Sweet 16 Update - Dec 31, 2018
Posted: Mon Dec 31, 2018 6:01 pm
The Sweet 16 finished the year down 40.5% YTD; the worst year EVER (since my first Sweet 16 in 2001).
> Only the 3rd time the Sweet 16 has finished down for a year
> This is the first time that all 16 stocks finished the year down
Earnings per share for the group were actually higher YOY in 2018. My guess is that when the actual numbers come in for Q4, EPS will be up ~20% YOY. All 16 companies are arguably in much better shape today than they were a year ago. Higher production more than offsets slightly lower commodity prices YOY on this date. Natural gas and NGL prices are much better.
8 of the 16 companies closed on 12/31/2018 trading at less than book value per share. Any of you that know the GAAP accounting rules for upstream companies, know that means that the companies are trading below break-up value. The only rational explanation is that investors believe oil, gas and NGL prices are going a lot lower and staying low forever. "Fundamentals don't matter for investors until they do again."
Based on my forecast/valuation models, the Sweet 16 finished the year 120% below "Fair Value".
The group finished 98% below First Call's price targets. I've never seen anything even close to this.
As I pointed out in the December 29th podcast, the Energy Sector had the best YOY earnings growth of any sector.
What happened?
> I think investors just got tired of trying to figure out the wild price moves for oil.
> Each time oil moved higher, it pulled back sharply. Most of the price moves up or down had no logical explanation.
> Trump's sanctions against Iran (or lack there of) was the last straw. When waivers were given to 8 countries, hedge funds dump all of their oil stocks and threw out the "gassers" at the same time, despite rising gas prices. Until early October, the "Rebound Phase" of this cycle was behaving like it should (see slide 2 of the podcast). WTI did get about $10/bbl ahead of the "Right Price" on the "Trump Team's" repeated promises of taking Iran's production to zero.
MY TAKES:
> Oil is oversold, trading well below the "Right Price", which IMO is somewhere around $65/bbl for WTI.
> The Wall Street Gang is in agreement that oil prices are too low (see slide 3 of the podcast)
> The U.S. oil & gas industry will survive. Actually, it MUST survive in order for this world's thirst for energy to be satisfied.
> The global oil market is much tighter than people realize.
> Q4 & Q1 are the seasonal low points for oil demand. Unless we have a MAJOR GLOBAL RECESSION, oil demand will increase by 1.5 to 2.0 million barrels per day from Q1 to Q3. See chart here for proof: https://www.iea.org/oilmarketreport/omrpublic/
> OPEC+ needs higher oil prices to survive. They will make the necessary production cuts to tighten up the global market, which is not really oversupplied anyway.
> OPEC+ cuts should show up in February inventory reports
> Winter is not over and we will see some wild price moves for natural gas in Q1. See the Dec 31st update here: https://www.weatherbell.com/premium/
I will send out the Sweet 16 for 2019 on Wednesday morning.
> ESTE and NFX are out
> CRZO and SWN are being added. Both are former Sweet 16 companies that I have been tracking for 10+ years.
Be safe tonight and Happy New Year to all of you.
> Only the 3rd time the Sweet 16 has finished down for a year
> This is the first time that all 16 stocks finished the year down
Earnings per share for the group were actually higher YOY in 2018. My guess is that when the actual numbers come in for Q4, EPS will be up ~20% YOY. All 16 companies are arguably in much better shape today than they were a year ago. Higher production more than offsets slightly lower commodity prices YOY on this date. Natural gas and NGL prices are much better.
8 of the 16 companies closed on 12/31/2018 trading at less than book value per share. Any of you that know the GAAP accounting rules for upstream companies, know that means that the companies are trading below break-up value. The only rational explanation is that investors believe oil, gas and NGL prices are going a lot lower and staying low forever. "Fundamentals don't matter for investors until they do again."
Based on my forecast/valuation models, the Sweet 16 finished the year 120% below "Fair Value".
The group finished 98% below First Call's price targets. I've never seen anything even close to this.
As I pointed out in the December 29th podcast, the Energy Sector had the best YOY earnings growth of any sector.
What happened?
> I think investors just got tired of trying to figure out the wild price moves for oil.
> Each time oil moved higher, it pulled back sharply. Most of the price moves up or down had no logical explanation.
> Trump's sanctions against Iran (or lack there of) was the last straw. When waivers were given to 8 countries, hedge funds dump all of their oil stocks and threw out the "gassers" at the same time, despite rising gas prices. Until early October, the "Rebound Phase" of this cycle was behaving like it should (see slide 2 of the podcast). WTI did get about $10/bbl ahead of the "Right Price" on the "Trump Team's" repeated promises of taking Iran's production to zero.
MY TAKES:
> Oil is oversold, trading well below the "Right Price", which IMO is somewhere around $65/bbl for WTI.
> The Wall Street Gang is in agreement that oil prices are too low (see slide 3 of the podcast)
> The U.S. oil & gas industry will survive. Actually, it MUST survive in order for this world's thirst for energy to be satisfied.
> The global oil market is much tighter than people realize.
> Q4 & Q1 are the seasonal low points for oil demand. Unless we have a MAJOR GLOBAL RECESSION, oil demand will increase by 1.5 to 2.0 million barrels per day from Q1 to Q3. See chart here for proof: https://www.iea.org/oilmarketreport/omrpublic/
> OPEC+ needs higher oil prices to survive. They will make the necessary production cuts to tighten up the global market, which is not really oversupplied anyway.
> OPEC+ cuts should show up in February inventory reports
> Winter is not over and we will see some wild price moves for natural gas in Q1. See the Dec 31st update here: https://www.weatherbell.com/premium/
I will send out the Sweet 16 for 2019 on Wednesday morning.
> ESTE and NFX are out
> CRZO and SWN are being added. Both are former Sweet 16 companies that I have been tracking for 10+ years.
Be safe tonight and Happy New Year to all of you.