HOUSTON. The View from. Non-OPEC production is falling. By: Dan Steffens, President INSIDE THIS ISSUE

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1 The View from HOUSTON Energy Prospectus Newsletter: "The View from Houston March 15, 2016 Issue: 119 By: Dan Steffens, President Dan Steffens is the President of Energy Prospectus Group (EPG), a networking organization based in Houston, Texas. He is a 1976 graduate of Tulsa University with an undergraduate degree in Accounting and a Masters in Taxation. Mr. Steffens began his career in public accounting, becoming licensed as a CPA in After four years in public accounting, he transitioned to the oil & gas industry with the bulk of his time (18 years) spent with Amerada Hess Corporation (HES). He served as the Hess United States E&P Division Controller from 1994 to INSIDE THIS ISSUE 3 Natural Gas 4 Sweet 16 Growth Portfolio 6 Small-Cap Growth Portfolio 8 High Yield Income Portfolio Seek and ye shall find. At EPG we are seeking out the best energy stocks and we bring those companies to the attention of our members. Some of the gloom & doom hanging over the energy sector has faded away thanks to rising oil prices, but we still have a long way to go. Oil below $40/bbl and natural gas under $2.00/mcf makes it difficult for even the most well managed upstream companies to turn a profit. The almost 50% increase in crude oil prices since mid-february has been fueled by a steady stream of short covering rallies. Speculators that have been shorting oil futures contracts have gotten burned over the last few weeks, but it will take improving supply/demand fundamentals to get them to go long on oil. Speculators, which outnumber commercial traders by more than 20 to 1, set the prices for oil & gas. They tend to move in a pack. When the majority of speculators start taking long positions and profiting from them, we will see a significant rise in the price of oil. Non-OPEC production is falling On March 11, 2016 the International Energy Agency (IEA) issued their monthly Oil Market Report. You can read the summary HERE. 1

2 EPG Coming Events Our luncheons in Houston and Dallas give EPG members and their guests an opportunity to meet the top management of some of the most promising small and mid-cap energy companies that we track. Members and guests need to register on our website. Our luncheons are free for EPG members and just $40 for non-members that register through our website or $50 at the door. Tuesday, March 29: Houston American Energy Corp. (HUSA) is expected to host a luncheon at the Hess Club, 5430 Westheimer, Houston, Texas. This date is tentative, so check EPG website to confirm it a few days before March 29. Visit energyprospectus.com to register. oil production alone will fall by a million barrels per day this year. Total OPEC oil production declined by 90,000 bpd in February. Increased output from Iran was more than offset by declines in Iraq, Nigeria and the UAE. You may recall that I predicted that Iraq s production would fall because I believe Iran was smuggling a lot of oil out through the port city of Basra before the sanctions were lifted. Now Iran can claim these barrels. I believe Iranian production growth will only be 300,000 bpd this year, nowhere near their boast of being able to quickly increase by 1,000,000 bpd. The tone of the report was much more encouraging than their February report. It is now clear that supply/demand fundamentals are moving in the right direction. There are clear signs that we have seen the bottom for oil prices during this cycle. However, the recent spike in oil prices has been fueled by headlines. Hope that OPEC and Russia will agree to freeze production may be short-lived if Iran refuses to play along. Positive factors sighted in the IEA report: Clear signs that non-opec supply is falling No reduction in IEA s forecast of a demand spike this summer Supply outages in Iraq, Nigeria and the UAE Supply may also be tighter than the agency thinks it is. Just one month after IEA warned that the global oil glut was set to get larger; they are now saying that may not be the case. The main reason is that Iranian production, which had been curtailed due to sanctions, is not returning to the market as fast as many analysts had predicted. You may recall that I expected this to be the case months ago. Iran was boasting when they said they could quickly ramp back up to pre-sanction levels. Forecasts of Iran being able to quickly bring a million more barrels per day to the market were ridiculous, ignoring the huge amount of capital it will take to bring their oilfields back to pre-sanction conditions. Wall Street analysts think it is as simple as opening up a few valves, but we are smarter than that. Global oil