Alden US Morning Energy Sales Commentary

The API reported a 3.1mmb draw (Cushing: 1.6mmb), a 3.6mmb draw in mogas, and a 2.3mmb build in distillates. All-in-all a positive report although the distillate build may not auger well for the natural gas storage.

XEC: Charles Robertson, Alden’s Head of Energy research, spoke with XEC yesterday is available should you have questions. Please let me know. Does not appear to be any volume issues for 1Q but its is a transition (REN) quarter. Company now has 259K acres in the Delaware, more than APC or NBL. Not suggesting they are a seller. JDA with CVX in the Permian (100k acres) is expected to be extended. Spending for free cash flow, still more likely to raise dividends than buyback stock.

WTI May oil futures were higher this morning, above the 50-day moving average of $58.66bbl and the 200-day moving average of $60.74bbl, with the bullish API data and a stronger Chinese economy. China’s 1Q19 GDP grew 6.4%, above the 6.3% consensus and equal to 4Q18. Factory output in March rose 8.5% and retail sales 8.7%. Last week, China trade figures were solid, particularly on exports. OMR’s from the EIA, IEA and OPEC were slightly bearish on supply and demand but do point to significant OPEC production cuts. For April, the mixed DOE’s and concerns regarding global economic growth have not stop crude from reaching new highs due the strong prospects for US/China trade talks and OPEC production cuts. OPEC-Plus appears committed to maintaining production cuts until at least June. Reports have the Saudi’s extending deeper production cuts into April and Venezuelan output is at 500mbopd due to power outages. This has boosted crude prices over 32% in 1Q19. Early in March, the lack of a US/China trade agreement, negative economic data, a bearish DOE report and the prospect of an incremental 600-700mboepd of production coming from the Permian from CVX and XOM by the early-to-mid 2020’s all put pressure on oil prices. In late February, oil prices received a boost last on prospects for a US/China trade accord plus better economic data out of China and OPEC production cuts. Earlier in February, DOE data had been disappointing and OPEC, IEA and EIA all slightly modified global demand growth while raising non-OPEC supply estimates. January saw disappointing DOE data and further evidence of an economic slowdown in Europe/China. The OPEC 1.2mmbopd production cut for 2019 did not offset bearish DOE’s and negative OPEC/EIA/IEA Oil Market reports in 4Q18. OMR’s entering 2019 were less pessimistic but the DOE’s were disappointing in January/February and US supply continued to grow. Economic sanctions against Iran started Nov 4th, provided underlying support for oil prices (currently 1..14mmbopd) until early October but 180-day waivers blunted the impact. Several countries have boosted imports from Iran in anticipation waivers may not be extended beyond May. The elimination of those waivers along with OPEC production cuts should put a floor under crude prices. Western Canadian Select is trading at a $9.25bbl discount to WTI, unchanged from Monday and off over 80% from over $52.00bbl in October with Alberta curtailing production 8.7% in 1Q19. The province has been relaxing those restrictions since the beginning of the year but Enbridge suffered a pipeline construction delay. There is a current shortage of heavier crudes, accentuated by Venezuelan sanctions. Equity futures were slightly higher on the Chinese economic news. The Brent/WTI spread widened to $7.70bbl, the trade-weighted dollar was weaker, above the 50-day moving average, and the May natural gas contract was higher at $2.58mcf, below the 50-day MA of $2.74mcf and the 200-day MA of $2.70mcf. Mogas cracks were higher and have rallied sharply over the past two months while the ten-year US treasury yield was rose 2.61%. As we have said in the past, a strong dollar and/or higher rates have been historic headwinds for crude.

**The energy indices/ETF’s continue to trade below 200-day MA’s, tested 50-day MA levels early and late in March after solidly outperforming in 2019, and now appear to be rebounding with even the refiners trading above 50-day MA’s. Oil prices traded above their 50-day MA’s in late January and now trade above their 200-day MA while natural gas conversely now trades below the 200-day MA and have fallen sharply the past three months. We had said the test will be whether this rally was just the traditional first of the year rally in the sector, particularly with 4Q18 reporting season. Performance tailed off later in earnings season but is showing signs of recovery. In 4Q18, oil fell below the 200-day MA’s before the end of the refinery turnaround season with excess supply, Iranian sanctions waivers, and growing inventories while gas prices hit four-year highs. We remained constructive on valuations (witness the pickup in M&A and activism since October) and the long term outlook, but felt technicals needed to improve for crude and the stocks before investors ventured to establish positions. Those technical improved in January with the ETF/Indices and oil trading above their 50-days but tested those levels twice in March. Despite market action and the 40% decline in oil prices in 4Q18, most of the Majors and Mid/Large cap E&P’s posted solid 3Q/4Q18 results and M&A/activism has continued (QEP, GPOR, EQT, HK, UPL, PDCE, LPI). There will be more challenges for the group ahead but we see opportunities given the markdown in the sector, especially among mid to large-cap E&P’s and the Majors. It’s more challenging to make the case for exposure in oil service, tankers, and refiners near term. The OPEC-Plus production cuts have helped with production falling every month YTD. Consensus estimates have adjusted to the new price environment. We have maintained the odds favor a move higher in the sector between the 4Q18 and 1Q19 earnings results given the recovery in crude oil prices over the past month.

• 2Q19 to date US Energy Index/ETF performance: S&P +2.6%, OSX +5.7%, XLE +2.2%, XOI +3.2%, XOP +5.0%, IEO +5.2%, R&M +1.6%.
• YTD19 US Energy Index/ETF performance: S&P +16.7%, OSX +24.9%, XLE +18.8%, XOI +16.8%, XOP +21.9%, IEO +19.0%, R&M +9.7%.
• 1Q19 US Energy Index/ETF performance: S&P +13.6%, OSX +18.1%, XLE +16.2%, XOI +13.2%, XOP +16.2%, IEO +13.1%, R&M +8.0%.
• 4Q18 performance: S&P -13.5%, OSX -45.8%, XLE -23.6%, XOI -24.9%, XOP -38.6%, IEO -31.6%, R&M -27.3%.
• 2018 US Energy Index/ETF performance: S&P -4.4%, OSX -45.2%, XLE -18.2%, XOI -10.5%, XOP -28.1%, IEO -19.4%, R&M -9.7%.

The Focus List in order of both group & stock preference: E&P- PXD, HES, PE, ECA, FANG, JAG, OXY, SU, CXO, XEC, MRO, COG, RRC, trades: QEP, WPX, CLR; Majors: CVX, XOM; Service-NE, ESV, FTI, HAL; Tanker: GLOG, DHT, EURN; R&M-trade: MPC. We are taking PUMP off the focus list today, 4/17 due to price performance. The stock is up 100% since December. The company remains are favorite small cap way to play the pressure pumping sector. APC was removed from the Focus List on 4/15 following the acquisition announcement by CVX due to the significant premium paid, acknowledging the stock may still be in play. That said we believe CVX got a good deal, therefore, we are keeping it on the list. We are also keeping OXY on the list but it has moved lower as the company showed its hand by bidding for APC. We pulled CNX from the list on 4/1/19 due to increasing concerns regarding excess global natural gas supply. We believe the refining group may be due for a bounce after underperforming the energy complex YTD and put on MPC as a trade on 4/10/19. However, we maintain our bearish view on refining and earnings estimates continue to come down in the sector. We had raised our exposure to the energy sector from market weight to selective overweight on August 13th after three months of underperformance and the pullback on crude prices over a six week period (our Energy sector weighting had been reduced from overweight to market weight of May 8). In addition, the indices did not reflect the individual stock carnage following 2Q18 earnings reports nor the improvement in natural gas fundamentals. We were wrong in our call believing there was limited down side in the stocks/commodities as long as positive US inventory data, shareholder activism, M&A, and industry capital discipline continued. We had warned refinery turnaround season would be a challenge for oil prices near term but did not anticipate a 40% decline in oil prices. Clearly the environment for the Energy sector and the overall market changed, therefore, we moved back to a market-weighting from a selective overweight position on 12/14/18, looking for technicals to improve both for the commodities and the stocks, which they have. Emphasis continues to be on stock buybacks, free cash flow generation, and restructuring efforts. Investors increasingly require better-than-expected results, capital discipline, improving financial returns, and returning capital to shareholders. The improving returns will hopefully attract more interests from generalist over time. We believe consolidation in the energy sector is necessary to compete for investor interest and well as compete operationally. Natural gas names progressively moved up the list since April and were at the top of our preference list among producers but we have been deemphasizing those names given their strong relative and absolute performance starting last November 14. With the prospect of a coordinated OPEC/non-OPEC production hike, a strong US dollar, and slower global economic growth, we had expected producers and oil service stocks to lag through the summer on 2018. Most of the energy indices traded below 50-day MA’s as we anticipated following oil’s move below its 50-day MA. With the pullback in 4Q18, we looked to high-grade energy portfolios, particularly in mid/large cap E&P’s, post the 3Q18 reporting and tax-loss selling season. We do believe the price risks are now moderate for oil and low for natural gas. Secular trends we remain focused on: Industry consolidation (E&P, Tankers, and Oil Service), consolidation/simplification within the MLP space, the positive longer term outlook for LNG demand/transport. For a complete review of our Focus List moves, see bottom of the note.

Energy Events (B-Bloomberg consensus, R-reported, A-actual, G-guidance

• 4/16: 4:30pm-KMI (B$0.24)
• 4/18: 8:30am-SLB (B$0.30)
• 4/22: 9am-HAL (B$0.22), May WTI oil contract expires
• 4/23: 9am-RRC (B$0.23/0.99, 1QE prod: 372.4mboepd)
• 4/24: 9am-SPN (B-$0.24), RES (B$0.03)
• 4/25: 8:30am-CLB (B$0.43), GLOP (B$0.49), 9-QEP (B$0.01/0.54, 1QE prod: 79.9mboepd), 10-VLO (B$0.26), PTEN (B-$0.21), HES (B-$0.29/1.61, 1QE prod: 274.7mboepd), 10:30-EQT (B$0.76/2.55, 1QE prod: 687.4mboepd), 11-HP (B$0.37), 11:30-CRR (B-$0.55), 2pm-PDS (B-$0.04)
• 4/26: 8am-FTI (B$0.31), 9:30-COG (B$0.65/1.09, 1QE prod: 379.1mboepd), XOM (B$0.77/1.90, 1QE prod: 4.029mmboepd), 10-NR (B$0.06), FET (B-$0.07), 10:30-SWN ( B$0.20/0.46, 1QE prod: 336.6mboepd), 11-NOV (B-$0.04), CVX (B$1.45/3.70, 1QE prod: 3.059mmboepd), May NYMEX natural gas contract expires
• 4/29: 8:30am-MDR (B$0.13), 9-DO (B-$0.60)
• 4/30: 8am-EURN (B$0.14), 9-RIG (B-$0.32), ECA (B$0.15/0.46, 1QE prod: 479.0mboepd), 9:30-BHGE (B$0.13), 10-CNX (B$0.24/1.07, 1QE prod: 240.0mboepd), 11-OII (B-$0.45), CNXM (B$0.50), 12pm-PSX (B$0.51), CLR (B$0.48/1.92, 1QE prod: 324.0mboepd), COP (B$0.82/2.23, 1QE prod: 1.34mmbopd), EIA February Oil & Gas Production/Natural Gas Monthly
• 5/1: 8:30am-PBF (B-$0.90), SLCA (B-$0.14), SOI (B$0.42), 9-CXO (B$0.83/3.43, 1QE prod: 305.4mboepd), 10-RNGR (B$0.11), 11-NBR (B-$0.25), DVN (B$0.29/1.43, 1QE prod: 510.4mboepd), 12pm-CFW (B-$0.06)
• 5/2: 8:30am-HFC (B$0.44), 9-NE (B-$0.47), PE (B$0.25/0.89, 1QE prod: 121.5mboepd), MRO (B$0.08/0.86, 1QE prod: 400.4mboepd), 10-WPX (B$0.04/0.65, 1QE prod: 155.4mboepd), 11-PDCE (B$0.59/3.13, 1QE prod: 126.3mboepd), AR (B$0.34/1.33, 1QE prod: 531.9mboepd), APA (B$0.09/1.94, 1QE prod: 483.1mboepd), 12pm-AM (B$0.26/0.96), 4:30-XOG (B$0.01/0.82, 1QE prod: 82.6mboepd), 5pm-CRC (B-$0.43/2.45, 1QE prod: 134.8mboepd), Iran Sanctions Waivers Decision
• 5/3: 5:30am-EQNR, 9-NBL (B-$0.05/1.09, 1QE prod: 335.1mboepd), 10-EOG (B$0.95/2.91, 1QE prod: 768.7mboepd)
• 5/6: 8:30am-DKL (B$0.67), 9:30-DK (B$0.44), 11-KOS (B-$0.08/0.25, 1QE prod: 54.2mboepd)
• 5/7: 8:30am-FRAC (B-$0.15), 9am-CPE (B$0.18/0.48, 1QE prod: 39.3mboepd), 10-PXD (B$1.46/4.48, 1QE prod: 324.5mboepd), CDEV (B$0.05/0.47, 1QE prod: 68.9mboepd), 12pm-OXY (B$0.76/2.28, 1QE prod: 710.4mboepd), 3-AXAS (B$0.05/0.12, 1QE prod: 10.4mboepd), 4:30-TGE (B$0.42/1.34), EIA Short-Term Energy Outlook
• 5/8: 8:30am-WFT (B-$0.12), HCLP (B-$0.02), 9-MPC (B$0.40), 10-WTTR (B$0.13), FANG (B$1.45/3.99, 1QE prod: 266.4mboepd)
• 5/9: 8:30am-CVIA (B-$0.31), 10-CNQ (B$0.49/1.81, 1QE prod: 1.041mmbopd), 11-XEC (B$1.33/3.57, 1QE prod: 252.0mboepd), TOU/CN (B$0.56/1.50, 1QE prod: 289.1mboepd), BRY (B$0.34/0.73, 1QE prod: 27.9mboepd), 12pm-UPL (B$0.12/0.41, 1QE prod: 114.7mboepd)
• 5/14: OPEC Monthly OMR
• 5/15: IEA Monthly OMR

