March 2017

March 2017 Issue

1

Brother vs. Brother, and the Dirty Little Secret

OPEC Refuses to Admit

How bad are things really getting for OPEC?

The outlook isn’t so good.

On one hand, you have the Saudis in a lose-lose situation. Don’t forget that it was the Saudis that sparked the oil price war that waged from the summer of 2014 all the way through February of 2016.

During that period, WTI prices crashed more than 75%, plummeting from roughly $106 per barrel to about $26 per barrel.

Now, even though the Saudis insisted that it was to protect their market share in the wake of the U.S. shale boom, I can’t say I blame them for panicking a little. After all, U.S. production, which has been in a seemingly irreversible decline since 1970, suddenly changed course as drillers began tapping into the country’s tight oil resources.

I’m pretty confident that most of you know the rest of that story.

Nearly a full year of sharp price declines passed before low prices started curtailing U.S. output, which rose to 9.627 million barrels per day in April of 2015. Nearly everyone in the entire upstream sector slashed capital expenditures as if spending had become anathema.

U.S. output fell to around 8.5 million barrels per day in September of 2016.

Although domestic production declined, don’t make the rookie mistake of thinking that tight oil boom was over.

Perhaps the most important piece of information I can give you today is to truly understand where we get our oil supply.

Below, the EIA shows us exactly how important these tight oil resources are to the United States:

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What’s interesting is that conventional oil never stopped its irreversible decline; it was simply masked by the tight oil boom. Today, just three plays account for nearly half of the oil we use to feed our refineries.

And it’s not enough…

Gasoline demand has been at record highs for the last 12 months, up until the most recent few weeks, when it fell below last year’s level.

Do you want to see just how bad our addiction to crude oil has become?

Here you go (warning: U.S. oil consumption stats are not for the faint of heart):

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What’s even more intriguing than the jaw-dropping 19.5 million barrels of oil and petroleum products that we consume on a daily basis is the fact that most projections have us consuming around 19 or 20 million barrels of oil and petroleum products per day for the next two decades.

It’s true.

U.S. oil demand is actually going to remain relatively flat, just as it has been, more or less, for the last 44 years!

Yet, even with flat demand growth, the problem has never been the prospect of surging consumption in the U.S. — it’s that developing countries like India and China undoubtedly want to enjoy the benefits of oil, too.

But let’s get back to the topic at hand: OPEC.

Personally, I’m not convinced the Saudis were threatened by the United States.

For starters, U.S. oil companies were still banned from shipping their crude abroad, so they were no threat to the Saudis’ Asian customers.

Sure, there’s some struggle over areas like the Gulf Coast, where more refineries are geared towards heavy oil, given that Saudi spare capacity is nowhere near the same quality as its clients are used to.

We learned this years ago, when Libya’s civil war forced European refineries to replace that supply with Saudi crude. Those European refineries simply couldn’t handle the poor-quality crude from the Saudis’ spare capacity.

So the Saudis certainly coveted access to the U.S. Gulf of Mexico… but why take on the U.S. shale boom when there were other, more vulnerable targets?

I’m referring to Venezuela, a country that just so happens to hold the largest amount of proved oil reserves on Earth.

With crude oil trading for over $100 per barrel in the spring and early summer of 2014, Venezuela was one of the most damaging threats to Saudi Arabia’s market share.

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There was a catch, of course.

When it comes to Venezuela’s massive oil resources in the Orinoco Belt, we’re talking about some of the poorest-quality crude on the planet. It’s very heavy, very sour, and shares more similarities with the bituminous sands in Alberta than anything else.

More important, however, is that it’s very, very expensive to extract.

It’s not as if the Venezuelan oil industry was in great shape to begin with. After Chavez’s “May Day Takeover” (on which I wrote extensively to my Energy and Captial readers years ago as it occurred back in 2007), PDVSA — Venezuela’s state-owned oil company — was never able to recover from the loss of foreign oil companies helping develop the country’s rich oil assets.

Unfortunately, things are even worse than they appear… and we got our first glimpse of how OPEC’s house of cards will begin falling.

Venezuela’s central bank released its 2016 financial report recently. Inside, we learned that the country is quickly running out of cash.