supplies actually declined by 180,000 barrels per day in February on lower OPEC and non- OPEC output. Production is still 1,800,000 barrels per day higher than it was a year ago, but we may have seen the peak. IEA is now estimating that non-opec production will fall by 750,000 barrels per day in 2016, an increase of 100,000 bpd since their February estimate. I believe U.S. Preliminary data suggests that OECD crude oil inventories actually declined in February. It is clear that Iran will need billions of dollars of investment to reach their production potential and let's face it, with prices this low and major oil companies cutting spending, the cash just is not there. We believe this is a historic time to position for an energy sector recovery. Bust cycles do not last forever. Phil Flynn, a leading energy sector analyst. The IEA sees a much tighter global oil market within six months: For the first half of 2016, the implied surplus of supply over demand 2

3 remains high at 1.9 mb/d in 1Q and 1.5 mb/d in 2Q. To the extent the oil price is forward-looking, comfort will be taken from our view that in the second half of 2016 the gap between supply and demand narrows significantly to 0.2 mb/d in both 3Q and 4Q. There is nothing that I can see which will stop supply from falling, except a significant increase in the price of oil. U.S. oil production is on steady decline On March 11th, Baker Hughes (BHI) reported that the active drilling rig count in the United States had fallen to 480. This is the lowest level of drilling activity reported by Baker Hughes in the 70 years they have tracking rig activity. In October, 2014 there were 1,609 rigs drilling new oil wells. Today there are only 386 rigs drilling for oil and only 94 rigs drilling for natural gas. There are close to a million producing oil & gas wells in the United States. 99% of these wells are on decline. Unless we are constantly completing new wells to offset the decline, it is impossible to maintain current production levels. As the rig count continues to fall, which I expect to be the case through the 2nd quarter, the rate of production decline will accelerate. New Profiles The following reports were posted to the website since our last newsletter: Updated Net Income and Cash Flow Forecasts for several of our Sweet 16 and other portfolio companies A table of our Fair Value estimates for each Sweet 16 company compared to First Call s 12-month price targets Company Profiles Antero Resources (AR) Carrizo Oil & Gas (CRZO) Concho Resources (CXO) Devon Energy (DVN) Diamondback Energy (FANG) EOG Resources (EOG) Laredo Petroleum (LPI) Conventional oilfields decline at 5% to 6% annually. The rate of production declines in the shales and other tight formations, primarily developed with horizontal wells, is much higher. We need twice as many rigs drilling for oil & gas than are working today just to maintain production and that will not happen until commodity prices are a lot higher. In fact, since upstream capital budgets are set for this year, we will not see a meaningful increase in drilling activity from Matador Resources (MTDR) Newfield Exploration (NFX) Parsley Energy (PE) PDC Energy (PDCE) Range Resources (RRC) SM Energy (SM) where it is today, no matter what commodity prices do until mid This is why I believe the depth of this oil price cycle is setting up a major oil shortage in less than two years. Natural Gas On March 7, 2016 the EIA published their new Drilling Productivity Report. You can view it HERE. EIA tracks production from the seven largest producing regions in the United States. These seven areas generate more than half of the country s oil & gas production. It is important to note that outside of these seven regions only SCOOP/ STACK has any significant drilling activity today, so it is safe to assume the legacy fields are all on steady decline. EIA now estimates that in these seven regions, from March to April: Oil production will decline 106,000 barrels per day Natural gas production will decline 450,000 mcf per day Both decline rates are expected to accelerate as we move into summer 3

