Energy Prospectus

For the week ending June 2, 2018 the Sweet 16 was down 0.27%, but it seemed a lot worse because the Permian Basin companies took a beating on Friday.

Our three "gassers" (AR, GPOR and RRC) were all up for the week as it is FINALLY sinking in that natural gas in storage is going to have a very tough time getting back to the 5-year average before the next winter heating season begins. The front month (July) NYMEX contract for natural gas closed at $2.98/MMBtu on June 1st and the November - March NYMEX contracts are now all over $3.00/MMBtu and my guess is that they will move higher. A HOT summer in Texas (99% chance of happening) should push the winter contracts over $3.50/MMBtu.

All year EIA has been telling the market that a massive amount of gas supply is coming on line, but it never shows up in the weekly storage reports. There is no doubt we have HUGE natural gas reserves in America, but reserves in the ground aren't the same as production capacity. TODAY demand for U.S. natural gas is keeping up with increasing supply.

Continental Resources (CLR) was up for the week and it is now up 28.7% YTD. I was somewhat surprises to see it up last week because none of CLR's oil is hedged. It is totally exposed to the ups and downs in the oil price. However, it has nothing in the Permian Basin, so it is not exposed to the new FEAR of lack of takeaway capacity sweeping across Wall Street.

EOG, NFX and PXD were also up last week. PXD is a pure play on the Permian Basin, so that one is a bit of a surprise.

Callon Petroleum (CPE) announced a big strategic acquisition from Cimarex Energy (XEC) in the Permian Basin. It is a big deal for CPE, adding over 6,000 Boepd of production and lots of high quality drilling locations. Cimarex is a much larger company with over 206,000 Boepd of production in the first quarter. I have posted an updated forecast/valuation model for CPE to the EPG website. Cimarex has a "gassier" production mix and lots of upside in STACK, so it is puzzling why it is down 27.8% YTD. First Call's price target for XEC is $128.77, so I'm not the only analyst that likes it.

An updated Sweet 16 spreadsheet that shows my current valuation and First Call's price target for each company will be posted to the EPG website late today (Saturday).

DENVER, May 24, 2018 /PRNewswire/ -- Cimarex Energy Co. (NYSE: XEC) announced today that it has signed a purchase and sale agreement to sell oil and gas properties principally located in Ward County, Texas, for $570 million in cash to Callon Petroleum. Production from these properties is approximately 6,831 barrels of oil equivalent per day (73 percent oil) and is mostly from the Bone Spring formation. The undeveloped acreage includes 18,925 net Wolfcamp acres of which 11,500 net acres have rights to the base of the Wolfcamp.

"The sale of the Ward County assets is part of our continuous portfolio optimization and high-grading of our investment opportunities," said Tom Jorden, Cimarex Chairman, President and CEO. "Cimarex was among the first horizontal operators in the Bone Spring formation in Ward County and it's been a great area for us over the years. However, the remaining Wolfcamp opportunities have not competed for capital versus other Cimarex projects."

The transaction is expected to close in the third quarter of 2018, subject to customary closing conditions and adjustments.
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Cimarex already has a strong balance sheet that will be "pristine" when this deal closes. They should have close to $1 Billion of cash on the balance sheet when this deal closes. My guess is that they will accelerate their STACK drilling program in Q4.

In the last 3 months, 12 ranked analysts set 12-month price targets for XEC. The average price target among the analysts is $126.50. The 12 Wall Street analysts, all looking at the same data have valuations for XEC that range from $98/share to $180/share. My valuation has been adjusted to $157.00/share.

The most recent analysts' forecast/valuations submitted to Reuters / First Call are dated May 25, 2018 so they include the sale above. Those two reports value XEC at $136 and $180 per share.

My updated forecast/valuation model will be posted to the EPG website late on June 2.

I'm curious about how to determine realized oil price.
The latest XEC net income forecast has the actual XEC crude oil price for Q1 '18 at $57.82.
The XEC website reports: "Realized oil prices averaged $59.93 per barrel"
Just wondered what goes into that calculation?

The price XEC mentions $59.93/bbl is what they sold the physical oil for. The $57.82/bbl for oil in my forecast/valuation model for Q1 is net of the cash settlements on their oil hedges during Q1.

All companies sell their production in the physical market. Hedges are financial instruments that are settled with the counter-party outside of the physical market. Hedges are "derivatives" that are totally separate from the physical oil. They are like Puts and Call options on stocks. You can buy or sell hedges on oil, just like you can buy or sell Puts and Calls without owning the stock that they derive their value from. NYMEX futures contracts, which anyone can buy and sell, are derivatives. Do not buy or sell them unless you REALLY KNOW WHAT YOU ARE DOING.

To understand what I am doing in the models, go back to the Cimarex forecast spreadsheet.
Take Total Revenues on row 13 and subtract the Revenues from gas gather, processing and other: ($567,134 - $11,693) X 1,000 = $555,441,000 < this is what XEC sold production for in the physical market
$555,441,000 - $12,389,000 (cash settlements on derivatives on row 24) = $543,052,000 < which is equal to what is on row 62

What I am attempting to do in each forecast period is estimate what each company will get in cash for their oil, gas and NGL sales net of cash settlements on hedges and net of regional price differentials. It takes a bit of "SWAG" on my part. SWAG is a "Scientific Wild Ass Guess".

Good work. The forecast/valuation models housed on the EPG website are valuable, but very few of our members take the time to understand them.