Very quickly.

The report showed that Venezuela has about $10.5 billion left in foreign reserves. Moreover, approximately 73% of its remaining reserves are in gold, which it is starting to send to Switzerland in order to make the country’s debt payments.

The IMF has said that Venezuela’s inflation is projected to rise 1,660% in 2017, then another 2,880% in 2018.

We’re talking about a country already plagued by food shortages, regular rolling blackouts, and an increasingly unruly populace.

You and I both know precisely what will happen next...

Total collapse.

Let’s move on…

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Reader Questions

Do we still like coal?

Regards, Frank R.

Short and to the point, Frank. I have to admire the brevity of the question.

Here’s an even shorter answer to your question: No.

Now, before the coal bulls in our investment community start flooding my email inbox with scathing letters in defense of the coal industry, let me expand on that one-word answer.

Look, I fully understand the desire for some investors to turn bullish on coal stocks. In fact, there are several short-term catalysts that are extremely positive for the industry.

In Washington, D.C. (or Mar-a-Lago, if we want to get specific), President Trump has been hard at work grinding the EPA into minced meat.

And if you think Republicans are only looking to slash a few regulations, you’re in for a shock.

H.R. 861 is making its way through the House of Representatives right now.

The bill is just one sentence long, and its goal is singular:

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Investors who read the sentence I circled in red should immediately feel an urge to start buying coal. Truth is, the EPA’s war on the industry absolutely decimated coal stocks.

If you had ANY skin in the game whatsoever 10 or 20 years ago, then the shale gas boom that exploded into the spotlight back with the emergence of the Barnett Shale in 2005 would have utterly destroyed your coal profits.

Major coal producers like Arch Coal would have lost you about 99% of your initial investment… and that’s assuming you were able to sell that worthless paper.

Here’s my main concern…

Coal stocks like CONSOL Energy have performed decently, with share prices rising 35% over the last 12 months.

I’m not interested in playing the short game in energy.

You shouldn’t be either.

And no matter how you slice it, coal is doomed in the long term, if for no other reason than the fact that the U.S. is gearing its new electrical generation toward natural gas, wind, and solar.

Even more damning is the fact that more and more coal plants are reaching their retirement age. As you can see, we switched to natural gas right around the year 2000, when natural gas output in the Barnett Shale started to gain momentum.

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This crisis for the coal industry was further exacerbated after 2010, with coal not even showing up in scheduled electric capacity additions in 2016:

Regardless of whether President Trump intends to rescue the coal industry, it’s a physical impossibility to get things back to normal for those companies.

All they can do is enjoy business while it lasts, because it’s only a matter of time now.

Now, let’s dig into one of our plays that is helping drive this renewed drilling activity in the United States’ oil patch.

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Monthly Spotlight: Matador Resources

Ticker Symbol: MTDR

Market Capitalization: $2.5 Billion

Outstanding Shares: 99.5 Million

52-Week Range: $15.38–$28.51

Matador Resources is one of our premier growth stocks operating in the Texas oil patch.

Specifically, the company has a solid presence in both the Eagle Ford shale play in South Texas and the Wolfcamp and Bone Spring zones in the Delaware Basin, which, as you know, is one of the best up-and-coming plays in the Lower 48.

After an impressive run in 2016, we’re ready for Matador to crank up the action this year.

The company plans to run four rigs in the Delaware Basin during the first quarter, then increase that number to five for the remainder of 2017.

And it’s clear that this driller is focused on developing this part of the Permian Basin, too, considering that it’s allocating most of its capex this year to the play. This year, Matador has set its capital spending program between $370 million and $390 million.

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For the record, that’s a solid 52% year-over-year increase in capital spending.

And all of that drilling is expected to bear fruit…

Total production for 2017 is expected to average between 6.7 and 7 million barrels of crude oil (representing a 33% increase year-over-year), as well as natural gas production between 33 and 35 billion cubic feet (11% higher than 2016).

When I say these guys have transitioned into a West Texas driller, let me show you exactly what I mean.

