Sweet 16 Update - June 18

[dan_s]

For the week ending June 17, 2016 the Sweet 16 was up 0.54% and is now up 31.23% year-to-date. This compares to the S&P 500 Index that was down last week and is now up just 1.34% YTD.

The Sweet 16 spreadsheet which shows my valuation and First Call's price target for each company is now available on the EPG website.

Leading the pack by a wide margin are Continental Resources (CLR) up 85.51% YTD and Range Resources (RRC) up 80.01% YTD. In 3rd place is SM Energy (SM) up 49.4% YTD.

Since they released Q1 results and (primarily) because oil & gas prices have moved higher, First Call's price targets have moved significantly higher for all 16 companies. First Call's price targets for XEC, CLR, PE and PXD now exceed my valuations. The first wave of money rotating to the energy sector is just the start. When WTI moves firmly over $50/bbl in July, we should see another big wave. Raymond James is forecasting that WTI will ramp to $70/bbl within three months.

Three companies are approaching my valuations: XEC, CLR and RRC.

PDC Energy (PDCE) dipped last week and is now down 0.32% YTD. It closed Friday 74.8% below my valuation of $93.00/share. Stifel rates PDCE a BUY with a $70 price target.
On June 16, 2016 PDCE announced that it has entered into definitive agreements with Noble Energy, Inc. (NBL) to consolidate certain acreage positions in the Core Wattenberg field located in Weld County, Colorado. The Company anticipates closing this transaction early in the fourth quarter of 2016.

This strategic trade includes leasehold acreage only, and does not include production or wellbores. PDC expects to receive approximately 13,500 net acres from Noble in exchange for approximately 11,700 net acres, subject, in each case, to title examination and other customary adjustments. The difference in net acres is primarily due to variances in net revenue interests. “The anticipated acreage trade creates significant operational efficiencies and incremental value for both PDC and Noble by consolidating our operated acreage positions in this premier field,” said Bart Brookman, PDC’s President and CEO. “This will enable us to design more comprehensive, long-term development plans, capture operational synergies, and streamline marketing and midstream. Most significantly, the trade increases opportunities for longer horizontal laterals with significantly increased working interests, all while minimizing potential surface impact.”

This is a win-win deal for both Sweet 16 companies and I think it would be wise to pick up shares on this dip. Read our profile on PDCE (which you can download from the EPG website) and you'll understand why I believe it will be a big winner for us. NBL was added to the Sweet 16 on April 9, 2016 and it is up 16.18% since that date.

Natural Gas Prices: Ngas prices and NGL prices continue to move higher. The July NYMEX contract was up $0.07/mmbtu on Friday, closing at $2.65/mmbtu. Gas is now up more than $0.90/mmbtu since the low in the first quarter. The January 2017 NYMEX contract closed at $3.27/mmbtu on Friday. I now believe we will see Ngas over $3.00 by the end of the 3rd quarter and we could see it over $3.50 by Christmas.

Over the last six weeks the Ngas storage builds have been 100 Bcf below the 5-year average. This trend should continue as a HOT summer in the eastern half of the U.S. will require a lot more gas for power generation. The Sweet 16 companies that will benefit the most from higher gas and NGL prices are AR, GPOR, RRC and SM. You can find the product mix for all 16 companies at the bottom of their forecast models.

U.S. natural gas production is declining by over 400 million cubic feet per day month-after-month. You can confirm this by going to the EIA Drilling Productivity Report. U.S. gas production will be approximately 4 Bcf per day lower in December, 2016 than it was a year earlier. U.S. natural gas demand (including exports) is forecast to increase from 80 Bcf per day in 2015 to 83 Bcf per day in 2016. Now you know why speculative gas traders are bidding up the price.

I will be opening the EPG Luncheon presentation on Wednesday, June 22nd with why I believe we are going to have a much tighter gas market in the U.S. by the start of the next winter heating season. PLEASE register if you plan to attend.