Sweet 16 Update - May 20

[dan_s]

The Sweet 16 finished the week ending May 19th on a positive note (up 0.48% for the week), but the portfolio is still down 14.06% year-to-date.

This is reminding me a lot of what happened in 2011:
> 2010 was the best year ever for the Sweet 16, finishing the year up more than 54%. 2011 got off to a rough start, primarily because of profit taking in Q1. It flopped around through Q2 and then finished strong, up over 30% for the year. All of the gains in 2011 came during the second half of that year.
> When Wall Street gains more confidence in oil prices, this year's version of the Sweet 16 should also finish strong. A positive outcome from the May 25th OPEC meeting should do the trick.
> This year's version of the Sweet 16 is rock solid. It my opinion, it may be the best group I've ever put together. They all reported strong Q1 results and they all have strong production and reserve growth locked in for the remainder of 2017 and 2018, even if commodity prices stay exactly where they are today.
> This is a capital intensive business and all of the Sweet 16 generate strong cash flow from operations and they have access to the capital markets for all the debt or equity they need. Most of them are funding all or most of their growth from operating cash flow.

All of the "noise" coming out of Washington, DC is definitely adding to the "Fear Factor" these days. IMO 90% of our elected officials are in it for the money. Trump scares the hell out of them, (a) because he does not need the money and (b) he is a loose cannon. Most of Trump's proposals, especially less regulation and lower income tax rates, are good for the U.S. energy companies. Lowering corporate tax rates would not only improve cash flows, but they'd have a major impact on balance sheet ratios. Most of the Sweet 16 carry a big deferred tax liability on their balance sheets.

FYI The "Sweet 16" has been our Top Pick Portfolio since 2001, the year Kevin Hopkins and I founded EPG. Kevin "retired" in 2005 to become a full-time scout for the NHL.

The Sweet 16 gets the majority of my attention.

When quarterly earnings reports come pouring in, I update my forecast models for the Sweet 16 as fast as I can. Then after our MBA Student Interns update the profiles a few weeks later, I go back and go over the forecast model spreadsheets again. I recheck my logic for each line item and I compare my forecasts for revenue, net income and cash flow from operations to what First Call shows. It usually takes 2 to 3 weeks after 10-Qs come out before First Call forecasts are updated. For most of the Sweet 16 my forecasts are very close to what First Call shows today. You can find First Call forecasts through your on-line brokerage account (I use E-Trade) or through Yahoo Finance. From Yahoo Finance, go to an individual company and click on the "Analysts" tab.

You can also find First Call forecasts for Revenue, EPS and CFPS at the bottom of each of our forecast models. The most important number is operating CFPS, so I put it in the RED BOX.

Profiles for 11 of the 16 companies have been updated. We send them out by e-mail to all of our active members, but members can also view and download them from the website. Up-to-date forecast models for all 16 companies are on the website today.

PCDE: I updated my forecast model for PDC Energy this morning, taking a very conservative approach on each line item. My valuation is $30/share higher than what First Call shows, but I cannot see anything that justifies FC's valuation, except the fact that most of their production is from the DJ Basin. I use a multiple of 10X CFPS to value PDCE, which compares to 12X to 16X used to value the Permian Basin pure plays. PDC increased their production by 44% in 2016 and they are expecting 40% to 50% production growth this year and again in 2018. In my opinion, PDCE is trading at a deep discount to what its aggressive growth deserves.

AR, CRZO, GPOR and RRC also trade at less than 50% of my current valuations.

I will update the profiles for Gulfport Energy (GPOR) and Cimarex Energy (XEC) this weekend. The interns have been told to finish up their work on CRZO, PDCE and RSPP as soon as possible, so I hope to get them out to you early next week.

I will be in Dallas on May 25th and I will open the luncheon presentation with comments about what comes out of the OPEC meeting. No matter what they do, it will cause quite a stir.

