Sweet 16 Update - May 27

[dan_s]

The Sweet 16 moved 3.7% lower for the week ending May 26. It is now down 17.76% YTD. The S&P 500 Index is up 7.91% YTD.

The Sweet 16 is now trading 47.62% below the First Call Price Targets and 82.85% below my combined valuation. AR, CRZO, GPOR, PDCE and RRC are trading at less than half of my valuations.

CXO, FANG and PXD are holding up better than the pack, primarily because they are the most well known Permian Basin companies and Wall Street is in love with the Permian.

Oil Price: Oil sold off on May 25 after OPEC officially announced the extension of their production cuts for nine more month. Everyone was expecting the announcement, but some speculators were hoping for an increase in the cuts. Stop losses were set very tight and when the selling started it quickly caused a cascading selloff. The oil price rebounded on Friday. Probably the same speculators that took profits on Thursday went long again when they felt the selling was overdone. IMO that is a good sign. As you can see on slide 9 of my podcast, WTI is back in the rising wedge formation. If we continue to see U.S. crude oil inventories fall, WTI should drift above $50 and eventually test the very strong resistance at $55.

Natural Gas Price: Go to http://www.americanoilman.com/ and click on Gas Storage. What you will see is that the next three weekly storage reports will be the highest injections of the refill season. Once we get to mid-June, demand for power generation really picks up and the gas going to storage goes down. This year we have the added demand from Cheniere which is already ramping up Train #3 at Sabine Pass. A HOT July and August should push ngas storage levels below the 5-year average. That will draw a lot of attention. The last time that storage went more than 100 BCF below the 5-year average (2014) the price of natural gas spiked to $6.00/MMBtu. I do not see that happening, but a rally above $4.00 would be nice.

My forecast/valuation models are using a gas price lower that the current strip.

All of the Sweet 16 produce a combination of oil, gas and NGLs. You can find the mix for each company at the bottom of the forecast models.

Investors need a "paradigm shift" before they rotate money back into the energy sector. They need to understand that upstream companies can generate profits at $50 oil and $3.00 gas. Just take a look at Q1 results. All of the Sweet 16 had Q1 results that met or beat my forecasts and they were profitable except for PXD that took a big impairment charge in Q1.

There also seems to be an assumption that when the new OPEC production agreement ends that they will flood the market with oil again. I do not see that happening. It was OPEC that took the big losses when they tried that strategy and I think they know it will not work. Demand for oil will be going up approximately 1.5 million barrels per day over the next six months, so OPEC should be able to raise their quotas after 3/31/2018.

I will be focused on the companies in our Small-Cap Growth Portfolio next week. We sent out an updated profile on SRC Energy (SRCI) yesterday. It has very strong production growth.

Sanchez Energy (SN) is hosting our luncheon in Houston on Tuesday, May 30

BlueKnight Energy Partners LP (BKEP) is hosting our luncheon in Dallas on Friday, June 2