Energy Prospectus

For the week ending March 10, the Sweet 16 declined 3.67% and is now down 11.73%. The S&P 500 Index was down 0.47% on the week, but still up a healthy 5.98% YTD.

Range Resources (RRC) was the only stock up just a bit last week, obviously thanks to the winter storms pounding the NE over the next few days. NYMEX gas over $3.00 is nice to see. If not for the energy sector selloff, our "gassers" would have gotten a lot of love. The next two gas storage reports should be interesting.

First Call raised price targets for EOG, FANG, PE and PXD. The love affair with the Permian Basin continues.

Crude Oil Prices crashed through support levels at $52, $51 and $50. Bad news is that the next support level is probably $45.
> Big drops like this are caused by programed selling. Longs had tightened up their Stop Loss orders and the bearish storage report triggered the selloff.
> A few things to remember:
1. OPEC producers ramped up production in Q4 and that is what we are seeing in the import numbers. It takes months before production changes in the Middle East hit the U.S.
2. Q1 is the lowest demand period for crude oil (actually February are March because of refinery maintenance).
3. Demand will ramp up in April and take off in June.
4. Demand for liquid fuels increases by 1.5 million barrels per day in Q3 < This happens each year unless the U.S. economy is in the tank.
5. OPEC production cuts should show up around the same time refiners start drawing more crude oil from inventory

The Sweet 16 are in MUCH BETTER shape than they were a year ago. Q1 2017 results are going to crush Q1 2016 results (remember we had oil under $30 and ngas under $2)

I am speaking to a Investment Club that meets at U of H on Saturday morning, so if you do not hear from me again it is because they killed me.

The Sweet 16 spreadsheet is updated each weekend. It shows my current valuation for each stock (think of it as my estimated break-up or takeover value) compared to First Call's price target.

All of the individual company forecast models have been updated. You can view them on the EPG website or download them to Excel. They are macro driven spreadsheets, so you can change the production volumes and commodity price assumptions at the bottom and the EPS, CFPS and stock valuations will change automatically.

Per Credit Suisse report dated 3/3/2017: Gulfport Energy (GPOR)

GPOR plans to step up Utica proppant loading in 2017, raising sand volumes to 2,000-2,500 lbs/ft, up from the 2015/2016 average of 1,000-1,500 lbs/ft. With the upsized completion design, GPOR is more in-line with Utica peers RICE and EQT, which have been utilizing 2,000-3,000 lbs/ft of sand and RICE has tested upwards of 3,000-3,500 lbs/ft in 2016.

GPOR has previously indicated that their wells perform inline with their type curves on current 1,000-1,500 lbs/ft sand loading, and we expect GPOR to realize an improvement in well productivity and EURs in 2017 on the back of increasing its completion intensity.

As GPOR upsizes its proppant loading, the company remains relatively well insulated from service cost inflation due to the 24% equity interest in TUSK, whose suite of services include pressure pumping, proppant sourcing and distribution, and drilling rig rental.

We believe GPOR will realize synergies from its equity ownership of TUSK during renegotiation of service contracts. Therefore, we are forecasting a 7.5% increase in well costs in 2018/19 for GPOR's Utica operations, compared to 10% in both years for peers in the Appalachian Basin and the company's SCOOP operations.

The Credit Suisse forecast model is very close to what I have in my forecast/valuation model for GPOR.
Production Growth of 50% YOY in 2017 to 179,900 BOE per day (slightly higher than my forecast)
Production Growth of 44% YOY in 2018 to 258,350 BOE per day (higher than my forecast of 238,000 BOE per day)

Credit Suisse assumes a value of only $0.40/Mcfe to come to their Net Asset Value of $33.00/share for GPOR. I think that is too low.

My valuation of GPOR is $40, but I think we'd all be happy if it bounces back to $33.

On the main Sweet 16 spreadsheet I do show Price/Earnings ratios but they are almost meaningless during periods of wild swings in commodity prices like we've had the last few years. However, I do think Share Price / Operating Cash Flow Per Share is meaningful.

The Sweet 16 currently trades at a Price/CFPS ratio of 8.2, which is relatively low for a group of this quality.

"Aggressive Growth" companies with lots of running room deserve to trade at a high multiple of operating cash flow per share. Think of it kind of like a PEG ratio ("Price to Earnings Growth"). Upstream companies with high production growth rates, especially during periods of rising commodity prices, deserve higher valuations. PEG ratios are like golf scores, lower is better.

PE at 13.43 X CFPS and PXD at 12.93 X CFPS are the highest < Both are pure plays on the Permian Basin
AR at 4.49 X and GPOR at 4.71 X are the lowest

What's interesting (to me at least) is that PXD is only expected to grow production by 16.4% YOY in 2017, which is still very good.
AR is expecting production growth of 21.3% in 2017
GPOR is expecting production growth of 47.2% in 2017
PE is expecting production growth of 70% in 2017 (after growing by 73% in 2016)

Obviously, AR and GPOR are "gassers" and this market is not as keen on the Marcellus/Utica as they are on the Permian Basin. Just keep this in mind if natural gas and NGL prices keep moving higher. BTW AR has over 100% of their 2017 and 2018 natural gas production hedged at VERY GOOD prices.

After all of the Small-Cap Growth Portfolio companies report Q4 results, I will be "promoting" a few of them to the Sweet 16.