Sweet 16 Update - August 29
Posted: Sat Aug 29, 2015 11:10 am
"Crazy Market" is an understatement for the ride we went through last week. The Sweet 16 ended the week up 3.9%, but it is still down 17.1% YTD,
The Sweet 16 spreadsheet, which shows my valuations for each company compared to First Call's Price Targets, will be posted to the website this afternoon.
There aren't many changes since last week. I did take a hard look at Matador Resources (MTDR) yesterday and increased my valuation by $3.30 to $27.30/share.
I still need to update the profiles for Cimarex Energy (XEC) and Carrizo Oil & Gas (CRXO). I should finish both of them this weekend. Then I plan to take a hard look at several large-caps that impressed me at EnerCom. COG, EGN, PDCE, QEP, SWN and WLL all deserve a look.
At today's oil price, the Permian Basin, Tier One acreage in the Eagle Ford and SCOOP/STACK in Oklahoma make sense. Very few other project areas make sense to drill until oil gets back to $60/bbl. There is reason for optimism by the "gassers", as I think there is potential for natural gas prices to move back to $4.00/mmbtu this winter.
The Sweet 16 is a "Growth Portfolio", so companies that have been forced to "hunker down" may need to be dropped. BTE and OAS are the two most likely candidates to be dropped, BUT they are both trading way below my valuation. Baytex has great acreage in the core of the Eagle Ford, but they have too much heavy oil in Canada where prices are getting hammered. Oasis is a pure play the Williston Basin (Bakken / Three Forks) where netbacks are under $40/bbl. OAS is a takeover target for any major that wants to get exposure to the Bakken. OAS is well hedged through year-end, but could struggle if oil prices stay low well into 2016. Of course, I can say the same for a long list of companies.
Oil Prices: I think there is a good chance we have seen the low for the year. There was some technical resistance around $43 for WTI, so the close on Friday above $45 was very encouraging to me. My prediction is that this is the 3rd and FINAL test of the low for this cycle. There is very little technical resistance until $60/bbl.
Simple math tells us that a large drop in U.S. oil production is just ahead.
> In the last six weeks, U.S. oil production has dropped 221,000 bbls per day. See: http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm
> Well completions have dropped like a rock and there is no way new wells are offsetting the decline of all the legacy wells.
> We should see a drop in U.S. production of AT LEAST 500,000 bbls per day between now and year-end. I think we could see oil production dip under 8.5 million barrels per day and imports exceed production once again. .
> As you saw on Thursday and Friday, there is a lot of money on the sidelines eager to get back into energy. Fund managers know how important this sector is to the global economy and they also know that oil prices tend to "over-shoot" at both the top and the bottom of each cycle.
A few other things that should drive oil prices higher:
> OPEC excess production capacity is at an all-time low ( a million BOPD at the most ).
> Non-OPEC oil production is rolling over. Per Core Labs at EnerCom, Russian production may drop by close to a million barrels per day from 2015 to 2016. Mexico and Canadian production is falling.
> All of the OPEC countries are bleeding money and several members have called for an emergency meeting. Saudi Arabia is under a lot of pressure from other OPEC members and they now need to spend a lot more money on defense. A ground war in Yemen with rebels funded by Iran is not going to be cheap.
> Improvement in the U.S. economy more than offsets any decline in Chinese oil imports, which are probably not going down anyway.
> Iran is not going to bring nearly as much oil to market as some "experts" think they will. BTW over 60% of the American people know this is a stupid deal. 30% would jump off of a bridge if Obama told them to and 10% don't know what planet they live on.
> IEA will increase their global demand forecast month after month because they need to catch up to what is happening in the real world. Their forecast models are flawed. For more on this, send me an e-mail (dmsteffens@comcast.net) and I will send you a short lesson on what is wrong with both the EIA and IEA forecasting methods. They are both formula driven and put too much weight on historical trends and they miss the increase in demand caused by lower fuel prices. They made the same mistakes in 2009.
