Sweet 16 Update - December 29

[dan_s]

Despite crude oil prices moving higher this week and a major winter storm that should result in more demand for natural gas, the Sweet 16 share prices moved lower. The market is being driven by the FEAR that the U.S. will go over the Fiscal Cliff. Obviously, ANY agreement in Washington that resolves this issue will result in a market rally. IMO the best we can hope for is some agreement that "kicks the can down the road".

First Call increased their price target for Gulfport Energy (GPOR) to $46.83, an increase of over $2/share. This is still well below my Fair Value Estimate.

Carrizo Oil & Gas (CRZO) announced the sale of their North Sea assets. I like the deal, which shores up the balance sheet and allows them to focus on developing their very profitable Eagle Ford leasehold.

Energy XXI (EXXI) is now trading at less than half my Fair Value Estimate. They should report solid fiscal 2nd quarter results, as I am expecting a big increase in production as they rebound from hurricane Isaac shut-ins and report results from their horizontal development drilling program.

After the market closed on Friday, EOG Resources (EOG) announced they are selling their stake in the Kitimat LNG export facility to Chevron. I like the decision as it will allow EOG to focus more capital on the Eagle Ford that has much higher net present value.

On Monday, Denbury Resources (DNR) announced closing of the 2nd and final stage of its deal with Exxon to sell its Bakken assets. Proceeds will be held in trust to fund future acquisitions that qualify for Section 1031 tax deferral.

We are still working on the updated profile for SM Energy (SM). My SMU intern working on it was on vacation this week.

If you have not done so, I urge you all to take a hard look at the profile I sent out on Gran Tierra (GTE). This former Sweet 16 company is going to report a big jump in Q4 production.

[dan_s]

You can find a spreadsheet showing my Fair Value Estimate compared to First Call's Price Targets for each company under the Sweet 16 Tab. This spreadsheet is updated each weekend.

To see how I calculate Fair Value for an individual company: Go to the Sweet 16 Tab and click on the company logo. You can see the calculation in the lower right hand corner of the Net Income & Cash Flow Forecast model.

As a group, the S-16 is now trading at just under 4.3 X 2012 CFPS. That is a very low multiple for companies with strong balance sheets and double digit production growth locked in. Plus, assuming oil prices hold up, I am forecasting that each company will increase CFPS in 2013 (some by a lot). Six companies are now trading at less than 4X 2012 CFPS (CRZO, EXXI, SM, SFY, UNT and WLL).

IMO an E&P company with a solid balance sheet and strong production & reserve growth should trade for at least 6X CFPS. In today's ultra-low interest rate environment, the multiples should be even higher. The reason for this is that in a low interest rate environment future earnings have a higher present value.

[ghrcap]

Several Sweet 16 members are embraced in this January 4 analysis of valuation to projected 2013-2014 cash flow growth from Credit Suisse. EXXI screens particularly well. The download can be opened with Adobe Acrobat Reader and is clean.
http://www.sendspace.com/file/glk3fx

[dan_s]

George: Thanks for sharing that link. Energy XXI should be a winner for us this year. It is trading at a huge discount to my Fair Value Estimate. I think McMoRan's difficulty getting the Davy Jones well completed is a black cloud over EXXI. My valuation has zero in it for Davy Jones.

[dan_s]

Energy XXI's IR Manager attended our luncheon on 1/8. I think they are going to host a luncheon for us in late February. Their horizontal development well program should really ramp up production and increase recoverable reserves.