Below, you can see how the company’s proved reserves have shifted over the last two years:

As you can see, three-quarters of Matador’s nearly 106 million boe of proved reserves are now located in the Delaware Basin. The company even managed to increase its year-over-year proved reserves by 24% in 2016.

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During the fourth quarter of 2016, the company earned a net income of $104.2 million, or $1.09 per diluted common share, on revenues of $94.8 million. Adjusted net income came in at $7.2 million and generated earnings of $0.08 per diluted share.

During the fourth quarter, the company realized the remaining $104.1 million from the October 2015 sale of its natural gas processing plant in Loving County, Texas.

To give you a better idea of just how good this company is at beating analyst expectations, take a look at how often it does it:

Matador has exceeded expectations 9 out of the last 16 quarters.

Of course, you may also notice that the company is setting up for a very strong year, with earnings estimates totaling $0.79 for the full year.

For the full year, Matador reported a net loss of $97.4 million, or $1.07 per diluted common share. Although posting a net loss isn’t too great, keep in mind that this is compared to the net loss the company reported for 2015.

During the fourth quarter of 2016, the company posted record average oil production of approximately 30,000 boepd, a 2% quarter-over-quarter increase.

If you still have your doubts about this growth story, just take one small glance below and tell me you can’t get excited for the future:

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Matador’s Delaware Basin operations contributed nearly 70% of their average daily production, or about 20,700 boepd. This represents a 138% increase year-over-year for its Delaware Basin output.

Even though shares nearly crossed above our buy limit in early February, we’re not ready to raise it just yet. Shares have been experiencing a correction during the last two weeks, giving us a strong opportunity to build our position before the stock bounces off its 200-day moving average.

Assuming we don’t see any unexpected obstacles, shares could find support around $23.50. And even though we don’t want to chase this stock should it run higher, now would be a good time to take a closer look at this driller.

Matador Resources is a “Buy” under $30.

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Rankings and Portfolio

March’s Top 10 List:

1. Matador Resources

2. Diamondback Energy

3. Oasis Energy

4. Approach Resources

5. Abraxas Petroleum

6. Orocobre Ltd.

7. Range Resources

8. Cypress Energy Partners

9. ONEOK Partners

10. Cheniere Energy Partners

Abraxas Petroleum (NASDAQ: AXAS)

Within the span of the last 12 months, we’ve watched our Abraxas shares surge from less than $1 all the way to a high of $2.99 by early January.

So it was only natural for the market to correct a little, which is exactly what we’ve seen over the last several weeks. However, this is actually good news, believe it or not. We’re not looking for an overnight surge sparked by emotional sellers looking for an exit.

As I mentioned earlier, we have to keep in mind that prices will most likely stay within a $50 to $65/bbl trading range for the rest of the year.

Not only are analysts expecting Abraxas to turn profitable in 2017 (which it hasn’t been since the fourth quarter of 2014), but also remember that this company is operating in two of the best tight oil plays in the Lower 48: the Bakken/Three Forks play in North Dakota and the Delaware basin portion of the Permian Basin in West Texas.

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Together, those two plays will account for 85% of Abraxas’ capital budget. To the right, you can see how its budget is broken down. Even more interesting is the fact that Abraxas has managed to increase production every year since 2012 despite radically slashing its capital spending.

Two weeks ago, the company released an update on its reserves and operations.

In total, Abraxas now holds approximately 44.7 million barrels of oil equivalent in oil and natural gas reserves, which is a slight increase over the previous year.

In case you were wondering, this increase took place in spite of the weak oil price environment for much of 2016, as well as the fact that Abraxas had only set its capital budget at a little more than $25 million.

Imagine the growth we’ll see now that Abraxas is spending about four times more this year!

Now, I don’t want to speculate on the company’s earnings just yet. We won’t learn those results for another two weeks, when it releases its FY 2016 report. Analysts are expecting the company to generate revenues between $52.7 million and $56.3 million and post a loss of $0.19 per share for the year.

But as I said above, 2017 is shaping up to be a very strong year, with the consensus projecting Abraxas to earn $104.62 million — a 91% year-over-year gain! — as well as earnings of $0.12 per share.

