Sweet 16 Update - April 19

[dan_s]

Sweet 16 Growth Portfolio spreadsheet has been updated and posted under the Sweet 16 Tab:
> Tab 1 of the spreadsheet is a summary of the EPS and CFPS forecasts for individual companies,
> Tab 2 shows my Fair Value Estimate compared to First Call's Price Target for each company as of 4-19-2014

Year-to-Date the Sweet 16 is up 17.3%, compared to the S&P 500 that is now up 0.9%. < I'd say we are KICKING BUTT this year!

SM Energy (SM) is the only Sweet 16 down YTD and I think it has a lot of potential for us going forward. The company's production mix is approximately 49% natural gas, 29% crude oil and 22% NGLS. 44% of their natural gas is hedged at $4.06/mcf and only 4% of their NGLs are hedged at $58.42/bbl. Revenues should be getting a significant boost from the Q1 spike in NGL prices. I believe that SM's update on the Eagle Ford will draw a lot of attention when they release Q1 results.

Oasis Petroleum (OAS) is finally up YTD, getting a big boost last week from TPLM's fiscal Q4 report. OAS is going to have a great year with production up 40% YOY. Pick this one up before the idiots on Wall Street figure it out. Most of their production growth will be after spring break-up, which ends early in June.

Matador Resources (MTDR) is leading the pack and approaching my Fair Value Estimate. If you own a lot of this one, consider selling half and moving it to SM.

Carrizo Oil & Gas (CRZO) is up 21% YTD and 6.7% since I added it to the Sweet 16 on April 12. I think it has 20% more upside this year. It has a darn good looking chart.

All of the Sweet 16 should report rock solid Q1 results. Be sure to focus on Cash Flow Per Share (CFPS) and production growth. Earnings Per Share for E&P companies can be very misleading, thanks primarily to the ridiculous mark-to-market adjustments on hedges. Remember that First Call EPS forecasts do not include the adjustments on hedges, so they need to be compare to "Adjusted Earnings."

From our Small-Cap Growth Portfolio:

Triangle Petroleum (TPLM) reported solid fiscal Q4 results and I have increased my Fair Value Estimate to $14.00/share.

Osage Exploration & Development (OEDV) has reached TD on their first operated horizontal Mississippian well and spud their first Woodford Shale test well in Logan County last week. IMO this is the most important well that Osage will drill this year. If the Woodford is good under their acreage, it will make OEDV a takeover target and Devon Energy can buy it with petty cash. Devon has a 15 rig Woodford program this year and they are drilling just to the east of Osage leasehold.

Osage Press Release: http://finance.yahoo.com/news/osage-exp ... 00925.html

Gastar Exploration (GST) is hosting our luncheon in Houston next Thursday, April 24. Seating is limited, so register early as we are nearing capacity.

Comstock Resources (CRK) is setting up to be the "Comeback Kid" for us this year. They are one of my Top Picks for the Eagle Ford and natural gas.

Swift Energy (SFY), which is not in the portfolio today, is high on my radar screen. We will be publishing an updated profile late this month.

I will also be taking hard looks at DNR, ENRJ, HIIT and TGA this month.

I want to wish all of you a Happy Easter! I consider it the #1 holiday. We are blessed to live in this great nation and I thank God each day that he got me to Texas.

Hang tough my friends, this year is setting up to be very profitable for energy sector investors that know what they are doing. I am working hard to find the companies with "market crushing" potential for us.

[dan_s]

One of our members just asked me for my Top Picks in the Bakken. Here they are listed from lowest to highest risk:

1. Whiting Petroleum (WLL): Read this > http://seekingalpha.com/article/2146723 ... second-act

2. Oasis Petroleum (OAS): Guidance is for 40% production growth this year

3. Triangle Petroleum (TPLM): This small-cap is on a January fiscal year. They just reported Q4 and full year results that were very strong. TPLM's production will be up 80% to 90% this year and they have a profitable oilfield services firm that is expecting to get larger profit margins this year.

All three are trading at a deep discount to Continental Resources (CLR), a Sweet 16 member that still has a ton of upside for us. CLR is the largest acreage holder and largest producer in the Bakken, so a whole bunch of funds hold it. Plus, their SCOOP oil play in Oklahoma keeps looking better and better. See our recent profile for details.

