Energy Prospectus

Thanks to a rebound in crude oil prices on Thursday & Friday, the Sweet 16 was up 5.65% last week, but it is still down 9.41% YTD. Lots of "gloom & doom" is still hanging over the energy sector.

As I predicted back on January 1, the "gassers" (AR, GPOR, RRC and SWN) are leading the pack. They are now all up YTD. It's not that they are doing that great. It is just because they became grossly oversold late in December, thanks to the warm weather. I just felt that they had to rebound a bit when the first winter storm rolled through and that is what happened.

Back in December, I saw forecasts that gas in storage would end the heating season near 3 TCF. Now it looks like storage will be close to 2.0 TCF at the end of March, assuming a "normal" winter from here on out. That is still a high ending storage level relative to the 5-year average of 1.6 TCF at the end of winter, but not terrible. U.S. gas production is now on steady decline and we are getting cold weather (finally). Dr. Joe Bastardi is now forecasting two more winter storms that follow a track across the South and then up into the Northeast. The next one will arrive in New York around February 1. Watch Joe's Saturday update at: http://www.weatherbell.com/

Natural gas trades on regional markets and the U.S. gas market will be much tighter heading into next winter.

Southwestern Energy (SWN) is up 23.4% YTD and it is still 48% below my valuation, but I may be dropping it from the Sweet 16. SWN has suspended all drilling and they have not given any guidance for 2016. They have reduced the workforce by 44% and are now in "hunker down" mode. SWN will make it and for those of you that think natural gas prices will rebound next winter, this one could be a good long-term holding. However, the Sweet 16 is a "growth" portfolio and I believe SWN's production will decline in 2016.

Antero Resources (AR) has 100% of their natural gas for 2016 hedged at $3.92/mmbtu, so it is the safe bet among the gassers.

We sent out an updated profile on Devon Energy (DVN) last week. It is a super high quality company whose share price is depressed because of the market's confusion over the big acquisition they announced in December. In a bear market the analysts don't like confusion. I love the STACK play, so I like the deal.

Newfield Exploration (NFX) is my Top Pick for STACK. CLR and XEC also have a lot of exposure to SCOOP & STACK.

SM Energy (SM) continues to trade at a ridiculously low multiple of cash flow per share. I have gone over my forecast model line-by-line and I cannot see explain why the market is so down on this company. They even have some good hedges in place for 2016 that protect them from current commodity prices. I am hoping to get them to speak at our luncheon in March.

Next to STACK, the Permian Basin is holding up better than most areas. That is where the Sweet 16 has the most exposure (CRZO, CXO, XEC, DVN, EOG, FANG, LPI, MTDR, PE)

I do think we have seen the low for this cycle on oil prices, but it will be a slow crawl back to $50/bbl. More and more analysts now see the potential for a balanced global oil market by the end of 2016. Non-OPEC production is on decline. As that fact is confirmed, you will see a lot of money rotate into this sector. See my post under The View From Houston tab for more on oil prices.

I got an e-mail from one of our members that asked: "I've looked at several of the Sweet 16 forecast spreadsheets and I notice that your top line revenue forecast are higher than what First Call is showing for some companies. Much higher for a few and about the same for other. Can you explain why?

When I get a general question like this, it is best to answer it here than just respond to one member.

Here's why my forecast revenues are sometimes quite a bit higher: Some analysts (not all) do not consider the impact of hedges in their revenue forecasts. They may consider them lower in the income statement, but some analyst don't even do that. All they do is take forecast produced volumes times their firm's commodity price deck. That is extremely misleading. What I do, is adjust future period commodity prices (shown at the bottom of each forecast spreadsheet) for the impact of hedges for each period. I also consider regional price differentials. So, the oil, gas and NGL prices that I use are "all inclusive". Said another way, I take forecast volumes X the actual net cash the company should be getting.

When companies report actuals for a quarter, they break out the impact of hedges, often in "Other Income". Some companies call them "Realized gains (losses) on derivatives". These are the actual cash settlements during the period on their hedges. We all know that "Cash is King", so this is very important for you to understand.

Companies with hedges in place must break out on the income statement their "Unrealized gains (losses) on derivatives". These are the non-cash mark-to-market adjustments on hedges.

If you look at a company on Yahoo Finance and click on Analysts Estimates you are going to see extremely wide ranges for revenues and sometimes for earnings per share. There are many reasons for this, but one is that some analyst really do not understand oil & gas accounting rules and how to deal with hedges.

I have gotten Wall Street reports on some companies that are incredibly wrong. I cannot come close to the revenues they forecast without using ridiculous high or low commodity prices.

who are your likely Sweet 16 candidates for a new addition if you have any in mind yet?

High on my watch list are:

PDC Energy (PDCE): Stifel rates it a BUY with a price target of $70.00. The company should generate over $10.50 CFPS this year and they have lots of visible growth. Strong Balance Sheet.

Noble Energy (NBL): When I profiled it in late October my valuation was $45.00.

This is why NBL is high on my list:

Noble Energy, Inc. ("Noble Energy" or "the Company") (NYSE: NBL) today increased its fourth quarter 2015 sales volumes to range between 405 and 415 thousand barrels of oil equivalent per day (MBoe/d), with the midpoint of the new estimate representing a 15 MBoe/d increase over the prior midpoint. Actual volumes sold in October and November 2015 exceeded expectations due to improved completion practices in the Eagle Ford and DJ Basin, as well as the accelerated ramp-up and early performance of Big Bend and Dantzler in the Gulf of Mexico. Combined, the two deepwater fields have already achieved their targeted peak production rate of 20 MBoe/d, net to Noble Energy. In addition, fourth quarter volumes in the Company's other U.S. Onshore, West Africa and Israel assets is consistent with to slightly better than prior expectations.

3rd quarter production was 379.5 Mboe/day.

Gary W. Willingham, the Company's Executive Vice President of Operations, commented, "We are finishing 2015 with tremendous operating momentum and performance across the business. The Company's 2015 capital budget remains unchanged and fourth quarter capital will be the lowest quarterly spend of the year. We've positioned the company to operate within cash flow while still being able to deliver modest pro-forma annual volume growth in 2016."

Eagle Ford Well Performance Update

Performance from Lower Eagle Ford wells designed and completed by Noble Energy continue to materially outperform historical results from these assets. The most recent three wells, including the Gates 05D 10-20, 14-20, and 18-20, were all completed with reduced stage and cluster spacing, increased proppant concentration, and more conservative pressure management. The average 30-day IP for each of the wells, which have a lateral length of approximately 7,000 feet, was 4,885 Boe/d (10-20), 6,050 Boe/d (14-20), and 6,300 Boe/d (18-20).

Noble Energy (NYSE: NBL) is a global independent oil and natural gas exploration and production company with total proved reserves of 1.7 billion barrels of oil equivalent at year-end 2014 (pro forma for the Rosetta acquisition). The company's diverse resource base includes positions in four premier unconventional U.S. onshore plays - the DJ Basin, Eagle Ford Shale, Delaware Basin, and Marcellus Shale - and offshore in the U.S. Gulf of Mexico, Eastern Mediterranean and West Africa. Driven by its purpose, Energizing the World, Bettering People's Lives®, the company is committed to safely and responsibly providing energy to the world while positively impacting the lives of our stakeholders. For more information, visit www.nobleenergyinc.com.

In a 13G filing, Andreas Halvorsen’s Viking Global reported purchasing a new stake of 35.52 million shares of Southwestern Energy Company (NYSE:SWN), which account for 9.2% of the company’s outstanding shares.