Energy Prospectus

The next edition of The View From Houston will be send to EPG members via e-mail on Monday, so this update will be kept short.

The Sweet 16 portfolio is now up 23.7% year-to-date, compared to the S&P 500 Index that is up just 2.4%. All 16 companies are now up YTD as Oasis Petroleum (OAS) finally got out of the red. Oasis has a very high percentage of their Q1 & Q2 oil hedged at good prices. Therefore, their first half results this year will be good. I believe crude oil prices will continue to drift higher. Assuming I am right about oil prices, OAS is way oversold.

RRC and WLL have already reported first quarter results. Updated forecast models are available on the website. We sent out the updated profile on RRC this morning. Both companies reported production that beat my forecast, but realized prices for their liquids were lower than I expected. NGL prices have been hammered, which is why my valuation of RRC was lowered.

Although I raised my valuation on WLL, the company may have to be dropped from the Sweet 16 because their production will be falling quarter after quarter as WLL is forced to "hunker down". Management's decision to move forward with the KOG merger without hedging a high percentage of their production was "foolish" to say the least. That said, if WTI moves back to $80/bbl (my 12 month forecast), WLL will be in great shape.

I took a hard look at Carrizo Oil & Gas (CRZO) on Saturday morning and I have raised my Fair Value Estimate by $6.00/share to $59.00/share, compared to First Call's Price Target of $57.91. If CRZO reports good first quarter results and holds or increases their production guidance, my valuation will go higher.

All of the other Sweet 16 report first quarter results this week. I will update the forecast models as fast as I can.

Pay close attention to what CLR, XEC, DVN, and NFX are saying about Oklahoma. SCOOP / STACK is quickly becoming the next "Big Thing".

I noticed MS upgraded WLL to overweight and a price target of $48.

Whiting Petroleum Corp.: Oil on Sale; Upgrade to OW
Drew Venker, CFA – Morgan Stanley
May 4, 2015 4:02 AM GMT

WLL should outperform as divestitures reduce leverage and growth rebounds in line with high quality peers. WLL fits the bill for investors adding to energy: exposure to oil with the strength to survive low prices.
Ideal investment for the environment. Negative sentiment after WLL's equity raise created a valuation discount which we view as an opportunity. WLL offers compelling risk-reward, with 2.5x upside to downside, due to this discount and the potential to reduce leverage and boost growth in line with peers. Further, it makes an ideal investment for inflows into the sector because it offers what long-term investors seek: exposure to oil prices and adequate funding to withstand low oil prices for 2+ years.
Discount to narrow as leverage falls and growth rebounds in line with peers. WLL's divestiture program could reduce leverage to 2.2x on the strip by YE-16, in line with high quality oil peers at 2.1x (CLR, CXO, FANG, EGN, see details here). We believe this should narrow its 4 turn EV/EBITDA discount on the strip. Admittedly, we expect slower 2016 growth for WLL at 3% (post asset sales) vs. peers at 18%, but on strip pricing WLL will be FCF neutral while its peers are spending 142% of cash flow. Importantly, we expect production growth to rebound to in line with the peers in 2017 at 22% vs. 24% for the peers. We are raising our target to $48 for lower well costs.
Many investors looking for E&Ps w/ exposure to oil prices that can survive low prices for the next 2-3 years. Post its equity and debt offerings, WLL has the leverage profile and liquidity to survive through 2+ years of $50/Bbl WTI oil and offers substantial exposure to upside in crude prices.
Negative sentiment creates a valuation discount.

My Fair Value Estimate for WLL is $42.50/share. - dan