Energy News: Bloomberg’s tanker tracker suggests Iranian exports averaged 1.14mmbopd for the first two weeks of April compared to 1.53mmbopd for the same period in March. Aramco is reportedly considering purchasing RDS’s 50% stake in the Saudi refining JV, SASREF. Thirteen companies bid roughly $1B in Argentina’s offshore sale. XOM, along with Qatar Petroleum (70/30 JV), won three blocks totaling 2.6mm net acres. China’s apparent oil demand rose 2.6% YOY to 11.54mmbopd in March. YTD demand rose 3.5% to 12.03mmbopd

The May WTI crude contract closed higher on Tuesday at $64.05bbl, above the $58.66bbl 50-day MA and the 200-day MA of $60.74bbl, with optimism on US/China trade talks. The expectation calls for another DOE crude build today. The EIA released its April Drilling Productivity Report for unconventional production. April’s oil production was revised lower to 8.380 from 8.592mmbopd. Permian production was revised to 4.094 from 4.177mmbopd. The preliminary May estimate is 8.460mmbopd with Permian production of 4.136mmbopd. Permian and Niobrara plays are contributing to the growth. Natural gas production for April was revised to 78.92 from 79.02bcfd. The initial May estimate is 79.84bcfd with the Marcellus, Haynesville, and Permian contributing to the growth. The EIA projects improved productivity in the Permian, Niobrara, and Haynesville plays for oil and gas. The DUC count was reduced to 8,504 from 8,576 wells for February. March’s estimate is 8,500 wells. The only area of growth is in the Permian. Russia’s oil production declined to 11.25mmbopd in the first week of April according to Bloomberg. Russia’s target under the OPEC-Plus agreement is 11.19mmbopd. There were reports Russia was reconsidering production cuts and may pursue market share in 2H19. North Dakota oil production declined to 1.335mmbopd from 1.404mmbopd in January. China trade figures were solid overall. China’s crude imports in March fell 9.4% MTM to 9.3mmbopd. YTD imports are up 8.2% to 121mm tons or 9.87mmbopd. Natural gas imports YTD are up 17.8% at 24.3mm tons. MTM gas imports fell 9.2%. The PXD’s CEO stated US oil output will rise 40% to 17mmbopd, higher than the EIA forecast of 14.0mmbopd in 2027, principally from the Permian. Platts reported Iranian exports rose to 1.7mmbopd in March, up 12%, due to demand from China, India, and South Korea. China’s LNG imports in March were 4.5mm metric tons, up 2% sequentially and 23% YOY. Global imports were 30.4mm metric tons in March. Bloomberg’s tanker tracker estimates Saudi exports in March averaged 7.052mmbopd compared to 7.062mmbopd in February. Kuwaiti exports dropped to 1.9 from 2.1mmbopd, a seven-month low while Iraqi exports fell to 3.711 from 4.055mmbopd, an 11-month low. Rystad Energy estimates 1Q19 global oil discoveries totaled 3.2BBOE. XOM was the most successful with three discoveries. Rystad estimates global conventional discoveries were 9.1BBOE in 2018, 10.3BBOE in 2017 and 8.4BBOE in 2016. The Saudi oil minister stated there was no need for further production cuts. Platts reports the US is likely to extend waivers for four of Iran’s top importers (China, India, South Korea, and Turkey) for an additional six months in early May. However, those importers must reduce purchases by another 20%, pushing exports below 800mbopd from 1.3mmbopd in 1Q19. The US is targeting Iranian oil exports to be under 1.0mmbopd by May. Bloomberg reports the Saudis will extend deeper production cuts in April, below 10.0mmbopd. Exports will be below 7.0mmbopd. The Saudi oil minister stated production is likely to remain below its 10.33mmbopd quota for the first half of the year. OPEC production cuts, the end of the US government shutdown, and US/China trade talk optimism have lifted crude the past three months. US March industrial production fell 0.1%, below the +0.2% consensus and +0.1% in February. Manufacturers production was flat, compared to -0.3% the previous month.

• Demand growth forecasts by the IEA, EIA and OPEC for much of 2018 were flat to up while non-OPEC supply growth estimates grew with rising oil prices. The IEA and OPEC did report global oil stocks were below the five-year average in 3Q18 but that reversed in November. However, fourth quarter monthly OMR’s tilted more negative on demand due to global economic concerns but also on supply. Inventories moved back above five-year averages. So far, 2019 reports YTD show slight downward revisions in demand but further supply growth. The EIA’s US supply estimates have risen steadily since 3Q16 although recent drilling productivity reports do suggest some slowing. US crude inventories are now 0.6% above the five-year averages compared to even last week. The Brent/WTI spread narowed to $7.65bbl while the US dollar firmed, above the 50-day MA. Cushing stocks have moved just above historical averages with the slow return of some Canadian exports offset in part by Iranian sanctions. The Midland/WTI differential traded at a $3.65bbl discount, up from a $3.75bbl discount, and up from the $17.90bbl discount in 4Q18. Differentials did trade at $1.00 premium in early February. The 12-month WTI price differential rose to $2.40bbl of backwardation, below the $10bbl backwardation level reached five months ago but above the $2-3bbl of contango we experienced the past several months. The market has returned to backwardation suggesting near term markets are tight. Futures hover around $62bbl this year and next, then decline in the outer years below $55bbl, a level that should not encourage a significant ramp in spending. However, we are watching this closely as budgets are using a $50-55bbl price deck. This is critical to our positive bias on the upstream sector long term as there is little incentive to increase budgets or hedge. In addition, there remains little external funding available for upstream spending and pressure for companies to maintain financial discipline.
• We made our first adjustment of our 2019 price deck on 4/2, raising our oil forecast to $55.00-60.00bbl from $52.50-57.50bbl while our gas price deck was lowered to $2.75-3.00mcf from $3.00-3.25mcf. We do maintain an optimistic view regarding global gas/LNG demand despite US/China trade relations. However, global supply is growing at an accelerating rate. Please note we will use strip pricing when modeling the companies. Our average oil and gas price deck for 2018 was $62.50bbl and $3.10mcf, last changed on 11/22. The collapse in crude since early October reflecting higher production and a slowing global economy led us to lower our average oil price for 2018 from $65.00-70.00bbl, which had moved up steadily since the beginning of the year, the last being in September. Prior to October, reduced OPEC-Plus production cuts leading to higher global supply, trade tariffs, and a slowing global economy had little effect on prices. Spare global capacity remained tight (Libya, Venezuela, Iran, Angola, Nigeria) and global inventories remained below five-year averages. However, a prolonged US refinery turnaround season, higher US, Saudi, and Russian oil production, and Iranian sanctions waivers triggered a 40%-plus decline in oil prices. Our 2018 average gas price forecast was raised from $3.00mcf to reflect improved demand, low inventories, and obviously higher 4Q18 prices. We had raised our energy exposure to selective overweight from market weight on August 13th due to relative underperformance in the sector, post earnings report disappointment and lower crude prices. While our stock selection and subsector emphasis proved correct, the sector was overwhelmed by the oil price and stock market declines since October. We lowered our selective overweight exposure to market weight on December 14th. In both cases, company specific catalysts, efforts to reward shareholders through return of capital, and emerging investor themes are the keys to energy stock selection. Over the summer oil prices had faltered post the OPEC agreement to raise production, a rising dollar, and trade issues. Back on May 8th, we moved to market weight from overweight position as energy equities significantly outperformed the broader markets, reflecting increased confidence current oil prices were sustainable, as seen in the backend of the price curve. We were concerned oil prices and energy stocks had rallied too far, too fast. We had increased our position to overweight in October, 2017, as energy equities had not discounted our conservative forecast much less market prices. Concerns about rising US oil rig counts and oil production as well the possible erosion of E&P capital discipline remained. While experiencing some capex creep due to non-op drilling, increased efficiencies, and oilfield inflation, we have not seen company price decks rise meaningfully above $55-60bbl/$3.00mcf (BP the exception) and the industry’s returns focus remains as shareholders/activists require it. Access to capital remains very challenging with equity offerings slowing dramatically. The global oil market should be in better position to recover as the accord has been extended, although inventories are back above five-year averages. A stronger US dollar and higher interest rates also remain headwinds for oil prices. The yield curve actually inverted recently and yet the dollar strengthened despite indications of a slowing US economy. We have seen US oil product demand growth slow since 2Q18. The global economy also has given some signs of slowing with the IMF lowering its estimates to 3.3% from 3.5% for 2019 with the estimate of 3.6% unchanged for 2020 due to trade, government shutdown, and emerging market concerns. The OECD cut its 2019 forecast to 3.3% from 3.5%.
• The May natural gas contract closed lower on Monday at $2.57mcf, below the 50-day MA of $2.74mcf and the 200-day MA of $2.70mcf, as the market has experienced injections the past two weeks. The storage deficit appears likely to disappear in the next two weeks. The WSJ featured on the back page last Friday the growing globalization of the natural gas market and the pressure it has on prices. Permian takeaway bottlenecks will not likely to be alleviated until new capacity is opened beginning in October of this year or drilling activity is reduced. Companies with some modest exposure include: CVX, XOM, XEC, MTDR, MRO, DVN, and EOG. Gas producer budget cuts have encouraging (CNX, COG, EQT, SWN, GPOR, RRC). The YOY deficit narrowed last week but storage did end the heating season lower than last year and the five-year average. The 12-month strip trades at $2.75mcf with gas prices off over 40% from their mid-November highs. Dry gas production for the Lower-48 fell 0.9% sequentially but rose 10.0% higher YOY for the week ending April 10rd at 88.9bcfd. US total gas demand was 76.5bcfd compared to 84.3bcfd last week and 90.7bcfd last year. US unconventional production is estimated at 78.0bcfd for March, up 1.2% sequentially. Briefly in November, the market finally recognized a significant deficit to last year at the end of the injection season and gas traded at $4.84mcf. Natural gas in storage is currently 1,155 BCF, 183 BCF below last year (1,338 BCF) and 485 BCF below the five-year average of 1,640 BCF. At one point late last year the YOY deficit was over 700 BCF. Worth noting, global thermal coal prices have pulled back over 25% from recent six-year highs set this July and Asian LNG demand/pricing is at three-year lows. The majority of natural gas producers indicated flat-to-down capex last year and lower capex this year (SWN, CNX, EQT, RRC, GPOR the latest). The US gas rig count of 189 (down five last week) is below 2018 levels. Natural gas prices now appear to in line with fundamentals after a volatile 2018, perhaps overshooting to the downside. In 2016, investors had become progressively more bullish on gas with the prospect of secular demand growth, reduced supply overhang and production declines. In 2017, investor sentiment reversed with growing deliverability out of the Permian and in the Marcellus. That sentiment remains in place. Natural gas supply grew at an accelerated rate from June ‘17 due to oil-related drilling activity in Permian, EFS, and Bakken plays. Demand for natural gas rose 10.5% last year compared to a decline of 1.2% in 2017. US demand for natural gas in January was 109.25bcfd, up 14.0% sequentially and up 2.3% YOY. We turned more positive on selected natural gas stocks mid-2015 due to improving supply/demand fundamentals but more so as stock valuations became attractive for the first time in a decade. The market, however, remained focused on excess supply until 2Q16. The stocks then responded, and we pulled back from a natural gas overweight to a balance between oil and gas producers. We believe the demand growth story has panned out since 2018 with coal plant shutdowns plus higher LNG and Mexican exports but it’s all about supply/weather now. Worth noting the natural gas DUC’s in the Marcellus have been declining while the Permian and EFS oil producing basins have seen growth. Gas-weighted company valuations caught up with their oily peers given both strong absolute and relative performance in November as gas prices breached $4.00mcf. They remain less favored by investors despite strong demand/exports and lower storage levels. We currently see natural gas price risks as modest following a decline of 45% from three-year highs in November ‘18. US natural gas supply has responded to increased activity in the shale plays since 2Q17 while demand started to improve in October, 2017. Prior to the advance in October/November, natural gas prices had discounted new supply additions from the Marcellus and Permian this year but not tight storage. We see moderate price risks in oil after a 25% pullback due to ramping OPEC-Plus production and disappointing DOE’s, in part due to normal refinery maintenance. Data was less constructive on global oil demand/inventories late last year and non-OPEC supply growth estimates continued to grow. OPEC-Plus production discipline and Chinese demand growth remain critical to maintaining oil prices, both of which appear to remain intact. Prices rallied to new four-year highs in early October on the upcoming Iranian sanctions only to back off 40% late in 4Q18. The industry has by-in-large maintained both financial discipline and a returns’ focus. Nothing suggests that discipline has diminished as shareholders require it.

DOE/EIA’s: The Bloomberg survey calls for a 1.6mmb build in crude and draws of 1.7mmb in mogas and 1.2mmb in distillates. Refinery utilization is expected to rise 90bps to 88.4%. The consensus natural gas storage injection is 82 BCF compared to a 36 BCF withdrawal last year and the five-year average injection of 21 BCF.