From an operational standpoint, however, things are starting to heat up…

Production during the last quarter of 2016 is expected to average 7,955 boepd, with some volume having been impacted by freezing weather in both the Bakken and Permian Basin. Also impairing production was the sale of two assets, totaling 175 boepd.

In Ward County, Texas, the company spudded a two-well pad (the Caprito 98-201H and Caprito 98-301H) last month. The 98-201H well was targeting the Wolfcamp A2 zone, with the other going after another prospective zone in the Wolfcamp A1 zone.

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In the Bakken/Three Forks plays, Abraxas completed the intermediate sections of the Stenehjem 6H-9H wells, and the lateral of the Stenehjem 9H well, which is located on the company’s North Fork Prospect in McKenzie County, North Dakota.

We’re still well positioned for the long term and are fully expecting this position to recover as we move through 2017.

Abraxas is a “Buy” under $3.00.

Apache Corp. (NYSE: APA)

Apache released its fourth-quarter and full-year 2016 results last week.

Let’s start off with the quarterly results. During the last three months of 2016, Apache generated a loss of $182 million, or approximately $0.48 per diluted share. After including non-cash, after-tax impairments of $90 million, as well as a few other items, the company’s Q4 loss totaled $22 million, or roughly $0.06 per share.

Operationally, Apache drilled and completed 29 gross-operated wells in North America.

And if you haven’t guessed by now, North America has become a primary focus for the company, with total production in that region averaging 252,000 boepd during the last quarter.

In the Permian Basin, which accounted for nearly 60% of the company’s quarterly production, Apache drilled and completed 17 gross operating wells. This was on the heels of the 29 wells it completed during the third quarter of 2016.

These Permian wells included five completed wells at Alpine High. I discussed the Alpine High discovery in last month’s issue (you can find that issue by clicking here).

According to last week’s report, delineation drilling confirmed an over-pressured regime across the acreage position, a productive hydrocarbon column in the southern portion of the play, and productivity from the Pennsylvanian formation.

Along with this work in the Alpine High, Apache also drilled and completed another four gross wells in other targets within the Delaware Basin, mostly in the Bone Springs formation.

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For the FY 2016, Apache reported a net loss of $1.4 billion, or $3.71 per diluted common share. Adjusted, the loss totaled $430 billion, or $1.13 per share. This was slightly more than the average consensus.

For the full year, Apache’s production averaged roughly 552,000 boepd (449,000 boepd after adjustments).

Where do we stand?

Well, let’s just say that if there was ever a year to be bullish on Apache, this is it.

To start, the boost in capital spending alone gives us the potential for some serious year-over-year growth. So far, the earnings consensus for 2017 is $1.43 per share. Even if crude prices are stagnant throughout the rest of the year, Apache is more than profitable at these levels.

More importantly, the company’s renewed focus on its North American onshore projects — including the massive Alpine High discovery — puts Apache in a prime position.

Apache is a “Buy” under $60.00.

Approach Resources (NASDAQ: AREX)

Approach Resources is our independent driller that has focused its attention on the acquisition, exploration, development, and production of oil and natural gas assets in the Permian Basin in West Texas.

Although there hasn’t been any news out of Approach since we talked about its recent transaction with Wilks Brothers, LLC and SDW Investments, that will change very shortly after the company releases its next earnings report on March 9th.

Going into the announcement, analysts following the company are expecting the company to generate earnings of about $90.6 million and a net loss of $0.79.

I’m going to reserve judgment today, at least until we have a clearer look at Approach’s results.

Approach is a “Buy” under $7.50.

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Aqua American (NYSE: WTR)

Aqua America is our water utility play offering both water and wastewater services throughout the United States.

Last week, the company reported its fourth-quarter and full-year results for 2016.

We learned that Aqua America increased its total operating revenues to approximately $819.9 million in 2016, a slight boost compared to the $814.2 million it earned the year prior.

Net income for the year totaled $234.2 million, or approximately $1.32 per share. This was a solid 16% increase over 2015.

Believe me, this company was busy throughout 2016. By December, Aqua America had closed a total of 19 acquisitions totaling $22.248 million and adding 6,558 customers to its list.

Keep in mind that it also has several acquisitions that are pending, which include four municipal systems, and for about 8,800 additional connections. These systems will come with a price tag of about $113,700.

