Sweet 16 Update - July 13

[dan_s]

The Sweet 16 stock prices sure don't reflect the current oil price (over $60/bbl). Natural gas and NGL prices have also stabilized. Part of the higher commodity prices were caused by Hurricane Barry's impact on production. Over a million barrels of oil per day from the Gulf of Mexico is now offline. Flooding of refineries and midstream processing facilities in South Louisiana will also impact production and refined product inventories.

The Sweet 16 finished the week down another 1.14% and it is now down 5.59% YTD. Most the week's and YTD decline is caused by the four "gassers" (AR, GPOR, RRC and SWN). If I take the gassers out, the "Sweet 12" is up 3.74% YTD. In that group, FANG (up 19.6%), MTDR (up 26.7%) and PE (up 14.5%) lead the pack.

All four of the gassers are profitable at the current strip price for natural gas. I am more eager to hear what their outlook is for NGLs. NGL prices are much lower than they were last year, but the price should rebound in Q4 with demand for ethane and propane expected to increase.

Callon Petroleum (CPE) recently retired their preferred stock, which gets that layer out of the way. So far, it is not reflected in the common stock price. CPE's Adjusted Net Income should be over $1.00/share for 2019 and cash flow from operations s/b over $2.00/share. My valuation of the common stock is $13.25, which compares to First Call's price target of $11.13. The FC target does not reflect the impact of retiring the pfd stock.

Continental Resources (CLR) and EOG Resources (EOG) have the most exposure to rising oil prices because none of their oil is hedged. EOG gets a nice premium for all of their Eagle Ford oil. These two large-caps are "core of the core" quality upstream companies that are generating lots of free cash flow from operations today. CLR has a $1 Billion stock repurchase program underway and EOG pays a small dividend that I am expecting them to increase.
> In the last 3 months, 9 ranked analysts set 12-month price targets for CLR from $45 to $72. The average price target among the analysts is $55.78.
> In the last 3 months, 9 ranked analysts set 12-month price targets for EOG from $97 to $146 per share. The average price target among the analysts is $119.29.

Encana (ECA) is a company "in transition". Q2 will be the first full quarter since the merger with NFX that closed in February. I am expecting Encana to provide more detailed production and expense line item guidance that should give the Wall Street Gang a lot more confidence this very large company. They also have a stock repurchase program underway.

Concho Resources (CXO), EOG and Pioneer Natural Resources (PXD) are the only Sweet 16 stocks trading at more than 6X operating cash flow per share. The higher multiples are more than justified by the extremely valuable leasehold they control. I believe that Concho's horizontal drilling inventory (over 20,000 locations) is worth more than the company's market-cap of $20.5 Billion.

A few of the companies in our Small-Cap Growth Portfolio deserve a promotion to the S-16, so I will be making a few changes by the end of August after I get a chance to update all of the models for Q2 results. Range Resources (RRC) will be the first Sweet 16 company to announce Q2 results. RRC's results are expected on July 25. The rest of this group will announce Q2 results from July 31 to August 7.