Company news: GLNG announced it had received a $700mm funding commitment to convert the Gimi LNG tanker into a FLNG vessel for use at BP’s Tortue project. The vessel will start on a 20-year contract beginning in 2022. SHLE reported 1Q19 sand sales of 698m tons, up 9% YOY, and better than guidance of 643m tons. DRQ 1Q19 booking totaled $99mm, exceeding guidance of $80mm. Backlog was $304mm. TALO reported another successful appraisal well at the Zama discovery offshore Mexico. The Zama-2 ST1 encountered 873 gross feet of pay and flow tested 7.9mboepd. Peak production from the field is expected to be 150-175mboepd. From 4/16: LPI received $42.5mm as the result of a settlement with RDS regarding a crude purchasing agreement. ROAN announced the resignation of Chairman, CEO, and President Tony Maranto for personal reasons. Board member Joseph Mills has assumed the role. CXO and Frontier Midstream announced a JV in the Northern Midland basin to build and provide oil gathering, transportation and storage services. Delek and Ineos are reportedly front runners to bid on CVX’s UK North Sea assets valued as much as $2.0B.

Energy Indices/ETF’s

• OSX: close 100.13, 50-Day MA-95.96, 200-Day MA-117.95, 2019 high/low 100.19-80.60, 2018 high/low 170.18-75.70, 2015-17 high/low 224.32-117.79
• XLE: close 67.60, 50-Day MA-65.92, 200-Day MA-68.70; 2019 high/low 67.91-57.35, 2018 high/low 78.91-53.84, 2015-17 high/low 82.94-51.77
• S&P R&M: close 1573.75, 50-day MA-1581.26, 200-Day MA-1740.87, 2019 high/low 1633.92-1440.47, 2018 high/low 2123.68-1326.58, 2015-17 high/low 1657.68-935.08
• XOI: close 1,342.68, 50-Day MA-1304.91, 200-Day MA-1376.68, 2019 high/low 1351.61-1159.10, 2018 high/low 1600.12-1084.70, 2015-17 high/low 1439.35-900.52
• XOP: close 32.27, 50-Day MA-30.42, 200-Day MA-35.54, 2019 high/low 32.46-26.53, 2018 high/low 44.57-24.12, 2015-17 high/low 55.63-23.60
• IEO: close 61.18, 50-Day MA-58.13, 200-Day MA-64.76, 2019 high/low 61.70-51.63, 2018 high/low 78.42-47.66, 2015-17 high/low 79.23-41.85
• DX/Y: close 97.08, 50-Day MA-96.80, 200-Day MA-96.07; 2019 high/low 97.63-95.22, 2018 high/low 97.47-88.59, 2015-17 high/low 103.29-90.27

Figures in bold highlight a new high/low or a close above or below a certain moving average, if underlined it suggests a confirmed close above or below a certain MA.

Energy Stock Comments: The energy indices/ETF’s were down 0.1% (R&M ) to up 1.5% (OSX) on Tuesday, outperforming the S&P 500 with lower oil prices and little follow thru from upstream M&A. Much of the week’s discussion revolved around potential upstream M&A and the prospects for a competing bid for APC. There was even discussion of activist investors becoming involved in APC given reports of a higher rival bid by OXY. The EIA released its April Drilling Productivity Report for unconventional production. April’s oil production was revised lower to 8.380 from 8.592mmbopd. The preliminary May estimate is 8.460mmbopd with Permian production of 4.136mmbopd. Natural gas production for April was revised to 78.92 from 79.02bcfd. The initial May estimate is 79.84bcfd with the Marcellus, Haynesville, and Permian contributing to the growth. The DUC count was reduced to 8,504 from 8,576 wells for February. March’s estimate is 8,500 wells. Russia’s oil production declined to 11.25mmbopd in the first week of April according to Bloomberg. Russia’s target under the OPEC-Plus agreement is 11.19mmbopd. There were reports Russia was reconsidering production cuts and may pursue market share in 2H19. North Dakota oil production declined to 1.335mmbopd from 1.404mmbopd in January. This past week, consensus earnings estimates for energy companies with scheduled call dates fell slightly for E&P’s and oil service names. Estimates continued to decline significantly for the Refiners. XOM and CVX estimates declined with downward revisions in R&M estimates. FET and NOV had more than average downward revisions in oil service. CXO and XOG had downward revisions among the E&P’s. Notable upward revisions included: DK among the refiners and CLR, PCDE, EOG, XEC, and TOU/CN among the producers. US March industrial production fell 0.1%, below the +0.2% consensus and +0.1% in February. Manufacturers production was flat, compared to -0.3% the previous month. The Energy Indices/ETF’s tested 50-day MA’s in early February with the E&P indices ducking below those levels. On February 13, all the ETF’s/Indices traded above their 50-day levels and confirmed those levels. In March, we saw more tests of the Indices/ETF’s with Oil Service, Refiners, and E&P’s confirming moves below their 50-day MA’s. In late March, the indices all traded and confirmed above their 50-day MA before falling back with only the XLE and XOI trading above their 50-day levels. Those two groups set new highs for the year early that week. All the groups were handily outperforming from mid-August when we went to a select overweight up until the second week of October. The stocks then cratered with the commodity until late December. The OSX in particular went from first to worst and hit levels not seen in almost 17 years. Increased customer focus on financial discipline and returns to shareholders did not auger well for the OFS group along with lower oil and gas prices during budget season. All the Energy ETF/Indices established new lows for the year on Christmas Eve but have moved higher since, outperforming the broader averages with the exception of Refiners. The OSX continues to lead the Energy sector while the R&M Index trails although there was some reversion to the mean within the sector, coinciding with 4Q18 results. Many of the ETF/indices set new highs for the year on 4/12 and trade above their 50-day MA’s with the exception of refiners. We expected and got a more challenging environment for energy equities as 4Q earnings season continued, particularly for Producers and Small Cap Oil Service. We saw some erosion in the group’s relative performance after 4Q18 earnings reports were in the books. However, with oil prices settling near new 2019 highs, we may see the sector moving higher until 1Q19 earnings season begins.

Last week’s highlight was CVX’s prospective acquisition of APC for $33B or $65p/s ($16.25p/s in cash, 0.3869 shares of CVX), a 39% premium and 5.5x 2020 EBITDA, driving much of the sector higher on potential consolidation. RDS is selling its 22.45% stake in the Caesar-Tonga field (71mmboepd) in the GOM to Delek Group for $965mm ($785mm adjusted for 2019 YTD cash flow). The net assets are 15.94nboepd (90% oil) with $230mm of annual cash flow and 78MMBOE of reserves (3.5x cash flow, $50K/flowing, $10BOE for 2P). XOM did guide to lower 1Q profits which was not a surprise, in line with Analyst Day guidance. The IEA left its global demand and supply estimates unchanged but did warn of economic risks. OPEC guided to slightly lower global demand, a slight reduction in non-OPEC supply, and a significant reduction in OPEC production. Earlier, CPE announced a significant asset sale, streamlining the company and lowering debt. Most of the ETF/Indices established new highs yesterday. Of the companies scheduled to report this month, Refiners earnings estimates were revised lower (VLO, PBF, PSX, HFC). There were also downward revisions for HAL, CFW, EQT, CXO, PDCE, and EOG. Platts estimates OPEC production fell 570mbd to 30.23mmbopd in March. Saudi production declined 280mbd to 9.87mmbopd while Venezuelan production dropped 380mbd to 740mbopd. Libyan production rose by 180mbd to 1.08mmbopd. The US oil rig count rose by 15 to 831 rigs. The IMF revised global growth expectations to 3.3% from 3.5% for 2019, the third downward revision. US February factory orders declined 0.5%, in line with consensus and 0.0% in January. Capital goods orders fell 1.6%, also in line with consensus and January’s 1.6% decline. The US CPI reading for March was +0.4%, in line with expectations and up from +0.2% in February. Core inflation rose 0.1%, below the 0.2% consensus and similar to the previous month. The CPI increased 1.9% YOY slightly ahead of consensus and the 1.5% figure in February. The core number advanced 2.0%. The ECB kept rates unchanged which was as expected. The US PPI reading for March was +0.6%, above expectations of +0.3% and up from +0.1% in February. Core inflation rose 0.3%, above the +0.2% consensus and +0.1% the previous month. The PPI increased 2.2% YOY compared the 1.9% figure in February. The core number advanced 2.4%. Weekly jobless claims declined by 8K to 196K, a 49-year low and above consensus of 210K. Eurozone February industrial output was down 0.2% MTM and 0.3% YOY, better than expectations. For the week, the Dow was 0.05% lower, the NASDAQ +0.57% and S&P 500 +0.51%. S&P 500 Financials (+2.09%), Telecom (+1.55%), and Tech (+1.16%) lead the markets while the S&P 500 Healthcare (-2.44%), Energy (-0.17%) and Utilities (+0.20%) lagged. Crude oil prices rose 1.28% (mogas +3.47%), but natural gas prices edged 0.15% lower, off 45% from late November highs and below the 50-day MA. The Energy index/ETF’s performance last week: the OSX -0.51%, R&M -0.39%, the XLE -0.07%, the XOI +0.99%, the XOP +2.04%, and the IEO +3.78%.

1Q19 US Energy Index/ETF performance: S&P +13.6%, OSX +18.1%, XLE +16.2%, XOI +13.2%, XOP +16.2%, IEO +13.1%, R&M +8.0%. Brent crude closed at $68.39bbl (+27.1% in 1Q19), WTI closed at $60.14bbl (+32.4%) and Natural Gas at $2.67mcf (-9.2%). Other 1Q19 performance: Mogas +45.58%. S&P 500 Tech +19.37%, S&P Industrials +16.64%, S&P Real Estate +16.64%, NASDAQ +16.49%, S&P Energy +15.42%, Alerian MLP +14.48%, INDU +11.15%, S&P Materials +9.68, S&P Financials +7.90, S&P Health Care +6.12%.

US equity markets were flat to up 0.3% on Tuesday with mixed earning and talk of further progress in US/China trade negotiations earnings. Last week, bank earnings, China trade figures, and Energy M&A drove the markets along with the prospect of a US/China trade agreement. The Fed confirmed its dovish stance from earlier in the year and the ECB kept rates unchanged. 1Q19 earnings season has begun. All eyes were on the yield curve, which inverted briefly a few weeks ago, the US dollar and the global economy. Markets had their best quarter since 2009 in 1Q19. The Fed has ruled out rate increases for 2019 and plans to end QT in September. US oil prices reached new highs for the year with better DOE’s, oil rig count declines, and further evidence of OPEC production cuts. Earlier in the month, US and global economic data was somewhat weaker, inflation data was benign, and there were no updates on the US/China trade front all putting pressure on equity markets. Trade and the government shutdown, in addition to the overarching concern regarding global growth, lead markets in a risk-off mode in 4Q18. On Tuesday, Financials, Energy, and Industrial stocks lead the market while Real Estate, Healthcare and Utility stocks lagged. S&P 500 Energy was up 0.64% on the day, outperforming the S&P 500. Upstream and Midstream MLP’s underperformed the sector with rates moving higher. Concerns about upstream growth and pipeline overbuilding have put pressure on this space. The energy stocks recovered with oil and gas prices, outperforming the broader averages from late August, ‘18 until the second week of October. 3Q18 results for the Oil Field Service sector were mixed with outlooks discouraging. Most Refiners, Producers, and Majors results/guidance were more favourable. 4Q18 results for the oil service sector, while good, have been accompanied by gloomy outlooks. Subsequently OFS reporting has been poor. R&M earnings have beat consensus but also have been accompanied with poor 1Q19 outlooks. The Majors have posted solid results with some outlooks improving. E&P’s have reported a mixed bag to date along with lowering guidance on capex and production. The ten-year treasury yield rose to 2.59% and the dollar firmed, above the 50-day MA’s. S&P 500 earnings are expected to be up 9.2% for 2019 (17: +8.9%, 18: +23.0%, 19: 9.2%, 20: 11.3%). 4Q18 S&P 500 earnings growth was 17.9% 1Q19 consensus calls for 8.0% growth (down 0.6% sequentially). The S&P 500 Energy Sector earnings growth estimate is +86.9% in 2018 and -13.3% in 2019, followed by +29.3% growth in 2020. Oil had mostly traded above 50-day/50-week levels until October but dove below 200-day MA’s as OPEC-Plus increased production during the refinery turnaround season. Oil has recovered this year above this levels this year. Natural gas prices were mostly in the doldrums last year, pulling back to five-month lows in 3Q18 due to bearish storage data and mixed messages regarding capital discipline (SWN). Natural gas traded above 200-day level in November driven by last year’s storage deficit and positive comments from companies regarding capital discipline before collapsing again starting in December. Gas prices have been in the doldrums since and only now trade above the 200-day MA’s. The US dollar is near one-year highs despite the recent decline in interest rates. Comments from the Fed point to a pause in rate hikes for 2019 and an end to quantitative tightening in September. The ECB has reversed course becoming more accommodative while maintaining current rates until the end of the year. The BoE maintained rates given the current unease regarding Brexit.

