U.S. Energy and Commodity Price Outlook

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1 U.S. Energy and Commodity Price Outlook ENERGY SECTOR REPORT 12 December 2016 ANALYST(S) Brian M Youngberg, CFA Buy-rated energy stocks: Integrated Energy: Chevron (CVX - $115.81) Royal Dutch Shell (RDS.A ) Total SA (TOT - $49.16) Exploration & Production: Apache (APA - $66.56) Canadian Natural Res. (CNQ - $33.38) ConocoPhillips (COP - $50.77) Devon (DVN - $48.07) EnCana (ECA - $12.88) EOG Resources (EOG - $106.45) Marathon Oil (MRO - $18.25) Newfield Exploration (NFX- $47.82) Pioneer Natural Resources (PXD - $187.06) Midstream: Enbridge (ENB - $42.03) Oil Services: Halliburton (HAL - $54.20) National Oilwell Varco (NOV - $39.78) Schlumberger (SLB - $84.78) Prices and opinion ratings as of market close on 12/09/16; subject to change. Source: Reuters. Edward Jones clients can access the full research report with full disclosures on any of the companies Edward Jones follows through the Account Access link on the Edward Jones Web site ( Clients and others can also contact a local Edward Jones financial advisor, who can provide more information including a complete company opinion, or write to the Research Department, Edward Jones,12555 Manchester Road; St. Louis, MO Information about research distribution is available through the Investments & Services link on OIL AND NATURAL GAS PRICE OUTLOOK Our long-term expectation is for oil prices to typically be in a range of $55 to $70 per barrel, although it will be above and below that at times. Prices have risen in 2016 with global oversupply decreasing and with the announced plans for OPEC (Organization of Petroleum Exporting Countries) and other countries to reduce production beginning at the start of Even if the cuts are not totally done, we see any supply cut positively impacting oil prices. We see markets being more balanced in 2017 and prices moving from current levels toward near $60 by the end of 2017, and then above $60 in There are numerous factors that impact oil prices, and these factors are quite difficult to forecast. Key drivers in the price include global supply, global demand, the U.S. dollar (typically oil moves opposite the dollar), geopolitics, alternative energy sources, global economic conditions, and investor sentiment on oil prices. Our long-term price outlook for natural gas is a range of $3.50 to $4.50 per thousand cubic feet (mcf) most of the time. Prices have risen and are near the bottom of this range as supply has decreased and demand has improved. Weather will drive the price in the nearer term. Over the longer term, we expect prices will rise due to continued growth for power generation and, eventually, liquefied natural gas (LNG) exports. We expect prices to be in this range most of the time in the longer term. GUIDANCE FOCUSED ON DIVERSIFICATION AND LONG TERM We believe it is an opportune time for investors to consider investing in energy stocks if they are not currently overweight energy in their portfolio. However, investors will need to be diversified within the sector, be patient and remain focused on the longer term. In addition, investors should expect continued volatility for both oil and natural gas prices. However, we see prices of both commodities higher most of the time in the longer term relative to today's levels. While we are positive on the energy sector, we also emphasize diversification. Our recommended weighting for energy is 9%. If you are currently below this level, we would recommend adding appropriate energy stocks based on suitability. For those investors in excess of our recommended weighting, we recommend reducing your position to improve diversification. Please see important disclosures and certification on page 5 of the report. Page 1 of 5

2 What Is Our Outlook for Oil Prices? Our long-term expectation is for oil prices to typically be in a range of $55 to $70 per barrel (see Figure 1), although it will be above and below that at times. Prices have risen in 2016 with global oversupply decreasing and announced plans for OPEC (Organization of Petroleum Exporting Countries) and other countries to reduce production beginning at the start of Even if the cuts are not totally done, we see any supply cut positively impacting oil prices. We see markets being more balanced in 2017 and prices moving from current levels toward near $60 near the end of 2017, and then above $60 by sometime in There are numerous factors that impact oil prices, and these factors are quite difficult to forecast. Key drivers in the price include global supply, global demand, the U.S. dollar (typically oil moves opposite the dollar), geopolitics, alternative energy sources, global economic conditions, and investor sentiment on oil prices. Figure 1 Global Demand Growth Remains Challenging - Global demand growth has historically averaged 1.5% per year, but had slowed post-recession as Asian and European economies struggled (see Figure 3). Asian demand, most notably China, has generated most global oil demand growth in recent years. While this change does not sound like much, oil prices tend to be quite sensitive to such changes. Demand growth has improved slightly the last year or so, but needs to improve further to support oil prices rising. Figure 3 What Drove Oil Down in the First Place? We believe there were four drivers: Plentiful Supply - Supply growth in recent years has been strong, much faster than the rate of growth in demand (see Figure 2). So far in 2016, we have seen supply growth stall in response to lower oil prices. Almost all supply growth in recent years has come from oil shale in the U.S.; thus, reducing volumes there are having a great impact. While supply is up in Iran and Iraq, it is being offset elsewhere. OPEC Agreement Should Help in Beginning in 2014, OPEC changed course and protected its market share rather than protect market prices. In late 2016, OPEC decided to reduce production to help push prices higher. Certain non-opec countries also agreed to cut. These cuts are set to take effect at the start of 2017 for six months (with a six-month Page 2 of 5

