Sweet 16 Update - June 11

[dan_s]

Thanks to the down day on Friday, our Sweet 16 Growth Portfolio was down 0.06% for the week ending June 10. The Sweet 16 is up 30.69% year-to-date, compared to the S&P 500 Index that is up just 2.55% YTD. Profit taking is understandable after the big run-up in these stocks earlier in the week. Plus, oil prices pulled back under $50/bbl on Friday.

The Sweet 16 spreadsheet has been updated and posted to the EPG website.
> Tab 1 shows the Elite Eight (highlighted in yellow), the market cap of each company, my EPS forecasts by quarter for 2016 and my full year EPS forecast for 2017. Keep in mind that the companies have not provided production guidance for 2017, so those numbers are my SWAG. It also shows my 2016 operating cash flow per share for each company, which is probably the most important number on the spreadsheet. PE ratios are meaningless for this sector, so focus on the Price/CFPS ratio.
> Tab 2 shows my valuation for each company, compared to First Call's price targets.

I have updated all of the Sweet 16 forecast models. To see them, click on the logo for the company. On Friday, I updated the forecast models for our three "gassers", AR, GPOR and RRC.

Weather has a HUGE impact on natural gas demand. Natural gas prices are moving up because July & August are now forecast to be HOT across the eastern half of the U.S. U.S. natural gas production is now falling by over 400,000,000 cubic feet per day month-after-month. Almost half of the decline is coming from the Eagle Ford. To confirm this, go to the EIA Drilling Productivity Report at http://www.eia.gov/petroleum/drilling/#tabs-summary-2

Natural gas in storage is high for this time of year, but I expect it to be much closer to the 5-year average by September. Keep in mind that we now need a lot more gas in storage to make it through the winter than we did five years ago. 90% of new homes heat with natural gas. This summer at least five coal fired power plants are being replaced by natural gas fired power plants. Plus, exports of LNG and via pipeline to Mexico are increasing. U.S. gas demand is forecast to be 83 Bcf per day in 2016, up from 80 Bcf per day last year. The U.S. gas market is tightening much faster than the global oil market.

SM Energy (SM) may be the company that benefits the most from a rebound in natural gas and NGL prices. Their production mix is 45% natural gas, 24% NGLs and 31% crude oil. 55% of their 2016 natural gas is hedged at $3.61/mmbtu. You can find the production mix for each company at the bottom of the forecast models.

Companies trading at the largest discount to my valuation are PDC Energy (PDCE), SM Energy (SM), Devon Energy (DVN) and Gulfport Energy (GPOR).

Since they released Q1 results, First Call price targets have increased for all 16 companies. First Call price targets for PE and PXD are now above my valuations. Wall Street loves the stack pays in the Permian Basin.

I recommend that all of you take a hard look at Antero Resources (AR). Start by listening to their conference call on Friday, June 10. Download the slides first, so you can follow along. Range Resources (RRC) and Antero are going to be natural gas "Power Houses" heading into the next winter. For those of you seeking high yield, Antero Midstream (AM) is a good choice.

NFX, DVN and CLR are my Top Picks for the STACK play in Oklahoma.