Sweet 16 Update - January 14
Posted: Fri Jan 13, 2017 7:38 pm
Each weekend, I update the main Sweet 16 spreadsheet. You should all take the time to download it to Excel and study it. It contains some valuable information (at least in my mind).
Under Tab 1 you can find the market cap for each company. I also highlight the "Elite Eight" in yellow. These are the companies that are "Super Solid" and I have followed them all for over five years. I have an extremely HIGH level of confidence in my forecast models for them.
You can also find each company's debt level at 9/30/2016. Keep in mind that all debt is not created equal. For example, your home mortgage is not the same as overdue credit card debt. You will note that all 16 companies are trading at a premium to Net Book Value. That's because GAAP accounting rules are super conservative for upstream companies. Just remember that comparing upstream companies based on net book value is a worthless exercise.
The most important info on Tab 1 is at the far right where you can see operating cash flow per share. All 16 companies have strong cash flow from operations and solid production and proven reserve growth locked in. Note that the Permian Basin companies (CXO, FANG, PE, PXD and RSPP) all are trading at close to or above 20X 2016 CFPS. Wall Street is head-over-heals in love with the Permian Basin because well level economics are very good at current oil & gas prices in the Tier One areas of the Permian. "Love" is good for stock values.
On Tab 2 of the Excel spreadsheet you can see my current valuation compared to First Call's price target. Just be aware that I am in the process of extending my forecast models for each company through 2018. So far, I have only done it for AR and PE. I value each company's stock based on a multiple of 2016 to 2018 operating cash flow per share. The companies with strong balance sheets and higher production growth deserve higher multiples of cash flow. When I was at Hess we valued takeover targets like this and I use the same general method that I used at Hess while I was part of their Business Development Team. Since all of these companies have double digit production growth and I am using higher oil, gas and NGL prices for 2018 my valuations for all of them will be going up. The Sweet 16 are all Prime Takeover Targets.
For the week ending January 13th, the Sweet 16 pulled back 2.53% and is now up just 0.20% YTD. The S&P 500 Index is up 1.60% YTD.
AR and EOG were the only two stocks up this week. However, First Call price targets went up for most of the companies. AR provided some very strong production guidance for 2017.
First Call prices targets are higher than my valuationa for XEC, EOG, FANG, PXD and RSPP.
Right now AR, DVN, GPOR, NFX, RRC and SM look like very good buys to me. I would rate AR a "Screaming Buy" up to $30. Keep in mind that AR is one of our three "gassers", so if you do not believe natural gas and NGL prices are going to be higher in 2017, then it is not for you. GPOR and RRC are the other two companies that get the majority of their revenues from natural gas sales.
I will be taking a hard look at XEC, EOG and GPOR this weekend. I also plan to spend some time on Sanchez Energy (SN) which announced a BIG DEAL in the Eagle Ford today.
A lot of companies will be announcing Operations Updates over the next two weeks. We are approaching "Information Overload" time. I will do my best to keep up.
Under Tab 1 you can find the market cap for each company. I also highlight the "Elite Eight" in yellow. These are the companies that are "Super Solid" and I have followed them all for over five years. I have an extremely HIGH level of confidence in my forecast models for them.
You can also find each company's debt level at 9/30/2016. Keep in mind that all debt is not created equal. For example, your home mortgage is not the same as overdue credit card debt. You will note that all 16 companies are trading at a premium to Net Book Value. That's because GAAP accounting rules are super conservative for upstream companies. Just remember that comparing upstream companies based on net book value is a worthless exercise.
The most important info on Tab 1 is at the far right where you can see operating cash flow per share. All 16 companies have strong cash flow from operations and solid production and proven reserve growth locked in. Note that the Permian Basin companies (CXO, FANG, PE, PXD and RSPP) all are trading at close to or above 20X 2016 CFPS. Wall Street is head-over-heals in love with the Permian Basin because well level economics are very good at current oil & gas prices in the Tier One areas of the Permian. "Love" is good for stock values.
On Tab 2 of the Excel spreadsheet you can see my current valuation compared to First Call's price target. Just be aware that I am in the process of extending my forecast models for each company through 2018. So far, I have only done it for AR and PE. I value each company's stock based on a multiple of 2016 to 2018 operating cash flow per share. The companies with strong balance sheets and higher production growth deserve higher multiples of cash flow. When I was at Hess we valued takeover targets like this and I use the same general method that I used at Hess while I was part of their Business Development Team. Since all of these companies have double digit production growth and I am using higher oil, gas and NGL prices for 2018 my valuations for all of them will be going up. The Sweet 16 are all Prime Takeover Targets.
For the week ending January 13th, the Sweet 16 pulled back 2.53% and is now up just 0.20% YTD. The S&P 500 Index is up 1.60% YTD.
AR and EOG were the only two stocks up this week. However, First Call price targets went up for most of the companies. AR provided some very strong production guidance for 2017.
First Call prices targets are higher than my valuationa for XEC, EOG, FANG, PXD and RSPP.
Right now AR, DVN, GPOR, NFX, RRC and SM look like very good buys to me. I would rate AR a "Screaming Buy" up to $30. Keep in mind that AR is one of our three "gassers", so if you do not believe natural gas and NGL prices are going to be higher in 2017, then it is not for you. GPOR and RRC are the other two companies that get the majority of their revenues from natural gas sales.
I will be taking a hard look at XEC, EOG and GPOR this weekend. I also plan to spend some time on Sanchez Energy (SN) which announced a BIG DEAL in the Eagle Ford today.
A lot of companies will be announcing Operations Updates over the next two weeks. We are approaching "Information Overload" time. I will do my best to keep up.