HOUSTON. The View from. Greek Tragedy. By: Dan Steffens, President INSIDE THIS ISSUE

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1 The View from HOUSTON Energy Prospectus Newsletter: "The View from Houston July 7, 2015 Issue: 108 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 Greek Tragedy INSIDE THIS ISSUE 4 Oil Supply and Demand 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. The real tragedy is the fear being generated by this small country s lack of fiscal discipline. It has caused significant losses for its citizens and unnecessary market volatility. Spending more money than you have or can ever make is a recipe for disaster. On Sunday, Greeks voted no to the bailout offer made by European officials because most of them do not want to accept any reduction in their free stuff. Talks will begin again on Tuesday. Greece has an economy 1/6th the size of the Texas economy and only 0.39% of the global economy. However, the media hype makes it sound like all of Europe will collapse if they leave the Euro Zone. Investors need to learn how to deal with the media frenzy. Selling off good stocks at a loss, most of which don t have anything to do with Greece, is not an appropriate response to Chicken Lickin. Buying good stocks at bargain prices makes a lot more sense to me. 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, July 14: Evolution Petroleum (EPM) a small-cap upstream company, is hosting a luncheon at The Hess Club, 5430 Westheimer Rd, Houston, Texas Visit energyprospectus.com to register. Obviously, if all sanctions against Iran are lifted, it will have an impact on the global oil markets. I ve seen estimates that Iran can quickly bring 40 million barrels of crude oil they have in storage to an already oversupplied market and that they can ramp up their daily production by an estimated 500,000 barrels within six months. My guess is that both are unlikely, but the possibility will cause a dip in oil prices. The Washington Examiner reported on Sunday, July 5 that Iran has already received 13 tons of gold as part of the negotiations. I do feel sorry for the poor people of Greece, who put their faith in a bunch of political hacks that got elected based on promises they could not keep. We d never do that in the United States of America. Greece will survive because the European Central Bank will eventually give them another loan they cannot pay back. Some social programs will have to be cut. On a slow news day a few months from now, this will once again become a big story. Next up: Iranian Nuclear Deal There may be some sort of a deal made between Team Obama and the Iranian negotiator, but a senior administration official (unnamed surprisingly) emphasized on Saturday that no element of the agreement will be complete until it has been approved by foreign ministers of all negotiating parties. Your guess is as good as mine on when politicians from Britain, China, France, Germany, Russia and the United States can all agree on this deal, since no one really knows what the details are. By the way, the Supreme Leader of Iran also has to agree to it. The last time I checked, we had three branches of government for checks and balances. In this case the U.S. Congress does have a say. Under compromise legislation agreed upon by Congress, Obama has until July 10 to transmit to lawmakers the text of an agreement and all annexes, along with written assurance by Mr. Kerry that Iran has verifiably stopped all work toward developing a nuclear weapon. (How the heck is Kerry going to do this?) The legislation allows Congress 30 days to review the documents and vote a resolution of disapproval if it so chooses before any sanctions are lifted. If the documents arrive after July 10, that review period increases to 60 days. As energy sector investors we need to keep an eye on things like this, but we also need to keep things in prospective. Oil traders probably have more oil coming from Iran already baked into the oil price. This world consumes close to 94,000,000 barrels of hydrocarbon base liquids EACH DAY. Estimates are that global consumption will top 95 MMBbls per day by year-end. All of that Iranian oil will not show up in Cushing, Oklahoma the day after sanctions are lifted. 2

