Sweet 16 Update - Feb 7
Posted: Fri Feb 06, 2015 6:51 pm
The Sweet 16 had a great week, up 15.3%. The group is now up 12.2% YTD, compared to the S&P 500 Index which is down 0.2%. Considering that crude oil prices are still down YTD, this is a rather remarkable comeback. The group was grossly oversold unless you believe oil prices are going to stay at these levels FOREVER. I haven't seen anyone that believes that.
SM Energy (SM) is leading the pack, up 24.8% YTD. It is still trading well below my valuation of $90.40/share.
Diamondback Energy (FANG) is up 18.5% since being added to the Sweet 16 on January 1st and it is getting close to my valuation. I do expect them to report solid 4th quarter results and an impressive year-end reserve report. FANG is expecting 40% year-over-year production growth in 2015.
Gulfport Energy (GPOR) and Range Resources (RRC) are the weakest so far because they are both heavily weighted to natural gas. They may get some attention if February stays cold in the eastern half of the U.S. Watch Joe Bastardi's Saturday morning update: http://www.weatherbell.com/
In past dips in crude oil prices, the share prices have comeback when the market believes oil has set a bottom. That is because of massive short covering, which is what we saw in both the share prices and oil futures this week. Although we may see more weakness in crude oil prices, my SWAG is that we have seen the low for the year. I expect oil to flop around in the low $50s for the rest of this quarter. When EIA and IEA begin lowering supply forecasts and/or increasing demand forecasts, the price of oil will move steadily higher.
The active rig count is the best gauge on what is coming for oil supply. Baker Hughes reported Friday that the North American rig count dropped by another 100. The number of rigs drilling for oil dropped by 83. The two week decline of 223 is the largest decline I have ever seen.
The U.S., Canada and Brazil have accounted for virtually all of the world's production growth in the last three years, with 84% from the U.S..
North American oil production may go up for a couple more quarters from 9.2 million barrels per day in Q4 to 9.5 million bbls per day in Q2. This is because a lot of wells were in inventory waiting on completion at year-end. If the active rig count drops below 1,000 then we are heading for a world with declining production capacity. When that sinks in, oil prices are heading higher and could go a lot higher if production growth is not restored. OPEC is playing a very dangerous game with the global economy.
Steven Kopits, President of Princeton Energy Advisors, in a article published by Platts estimates that up to 2.8 million barrels per day of oil production is now sub-economic and at risk of being lost if oil prices stay depressed.
Just ahead are 4th quarter results and lots of impressive year-end reserve reports. There will be a lot of "noise" in the 4th quarter results including non-cash Mark-to-Market Gains on Derivatives, Ceiling Test Writedowns and Impairment charges. Try to ignore all of that crap and focus on cash flow per share.
The first of the Sweet 16 to report Q4 results will be: XEC, DVN, EOG and SM. They are all expected to report the week of Feb. 16-20. We will be updating individual forecast models and profiles as fast as we can for all of the model portfolio companies.
More than half of the Sweet 16 are PRIME "Takeover Targets", which the large-caps have teams of analysts looking at real hard. I used to do it for Hess.
The companies that have large acreage blocks in the Big Three shale plays are the most attractive. At the top of my list would be OAS, ROSE and WLL. This week there has been very heavy volume in all three. Often a buyer will accumulate a lot of shares, which they believe are depressed, before they make a hostile run at the company. If they are unsuccessful in their takeover attempt, at least they make a nice gain on the shares they got early. Our old friend Boone Pickens made a lot of money on companies he never really expected to buy by doing this.
Susan & I will be on the EPG Cruise February 8-15. I will be checking in a few times during the cruise.
Enjoy the ride. I believe this is going to be a very profitable year.
SM Energy (SM) is leading the pack, up 24.8% YTD. It is still trading well below my valuation of $90.40/share.
Diamondback Energy (FANG) is up 18.5% since being added to the Sweet 16 on January 1st and it is getting close to my valuation. I do expect them to report solid 4th quarter results and an impressive year-end reserve report. FANG is expecting 40% year-over-year production growth in 2015.
Gulfport Energy (GPOR) and Range Resources (RRC) are the weakest so far because they are both heavily weighted to natural gas. They may get some attention if February stays cold in the eastern half of the U.S. Watch Joe Bastardi's Saturday morning update: http://www.weatherbell.com/
In past dips in crude oil prices, the share prices have comeback when the market believes oil has set a bottom. That is because of massive short covering, which is what we saw in both the share prices and oil futures this week. Although we may see more weakness in crude oil prices, my SWAG is that we have seen the low for the year. I expect oil to flop around in the low $50s for the rest of this quarter. When EIA and IEA begin lowering supply forecasts and/or increasing demand forecasts, the price of oil will move steadily higher.
The active rig count is the best gauge on what is coming for oil supply. Baker Hughes reported Friday that the North American rig count dropped by another 100. The number of rigs drilling for oil dropped by 83. The two week decline of 223 is the largest decline I have ever seen.
The U.S., Canada and Brazil have accounted for virtually all of the world's production growth in the last three years, with 84% from the U.S..
North American oil production may go up for a couple more quarters from 9.2 million barrels per day in Q4 to 9.5 million bbls per day in Q2. This is because a lot of wells were in inventory waiting on completion at year-end. If the active rig count drops below 1,000 then we are heading for a world with declining production capacity. When that sinks in, oil prices are heading higher and could go a lot higher if production growth is not restored. OPEC is playing a very dangerous game with the global economy.
Steven Kopits, President of Princeton Energy Advisors, in a article published by Platts estimates that up to 2.8 million barrels per day of oil production is now sub-economic and at risk of being lost if oil prices stay depressed.
Just ahead are 4th quarter results and lots of impressive year-end reserve reports. There will be a lot of "noise" in the 4th quarter results including non-cash Mark-to-Market Gains on Derivatives, Ceiling Test Writedowns and Impairment charges. Try to ignore all of that crap and focus on cash flow per share.
The first of the Sweet 16 to report Q4 results will be: XEC, DVN, EOG and SM. They are all expected to report the week of Feb. 16-20. We will be updating individual forecast models and profiles as fast as we can for all of the model portfolio companies.
More than half of the Sweet 16 are PRIME "Takeover Targets", which the large-caps have teams of analysts looking at real hard. I used to do it for Hess.
The companies that have large acreage blocks in the Big Three shale plays are the most attractive. At the top of my list would be OAS, ROSE and WLL. This week there has been very heavy volume in all three. Often a buyer will accumulate a lot of shares, which they believe are depressed, before they make a hostile run at the company. If they are unsuccessful in their takeover attempt, at least they make a nice gain on the shares they got early. Our old friend Boone Pickens made a lot of money on companies he never really expected to buy by doing this.
Susan & I will be on the EPG Cruise February 8-15. I will be checking in a few times during the cruise.
Enjoy the ride. I believe this is going to be a very profitable year.