Energy Performance Previous Trading Day

The Producer indices tracked the sector Tuesday with lower oil prices and more chatter about further M&A moves surrounding the CVX/APC deal. Earlier Last week, CPE announced an asset sale and traded higher along with COG and SWN, which were considered takeout targets. Early in April, COP was said to be holding talks with Chrysaor regarding the sale of North Sea assets. Discussions with Ineos collapsed in January. Street estimates put the valuation as high as $3.0B for the 60mboepd of production. XOG announced it has bought 13mm shares for $63mm as part of its $100mm stock buyback announced on November 18th. The company increased the buyback program to $163mm from $100mm with an expiration of December 31st. Stonepeak Infrastructure Partners is acquiring Oryx Midstream, the largest private midstream crude operator in the Permian, for $3.6B in cash. CXO will receive $300mm for its interests in the system while WPX will net $350mm. WPX management stated the sale may accelerate its plan to return capital to shareholders from 2021. Last week, PXD outperformed as feedback from a major investor energy conference suggested the water and midstream assets may be put up from sales, generating $2-3B in proceeds. In mid-March, the PVAC/DNR deal was terminated. MUR announced an asset sales with a stock buyback, a significant change in corporate philosophy and yet the stock failed to outperform the group. The Indices/ETF’s had confirm moves above their 50-day MA’s last week only to falter. Deal stocks had fared better after receiving a boost from talk of a SM/CRZO combination but gave back much of those gains. CRZO insiders actually reported stock sales later in the week. ROAN’s positive outlook could not support the stock. Early in March, deal stocks continued to drift lower as the message from bankers is deal activity is stuck dead in its tracks. EPE missed and gave little guidance, selling off 10% that day. AXAS sold off after results essentially in line and a potential Bakken sale. The has stock recovered since. TALO rallied significant on the headline beat. Earlier that week, HK disappointed while MR and ESTE’s results were better. HK is exploring a possible sale but the stock traded lower. NOG beat with no significant surprises. The Norwegian Wealth Fund decided to sell its E&P holdings. Investors were still accessing the XOM and CVX analyst day presentations. The group was put under pressure by their upwardly revised outlook for Permian production with little pressure from service costs. It may turn the slower growth/capital discipline theory on its head. Scale is key in the Permian. Quality inventory both in basin and elsewhere is also important. Late February was a roller coaster with earnings results were greeted favourably (SWN, JAG). Very few names (ECA, SBOW) reacted well to solid results. The reaction to 4Q18 results from EOG, CHK, CPE, MTDR, HPR was more positive with only WLL trading sharply lower on guidance and capex outspend. EOG appeared to get a pass despite outspending capex and lower guidance for 2019. Results from RRC, CDEV, MGY and HSE failed to impress, CDEV spectacularly so on lower guidance.

Natural gas stocks tracked the group despite lower gas prices. Almost the entire group has found financial spending religion and storage comps appear easy to beat. Permian producers were mostly higher as Midland differentials rose to a $3.65bbl discount, the CVX/APC was live, and the massive CVX/XOM production growth looms. The Permian gas takeaway issue weighed on those stocks last week. RDS has expressed the desire for further acquisitions in the basin. The DJ Basin names were higher with new drilling legislation approved that was less onerous than originally expected. That group has been particularly disappointing since the favourable vote on Prop #112 as well as favourable court and regulatory rulings. The Colorado state legislature approved proposed changes in the state’s oil and gas laws giving local authorities more control over drilling activity. Activist activity in PDCE may suggest some consolidation in the basin. The large cap Canadian heavy oil producers tracked the sector as differentials have begun to widen. The WCS differential to WTI was unchanged at $9.25bbl, well below the recent highs over $52bbl, as Alberta mandated an 8.7% reduction in production to reduce inventories along with providing more transport by rail. The province has been relaxing those restrictions ever since but there has been a shortage of heavier crudes with Venezuelan sanctions. CNQ was higher post 4Q18 results although nothing newsworthy came out. The company is committed to returning free cash to shareholders. In mid-February, PE and COG had mixed results although their outlooks were positive. PXD rallied on management changes. QEP, WPX, SRCI, SM, CRK, and XEC. QEP also announced it had pulled its $1.725B Bakken sale. Investors are becoming more circumspect about budget cuts in the name of financial discipline. There is an increased concern regarding growth in 2020 and beyond. Earlier, FANG, DVN, and CXO headlined with all cutting capex and production. All three missed estimates but had varying reactions to their outlooks. FANG up with strong production, reduced capex, DVN rallied sharply on restructuring and buyback news, and CXO was off sharply on lower guidance and little inclination to buy stock at this time. NBL and CLR did the same earlier with CLR off 5% while NBL rallied almost 5%. In Early February, PXD, MRO, EQT, AR, and LPI’s earnings results evoked a variety of responses. PXD and LPI cut budgets and production guidance (EQT, AR earlier). MRO raised capex for 2019 and rallied on free cash flow returns to shareholders. LPI traded lower with an outlook for flat production. EQT recovered after selling off despite improving cash flow as the Rice threat seems limited. CVE missed but traded higher on its 2019 outlook while OXY’s numbers beat consensus with a solid outlook and both traded higher. PDCE and CPE came out with guidance for 2019 with both cutting capex and production-stocks were higher after disparate performance upon announcements. TLW’s results were also solid. Earlier, RRC reacted positively to reserve growth and indications of solid 4Q18 production results. CRZO, NVA/CN, SM, and SRCI announced lower 2019 guidance and financial discipline was punished. APC’s earnings missed though there was no change in guidance. SWN brought capex guidance down but still won’t be cash flow positive this year. Earlier that week, EQT sold off following the Rice conference call as little new came up. WPX managed to bounced as the capex cut for 2019 was larger the revised production guidance. CNX, while beating consensus, fell sharply again on guidance, which up until this week would have been considered a positive. The stock was down 25% following. In late January, HES reported a beat on production and announced its tenth discovery offshore Guyana with XOM (make that now twelve). CLR recovered from the Mid-Con update that failed to impress last week. EQT put forth guidance that failed to impress but the stock recovered as the Rice Brothers intend to wage a proxy fight. MEG/CN also guided a bit lower although capex fell over 50%. Earlier that month, GPOR was the headliner with reduced guidance plus a major 26% stock buyback over two years. UPL has retraced much of the sharp gains on a positive court ruling. ESTE continued to sell off after higher 2019 capex without commensurate production growth. HSE/CN dropped its takeover bid for MEG/CN. The original offer was $11p/s in cash (up to $1.0B) or 0.485 shares of HSE stock. There was additional budget and production guidance mostly international (PEY, TOU, GKP, and TLW) much along the lines of the domestic E&P’s but TALO did raise both capex and production guidance. TLW’s capex is also up significantly this year. CPG traded lower after lowering 2019 capex, production guidance, albeit modestly on the latter. The dividend was also cut but a buyback was announced. CHK and AR lowered capex and production (AR) guidance for 2019. QEP received an all-cash $8.75p/s bid at a 44% premium to the 1/4 close, continuing the ongoing M&A/activism in the space. The stock has traded above the offering price as the company may be shopping itself. OXY traded higher on its preliminary 2019 budget/production guidance. HES posted a strong recovery after the uproar regarding a vote of no-confidence in Guyana as well as Venezuela’s naval actions. The week before Christmas, CDEV, gave preliminary lower production and capex guidance for 2019. The stock has held up relatively well but reflected a sharp contrast to the aggressive spending of the past. PE did outperform the group after lowering its 2019 budget and rig activity and FANG pulled back after its capex/production reduction for 2019, albeit maintaining strong growth. We lowered our emphasis on the natural gas names after strong performance when prices touched $4.84mcf (COG and RRC only names on focus list) on November 14th.

The Majors outperformed the refiners but lagged the producers yesterday. CVX and XOM have outperformed the Internationals since their impressive analyst day presentations in early March and did so again yesterday. XOM’s 1Q19 guidance has put pressure on the stock along with possible M&A moves. CVX outlined solid upstream production growth potential without a significant ramp in capex and growing returns to shareholders. XOM did so differently with rising production and capex but an increase in the Permian rig count. Shareholder returns were given some lip service but not to the degree of CVX. Reuters reports XOM is considering the sale of its Nigerian assets (225mboepd) for up to $3.0B. Solid 4Q18 result by CVX and XOM ignited a sharp rally but there was not much follow through. Investors have favored CVX which is aggressively raising dividends and buying back stock. BP’s, TOT’s and RDS’s results have boosted those equities. Strong 3Q18 strong results had boosted the majors relative to other subsectors in 4Q18. Surprisingly, earnings for 4Q18 are helped by the downstream but both XOM and CVX warned of much weaker margins in 1Q19. XOM and CVX have been a drag on the Major’s overall performance this year due to capex, production, and downstream performance. Investors were concerned about a repeat of 2Q18 disappointments but 3Q18 results were solid and /or pointed to improvement. Recently, investors were concerned those companies, along with COP, might bid on private Permian producer, Endeavor, valued at up to $15B. Tow month’s ago, Bloomberg reported RDS is likely to buy the company for only $8B and wants to acquire more assets in the Permian. XOM and COP appeared to be out of the running, although neither company has totally ruled out acquisitions. The International-based Majors outperformed last year principally due to their ability to grow production, increase dividends, and buyback stock. Capital discipline and increasing returns to shareholders have been more universally embraced during and post 3Q18 results. Growth as well as buybacks/dividends will likely be key components in the majors performance this year. This year we added FANG and OXY while removing PE. QEP, our #1 E&P stock, has been moved to the trading list following the $8.75p/s all-cash offer from Elliott. The position has been reduced by 50% in the model portfolio on 1/8 with the stock trading above the offering price. On 1/10, we moved HES and MRO down the focus list due to strong performance. On Jan 15, we took COG off the list due to increasing concerns regarding natural gas prices near-term. It remains one of our favorite gas names longer term. We added XOM (1/24) as a defensive play on refining but more importantly for the potential of upstream performance surprises. On 2/22, we removed NBL and added back PE and COG post 4Q18 results and outlooks. HPR was removed on 3/6, not because of company fundamentals, but due to the increasingly hostile regulatory situation in Colorado. We were reluctant to sell the name post the defeat of Prop #112 and paid for it. The stock fell 50%. We added back the 50% we sold in QEP now that it trades well below the $8.75p/s all-cash bid from Elliott Management. It remains in the trading portfolio. CNX was removed on 4/1 due to increasing concerns regarding excess global natural gas supply. APC has being pulled on 4/15, post the acquisition announcement by CVX.

In mid-December, PXD announced a $2.0B stock buyback and SU forecast 10% production growth with a flat budget for 2019. OXY stated it had no plans to cut back activity. A number of producers released preliminary budgets for 2019 (HES, CVX, APC, COP, CNQ, CVE, ATH, CR, BTE, FANG, PE, ROSE, HSE, WCP) with most being flat-to-down. In November, two deals of significance were announced, XEC acquiring REN and QEP sold its Haynesville/Cotton Valley assets. APC announced a further stock buyback and dividend increase after the close, almost immediately redeploying proceeds from its $4B midstream sale the previous week. Many of the SCOOP/STACK names lagged (AMR, DVN, NFX, GPOR, MRO) following attention to well-spacing issues post AMR’s results. Colorado voted down Prop #112, but failed to provide a lasting boost for those producers affected(APC, NBL, HPR, BCEI, XOG, PDCE, WLL, SRCI). In fact, those stocks have lagged. QEP announced the sale its Williston assets, boosting the name though the price was considered by some to be low. In late October, many of the mid to smaller cap names reported with more disappointments (LPI, CDEV, PDCE, OAS, REN, SBOW, FANG, HK, MUR). QEP, MRO, PXD, DVN, XEC, CPE, CRZO and OXY’s results were better. 3Q18 earnings were better-than-expected for the large and mid-cap producers and capital discipline was maintained. However, if you miss expectation or announce a capex increase as SM and EOG, your stock got punished. HK traded 15% higher after announcing the sale of its water assets. HES underperformed on its plans for increase capex while APC missed estimates and appeared unwilling to press growth and played down further stock buybacks after the current program was complete. There was more M&A with two deals in the EFS and one in the SCOOP/STACK. ECA/NFX on top of the CHK/WRD, DNR/PVAC, all with a fair amount of equity but at nice premiums. We don’t believe this will stop as companies need capital, scale, and size to be relevant with investors. The natural gas stocks have been relative outperformers in November with the increased recognition of the storage deficit. The names had broken out of their month long malaise (COG, CNX, GPOR, and RRC our favorites) until the downdraft in Energy began in mid-October. We dropped EQT from the Model Portfolio after disappointing results and outlook and added RRC. COG and CNX have been outsized performers given their well outlined plans to grow within cash flow while rewarding shareholders through stock buybacks Many investors remain convinced the upside is limited for gas, supplies will be plentiful to offset demand growth, and question when that group moves to positive free cash flow status. Capex plans may prove otherwise.

In mid-October, GPOR’s 3Q18 preliminary production beat both guidance and consensus. REN and HK were the targets of activists but failed to outperform. XOG’s dramatic reduction in production guidance and a significant miss in 3Q18 production punished the DJ basin group for fear they would also announce revisions due to the issues with DCP #10. SRCI missed 3Q production and raised capex the day before. SM beat 3Q18 production guidance and capex was in line. ESTE bought the private Permian company Sabalo for a reasonable valuation ($25K/acre) although that deal subsequently fell through. DVN’s 3Q18 ops report was encouraging both for the increased US production guidance and capex discipline. Earlier in October, MUR did react positively to the PBR GOM joint venture with attractive metrics. AMGP bought AM for $3.415/share in cash and 1.635 share of new AM stock valued at $31.41/AM unit (7% premium). AR announced a $600mm stock buyback. Earlier in the 4Q, DJ Basin stocks (HPR, SRCI, PDCE, BCEI,PDCE, APC, NBL) continued to lag on concerns regarding Proposition #112. The Permian names firmed, outperforming the Bakken and EFS names with differentials narrowing to $6.75bbl. Permian names had lagged the Bakken and EFS names past several months, particularly the perceived M&A candidates who may have takeaway issues (LPI, JAG, REN, CPE, HK, PE) as pipeline capacity approached 100% utilization. LPI shareholder Warburg Pincus sold 12.3mm shares, lowering its stake to 51.2mm shares of just under 22%, perhaps signaling it could not sell the company. We have maintained exposure to potential Permian consolidation throughout because the increased pressure to sell (need of scale, takeaway capacity) but recognize that the play’s production growth may slow without sufficient takeaway capacity until 2H19. MRO was reportedly interested in selling its UKNS fields to focus on US shale. The assets produce 13mboepd net, have 21MMBOE of reserves, and are expected to generate $85mm in cash flow next year. Banking sources suggest the assets could fetch up to $200mm but were subsequently sold for $140mm. The HSE/MEG deal did provide some support for the group as well. MTDR raised 2018 capex without an increase in production guidance. ECA announced the sale of its San Juan assets for $480mm to DJR Energy. The assets include 182K acres and 5.4mboepd of production of which 3.9mmbopd are liquids (@$40k/flowing, roughly $1.5K/acre).

