Sweet 16 Update - July 4

[dan_s]

We have some friends coming over for dinner this evening, but I was just sitting here catching up on reading on a gloomy rainy day in Sugar Land, Texas.

I thought it was a good time to take a hard look at the two Sweet 16 companies that are trading at less than half of my valuation.

Gulfport Energy (GPOR) closed at $12.70 on July 3rd and my valuation is $28.00 per share:

> It is one of the most profitable companies in the Sweet 16
2017 Actual: $2.38 EPS and $3.45 Operating Cash Flow Per Share
2018 Estimate: $1.83 EPS and $4.96 Operating Cash Flow Per Share

> Gulfport is one of the three "gassers" in the Sweet 16. Their production mix in Q1 2018 was 88.0% natural gas, 8.1% NGLs and 3.9% crude oil.

> Gulfport's realized natural gas price in Q1 2018, including cash settlements on their hedges was $2.60/Mcf and the company reported EPS of $0.52 for the quarter.

> Their realized natural gas prices for the rest of 2018 and 2019 will probably exceed what I am using in my forecast/valuation model (based on today's NYMEX strip)

> Gulfport is on-track to 21% YOY production growth in 2018 and it will be fully funded by cash flow from operations.

> This is not a small company. Gulfport should exit 2018 with production over 230,000 Boe per day. At 12-31-2017 it had Proved Reserves of 5.4 TCFE and that number should go up by at least another 0.5 TCFE this year.

So... What should draw more of the market's "love" to GPOR?

1. Higher natural gas prices: The NYMEX front month futures contract for natural gas (August) closed at $2.84/MMBtu on July 3. GPOR will be fine if it stays there forever, but I am expecting natural gas prices to push much higher because the gas market is much tighter than the Wall Street Gang thinks it is. U.S. natural gas storage is over 500 Bcf below the 5-year average today and there is very little chance for storage to get back to the 5-year average before the next heating season begins.

2. Well results in the Merge Area in Central Oklahoma: "Merge" is the area between the STACK play to the North and SCOOP play to the South in Central Oklahoma. Gulfport has 92,500 net acres in Merge, with most of it in the "Wet Gas" part of the play in Grady County. In the "Wet Gas" part of the play, the wells produce approximately 65% natural gas, 20% NGLs and 15% crude oil. Gulfport expects to turn 22 to 25 net horizontal well to sales in 2018. They are completing wells in the Woodford and Springer formation. The six horizontal wells that GPOR has turned to sales this year in Merge with more than 60 days on-line have 60-day production rates of 11.3 to 18.4 MMcfe per day. These are outstanding wells. Other companies, including Continental Resources (CLR), have completed good wells in the Sycamore zone.

Our May 14, 2018 profile on GPOR can be found on the EPG website under the Sweet 16 tab.

[dan_s]

Earthstone Energy (ESTE):

ESTE closed on July 3 at $9.05. My valuation is $18.25 per share.

Earthstone has agreed to host our next Houston luncheon on Monday, July 16. Frank Lodzinski, CEO will be the speaker. This is definitely a luncheon you should attend. ALL WOMEN GET IN FREE, so invite your lady friends to lunch. Plus, a senior analyst from Raymond James is going to be our opening speaker with an update on their view of the global oil market.

Earthstone is the smallest and newest member of the Sweet 16 Growth Portfolio. For all small-caps the team is VERY IMPORTANT.

> Frank's team has a strong track record of building companies (i.e. GeoResources) and selling them at the top of the oil price cycle. I have known Frank and most of his team for over a decade. They are rock solid. I expect ESTE to be sold at a big premium to the current share price in 3 to 5 years.

> Earthstone is a pure play on the Permian Basin. It is also a company "in transition", after completing two significant acquisitions / mergers.

> The company has strong production growth locked in.
Annual production:
2016A = 4.002 Boe per day
2017A = 7,852 Boe per day
2018 Q1 A = 9,664 Boepd
2018 Q2 E = 10,700 Boepd
2018 Q3 E = 12,500 Boepd
2018 Q4 E = 15,000 Boepd
Note that 2018 estimates are all based on the mid-point of the company's recent production guidance.
2019 E = 18,100 Boepd < This is my SWAG, but I think it may be too low.

> Earthstone is "off the radar screen" of the Wall Street Gang:
1. The company has been extremely busy completing the merger with Bold Energy, so they have not been out telling their story enough. They plan to make more presentations at conferences after Q2 results come out. We are getting a preview at our luncheon.
2. The most recent analyst report included in First Call's price target ($15.18) is dated 4/5/2018, so it does not even include Q1 actual results.
3. The Wall Street Gang is lazy. It takes a lot more work to figure out small-caps that are "in transition". < This is why I recently added it to the Sweet 16. I think when Wall Street does figure it out, this one has a lot of upside for us.

> There is lots of FEAR that has recently put pressure on the Permian Basin companies. There is FEAR that lack of pipeline capacity will "strand" lots of oil and gas in the basin.
a. This is a short-term issue
b. Very little if any of the oil will be shut-in, but if so, it is not lost and will probably sell at a higher price in the future anyway.
c. My valuation is based on a realized oil price of $60/bbl for the remainder of 2018 and 2019. Plus, I have some "cushion" in my operating cash flow calculation that s/b enough to offset the large Midland Basin oil price differentials.

> Earthstone has more than enough cash flow from operations + liquidity to fund an aggressive drilling / completions budget.

Conclusion: ESTE has very little downside and a lot more upside than where it closed on July 3. It is a PRIME TAKEOVER TARGET because (a) it is being built for sale and (b) it holds a lot of leasehold in one of the most productive oil basins on Earth.