4 Gulf of Mexico oil production is expected to increase 150,000 to 200,000 bpd this year as development wells are being connected to several major production platforms that were set last year. Canadian production is expected to hold up, but I find that hard to believe since their active rig count has also plunged to historic lows. Add all of this together and you can see how I arrive at my forecast that U.S. oil production will decline by approximately 1,000,000 bpd in 2016 and natural gas production will decline by 4 to 6 Bcfpd this year. This is setting up a much tighter U.S. natural gas market heading into next winter because, in additions to falling supply, demand for gas is expected to increase by 2 to 3 Bcf per day. Before this will impact gas prices, we first have to see the amount of gas in storage return to a normal level. The warm winter is going to leave approximately 700 Bcf more gas in storage than is normal for April. Since our gas market is growing rapidly, an argument can be made that we need a lot more gas in storage. Weather does matter: El Nino winters are usually followed by La Nina. Mother Nature has a way of balancing things out and La Nina could bring much colder than normal air to the United States during the winter. For now, I am assuming natural gas prices remain depressed until it is clear to the market that tightening is occurring. That should happen this summer when all of the gas powered electrical plants fire up. With luck, we will see $3.00/mcf gas prices by Thanksgiving. Sweet 16 Growth Portfolio The Sweet 16 is a collection of large and mid-cap upstream companies that are well-positioned to survive an extended period of low oil prices. They all reported 4th quarter results that were in-line with or above my forecast models. I have adjusted my forecasts and valuations to align with their production guidance. For a more in depth look at each company, I recommend you download the updated profiles from the EPG website. Below are a few highlights from their year-end reports. First let s look at the three companies that primarily produce natural gas. All three will probably trade in a narrow range until we see better gas prices. Antero Resources (AR) is the safe bet. It has a debt-to-capital ratio of 39.25% and more than 100% of the company s gas production is hedged through 2017 at levels that lock in realized prices over $4.00/ mcf. Antero s production increased 48% in 2015 and should increase another 15% in Gulfport Energy (GPOR) is the smallest of this group. They increased production a stunning 128% in 2015 and more than 30% production growth is expected this year. The only reason my valuation is down since the last newsletter is because they sold 19.9 million shares of common stock to shore up an already strong balance sheet. More than 75% of this year s gas production is hedged at $3.29/mcf. Range Resources (RRC) is #1 in the Marcellus Shale. Year-over-year production will be flat in 2016, but I am expecting it to dip in the first quarter. Use any weakness to add RRC to your portfolio because if natural gas increases to $3.00/mcf this stock could set a new all-time high next winter. Now I want to look at the oil prone companies. They are listed from highest market cap to lowest. EOG Resources (EOG) has a market-cap over $41 Billion, almost twice that of PXD. None of their crude is hedged, so I expect it to move in lockstep with oil prices. They ve slashed capital spending to live within cash flow from operations this year. It has a very strong balance sheet and Top Tier acreage in the Eagle Ford, Bakken and Permian Basin. Pioneer Natural Resources (PXD) is primarily a Permian Basin company. They have an aggressive development drilling program in the Spraberry/ Wolfcamp play that is supported by a hedging program that has locked in oil prices over $55/bbl. 4

5 Sweet 16 Growth Portfolio Company Name Primary Product Stock Symbol Share Price EPG Fair Value Estimate Percent Undervalued 3/11/16 ANTERO RESOURCES GAS AR $23.73 $ % CARRIZO OIL & GAS OIL CRZO $28.43 $ % CONCHO RESOURCES OIL CXO $ $ % CIMAREX ENERGY OIL XEC $94.47 $ % CONTINENTAL RESOURCES OIL CLR $27.36 $ % DEVON ENERGY OIL DVN $24.78 $ % EOG RESOURCES OIL EOG $75.18 $ % DIAMONDBACK ENERGY OIL FANG $78.43 $ % GULFPORT ENERGY CORP GAS GPOR $27.24 $ % LAREDO PETROLEUM OIL LPI $7.90 $ % NEWFIELD EXPLORATION OIL NFX $31.84 $ % PARSLEY ENERGY OIL PE $20.49 $ % PDC ENERGY OIL PDCE $56.48 $ % PIONEER NATURAL RESOURCES OIL PXD $ $ % RANGE RESOURCES GAS RRC $31.11 $ % SM ENERGY OIL SM $16.91 $ % Their realized oil price in the 4th quarter was $60.70/bbl. Production should increase 10% this year. Concho Resources (CXO) is a pure play on the Permian Basin. This year they plan to run twelve rigs, down from 24 in December. Production will dip in the first quarter then bounce back in the second quarter. Accumulate this Core Holding on the dips. Devon Energy (DVN) is a company in transition. In December, Devon made the decision to go big in the STACK play, announcing a $2 Billion acquisition. They have several non-core assets on the market with the hope that proceeds from the sales will cover the STACK acquisition. If their plan works, the company is going to look much better to the market in six months and there is significant upside to my valuation. Continental Resources (CLR) is still paying the price for deciding to monetize all of their oil