Sweet 16 Update - July 18

[dan_s]

It was a rough week for the Sweet 16. The portfolio was down 5.75% for the week and is now down 7.27% YTD, compared to the S&P 500 Index that is up 3.29% YTD. The Energy Sector is about as far out of favor as it can get.

As I noted in an earlier post, it is difficult for the companies to defend themselves during the "Quiet Period" before earnings release dates. 2nd quarter results start coming out the week of July 27th.

An updated Sweet 16 spreadsheet will be posted to the EPG website later today and you can compare my valuations to First Call's Price Targets for each company. The only change that I made today was to lower my valuation of Matador Resources (MTDR) to $27.10. It is trading at a relatively high CFPS multiple and I thought my 4th quarter production forecast might be a bit too high. There is nothing wrong with MTDR and Wall Street likes it. They are doing a great job lowering completed well costs while completing some very good wells in the Permian Basin. First Call's price target is $31.15.

There was very little movement in the First Call price targets since last week. Most of them are close to my valuations.

A lot of analysts are beginning to see how oversold these stocks are. Check this out:
> On July 11 Macquarie raised DVN to Outperform with a price target of $72.00 (FC = $75.34)
> On June 30 Canaccord Genuity raised BCEI to a BUY with a price target of $29.00 (FC = $28.58)
> On July 7 Jefferies raised EOG to HOLD with a price target of $80.00 (FC = $102.03)
> On July 1 Stephens raised FANG to Overweight with a price target of $98.00 (FC = $94.55)
> On July 14 Global Hunter raised NFX to a BUY with a price target of $45.00 (FC = 43.56) and I saw NFX listed as the #1 energy stock to buy NOW in another article. IMO what NFX has going up in Oklahoma is a really big deal.
> On July 14 Cowen & Co. raised OAS to a BUY with a price target of $17.00 (FC = $18.02)
> On Jun 30 Raymond James raised RRC to Outperform, but they did not give a price target (FC = $68.34)

It is always nice to see respected analysts that agree with me.

All of the Sweet 16 are solid companies with strong balance sheets and more than enough liquidity to survive an extended period of low oil & gas prices.

This coming week, we will still be in the "Quiet Period", so the Sweet 16 will likely trade up and down with oil prices. No one seems to notice that natural gas prices have been drifting higher. Natural gas will get more attention in October. BTW this is an El Nino year and that means a cool & wet start to winter in late October. The Southeast quarter of the country is now hotter than normal and that means more gas fired power plants are burning up natural gas to keep our air conditioners going. For more on the weather see: http://www.weatherbell.com/saturday-sum ... ly-18-2015

Smaller companies get hit harder: In the 2008/2009 oil price cycle, it was the small-cap E&P companies that really got hammered AND they were the ones that generated 500% to 1,000% gains when oil prices rebounded. This may be why Bonanza Creek (BCEI) is down 50% YTD when there is no news to support the selloff. Note above that Canaccord Genuity (which covers a lot of upstream companies) recently raised it to a BUY with a $29 price target. Bonanza Creek has less than 50 million shares outstanding, so if a fund manager dumps it, the sale can trigger a lot more sell orders. Investor tend to set tighter stop loss orders on small-caps. I've taken several hard looks at my forecast model for BCEI and I see nothing to justify its current share price. Operating cash flow per share should be $4.50 to $5.00 this year and it has a solid balance sheet.

I did notice that BCEI does not account for their derivatives as "hedges". Therefore, the cash settlements during each quarter show up on the Cash Flow Statement as "Cash From Investing Activities" instead of in the "Cash From Operating Activities" section at the top. This may be confusing some analysts that are not familiar with oil & gas accounting rules. Take a look at the first quarter 10-Q to see what I mean.

Iranian Deal: I encourage all of you to read carefully the RBC Capital report we sent out on Friday. There is a lot of confuse out there about the Iranian oil deal and I think RBC does a great job of explaining it. NO ADDITIONAL IRANIAN OIL WILL REACH THE MARKET UNTIL Q2 OF 2016. By then, we many need every drop.

Say a prayer for the families of those four Marines that were killed in TN. We are at war with a bunch of wacko nut jobs that have no respect for human life. We are at war regardless of what those fools in Washington want to call it. Iran is going to get over $100 Billion cash in a few months from this nuke deal and a lot of that money will go to terrorist groups. We live in a crazy world.