Energy Prospectus

The Sweet 16 had one of its best weeks ever, up 11.4% for the week ending April 22. The Sweet 16 is now up 25.08% year-to-date. All 16 companies are now up YTD. The Sweet 16 is beating 99% of all hedge funds. Obviously, a lot of money has rotated into the energy sector, a prediction I made at the start of the year. Energy was the worst preforming sector in 2015 and is well on its way to being the best preforming sector in 2016. They call them "cycles" for a reason.

An updated Sweet 16 spreadsheet that shows my valuations compared to First Call's Price Targets will be posted to the website later today (4/23).

Four companies are now trading above my valuations: XEC, CLR, FANG and PXD This does not mean they will not go higher. It just means I need more information to justify a higher valuation.

The companies that IMO are the most undervalued: SM, PDCE, NFX and GPOR. I also believe my valuation for DVN has a lot of upside, if they are able to close their non-core asset sales.

A word of caution: First quarter results will be ugly. Oil & gas prices bottomed in Q1 and several companies will be reporting declining production. Some may still need to report impairment charges. However, the market is forward looking and with commodity prices on the rise the companies should have some upbeat outlooks in their press releases.

My Top Picks in the Stack Play are NFX and DVN. CLR is expected to have more "glowing" reports on SCOOP well results.

The U.S. natural gas market is going to tighten by 4-6 Bcf per day as we move through the summer. Increasing demand from power generation, the industrial sector and for exports will increase by more than two Bcf per day. Production will fall by 2 to 4 Bcf per day before the beginning of the next heating season. Henry Hub gas prices have increased by more than $0.40/MMBtu in the last two months and they should ramp to $3.00 by December. NGL prices are also going up. Our "gassers" are AR, GPOR and RRC. SM, NFX and EOG also produce a lot of gas.

From our friend Keith Kohl:

With crude prices finding some support in the mid-$40s right now, it's important to look down the road and see why our outlook is so positive. Granted, I don't want to suggest that the oil sector is out of the woods yet, but it's become glaringly obvious that we're slowly moving away from the bottom.

And the situation is starting to get ripe for an oil comeback.

Over the last year, I've told you to forget about the drama being played out in the media between the Saudis, Iran, Russia, and other OPEC producers. What we've been looking for is a signal that the glut currently plaguing the oil market will ease.

Simply put, we want to see the supply/demand imbalance addressed, and I think we're finally starting to see the first cracks in the dam appear.

In its latest Short Term Energy and Summer Fuels Outlook, the Energy Information Administration reported that U.S. crude oil production averaged 9.4 million barrels per day in 2015. This year, it's projected to decline roughly 8.5% to 8.6 million barrels per day. [ I believe U.S. oil production will drop below 8.0 million bbls per day by year-end. - Dan ]

In fact, we've recently seen the United States' daily output fall below the 9 million bbls/d mark for the first time in a long, long while. Two weeks ago, U.S. production averaged 8.977 million barrels per day. Last week it declined, albeit slightly.

Remember, this is only the beginning.

According to the latest rig count by Baker Hughes, the U.S. lost another 8 drilling rigs this week. For the record, this is the fifth consecutive weekly decline, and which brings the total of rigs actively drilling for crude oil to 343.

For a little perspective, compare that amount to the more than 1,600 rigs that were furiously drilling for oil during the summer of 2014.

Like I've said... the catalysts for an oil comeback are lined up, and it's hard not to see us move away from a bottom in oil right now.

Of course, this is only one side of the equation. And when we look at demand, our sentiment turns even more bullish.

Last week, consumption of petroleum products within the U.S. averaged 20.2 million barrels per day. Not only is demand healthy, but the U.S. is consuming gasoline at near record levels currently.

We're not just talking about the United States' addiction to crude oil, but also the fact that global demand is also at record highs. IEA now forecasts that demand for refined products (over 90% from crude oil) will increase by 1.8 million barrels per day from Q1 to Q3 of 2016. Is so, global demand for oil will exceed global supply by September.

Each month OilPrice.com asks me to highlight one of my favorite stocks. Next week's report will highlight Carrizo Oil & Gas (CRZO).

It has been a couple of months since I took a hard look at Carrizo. I have updated my forecast model and I am raising my valuation to $51.00/share. The company's hedges should result in a realized price for their oil of more than $50/bbl (net of hedge settlements) this year. They also have the potential to significantly increase their natural gas and NGL production when I expect those commodity prices to be higher next winter. More than half of Carrizo's natural gas production this year is already hedged at $3.00.

Carrizo has a history of "under-promising and over-delivering" when it comes to production guidance, so I think there is upside to my valuation.