Sweet 16 Update - February 9

[dan_s]

Sweet 16 Growth Portfolio: An updated summary spreadsheet has been posted under the Sweet 16 Tab on the home page. Tab 1 of the spreadsheet is a summary of my EPS and CFPS forecasts, Tab 2 shows our Fair Value Estimate compared to First Call's Price Target for each company as of 2-9-2013 (Excel).

Based on Friday's closing prices, the Sweet 16 is still trading at less than 4X my combined 2013 cash flow per share estimate for the group. That is an extremely low multiple for companies of this quality. In a "normal market" an E&P company with growing production and proven reserves would trade around 6X CFPS. Companies with double digit production growth and lots of running room, like those in our Sweet 16 today, should trade at 8X to 12X. EOG has over a million acres in the Eagle Ford Shale and over a decade of incredible growth potential. It is trading at just 6X CFPS; IMHO that is ridiculously low.

SFY is trading at less than 2X CFPS. First Call's price target is $26.17.

CRZO, ROSE, SM, UNT and WLL are all trading at less than 4X CFPS.

I will be taking a hard look at Energy XXI and sending out an updated profile this weekend. Quarterly results were below my forecast but production was up 19.5% quarter-over-quarter, not exactly chopped liver. Production should continue to move higher as they bring on additional horizontal development wells. They sell all of their oil at close to Brent and oil production is expected to increase by 10,000 bbls per day over the next six months. First Call's price target is $41.67 and my Fair Value Estimate is a lot higher.

EOG will be the next company to release Q4 results. Pay close attention to what they say about their Eagle Ford Shale development drilling program.

Another one that I am very eager to see is Unit Corp. (UNT). After the strong results by HP and PTEN and the improving outlook for the onshore drillers, UNT could be looking at some good numbers and lots of analysts' upgrades. My updated forecast model for PTEN is available under the Watch List Tab. I have raised my Fair Value Estimate quite a bit for this former S-16 member, primarily because their pressure pumping business is now doing quite well.

On our Small-Cap Growth Portfolio, Evolution Petroleum (EPM) gave us some very good news this week. The Delhi Field (operated by Denbury Resources (DNR)) is rapidly approaching payout. At payout, EPM's share of production will triple. My updated forecast model for EPM is available under the Watch List Tab.

Oasis Petroleum (OAS) is up 23% YTD after reporting a stunning 110% year-over-year increase in production. OAS is just getting started, so my recommendation is to keep buying on the dips.

Continental Resources (CLR), already the #1 oil producer in the Bakken Shale, has become extremely bullish on their SCOOP area in southern Oklahoma. Check it out on their website.

We are now looking at Bonanza Creek (BCEI), Cabot Oil & Gas (COG) and Noble Energy (NBL) for promotion into the Sweet 16. CRZO and SFY will be moving to our Small-Cap Growth Portfolio, just because they are under $1Billion in market cap. I still like both of them.

Oil Prices will continue to flop around but increasing global demand, continuing unrest in the OPEC nations and a weak U.S. dollar should keep crude oil prices elevated. It is hard to be bullish on natural gas prices but a couple more winter storms and storage levels might get low enough to at least keep it over $3.00/mmbtu all year. That is a definite improvement over last year.

Susan and I will be on a cruise ship next week. I will have limited internet service but I promise to check in a few time.