Again, I can’t stress how strong this company will perform for us over the long term, and it’s not just because these guys have been in the business for 130 years.

Earnings grew by 4.8% year-over-year in 2016, with more growth expected this year. The company expects to post earnings between $1.34 and $1.39 per share in 2017.

Aqua America invested a record of nearly $400 million in the company’s infrastructure during 2016.

This year it intends to break that record and invest $450 million.

In fact, Aqua America plans to spend $1.2 billion over the next three years to grow its customer base and strengthen its infrastructure.

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The bottom line here for us is that it really isn’t unreasonable to think management can’t sustain that 1.6% growth in its customer base going forward.

Aqua America is a “Buy” under $40.00.

Atwood Oceanics (NYSE: ATW)

Boasting a fleet of 10 mobile offshore drilling units, Atwood is operating in waters like the Gulf of Mexico, the Mediterranean Sea, offshore West Africa, Southeast Asia, and off the coast of Australia.

Now, the company is set to release its next earnings report around May 4, so we won’t be able to take a look at its performance until then.

In the meantime, you can check out the current status of Atwood’s rig fleet by clicking here, which was updated in the beginning of February.

There’s no sugarcoating the volatility that has plagued the offshore sector for the last few years. I would argue that many of those deepwater drillers were hit even harder by the low commodity price environment than most investors first think.

Truth is, it was downright brutal for offshore drillers.

We can understand just how difficult things were for Atwood after reading its 2016 Annual Report. In Atwood’s case, the company’s five jackups are now idle. It had to scrap the semi-submersible Atwood Falcon, then idle its sister rig, the Atwood Eagle.

Then, the company wasn’t able to secure inaugural contracts for the two drillships that were under construction: the Atwood Admiral and the Atwood Archer.

As you might have expected, layoffs followed this period of inactivity.

It’s not all doom-and-gloom, mind you.

In this case, fiscal discipline was a must. And had Atwood not strengthened its balance sheet over time, we would be contemplating an exit strategy and not talking about weathering the storm. In fact, the company managed to purchase and retire more than $200 million of its publicly traded bonds at an aggregate +30% discount.

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Atwood is undoubtedly in a better position going forward.

Despite our long-term optimism, we still need to see market conditions improve and become more favorable for the offshore sector before we look to average down our position.

Atwood Oceanics is rated a “Hold” at current prices.

Cenovus Energy (NYSE: CVE)

Of all the oil plays across the world, one of the least likely areas to have a profitable oil company with $50 oil is the bituminous sands in northern Alberta.

Make no mistake; extracting bitumen and refining it into a marketable product is not a cheap endeavor. And believe me, things could be much, MUCH worse.

After all, Venezuela, a country that boasts nearly 300 billion barrels of proven oil reserves, and one that has a similar heavy oil to market, is on the verge of collapse after two years of declining oil prices.

And yet, despite the odds, Cenovus ended up surprising analysts last month by increasing crude oil production last quarter by 10%, to 219,551 bbls/d. This was thanks to its expansions in its Christina Lake and Foster Creek projects.

Even more surprising, however, is that Cenovus also posted a profit in the fourth quarter of 2016. The company reported net earnings of $91 million CAD ($69.73 million USD), or approximately $0.11 Canadian per share.

Let that sink in for a minute…

A year ago, the company reported a loss of $641 million CAD for the fourth quarter of 2015.

Here are a few highlights from its operational update from two weeks ago.

For starters, Cenovus added about 80,000 barrels per day to its oil sands capacity. Production in 2016 increased by 7% year-over-year. Additionally, the company lowered its oil sands per-barrel non-fuel operating costs by 13% year-over-year.

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Cenovus managed to fund its capital program and dividend, while generating free funds flow with WTI prices averaging less than $45 per barrel last year!

Don’t think the company is on easy street now.

Looking forward, the company plans to resume investment in its phase G expansion at Christina Lake, which it believes can be done with an investment between $16,000 and $18,000 per flowing barrel.

Once completed, the project will add approximately 50,000 gross bbls/d to its capacity. We’re expecting to see the first barrels of oil from the phase G expansion in the latter half of 2019.

