Sweet 16 Update - May 24

[dan_s]

Sweet 16 Growth Portfolio spreadsheet has been updated and posted to the website. Just log on and click on 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 5-24-2014

The Sweet 16 had a good week, primarily on big moves made by BCEI and SN. Both companies announced major acquisitions.

The Sweet 16 is now up 15.4% YTD, compared to the S&P 500 Index which is up 2.8%.

The Sweet 16 remains heavily weighted to oil (and so should you). I do believe natural gas prices will move higher, but gas wells are marginal at best even at $5.00/mcf for gas. My top picks for adding more exposure to natural gas are UNT, SM, XEC, EOG, GPOR and RRC. Unit Corp (UNT) is my top pick because they are trading at just 4X my CFPS forecast and I am becoming very bullish on the onshore drillers. UNT has a drilling company as one of its subsidiaries. Read our recent profile before you invest. [See our recent profiles on PDS and PTEN under the Watch List Tab. We will publish a profile on NBR this month.]

MTDR issued more equity this week: Buy the dip, this is a rock solid small-cap that is going to report very strong production and proven reserve growth this year. My current Fair Value Estimate (adjusted for the new equity) is $32/share, but there is upside from that number.

WTI crude oil prices are now testing the upper limit of the channel it has been trading in for almost two years. The fundamentals behind this move are (a) Memorial Day marks the start of increasing summer demand for gasoline in the U.S. and (b) the IEA increased their oil demand forecast for the 2nd half of 2014 saying that Saudi Arabia had to increase production by 900,000 bbls per day to meet demand. In my opinion, Saudi will not produce more than 10 million bbls per day as they believe a higher rate will damage their oil fields. They are now very close to that level. Libya, Iran and Iraq have major supply disruptions that I do not see going away soon. All of this adds up to high oil prices during the second half of this year.

U.S. shale oil production is increasing (thank God), but not enough to meet rapidly rising global demand for oil. Conventional oil production peaked several years ago and is now on decline. Shale oil, Canadian oil sands and deep water (all very expensive) are the only hope for oil supply growth.

I think all of our Bakken companies (CLR, EOG, KOG, OAS, SM and WLL) will report that production was just slightly higher in Q2 than in Q1, but production will ramp up sharply in Q3. Completion crews will be tying in a lot of high rate wells starting in June. SM, OAS and WLL all look like "Screaming Buys" to me at their current share prices.

I should have all of the Sweet 16 profiles updated by the end of May. Still working on XEC, CLR, GTE and RRC

PS: I follow a lot of E&P companies and I can see increasing demand for onshore rigs and frac sand. Those of you in Houston should plan to attend our luncheon on June 6th, Hi-Crush Partners LLC (HCLP) is hosting. EMES and HCLP have been big winners for us. Both are in our High Yield Income Portfolio.

PPS: The next edition of The View From Houston will be published on Tuesday, May 27. There will be more on all of our model portfolio companies in the newsletter.