In mid-September, MTDR was punished for its aggressive land purchase in the Permian. In the first week of September, MRO’s stock buyback and SWN’s Fayetteville Shale sale were dismissed, the latter due to the proposed allocation of sale proceeds. A federal lease sale in the Permian with bids as high as $95K/acre also provided little support for those producers. In late August, the news that CO Initiative #97 (Prop #112) would appear on the ballot had the predictable negative impact on most of the DJ Basin producers (APC, NBL, PDCE, WLL, BCEI, HPR, SRCI, and XOG) despite Initiative #108 also reaching the ballot, compensating producers for losses due to regulatory changes. The messaging from the producers from Enercom was financial discipline and returns to shareholders remain the prime directives. The ongoing capex creep among customers (COG, APC, WPX, LPI, NBL, CP, CRZO, OAS, PE, PXD, CLR, FANG, PDCE, NOG, MUR, OXY, EPE, JAG, ERF) appeared readily explainable. August saw two deals in the Permian, FANG acquiring EGN for $9.2B and CRZO buying Permian assets from DVN but funded part of the deal with equity. Along with the FANG/AJAX deal earlier, these deals have provided modest support for valuations. During 2Q18 earnings season, if a company reported and missed expectations or failed to accelerate efforts to return capital to shareholder, the stock was marked-down 5-10%. Natural gas stocks had outperformed until late August, responding to higher prices and positive storage comps. But they too have been punished if they didn’t meet the loftiest expectation on the Street (CNX, AR). We have been more constructive on such gas producers as COG, CNX, GPOR and RRC since the end of the 1Q18 with improving fundamentals and stock buybacks authorized. WLL shelved the Red Tail sale for the time being.

In late July, the BP/BHP and Encino/CHK Utica deals actually drove stocks lower. Both deals were viewed as cheap with little premium for acreage. The latter deal valued gas at in the ground at only $0.70/mcf drove the natural gas producers sharply lower. Drillinginfo forecasts $50B in M&A activity in the energy sector in 2H18 as companies focus on core acreage and confidence regarding the current level of oil prices rises. Only $29.8B of deals occurred in 1H18. Oilfield inflation concerns entered into the discussion (+10-15%, steel, labor, fuel) and are going to be watched closely the next few quarters along with capex and production guidance. Production growth concerns for 2H18/1H19 crept in the group given the takeaway situation in the Permian. In 1H18, missed estimates, capex increases, lack of takeaway capacity in the Permian, and rising gas production were punished. Hedge funds were net sellers in 1Q18 while Producer insiders also selling. Most earnings results were positive and capital discipline was almost uniformly maintained (LPI excluded). There was no interest in being long natural gas, regardless of positive ops reports/results (GPOR, CNX, COG), stock buybacks, and valuations. We became more positive on the gas group in April and used any weakness as an opportunity, particularly those companies buying their own stock (CNX, COG, GPOR). We would note a number of producers suggested production growth would be weighted towards 2H18 while capex will be more front-end loaded. APC, APA, EQT, COG, COP, CNX, DVN, GPOR, HES, PXD, COP, NBL, LPI, ECA, GPOR, FANG, SU, DVN, ERF, OXY, QEP, CNQ, MRO, EQT and MUR have adopted shareholder friendly, returns focused approaches. XEC and CXO squelched a similar strategy by making acquisitions. EOG appears set against buybacks and will emphasize dividend growth. Since December ‘18, investors have believed the group is more returns focused reinforced by recent operations updates/presentations but a wary of any company guidance that calls for cash flow outspend. The focus remains on Large/Mid-cap oily producers that can grow within cash flow while reducing debt and/or share count. Those names have been the conspicuous outperformers much of 2018. Fiscal discipline, free cash flow, and returns have been the mantra, not growth for growth sake and failure to hew that line has been met with selling. APC, PXD, NBL, AR, COG and HES outlined plans for 2018 and beyond that call for 10%-plus production growth (HES out to 2025), spending within cash flow plus stock buybacks and debt reduction. The number of companies that can support these metrics rose among mid-cap and large cap producers as the industry shifts to full development mode-moving and away from the land grab/ exploration. Consensus called for cost increases of 10-15% for 2018 but many companies have successfully managed cost inflation well below these levels and actual cost came down in 2H18. We continue to like select natural gas producers for long term investors given low valuations, stock buybacks (CNX, COG and RRC), and growth potential on par with many oil producers. Growing supply has been offset by rising demand both domestically and through exports. Storage deficits do remain. Note M&A (EQT/RICE, ECR/BRMR) and asset acquisitions by XOM and BP suggesting natural gas/LNG is of future focus. We continue to avoid most smaller-cap, highly levered names, as residual bankruptcy risks (JONE, AMR recently), equity for debt swaps, and dividend cuts/suspended interest payments. There remain significant risks among these producers with constrained liquidity, lack of hedges and limited ability to grow due to a lack of scale. Shareholders still want efficient growth, financial discipline, and returns to shareholders in the current price environment which increasingly requires scale and a strong balance sheet.

The OSX lead the sector again on Tuesday with higher oil prices. NAM onshore names were strong despite CVX’s acquisition plan involves $1.0B less capex per year, although concentrated in the Permian. MDR advanced sharply on news that its Cameron LNG project had reached final commissioning on Train 1. Most subgroups were up on the day perhaps in anticipation of SLB’s earnings on 4/18. Offshore continued to lag. Last week, CKI/CN bought a 10% stake or 24.9mm shares of TCW/CN and has nominated its President and CEO to the board. Trican has bought back 16% of it shares over the last 18 months. Earlier, FTI won yet another subsea contract, this time offshore Brazil. Early in the month, the company secured a contract to deliver subsea systems to Neptune Energy’s Duva/Gjoa P1 field projects offshore Norway, continuing the company’s strong momentum. The contract amount was not disclosed but Upstream suggested the contract was worth $350mm. Late last month, SLB made an unsurprising downward assessment of the NAM market. HAL sees global oil demand outpacing demand near term. Pricing for services remains under pressure. The frac glut will rebalance later this year. NAM spending is expected to be down 6-10%. CVIA’s numbers missed but the company reiterated the positive outlook other sand and pressure pumping names have relayed. The IEA has forecast global upstream capex would grow 4% this year. In mid-March, TUSK’s earning were fine but the outlook for infrastructure was poor. Management did make some positive comments of frac and sand. SND beat guidance/consensus, gave constructive 1Q19 guidance as well as a positive outlook for industry demand. Upstream reported FTI was the front runner for EQNR’s Phase II subsea production system for the Johan Sverdrup project worth $400-500mm which it subsequently won. In early March, NCSM, NINE and QES reported and expressed a lack of visibility for much of 2019. CVX did increase its budget for 2021-23 to $19-22B from $18-20B for 2018-20 but its clear the company does not expect cost pressures and expects a flattish rig count. XOM also increased capex substantially ($30-35B from $30B for 2020-2025) as well as its rig count but sees little cost pressures. Late February was mixed as BCEI, JAG, SBOW, ECA, OAS, DNR, MTDR, HPR, CPE, WLL, RRC and CDEV lowered 2019 budgets. ICD and BAS reported constructive outlooks but not without 1Q19 challenges. Earlier, SOI, FTSI, CFW and ESV all reported disappointing results or outlooks. PUMP and WTTR reported solid results while NBR missed. FRAC reported a good 4Q18 but guidance was lowered for 1Q19 and visibility for FY19 was murkier. QEP, SM, SRCI, XEC, WPX, FANG, DVN, CXO, CLR, PE, COG, PXD, EQT, LPI, OXY, CVE, CPE, PDCE and NBL all lowered spending, many alluding to lower drilling costs in 2019.

Pressure pumpers were higher after their solid performance this past month with higher frac counts since the beginning of the year and results from BAS, PUMP, FTSI, FRAC, CJ, NINE, QES,TCW, SLCA, PES, TUSK and SPN. The US frac count is approaching October, 2018 levels. PUMP has been a conspicuous outperformer and has been our favorite way to gain exposure although we are taking the stock off the focus list today. There remains too much capacity but clearly the reduction of DUC’s affords perhaps the easier way for producers to maintain and grow production. The Sand producers were mostly higher on the day with SHLE’s 1Q19 volume guidance better-than-expected. Onshore drillers were strong with higher oil prices and high-spec rig counts. Conversations with the companies (PTEN) suggest pricing and utilization for premium equipment remains intact. NBR gave constructive guidance on capex, and debt reduction several weeks ago but gave up much of its gains. Offshore drillers were mixed despite improving rig counts and two new UDW fixtures announced by RIG plus a two rig contract announced by BDRILL a few weeks back. Prospects for activity improving offshore Brazil with the government’s settlement with PBR. The group has lagged despite solid earnings, higher oil prices, and commentary from NE, ESV, RDC. ESV and RDC both missed on higher costs. RIG’s results missed although the commentary was very positive, similar to DO. Rising capex/opex are the concerns. RIG’s CEO expects dayrates to double for UDW rigs over the next year or so. Offshore construction names acted better, as more awards are announced (FTI, MDR, OII). In February, the group sold off due to less than stellar results/outlooks from NOV, FET, PTEN, LBRT and HCLP. FET, LBRT and PTEN did state pressure pumping markets looked to be bottoming in 1H19. There were no budget cuts at either XOM or CVX but WPX, NWA, SM, CRZO, SWN and SRCI did lower budgets significantly. XOM’s budget actually increased by $2.0B. In January, WFT results were mixed but free cash flow and the dismissal of bankruptcy concerns carried the day. BHGE’s outlook likely required downward earnings, HP gave positive commentary on the premium drilling market. The reduction in capex was greeted positively. FTI did win a significant contract awards from LUPE/SS, PBR, and XOM. In January, HAL’s earnings beat failed to overcome the company’s cautious commentary on pressure pumping markets, somewhat counter to investor reaction to SLB’s results. RES’s earnings missed and it was clear management has little visibility on the near-term outlook. On the other hand, PUMP gave solid 4Q18 guidance, ahead of expectations. The OSX has been the star energy sector performer in 2019 after substantially underperformed both the sector and the overall markets last year. As we mentioned above more producers are giving capex/production guidance for 2019, most being revised lower. EQT, MEG/CN (down 25-60%), PEY, CPG, TOU, GPOR (down 6-30%), CDEV, FANG, CHK, AR, VII, OXY, PE, HSE/CN, WCP/CN, BTE/CN CNQ, CVE, CR, and ATH all announced flat to lower spending for 2019 with lower production. We should add TALO, ESTE, TLW/LN, and GKP/LN all confirmed or increased 2019 spending. NBR cut spending and the dividend. PES lowered 4Q18 guidance. SOI announced the amendment of its contract with a major customer (DVN, we believe) reducing minimum volumes for proppant at the company’s transloading facility in Kingfisher, OK. We believe this may signal further cutbacks in SCOOP/STACK expenditures. In early December, FTI slumped after constructive 2019 guidance but has performed better since. The HES and COP capex budgets, while flat to higher, came as no surprise. CVX’s plan to raise capex earlier in December to $20B from $18.3B appeared to have little effect on the group. SLB lowered guidance for 4Q18 due to weak NAM pressure pumping markets, hammering those stocks. The mantra of financial discipline and lower oil prices has put significant pressure on the group for much of 2018 and now budgets are less likely to be raised with oil below $55bbl. The sector floundered in November with mixed results/outlooks from FRAC, TCW, NBR, LBRT, HCLP, BHGE, FTSI, FET, WFT, SLCA, SPN, and PES. Other service companies BAS, ERII, TUSK, SOI, SND, PUMP, and NE did beat consensus or had more positive outlooks. In October, NOV, NR, OII, CRR, and CLB all disappointed. CFW.CN and PTEN both outperformed as results beat expectations and both companies showed discipline with the pressure pumping space. HAL reported a beat, but like SLB, lowered guidance due to a worsening outlook for NAM pressure pumping. No change to that outlook in 4Q18 reports. Pressure pumpers had shown some relative strength in early December but suffered with poor earnings since October and LBRT’s 4Q18 profit warning in early December. PUMP’s results certainly did help along with the accretive acquisition of PXD’s assets. FRAC’s 4Q18 guidance was raised. The messaging from industry and from NOV is that capacity expansion and fleet reactivation has fallen sharply as Pumpers aggressively pursue self-help measures. The recovery, however, has been pushed out at least to 2Q19 and the frac crew count continues to fall. We took PTEN off the focus list on December 21. ESV was added 01/15 post the revised bid for RDC as we want to have more exposure to the offshore drilling sector and like the combined entity (RDC assets in particular). We took FRAC off on 1/23 simply due to too much pressure pumping exposure (HAL, PUMP). We are taking PUMP off the focus list today, 4/17 due to price performance. The stock is up 100% since December. The company remains are favorite small cap way to play the pressure pumping sector.