Cenovus Energy is currently rated a “Hold” at current prices.

Cheniere Energy Partners (NYSE: CQP)

Through its subsidiary, Cheniere Energy Partners owns and operates the Sabine Pass liquefied natural gas terminal.

And earlier this week, the Delaware-based MLP released its latest round of earnings. According to the release, CQP reported a net income of $85.3 million for the fourth quarter of 2016, as well as a net loss of $171.2 million for the full year 2016.

If there were ever a time to get excited over the road ahead, it’s right now.

You might have seen this MLP make headlines recently. That’s because last November, the first commercial delivery of LNG was reached under the fixed price, 20-year LNG Sale and Purchase Agreement with BG Gulf Coast LNG.

Moreover, CQP is developing up to six trains at the Sabine Pass LNG terminal adjacent to the current re-gasification facilities; each one is expected to have a nominal production capacity of approximately 4.5 million tonnes per year.

Here’s a detailed breakdown of where we are so far with the development of these trains, as well as some remarks by CQP, which I’ve taken straight from the press release:

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• “Construction on Trains 1 and 2 began in August 2012, and substantial comple-tion was achieved in May 2016 and September 2016, respectively. Substantial completion is achieved upon the completion of construction, commissioning and the satisfaction of certain performance tests.

• Construction of Trains 3 and 4 began in May 2013, and as of December 31, 2016, the overall project completion percentage for Trains 3 and 4 was ap-proximately 95.5%, which is ahead of the contractual schedule. In September 2016, commissioning activities commenced on Train 3. Based on the current construction schedule, we expect to reach substantial completion for Train 3 in the first quarter of 2017, and Train 4 in the second half of 2017.

• Construction on Train 5 began in June 2015, and as of December 31, 2016, the overall project completion percentage for Train 5 was approximately 52.4%, which is ahead of the contractual schedule. Engineering, procurement, subcontract work and construction were approximately 96.6%, 76.6%, 43.7%, and 11.3% complete, respectively. Based on the current construction schedule, we should expect Train 5 to reach substantial completion in the second half of 2019.

• Train 6 is currently under development, with all necessary regulatory approv-als in place. We expect to make a final investment decision and commence construction on Train 6 upon, among other things, entering into an engi-neering procurement, and construction contract, entering into acceptable commercial arrangements, and obtaining adequate financing.”

Finally, let’s not forget the dividend we received. The quarterly cash divided of $0.43 per unit paid out on February 13, 2017 to unit-holders on record as of February 2, 2017. At current prices, this offers new investors a steady 5.2% annual yield.

Cheniere is a “Buy” under $35.

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Cypress Energy Partners LP (NYSE: CELP)

Cypress Energy Partners is one of our pipeline infrastructure plays… but with a twist.

You see, this growth-oriented MLP isn’t your typical pipeline stock. Unlike Enbridge, which controls vast pipeline networks that crisscross Canada and the United States, Cypress generates revenue through three segments: pipeline inspection services, integrity services, and water and environmental services.

In other words, these are the guys making sure that American pipelines are safe. Remember, the U.S. Department of Transportation requires that companies test their liquid pipelines every five years and natural gas pipelines every seven years.

And with President Trump going full steam ahead on all infrastructure projects, not even the DNC can refute that he’s gung-ho for more oil and gas pipelines.

It really doesn’t matter how much public vitriol is shown for companies like ETP and the Dakota Access Pipeline; the reality of the situation that we find ourselves in is that pipelines are far safer and far more cost effective than transporting oil by rail or truck.

Think about it…

Although there is no question that our pipeline infrastructure has its issues with age, the fact is that America’s freight cars are in even worse shape!

When I released your report on three of our infrastructure positions (you can view the report here), I said that Cypress was on the verge of another surge.

It turns out it came sooner than even I thought…

Cypress shares have jumped more than $2 over the last few weeks and are closing in on the initial buy limit we placed on this investment.

I don’t want to jump the gun just yet, because Cypress will be releasing its fourth-quarter and full-year 2016 results the week of March 20th.

I hope to have a more detailed update for you once we get our hands on that report.

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Until then, we’re going to let our patience pay off.

