Sweet 16 Update - April 29

[dan_s]

The Sweet 16 moved 0.9% lower during the week ended 4/28/2017 and it is now down 15.48% YTD. The S&P 500 Index moved up 1.58% and is now up 6.49%, primarily on hope that the Trump income tax play will get passed this year.

Fear continues to hang over the oil market as investors are worried that OPEC will not extend their production agreement. I think they will extend the agreement through year-end because the cartel members have so much to lose if they do not. Regardless, demand for oil will exceed supply during the rest of this year as demand for refined products ramps up ~1.7 million barrels per day from Q1 to Q3. To confirm this, go to: https://www.iea.org/oilmarketreport/omrpublic/

The Sweet 16 are all expected to report solid first quarter results (RRC already has). Most of them report Q1 results next week.

Q1 reports also contain production guidance for the remainder of the year, which gives analysts more confidence in their forecast models.

The Sweet 16 is trading at an 80% discount to my valuation and well below the First Call price targets. Most of them have a big chunk of their production hedged, locking in solid cash flow from operations. Details on their hedges can be found at the bottom of my forecast models for each company.

Oil prices are determined on a global market. Natural gas and NGLs trade on regional markets. Over the next six months, the U.S. natural gas and NGL markets are going to get a lot tighter. Big increases in demand for these product are coming in the 3rd quarter (exports, power generation and industrial demand).

I will be traveling for a few days and back in the office on Wednesday, May 3. I will be checking the market each day. When I return, my focus will be on updating Sweet 16 forecast models as fast as I can.

We had close to 90 attendees at our luncheon in Houston on Friday. King Crow with Flatland Minerals gave a very good presentation on the Permian Basin and their new LP that will be acquiring mineral interests in the Permian. Mineral interests are long-term investments that generate nice cash flow. King is an EPG member based in Dallas. If you'd like to see his presentation slides, send me an e-mail: dmsteffens@comcast.net

Our next luncheon in Dallas is set for May 9th. It will focus on the Permian Basin.