Energy Prospectus

Dan,

I wanted to understand your recent comment (below) a little more clearly on OAS and BTE:

"I do not see anything near-term that will move these stocks higher other than a spike in oil prices. BTE has a large stake in Canadian Heavy Oil plays and OAS is a pure play on the Williston Basin (Bakken & Three Forks). Both need much higher oil prices."

With respect to OAS, the company is cash flow neutral at about $57.00 / barrel. That number is significantly lower than many E&P's and certainly lower than almost all of the MLP's...

Regarding BTE, they are cash flow neutral at less than $50.00 / barrel; with regard to new drilling, BTE is break even at a 10% discount rate with WTI pricing at $35 for their US assets and $42 for CDN light oil and $47 CDN heavy oil.

Why do BTE and OAS get singled out on the need for higher oil when there are so many worse? Take BCEI for example, my understanding is that company needs at least $69.00 WTI for cash flow neutrality today, especially given their stubbornly high costs per barrel.

What am I missing, thanks a bunch!

First: I value BTE, BCEI and OAS at much high prices than where they sit today. They have strong management teams and some very good assets.

The Sweet 16 is all about production growth. BTE has announced that they are cutting capex and production will be on steady decline. However, I love their Sweet Spot acreage in the Eagle Ford. Canadian based companies, especially those with a lot of heavy oil are out of favor.

BCEI: I still like it a lot and will move it to our Small-Cap Growth Portfolio. I like companies to have at least a market cap of $1Billion in the Sweet 16.

OAS: For now it is staying in the Sweet 16. Solid company with great acreage in the Bakken/Three Forks. I think it is grossly oversold and a prime takeover target. Cash flow from operations should cover most, if not all, of this year's capital program. My valuation of $18 is less than 4X CFPS. If I was still working at Hess, I would be telling them to take a hard look at OAS. Share price is down because the Bakken is currently out of favor with Wall Street.

OAS is the next to go if I can find a replacement because their production is going to decline in Q3 and Q4.

This happens each time I remove a company from the Sweet 16. All I am doing is trying to upgrade the portfolio. After looking at PE and SWN, I just think they look a lot better. Plus, they have double digit production growth locked in. The Sweet 16 is a "Growth" portfolio. The Wall Street gang still seems to like the Permian Basin, so PE replacing BCEI makes sense to me. SWN is going in because I want to add more exposure to natural gas.

PS: If you agree with me that crude oil prices will soon bounce back, then hang tough with these three. They are perfect example of how Wall Street hammers the small-caps during this phase of the oil price cycle. If WTI pushes over $60/bbl they could all double.