[dan_s]

Gulfport Energy (GPOR)

I just finished updating the profile on Gulfport, which was prepared by Steven Lightbody our #1 Intern. He does a great job and he always adds his own opinions. We both think Gulfport is going to have a darn good year. So, for whatever it is worth, you have an old guy (me) and a very smart young guy (Steven) agreeing that this stock is grossly oversold. To give you more comfort, Credit Suisse rates GPOR as "Outperform" (based on value) with a $33 price target. I found this comment in their latest report interesting: "Since GPOR’s announced acquisition of Vitruvian back in mid-December, the stock is down ~41% vs. an 18% drop for Appalachian operators and 20% drop for SCOOP focused operators. Inside we expand on how the market has punished the name to the point where little to no value is given for its $1.85bn acquisition of 46,400 net acres and 183 MMcfe/d of production, despite improving well results from bigger completions and the relative rate-of-change left to extract from the SCOOP."

GPOR closed the acquisitions right in the middle of Q1, so only half of the new production is included in their first quarter results. Plus, they only completed five wells to sales during the quarter. Their plan is to complete ~90 high rate horizontal gas wells this year, including 15 to 18 in SCOOP where they are running four operated rigs today.

My valuation of GPOR is $40/share, compared to First Call's price target of $26.46. Here is why I like it so much:
> Gulfport has a VERY STRONG track record of growth. Production increased 31.5% year-over-year in 2016 and the company's guidance is for 45% to 55% YOY growth this year.
> Gulfport has FIRST CLASS geoscience and engineering teams. They have completed two wells in SCOOP and the initial well results are above the pre-drill type curve.
> Gulfport is an expert on horizontal gas wells. They have hundreds of HZ wells in the Utica Shale and they will complete 75 more HZ wells in Ohio this year.
> My valuation assumes GPOR gets paid $3.00/mcf for their natural gas in 2018. I think their actual gas price could be much higher because several midstream project completions are improving netback prices in Eastern Ohio already. GPOR's realized gas price in Q1 was $2.57/mcf. < If I assume ngas only sells for $2.50 in all of the forecast periods, my valuation of GPOR's common stock dips to $35.50.
[/i]> SCOOP wells should product a lot of NGLs. In Q1 Gulfport produced 13,139 barrels per day of NGLs. Their NGL production may double in the next twelve months. NGL prices are going up.
> Strong production and proven reserve growth is locked in. In 2015, Gulfport produced 91,220 BOE per day. In 2016, 119,921 BOEpd. They are on-track to have production of 220,000 BOEpd by December of this year and 250,000 BOEpd by December, 2018. < It ridiculous that a company with growth like this is trading for less than 5X operating cash flow per year.

Just for grins, let's say that GPOR keeps trading at 5X operating cash flow. Below are First Call's operating cash flow per share forecasts (mine are close):
> 2016A = $2.98 CFPS in a year with terrible gas and NGL prices
> 2017E = $3.70 CFPS
> 2018E = $5.04 CFPS
> 2019E = $6.67 CFPS
> 2020E = $8.37 CFPS

So, if First Call's CFPS forecasts are accurate and GPOR stays at just 5X CFPS the stock price should be:
> $25.20 by the end of 2018
> $33.35 by the end of 2019
> $41.85 by the end of 2020

In my opinion, an upstream company that has 30% annual production growth locked in for AT LEAST five years, should be trading for AT LEAST 10X CFPS.

In cases like this, if Gulfport does report 15 horizontal SCOOP wells that produce at rates above their type curve, there are two possible outcomes.
1. The share price reflects the full value, or
2. A large-cap swoops in to take it over.
* This is why I say on page one of the profile that SCOOP results will be what drives the share prices this year. Everyone already knows what Gulfport has in the Utica.

At 12-31-2016, Gulfport had 2.3 Tcfe of proven reserves. That number will go over 3.0 Tcfe by 12-31-2017 and they will have at least triple that amount in 2P reserves.

In my opinion, this stock is trading as if the company has zero development drilling locations. It actually have thousands of them.

[wilmawatts]

In cases like this, if Gulfport does report 15 horizontal SCOOP wells that produce at rates above their type curve, there are two possible outcomes.
1. The share price reflects the full value, or
2. A large-cap swoops in to take it over.
^^^

Same analysis for Newfield Exploration?

[dan_s]

Yes. The sale of China will actually make NFX a better takeover target. Companies looking for targets like "pure plays" and China is more of a distraction than an asset at this point.