Sweet 16 Update - February 1

dan_s · Post by **dan_s** » Sat Feb 01, 2014 1:46 pm

Sweet 16 Growth Portfolio spreadsheet has been posted:
> Tab 1 is a summary of the EPS and CFPS forecasts,
> Tab 2 shows my Fair Value Estimate compared to First Call's Price Target for each company as of 2-1-2014

Despite strong oil, natural gas and NGL prices in January the Sweet 16 is down 2.8% year-to-date. It did inch a bit higher last week, primarily due to the nice move in GPOR. Overall market weakness is the problem. All the companies should report solid Q4 results. Year-end reports will be pouring out by mid-February.

There is some concern that the Permian Basin and Bakken companies will report weather related production issues. IMO these are no big deal and will be resolved. The oil and gas isn't going anywhere.

MTDR and SN, my newest additions to the Sweet 16, are leading the pack.

The companies that will benefit the most from increasing natural gas and NGL prices are RRC, UNT, XEC, EOG, GPOR, ROSE and SM. ROSE is down 11.3% YTD and it looks like a Screaming Buy to me at today's price. I updated my forecast model last week and increased my Fair Value Estimate to $76/share. I also updated UNT's forecast, raising my valuation to $84.35/share. I think there is a good chance that Unit sells their midstream business to an MLP or just spins it off to its own MLP.

For my forecast models I am raising my 2014 natural gas price to $4.00/mcf and I am still using $90/bbl for WTI. I do expect oil prices to dip in Q2, but I now think a dip below $90/bbl is less than 50% probable.

Lots of talk now about the "January Effect" on the market. Historically, 73% of the time the market has been down in January it finishes the year down. IMO as long as the U.S. and Chinese economies are growing, demand for oil will remain strong and support crude prices. The Sweet 16 are all increasing production and lowering F&D costs. That combination should lead to higher valuations, but FEAR and GREED drive the markets. FEAR seems to be in control these days. My hope is that strong Q4 results and strong year-end reserve reports gets this group going again.

The midstream business is VERY STRONG these days. Improving natural gas and NGL prices increases demand for gathering, processing, transportation and storage even more. Now may be the time to add more midstream MLPs to your portfolio. They offer high dividend yield and growth potential. We have several good ones in our High Yield Income Portfolio, which you can find in the newsletter.