Sweet 16 Update - April 30

[dan_s]

The Sweet 16 gained 2.81% the last week of April and is now up 27.89% year-to-date. If the Sweet 16 was a hedge fund, it would be in the top 1% of all hedge funds.

Of note is that (a) all 16 companies are now up YTD and (b) last week the First Call Price Targets for all 16 companies went up. Several FC targets are now above my valuations.

Wall Street is rotating a lot of money back to this sector. Many of the Wall Street firms have come around to the realization that global oil supply & demand are rapidly working their way back into balance and some firms see the potential for an oil supply shortage next year.

As I have been posting here for months, "the cure for low oil prices is low oil prices". In my 40 years in the industry, all oil price cycles overshoot the mark and this one is no different than all the dozens before it. The only difference is that today there is very little excess production capacity in the world, so any disruption in the supply coming from the Middle East or North Africa could quickly cause the price of oil to spike. I believe Saudi Arabia and Iran are headed on a collision course that could end in an escalation of violence, so out month NYMEX futures contracts deserve a much higher geopolitical premium than speculators have priced in. The speculators (which set the global oil price) who have been shorting oil have been burned several times this year. After a while they give up and go long.

Yesterday I talked to Lou Powers ( http://theworldenergydilemma.com/about-the-author). Lou is an EPG member and an expert on Saudi Arabia. He has contacts in the kingdom who are telling him that the odds of increased military conflict with Iran increase daily and there is also potential for internal uprisings. Saudi Arabia has lost over $200 Billion during this oil price cycle and the "natives" are getting restless. For those of you interested in Global Warming, there is a video on Lou's website you should watch. Here is a link to the video: https://www.youtube.com/watch?v=LVkUKNO ... e=youtu.be

Antero Resources (AR) reported outstanding first quarter results that give me a lot higher level of confidence in my forecast model for this "gasser". It helps that they have more than 100% of this year's natural gas production hedged at $3.80/Mcf. The cash settlements on the gas hedges pushes their realized gas price over $4.00/mcf. I have updated my forecast model for AR and I am raising my valuation to $37.50/share, which compares to First Call's price target of $31.09.

As I posted earlier today, Range Resources (RRC) had a solid first quarter. It also has a high percentage of this year's gas production hedged at very good prices.

I have updated my forecast model for Pioneer Natural Resources (PXD). Primarily because they have increased their production guidance, I have increase my valuation to $173.25/share. This compares to First Call's Price Target of $177.70. To say Wall Street loves PXD is an understatement. This stock trades at a high multiple of operating cash flow per share and it deserves every penny. PXD holds the largest acreage position in the Permian Basin, which makes it a PRIME TAKEOVER TARGET for all of the majors. It also has:
> A SUPER STRONG balance sheet and access to all the capital it wants
> A HUGE inventory of low-risk high-rate horizontal drilling locations

The updated forecast models for AR, PXD and RRC should be posted to the EPG website on Sunday. Jeff, our "Tech Guy" has to post the forecasts and profiles for the Sweet 16 companies because to get them under the company logos it takes technical training which I don't have.

All of the remaining Sweet 16 will release Q1 results next week. Remember, Q1 is the low point for this cycle. Q1 results are not going to be good. Focus on the outlook for each company and their liquidity. The Sweet 16 are ALL solid companies that will survive this cycle and are very well positioned to gain strength during the rebound. This is why the Sweet 16 is up more than 27% YTD.

[dan_s]

Leading the pack:

Range Resources (RRC): Up 79.24% YTD < #1 company in the Marcellus Shale that increased production guidance last week. Doing a great job of getting the gas and NGLs to new markets.

Continental Resources (CLR); Up 62.14% YTD < #1 in SCOOP and now getting great results in STACK

SM Energy (SM): Up 58.49% YTD < Got grossly oversold in 2015. Thanks in part to my urging, Investor Relations filling got to more conferences to tell their story.

At the end of each oil price cycle, finding the oversold companies is the key to big gains. It takes a lot of hard work. The Sweet 16 are all quality upstream companies that are well positioned to do quite well during this rebound period.