Energy Prospectus

Dan, for over a year you have expressed amazement at the low multiple, given the quality of SM. It now appears the prospects were not all they appeared to be. Even allowing for the low oil $$. this is a disaster.
I for one would appreciate more guidance on the long term names we have come to know and less on the latest ideas.

Petrohawk: Go to the EPG website, log on, and click on the Sweet 16 tab. Download the SM forecast to Excel and take 15-20 minutes to study it. Focus on row 48, cash flow from operations.

Tell me what you think is wrong with my forecast model.

SM generated around $13.00/share of cash flow from operations in 2015
For 2016
> They have ~44% of oil production hedged at around $88/bbl. At the bottom of the forecast model you can see a table of all of their hedges.
> I am using a combined (net of hedges) realized oil price of $55/bbl for 2016; ($88 x 0.44) + ($35 X 0.56) = $58.32
> My revenue forecast is $1.69 Billion, which is about the same as First Call shows today
> My forecast shows operating cash flow per share of over $9.00/share (this is net of interest expense)
> First Call's cash flow per share forecast for 2016 is $11.50

Assuming you cannot find anything wrong with my forecast model, tell me why SM should be trading at 1.5 X CFPS.

Now take the time to go slowly through their most recent PowerPoint presentation and tell us why this stock is priced as if the company is on the verge of bankruptcy.

Sometimes stock prices make no sense. There is ton of negative stuff out there on this sector and there are a lot of companies trading at levels that make sense only if you believe oil is going to stay at $30/bbl FOREVER. The only reason I can see for SM's low share price is that they are one of the "tweener" company and a bit "off the radar screen" of the Wall Street gang. It is trading like it was a very small company, not one that produces over 160,000 boepd.

BTW First Call's price target today is $37.81. 21 Wall Street analyst have submitted price targets to First Call. They range from $23 to $61.

PS: If you want me to comment on a specific company, this is the right place to ask. All of the Sweet 16 profiles and forecast models have been updated and are available on the EPG website. All you have to do is log on to see them and download them. All of the Small-Cap Growth Portfolio companies have updated forecast models on the website. I work on this stuff about 60 hours per week and I do my best to keep current.

PPS: We are in a Bear Market. I know it is frustrating watching the sector go down day after day. Believe me, "This too shall pass". The industry is not going away.

The industry will not be going away, but there are a bunch of E&P companies and MLP's that
are trading as though they will be bankrupt soon. Dan, which of the companies and MLP's that you follow do
you believe will not survive?

As of today, none of the model portfolio companies are at risk of bankruptcy. If oil stays at $30/bbl all year, that may change.

The pricing we are seeing to me is based on markets believing the lower longer - much longer theory. Hedges for 2016 therefore become less meaningful.

A year ago I thought many of my favorites were protected - but here we are in 2016 and pricing is worse. I can remember Boone Pickens last summer saying prices would be ~$60 by the end of the year. Now others are saying the same thing for 2016. The market is saying prices at the end of 2016 will be bad.

It really comes down to one's "guess" as to what pricing will be later this year.

Bob

Keep in mind that the NYMEX strip is not a forecast of future prices. It is driven by speculators that outnumber commercial traders by up to 20 to 1.

The out months are just "derivatives" based on the front month with a time premium. They are no different than Puts and Calls on stocks.

dan_s wrote:Petrohawk: Go to the EPG website, log on, and click on the Sweet 16 tab. Download the SM forecast to Excel and take 15-20 minutes to study it. Focus on row 48, cash flow from operations.

Tell me what you think is wrong with my forecast model.

SM generated around $13.00/share of cash flow from operations in 2015
For 2016
> They have ~44% of oil production hedged at around $88/bbl. At the bottom of the forecast model you can see a table of all of their hedges.
> I am using a combined (net of hedges) realized oil price of $55/bbl for 2016; ($88 x 0.44) + ($35 X 0.56) = $58.32
> My revenue forecast is $1.69 Billion, which is about the same as First Call shows today
> My forecast shows operating cash flow per share of over $9.00/share (this is net of interest expense)
> First Call's cash flow per share forecast for 2016 is $11.50

Assuming you cannot find anything wrong with my forecast model, tell me why SM should be trading at 1.5 X CFPS.

Now take the time to go slowly through their most recent PowerPoint presentation and tell us why this stock is priced as if the company is on the verge of bankruptcy.

Sometimes stock prices make no sense. There is ton of negative stuff out there on this sector and there are a lot of companies trading at levels that make sense only if you believe oil is going to stay at $30/bbl FOREVER. The only reason I can see for SM's low share price is that they are one of the "tweener" company and a bit "off the radar screen" of the Wall Street gang. It is trading like it was a very small company, not one that produces over 160,000 boepd.

BTW First Call's price target today is $37.81. 21 Wall Street analyst have submitted price targets to First Call. They range from $23 to $61.

PS: If you want me to comment on a specific company, this is the right place to ask. All of the Sweet 16 profiles and forecast models have been updated and are available on the EPG website. All you have to do is log on to see them and download them. All of the Small-Cap Growth Portfolio companies have updated forecast models on the website. I work on this stuff about 60 hours per week and I do my best to keep current.

PPS: We are in a Bear Market. I know it is frustrating watching the sector go down day after day. Believe me, "This too shall pass". The industry is not going away.

I did what you recommended. The spread sheet shows nothing hedged in 2017. Put in today's prices for the 2016 column and watch the cash flow disappear. Markets IMO are pricing today's prices into the future. Do I believe that no - but a lot of big money houses are predicting lower much longer. 2016 hedges are nice - the lack of 2017 hedges at today's prices is damning. It is that simple.

If you believe oil is going to stay at or below $30/bbl for over a year, you should sell everything in the energy sector.

Just keep in mind that global oil production will drop off a cliff at that level and when that happens the price of the world's most valuable commodity will go a lot higher.