There was little investor interest in the oil service group up until this year as the outlook for NAM onshore capital spending for 2019, at least for the first half, worsened. Rystad Energy stated it would take until 2025 for the global oil services market to reach its former peak in 2014 ($920B in sales), the longest slump since the 1980’s. Activity levels will recover sooner (2021/22) those costs cuts will mean spending is at only 80% of former levels. FPSO’s and pressure pumping are expected to recover in 2020 and 2023, respectively, followed by E&C and subsea contractors. Offshore drillers and seismic contractors are not expected to see a full recovery until 2027. The OFS names did advance from early September’s 2H18 profit warnings by SLB, HAL, OIS and FRAC, until early October with oil prices reaching new highs. International activity is expected to grind higher this year but that recovery has been slow. The group significantly underperformed the sector from May to early September. M&A activity continued in the OFS space with NINE acquiring Magnum Oil Tools for $493mm in 4Q18 but there has been little since. We continue to avoid the land drillers as we expect rigs counts to grind lower but to date, day rates have remained stable (SLB, HP confirmed although the producers continue to drop rigs). Most offshore drillers, our favorite beta play in the space, have given up more than their gains from 2018. Offshore rig utilization continues to head inexorably higher but the group is probably the most highly correlated group with oil prices. Those 2018 gains were due to continued positive fixture news (NE, RIG, RDC, ESV, DO, SDRL), some with longer terms, rising utilization/tender activity and positive earnings reports/outlooks along with M&A (RIG/ORIG, RIG/Songa, ESV/RDC-bid raised twice) which drove the offshore names to new 2018 highs in early October. SDRL recently signed a $330K/D contract for the harsh environment semi West Bollsta with LUPE/SS for six months in 2/3Q20. Premium floater contract are now being priced between $250-300K/D. Clarkson’s expects offshore rig utilization to improve markedly over the next two years. Utilization is expected to rise 7% to 77% at yearend 2019 before reaching 80% at the end of 2020. Floater utilization is expected to rise from 65% at the end of 2018 to 73% at the end of 2019 and to 79% at the end of 2020. Combined offshore rig utilization stood at 71% in early March, up 2% from February and the highest level in over two year. A federal judge from the US District Court for DC order a halt to new drilling activity on more than 300K acres in Wyoming citing impacts on climate change. The leases were not voided and remanded the BLM to cure the situation. Bids for the GOM lease sale #252 were up 50% from the last two such events at 257 with 30 companies participating. High bids totaled $244mm compare to $178mm last August. RDS won 87 blocks. EQNR has the highest winning bid of $24.4mm for MC Block #801. IHS Markit estimates offshore rig demand will rise to 521 units in 2020 compared to 453 units in 2018. The growth will be primarily in floaters and Aramco will account for a third of the increase. Deepwater semis are expected to rise 25% to 89 from 71 rigs while drillships are expected to jump 27% to 79 from 62 rigs. Westwood Global Energy believes offshore project sanctioning will rise to 90 this year from 51 in 2018. The firm expects offshore spending to rise 8-10% in 2019. The Bloomberg US and Permian frac crew count, which had been falling since October, did fall by four to 478 (Permian: 165, up three) last week, but has been in recovery mode since late January. The US frac count is just off its highest level since mid-June, 2018 even though the Permian frac count has been slower to recover. Rystad Energy expects weaker completion activity into 1H19. HAL/SLB/SPN/SLCA/RES all confirmed weakness has entered the Permian basin. Sand Producers have rallied of late, helped by positive pricing comments and results from SND, TUSK, and SLCA’s results. These stocks have been punished since October with all the talk of price concessions (SLCA) and the increased use of local sand in the Permian. At least 20-25mmta of sand mine capacity being idled or shut down in the past nine months. CVIA’s 4Q18 oil proppant sales expected to be 4.4mmt, in line with the 4.3-4.5mmt guidance. Given the decline in over demand for oil proppants in 4Q18, the company took market share. SLCA missed estimates and revised guidance lower for 4Q18. HCLP eliminated its quarterly distribution and lowered guidance significantly for 4Q18. PXD’s long term contract with SLCA, announced in mid-September, along with capacity reductions by CVIA and HCLP, have had little effect. Producers suggest frac and sand pricing will experience the most weakness in 1H19. Capital equipment names (FTI, DRQ, NOV) were relative outperformers until October, after posted solid earnings results/outlooks in 2Q18, but have sold off on mixed 3Q18 results and oil price weakness. These stocks have shown some relative strength of late. We like the secular fundamentals both in the offshore drillers and the offshore capital equipment names.

M&A picked up in the space in 3Q18 in the space with ESI.CN acquiring TDG.CN for all cash (C$1.68p/s). The combined company will be a significant NAM operator. PDS offered TDG.CN a 25% premium over the ESI offer on August 30th but pulled that offer due to the stock’s decline. In early August, we saw OSV consolidation with TDW buying GLF and land driller ICD buying Sidewinder. The 3Q was characterized by negative comments from producers regarding rig activity and slack pressure pumping capacity and pricing. The consensus has called for reduced capital spending requirements in 2H18, especially in the Permian with constrained pipeline capacity. Investors have residual concerns regarding pricing and logistical issues as well as capacity overexpansion and rising costs. Our favorite beta play remains the offshore drilling space as self-help measures continue (M&A, scrappage) along with improving supply/demand fundamentals, rising tender activity and improving fixtures, particularly for high-spec jack-ups. Floater rates are now also moving higher.

Our forecast for 2019 upstream capex calls for down 5-10% with risks to the downside after a 5-10% increase last year. Customers’ capital disciple looks to be intact with price benchmarks relatively unchanged at $55bbl/$3.00mcf (BP now $60-65bbl) with buybacks and dividend favoured over spending increases. The increase in oil prices did provide a brief boost to the group in April/May but investors remained sceptical regarding pricing and rising spending. Prior to late January, the service stocks had responded to higher oil/gas prices and a positive tone on capex. The market is anticipating the producers will continue to transition to development from land acquisition and exploration. Pressure pumpers should benefit as completions are likely to be the dominant theme domestically for 2019-20 as the DUC inventory continues to build. The problem remains overcapacity and a lack of discipline when redeploying it. Those stocks massively underperformed last year, particularly in 2H18with newbuilds, poor earnings results, and SLB’s discount purchase price for the WFT assets. SLB does appeared focused on fleet reactivation, not newbuilds. CNQ, SU, CVX, SN, HES, APC, PDCE, OAS, GPOR, CNX, SWN, AR, MRO, CNQ, LPI, DVN have budgets flat-to-down for 2018, PDCE, PE, WPX, COP, XOM, XOG, NOG, SRCI, PXD, STO, BBG, CPE, AXAS, QEP, REN, EPE, MTDR, EQT higher). CVX announced a $20.0B capex budget for 2019, up from $18.3B this year and at the upper end of the $18-20B range through 2020. The budget is heavily focused on US unconventionals and is rising to $19-22B in 2021-23. XOM, is increasing capex to $30B this year and $30-35Bthrough 2025. RDS is also ramping its upstream capex over the next five years. STO and TOT are not growing their budgets. We have avoided most land drillers, sand producers and commodity-oriented service names due to customer focus on financial discipline and efficiencies. E&P M&A, although funded with equity, might actually result in reduced rig counts as the acquirers seek efficiencies. The service industry as a whole has executed poorly during the ramp in activity, putting unexpected pressure on margins.

The major oilfield products company margins improved in 2017(NAM starting in 3Q16) when producers loosened purse strings after two years of capital discipline. Short-cycle NAM shale plays were bullish for a number of US onshore service names. The quality of the US land drilling recovery improved with a majority of the rigs added being AC rigs. Pressure pumping consolidation and IPO’s (STEP/Tucker, LBRT, BHI/BJS, PTEN/SVNT, FRAC/RockPile, SLB/WFT, FTSI, BDFC,TCW/FRC) appeared to have little negative effect on pricing, utilization, and capex plans. The Pumpers were reactivating/building PP equipment with improving utilization and margins up until 2Q18 when weather/logistical impacts reduced profitability and spending rolled over in 3Q18. HAL stated 50% of newbuild orders (4.5mm HHP) were to replace existing equipment (HAL, FRAC, PUMP, BAS, LBRT, CJ, CFW and RES were adding newbuild equipment but not on spec) as pricing was not justified it. TCW/CN, PTEN, SLB and SPN had no plans to add newbuild frac capacity in 2018. Enercom estimates it would take over $21B in capex to complete the estimates 8.5k DUC’s in the US with potential production is estimated at 7.5BBOE- a potential LT positive for Pressure Pumpers. Some segments saw pricing power and demand growth (pressure pumping, land rigs) while other see some stabilization (offshore rigs). Sand pricing/overcapacity remains a major concern although proppant intensity continues to rise. We recognize oil service names provide alpha and have been using NE, HAL, ESV, FTI, and PUMP as our focus names. Offshore Drillers and Offshore Capital Equipment are our preferred plays in a much out-of- favour segment. We believe Sand producers will fight challenges of growing supply and local substitution. Most land drillers face a recovery with modest rig/pricing growth. Producers believe the rig efficiencies are as much as two-thirds permanent thus demand for rigs will be much lower than in previous recoveries. The outlook for companies associated with long-term offshore projects has improved and we added FTI to the Model Portfolio in 3Q18. Unfortunately, The offshore drillers and offshore construction names have a high correlation with oil prices and sold off sharply in 4Q18. Rystad Energy estimates offshore capital spending will rise 6% this year to $208B and 14% in 2020 to $237B. Subsea equipment spending is expected to lead the rebound.

The R&M stock index continued to trail the energy complex with higher oil prices and despite improving mogas cracks. DOE’s have been bullish for product demand and inventories. That said, 1Q19 earnings expectations have been revised lower for several weeks. The administration’s advanced a plan to allow E15 mogas year-round and limit RIN credits did put some pressure on the group earlier this month. The oil industry is expected to challenge this move. RIN prices collapsed as a result but have shown more improvement of late. DK, CVI, and HFC results were positive but the outlook for margins near term is weak. HFC raised capex while DK plans to return more capital to shareholders. Strong earnings from PBF, PSX and MPC plus higher mogas cracks failed to boost the group several weeks ago as 1Q19 guidance and earnings estimates were lowered. MPC and VLO recently raised dividends. XOM and CVX have both commented on the poor operating environment for refiners in 1Q19. The group outperformed briefly at year end 2018 but has sputtered for the most part since early September. Through the first nine months of 2018, R&M was the best performing energy group. IMO did not extend the date for IMO-2020 implementation. In October, the VLO/VLP deal called in to question valuations and the drop down thesis Refiners had espoused when forming MLP’s. The Brent/WTI spread narrowed but mogas cracks rose 1.4%. Cracks have declined 10% since June but are now up 45% since September having rallied significantly the past two months. At their worst, cracks had fallen 75%. Midland crude differentials fell to a $3.65bbl discount to WTI but RIN prices fell. The administration is asking for a modest increase in biofuel requirements unchanged for 2019, calling for 19.92B gallons of biofuels (+3.3 from previous levels) required to be blended, a 3.1% increase over 2018. Ethanol requirements are unchanged. HFC did authorize another stock buyback, this time for $1.0B, replacing the existing authorization in place. The Trump Administration is attempting to roll back CAFÉ standards that could add 0.5mmbopd in US production demand. We have normally traded most of the Refiners and avoided the Majors as restructuring moves appear in their latter stages. Refiners have outperformed the energy sector and the S&P 500 since 2H16 and were consensus longs going into 2018. We added HFC to the model portfolio on May 29th for a trade for OPEC/non-OPEC relaxation of production cuts and wider Midland differentials. We overstayed this trading exposure and removed the stock after a loss of 21% as of December 3rd. On 1/24, we removed our only R&M position MPC. The stock was added as the result of our ANDV acquisition arbitrage put on May 2nd. Earlier on March 31, ANDV was added for a trade given relative underperformance, growing synergies from acquisitions, and a potentially strong near-term outlook for refining profits (2Q18). We pulled that trade on 4/18 after a 17% gain. We believe the refining group may be due for a bounce after underperforming the energy complex YTD and put on MPC as a trade on 4/10/19. However, we maintain our bearish view on refining and earnings estimates continue to come down in the sector. From a valuation standpoint, the Integrated’s may be a better play for those wishing to play the downstream as upstream production appears to be growing. They have lagged the pure refiners, in part due to poor relative operating performance, limited production growth, and dividend concerns which are now in the rear view mirror. They should benefit as do the pure refiners from the IMO 2020 regulations and are not as crowded a trade. WoodMac stated there in not enough 0.5% sulfur fuel oil to replace higher sulfur resid for IMO 2020. The market could be short by 1.5mmbd in 2020. On April 10, we put on MPC for a trade on valuation and a strong start to 2Q19 earnings but remain negative on the group which has significantly underperformed in 2019.

