Appalachian Energy Update

Transcription

1 Holly Stewart Alonso Guerra-Garcia October 6, 2014 Appalachian Energy Update Takeaways from the Pittsburgh Bus Tour Quick Take: A quick update from the majority of the producers and infrastructure names in our Appalachian basin coverage universe has us excited for the growth (both in the upstream and midstream space) but fairly bearish on the commodity. We assume that puts us in the Consensus camp, which we are okay with for the time being. We continue to see the midstream opportunities as vast, and we recommend owning producers with that optionality AR, EQT and RICE. We do believe the market is already positioning for an ugly 3Q14 given basis, but are also not convinced the stocks are overly cheap on 2015 valuations. So we are not getting aggressive yet on the group, and are intrigued with names like RRC trading at 8.9x 2015 vs. the historical multiple of 11x, but continue to see upside (and relative outperformance) in a handful of names. Continued Production Ramp: We have previously outlined our expected 2H14 volume ramp from our Appalachian Energy names, and our recent company meetings have not changed that perspective as activity levels in our view will continue into See our Appalachian 2Q14 Recap (Full Report). Production growth has averaged nearly 45% per year over the last several years in the region, with a growth clip of 10-15% expected for the next three years. We continue to forecast volume growth of 0.8 bcf/d in 3Q and an incremental 1.1 bcf/d in 4Q14. Industry statistics are forecasting the Marcellus to reach 20+bcf/d by 2020, with the Utica expected to more than 3x its 1.6 bcf/d in just the next 2 years. Growing Takeaway When are we over-piped?: Given the basin s prolific growth profile, pipeline companies have announced 25 bcf/d of projects over the next 3+ years to alleviate the current takeaway issue. Of course there are some redundancies in the number in our opinion and thus we do not anticipate all of those projects will move forward. With some companies forecasting expected relief in mid to late 2016 and others pushing that scenario out another year, the debate continues on when the supply and demand imbalance is resolved. With shippers locked into contracts for years, a secondary market could become crucial for companies to release and sell capacity, and equally as critical for those with not enough takeaway. The Utica remains the swing factor as recent exploratory results have indicated more supply is on the horizon. Antero Resources : AR Price Target $68 SO Share Price (August 25) $53.13 Enterprise Value ($mm) $17,274 Cabot Oil & Gas Corp. : COG Price Target $39 SO Share Price $31.52 Enterprise Value ($mm) $14,300 CONSOL Energy : CNX Price Target $49 SP Share Price $36.12 Enterprise Value ($mm) $11,434 Eclipse Resources : ECR Price Target $24 SO Share Price $15.01 Enterprise Value ($mm) $2,321 EQT Corp. : EQT Price Target $110 SO Share Price $90.11 Enterprise Value ($mm) $15,301 National Fuel Gas : NFG Price Target $78 SP Share Price $69.91 Enterprise Value ($mm) $7,487 Range Resources : RRC Price Target $90 SP Share Price $67.96 Enterprise Value ($mm) $13,894 Rice Energy : RICE Price Target $31 SO Share Price $26.02 Enterprise Value ($mm) $3,771 Williams : WMB Price Target $68 SP Share Price $55.83 Enterprise Value ($mm) $61,211 Howard Weil is a division of Scotia Capital (USA) Inc., a member of the Scotiabank group, and represents Scotiabank s energy equities business in the United States. All relevant disclosures and certifications begin on Page 17 of this report. Howard Weil Incorporated 3200 Southwest Freeway, Suite 1490 Houston, TX Source: Thomson ONE & Howard Weil

2 Company Capsules Cabot Oil & Gas $31.52 (SO, PT $39) Big Picture: Our recent update with the Company followed the Eagle Ford acquisition announced on September 24. It was apparent management is growing more confident in its position in the oily play, and in our opinion could move to slow its development plans in the Marcellus on its 3Q14 earnings conference call as it ramps up activity in the EF. COG is currently running 6 rigs in the Marcellus and with this latest deal, now has 4 rigs in the EF. Our quick math says it would take a big ramp in EF activity to offset a slowdown in the Marcellus, particularly given the increase in costs on the oil side. Eagle Ford Development: Cabot continues to build its position in its Buckhorn area where with its latest acquisition, it now holds 60k acres. Another 10k acres are in its Persidio area in Eastern Atascosa (their JV with EOG) and the remaining 13k acres will be evaluated in the future as another area for development. With a total of 83k net acres, the Company appears to be growing more confident of its position in the play. Hitting 100k net acres seems to be a good target by adding incremental bolt-ons through additional infill leasing. We believe the recent transaction should put the PVA takeover rumors to bed, with COG alluding to more value in the acreage transactions. COG has a rig on location related to the recent