3 optional extension). We believe this will have a material impact on markets, even if the cut is less than agreed upon. Figure 5 Figure 4 Strong U.S. Dollar - The U.S. dollar and oil prices tend to move opposite each other (see Figure 4). The U.S. dollar began to appreciate in mid-2014 as it was increasingly viewed as a safe haven amidst a world of economic stagnation. Earlier in 2015, the dollar declined in value to some degree, and helped push oil prices up. The dollar then rebounded, resulting in oil prices falling again. The dollar had weakened a bit earlier in 2016, but more recently has strengthened. Lately the impact of the dollar has not been consistent with history. The direction of the U.S. dollar is quite difficult to predict. How Is U.S. Production Responding to Lower Oil Prices? We are now beginning to see a slowdown in U.S. oil shale production as evidenced by volumes from the three largest plays (Eagle Ford and Permian in Texas, Bakken in North Dakota) trending downward in recent months (see Figure 5), reflecting reduced spending and drilling activity in recent months. We expect production will continue to decline as long as prices remain low, but likely will bottom in 2017 if oil prices rise as we expect. Investment should modestly rise sometime next year. How Has the Rest of the World's Supply Responded to Lower Oil Prices? We are seeing investment being curtailed around the world in response to lower oil prices. Reduced investment initially has limited impact on global supply, but eventually its effect grows. In coming quarters, we expect supply to ebb around the world in addition to the cuts by OPEC and countries working with it. The first areas likely to be impacted include the North Sea, Russia, Africa and U.S. shale. Eventually, OPEC countries, the Canadian oil sands, and deepwater projects around the world will also likely be impacted by reduced investment. With supply eventually tightening and demand growth likely to improve, prices should rise. There is uncertainty over how quickly U.S. producers will increase investment and production from oil shale. We believe most companies will be conservative and not ramp up too quickly. Even if it increases, it will likely be materially less than the OPEC cuts. What Factors Will Influence Oil Prices in the Future? What makes forecasting oil prices so difficult is the numerous factors that impact them. Prices are quite sensitive to any change in any of these factors. Since most are out of an investor's control, we do not recommend investing based on guessing what will happen to any of them. The most notable drivers: - Global Supply - Global Demand Page 3 of 5

4 - U.S. Dollar - Geopolitics, including Terrorism - Alternative Energy Sources - Global Economic Conditions - Investor Sentiment Figure 6 What About Gasoline Prices in Coming Months? The average pump price for regular unleaded gasoline in the U.S. has fallen with oil prices. The average U.S. price for a gallon of unleaded gasoline was $2.14 as of 12/05/16 (see Figure 8), down 19% from two years ago. While prices will likely remain volatile in the nearer term given uncertainty over oil prices, we see prices gradually rising with oil in coming quarters. However, we do not anticipate it reaching near $4 as in recent years. Figure 8 What About Natural Gas Prices? Our long-term outlook to a range of $3.50 to $4.50 per mcf. We expect prices to be in this range the majority of time in the long term. Prices have been well below this range most of the time in recent years (see Figure 6) due to strong supply growth (see Figure 7) that has exceeded demand growth. Prices have risen and are near the bottom of this range as supply has decreased and demand has improved. Weather will drive the price in the nearer term. Over the longer term, we expect prices will rise due to continued growth for power generation and, eventually, liquefied natural gas (LNG) exports. We expect prices to be in this range most of the time in the longer term. Figure 7 Are Energy Stocks Attractively Priced? We believe those we rate a Buy are attractively priced. Given weak commodity prices and their impact on earnings and cash flow, we use our longer-term commodity price outlook to value energy stocks. Low commodity prices can make nearer-term measures (i.e., 2016 and 2017) much higher than historical averages, or negative in some cases. We use our mid-cycle longer-term average price expectation when valuing energy stocks, something we currently see happening by We see supply and demand better balanced at that time. We believe most energy stocks currently reflect commodity prices below our longer-term expectations. Are Energy Stock Dividends Safe From Cuts? We expect dividend increases to be fewer and smaller in the nearer term given the impact on earnings and cash flow from low oil prices. There have been several cuts over the last two years, but we see fewer going forward. Some stocks with histories of dividend increases in the past may not increase them in the nearer term even if we still Page 4 of 5