hedges at the end of Like EOG, they are virtually unhedged today. CLR will move in lockstep with oil prices. It is #1 in the Bakken and SCOOP, but production will be down 7% to 8% this year as they have slashed their drilling program. Cimarex Resources (XEC) is an industry leader in the Permian Basin and in the Oklahoma STACK play that consistently beats my forecast. Since very little of their oil production is hedged for 2017, they have elected to hunker down. Cimarex is going from a 16 to a 4 rig program until oil prices rebound. This is a very conservative company with outstanding technical teams. Diamondback Energy (FANG) is another pure play on the Permian Basin. Its share price has held up very well, primarily because it keeps beating its own production guidance. Production was up 70% YOY in 2015 to 37,611 boepd in the 4th quarter. On a reduced capital budget this year, I am expecting production to 5

6 flatten out and it may fall in the 2nd quarter. Note that it is now approaching my valuation, so I recommend only adding it now on the dips. If you own a lot of FANG, consider harvesting some of the gain and moving the money to NFX, PE or PDCE since they have production growth locked in. Newfield Exploration (NFX) is my Top Pick for the SCOOP/ STACK play in Oklahoma. NFX is trading at less than 5X my forecast of operating cash flow per share for I expect Newfield to beat the current First Call earning per share forecast for the first quarter and continue to report outstanding well results in the Anadarko Basin where they are going to run ten rigs all year. Raymond James upgraded NFX to a Strong Buy after reviewing their 4th quarter results and several other analysts also upgraded it. Parsley Energy (PE) is the newest addition to the Sweet 16 and another pure play on the Permian Basin. It is similar to FANG, running about a year behind on production. Unlike FANG, I expect Parsley to grow production by more than 40% in PDC Energy (PDCE) is a leader in the Wattenberg area in Northern Colorado. Production was up 65% YOY in 2015 and their guidance is for 35% production growth in Their aggressive capital program is supported by hedges at $80.95/bbl on 50% of this year s oil production. Laredo Petroleum (LPI) is a pure play on the Permian Basin where they are developing their leasehold by building Production Corridors. This unique method is a bit more expensive up-front, but it significantly reduces operating expenses going forward. Laredo has more than 85% of this year s oil production hedged at $70.84/ bbl, locking in strong cash flows from operations. The company does have more debt than I like and there is more risk with this small-cap if oil prices do not rebound to at least $50/bbl by year-end. Carrizo Oil & Gas (CRZO) is primarily focused on the Eagle Ford where they continue to get strong well results. It has smaller positions in the Delaware Basin, Niobrara and Marcellus/Utica, which is primarily a gas play. For those of you that are active traders, CRZO may be your cup of tea. For some unexplainable reason, this stock s price really flops around. Read the profile we published last week. SM Energy (SM) has the lowest market-cap in the Sweet 16 despite having production of close to 150,000 boepd (46% natural gas, 30% crude oil & 24% NGLs). I believe it is the most undervalued company in the Sweet 16. Management agrees and they decided to hit the road to tell their story after announcing solid 4th quarter results on February 22nd. Their presentations at three major energy conferences since our last newsletter certainly helped because the share price has doubled in the last two weeks. Based on my forecast, cash flow from operations will be $7.60/ share this year. Disclosure: I have long positions in BBEP, CLR, DDRI, GST, HCLP, LINE, MEMP, MTDR, MPLX, NFX, RRC, and SN. I do not intend on buying or selling any securities mentioned in this newsletter within 72 hours of the publication date on page one. I am not receiving compensation from any of the companies mentioned in this newsletter. See the DISCLAIMER on the last page of this newsletter for more details. Small-Cap Portfolio Small-caps have more risk than the larger companies in our Sweet 16, but they also have more potential. Companies with lower production have more exposure to a prolonged period of low commodity prices. I believe by staying focused on the fundamentals we can increase our chances of making profitable investments in this space because it has less analysts coverage. Before you invest in this group you need to decide where you believe oil & gas prices are heading. If we get to the end of 2016 and crude oil is 6

