Sweet 16 Update - Nov. 8

[dan_s]

It took me most of the weekend to get all of the forecast models for the Sweet 16 updated, but I am FINALLY done. The main spreadsheet that shows my updated valuation for each company compared to First Call's price targets will be on the website in the morning. You can see the individual forecast models by clicking on the company logos under the Sweet 16 tab on the website.

The Sweet 16 was up 3.6% last week and is now down just 2.2% YTD, compared to the S&P 500 Index that is up just 2.0%. So, we are not doing too bad considering the terrible year for oil & gas prices.

All of the Sweet 16 reported 3rd quarter results that were fairly close to my forecasts. Most of them reported Adjusted Earnings that were slightly higher.

REMEMBER to ignore those big non-cash impairment charges. Those are just writedowns of sunk costs that have no real bearing on the value of the companies. Investors should primarily focus on CASH FLOW FROM OPERATIONS and the company's potential to grow production and proven reserves.

I believe 3rd quarter results will be the low point for this cycle. Crude oil supply/demand continues to tighten and we should begin to see weekly crude oil storage reports that are more bullish as refiners ramp up heating oil production. I'm sure we are going to see a steady decline in the active rig count, which is reported each Friday.

Last week the U.S. dollar rallied to seven-month highs against a basket of six other major currencies after data showing the U.S. economy created more jobs than expected in October bolstered expectations for a rate hike next month. The higher dollar does pressure oil prices.

The North American natural gas market is also going to tighten.
> U.S. production is now on steady decline as you can see for yourself at http://www.eia.gov/petroleum/drilling/#tabs-summary-2
> The weather is turning colder, so we should see draws from storage in a couple weeks
> LNG exports will ramp up soon and hit 2 BCF per day when Cheniere's first train at Sabine Pass is fully operational by the end of the first quarter

The big story that doesn't get the press it deserves is rapid improvement in the SCOOP & STACK plays in Oklahoma. CLR, DVN, NFX and XEC all have a lot of exposure to these plays that have solid economics even at today's oil prices. Read the NFX profile carefully. BTW NFX is now up 45% YTD and I think the share price could double if crude oil just gets back to $60/bbl.

The company that will benefit the most from improving natural gas prices is Southwestern Energy (SWN), followed by RRC, GPOR and DVN. All of the Sweet 16 have some exposure to natural gas. You can see the production mix for each company at the bottom of their individual forecast models.

We have already e-mailed updated profiles for NFX, RRC and SM to your. My plan is to get the rest of them done this coming week.

If you have any questions, posting them to the Forum is the best place to ask them. I promise to respond.