You can find my valuation for each Sweet 16 member by logging on to the EPG website, click on the Sweet 16 Tab and click on the link to "Sweet 16 Forecasts". I check my valuations each weekend and update the spreadsheet. Today I updated the valuation for RRC.

PS: My current valuations are based on much lower oil and gas prices than what actuals are today. If commodity prices hold, I will be increasing the Fair Value Estimates once I see each company's 1st quarter results. They will be pouring in very soon.

[adamlloyd]

Dan, if you are looking at DNR (which may finally be waking up), perhaps you could give us your thoughts on EPM. It's more than tripled since you first recommended it and is approaching your estimate of fair value. I suspect there may be better opportunities elsewhere now. I'm tempted to sell.
Thanks, Adam

[dan_s]

Adam: Yes, I think there are much better choices than EPM common stock right now. They are in a dispute with DNR over the "Payout" point at Delhi Field. I am going to update my EPM forecast model today and I will have more comments later.

I do think DNR is grossly undervalued, especially if oil stays over $100/bbl. I went to an Analyst Day hosted by DNR a few months ago. There was disappointment in the room when Phil said they decided not to convert to an MLP. That selling should be over now and I think their Q1 report will be very impressive.

Selling EPM and moving the money to DNR might work out quite well.

Check back later for my thoughts on EPM. I am working on my forecast model now.

[dan_s]

There is now quite a bit of uncertainty in my EPM forecast because of this:

"As previously reported, the temporary reduction in oil production and substantial remediation costs (at Delhi Field operated by DNR), partially offset by lower CO2 purchase costs, insurance recoveries and application of the operator's indemnification of EPM (which is being disputed by the operator), may be expected to delay reversion of our 24% working interest into calendar 2014. Due to these uncertainties and the dispute, we cannot accurately forecast when in 2014 the reversion will occur. We filed a lawsuit against the operator seeking declaration of the validity of the environmental indemnity, as well as remedies for other breaches of our operative agreements."

Delhi Field was expected to hit Payout at 12/31/2013, but it has been delayed. For my forecast, I am assuming Payout is reached 7/1/2014 BUT it may be delayed further.

At Payout, EPM's revenue interest in the Delhi Field (a CO2 flood operated by DNR) will increase from 7.4% today to 26.5%. This is by far the most important asset EPM has.

[dan_s]

Evolution Petroleum (EPM): An updated Net Income & Cash Flow Forecast has been posted under the Watch List Tab.

[Laurin_DE]

Osage Exploration & Development (OEDV) has reached TD on their first operated horizontal Mississippian well and spud their first Woodford Shale test well in Logan County last week. IMO this is the most important well that Osage will drill this year. If the Woodford is good under their acreage, it will make OEDV a takeover target and Devon Energy can buy it with petty cash. Devon has a 15 rig Woodford program this year and they are drilling just to the east of Osage leasehold.

Dan,
could you, if possible, please put some numbers to the above statement?
and when will it be known whether this was successful? already after they will have drilled the horizontal or after fraccing?

Thanks.

cheers - Laurin

[dan_s]

We are working on an updated profile for Osage. No production yet on the new HZ well.

[ghrcap]

Maybe we should have a third watch list composed of the the micro-cap firms of less than $100M in market cap. Off the top of my head,ENRJ,OEDV, SARA, TRCH, ZAZA and AXPLF are all firms with potential and which are also participating in IPAA and EnerCom conferences and making information available. As you pointed out, Dan, some of these have little to no current production and a stab at valuation must include something for the value of their acreage and JV's, but this is often where the potential lies. It will be qualitative rather than quantitative. I'm sure there are others who have hosted luncheons or have caught your attention that fit this bill. Just a thought.

[dan_s]

EnerJex looks good to me. I am waiting to see Q1 results before we publish a new profile.

Based on their reserve report SARA looks undervalued, but P&L looks weak.

[gjames]

Dan:
Any preliminary comments on HIIT in advance of your updated profile? Revenue growth still looks very impressive. I am considering buying more, but am curious how much the recently announced frac water recycling service is going to move the needle for them.

[dan_s]

I will be working on HIIT next week.