3 It will take time to move that much oil and most of it will go to Asian buyers. Basing your investment decisions on Chicken Lickin can get very expensive. Taking advantage of fear related selloffs can be very profitable. Oil Supply & Demand In June, Raymond James and Associates sent out two separate reports calling into question the International Energy Agency s (IEA) estimate of global demand for oil and the U.S. Department of Energy s Energy Information Agency s (EIA) weekly report of U.S. oil supply. I have been telling those of you that read the EPG Forum for months now that both IEA and EIA grossly underestimated oil supply & demand during the last big oil price cycle in I believe they are doing it again and it is nice to see Raymond James agree with me. Raymond James Energy Team, based in Houston, is not a pack of junior analysts. Marshall Adkins has a first class team and they would not publish reports like this without doing the research to back up their conclusions. Marshall s team closely tracks data from hundreds of energy companies and oilfields all over the world. Plus, it is well known that the IEA has a line item plug number in their monthly Oil Market Report. IEA even has a name for it, the miscellaneous to balance ( MTB ) number. I wonder if your college math professor would have given you a passing grade if you used an MTB to solve problems. In the last fifteen years, the IEA has revised demand higher for fourteen of the fifteen years. In the past decade and a half, annual demand figures initially reported by the IEA have been revised upward by a whopping 700,000 Bbl/d on average. This implies (assuming supply and changes in stocks are not responsible) that global oil demand estimates are meaningfully understated on a consistent basis by the IEA. This was the case back in 2009, when IEA had to significantly increase their global demand estimates month after month. Apparently, lower fuel prices do increase demand. Didn t we all learn that in Economics 101? In their June 29th Energy Industry Brief, Raymond James makes the case that the EIA s weekly report includes a plug number that is overstating supply growth in the United States. To me this makes sense since I believe it is impossible for U.S. oil production to keep increasing when we have moved almost 1,000 rigs that were drilling for oil back to the yard. It is reasonable that oil production would keep rising for a few months after the peak in early October, 2014 of 1,609 rigs drilling for oil. However, by early 2nd quarter we should have seen production roll over. There are 3

4 now more than 40,000 horizontal wells in the tight oil plays on steep decline and completions of new wells was dropping like a rock through the first quarter. Raymond James: the EIA s weekly data shows U.S. oil supply continuing a steady climb to current all-time highs, while our production-by-play model shows U.S. oil supply has been falling at an increasing pace since March. In this week s Stat we will detail the discrepancy between the EIA s weekly data and our proprietary oil supply model, and show why we think that the EIA s weekly inventory data is not only overestimating U.S. oil production, but has completely missed the U.S. oil supply rollover. Bottom Line: Global Supply & Demand for oil may be much tighter than we are being lead to believe by EIA and IEA. Raymond James concludes that (a) the IEA may be understating global demand by as much as 1,200,000 barrels per day and (b) our own EIA may be overstating U.S. oil production by approximately 300,000 barrels per day. If this is true, the global oil market is very close to being balanced today and they will be undersupplied by the 4th quarter. Don t call your congressman to scream about the EIA. I know they have a huge staff and an annual budget over $3 billion, but forecasting oil supply & demand is difficult. They rely heavily on data coming in from a lot of different (and often unreliable) sources. I just wish they would learn from their past mistakes and use a little more common sense. I realize that is asking a lot from our government. By the way, the EIA s monthly Drilling Productivity Report agrees with Raymond James analysis. They have been showing U.S. oil and natural gas production on decline for several months. I guess the EIA team that publishes that report doesn t talk to the team that publishes the weekly report. If the CIA and FBI can share information, surely teams within the same agency can. Sweet 16 Growth Portfolio The Sweet 16 has declined since my last newsletter, primarily because of all the media hype about Greece and Iran. Plus, we are in a bit of an information void until 2nd quarter operational and financial reports start pouring in. Rest assured, 2nd quarter reports are going to be an improvement over 1st quarter results. Oil & gas prices were on the rise during the quarter. Realized prices of production should be $7.00 to $10.00 per boe higher. The Sweet 16 is now up 2.6% yearto-date, compared to the S&P 500 Index that is up just 0.6% YTD. It is nice to be doing well on a relative basis, but I think the portfolio should be doing much better. As the oil markets tighten, a lot more investors will be moving money to this oversold sector. First Call s price targets have been drifting higher since the first quarter and most of them are now getting close to my valuations. Bonanza Creek Energy (BCEI) was upgraded to a BUY by Canaccord Genuity with a price target of $29. The company has a deep inventory in Northern Colorado with over 2,000 net 4