7 still trading under $40/bbl and natural gas is trading under $2.00/ mcf, these small-caps will be trouble. I believe today s commodity prices are at unsustainable levels, but that doesn t mean they will go up. Many things impact commodity prices and the companies have very little control over what they can sell their production for. This is High Risk / High Reward territory, so do not invest your retirement money in small-caps. Now that you know the risk, the upside of this group is much higher than the Sweet 16. The Wall Street gang has written off most of the upstream companies with market caps under $Billion. They assume they are all going bankrupt. Quite a few of them will, so we need to take the time to dig into the numbers. I will be spending a lot of time on this group over the next three weeks and I m sure I will make some changes to the portfolio in the next newsletter. We will be publishing updated profiles on each company and my valuations will change after I spend a day on each one. I will keep you posted of the changes via Flash Alerts. I have decided to drop Jones Energy (JONE) and Ring Energy (REI) because they have gone to maintenance mode and I do not see anything that will move the share prices higher this year. Both of these companies will generate positive cash flow from operations in 2016 and they both have a lot of potential when commodity prices rebound. Bonanza Creek (BCEI) is on hold for now. The company had a decent year in 2015 with production up more than 20%. When they released 4th quarter results on February 29th they also announced that the Buyer of their Rocky Mountain Infrastructure (RMI) assets had decided to call off the deal. The market does not like surprises like this and several analysts downgraded the stock. The stock appears to be grossly oversold, but on March 10th Bonanza Creek drew down $209 million against their bank credit facility. This is a puzzling move. Today they have $235 million cash on the balance sheet and appear to be operating within cash flow from operations. The company needs to find a buyer for the RMI assets to calm down the creditors. Callon Petroleum (CPE), a pure play on the Permian Basin, continues to impress me. They reported YOY production growth in 2015 of 70%. Production should be up more than 20% in The company sold 15,250,000 shares of common stock on March 9th to shore up the balance sheet. This is good news for those of you that own the preferred stock. Earthstone Energy (ESTE) reported 4th quarter results that were slightly below my forecast and they will hunker down to live within cash flow from operations until they close the acquisition of Lynden Energy. The all-stock transaction is Small-Cap Growth Portfolio Company Name Primary Product Stock Symbol expected to close in the 2nd quarter. This deal adds a third core basin for Earthstone, and it is not just any basin; it s the Midland basin. The Midland basin is coveted for its stacked pay features, with multiple prolific producing horizons. The properties are in the Tier One area counties, primarily in Glasscock and Howard with smaller blocks in Midland and Martin. Gastar Exploration (GST) is working through a liquidity issue that should be resolved when they close the sale of their Marcellus/Utica package late in March. All of the proceeds will go to Wells Fargo to pay down their credit facility to $100 million. Gastar has more than enough cash on hand and cash flow from operations to cover a limited capex program this year. They will be completing their 2nd STACK well in the Meramec zone by mid-april. The logs show over 200 ft. of oil saturated zone. If you own GST, you definitely should listen to the replay of their 4th quarter results Share Price 3/11/16 EPG Fair Value Estimate Percent Undervalued BONANZA CREEK OIL BCEI $2.41 $ % CALLON PETROLEUM OIL CPE $8.01 $ % EARTHSTONE ENERGY OIL ESTE $12.40 $ % GASTAR EXPLORATION OIL GST $1.11 $ % LONESTAR RESOURCES OIL LNREF $3.13 $ % MATADOR RESOURCES OIL MTDR $20.34 $ % RSP PERMIAN OIL RSPP $27.75 $ % SANCHEZ ENERGY OIL SN $5.35 $ % SYNERGY RESOURCES OIL SYRG $7.88 $ % 7

8 conference call. Russ Porter lays out a step-by-step plan for 2016 that should have the company in great shape heading into Lonestar Resources (LNREF) increased their proven reserves by 30% in 2015 to 40.2 million boe (76% crude oil, condensate and NGLs). Lonestar is moving its domicile to the United States and the stock should be trading on NASDAQ in early April. I am expecting the move to NASDAQ to significantly increase their trading volume and draw a lot of attention to this rapidly growing pure play on the Eagle Ford. Lonestar s production is rapidly approaching 8,000 boe per day. You can find our updated profile on Matador Resources (MTDR) on the EPG website. Production should be up approximately 6% this year. They sold some equity in March to