Sweet 16 Update - Feb 27
Posted: Sat Feb 27, 2016 2:57 pm
The Sweet 16 gained 3% for the week ending 2/26/2016, but it is still down 12.2% YTD compared to the S&P 500 Index that is down 5.0% YTD.
Oil prices "feel" like they want to move higher, but the moves up have been short covering rallies in reaction to news. There needs to be more evidence that Non-OPEC supply is coming down before we see more committed buyers. That should happen in the 2nd quarter.
Continental Resources (CLR) and Newfield Exploration (NFX) were the big gainers this week, primarily because of the glowing well results they are getting in the SCOOP & STACK plays in Oklahoma. If not for the gloom and doom hanging over the sector, these Anadarko Basin plays would be getting a lot more attention. Return on investment for NEW WELLS are still quite good in SCOOP & STACK even at current oil prices. Devon Energy (DVN) and Cimarex Energy (XEC) also have significant positions in these areas.
For those of you still in Gastar Exploration (GST) I highly recommend you read the CLR and NFX Q4 press releases and go to their websites to view their current investor slide presentations. NFX will be drilling several direct offset wells to GST leasehold this year. Gastar has a 46,000 acre block of leasehold that is directly on-trend to where NFX is completing some fantastic oil wells. Believe me, they see it.
I have completed updating all of the Sweet 16 forecast models based on each company's guidance. You can download them from the EPG website.
All of the companies are now well positioned to survive until oil prices rebound. CLR, EOG and FANG don't have any of their oil hedged, so they have the most exposure to a prolonged period of low oil prices. They also have the most to gain from an improving oil market.
Laredo Petroleum (LPI) has the most debt leverage. They will be fine through 2016 because over 85% of their oil is hedged at $70.84/bbl. If WTI is still below $50/bbl at year-end they will be in some trouble.
The main Sweet 16 spreadsheet, which you can download from the EPG website, shows my current valuation compared to First Call's price target for each company. My "Fair Value Estimate" is what I think the company would sell for today in a competitive bidding situation. First Call's price targets are an average of where industry analysts believe the stock will be trading a year from now.
I still plan to make some changes to the Sweet 16 in March, but I need more time to take a hard look at several candidates. OXY and NBL are at the top of my list. CRZO, LPI and SM are likely to be moved to our Small-Cap Growth Portfolio.
I do get a lot of e-mails about SM Energy (SM). All I can tell you is that I see no justification for it trading where it is today. SM has solid cash flow from operations. Their production will decline 15% to 20% this year because they are putting off completion of a lot of wells until oil prices improve. However, SM should still generate more than $7.00 operating cash flow per share in 2016. In fact, First Call's CFPS forecast is over $9.50 per share. There is no justification for this stock to be trading at 1X CFPS. As a group, the Sweet 16 is now trading at more than 8X my 2016 CFPS forecast.
Devon Energy (DVN), one of the largest companies in the group, is also trading below book value. There just seems to be a lot of confusion surrounding the Felix Energy acquisition and their non-core asset sales. Companies that are "in transition" do tend to get some time in the penalty box until the smoke clears and the analysts have a clear picture of the future. It may be a couple more quarters before this one gets the attention it deserves. My view is that Devon is going to be in great shape by the end of Q3.
If you have yet to read our new profile on PDC Energy (PDCE), I urge you to do so.
We have published updated profiles on XEC, FANG, GPOR, PDCE and PXD. We will be sending out updated profiles on the rest of the Sweet 16 during the first week of March.
This coming week I will be updating the forecast models of all of the companies in our Small-Cap Growth Portfolio.
Oil prices "feel" like they want to move higher, but the moves up have been short covering rallies in reaction to news. There needs to be more evidence that Non-OPEC supply is coming down before we see more committed buyers. That should happen in the 2nd quarter.
Continental Resources (CLR) and Newfield Exploration (NFX) were the big gainers this week, primarily because of the glowing well results they are getting in the SCOOP & STACK plays in Oklahoma. If not for the gloom and doom hanging over the sector, these Anadarko Basin plays would be getting a lot more attention. Return on investment for NEW WELLS are still quite good in SCOOP & STACK even at current oil prices. Devon Energy (DVN) and Cimarex Energy (XEC) also have significant positions in these areas.
For those of you still in Gastar Exploration (GST) I highly recommend you read the CLR and NFX Q4 press releases and go to their websites to view their current investor slide presentations. NFX will be drilling several direct offset wells to GST leasehold this year. Gastar has a 46,000 acre block of leasehold that is directly on-trend to where NFX is completing some fantastic oil wells. Believe me, they see it.
I have completed updating all of the Sweet 16 forecast models based on each company's guidance. You can download them from the EPG website.
All of the companies are now well positioned to survive until oil prices rebound. CLR, EOG and FANG don't have any of their oil hedged, so they have the most exposure to a prolonged period of low oil prices. They also have the most to gain from an improving oil market.
Laredo Petroleum (LPI) has the most debt leverage. They will be fine through 2016 because over 85% of their oil is hedged at $70.84/bbl. If WTI is still below $50/bbl at year-end they will be in some trouble.
The main Sweet 16 spreadsheet, which you can download from the EPG website, shows my current valuation compared to First Call's price target for each company. My "Fair Value Estimate" is what I think the company would sell for today in a competitive bidding situation. First Call's price targets are an average of where industry analysts believe the stock will be trading a year from now.
I still plan to make some changes to the Sweet 16 in March, but I need more time to take a hard look at several candidates. OXY and NBL are at the top of my list. CRZO, LPI and SM are likely to be moved to our Small-Cap Growth Portfolio.
I do get a lot of e-mails about SM Energy (SM). All I can tell you is that I see no justification for it trading where it is today. SM has solid cash flow from operations. Their production will decline 15% to 20% this year because they are putting off completion of a lot of wells until oil prices improve. However, SM should still generate more than $7.00 operating cash flow per share in 2016. In fact, First Call's CFPS forecast is over $9.50 per share. There is no justification for this stock to be trading at 1X CFPS. As a group, the Sweet 16 is now trading at more than 8X my 2016 CFPS forecast.
Devon Energy (DVN), one of the largest companies in the group, is also trading below book value. There just seems to be a lot of confusion surrounding the Felix Energy acquisition and their non-core asset sales. Companies that are "in transition" do tend to get some time in the penalty box until the smoke clears and the analysts have a clear picture of the future. It may be a couple more quarters before this one gets the attention it deserves. My view is that Devon is going to be in great shape by the end of Q3.
If you have yet to read our new profile on PDC Energy (PDCE), I urge you to do so.
We have published updated profiles on XEC, FANG, GPOR, PDCE and PXD. We will be sending out updated profiles on the rest of the Sweet 16 during the first week of March.
This coming week I will be updating the forecast models of all of the companies in our Small-Cap Growth Portfolio.