Sweet 16 Update - March 15

[dan_s]

Sweet 16 Growth Portfolio: An updated spreadsheet has been posted under the Sweet 16 Tab:
> Tab 1 of the spreadsheet 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 3-15-2014

The Sweet 16 pulled back a bit this week with the overall market and the recent dip in crude oil prices. It is now up 4.8% YTD compared to the S&P 500 which is down 0.4% YTD. First Call's Price Targets have been increased for all 16 companies since Q4 results came out. That is a good sign.

All of the companies in the portfolio have now reported 4th quarter results and I have updated all of my individual company forecast models. We are now focused on updating all of the profiles. New profiles for BCEI, CXO, XEC, GPOR, ROSE, SN and SM are now available. You can download them from the website. Just click on the Sweet 16 Tab, then click on the company's logo.

All of the Sweet 16 are on-track to generate double digit production and proven reserve growth this year. This is a growth portfolio and they are all growing. The real value of any E&P company is its (Proven Reserves + Growth Potential) - Debt. I want to own E&P companies that have proven reserve growth locked in.

First Quarter results should be strong for all 16 companies.
> Crude oil, natural gas and NGL prices are going to be higher in the 1st quarter.
> Combined with increasing production, means we should see some impressive results.

Matador Resources (MTDR) reported 4th quarter results last week. Their results were in-line with my forecast. Their first quarter revenues are going to get a nice boost from the spike in natural gas prices. Their natural gas hedges are all Collars with $4.93 ceilings, so they get most of the price increase. 30% of their gas is unhedged. Matador's production should be up ~28% in 2014.

SM Energy (SM) is now trading at just 3X my cash flow per share (CFPS) estimate for 2014. That is ridiculous for a company of this quality. First Call's price target is $94.21, which still looks too low to me. SM produces a lot of gas and NGL's, so Q1 results are going to be strong. Read our profile on this one and you will see that it has a lot of upside. SM is primarily focused on developing their Eagle Ford acreage, but they are also drilling in the Bakken, Permian Basin, Mid-Continent and they have a exciting new play in the East Texas Woodbine play.

Oasis Petroleum (OAS) is down 12% YTD. The company is expecting more than 40% production growth this year. Most of the growth will come during the 2nd half as the weather improves in North Dakota. Oasis is a Pure Play on the Bakken. Accumulating shares now should result in a nice gain by year-end.

The two companies most exposed to natural gas are Range Resources (RRC) and Unit Corp (UNT). If you've read the recent EIA outlook for natural gas (http://www.eia.gov/todayinenergy/detail.cfm?id=15391) you know that the U.S. will be heading into next winter with a lot less gas in storage than is necessary to insure all the major cites in the upper tier have enough fuel for space heating. If the refill season starts slow, this situation will be getting a lot of attention in the next few months.

RRC is only up 4% YTD, which is amazing when you look at their year-end reserves report and the outlook for natural gas. UNT is up 18% and I think it could be leading the pack by year-end. Improving gas prices are VERY BULLISH for UNT.

I will be sending out updated profiles on CLR, EOG and UNT early next week.
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Callon Petroleum (CPE) reported very impressive Q4 results. It will be added to the Small-Cap Growth Portfolio in my next newsletter.