Energy Prospectus

The Sweet 16 portfolio dropped another 4.91% during the week ending November 16. This happened even with oil prices stabilizing and natural gas prices soaring. The real "head scratcher" is that all three of our gassers (AR, GPOR and RRC) moved lower. Only two stocks moved higher last week, CXO and FANG.

All of the Sweet 16 forecast/valuation models have been updated and posted to the EPG website. We still have five profiles to update. Profiles for CXO and EOG are sitting here waiting for my review. I will get both done and sent out on Monday.

As of November 16th the S&P 500 is trading at a Price/Earnings ratio of 22.34. That is a bit high compared to the historic average, but nowhere near "Irrational Exuberance" level. In other words, stock are still reasonably priced. The Sweet 16 is trading at PE ratio of 19.22 based on the my 2018 EPS estimates and a PE ratio of just 10.81 based on my 2019 EPS estimates. The Sweet 16 company with the lowest PE ratio is Gulfport Energy (GPOR), which is trading at a PE of 3.86 X my 2018 EPS estimate.

The Weather Channel is finally realizing that this year's mild El Nino is actually going to lead to a Colder Than Normal winter in the eastern half of the U.S. See how they have flipped from their warm winter forecast at the link below.
https://weather.com/forecast/national/n ... =hp-slot-3

There are only two reasons that I can come up with for why our gassers have moved lower:
1. AR, GPOR and RRC all have a high percentage of their Q4 and Q1 gas hedged at prices much lower than $4.00. However, they do have some unhedged gas, so they will benefit from higher actual prices in Q4 and Q1. Plus, higher actual prices will cause a big jump in the PV10 of their year-end reserve report.
2 NYMEX gas futures for Dec to Mar have moved higher with the four contracts closing at $4.39, $4.41, $4.28 and $3.99 on Friday. However, the futures after March have barely moved with April closing at $2.79. The overall average strip price for 2019 has moved quite a bit higher and a few Wall Street firms have increased their gas price forecasts.

I am more bullish on the price of natural gas than the Wall Street consensus because I still see no evidence of U.S. gas supply growth outgaining demand. For over two years, the EIA has been pounding the table that we have a massive supply of natural gas, but they barely mention the fact that demand has exceeded supply this year. Strong demand for U.S. gas is why we are entering the high demand winter heating season with "dangerously low" amount of gas in storage.

At the link above, the Weather Channel is now saying that February will be the coldest month of the winter. If so, we could see regional gas shortages in major eastern cities. My prediction is that a cold winter will push the Q2 NYMEX futures over $3.00/MMBtu. All it will take is one big Polar Vortex.

BTW a cold winter in the Eastern U.S. and in Europe will increase demand for heating oil as well.

You each need to decide where you think oil prices are heading, but IMO the OPEC+ group will quickly reduce exports and end all the talk of an over-supplied global oil market. U.S. crude oil and OECD oil inventories are a bit higher than average, but nowhere near "glut" level. Per EIA: "At 442.1 million barrels, U.S. crude oil inventories are about 5% above the five year average for this time of year." I have also seen comments that the tanks at Cushing, Oklahoma are filling up fast. That is HOGWASH. Today, Cushing is only about 60% full. Just Google it.

For most of the Sweet 16, higher natural gas and NGL prices are going to soften the impact of lower oil prices.

EOG is printing money!

EOG Targets Lower Costs As It Improves Inventory
by Velda Addison Senior Editor, Digital News Group Hart Energy
Friday, November 16, 2018

In U.S. shale plays, where increasing efficiency is among the unofficial mantras, EOG Resources Inc. (NYSE: EOG) is on a mission to drive down costs as the company improves the quality of its growing inventory.

The Houston-based independent, which generated more than $500 million of free cash flow during third-quarter 2018 as part of more than $1 billion this year, has already slashed well costs. In the Bakken, well costs are down by more than half, going from $9.8 million in 2012 to $4.6 million today. The company’s Eagle Ford well costs also fell, dropping from $7.2 million to $4.4 million during the same time frame.

“If you think about those times, we were going through times of high oil prices and times of low oil prices and we were still able drive down well costs regardless of commodity price,” Billy Helms, the company’s COO, said Nov. 14 during the Bank of America Merrill Lynch’s 2018 Global Energy Conference. “We’re well on our way to achieving our 5% cost reduction that we started out this year.”

This includes a goal to bring down well costs to $7.4 million in the Delaware Basin’s Wolfcamp. Costs are currently at $7.5 million, but EOG is confident costs will fall further as it pulls levers such as drilling and completion efficiencies, tools, sand and water.

Oil and gas companies have been focused on lowering costs since the market downturn tanked oil prices a few years ago. In response, many have gained fiscal discipline and have been more willing to try new technology and techniques among other efforts.

Smarter ways of operating could hang around as companies exercise lessons learned. Many E&Ps are already starting to see higher cash flows from operations. EOG along with peers such as Pioneer Natural Resources Co. (NYSE: PXD) and Continental Resources Inc. (NYSE: CLR) are among them.