Sweet 16 Update - November 23

[dan_s]

This week I cracked the whip on the interns to get the Sweet 16 profiles updated for Q3 results. By the end of today we will have ten of the sixteen profiles updated. ROSE should be coming to you via Flash Alert e-mail today. ROSE had a strong Q3 and I think it will be a big winner for us over the next six months.

By Thanksgiving I should have the rest of them updated. XEC, EOG, GTE, GPOR, OAS and UNT are being worked on this weekend.

For the week ending November 22, the Sweet 16 was down about 3%. Only GTE and RRC were up for the week. My take is that this is being caused by "rotation" as fund managers move money to another sector they think is "hot". Lots of money has moved into the Retail and Transportation sectors this month. If oil prices hold up and natural gas moves over $4.00, I think we will see a lot of money moving back to the energy sector in December. Despite lower oil prices, the Sweet 16 are going to report outstanding Q4 results.

Each time we publish an updated company's profile I take an extra HARD LOOK at my forecast model and valuation for the company. So far, the only valuation that I have lowered is for Energy XXI (EXXI), taking it down a couple dollars to $50.00/share. First Call's price target for EXXI is $39.31. EXXI has a strong balance sheet and it should be reporting production growth the next two quarters. The stock is trading at less than 4X CFPS, a very low multiple for a company with a strong balance sheet, free cash flow, pays a dividend and has a share repurchase plan underway.

Denbury Resources (DNR) also has an aggressive share repurchase plan underway and they will start paying dividends in 2014.

Continental Resources (CLR), Oasis Petroleum (OAS) and SM Energy (SM) all look like high quality "Screaming Buys" to me at the current share price. These are "Core Holding" quality companies and I think other analysts will keep raising their price targets toward my valuations. I expect all of them to report great Q4 results and "eye popping" year-end reserve reports. I increased my positions in OAS and SM on Friday.

The weather has turned bullish for natural gas prices. Next week's EIA storage report won't be very impressive (~20 bcf draw), but the next two should report draws way over the 5-year average. Triple digit draws will get a lot of market attention. As the gap widens to the 5-year average amount of gas in storage the price of gas goes up. We should see Ngas over $4.00/mcf by mid-December. NGL prices are also going up.

Except for GTE, all of the Sweet 16 will get some boost from higher natural gas prices. Companies that have the most exposure to gas are (in this order): RRC, UNT, SM, XEC, EOG, EXXI, and GPOR. Unit Corp. (UNT) is somewhat "off the radar" screen because it is lumped in with the onshore drillers, but it is really a rock solid E&P company. My valuation is over $80/share. We will publish an updated profile on UNT this week. Read it carefully.

Concho Resources (CXO) is trading the closest to my valuation, but I should probably used a higher multiple of CFPS to arrive at my valuation since they have such an aggressive drilling program. I just want to see their year-end reserve report first.

Gulfport Energy (GPOR) has the highest risk level. They need to report Q4 production near 20,000 boepd to meet the market's expectation. GPOR's guidance for 2014 is now 50,000 to 60,000 boepd. Production is ramping up fast in the Utica Shale and their Canadian Oil Sands project.

The Sweet 16 spreadsheet on the website has a lot more details and my Fair Value Estimate for each company compared to First Call's Price Target for each company. First Call's price targets have gone up for all 16 companies since they released Q3 results.

[letitfly]

Thanks for these updates

[dan_s]

Rosetta Resources (ROSE): An updated profile and forecast model have been posted under the Sweet 16 Tab.

[Laurin_DE]

Maybe one of the North American members can help a non-NA member here...?

Which of the NG-producers mentioned is best known in the US as a gasser?
(trying to be opportunistic and try a trade here)
Any opinions on Bellatrix (BXE) in this context?

Thanks.

cheers - Laurin

[dan_s]

RRC and UNT are known as gassers. Take a hard look at my forecast models for XEC and SM. You will see why they will get a nice revenue boost from higher natural gas prices.