Energy Prospectus

The Sweet 16 finished 2016 up 47%. It is off to a good start in 2017, up 2.73% compared to the S&P 500 Index that is up 1.71% in the first week of trading. My guess is that fund managers are adding more exposure to energy this year. High quality companies like these will get the most "love".

Devon Energy (DVN), Newfield Exploration (NFX) and PDC Energy (PDCE) are up more than 6%.

I want to be crystal clear that I am bullish on natural gas for 2017, but I am SUPER BULLISH on NGL prices. I think NGLs will double in price this year. NGLs are a "basket" of liquids, but propane and ethane make up a big part of the mix. The outlook for both are significantly better than they were at the beginning of 2016.

Read this carefully: https://rbnenergy.com/the-top-ten-rbn-e ... he-rooster

If you have low "Risk Tolerance" then I suggest that you keep most of your money in the Elite Eight: XEC, CXO, CLR, DVN, EOG, NFX, PXD and RRC

AR, GPOR and SM trade at the largest discount to my valuations. All three of them produce a lot of NGLs.
> Antero Resources (AR) recently put out production guidance for 2017 and I have updated my valuation to $47.50/share.
> In my opinion, the market over-reacted to the big SCOOP/STACK acquisition that Gulfport Energy (GPOR) announced in December. The acquisition will be immediately accretive to cash flow from operation and it gives them a new Core Area for long-term growth. I have been following Gulfport for over five years and I have an extremely high level of confidence in my forecast/valuation model.
> SM recently sold their non-op Eagle Ford position for $800 million. It shores up their balance sheet and gives them cash to accelerate development of their Permian Basin leasehold. SM trades at a deep discount to the other Permian companies. If they report strong well results in the Permian Basin, there is upside to my valuation of $62.00/share.

DVN, NFX, CLR and XEC are my Top Picks for SCOOP/STACK. Well level economics in the Tier One areas of SCOOP/STACK are better than they are in the Permian Basin.

During January I will be rolling my forecast models forward one year. I've already done it for AR since they announced guidance.

I usually make a few changes to the Sweet 16 at the beginning of each year. This year I will wait until I see Q4 results. Year-end reserve reports will make a difference and I am expecting them all to be quite good.

Large-cap upstream companies with access to capital (like our "Elite Eight") are building out significant contiguous acreage positions in their core operating areas, which gives them the ability to lower drilling, completion and operating costs. That is extremely important in the low commodity price environment producers must deal with today. It is the low-cost producer that survives and thrives. Capital is being used as a weapon to make strong producers stronger by consolidating strategic geographic positions.

We want to own companies that have large contiguous blocks of leasehold in the best plays.

On January 4, 2017 BofA Merrill Lynch initiated coverage on SM Energy (SM). If you want to see the full report, send me an e-mail ( dmsteffens@comcast.net )

"We are initiating coverage of SM Energy (SM) with a Buy rating and price objective of $52/share based on 5.0x normalized EBITDA and supported by our risked Net Asset Value. SM is a diversified E&P with core positions in three plays; the Permian, the Eagle Ford and the Bakken. The company is in the midst of a significant transition similar to that of Newfield a few years ago – SM has sold over $2bn of assets since 2013 while establishing a sizable footprint in the Permian Midland Basin. The Permian should receive the bulk of capital over the next few years, which in our view should drive significant improvement in SM’s debt-adjusted growth metrics and see the oil mix rise from 30% in 2016 to 44% by 2019. We estimate a three-year CAGR of 4% 2016- 2019E), with oil production growing at an 18% CAGR over the same period."

I think Wall Street is looking for Permian Companies that are not already trading at over 20X CFPS. This may be the year the SM gets the attention it deserves. - Dan

For those of you that are bullish on natural gas and NGLs ... I have received two new analysts' reports on Gulfport Energy (GPOR).

On 12-21-2016 SunTrust rated GPOR a BUY with a $32 target price

On 12-22-2016 Simmons & Co rated GPOR as OVERWEIGHT with a $33 price target

Simmons: "GPOR's acquisition of Vitruvian was not well received by investors. The acquisition
surprised many who wanted GPOR to continue to core up in the Utica. In addition, the
sudden shift to a new basin brought worries about loss of focus and concerns over the depth
and quality of the company's Utica position. The equity has suffered as a result (GPOR -9%
YTD is the worst performing E&P under coverage). While we understand these concerns
and the shares might be in the penalty box for a while, the risk/reward is favorable, in our
view, given the significant decline in the share price. Given that the bar is set low, if the
company is able to demonstrate good SCOOP well results and execute on their plan, then
the shares should start closing the gap between the current share price and our PT/NAV
as well as gradually narrow the significant cash flow discount vs. peers."

GPOR close at $21.61 on Friday, January 6 so it has ~ 50% upside from here. IMO the downside risk is minimal. If I'm right about gas and NGL prices going up, GPOR could be a double for us this year. Long-date CALL options on GPOR might be worth considering. - Dan

Morgan Stanley rates RSP Permian (RSPP) a BUY with a $65/share target price.

An updated Sweet 16 spreadsheet, which shows my valuation and First Call's price targets for each company, has been posted to the EPG website.

* I am SUPER BULLISH on NGL prices *

Looking at the production profile it appears NFX has 1/3 NGL's and roughly 1/3 nat gas, so if your premise is correct I expect it might fly a bit price wise in 2017.

Newfield's production on a BOE basis is approximately 43.5% crude oil, 38.1% natural gas and 18.4% NGLs. If NGLs move back to $30/Bbl in 2017, then my valuation of NFX will go to around $70/share.