deal and will compete its first well once the transaction closes this month. The Company anticipates a 2-3 well pad to spud shortly. Pipeline Takeaway: The Constitution Pipeline continues to be a big focus for investors, and we have noted the latest in our WMB commentary on page 7. COG is likely to participate in at least one more big pipeline project in our opinion, adding capacity to its portfolio as well as ultimately very sellable infrastructure assets. The Company continues to look for capacity opportunities and seems to like to be involved in the decision making process of an asset in which it is tied to a long-term contract as well as one that takes its gas to market. Cabot will participate in the ~1 bcf/d PennEast project as a seller of gas. This project is particularly attractive to an upstream company as the pipeline is being built by a conglomerate of five utilities who are taking the capacity. The project will connect to Cabot s 650 mmcf/d Springville lateral with COG a major supplier and not needing to contribute capital. CONSOL Energy $36.12 (SP, PT $49) Utica Update: CNX has plans to drill 33 Utica wells in 2014, with the majority of those wells under the JV with HES. The Company is currently pushing 4,000 bbls/d of condensate volume and has moved gas volume up from 12 mmcf/d to 60 mmcf/d as of late. CNX noted the Company is outpacing its type curve in the wet area of OH and is sitting between a handful of recently released wells on the dry side. With a batch of Utica dry gas wells planned in 2015 in both their SWPA and CPA acreage, CNX estimates they have 472k net acres the dry gas Utica in both PA and WV where they have a 100% WI stake. Upper Devonian Activity: CNX will drill eight Upper Devonian wells in 2014, six of those targeting the Burkett and two targeting the Rhinestreet formation. Thus far, none of the Upper Devonian wells have been completed. CNX has moved EURs in the play up from 6 bcf to 9 bcf based on a very shallow decline curve. CNX has one SW PA Upper Devonian well in Washington County that started producing at 3 mmcf/d back in June That well is producing at 2.7 mmcf/d today, having produced 1 bcf in the first year. We 2 Howard Weil

3 have very little value in our NAV for the Upper Devonian so as development activity ramps, we will look to incorporate incremental valuation. Attractive Takeaway Portfolio: An aspect about CONSOL that we feel is missed by the investment community is the marketing portfolio and pipeline capacity. The Company has 1 bcf/d of takeaway capacity moving to 1.3 bcf/d in 2016, with a current cost of transportation of just $0.24/mcf. We are assuming that transportation costs will rise as we move closer to 2016 (for all in the group). CNX is participating in the NEXUS project, which will add up to 2 bcf/d of capacity in the Canadian and Midwest markets by the end of The Company s committed amount is unknown at this point, but the tariff appears to be in the neighborhood of $0.90/mcf depending on the end market. On the differential side, looking back to 2Q14, this pure Appalachian producer s gas price actually recorded a basis differential of ($0.44), a number higher than the majority of its peers. Looking to 2015: CNX has outlined a production growth strategy of 30% per year through 2016, noting that recent Marcellus production surpassed 900 mmcf/d in the Marcellus, currently ahead of the 1 bcf/d by mid-2015 target. Similar to prior years, the 2015 budget will be outlined in January. We would anticipate higher D&C and midstream budgets, though a lower coal budget. Our forecast is for $1.6b of spending in Eclipse Resources Corp. $15.01 (SO, PT $24) Development Plan Update: This newly public company continues to climb the drilling and completions learning curve, noting that it may be able to hit the same production growth objectives it outlined in its IPO roadshow but potentially with one or two fewer rigs. ECR has 4 rigs running today, all in the liquids rich portion of its Utica acreage. The goal was to ramp rig count to 6 rigs in early 2015 based off the drilling time of 25+ days per well. Because the Company is drilling these wells faster than planned, it is evaluating moving forward with a 4 or 5-rig program. With guidance expected on the 3Q14 call, we would anticipate hearing more about the latest plan, which could involve the same production expectations on less capital. Moving to the development plan, the 4-well Mizer Farms pad is currently being placed online in the condensate window, while the Duane Weisand well in the rich gas window will also come online shortly. Most of the wells being turned to sales in 2H14 and in 2015 are located in the condensate window with a much larger shift to rich gas in the 2015 development program. Midstream Notables: An important focus for Eclipse has been to line up reliable and diverse midstream and transportation options for both their Utica and Marcellus development areas. ECR is covered in the Utica where they have rich gas processing and fractionation, dry gas gathering, and condensate agreements. The Marcellus midstream solution is still being sorted out as Blue Racer's Natrium plant is running near capacity and the facility will likely have difficulty adding additional trains due to air permits restrictions. Given the relationship in the Utica, Blue Racer is considering other options to reach ECR in the Marcellus, while MWE's Mobley facility is also a potential option. For liquids takeaway, the Company has signed up through an agreement with Blue Racer to supply Mariner East II propane and butane starting in 4Q16. BP will market the NGLs for the project, which will be tied to a Japanese index price that is currently 25% higher than local prices. 3 Howard Weil

