance sheet that just got stronger.
4. Their bankers recently increased the borrowing base on the credit facility to $725 million, based on a strong 2017 year-end reserve report.
4. Matador elected to keep the lenders' borrowing commitment at $400 million to save on fees and because they don't anticipate needing more money.
5. If WTI stays over $65/bbl, Matador's growth at 20% per year should all be self-funded from operating cash flow. The recent stock offer covers all cash needs for the next twelve months.

I have raised my valuation to $47/share because (a) production should soon be over 50,000 Boepd and (b) this company is starting to look like a PRIME TAKEOVER TARGET.