Energy Prospectus

At least twice a month (usually in between my newsletters) I take a real hard look at the companies in our Sweet 16 Growth Portfolio. I compare my forecast models to what other analysts are reporting to First Call and I see if I need to adjust my Fair Value estimates. For anyone new to this board, my "Fair Value" estimate is what I think the company's break-up value per share is today. It is also what a reasonable takeover price would be.

I have updated my summary spreadsheets and you can find them under the Sweet 16 Tab, along with detailed forecast models for each company.

General observations:
> Lots of analysts have recently turned bullish on natural gas. Forecasts are now ranging from $4.00 to $5.00 per mmbtu average for 2013. Since every one of the Sweet 16 has some exposure to natural gas, this is very bullish.
> As a group, the Sweet-16 is now 52.6% my Fair Value estimate. Three companies (DNR, SFY and UNT) are now trading at less than half my Fair Value estimates.
> The First Call 12-month price target for GPOR has increased by more than $6/share in the last 30 days and is now very close to my Fair Value estimate. GPOR is the most highly leveraged company to the Utica Shale and they seem to have a very good acreage block in the play (high liquids content and very high btu gas).
> Companies added to the Sweet 16 on October 1: XEC, HP, RRC, SFY and UNT

I will be sending out a company profile on Unit Corp. (UNT) early next week. The stock closed below book value on Friday, which is insane for a company of this quality.

They booked a non-cash impairment charge in the 2nd quarter due to low natural gas prices, causing them to report a loss for the quarter. Guess what, natural gas price have now bounce back and are moving higher. All non-cash impairment does is make future reported earnings that much better by lowering DD&A expense.

First Call's target price is $61.43/share but I think that could go much higher after UNT reports strong Q3 results and natural gas prices continue to move higher.

Most analysts list Unit Corp as an onshore driller, but less than 42% of this year's revenues will be from contract drilling. The majority of their revenues are from oil & gas sales and midstream (gas gathering & processing). Their recent acquisition from Noble Energy will generate even more upstream revenues.

Cash flow per share this year should top $14.00/share, so the stock is trading at less than 3X CFPS. Start doing your homework on this one. It should be a real winner for us.

@@ As a group, the Sweet-16 is now 52.6% my Fair Value estimate. Three companies (DNR, SFY and UNT) are now trading at less than half my Fair Value estimates. @@

Have you ever seen so many companie selling at such a discount Dan?

How many times in the last 30 years have you seen such compelling valuations?

Just curious, you have been at this game a lot longer than I have. And you have an excellent long term view of the market and valuations.

I cannot remember E&P companies trading at such a discount to my Fair Value estimates for this long. Keep in mind that my "Fair Value" is what I believe the company's break-up value is today. To get valuations down to the current share prices, I must take oil & gas prices down very low. [Note that my Fair Value Estimates are not very far off the current First Call Price Targets for most of the Sweet-16, so I am not "way out there" on my valuations.]

If you look at the last column of the first tab of my Sweet 16 spreadsheet you will find Share Price / 2012 cash flow per share. As a group, the Sweet 16 is now trading at just 4.2 X 2012 CFPS. That is a very low multiple, especially for a group that has double digit production and reserve growth locked in.

Keep in mind that we are very near the end of 2012, so my CFPS forecasts aren't going to be far off from actuals at this point. Also, my CFPS forecasts for 2013 are much higher for all 16 companies.

IMO a company the quality of EOG trading at 6.1 X this year's CFPS is insane. I think EOG's position in the Eagle Ford is worth the entire market cap of the company. WLL at under 4X CFPS makes it an incredible takeover target.

IMO, in a world with interest rates this low, high quality E&P companies should be trading in the 8x to 12X CFPS range; higher if they have a lot of exploration upside. Also, higher if they have long-lived proven reserves like DNR.

I agree with your assessment. Thanks Dan.

Exciting times ahead.