Sweet 16 Update - May 30

dan_s · Post by **dan_s** » Sat May 30, 2015 1:34 pm

Most of the Sweet 16 moved slightly lower last week, despite the rebound in crude oil prices on Friday. I think they will continue to trade in a rather tight range for a few weeks, until the market digests news from the OPEC meeting this week. My guess is that nothing new will come from the OPEC meeting. The best we can hope for is that they say global oil supply & demand are balancing and (better yet) they announce a price target for Brent of $70-$80. All but a few of the OPEC members are being killed by the low oil prices and they will put pressure on Saudi Arabia to do something.

I watch the First Call price targets for our Sweet 16 very carefully and I update them each week on the Sweet 16 spreadsheet, which you can view on the EPG website. FC price targets have been drifting higher since first quarter results have come out. Most of them are now approaching my Fair Value Estimates ("FVE"). Below are the exceptions.

Bonanza Creek (BCEI) is now trading at half my FVE of $41.50. First Call's Price Target is $32.18.

Devon Energy (DVN): I just completed the updated profile on Devon today. My FVE is $86.75, compared to FC price target of $75.09. Devon is a world class company and one of the few Sweet 16 that will generate cash flow from operations that exceed their capital expenditure program. This is a Core Holding of mine and I think it is a Screaming Buy at today's share price. Devon gets most of their revenue from oil sales these days, but they still produce a lot of natural gas (over 1.6 BCF per day). I think natural gas prices will move up during the 2nd half of this year as demand ramps up. If so, there is a lot of upside for this one. The updated profile should be on the website tomorrow and it will be sent to you via e-mail next week. Read it carefully.

Newfield Exploration (NFX): My FVE is $62.50, compared to FC price target of $42.46. This is one of my Top Picks for the 2nd half of the year. I think it is a prime takeover target and I think several large-caps are taking a hard look at a merger with NFX. To get the NFX board to approve the merger, the offer will need to be close to my FVE. NFX is now trading for less than 5X my CFPS forecast for 2015.

Oasis Petroleum (OAS) is another prime takeover target. My FVE is $27.50, compared to FC price target of $18.88.

Range Resources (RRC) is the only Sweet 16 company were FC's price target ($71.32) is above my FVE ($68.20). RRC is a "gasser". If natural gas prices go up, so will RRC's share price. This is a World Class company.

SM Energy (SM) is up 36% YTD but it is still trading at just half my FVE of $105. FC's price target is $65. The current share price is less than 4X my cash flow per share forecast for 2015. Most of SM's revenues come from oil sales, but it does produce a lot of gas.

EOG Resources (EOG): It is the largest company in the Sweet 16. Adding this "Core Holding" quality company to your portfolio under $90/share should be a smart move. My FVE is $114.00.

Gulfport Exploration (GPOR): I finished up the GPOR profile yesterday. You can download it from the website. I have lowered my FVE $7 from what was in the last newsletter to $65/share. FC's price target is $57.82. GPOR is a "gasser". It is an incredible growth story. I just need to see some improvement in the market for their Utica Shale gas before I can take my valuation higher. There are several large midstream projects being completed in the Utica/Marcellus areas of Ohio and PA that should allow producers to get more gas to better markets. Better realized gas prices in this area will do wonders for GPOR and RRC.

Today is my 40th wedding anniversary. Susan & I are taking off next week on a cruise (momma loves cruises), but I will be checking this board and my e-mails from the ship. I will be eager to see the market's reaction to the OPEC meeting. I also think we will see week-after-week of big draws from U.S. crude oil storage all summer. Combined with confirmation of falling U.S. oil production and rising global demand for refined products, should make for a very interesting 2nd half of the year.