Energy Prospectus

The Sweet 16 flopped around with oil prices this week and finished up 0.08% for the week. It is now up 2.16% YTD.

ESTE lead the pack this week and is now up 23.51% since I added it to the Sweet 16 on 5/26/2018. GPOR and RRC went negative YTD because of gas price weakness, although supply/demand fundamentals for gas and NGLs are quite good.

Leading the pack YTD are:
PDCE up 20.16% YTD < most production comes from the DJ Basin
CLR up 17.84% YTD < none of their oil is hedged with no exposure to the Permian Basin
EOG up 16.73% YTD < none of their oil is hedged. Increasing oil prices in the Eagle Ford and other areas offsets lower oil prices in the Permian Basin.
AR up 14.53% YTD < 100% of their natural gas is hedged at $3.50/MMBtu for 2018 and 2019

I really don't expect much share price movement until they release Q2 results, which are going to be quite good. I am expecting most of the Sweet 16 to beat First Call's EPS estimates.

All of the Permian Basin companies (CPE, CDEV, XEC, CXO, ESTE, EOG, FANG, MTDR, PE, PDCE, PXD) will go into great detail on their conference calls on how the pipeline takeaway capacity issue will impact their future revenues. All of them will be impacted, but probably not as much as the Wall Street Gang is worried about. Some of them may move a rig or two out of Permian to another area and some of them may push well completions into late 2019.

Look for some operational updates next week.

EIA's weekly reports show U.S. oil production flat at 10.9 million barrels per day for five straight weeks. ~80% of the world's oil production growth through 2020 is expected to come from the United States. With demand for oil going up 1.5 million barrels per day per year, OPEC darn near out of spare capacity, Russia with minimal upside and the "Rest of the World" probably on decline, what happens if EIA's lofty production estimates for the U.S. don't materialize??????

Dan,

AR has all its production hedged for the next year or two (operating off the top of my head). RRC and GPOR do not have as much hedged (again, top of head).

If, as you believe, nat gas prices should strengthen, why is AR doing so much better than RRC and GPOR?

If nat gas prices should actually strengthen, should RRC and GPOR gain on AR?
To what extent are these companies similar or different?

Danke Schoen.

All of our gassers are trading at very low multiples of operating cash flow per share (CFPS). The Sweet 16 as a group closed on Friday, July 13 at 6.35 X my 2018 CFPS estimates.
AR is trading at 3.77 X CFPS (locked in by those great hedges)
GPOR is trading at 2.44 X CFPS (lowest in the Sweet 16)
RRC is trading at 4.14 X CFPS

Antero Resources (AR) may be doing so well this year because ...
1. Antero is the largest producer of natural gas liquids (over 100,000 barrels per day) and the NGL market is much stronger today than it was a year ago.
2. Some hedge fund managers want some exposure to natural gas, but they are afraid of gas prices. So...AR's hedging program takes away a high percentage of the commodity price risk.
3. It has 20% annual production growth locked in and they are funding the growth entirely from operating cash flows.
4. It is on track to generate more than $400 million of free cash flow from operations. Some large funds will only buy upstream companies that generate free cash flow.
5. Despite its size (revenues over $3.6 Billion and market cap over $6 Billion) it was a bit "off the radar screen" of the Wall Street Gang coming into 2018. Anyone looking at it for the first time is surely going to be impressed by its growth ($1.7 Billion revenues in 2016, $3.6 Billion in 2017 and on-track for $4.5 Billion in 2018)
6. Their large ownership stake in Antero Midstream (AM) is extremely valuable and a "liquid asset" that could be monetized quickly if they needed to do so, which they don't.

Gulfport Energy (GPOR): Here is what I like about it:
1. GPOR trades today at an insanely low CFPS multiple. BTW this makes it a Screaming Takeover Target (IMHO)
2. It is the most profitable company in the Sweet 16 with a single digit PE ratio
3. It has the best leasehold position in the Utica Shale Play in Ohio, where netbacks have significantly improved this year.
4. I think the Wall Street Gang is grossly under-estimating the upside they have in SCOOP. Their SCOOP wells produce more liquids, which is improving their production mix.
5. ~80% of their 2018 natural gas is hedged at $3.05/MMBtu. You can find details of the hedges at the bottom of my forecast model. Under the Sweet 16 tab on our website.
6. Last but not least: Gulfport stock buyback program will improve the per share numbers and it should put a floor under the stock price.

Range Resources (RRC): Here is what I like about it:
1. RRC has been in the Sweet 16 since 2003. It is my all-time best pick, going from $3.00 to $78.00 per share in just a few years.
2. RRC has a fantastic management team.
3. They are credited with discovering the Marcellus Shale. Actually, they discovered how to harvest Marcellus gas at a profit by using horizontal wells.
4. They hold over a million acres of leasehold in the Marcellus / Utica Shale plays and most of it is held by production ("HBP")
5. Annual production growth of 10% to 15% is locked in and should be funded entirely by cash flow from operations.
6. Since most of their leasehold is now HBP, their capital programs can be flexible.

You can find updated profiles and forecast models for all three of our gassers on the EPG website under the Sweet 16 tab.
Before investing
1. Read our profile
2. Go to their website and go through their most recent presentation slides
3. Study my forecast / valuation model for the company. Details on their hedges are at the bottom of the forecast models.

The front month NYMEX contract for West Texas Intermediate (WTI) closed at $71.01/bbl on July 13. A year ago, WTI closed at just over $44/bbl.

If the oil price is up more than 60% over the last twelve months, why aren't the Sweet 16 (all rock solid profitable companies) stocks trading a lot higher?

The answer is simple, FEAR and GREED drive the markets.
Read this: https://energyandresourcesdigest.com/ba ... ?src=email

If I take the price of oil for all future periods down to $50/bbl, the valuations of all of the Sweet 16 would still be higher than where they closed on Friday.

Looking at how tight the global oil market is today, with just 1% of untapped supply capacity (if that), the risk is that the price of oil will spike and put the brakes on the global economy. In my opinion, the "Right Price" for oil is around $75/bbl. The upstream companies will be taking money to the bank in wheel barrels if oil holds at that price.

History tells us that oil price cycles tend to over-shoot the "Right Price", especially when global inventories are falling like a rock.