4 Takeaway Position: Although investor s have questioned the Company s takeaway and marketing strategy, it has had no issues getting its gas to market. Management s philosophy is to target 50-60% firm coverage, and as it stands for 2015, it is over half covered according to our calculations, likely needing to layer on additional FS agreements for the summer of 2015 and into The bulk of ECR s FT agreements do not come into service until late 2016 when Eclipse gets 205 mmcf/d on TCO and 150 mmcf/d on ET Rover (100 mmcf/d to the Gulf and 50 mmcf/d to Dawn). Due to the gap in coverage for next year, operated gas production is expected to be exposed to a ($0.90)-($1.00) differential to NYMEX. EQT Corp. $90.11 (SO, PT $110) Utica Potential: On the 2Q14 earnings call, EQT announced it will do its first exploratory test in the PA dry gas Utica (well actually second), with a test well in Greene County, PA. This 13,500 deep well should spud before year-end and is likely to cost anywhere from $12 to $17mm due to the depth and some science work. EQT has identified 400k net acres or 3,000 locations that are perspective for the dry gas Utica in PA. Initially the well will flow into the Jupiter gathering system (now at EQM), but given the expected high pressures of the play, it will likely be choked back to keep from backing off some of the Marcellus wells that are tied into the system. Should the Company decide to move forward with a development plan in the area, a high-pressure system gathering system will be needed to handle the additional volume. Midstream Opportunities: We previously noted that the development of the Utica would be an additional opportunity for infrastructure but another area of potential development is in Tyler County. We have seen a handful of recent wells announced in the area, most recently by MHR and previously by AR. EQT is well positioned in Tyler County from a midstream perspective as EQM s Ohio Valley Connector (OVC) system will be in the area, right now awaiting FERC approval for an expansion. Besides moving forward with EQT s development in Tyler, EQM could quickly move to assist in third party development. Southeast Pipeline Project: The proposed Mountain Valley Pipeline (MVP) project will serve as the southern counterpart of OVC by taking gas from the Mobley processing plant to an interconnect with Transco's Station 165. The pipeline will get shippers to Station 165 at a cost between $0.65-$0.75/mmbtu, at which point gas may be sold at the pooling point or taken further south. The binding season was extended past the Sept. 29 deadline though the pipeline has enough firm commitments to move forward at 1.5 bcf/d. EQT/NEE are vetting the ultimate size of the pipe a 36" pipeline, in our opinion, would be used for both EQT and NEE volumes and a 42" pipe would be used to move other third party volumes. The bigger pipe has a higher cost but potentially higher upside should additional commitments be received. The project is receiving competition from two other potential projects, with similar routes and specs the Atlantic Coast and Western Marcellus pipelines. The former is a demand-driven project being spearheaded by Dominion and a group of utilities, and the latter is a Williams project mentioned on Page 7. It seems unlikely that all projects would move forward. We should hear something on the MVP project in the near term. 4 Howard Weil

5 National Fuel Gas $69.91 (SP, PT $78) Marcellus Update: Although NFG s production has historically been dominated by volume from its Eastern Development Area (EDA), we should see a significant shift in FY4Q14 and going forward as the Company continues to ramp its Western Development Area (WDA). Besides a rig currently testing the Utica in Tioga County, drilling in the EDA has waned until Atlantic Sunrise Pipeline comes online in Due to pricing swings and pipeline curtailments, Tract 100 (in the EDA) has averaged 300 mmcf/d with some days at 200 mmcf/d and others at 400 mmcf/d. In the WDA, NFG plans to continue to run 3 rigs to meet its FT position in The Company s main position within the 200k net acres of the WDA that are defined as core today, should provide up to 8 years of drilling, growing at a double digit production clip. We could ultimately see a further activity ramp in 2016, but based on the current plan, the Company s production would be 100% covered in Utica Potential: NFG is currently