5 Sweet 16 Growth Portfolio Company Name Primary Product Stock Symbol Share Price EPG Fair Value Estimate Percent Undervalued 7/2/15 BAYTEX ENERGY OIL BTE.TO $18.69 $ % BONANZA CREEK ENERGY OIL BCEI $16.66 $ % CARRIZO OIL & GAS OIL CRZO $45.62 $ % CONCHO RESOURCES OIL CXO $ $ % CIMAREX ENERGY OIL XEC $ $ % CONTINENTAL RESOURCES OIL CLR $40.00 $ % DEVON ENERGY OIL DVN $57.87 $ % EOG RESOURCES OIL EOG $85.67 $ % DIAMONDBACK ENERGY OIL FANG $73.13 $ % GULFPORT ENERGY CORP GAS GPOR $38.36 $ % LAREDO PETROLEUM OIL LPI $11.78 $ % MATADOR RESOURCES OIL MTDR $23.17 $ % NEWFIELD EXPLORATION OIL NFX $35.04 $ % OASIS PETROLEUM OIL OAS $14.63 $ % RANGE RESOURCES GAS RRC $47.97 $ % SM ENERGY OIL SM $43.53 $ % future drilling locations, and plans to drill 30% of its Wattenberg wells with extended reach laterals in "We believe that Bonanza Creek Energy offers an attractive way to play the Denver-Julesburg Basin (Niobrara and Codell formations). With a fairly contiguous 70,000 net acre position in the Wattenberg Field, the company has a sizable, highquality asset to exploit," Canaccord analysts said. A research report from Jefferies listed Carrizo Oil & Gas (CRZO) as one of their Top Value picks with a price target of $65. With a reduced capital budget this year, Carrizo is focused on maintaining their current production level and lowering costs as they develop their leasehold in the Eagle Ford, Utica Shale, Permian Basin and Niobrara. The company has a strong balance sheet and approximately 70% of this year s crude oil production is hedged. Stephens analyst Ben Wyatt initiated coverage of Diamondback Energy (FANG) with an Overweight rating and $98 price target. The analyst believes that the company is well positioned to become a "top-tier Permian producer." In addition to FANG, Laredo Petroleum (LPI) and Matador Resources (MTDR) are two smaller companies that have a lot of upside in the Permian Basin. Well economics are very good in the Permian, even at today s oil prices. Main Street Partners, a hedge fund that manages over $7 Billion lists Oasis Petroleum (OAS), Range Resources (RRC) and Pioneer Natural Resources (PXD) as its top three energy stocks. As I mentioned in the last newsletter, natural gas is starting to look a lot more promising to me. Recent weekly storage reports have been slightly bullish, despite rather mild weather in the United States. As heat and humidity spread across the South, we should see more gas burned for power generations and even smaller increases in the gas storage levels. All eyes are on oil prices these days, but around September the Wall Street gang may 5

6 Small-Cap Growth Portfolio Company Name Primary Product take notice of a tighter gas market developing. Sweet 16 with the most exposure to natural gas: Range Resources (RRC): Marcellus and Utica Shales Gulfport Energy (GPOR): Utica Shale Devon Energy (DVN): Woodford Shale EOG Resources (EOG): Eagle Ford, Permian and Bakken Newfield Exploration (NFX): STACK play in Oklahoma SM Energy (SM): Eagle Ford and Bakken Stock Symbol Share Price 7/2/15 EPG Fair Value Estimate Percent Undervalued ABRAXAS PETROLEUM OIL AXAS $2.76 $ % APPROACH RESOURCES OIL AREX $6.09 $ % CALLON PETROLEUM OIL CPE $7.35 $ % GASTAR EXPLORATION OIL GST $2.85 $ % PETROQUEST ENERGY GAS PQ $1.83 $ % RING ENERGY OIL REI $10.67 $ % RSP PERMIAN OIL RSPP $26.64 $ % SANCHEZ ENERGY OIL SN $9.20 $ % TRIANGLE PETROLEUM OIL TPLM $4.60 $ % we can increase our chances of making profitable investments in this space because it has less analysts coverage. I have decided to add Ring Energy, Inc. (REI) to the portfolio. I like the management team and I like the fact that they stick to their knitting. This is the same management team that formed Arena Resources, Inc. in 2001 and sold it for $1.6 Billion in Arena made it into our Sweet 16 in 2006 and was one of my best picks ever. I believe they plan to grow Ring s production and proven reserves and sell it when the timing is right; just as they did with Arena. Ring is based in Midland, Texas. They recently announced an acquisition in the Delaware Basin (a sub-basin of the Permian Basin) that is immediately accretive to earnings and cash flow per share. The seller was Finley Resources Inc., a privately owned operator based in Fort Worth, Texas. We will publish a detailed profile on REI later this month. The key points of the Ring acquisition of the Finley properties are as follows: The purchase price was $75 million with closing on June 30, Effective date of the transaction was May 1, Ring gets ~14,000 net acres, with approximately 65% held by production. Ring will assume operatorship of the properties. The properties carry a 98% working interest and average net revenue interests in excess of 78%. The properties are located in Disclosure: I have long positions in BBEP, BTE, CLR, CRK, DDRI, DVN, GST, HCLP, LINE, LNCO, LSTMF, MEMP, MTDR, MWE, NFX, OAS, PBG.TO, PWE, RRC, SN and TXP.TO. 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 mid-caps 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 6

