Energy Prospectus

Crude oil edged up less than 1% last week, closing at $53.83 per barrel. So why did some of our favorite stocks go down? Because individual company news trumps macro data and there were some rather significant announcements.

This is from Matthew DiLallo at Motley Fool:

"However, it was far from a quiet week in the oil patch as several companies updated the market on their strategies, driving big moves in their stocks. Leading the way, according to data from S&P Global Market Intelligence, were ONEOK Partners (NYSE:OKS), Seadrill (NYSE:SDRL), SM Energy (NYSE:SM), and Bill Barrett Corp. (NYSE:BBG)."

"Midstream company ONEOK Partners surged after deciding to abandon the MLP structure by agreeing to merge with its general partner ONEOK (NYSE:OKE) in a $9.4 billion deal. Under the terms of the deal, ONEOK Partners unitholders will receive 0.985 shares of ONEOK for every unit of the MLP they currently own, which represents a 22.4% premium to its pre-deal price. The deal will enable ONEOK to lower its capital costs while providing a clear path for future dividend growth."

"Unfortunately, not every strategy update had the same positive impact. That was certainly the case for shale driller SM Energy, which stumbled this week after reporting its most recent well results and hinting at its 2017 plans. The well results were exceptional: They included one of the best wells drilled to date in the Midland Basin. However, the company's guidance for 2017 was a bit ambiguous. SM Energy said that part of its 2017 strategy would be to invest capital in improving completion techniques and to further delineate its Midland Basin position. As a result, the company might not grow production as quickly this year as investors had hoped."

I went back and took a hard look at the SM Energy press release from last week. I don't see the negative that made the share price dip. Well results reported by the company were quite good.

SM is a "company in transition" and the Wall Street Gang does not like that because it makes it difficult for them to forecast future periods.

I went back and lowered my production forecast for 2017, assuming they sell their North Dakota package in Q2. Keep in mind that the sale will bring in lots of cash and lower their debt, but I am leaving interest expense alone for now and I am keeping my CFPS multiple used to value the stock at 8X. The multiple is very low for a company of this size that is evolving into a Permian Basin company. Our other Permian Basin companies are now trading at 15X to 20X CFPS.

I am lowering my valuation by $4.00/share to $59.00. This compares to First Call's price target of $44.05/share.

If SM Energy keeps reporting good well results in the Permian and they clarify their growth plan, this stock should rebound in the back half of this year.

Devon Energy (DVN) completed their "transition plan" in 2016 and now it has a clear path to growth in 2017 and beyond. This is why DVN is one of my Top Picks for 2017.

SM Energy uses the "Successful Efforts" method of accounting. This means they will be reporting some nice big gains on asset sales in Q1 and Q2 or Q3 depending on when the North Dakota sale closes.

Companies on the "Full Cost" method net gains and losses into the Full Cost Pool and do not report gains and losses on asset sales.