drilling a horizontal Utica well in Tract 007 in Tioga County. The well is located directly between the two Shell wells that peaked at 26.5 and 11.2 mmcf/d rates, with fairly short lateral lengths averaging 3,650. The well will be drilled to a deep vertical depth of 12,000', with an estimated cost of ~$2mm more than a typical Marcellus well (~$6.5mm). The Company has previously drilled a few Utica wells in the Northwestern area of PA that are not considered economic for development in today s pricing environment. Test results will come out in late January/ early February so we could get a flavor on the FY1Q15 call should all go according to plan. The Utica well site sits almost on top of TGP s 300 line, and thus would move any production to market. MLP Options: Management has outlined two potential strategic options to raise capital for the corporation 1) a midstream MLP or 2) a mineral rights MLP (i.e. VNOM and Prairie Sky). Production tied to the WDA royalty interest is currently 80 mmcf/d, rising to 160 mmcf/d by 2015 year-end as NFG ramps volume in Elk County tied to its 1 bcf/d gathering system. The takeaway is that volumes are currently small but growing quickly as ongoing development continues in Elk County, where the Company holds 300k net acres in fee. However, given the newness of the mineral interest MLP and the growing midstream and pipeline portfolio tied to Marcellus development, we believe the midstream MLP is more feasible. With the market readily accepting these predominately fee-based infrastructure assets backed by tremendous upstream growth, we would anticipate this MLP announcement sooner rather than later in FY2015. Range Resources $66.77 (SP, PT $90) Marketing Portfolio: It appears to be fairly clear in our opinion that RRC has one of the most diversified marketing portfolios in the basin, both on the natural gas side as well as NGLs. Being the largest acreage holder and biggest NGL producer certainly helps catch folks attention. RRC has a wide range of customers and a portfolio of pipeline capacity of 1.1 bcf/d, moving to 1.75 bcf/d by With ~60% of its gas moving out of the basin next year, the Company has one of the more diversified end-market positions among its Appalachian peers. Utica Update: RRC has a rig on location, as they prepare to spud their first Utica test in Washington County, PA. Management anticipates results around year-end as the plan would be to flow test and then shut-in the well. From the infrastructure side, RRC has excess capacity at its MWE facility, but would be moving dry gas through liquids rich infrastructure. The ability to drill other Utica wells on the same Marcellus pads will come 5 Howard Weil

6 in handy should this well prove to be as prolific as other Utica dry gas wells as of late. The Company did note that recent logs show what they were expecting to see. Should RRC decide to move to further develop Utica wells in the area, they would have to move forward on a dry gas pipeline to get the wells to a long-haul pipeline. Long-term Plan: Although RRC typically talks in terms of its 20-year development plan, we got the sense that condensate development was moving up the development to-do list as there seemed to be some focus around condensate infrastructure and end markets. The Company noted it is looking at all options, including exports, and might want to take advantage of some infrastructure opportunities it is seeing in the market. We have inferred that this means a potential condensate splitter project. There are only a handful in the basin, and although historically RRC has focused on its upstream core competencies, this could be the infrastructure piece that it ultimately takes a harder look at. Stay tuned. Rice Energy $26.02 (SO, PT $31) Utica Update: We see a good amount of upside to our RICE Utica NAV and the data points coming out of the play certainly make us more certain this upside will come to fruition. The latest in the Utica from RICE is all good news -- the Big Foot 9H is producing as expected, with no declines to flat rate of production. The well has accrued an impressive bcf in its first 90 days online. And the next batch of wells, the two Blue Thunder wells, have been flowing to sales for roughly 2 weeks, under the Company s restricted choke program. These wells are cleaning up and slowly being stepped up to the restricted rate of mmcf/d, with pressures similar to the Big Foot well. RICE is expected to take delivery of its second horizontal rig for its Utica development in January, putting total horizontal rig count at that level for the foreseeable future. Big Picture: Macro commentary The Marcellus is currently producing 16 bcf/d, while the Utica is in its infancy at just 1.5 bcf/d. With a tremendous amount of growth anticipated in the Utica, this play could be the missing element of the potentially "over-piped" theory, negating that thesis at least in the short to medium term. RICE anticipates volume in the Utica to reach 5-6 bcf/d by the end of 2016, that is 3-4x growth in a two-year period. Given the success by many