shore up the balance sheet and fund drilling in the Permian Basin. RSP Permian (RSPP) grew production by 80% in 2015 and production should grow another 20% in 2016 despite pulling back to a two rig program. This pure play on the Permian Basin has a strong balance sheet and lots of running room. Sanchez Energy (SN) had a strong 4th quarter, reporting production growth of almost 10% for the quarter and 72% YOY. They have more than enough cash on the balance sheet and cash flow from operations to fund this year s capital program. All of their oil production in 2016 (~17,000 bbls per day) is hedged at $62.00/bbl. Synergy Resources (SYRG) has a fiscal year-end of August 31, so they will be reporting their fiscal 2nd quarter results in early April. Production guidance is for 20% to 30% growth this year. Synergy is a pure play on the Wattenberg area in Northern Colorado. Keep an eye on your as we will be publishing updated profiles on each company in the Small-Cap Growth Portfolio is month. High Yield Income Portfolio Our Income Portfolio is focused on finding energy sector stocks and MLP units that offer high yield with a reasonable level of risk. Gastar Exploration (GST) announced last week that they will pay the monthly dividend for March on their Series A and Series B preferred stock on March 31, 2016 to owners of record on March 21. Then they are going to temporarily suspend the monthly dividends because dividend payments are prohibited under the new agreement they ve made with Wells Fargo on their revolving credit facility. The preferred stock dividends will accumulate regardless of whether any such dividends are declared. Gastar is marketing a 26,000 acre block of acreage (primarily in Canadian County, OK) that has STACK potential. Proceeds from this sale are expected to reduce the company s debt and should make the bankers happy. Hi-Crush Partners LP (HCLP) and Vanguard Natural Resources LP (VNR) have also temporarily suspended distributions to their unit holders. Hi-Crush is the low-cost frac sand producer in North America and they continue to gain market share. Just keep in mind that when the U.S. oil & gas industry rebounds, the upstream companies are going to need a lot of frac sand and Hi- Crush has the best sand and best distribution network in the industry. All three of these companies are taking steps to shore up their balance sheets and they should be in position to resume dividends when commodity prices rebound. Prices on the Callon Petroleum (CPE- PA) and Evolution Petroleum (EPM- PA) preferred stocks have moved higher since our last newsletter. Callon s common stock offering firms up their balance sheet and EPM continues to operate debt free. Both companies are heavily weighted to oil. Memorial Production Partners LP (MEMP) has more than 90% of this year s production hedged at prices high enough for them to fund a modest capital program and generate free cash flow. Distributable cash flow (DCF) available to limited partners for the fourth quarter of 2015 was $34.9 million, compared to $27.4 million for the third quarter of All of the midstream MLPs have moved higher since our last newsletter. The gloom & doom over the sub-sector got to the point of being ridiculous, so these moves are just getting back to the low end of most analyst s price targets. Magellan Midstream Partners LP (MMP) reported record DCF for the 4th quarter of $256.9 million. MMP owns the longest refined petroleum products pipeline system in the country, which can access nearly 50% of the nation s refining capacity. It can store more than 95 million barrels of petroleum products such as gasoline and diesel fuel. Much of its operations are in Texas, Oklahoma and Kansas. Magellan expects to increase cash distributions to unit holders by 10% in 2016 and at least 8% in MPLX LP (MPLX) completed the merger with MarkWest in December. Distributions grew by 29% in Distributions are now forecast to grow 12% to 15% in ONEOK Partners LP (OKS) announced the completion of the first phase of the Roadrunner Gas Transmission pipeline project in West Texas which will serve Mexico's rapidly expanding natural gas markets by connecting them with U.S. producers in the Permian Basin. Nearly 100% of this midstream MLP s revenues are fee-based, so they have very little exposure to 8

