Sweet 16 Weekend Update: Sept 15

[dan_s]

All of the Sweet 16 were up for the week ending September 14, 2018. That has not happened many times this year.

Since the beginning of the year: Crude oil and NGL prices are WAY UP and the U.S. natural gas market is tight and we are approaching the winter heating season with storage 600 Bcf below the 5-year average. Yet the Sweet 16 is down 3.7% year-to-date. This is an extremely high quality collection of profitable upstream companies, but the Wall Street Gang remains fairly negative on the oil & gas sector. It has been an extremely rough few years for investors in this sector and we have been stuck in Phase 4 of the Rebound for quite awhile. "Permi-Fear" is way over-blown, but that is what the Wall Street Gang does.

All of my valuations are based on $65/bbl WTI for all future periods (adjusted for regional price differentials and hedges) and I believe that I am being extremely conservative on the gas and NGL prices used in the forecast models. When you have time, take one of the Permian Basin company's forecast model and take the oil price down $5 or $10 per barrel. It really only takes the valuation down a few dollars unless you believe the Permian Basin takeaway capacity issue will last forever.

The Sweet 16 is trading 62% below my valuation of the group and 37% below the current First Call price targets, which are still not fully updated for Q2 results.

Gulfport Energy (GPOR) trades at the largest discount to my valuation. Friday's closing price is just 2.3 X my operating cash flow per share estimate for 2018, which at this late date is fairly certain. GPOR trades at the lowest PE ratio within the Sweet 16. The only thing that justifies the low share piece is their crappy investor relations department, which IMO does not get out of OKC enough to tell their story.

Cimarex Energy (XEC) bounced off the low for the year, but it is still trading at a deep discount to First Call's price target of $120.46. My valuation is $150/share.
> Cimarex does have quite a bit of exposure to the Permian Basin takeaway capacity issue, but that short-term problem will pass.
> The company should be getting a lot more credit for what they have going in STACK.

I like the acquisition that Matador Resources (MTDR) announced this week. On the surface it looks expensive, but when you look at the terms (10 year leases with just 1/8th royalty) it looks good. The acreage is a good fit for Matador and it is in an area where EOG and Apache are reporting outstanding well results. The market's reaction to announcements like this is always negative, as if the company did no due diligence before the purchase. The market is almost always proven wrong upon detailed analysis. Matador has a solid team and an outstanding track record.

If "Initiative 97" fails to pass in Colorado, PDE Energy (PDCE) should spike about 20%. The citizens of Colorado would be stupid to pass Initiative 97, but who knows what those potheads will do. Just kidding, I don't mean to offend the wonderful people of the state or any of the Denver Broncos.

Even at today's natural gas price, Antero Resources (AR) and Range Resources (RRC) are "Screaming Buys" because they are going to be selling a lot more gas this winter and their all in cash expenses (LOE, gathering, transportation, processing, marketing & production taxes ) are under $2.00/mcfe. Plus, they both sell a lot of NGLs. Their revenues in the 2nd quarter (net of cash settlements on their hedges) were $3.77/mcfe for AR and $3.23/mcfe for RRC. AR's revenues per mcfe are higher because 100% of their natural gas is hedged at $3.50/MMBtu.
< The Wall Street Gang doesn't believe the "gassers" can make money at today's natural gas price. The can and they are.

OECD oil inventories are going to PLUNGE to levels we have not seen in decades by year-end, regardless of how things work out with Iran. Hang Tough, Phase 5 of this Rebound should be very interesting. The U.S., Saudi Arabia and Israel have had it with the nuts running Iran and they are going to put the hammer down on the current regime. Regime change in the Middle East can cause a lot of movement in the oil price.