producers in the play, this could push out the balancing act of supply and demand by another year or two. Corporate strategy although it is clear RICE has been successful at adding acreage to the portfolio (43% increase since going public in January), investors are curious how they would approach a corporate deal. The main sticking point for the Company on corporate M&A is firm transportation capacity. Management believes the next 36 months in the commodity market could be tough so they would want a portfolio of assets that has a significant FT position associated with it. Since they would likely be bumping up against FT limits on an acquisition, it appears to us that the Company would not want to take on a deal where they can t drill the inventory. Near-term Activity: RICE has guided 3Q14 production growth of just 5-10% higher q/q as it would only bring 5 Marcellus wells and two Utica wells (Blue Thunder pad) online during the quarter. Separately the Company was expecting to shut-in 50 mmcf/d of production (in hindsight it wasn't bad timing due to pricing) as a result of some longwall activity in Greene County. 35 mmcf/d of that volume remains shut in and is expected to be back online in the next few weeks after the Company s 1.5 bcf/d gathering system in Washington County comes into service in mid-october. Moving to 4Q14, RICE anticipates turning to sales 17 Marcellus wells (or 116k horizontal feet), which have all been completed and are currently 6 Howard Weil

7 drilling out plugs. Once that is finished, it s just a matter of getting wells tied to sales. Management appears confident in the timing of the plan and ultimately the production exit rate for the year. Moving on to 2015, the current plan calls for 63 wells turned to sales, 40+ of those wells have been drilled today. MLP Thoughts: On the 3Q14 earnings call, RICE announced its intention to form a midstream MLP. With its first big midstream header system of 1.5 bcf/d expected to be placed in service as early as mid-october, and total CAPEX for midstream projects to date estimated at $475mm year-end, we think RICE has ample assets backed by a portfolio of upstream development to support such a vehicle. The 1.5 bcf/d Pennsylvania system is likely the first asset for the partnership, but the Company is in the process of permitting a 1 bcf/d header system in Ohio that is expected to be completed later in 2015 and would be a dropdown candidate. Additionally, RICE has water infrastructure that could ultimately be housed in the partnership. The Company has filed a private letter ruling (PLR) with the IRS in order to seek its approval should these assets ultimately reside at the MLP. Williams $55.83 (SP, PT $68) Pipeline Projects: Given Transco s position across the northeast and its estimated capital spending levels of $4.8b on expansion and greenfield projects from , investors spent a good portion of the conversation focused on two particular projects, the Western Marcellus Pipeline and the Constitution Pipeline. Western Marcellus Pipeline This project is designed to take 1 to 2+ bcf/d of gas from points in the Western Marcellus and Utica to areas as far south as Transco s Zone 3 compressor station 65 in Mississippi as well as north to the proposed Zone 6 River Road point in Pennsylvania. The distribution of gas appears to be 70% of volume moving south, 20% moving north, and the balance being sold at Station 165 in Virginia. In-service date is set for late 2018 and the non-binding open season closed on September 29. WMB appears to have confidence in the project and its ability to move forward due to the ultimate end markets and the fact that shippers will be able to drop off at multiple outlets along the southern route. This project is competing with EQT s Mountain Valley Pipeline (MVP), which has a similar route, but ends at Transco s Station 165. Both companies noted there is not likely the demand for both projects. Constitution Pipeline This project will move 650 mmcf/d of volume from Susquehanna County, PA to Schoharie County, NY, with an in-service date slated for late 2015/ early WPZ will be the operator with its 41% stake. The project remains in the limelight for a number of reasons, including the glutted market it serves in NE PA, the regulatory delays it has faced thus far, its route through NY state, as well as the fact that the pipeline is set to move 500 mmcf/d of volume for high growth producer, COG. WMB confirmed the October 24 timing related to the FERC EIS. Once that regulatory approval is finalized, permits from the NYDEC will be next on the agenda. With the issuance of the FERC s final EIS, all federal and state agencies have no more than 90 days to make final decisions. 7 Howard Weil