7 Culberson and Reeves Counties, Texas. Current net daily production is about 1,300 BOE per day (~80% crude oil). Pro forma for the pending acquisition, Ring will have over 2,750 BOE per day of current net production and over 45,000 gross (31,000 net) Permian acres. On June 30, Gastar Exploration (GST) reported outstanding results on their second Utica Shale / Point Pleasant well. The Blake U-7H well located in Marchall County, West Virginia had initial production of 36.8 MMcf per day. It settled in at 14.8 MMcf per day. Gastar has a 50% working interest and 41.1% net revenue interest in this well. Gastar has over 70 low-risk high potential horizontal drilling locations in their leasehold in the Utica Shale. They also have significant gas production in the Marcellus Shale to the east. Gastar does not intend to drill more Utica wells this year. Wisely, they are waiting until gas prices increase in the area. This year s budget is focused on increasing their oil production and proven reserves in Oklahoma. One of the hottest oil plays in the U.S. is now developing in Central Oklahoma. Gastar s Hunton Oil Play is surrounded by Sweet 16 members CLR, DVN, NFX and XEC that are getting outstanding results in the SCOOP and STACK plays. Gastar may drill a STACK well in the 4th quarter, but they are wisely letting these larger companies prove up their acreage. Gastar has leasehold in Canadian and Kingfisher Counties, Oklahoma. They believe they hold more than 63,000 acres with Meramec, Mississippi Lime and Woodford potential. I have raised my valuation of Callon Petroleum (CPE) since our last newsletter. Their well results and economics in the Permian Basin are very good. See our recently published profile. 7

8 High Yield Income Portfolio Primary Stock Share Estimated Annual Company Name Product Symbol Price Annual Yield Dividend 7/2/15 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 $ % $ BREITBURN ENERGY PARTNERS LP MLP BBEP $ % $0.50 LINN ENERGY (Upstream) MLP LINE $ % $1.25 MEMORIAL PRODUCTION PARTNERS MLP MEMP $ % $2.20 VANGUARD NAT RES (Upstream) MLP VNR $ % $1.41 EMERGE ENERGY SERVICES LP MLP EMES $ % $3.00 HI CRUSH PARTNERS LP MLP HCLP $ % $2.70 MARKWEST ENERGY PARTNERS MLP MWE $ % $3.64 PLAINS ALL AMERICAN PIPELINE MLP PAA $ % $2.74 SOUTHCROSS ENERGY PARTNERS MLP SXE $ % $1.60 PetroQuest Energy (PQ) is the only gasser in this group. I will be taking a hard look at it next week and we will send out an updated profile. Do not read too much into my valuation of RSP Permian (RSPP). This is a high quality company that probably deserves a higher multiple. I just want to see one more quarter of actual results to confirm a few of the assumptions I m using in my forecast model. All of the companies we track in the Permian Basin are doing a great job of getting their completed well costs down. The economics there are very good, even at today s low oil prices. 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. The preferred stocks are the safest bet. They have high tax deferred dividend yield, but they have little capital appreciation potential beyond par value. EPM s preferred stock trades over par because the company has no debt. If natural gas prices do increase, it will be great news for all of the upstream MLPs (BBEP, LINE, MEMP and VNR). On July 1, Raymond James sent out a note on Linn Energy (LINE). They reiterated a Strong Buy on LinnCo (LNCO) and Outpreform on LINE. They believe that the market continues to underestimate Linn Energy s base cash flow business, along with the impact of its multiyear hedge book and its acquisition opportunities. Raymond James put a $14 price target on LINE and a $15 price target on LNCO. Raymond James analyst Kevin Smith writes, LINN currently has two non-binding, strategic alliances in the works; 1) its acquisition alliance with Quantum Energy and 2) its drilling alliance with GSO Capital, both of which we expect will be finalized in relatively short order. While we support the notion that both of these structures will contribute to the partnership s ability to finance acquisitions and fund its drilling program in a balance sheet friendly manner, we expect the strategic acquisition alliance to be more impactful in the near-term, possibly adding value before yearend. We are going to publish an updated profile on Vanguard Natural Resources, LLC (VNR) this week. On July 2, VNR was upgrade by JP Morgan to Overweight with a price target of $17. I believe our two sand companies Emerge Energy Services LP (EMES) 8