9 High Yield Income Portfolio Primary Stock Share Estimated Annual Company Name Product Symbol Price Annual Yield Dividend 3/11/16 CALLON PETROLEUM COMPANY OIL CPE-PA $ % $5.00 EVOLUTION PETROLEUM - Pfd Series A OIL EPM-PA $ % $ GASTAR EXPLORATION - Pfd Series A GAS GST-PA $ % $ GASTAR EXPLORATION - Pfd Series B GAS GST-PB $ % $ MEMORIAL PRODUCTION PARTNERS MLP MEMP $ % $0.40 VANGUARD NAT RES (Upstream) MLP VNR $ % $- HI CRUSH PARTNERS LP MLP HCLP $ % $- MAGELLAN MIDSTREAM PARTNERS LP MLP MMP $ % $3.14 MPLX LP MLP MPLX $ % $2.00 ONEOK PARTNERS LP MLP OKS $ % $3.16 PLAINS ALL AMERICAN PIPELINE MLP PAA $ % $2.80 PLAINS GP HOLDING MLP PAGP $ % $0.92 commodity prices. Distributions are expected to remain flat at $0.79 per quarter. Increasing exports of natural gas to Mexico by pipeline and to the Asian market in the form of liquefied natural gas (LNG) is a big part of why I now believe the U.S. natural gas and NGL markets will be much tighter heading into the next winter. Plains All American Pipeline LP (PAA) has the most exposure to an extended period of low oil prices. Fourth quarter results came in below guidance, however the miss was more due to weather related issues than to low oil prices. PAA is in the middle of a multi-year, multi-billion dollar capital expansion program. They recently closed a $1.6 billion preferred equity placement that satisfies their capital needs through The midstream MLP has visibility for incremental cash flow contributions over the next 24 months from the completion of these projects, the majority of which are backed by minimum volume commitments and other contractual support. These projects enhance PAA s existing footprint and provide further significant leverage to a sustained increase in U.S. production levels with little to no incremental investment. PAA and PAGP quarterly distributions appear to be sustainable in 2016, based on the company s guidance. Beyond 2016, the outlook for this one looks very good. Final Thoughts They are called price cycles for a reason; they do come to an end. Unless you believe most of the people on this Earth are willing to accept a lower standard of living, demand for hydrocarbon based liquid fuels will go up year-after-year. Over the last 25 years the average annual increase in demand has been 1,200,000 barrels per day. Since demand for oil relentlessly moves up year-after-year it really does not matter if the oil ministers from OPEC and Russia can agree on production limits or not. If non-opec production is falling, there is no chance that OPEC + Russia can meet this world s thirst for oil. During this Price War they are producing flat out, so there is no cushion that is going to save the world from the next oil shortage. This phase of the cycle will not be a smooth return of oil price to the historical trend. There will be lots of stops and starts along the way and a few pull-backs. Unless something unexpected happens, we won t see West Texas Intermediate (WTI) trading over $100/ bbl anytime soon. We don t need the price to go that high for the stock prices to rebound. Drilling & completion costs have come way down and a large percentage of those cost savings will stick. 9

10 A benefit of falling gas production in the oil shale plays is that we are already seeing a nice increase in NGL prices. These products don t get a lot of attention from the media, but they are a significant percentage of the production for a lot of our portfolio companies. Our goal is not to tell you what to invest in, but to give you a lot of good choices. Not all of the stocks we discuss in this newsletter or on the website are going to go up, but the majority of them have since 2001 when I launched EPG. If you stay focused on owning companies that have strong fundamentals and growth locked in, I believe you will have an edge in the market. Thank you for your support. Keep an eye on the macroenvironment, but look closely at the details before you invest in anything and good luck! Dan Steffens, President Energy Prospectus Group EPG Disclaimer The analysis and information in this newsletter and the reports & financial models on our website are for informational purposes only. No part of the material presented in this NEWSLETTER and/or reports on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed herein constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the PUBLISHER (Energy Prospectus Group, a division of DMS Publishing, LLC) and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the PUBLISHERS, editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided ''as is'' without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in the NEWSLETTERS is provided by Energy Prospectus Group, a division of DMS Publishing, LLC. Employees and affiliates of Energy Prospectus Group may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. PUBLISHER will indicate whether he has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Index returns are price only and do not include the reinvestment of dividends. The S&P 500 is a stock market index containing the stocks of 500 large-cap corporations, most of which are US companies. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill Energy Prospectus Group 10