The refiners were on a tear in 4Q17 due to benefits from tax reform, rising 4Q17 EPS estimates, and the Trump Administrations consideration of caps on renewable fuels requirements. Recent dividend increases and stock buybacks have helped. Briefly in November ‘17, higher oil prices and the maintenance of EPA standards for biofuels had put some pressure on the group. US product demand was strong in 1Q18 but higher oil prices have cut into demand since. We took the opportunity to sell into strong 3Q17 results as cracks appear to be at unsustainably high levels along with the WTI/WCS and WTI/Brent spreads. Clearly the group benefits from having defensive characteristics (stock buybacks, dividends, restructuring) that make it attractive longer term investments. Aramco’s long range $18B capital spending plans at Motiva in addition to Iraq’s, Abu Dhabi’s and Kuwait’s downstream expansion plans could spell trouble down the line. The Saudi’s announced an interest in a newbuild 300mbd refinery in China. Global refining capacity is expected to grow by 7.6mmbd by 2022 and by a an additional 12.0mmbd by 2040. Saudi installed refining capacity is expected to be 3.2mmbd by the end of 2018, up from 2.9mmbd by the end of 2016. Aramco’s global capacity currently stands at 5.4mmbd. The Saudi’s announced an interest in a newbuild 300mbd refinery in China. The IEA expects global refining capacity is expected to grow 2.6mmbopd in 2019, the largest increase since 2009. Capacity grew 1.5mmb this past year.

VLCC stocks were mixed Tuesday although rates posted a string advance. Much of the recent rate decline has been seasonal due to the current prolonged refinery maintenance cycle in front of IMO 2020 as well as a high 1H19 delivery schedule for new VLCC’s. Rates rose 3.7% last week after declines of 18.0%, 19.0%, 5.1%, 9.1% and 5.9% the previous five weeks. Prior to then, rates rose 16.0%, 14.0%, and 20% respectively. US exports have fallen the past four weeks, in part due to a back up in the Houston Ship Channel but also to less advantageous spreads. The Saudi’s plan to keep exports below 7.0mmbopd through April and it appears that OPEC-Plus is likely to change policy until June. DHT results were in line but like EURN, adopted a more cautious view about 1H19. ASC and FRO earnings missed but maintained the outlook for product and VLCC tankers was positive. LNG player GLOP reported strong results and raised its distribution two weeks ago, although DLNG cut its distribution 75%. GLNG’s results were strong but GMLP’s missed consensus. Newbuild deliveries had pressuring prices along with the sanctions against Venezuela. From November to January, rates have eroded with the approval of the OPEC-Plus production accord. OPEC production fell in December and has fallen further in January and February. DHT and EURN were actively buying back stock since late December. The stocks had been in a strong upward trend in Sept/Oct. Some believe rising US exports with longer routes will more than offset OPEC-plus production cuts although DOE export figures recovered last week. The EIA, OPEC, and IEA have only marginally lowered global oil demand forecasts. Long haul rates were up 22.1% at $11.6K/D from $9.5K/D on Friday, well below cash breakeven, and off 80% from recent two-year highs of $58K/D just four months ago. Rates rose 147% from mid-September to October 5th ($40.3K/D) and almost tripled for the month of October. Super-tanker traffic to China for the next three months fell by 10 to 85, the lowest level in two months. Short-haul rates were up 5.0%, off recent 2019 lows while clean tanker rates were down 2.8% after setting new 2019 highs in early April. Product tanker stocks were strong (ASC, STNG) but LNG tanker stocks sold off even as rates showed some stability. The stocks had been lifted recently by encouraging US/China trade talks. LNG tanker rates have been under pressure since 4Q18. There has been a significant oversupply of LNG in the Asian markets due to a lack of cold weather and spot tanker rates are now well below last year’s levels. LNG prices have moved to three-year lows. The Middle East VLCC surplus for the next 30 days is expected to fall to 35%, the highest level of the year, from 35% last week and just above the 18% five-year average. Rates posted a stunning reversal in June, trading at 2018 highs in anticipation of an OPEC-Plus plan to raise production but quickly sold off. Tanker 2Q/3Q18 results were dismal but supply/demand fundamentals look to improve in 4Q18. Rate fixtures for 3Q18 showed marked improvement. EURN underscored that 2018 was a record year for VLCC scrappage although that will slow this year. With DHT reporting a better 3Q18 rate environment, we put DHT back on the Spec list on 8/8. We had traded the stock for a one month gain of 19% in late May to June. There is underlying evidence that scrappage in 2018 was well ahead of the total number retired in FY16 and FY17 together. GMS Inc., estimates 210 crude and product tankers were scrapped in 2018, the highest level since 2010 and 1983, due to low rates and the IMO 2020 standards. The newbuild order book appears to be slowing and newbuild pricing is higher, supporting asset values. Earnings comps likely improve starting 4Q18. We expect new vessel capacity entering the market peaks this year with scrappage accelerating and the new order book falling. Over the long term, we like select oil/oil product tanker exposure (DHT, EURN, GLOG) for Chinese import growth, rising global oil demand, potential M&A, a falling order book, and regulations that will force further scrappage. Saudi Arabia plans to increase its refining capacity to 8-10mmbd from 5.4mmbd currently which should be bullish for product carriers but bearish for refiners/crude carries. Global refining capacity is expected to rise by 8.1mmbd by 2021. Product tanker rates fared well in 2017 and supply demand dynamics are in much better balance than the VLCC’s. We added Ardmore (ASC) for product tanker exposure on 2/14 to play global product trade but have removed after sharp losses (35-40%) as the stock did not responded to higher clean tanker rates. The stock fell further but has since recovered. We added EURN as of 10/26 for more liquid exposure to VLCC’s. GLOG was added on 11/28 for LNG transport exposure though ill-timed given the aforementioned weakness in Asian demand.

Positioning (trading history available upon request)

Our energy focus list, by stock and group preference: E&P- APC, PXD, HES, PE, ECA, FANG, JAG, OXY, SU, CXO, XEC, MRO, COG, RRC, trades: QEP, WPX, CLR; Majors: CVX, XOM; Service-NE, ESV, FTI, HAL, PUMP; Tanker: GLOG, DHT, EURN; R&M-trade: MPC. Emphasis continues to be placed on stock buybacks and other returns to shareholders, free cash flow generation, and restructuring efforts. We were at a selective overweight position as of August 13 following the groups relative underperformance since May 8th when we went to market weight from overweight. Clearly the environment for the Energy sector and the overall market changed, thus we moved back to a market-weighting from a selective overweight position as of 12/14/18, looking for technicals to improve both for the commodities and the stocks. That has happened from crude and all the ETF/Indices to date. Only gas prices remain below 50-day MA’s.

2Q19 Moves:

We have removed CNX from the model portfolio on 4/1 due to increasing near-term concerns regarding excess global natural gas supply. We took a loss of 20% on the position. We believe the refining group may be due for a bounce after underperforming the energy complex YTD and put on MPC as a trade on 4/10/19. However, we maintain our bearish view on refining and earnings estimates continue to come down in the sector. APC was removed from the Focus List on 4/15 following the acquisition announcement by CVX due to the significant premium paid. That said we believe CVX got a good deal, therefore, we are keeping it on the list. We are also keeping OXY on the list but have moved it lower as the company showed its hand by bidding for APC. We are taking PUMP off the focus list today, 4/17 due to price performance. The stock is up 100% since December. The company remains are favorite small cap way to play the pressure pumping sector.

1Q19 Portfolio Changes:

FANG has been added to the Focus List on Jan 2 for outsized production growth and recent moves on capex to align closer with cash flow. We further adjusted the E&P focus list on Jan 3, replacing PE with OXY for buybacks, dividend growth, and the prospect of dialing back capex for 2019. FANG is effect is our more direct replacement for PE. WPX has been moved to a trade as we see M&A less likely near term. QEP, our #1 E&P stock, was moved to the trading list following the $8.75p/s all-cash offer from Elliott. The position was reduced by 50% (up from 33%) in the model portfolio on 1/8 with the stock trading above the offering price. On 1/10 we moved HES and MRO down the focus list due to strong performance. On Jan 15, we took COG off the list due to increasing concerns regarding natural gas prices near-term although it has all the characteristics we look for in a gas name. The stock rose 8.5% during the period it was on the focus list compared to a 10.3% decline in the XOP and a 7.9% decline in the IEO. ESV was added post the revised bid for RDC as we want to have more exposure to the offshore drilling sector and like the combined entity. We took FRAC off on 1/23 simply due to too much pressure pumping exposure. On Jan 24th, we removed MPC, leaving us with no pure refining exposure due to concerns regarding earnings with spreads narrowing and mogas cracks collapsing. We took a 7% loss on the position, after converting ANDV into the stock after the merger. We added XOM as a defensive play on refining but more importantly for the potential of upstream performance surprises. On 1/30, we moved the Tanker stocks below the Oil Service group. We like the names but see further downside for rates/earnings estimates in 1H19. On 2/22, we removed NBL and added PE and COG post 4Q18 results and outlooks. HPR was removed on 3/6, not because of company fundamentals, but due to the increasingly hostile regulatory situation in Colorado. We were reluctant to sell the name post the defeat of Prop #112 and paid for it. The stock fell 50%. We added back the 50% we sold in QEP now that it trades well below the $8.75p/s all-cash bid from Elliott Management. It remains in the trading portfolio.

4Q18 Moves:

We added RRC for more gas exposure on (10/25) while removing EQT due to poor upstream execution and lower guidance for 2018/19. RRC is beginning to generate free cash flow and progressive faster on its financial target. A stock buyback may be considered soon. EQT was removed down the list due to poor execution in the upstream, lowered production guidance, and higher capex. While we applaud the restructuring and the focus on free cash, there are concerns about overall production growth and execution. The capex moves are likely more bullish for natural gas prices. A very poor trade having lost 35% in four months. We added EURN on 10/26 to increase our VLCC tanker exposure through a more liquid vehicle. As of 11/13, we moved our favored gas producers down the pecking order simply due to strong relative and absolute performance (COG, CNX, GPOR, RRC). On 11/14 we move QEP off the Spec list and on to the Focus list following the successful sale of the Williston assets which should allow for more stock repurchases. We also removed NFX, belatedly, following the ECA acquisition announcement. NFX has been a disappointing long term favorite within the model portfolio, having lost over 50% in value since late 2016. We removed REN from the trade list on 11/19 following the acquisition announcement by XEC. The gain was roughly 17% over four months, substantially outperforming the E&P peer group over that period. Also on 11/19, we added CLR to the E&P trade list with the expectation the company will be returning capital to shareholders in the near future, probably through higher dividends or a special dividend. We do not believe the company would announce a stock buyback due to the high insider ownership. After discussing long term trends favoring the LNG transport industry for some time, we added GLOG to the model portfolio for exposure on 11/28. We overstayed our exposure in HFC and removed the stock after a loss of 21% as of December 3rd. We removed WRD on 12/10 as we continue to rationalize the E&P portfolio. The selection thesis was correct but the stock trades based on CHK’s performance following the acquisition. We took a 15% loss. PDCE, a longtime E&P holding, was removed on 12/12 as we continue to high-grade the E&P focus list. The stock has been a staple on the list since inception. RDC was taken off the list on 12/13 as part of our continued rationalization of the Focus List. We should have removed it at the time of the ESV acquisition new but we wanted to keep some offshore exposure. Despite the takeout, we took a modest loss on this position. On 12/21, we took down exposure in several names: DVN, GPOR, PTEN, and ASC as we continue to rationalize the focus list. They all have been poor performers since joining the list down as much as 50% since appearing. A majority of these names have characteristics we look for, particularly actions to reward shareholders. However, we continue to narrow our focus list for the difficult environment we said ahead for the stocks. CVX was added for exposure to the Majors. The company has outsized production growth prospects plus a stock buyback program and a growing dividend. Increasingly we believe the majors are an attractive way the play the Permian given their scale and production project acumen. We see little reason to venture beyond the E&P group at this point.

3Q18 Moves:

On July 10, we removed ECR from the Spec portion of the model portfolio after a 3.5-month gain of 41%, the stock is trade close to our back-of-the-envelope NAV of $2.00p/s. On July 30, we added FTI for improving profitability, a stock buyback, and increased leverage to rising Major Oil company project approvals. ERII was removed also on July 30th due to near term earnings concerns and a desire to deploy assets elsewhere. Unfortunately, a bad call on our part, as earnings were better-than-expected and the stock has moved higher. With the arbitrage close, we have converted ANDV into MPC on 7/30. The return was 9.0% on the ANDV trade put on May 2nd. We replaced ERII with FTI on the same day for leverage within the oil service sector to improved profitability, a stock buyback program, and leverage to rising major oil project approvals. We added OXY for a trade on 8/6 for 2Q18 earnings and an update on assets sales, possible stock buybacks. While that transpired, the increased capex in the Permian surprised both us and investors, thus we removed that trading call at a loss of 5%. We added DHT to the Model for improving fundaments in the tanker market post 2Q18 earnings on 8/8. On August 13, we added XEC which looks statistically cheap following the 2Q18 results sell-off. Production growth and capex guidance was unchanged but management appears unwilling to return more cash to shareholders, opening itself up to possible activism. Also on 8/13, we were stopped out of the UPL spec position at $1.10p/s post poor 2Q18 results, taking a substantial loss (45%). We removed EGN August 15th, following the offer from FANG to acquire the company. The gain was 42% over a 21-month period. We added WRD, REN and HPR as trades on August 24th going into the fall conference season post our meetings at Enercom. While not meeting all of our investment criteria, we do believe there is substantial near-term upside. Otherwise, stick with the Model Portfolio names mentioned above. We added ECA to the Model Portfolio on 9/10 as it meets the criteria we look for in E&P names (valuation, visible production growth per share, free cash flow generation, stock buybacks). We are also removing RES to further reduce service exposure, particularly in pressure pumping. R&M moved lower on the preference list (9/19) as the market and we look for move commodity price leverage.

