Energy Prospectus

Our Sweet 16 Growth Portfolio was down 0.40% for the week ending June 3, but it is still up 30.75% year-to-date. This compares to the S&P 500 Index that is up just 2.70% YTD.

The price of oil has tested the $50/bbl level several times, but has not been able to break through. My SWAG is that the next IEA Oil Market Report will do the trick. We should also continue to see weekly draws from U.S. crude oil storage as refiners must use more black oil to produce summer blends of gasoline. Global demand for hydrocarbon based liquid fuels is expected to increase by 1.5 to 1.7 million barrels per day from Q1 to Q3. The biggest spike in seasonal demand is June/July.

All three of the "gassers" in the Sweet 16 (AR, GPOR and RRC) were up last week as natural gas prices got a boost from weather forecasts of a long hot summer. Texas has been much cooler than normal, but that is about to change. "Muggy" is what we can expect with so much moisture in the ground. "Rain rain go away, come again another day."

The safe bet on gas is Antero Resources (AR). Antero has over 100% of their natural gas production for 2016 and 2017 hedged at very good prices. Antero's "realized price" for gas is locked in at over $4.00/mcf for the next 18 months. If natural gas storage levels are pushed back to the 5-year average by November, we may see $4.00/mmbtu by Christmas on NYMEX. U.S. natural gas production is now falling by approximately 500 million cubic feet per day month-after-month, primarily because of a steady decline in the associated gas coming from Eagle Ford, Permian Basin and Niobrara oil wells. Check for yourself at: http://www.eia.gov/petroleum/drilling/#tabs-summary-2

Range Resources (RRC) will be the #1 natural gas company in North America when the merger with MRD is closed. RRC should be a Core Holding in any energy sector portfolio.

The STACK oil play will continue to draw more and more attention. The reason is that ROI is FANTASTIC on STACK horizontal well at $50 oil; ROI over 100% with payouts in less than a year on the type curve wells. CLR is now forecasting EURs over 2 million boe on their extended reach (2 mile) laterals. Four of our Sweet 16 are the top public companies in this rapidly emerging oil play (CLR, DVN, NFX and XEC). You should all read the press release that Continental Resources (CLR) put out on May 17 about the Verona 1-23-14XH well. Devon Energy (DVN) holds 34% working interest in that well. CLR is up 80.1% YTD because of STACK. NFX is now my Top Pick for STACK and DVN is a close second. XEC is a rock solid company, but it is already getting close to my valuation.

"The Verona is another example of the exceptional results we are getting from wells drilled in the over-pressured oil window of STACK," said Harold Hamm, Chairman and Chief Executive Officer. "We couldn't be more pleased with the performance of our wells in STACK and the addition of this outstanding asset to our portfolio. Our STACK team also completed the Verona at a cost of approximately $9.0 million, which is $500,000 less than our year-end 2016 target cost for two-mile lateral wells in the over-pressured oil window. This is the Company's lowest cost completion in STACK to date."

The Verona is the Company's ninth well completed in the over-pressured oil window of STACK, and all have been strong producers. The Company is in the process of completing four additional Meramec wells. Continental currently has 11 operated rigs drilling in STACK, with six targeting the Meramec zone and five targeting the Woodford zone.

Based on the posts here and the dozens of e-mails that I get each week from EPG members, I know that many of you shy away from the stocks that are trading at high dollar amounts (like XEC, CXO, EOG and PXD). I think it is a mistake to assume that these stocks have more risk because they have a high share price. Fact is that it is the small-caps that have the most risk because they are more exposed to being cut off from capital. The bankers and Wall Street like larger companies, like our Sweet 16, because they have large proven reserves and solid production.

Perfect examples are AREX and BCEI. We sent out profiles on these two small-caps late on Friday. Both companies should survive, but they have been forced to suspend all drilling because their bankers have significantly reduced their credit facilities and they sure don't want to issue more stock at today's share price. This is a VERY capital intensive business and growth stocks can't grow without drilling & completing more wells.

There is a lot of noise out there about worries over upstream companies running out to drill & complete more wells now that oil is back up around $50/bbl. This is another "FEAR" that will not become a reality. We are so far below the number of active rigs necessary to stop the bleeding that it will take doubling of capex just to slow the decline. U.S. oil production is on steady decline and the rate of decline will accelerate in Q3 no matter what the price of oil does. Production does not respond quickly at the top or the bottom of these cycles. This is why oil price cycles ALWAYS overshoot the mark and result in shortages of supply. We are on a course that within six months will but global demand over global supply of oil.

All of the Sweet 16 profiles have been updated recently. You can download them from the EPG website. If you have any problems with the website, send an e-mail to Sabrina (EPG Member Services) at energyprospectus@gmail.com. The best way to reach me is by posting your questions here.

I will be in Plano, Texas on Monday, June 6 speaking at the Mick Energy Symposium.

If natgas goes to $4 by Xmas, can AR make $ on its hedges, or do they just go away, kind of like paying for an insurance policy that doesn't ever get cashed?

Here is how hedges work. The companies actually sell their production at the well head at current prices. The hedges are derivatives that settle based on the terms of the hedge. For example, if they have 1,000 mcf hedged at $4.00 and the actual price was $2.50 during the month they get paid by the counter-party $1.50 X 1000 = $1,500.