Energy Prospectus

Susan & I got back from the annual EPG Cruise Sunday afternoon. As soon as our plane landed in Houston, Susan got a message from Tulsa that her mother took a turn for the worse. Susan has been working today on getting hospice people in to sit with her. This is just a reminder that we all need to enjoy life while we are in good health. Susan's mother is 88 and she's had a wonderful life.

I have updated the Sweet 16 spreadsheet. It is now available from the EPG website. On tab 2 you can see my current valuation for each stock compared to First Call's price target.

4th quarter financial results and year-end reserve reports will be pouring in during the 2nd half of February. I will be updating the forecast models for each company as fast as I can and I will be rolling the forecast models forward another year, breaking out 2016 by quarter and showing my initial forecast for 2017.

As of February 6 the Sweet 16 is down 5.9% YTD, compared to the S&P 500 Index that is down 8.0% YTD.

Our four "gassers" (AR, GPOR, RRC, SWN) continue to lead the pack this year. AR has more than 100% of their 2016 natural gas production hedged at $3.92/mmbtu and GPOR published an operational update last week that topped my forecast. SWN has rebounded nicely off the low in December. A big hedge fund is accumulating SWN.

Natural gas prices are getting some support from the weather. Another blast of cold is on the way with the eastern half of the U.S. expected to see the lowest temps of the winter from February 14 to 24. See the 2/8 update at http://www.weatherbell.com/

One thing that jumped out on the GPOR update was that the prices they got for NGLs in Q4 were significantly higher than their realized prices for NGLs in Q3. The market is focused on oil prices, but several of the Sweet 16 get a lot of revenue from NGL prices. Very few companies hedge their NGLs. As U.S. natural gas production falls, the market for NGLs should improve. RRC is reporting a significant improvement in realized prices for the Marcellus/Utica gas as several major midstream projects have increased the regions takeaway capacity.

DVN and SM produce a lot of NGLs.

As I have mentioned here before, I will be making a few changes to the Sweet 16 after I see Q4 results.

Investing.com - U.S. natural gas futures rose sharply on Monday, as updated weather forecasting models pointed to seasonably cold weather through the next two weeks, lifting near-term demand expectations for the heating fuel. Forecasts originally called for mild winter weather during the period, prompting traders to close out bets on lower prices.

Bullish speculators are betting on the cold weather to increase winter demand for the heating fuel. The heating season from November through March is the peak demand period for U.S. gas consumption.

Natural gas for delivery in March on the New York Mercantile Exchange rallied 8.7 cents, or 4.22%, to trade at $2.150 per million British thermal units by 15:30 GMT, or 10:30AM ET, after rising to an intraday peak of $2.167, the most since February 1.

Natural gas storage in the U.S. fell by 152 billion cubic feet last week, according to the U.S. Energy Information Administration, compared to expectations for a decline of 158 billion.

That compared with draws of 211 billion cubic feet in the prior week, 115 billion cubic feet in the same week last year and a five-year average of 178 billion.

Total U.S. natural gas storage stood at 2.934 trillion cubic feet, 16.7% higher than levels at this time a year ago and 15.1% above the five-year average for this time of year.

The EIA's next storage report slated for release on Thursday, February 11 is expected to show a withdrawal of approximately 155 billion cubic feet for the week ending February 5.

Inventories fell by 160 billion cubic feet in the same week last year, while the five-year average change for the week is a drawdown of around 162 billion cubic feet.

Natural gas in U.S. storage was under 2,900 Bcf on January 31st. If storage dips below 2,000 Bcf by the end of March, which in now likely, it should support natural gas prices for the remainder of the year. Refilling storage each year is a big part of annual demand. There was fear in December that ending storage would be near 3,000 Bcf, the highest storage level EVER at the end of the winter heating season. The 5-year average for storage in mid-April is ~1,600 Bcf. Utilities need ~4,200 Bcf in storage when winter starts to insure they have enough for space heating demand. As I have posted here several times, Super El Nino winters start warm but then turn cold and they have produced several major winter storms in the eastern half of the U.S. during the first quarter. Super El Nino winters also tend to last well into April, which could delay the start of storage refill. - Dan