Sweet 16 Update - June 17

[dan_s]

I was on vacation last weekend, so it has been two weeks since I've updated the main Sweet 16 spreadsheet. You can download it from the EPG website to see how current share prices compare to my valuations and to First Call's price targets. As of the 6/16 the Sweet 16 was trading at a 63.7% discount to First Call's price targets. I don't remember ever seeing a gap that wide.

The Sweet 16 declined another 3.52% over the last two weeks and is now down 27.07% YTD. Rather stunning decline for some of the highest quality upstream companies when considering that Q1 results were good and Q2 results should be about the same. Realized oil, gas and NGL prices will be down a bit in Q2, but production will be higher Q over Q. All of the Sweet 16 have solid production growth locked in.

AR and RRC are the only two stocks that moved higher over the last two weeks. A few on Wall Street are beginning to notice that the U.S. natural gas and NGL markets are tightening. A few stats from the Credit Suisse report on natural gas tell the story.
> Texas gas production is down 2.5 Bcf per day year-over-year, which accounts for the entire U.S. decline. Other onshore is down about the same amount the GOM production is up.
> Exports to Mexico are now ~4.0 Bcfpd, about a Bcfpd higher than a year ago.
> Total demand (including exports) is expected to be up 2.5 Bcfpd YoY in 2017, with most of the demand growth coming in the 2nd half of the year.
> During the first five months of 2017, natural gas consumed for power generation averaged about 23 Bcfpd, down slightly from a year ago. This is about to change.
> In Q3 2016 (July to Sept) natural gas for power generation averaged about 35 Bcfpd, spiking to 39 Bcfpd the last week of July.
> "LNG exports will be a major swing factor in supply/demand balance." - Credit Suisse 6-9-2017
> With a normal summer, Credit Suisse estimates that ngas in U.S. storage will be ~3,500 Bcf when the winter heating season begins, which compares to the 5-year average of 3,877 Bcf.
> With a HOT SUMMER I think we will see draws from storage in July or August.

First Call Target Prices have only come down a bit in the last two weeks for the Sweet 16. The oil prices that I'm using for my valuations is probably too high, but I will wait until July to adjust it. Even it I assume $45 oil for all future periods it only brings the valuations down 5% to 15%, depending on production mix. CLR and EOG are the only two companies that don't have any of their oil production hedged. Hedges are shown at the bottom of each forecast model.

If you think Credit Suisse is right about a near-term spike in natural gas prices, then AR, GPOR and RRC are "Screaming Buys" at today's share prices. All of the Sweet 16 produce some natural gas and NGLs. Production mix is shown at the bottom of each forecast model.

If the price of oil stabilizes, I think there is a good chance that we see lots of Wall Street hedge fund managers rotate some money into the energy sector in July. The "gloom and doom" hanging over the sector seems overdone to me. Some funds are required to rebalance their portfolios each quarter.