Sweet 16 Update - October 1
Posted: Fri Sep 30, 2016 6:10 pm
The Sweet 16 had one of the best weeks ever, up 10.13% at the close on Friday. The portfolio is now up 48.01% YTD, compared to the S&P 500 Index that is up just 6.08% YTD.
During the last big cycle (2008-2010) the BIG GAINS came in Q4 of 2010. One reason for this is that in the last quarter of the "rebound year" the Wall Street Gang knows the companies are going to report BIG increases in proven reserves. Why?, because when commodity prices go up the economic lives of producing properties are extended and the proven reserves they wrote down due to low commodity prices at the end of 2015 can be added back. This causes much lower DD&A rates going forward, which (combined with lower cost basis) results in much higher reported earnings going forward. [I value companies based on operating cash flow per share because GAAP accounting rules are extremely misleading and cause period-to-period distorted earnings per share. Remember, "cash pays the bills, not earnings."]
All 16 companies are up YTD (find me one hedge fund manager that is batting 1,000). I work VERY HARD to find high quality companies for the Sweet 16. To get into this group, the bar is set quite high. This is why you pay the big bucks for your EPG membership.
Leading the pack are:
CLR up 126.11% YTD
SM up 96.24% YTD
PE up 81.53% YTD
RSPP up 59.00% YTD
IMO the near-term "sure thing" is that natural gas and NGL prices will be a lot higher at year-end than they are today. The "Wall Street Gang" (i.e. the Gang That Can't Shoot Straight) will not focus on natural gas until the first cold wave moves through NYC. All they talked about this week was the OPEC agreement to cap production, granted a very important event. They have yet to grasp how tight the U.S. natural gas market is going to be heading into the winter heating season. They should notice it by the end of October. I will discuss this more in the next podcast.
As a group, the Sweet 16 is now trading at 13.7 X 2016 operating cash flow per share. That is a bit high, but 2017 operating CFPS will be a lot higher. SM Energy (SM) closed Friday at just 4.7 X 2016 operating cash flow per share, a ridiculously low multiple for a well funded company with this much running room. I also really like SM's production mix. If you don't own SM, I urge you to read my recent profile on the company which you can find under the Sweet 16 tab.
For Q4, I recommend the "gassers" (AR, GPOR, RRC and EQT that is definitely going to be added to the Sweet 16). I also think Devon Energy (DVN), Newfield Exploration (NFX), Noble Energy (NBL), and PDC Energy (PDCE) will draw more attention when they report Q3 results.
CXO, EOG, PXD and FANG are approaching my valuations, but that does not mean they won't go a lot higher. Wall Street loves all four and they get a lot of attention.
The Permian and SCOOP/STACK have the best well level economics. The DJ Basin deserves more attention.
During the last big cycle (2008-2010) the BIG GAINS came in Q4 of 2010. One reason for this is that in the last quarter of the "rebound year" the Wall Street Gang knows the companies are going to report BIG increases in proven reserves. Why?, because when commodity prices go up the economic lives of producing properties are extended and the proven reserves they wrote down due to low commodity prices at the end of 2015 can be added back. This causes much lower DD&A rates going forward, which (combined with lower cost basis) results in much higher reported earnings going forward. [I value companies based on operating cash flow per share because GAAP accounting rules are extremely misleading and cause period-to-period distorted earnings per share. Remember, "cash pays the bills, not earnings."]
All 16 companies are up YTD (find me one hedge fund manager that is batting 1,000). I work VERY HARD to find high quality companies for the Sweet 16. To get into this group, the bar is set quite high. This is why you pay the big bucks for your EPG membership.
Leading the pack are:
CLR up 126.11% YTD
SM up 96.24% YTD
PE up 81.53% YTD
RSPP up 59.00% YTD
IMO the near-term "sure thing" is that natural gas and NGL prices will be a lot higher at year-end than they are today. The "Wall Street Gang" (i.e. the Gang That Can't Shoot Straight) will not focus on natural gas until the first cold wave moves through NYC. All they talked about this week was the OPEC agreement to cap production, granted a very important event. They have yet to grasp how tight the U.S. natural gas market is going to be heading into the winter heating season. They should notice it by the end of October. I will discuss this more in the next podcast.
As a group, the Sweet 16 is now trading at 13.7 X 2016 operating cash flow per share. That is a bit high, but 2017 operating CFPS will be a lot higher. SM Energy (SM) closed Friday at just 4.7 X 2016 operating cash flow per share, a ridiculously low multiple for a well funded company with this much running room. I also really like SM's production mix. If you don't own SM, I urge you to read my recent profile on the company which you can find under the Sweet 16 tab.
For Q4, I recommend the "gassers" (AR, GPOR, RRC and EQT that is definitely going to be added to the Sweet 16). I also think Devon Energy (DVN), Newfield Exploration (NFX), Noble Energy (NBL), and PDC Energy (PDCE) will draw more attention when they report Q3 results.
CXO, EOG, PXD and FANG are approaching my valuations, but that does not mean they won't go a lot higher. Wall Street loves all four and they get a lot of attention.
The Permian and SCOOP/STACK have the best well level economics. The DJ Basin deserves more attention.