8 Analyst Certification We, Alonso Guerra-Garcia and Holly Stewart, certify that the views expressed in this research report accurately reflect our personal views about the subject securities or issuers; and I, Alonso Guerra-Garcia and Holly Stewart, certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. Important Disclosures This report was prepared by a Howard Weil Research analyst. Howard Weil is a Division of Scotia Capital (USA) Inc., a US Registered brokerdealer and a member of the New York Stock Exchange and FINRA. Howard Weil Research analysts focus primarily on the US Energy Sector. Scotia Capital (USA) Inc. is a wholly owned subsidiary of Scotia Capital Inc., a Canadian registered investment dealer, and indirectly owned by The Bank of Nova Scotia. Scotiabank, together with Global Banking and Markets, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc. and Scotia Capital (USA) Inc. In addition to Howard Weil Research, Scotiabank publishes and distributes Scotiabank Global Banking and Markets Equity Research ( Scotiabank Research ), which is a separate research publication. Howard Weil Research Analysts and Scotiabank Research Analysts are independent from one another and their respective coverage of issuers are different. In addition, because they are independent from one another, Howard Weil Research Analysts and Scotiabank Research Analysts may have different opinions on the short-term and long-term outlooks of local and global markets and economies. This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider Howard Weil s research and/or ratings as only a single factor in making their investment decisions. Past performance of the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. All pricing of securities in reports is based on the closing price of the securities principal marketplace on the night before the publication date, unless otherwise explicitly stated. Any prices that are stated in this report are for informational purposes only. Scotiabank, Global Banking and Markets makes no representation that any transaction may be or could have been effected at those prices. The compensation of the research analyst who prepared this report is based on several factors, including but not limited to, the overall profitability of Scotiabank, Global Banking and Markets and the revenues generated from its various departments, including investment banking. Furthermore, the research analyst s compensation is charged as an expense to various Scotiabank, Global Banking and Markets departments, including investment banking. Research Analysts may not receive compensation from the companies they cover. For Howard Weil Research analyst standards and disclosure policies, please visit Equity research reports published by Howard Weil, Scotiabank, Global Banking and Markets are available electronically via: Bloomberg, Thomson Financial/First Call - Research Direct, Reuters, Capital IQ, and FactSet. Institutional clients with questions regarding distribution of equity research should contact us at Scotia Capital (USA) Inc. is a multidisciplined financial services firm that regularly intends to seek investment banking business with companies covered in its research reports, and thereby seeks to receive compensation from these companies for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent for private transactions. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. For applicable current disclosures for all covered companies, please write to the Howard Weil Research Department at the following address: Howard Weil Research Department 1100 Poydras Street, Suite 3500 New Orleans, Louisiana Definition of Howard Weil s Equity Research Ratings & Risk Rankings Prior to January 7, 2013, Howard Weil utilized a rating system of Focus List Stock (FS), Market Outperform (MO), Market Perform (MP), Market Underperform (MU) and Rating Suspended (RS). Click here to view definitions. We have a four-tiered rating system, with ratings of Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform. Each analyst assigns a rating that is relative to his or her coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Our risk ranking system provides transparency as to the underlying financial and operational risk of each stock covered. Statistical and judgmental factors considered are: historical financial results, share price volatility, liquidity of the shares, credit ratings, analyst forecasts, consistency and predictability of earnings, EPS growth, dividends, cash flow from operations, and strength of balance sheet. The Director of Research and the Supervisory Analyst jointly make the final determination of all risk rankings. The rating assigned to each security covered in this report is based on the Scotiabank, Global Banking and Markets research analyst s 12-month view on the security. Analysts may sometimes express to traders, salespeople and certain clients their shorter-term views on these securities that differ from their 12-month view due to several factors, including but not limited to the inherent volatility of the marketplace. Ratings Focus Stock (FS) The stock represents an analyst s best idea(s); stocks in this category are expected to significantly outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the Risk Rankings Low Low financial and operational risk, high predictability of financial results, low stock volatility. Moderate financial and operational risk, moderate 8 Howard Weil

