Sweet 16 Update - May 14

[dan_s]

Despite all 16 stocks being in the red on Friday the 13th, the Sweet 16 was up 2.36% for the week ending May 13, 2016. The portfolio is now up 26.25% YTD, compared to the S&P 500 Index, which is now up just 0.13%.

Devon Energy (DVN) is only up 1.63% YTD because of concerns about the asset sales process they have going. Devon needs to raise about $2 Billion from these sales, so it can keep the bank happy and focus on the HUGE upside they have in STACK. I think the sales will close in Q3.

A very good sign for this group is that the First Call Price Targets for 15 of the 16 companies were increased this week. The lone exception was Gulfport Energy (GPOR) whose price target was lowered by just $0.10. I can live with that.

I watch carefully the movement of the FC price targets during the few weeks after they release quarterly earnings. Obviously, increasing price targets means that the analysts who have submitted revised forecasts to Reuters were encouraged by the quarterly reports and the outlook for the group. Rising oil prices helps a lot.

Rising oil & gas prices also mean those ridiculously confusing impairment charges are now behind us. Big impairment charges actually improve the chances of better reported earnings in the future as they lower DD&A rates. If oil & gas prices end the year where I believe they are heading by year-end ($60 WTI and $3.00 Ngas) then the outlook for strong earnings reports in 2017 will improve even more. The companies have not abandoned the assets where they took those big impairment charges. Higher year-end commodity prices will cause a lot of upward revisions in proven reserves. Higher oil & gas prices extend the economic life of the wells.

Crude oil prices moved above a strong resistance point around $45 last week after the EIA reported a big draw from U.S. crude oil storage. Demand for transportation fuels also showed clear signs of increasing and U.S. oil production is falling.

On Friday an explosion closed a second Chevron facility in Nigeria, Africa's biggest oil producer. The explosion was the result of an attack by militants who are pissed at the government. 70% of Nigerians live on less than $1/day. They see the "top 1 percenters" living like kings, while they have trouble finding enough food to eat. Apparently, they have money enough for guns and explosives.
Exxon Mobil also reported on Friday that a drilling rig damaged a pipeline, shutting off more production of crude.
Nigeria's oil production was already down 600,000 barrels per day before these two incidents, primarily a result of militant attacks. Shell is now evacuating workers from its offshore Bonga oilfield following a militant threat. Shell's Forcados export terminal has been shut down since a February bombing.
To say Nigeria is a mess is an understatement.

Latin American oil production is now down close to 500,000 BOPD from year ago levels.

U.S. oil production is now around 8,800,000 barrels per day, well off the peak of 9,600,000 set in April, 2015. I believe U.S. production will fall to around 8,000,000 barrels per day within a year. It will take $60/bbl oil before we see a meaningful increase in drilling activity. I expect the active rig count to continue falling through June with the number of rigs drilling for oil in the U.S. drifting below 300.

Have I have posted here many times, the damage this cycle has done to the oilfield services firms is really bad. Even if oil prices move rapidly upward, it is going to take a long time to mobilize the rigs and completion equipment to get U.S. oil production moving up again. This is why all previous major oil price cycles overshoot the mark and this one has a chance to overshoot by a wide margin.

FANG, CXO, PXD and EOG are approaching my valuations.

We have update our profiles on XEC, CLR, NBL, PE and NFX which will be sent out via e-mail today. Updated forecast models for all 16 companies can be downloaded from the EPG website.

[dan_s]

Each weekend I update the main Sweet 16 spreadsheet. There you can find my current valuation for each stock compared to First Call's price targets for each company. It will be available for download later today.

Stocks where FC price targets have moved over my valuations: CXO, EOG, FANG, PXD