9 and Hi-Crush Partners LP (HCLP) are going to gain market share during this period of lower drilling activity. Both of them should be able to resume cash dividend increases in MarkWest Energy Partners LP (MWE) has 18 projects under construction in the three-state Appalachian region that makes up the Utica and Marcellus shale plays. When gas prices firm up this winter, I expect MWE to move toward First Call s price target of $74.24/unit. On June 24, Jefferies upgraded MWE to a BUY. Final Thoughts I love talking to investors around the country about the energy sector and why they need to have energy stocks in their own portfolios. During my presentations I always tell them how important it is to our standard of living to have abundant and cheap energy in America. We take for granted how blessed we are to have a steady flow of electricity to our homes and gasoline available whenever we what it. Demand for hydrocarbon based liquids is relentless. Right now we have an oversupply of expensive oil, but to say we have a glut of oil is a gross overstatement. Millions of people would love to have more fuel, but they can t afford it or it is not available in their village. All commodities are rationed by price and oil is no exception. By the end of July, there will be more than 7,255,000,000 people on this planet. An estimated 20% do not have electricity in their homes and another 40% only have it some of the time. We go crazy when a storm knocks out our electricity for just a couple of hours. Think what it would be like not to have it at all. America is also blessed to have an abundant supply of clean burning (and currently very cheap) natural gas. The gas and natural gas liquids sitting under Pennsylvania, Ohio, West Virginia and New York is God s Gift to the USA. Three HUGE shale resource plays the Devonian, Marcellus and Utica are stacked under this area and extend under the Great Lakes into Canada. We have over a hundred years supply of recoverable natural gas in this region, which also happens to be the hub of manufacturing in the United States. With good leadership, we could be doing so much more with these resources. I believe the stars are about to align for natural gas prices to move higher. North American gas production is falling today as a result of the big decline in drilling activity, demand is forecast to go up by more than two BCF per day in 2016, primarily because we will begin exporting liquefied natural gas (LNG) at the end of this year. Plus, we keep shutting down coal fired power plants and replacing them with clean burning natural gas. With supply going down and demand going up, I think it is a safe bet that gas prices will be higher this winter. The companies I like the most in the Northeast Shale Plays are: Range Resources (RRC) Gulfport Energy (GPOR) 9

10 Gastar Exploration (GST) MarkWest Energy Partners, LP (MWE) 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! 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 Abraxas Petroleum (AXAS) Approach Resources (AREX) Callon Petroleum (CPE) Earthstone Energy (ESTE) Emerge Energy Services LP (EMES) Gastar Exploration (GST) Hi-Crush Partners LP (HCLP) Linn Energy (LINE) Memorial Production Partners LP (MEMP) Plains All American Pipeline LP (PAA) RSP Permian (RSPP) Southcross Energy Partners LP (SXE) Triangle Petroleum (TPLM) 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