Sweet 16 Update - June 23

[dan_s]

The Sweet 16 gained 6.51% during the week ending June 23, 2018, but it is still down 2.11% YTD. The S&P 500 Index lost 0.93% on the week, but it up 3.04% YTD.

The Sweet 16 is trading at a 59.3% discount to my valuations and a 31.7% discount to First Call's price targets. < First Call's price targets (especially for the smaller companies) are STILL based on analysts' forecasts submitted to Reuters that are very old. For most of the Small-Caps, over 50% of the forecasts used in the price targets have not been updated for Q1 results and they use much lower oil & gas prices than we have today. Some are still assuming $40 oil for all future periods. Some average in forecasts that are dated in 2017, so they don't include Q4 results or the year-end reserve reports.

My valuations are all current based on $65/bbl WTI for all future periods and $2.75/mcf HH gas for 2018 and $2.50/mcf for HH gas in 2019. I do adjust each company's forecast/valuation models for regional oil & gas price differentials and for their hedges. < a lot of SWAG goes into this part.

I have a HIGH level of confidence in my forecast models for the Sweet 16 because I have been tracking them for several years. PDCE is the only Sweet 16 company that reported a Q1 2018 loss (thanks to a large mark-to-market adjustment on their hedges and a large non-cash impairment charge). All 16 companies should report VERY STRONG Q2 RESULTS with more production and higher realized commodity prices.

As of the closing price on June 22, the Sweet 16 is trading at 6X my 2018 operating cash flow forecast. That is a very low multiple of CFPS for companies of this quality and lots of running room.

Continental Resources (CLR) and EOG Resources (EOG) have the most exposure to oil prices. NONE of their oil is hedged (looks like a wise move today).

Antero Resources (AR), Gulfport Energy (GPOR) and Range Resources (RRC) have the most exposure to natural gas and NGL prices. The Wall Street Gang doesn't pay much attention to the "gassers" this time of year, but they will after Labor Day < especially if natural gas in storage is 400 Bcf below the 5-year average at the end of this summer.

The Sweet 16 has a lot of exposure to the Permian Basin and the pipeline takeaway capacity issue out there. IMO the FEAR related to that issue is over-blown by most of the Wall Street Gang. All of the Sweet 16 have good marketing people that have addressed it. Most of them have a significant amount of the production covered by contracts with pipeline companies and they have hedges in place to mitigate their exposure. BTW this issue will add to the Global Oil Market tightness by year-end, which will increase Brent and WTI prices.

In addition to the three gassers, the companies with the least amount of exposure to the Permian Basin are: XEC, CLR, EOG, NFX and PDCE.
MTDR has a lot of exposure to the Permian, but they can shift some rigs to the Eagle Ford.

In the Eagle Ford, I like LONE, CRZO and SN. < In that order. Eagle Ford oil is selling at a $5+ per barrel premium to WTI prices.