9 analyst. Sector Outperform (SO) The stock is expected to outperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Perform (SP) The stock is expected to perform approximately in line with the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Sector Underperform (SU) The stock is expected to underperform the average 12-month total return of the analyst s coverage universe or an index identified by the analyst that includes, but is not limited to, stocks covered by the analyst. Other Ratings Tender Investors are guided to tender to the terms of the takeover offer. Under Review The rating has been temporarily placed under review, until sufficient information has been received and assessed by the analyst. Ratings Distribution predictability of financial results, moderate stock volatility. High High financial and/or operational risk, low predictability of financial results, high stock volatility. Speculative Exceptionally high financial and/or operational risk, exceptionally low predictability of financial results, exceptionally high stock volatility. For risk-tolerant investors only. As of 9/30/2014, Howard Weil has 143 companies in its coverage universe. Of the 143 securities under Howard Weil s coverage universe, 143 carry a recommendation. The percentages referenced below are based upon the 143-rated securities in the Howard Weil coverage universe. 60% have been assigned a Focus List (FS) or Sector Outperform (SO) rating. Within the last 12 months, 43% of companies with this rating are investment banking clients of the Firm. 40% have been assigned a Sector Perform (SP) rating. Within the last 12 months, 40% of companies with this rating are investment banking clients of the Firm. 0% have been assigned a Sector Underperform (SU) rating. Within the last 12 months, 0% of companies with this rating are investment banking clients of the Firm. For the purposes of the ratings distribution disclosure FINRA requires members who use a ratings system with terms different than buy, hold/neutral and sell, to equate their own ratings into these categories. Our Focus Stock, Sector Outperform, Sector Perform, and Sector Underperform ratings are based on the criteria above, but for this purpose could be equated to strong buy, buy, neutral and sell ratings, respectively. Valuation / Risk Factors Valuation Method Used to Determine Price Target: Our current price targets for the Appalachian Energy sector are derived using a Sum-of-the- Parts approach to Net Asset Value (NAV). Our coverage universe is comprised of companies with both exploration and production assets as well as energy infrastructure assets. We assess each company s E&P assets using a discounted cash flow analysis (DCF) of the proved reserves, assuming a 10% discount rate in most cases. The resource potential or probable and possible reserves are valued based on the number of acres and thus drilling locations, driven by the number of wells drilled each year. Midstream assets, which include both long-haul pipelines, gathering pipelines, processing and fractionation facilities, are valued based on a multiple of 2015 EBITDA. Finally, we strip out the debt obligations to arrive at our price targets. Risk Factors Which May Impede the Achievement of the Price Target: (1) Industry fundamentals with respect to customer demand or product/service pricing could change and adversely impact expected revenues and earnings; (2) issues relating to major competitor or market shares or new product expectations could change investor attitudes toward the sector or the stock; (3) Unforeseen developments with respect to the management, financial condition or accounting polices or practices could alter the prospective valuation; or (4) external factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. Oil and Gas Prices and OPEC: Financial and operating performance for companies in the Energy industry are affected by absolute and relative changes in oil and gas prices, which are influenced by a multitude of regional, national and global factors. As such, future stock price performance may also be influenced by such factors associated with changes to fiscal and royalty regimes in countries where it operates, or might operate, the potential for geopolitical upheaval (given its global presence) and may face various technical and operational risks associated with the products and services it provides. Agreements among OPEC members, including production limitations, may also affect worldwide commodity prices and financial and operational performance for companies in the Energy industry. Additional Disclaimers and Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Scotia Capital (USA) Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. This report/ may be considered advertising under federal law. If you decide not to receive Howard Weil Research via , please reply to howardweil@howardweil.com and ask to be removed. 9 Howard Weil

10 Additional information is available upon request 1100 Poydras Street, Suite 3500, New Orleans, LA Howard Weil