Sweet 16 Update - Mar 5

dan_s · Post by **dan_s** » Sat Mar 05, 2016 3:58 pm

The Sweet 16 gained 12.79% for the week ending 3/4/2016. As a group, the Sweet 16 is now up 0.58% YTD, compared to the S&P 500 Index that is down 2.15% YTD.

SM Energy (SM), which has been trading well below my valuation, must have made a good impression at the Simmons conference on March 3 because the share price almost double on Thursday and Friday with very heavy trading volume after their presentation. They will be making the same presentation at the Raymond James conference on March 9 and I urge all of you to listen to the webcast, which you can find at this link: http://ir.sm-energy.com/phoenix.zhtml?c ... l-calendar

My valuation of SM is $42.65/share and I think there is upside beyond that. My 2016 cash flow per share forecast is $7.20, so it trading at barely over 2X CFPS. That is an extremely low multiple for an Eagle Ford / Permian Basin company. FANG is now trading at 20X CFPS, EOG at 16X CFPS and CXO at 9X CFPS. The average multiple for the Sweet is 9X CFPS. On the right hand side of the Sweet 16 spreadsheet (Tab 1) you can see my current CFPS forecast for each company.

Devon Energy (DVN) has a major acquisition to close in the STACK play and some assets to sell over the next few months. Wall Street hates these periods of confusion, so the share price may flop around at current levels until the fog clears. This is setting up to be a tale of two halves for DVN. Heading into the 3rd quarter, I expect DVN to look very attractive to the market. We will send out an updated profile on the company early next week. It is sitting here waiting for my final review.

We have published updated profiles on CXO, XEC, EOG, FANG, GPOR, PE, PDCE and PXD. I hope to finish the rest of the updates this coming week. Then I will turn my focus to the companies in our Small-Cap Growth Portfolio. The small-caps have more risk, but that is where the BIG GAINS will come from as oil and gas prices begin to rise.

NGL prices are not discussed very much, but have already started to rise and a lot more NGL demand comes on-line this year.

The updated Sweet 16 spreadsheet will be available for download from the EPG website later today. It shows my updated valuation for each company, compared to First Call's price target.

At this point in the oil price cycle is when I expect to see increased M&A activity. All of the Sweet 16 are PRIME TAKEOVER TARGETS because they control large blocks of leasehold in some of North American's premier oil & gas plays. When a company like Exxon goes "shopping" they are looking for big blocks they can operate that have many years of development potential.

The really big companies have an advantage in the M&A market because their cost of capital is much lower than the competition. They can also absorb the acquired assets into their systems without much difficulty.