History: The 4th quarter of 2009 (when oil prices recovered) was the best quarter for the Sweet 16 EVER. It gained over 50% in one quarter.
The Sweet 16 spreadsheet, which shows my valuations for each company compared to First Call's Price Targets, will be posted to the website this afternoon.
There aren't many changes since last week. I did take a hard look at Matador Resources (MTDR) yesterday and increased my valuation by $3.30 to $27.30/share.
I still need to update the profiles for Cimarex Energy (XEC) and Carrizo Oil & Gas (CRXO). I should finish both of them this weekend. Then I plan to take a hard look at several large-caps that impressed me at EnerCom. COG, EGN, PDCE, QEP, SWN and WLL all deserve a look.
At today's oil price, the Permian Basin, Tier One acreage in the Eagle Ford and SCOOP/STACK in Oklahoma make sense. Very few other project areas make sense to drill until oil gets back to $60/bbl. There is reason for optimism by the "gassers", as I think there is potential for natural gas prices to move back to $4.00/mmbtu this winter.
The Sweet 16 is a "Growth Portfolio", so companies that have been forced to "hunker down" may need to be dropped. BTE and OAS are the two most likely candidates to be dropped, BUT they are both trading way below my valuation. Baytex has great acreage in the core of the Eagle Ford, but they have too much heavy oil in Canada where prices are getting hammered. Oasis is a pure play the Williston Basin (Bakken / Three Forks) where netbacks are under $40/bbl. OAS is a takeover target for any major that wants to get exposure to the Bakken. OAS is well hedged through year-end, but could struggle if oil prices stay low well into 2016. Of course, I can say the same for a long list of companies.
Oil Prices: I think there is a good chance we have seen the low for the year. There was some technical resistance around $43 for WTI, so the close on Friday above $45 was very encouraging to me. My prediction is that this is the 3rd and FINAL test of the low for this cycle. There is very little technical resistance until $60/bbl.
Simple math tells us that a large drop in U.S. oil production is just ahead.
> In the last six weeks, U.S. oil production has dropped 221,000 bbls per day. See: http://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm
> Well completions have dropped like a rock and there is no way new wells are offsetting the decline of all the legacy wells.
> We should see a drop in U.S. production of AT LEAST 500,000 bbls per day between now and year-end. I think we could see oil production dip under 8.5 million barrels per day and imports exceed production once again. .
> As you saw on Thursday and Friday, there is a lot of money on the sidelines eager to get back into energy. Fund managers know how important this sector is to the global economy and they also know that oil prices tend to "over-shoot" at both the top and the bottom of each cycle.
A few other things that should drive oil prices higher:
> OPEC excess production capacity is at an all-time low ( a million BOPD at the most ).
> Non-OPEC oil production is rolling over. Per Core Labs at EnerCom, Russian production may drop by close to a million barrels per day from 2015 to 2016. Mexico and Canadian production is falling.
> All of the OPEC countries are bleeding money and several members have called for an emergency meeting. Saudi Arabia is under a lot of pressure from other OPEC members and they now need to spend a lot more money on defense. A ground war in Yemen with rebels funded by Iran is not going to be cheap.
> Improvement in the U.S. economy more than offsets any decline in Chinese oil imports, which are probably not going down anyway.
> Iran is not going to bring nearly as much oil to market as some "experts" think they will. BTW over 60% of the American people know this is a stupid deal. 30% would jump off of a bridge if Obama told them to and 10% don't know what planet they live on.
> IEA will increase their global demand forecast month after month because they need to catch up to what is happening in the real world. Their forecast models are flawed. For more on this, send me an e-mail (dmsteffens@comcast.net) and I will send you a short lesson on what is wrong with both the EIA and IEA forecasting methods. They are both formula driven and put too much weight on historical trends and they miss the increase in demand caused by lower fuel prices. They made the same mistakes in 2009.
History: The 4th quarter of 2009 (when oil prices recovered) was the best quarter for the Sweet 16 EVER. It gained over 50% in one quarter.