Cypress Energy Partners is a “Buy” under $16.

Diamondback Energy (NASDAQ: FANG)

Typically, whenever I see the phrase “Best in Class,” the first thing that comes to mind is a car commercial.

But it turns out that it’s also applicable in the oil and gas industry.

Diamondback Energy is considered one of the best growth stocks in the sector, and much of it can be attributed to the fact that it’s a pure Permian Basin play.

Specifically, Diamondback believes it can boost annual production growth by 65% this year. To achieve this, the company expects to complete between 130 and 165 gross wells with 8,500-ft. laterals.

As you know, the company controls approximately 182,000 net acres spread across six core areas in West Texas and has more than 4,300 horizontal drilling locations on the book.

Here’s a look at where the company is drilling:

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Again, we’re talking about a pure Permian oil play. Nearly 70% of Diamondback’s 1P reserves are weighted towards crude oil (1P simply refers to its proven reserves, or reserves that are virtually certain to be technically and commercially producible).

In fact, the company’s total proved reserves increased in 2016 to 205.5 million barrels of oil equivalent, a 31% year-over-year increase.

During the fourth quarter of 2016, Diamond reported a net income of $26 million, or approximately $0.32 per diluted share. Also, adjusted EBITDA for the quarter came in at $138 million — a 35% increase compared to the same period in 2015.

Looking ahead at the company’s 2017 guidance, the company is expecting production to average between 77,000 and 84,500 boepd this year, which includes both Diamondback Energy and Viper Energy Partners.

Furthermore, Diamondback’s capex program will fall between $8 million and $1 billion, which includes a 6- to 10-rig drill program, as well as roughly $75 million of infrastructure investments to be owned by the company.

Look, it hasn’t been easy to keep this company rated as a hold, especially given the fact that Diamondback will have nearly doubled its 2H2016 rig count.

In the next few weeks, the company is to have eight rigs up and running.

It’s not as if shareholders shouldn’t be used to this growth by now. Diamondback has successfully grown production at a 48% annual CAGR.

Oh, and while oil prices plummeted between 2014 and 2016, the company’s output grew 84.5%!

Finally, we learned this past week (on March 1st) that the company had closed its acquisition of leasehold interests and related assets from Brigham Resources Operating, LLC and Brigham Resources Midstream, LLC, for approximately $2.55 billion.

The acquisition adds 80,185 net leasehold acres in Pecos and Reeves counties to Diamondback’s position in West Texas. The company even plans to have two rigs running in this area this year.

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Given the kind of growth potential with this play, I believe this stock will easily outperform its peers over the next few years, and it’s time for us to raise our buy limit.

Diamondback Energy is rated a “Buy” under $120.

Gastar Exploration (NYSE MKT: GST)

Gastar Exploration is an independent energy company that is focused on the exploration and development of oil and natural gas assets in areas like the Hunton Limestone horizontal play in Oklahoma, as well as natural gas–rich shale in the Marcellus play in West Virginia.

Before I get too far, I want to note that this company will make its next earnings call next week.

So with that said, this is another position we’ll be covering in the near future.

I will, however, leave you with some very good news.

First, take a look at how this stock has performed over the last six months:

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We may be looking at an interesting buy opportunity here. I know the first thing that most investors will notice after glancing at this stock chart is that shares have jumped about 120% in just the last six months!

What I want you to notice, however, isn’t just the share price. Take a second look and tell me if you see any bullish patterns that might catch your eye.

See it?

Here’s a hint: it took place in November.

What you’re looking at is a “golden cross.” I know a few of my colleagues are chart geeks, and they would immediately look for the buy opportunity if they saw what you and I just did. The golden cross is simply a bullish breakout pattern that forms when the short-term moving average breaks above the long-term moving average (in this case, the 50-day average broke above the 200-day average).

What this indicates is that we’re staring at a fresh bull market down the road.

I hope to have more for you on Gastar’s operations soon.

Gastar Exploration is rated a “Buy” under $3.

Lithium America Corp. (TSX: LAC), (OTC MKT: LACDF)

Last month, we lumped our two lithium plays (Lithium America Corp. and Orocobre) together in our update section. In case you didn’t notice the change to this month’s Top 10 list, there were a few changes made to these two positions.

