Sweet 16 Update - June 13

[dan_s]

The Sweet 16 moved sideways in last week's trading, up 15.4% YTD, compared to the S&P 500 Index which is up just 1.7%. The "gassers" (RRC, GPOR, DVN and SM) remain under some pressure. CXO and XEC had a good week as First Call continues to raise their price targets for those two week-after-week. LPI also seems to be getting some "love". It is up 9.4% since I added it to the Sweet 16 on May 23rd.

First Call's Price Targets for CXO and XEC are now right at my Fair Value Estimates.

First Call's Price Targets continue to drift toward my valuations for most of the companies. You can view my Fair Value Estimates and FC price targets for each company on the Sweet 16 Spreadsheet on the EPG website.

Prior to each edition of The View From Houston (which will be published on Tuesday, June 16), I compare my forecast models to First Calls EPS, CFPS and Revenue forecasts for each company. FC forecasts are the averages of all forecasts submitted to Reuters. FC also shows the range of the forecasts. What stuck me today is the extremely wide range of the forecasts submitted to Reuters, even for the 2nd quarter which is now pretty much in the bag.

The reason for the wide ranges, is because analysts are forced to use the "official" oil & gas price targets of their firms in their forecast models. Several firms are obviously still using very low oil prices for 2015 and 2016, despite the improving fundamentals. My EPS, CFPS and Revenue forecasts for each company are in the upper half of the range, but they aren't the highest.

SM Energy (SM) is a good example:
First Call's EPS ranges:
2015: $-2.66 to $1.43
2016: $-4.75 to $4.81 < My EPS forecast for 2016 is $3.06

In order to hit the low end of FC EPS forecast for 2016 I had to take natural gas to $2.00/mcf and oil to $45.00/bbl. If you agree with those oil and gas prices you should sell every oil & gas stock you own. My forecasts for 2016 assume $3.50/mcf for Henry Hub gas and $70.00/bbl for WTI. For each company, I adjust the commodity prices for hedges and regional price differentials.

I did lower my Fair Value Estimate for Gulfport Energy (GPOR) earlier this week to $61.50 because of their equity offering. There is a lot of upside to GPOR's share price if natural gas prices go up this winter, which I believe will happen now that U.S. natural gas production has rolled over. Last week the Texas Railroad Commission reported that Texas natural gas production declined by 1.5 BCF per day from Q4 to Q1. All indications are that Texas gas production will continue to decline as the Barnett Shale, Eagle Ford, Permian Basin and Granite Wash are all on decline. See the slides from my presentation on June 10 for more on this topic.

I will have more on the Sweet 16 in Tuesday's edition of The View From Houston.