5 expect their dividends to rise in the longer term. Others will grow the dividend in the nearer term at a slower rate than in the past. We have 12-month dividend outlooks of "At Risk" for two stocks: Helmerich & Payne (Hold-rated; - $81.75) and ONEOK (Hold-rated; $57.01). We provide short-term and long-term dividend guidance on each stock in their individual research opinions. Please see the research opinion for each stock to read our expectations for the dividend. How do Energy Stocks Fit Into a Diversified Portfolio? Our recommended weighting for energy is 9%. If short of this figure, consider the stocks we rate with a Buy opinion (listed on page 1). If currently in excess of this guidance, we would recommend improving your portfolio's diversification by reducing your exposure to the sector. What Should an Investor Do Today If They Need to Add Energy Stocks to Their Portfolio? As to where to start, it depends on an investor's risk appetite and need for income. If an investor needs income or is risk averse, focus on those with higher yields we rate a Buy. If not risk averse and wanting growth rather than a higher dividend, we would encourage looking at those stocks with less of a yield (or no yield) we rate a Buy. These stocks can also help more conservative investors broaden their exposure in the sector. See the list on page 1 for stocks that we recommend with a Buy rating. The investment category and price movement is then noted in the research opinion for each stock. Valuation -- We believe the current valuation of the energy stocks that we recommend with a Buy opinion remain attractive relative to our longer-term commodity-price expectations. Nearer-term figures are skewed by low commodity prices. We use midcycle prices to value energy stocks. Methods used to evaluate the attractiveness of energy stocks include traditional measurements, such as price-to-earnings (P/E) ratios; P/E relative to the summation of our earnings growth outlook and the dividend yield (PEGY ratios); price-to-operating cash flow (PCF); enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA); and net asset value (NAV). Risks -- Some of the primary risks of the energy sector: declining commodity prices, which are cyclical and will affect earnings and the stock price; reduced company growth expectations; cash liquidity; demand being difficult to predict and could change at unexpected rates; foreign operations being affected by political uncertainties and currency fluctuations; regulatory changes affecting company operations; and adverse legal decisions. Please see the full opinions of the individual companies mentioned in this report for additional information, including valuation and risks. Required Research Disclosures Analyst Certification I certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers; and no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Brian M Youngberg, CFA Analysts receive compensation that is derived from revenues of the firm as a whole which include, but are not limited to, investment banking revenue. Other Disclosures The Edward Jones' Research Rating referenced does not take into account your particular investment profile and is not intended as an express recommendation to purchase, hold or sell particular securities, financial instruments or strategies. You should contact your Edward Jones Financial Advisor before acting upon the Edward Jones Research Rating referenced. All the proper permissions were sought and granted in order to use any and all copyrighted materials/sources referenced in this document. All investment decisions need to take into consideration individuals' unique circumstances such as risk tolerance, taxes, asset allocation and diversification. It is the policy of Edward Jones that analysts or their associates are not permitted to have an ownership position in the companies they follow directly or through derivatives. This publication is based on information believed reliable but not guaranteed. The foregoing is for INFORMATION ONLY. Additional information is available on request. Past performance is no guarantee of future results. In general, Edward Jones analysts do not view the material operations of the issuer. Diversification does not ensure a profit and does not guarantee against loss. Special risks are inherent to international investing including those related to currency fluctuations, foreign political and economic events. Dividends can be increased, decreased or eliminated at any time without notice. An index is not managed and is unavailable for direct investment. U.S. only: Edward Jones - Member SIPC Page 5 of 5