The most notable is that Orocobre’s rating was changed to a buy, which I will cover in a greater detail in next week’s update.

Make no mistake; this stock has made a roaring comeback after shares fell below $0.55 CAD since last November.

To put it a better way, our shares soared as high as 127% over the last four months!

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I hope the first thing you noticed was the golden cross pattern that occurred right around February 6th, which is bolstered by the higher volume.

Earlier this week, Lithium Americas Corp. gave us an update on its Cauchari-Olaroz lithium project. According to the press release, Minera Exar S.A. (which is a 50/50 joint venture between Lithium Americas and SQM) is continuing to advance as planned.

The most recent news is that Minera Exar is pursuing a development plan at the project that targets 50,000 tonnes per year of lithium carbonate production capacity in two stages, each consisting of 25,000 tonnes per year of lithium carbonate.

I think we’re close to seeing the company’s feasibility study on the first stage being released.

This project certainly doesn’t come cheap. The first stage alone has an estimated capital cost between $420 and $430 million, with construction possibly starting in the next few months.

Construction is expected to last roughly two years, with production beginning at some point in 2019.

Lithium America Corp. is a “Buy” under $1.20.

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Ring Energy (NYSE MKT: REI)

Ring Energy is another one of our Texas oil plays.

The company holds approximately 24.4 million barrels of oil equivalent in proved reserves, and has interests in approximately 18,130 net developed and undeveloped acres in Andrews and Gaines counties, about 19,679 net developed and undeveloped acres in Reeves and Culberson counties in Texas, as well as an additional 16,674 net acres in Kansas.

Their plans are simple: find an oil play in the Permian Basin with a strong upside, utilize advanced drilling and completing techniques to develop the asset, then kick-start an exploration program to minimize the higher risk that comes with these E&P companies.

Now, I don’t want to go too deep inside this company today, because Ring is scheduled to release its next earnings report on March 16th. Once we get our hands on that update, we’ll be in a better place to evaluate our position.

Until then, we can only point to what analysts are predicting. For the fourth quarter of 2016, the average consensus is that Ring will post revenues of 9.89 million and generate revenues of $0.02 per share.

If Ring can meet those expectations, it’ll mark the second consecutive quarter that the company is profitable. This year, they’re estimating that Ring will grow year-over-year revenues by about 138%!

Moreover, the company’s year-over-year revenues in the fourth quarter of 2016 are expected to jump 92%.

With the future looking much brighter for these small, independent Texas oil drillers, we’re ready to raise our buy limit.

Ring Energy remains a “Buy” under $15.

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Tsakos Energy Navigation (NYSE: TNP)

Tsakos is our tanker play that provides international seaborne crude oil and petroleum product transportation services across the globe. As of April 5, 2016, the company boasted a fleet of 50 vessels, including 47 crude oil and petroleum product tankers, one LNG carrier, and two shuttle suezmax tankers.

Although there hasn’t been any news out of Tsakos recently, I should have more for you as soon as the company releases its next earnings report on March 17, 2017.

Tsakos is a “Buy” under $8.00.

On the Radar...

I only have two notes before we part ways today.

The first is over a few organizational changes that will be made to the Energy Investor

portfolio in the coming days and weeks. After several reader suggestions, I will be breaking our model portfolio into several different sections.

This will both allow you to find your positions easier and guide you toward a certain group of stocks that you have your eyes on.

And finally, we’ve got a few earnings announcements on the horizon. I always recommend that members of our Energy Investor investment community take the time to listen to these conference calls.

Not only are they immensely helpful in learning what your stock has been up to lately, but oftentimes you’ll catch some great info on what the company’s management is thinking, as well as what management plans going forward.

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Keep the following dates in your calendar:

• March 7th: Atwood Oceanics, Gastar Exploration

• March 9th: Approach Resources

• March 12th: Ring Energy

• March 14th: Abraxas Petroleum

• March 17th: Tsakos Energy Navigation

• March 20th: Cypress Energy Partners

Good investing,

Keith KohlEnergy Investor

The Energy Investor Copyright © 2017, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the

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