2Q18 Moves:

On April 2, AMR and CDEV were removed from Spec E&P focus. AMR due to 4Q17 results and outlook. While the valuation is attractive, we do not expect the company to be cash flow positive until late 2019. CDEV, while under strong management, also expects to outspend through 2019. DVN is being added for oil production growth, success in asset sales, disciplined spending, and the recently announced stock buyback. ECR has been added back to the Spec list now that the company is seeking strategic alternatives and the stocks 40% slide in 1Q18. We added ANDV for a trade in R&M as conditions appear ripe for a near term move to the upside. We added SU on 4/3 for dividend and production growth as well as stock buybacks and the potential of light/heavy spreads narrowing later this year. We pulled DHT off the Spec List on April 13, after a nominal 5% gain over the past four months. The VLCC sector has held up quite well despite further erosion in long haul rates and the prospect of further negative revisions to earnings. The prospects for further M&A near term have diminished, a major reason for DHT’s inclusion. Our trade on ANDV was removed (4/18) after strong outperformance this month (+17%). This was too soon as the company subsequently received a $152.27p/s offer from MPC om 4/30. We added PTEN on 4/30, albeit late, due to its financial discipline, stock buyback and dividend increase as well as positive outlook and strong positioning in Land Drilling, Pressure Pumping, and Directional Drilling. We returned ANDV to the model portfolio on 5/2 to play the MPC deal arb. We added FMSA as of 5/7 to play near-term improvement in proppant fundamentals. On 5/10 we removed REN and added QEP to increase our exposure to companies selling assets and buying back stock. Simply put we see more catalysts driving QEP’s performance in an extended oil price market. REN advanced 42% since 9/9/17 when it was added to the Spec list. UPL was added 5/15 as a speculative natural gas play. The stock has collapsed by as much as 80% since the beginning of the year while executing its new business plan, drilling within cash flow, with new leadership. On May 29th, we added HFC and DHT as short term plays for the correction in crude oil prices. CVIA (FMSA) was removed 6/4 to reduce our oil service exposure in the current environment. The stock did not react as we expected to the closing of the CVIA deal and the attractive metrics/cost synergies, losing over 10%. DHT was removed on June 21st after a 19% gain in less than one month and a meteoric rise in long-haul benchmark rates. KOS, one of a few exploration-oriented companies on our list, has been removed on 6/26, after the dry hole at Anapai. The stock has been a good but volatile performer since it has been in the Model Portfolio but has suffered a string of exploration disappointments. EQT was added on 6/28 for more gas exposure, ongoing restructuring, and potential for significant free cash flow generation and stock buybacks. The stock faltered recently after a negative pipeline ruling.

1Q18 Moves:

We removed ECA on 1/16, after trading 25% higher since we added on 10/30/17. The company’s long term fundamentals remained unchanged. We added Jagged Peak (JAG) the same day for additional Permian/consolidation exposure. The company has a strong balance sheet and contiguous acreage position in the Delaware. The stock still trades below its early 2017 IPO price of $15p/s. We added AMR to the speculative producer list on 1/22 as the SCOOP/STACK company prepares to complete the merger on February 6th. We are maintaining some natural gas exposure on the speculative side but there has been little appetite to invest. We do believe LT fundamentals are improving and the supply deficit could widen into the shoulder season. Sentiment is as worse as it has ever been as witnessed by the reaction to AR’s and CNX’s analyst day. Perhaps interest will improve in 2H18 when oil prices possibly come under pressure as the OPEC/Non-OPEC accord expires. Gas producers RRC and ECR were reclassified as speculative as a result (1/31). RRX and ECR have been poor performers since they were in the Model portfolio. We closed out our CNX position with a 26% gain over the past 13 months the same day. Clearly a tough month pressure pumping stock performance, as well as E&P’s LPI, PE, and RRC where guidance, regardless of increased financial discipline, has been punished. Those producers are in the penalty box and will likely remain so. We believe the pressure pumpers are oversold and thus remain in the model portfolio. We took CNQ out of the model portfolio and replaced it with HES on 2/1. CNQ has been essentially unchanged since it was in the model portfolio and we see headwinds regarding WCS differentials, natural gas prices, and the overhang from the RDS ownership position. HES has adopted a more disciplined , shareholder friendly approach with stock buybacks. Pro forma production is expect to grow by 10% through 2020 with cash flow growth of 20-30% per annum. The company has 30% exposure to one of the most significant discoveries offshore Guyana, and an activist shareholder base to keep the company on plan. We removed XEC and added APC on 2/9 to increase our exposure to companies with strong financial discipline who are emphasizing returns to shareholders. CNX, GPOR, and COG replaced RRC and ECR for the same reason in the Speculative natural gas camp. Despite the collapse in share prices, there remains an opportunity cost owning most natural gas names. LPI was removed from the speculative portfolio. The stock had been moved the Speculative portfolio after continued execution issues. While we like rising production, lower capex in 2018, we don’t believe LPI will be the first choice for consolidation in the Permian, part of the reason why it was in the model portfolio to begin with. Ardmore Shipping (ASC) was added to the Spec portfolio on 2/14 to participate in a recovery in product tanker rates plus rising refining capacity around the world. On 2/23, we put KOS on the Spec list to make room for COG in the model portfolio. COG continues to set standards for financial/shareholder returns among oil and gas producers. We believe the valuation is attractive and the company can best weather the bearish environment for natural gas. KOS remains one of our favorite international plays but it is more appropriately a speculative name. On 3/13, we moved CNX from the Spec list to the model portfolio following the stock’s 5% pullback after the analyst day. on 3/15, we moved GPOR from the Spec list to the model portfolio as we are increasingly more comfortable with natural gas fundamentals, the valuation and the stock buyback. On 3/29, AMR was removed from the Spec list despite an attractive valuation. Cash flow neutrality is now a late 2019 event with a midstream IPO also likely next year.

2Q19 to Date Review

In the first week in April, Colorado passed new oil and gas drilling regulations to allow local governments more power to regulate industry activity. APC, NBL, BP, XOG, PDCE, COP, SRCI, HPR, and BCEI all impacted. FTI secured a contract to deliver subsea systems to Neptune Energy’s Duva/Gjoa P1 field projects offshore Norway. The contract amount was not disclosed but Upstream suggested the contract was worth $350mm. Reuters reports XOM is considering the sale of its Nigerian assets. The assets could fetch up to $3.0B. The company’s total production in Nigeria for the year 2017 was 225mbopd. Stonepeak Infrastructure Partners is acquiring Oryx Midstream, the largest private midstream crude operator in the Permian, for $3.6B in cash. CXO will receive $300mm for its interests in the system while WPX will net $350mm. WPX management stated the sale may accelerate its plan to return capital to shareholders from 2021. NEXT and RDS entered into a 20-year sale and purchase agreement whereby NEXT will supply RDS 2.0mmta of LNG from its Rio Grande LNG export project. TOT plans to invest $700mm in TELL and the Driftwood LNG project and receive 2.5mmta of LNG from the project. TOT will take a $500mm stake in the project and a $200mm stake in TELL, raising its stake by 19.87mm shares to 65.9mm or 27%. Aramco revealed the giant Ghawar field has a maximum capacity of 3.8mmbopd well below consensus estimates of 5.0mmbopd. The EIA listed the field’s capacity at 5.8mmbopd. The company’s overall maximum capacity is 12.0mmbopd and reserves of 226BBO, a 52-year reserve life at 12.0mmbopd. Rystad Energy estimates the world’s public R&P companies generated $300B in free cash flow in 2018. Almost 70% was returned to shareholders in buybacks and dividends. Bloomberg estimates OPEC production declined 295mbd in March to 30.385mmbopd. Saudi production hit a four-year low of 9.82mmbopd down 280mbd from February. Venezuela’s production fell 180mbd to 890mbopd. Libyan production increased by 200mbd to 1.10mmbopd while Nigerian production rose by 90mbd to 1.92mmbopd. OPEC capacity is estimated at 35.26mmbopd. Tanker Tracker put Saudi exports at 7.052mmbopd in March compared to 7.062mmbopd in February. Iraqi exports averaged 3.711mmbopd in March compared to 4.055mmbopd in February, the third successive monthly decline and an 11-month low. Further blackouts in Venezuela have reduced production to 600mbopd. Bloomberg estimates that country’s exports averaged 636mbopdlast month. Reuters estimated OPEC production in March fell 280mbd to 30.40mmbopd. Russia’s oil production last month averaged 11.298mmbopd, down 0.3% MTM and 120mbd lower than the October base level. Production had been reduced by 225mbd from the October base by month-end. Platts reports the US is likely to extend waivers for four of Iran’s top importers (China, India, South Korea, and Turkey) for an additional six months in early May. However, those importers must reduce purchases by another 20%, pushing exports below 800mbopd from 1.3mmbopd in 1Q19. China’s March manufacturing PMI was 50.5 compared to 49.2 in February. Caixin’s March manufacturing PMI data for China confirmed the official figure, rising to 50.8 compared to 49.9 in February. US February retail sales fell 0.2%, well below consensus and the 0.7% increase in January. February construction spending, however, rose 1.0% compared to consensus of -0.2%. The Markit March manufacturing PMI was 52.4 compared to consensus and February’s figure of 52.5. The March ISM manufacturing number was 55.3, ahead of the 54.5 consensus and 54.2 the previous month. US February durable goods orders fell 1.6% MTM (-1.8% E) compared to a 0.1% gain in January. February capital goods orders fell 0.1% MTM (+0.1% E) compared to +0.9% the previous month. The ADP employment figure for March saw the addition of 129K jobs compared to consensus of 175K and February’s +183K figure. The March non-manufacturing ISM was 56.1 (58.0E) compared to 59.7 in February. March Markit services PMI was 55.3 (54.8E) compared to 54.8 the previous month. The composite PMI was 54.6 compared to 54.3 in February. The Caixin Chinese services PMI for March was 54.4 compared to 51.1 in February, a 14-month high. The official services PMI was 54.8 vs. 54.3. The Eurozone composite PMI was 51.6 compared to 51.9 in February and 55.2 one year ago. The US non-farm payrolls rose 196K for March, above consensus of 175K and 33K reported in February. Wages rose 3.2% YOY. For the week, the Dow was 1.91% higher, the NASDAQ +2.71% and S&P 500 +2.06%. S&P 500 Materials (+4.25%), Financials (+3.33%), , and Consumer Discretionary (+3.23%) lead the markets while the S&P 500 Consumer Staples (-1.04%), Utilities (-0.15%) and Healthcare (+0.26%) lagged. Crude oil prices rose 4.89% (mogas +4.98%), but natural gas prices edged 0.08% higher, off 45% from late November highs and below the 50-day MA. The Energy index/ETF’s performance last week: the OSX +4.86%, R&M +3.62%, the XOP +3.48%, the XOI +2.80%, the XLE +2.25%, and the IEO +2.18%. S&P 500 Energy advanced 2.25%.

1Q19 Review

In the last week of 1Q19, SLB finally acquiesced saying NAM spending would be down 10% this year (HAL: down 6-10%). Russian Energy Minister Novak said the country was on track to reduce production within the OPEC-Plus accord (228mbd) by the end of the month. Oil prices had their best quarter in 17 years, up 32.4%, while natural gas prices have fallen 9.2%, the worst quarter in a year. In 1Q19, the oil rig count declined by 69 rigs to 816. OPEC’s Joint Ministerial Monitoring Committee meets on May 19th. Nigeria’s production has averaged 2.02mmbopd in March, the highest level since mid-2016, with the start up on the Egina field. The EIA reported last week January US oil and natural gas production declined. The IEA estimates global energy demand rose 2.3% in 2018, the fastest pace in a decade. China, the US, and India accounted for 70% of the increase. Natural gas posted the biggest gains accounting for 45% on the increase in energy consumption, growing 4.6% YOY. Oil demand grew 1.3% last year. US February housing starts fell 8.7% MTM to 1,162K (1,210K est). Building permits were down 1.6% from the previous month. January home prices rose 3.58%, below consensus of 3.80% and 4.14% in December. March consumer confidence was 124.1, below consensus of 132.5 and 131.4 in February. China’s industrial profits for the first two months of 2019 fell 14% YOY. US 4Q18 GDP growth was revised lower to 2.2% from 2.6% (2.3%E) compared to 3Q18’s 3.4%. February pending home sales fell 1.0% (-0.5%E) compared to growth of 4.3% in January. YOY sales fell 5.0%. Weekly jobless claims were down 5K to 211K (220K consensus). February personal incomes rose 0.2%, below consensus but above January’s -0.1% reading. January personal spending rose 0.1%, below the 0.3% consensus but higher than -0.6% in December. February new home sales advanced 4.9% to 667K annualized, an 11-month high. Median home prices, however, were down 3.6% YOY. March final consumer sentiment was 98.4, up from the initial reading of 97.8 and 93.9 in February. Ten-year notes traded at low as a 2.36% yield in March. For the week, the Dow was 1.67% higher, the NASDAQ +1.13% and S&P 500 +1.20%. S&P 500 Industrials (+2.85%), Materials (+2.04%), , and Consumer Discretionary (+1.85%) lead the markets while the S&P 500 Utilities (-0.51%), Telecom (-0.50%) and Energy (+0.95%) lagged. Crude oil prices rose 1.86% (mogas -1.57%), but natural gas prices declined 3.31%, off 45% from late November highs and below the 50-day MA. The Energy index/ETF’s performance last week: the XOP +2.26%, the IEO +1.55%, the XLE +0.99%, the OSX +0.97%, the XOI +0.22%, and R&M -1.14%. The higher risk sectors (E&P’s)outperformed for a third consecutive week.

1Q19 US Energy Index/ETF Performance:

S&P +13.6%, OSX +18.1%, XLE +16.2%, XOI +13.2%, XOP +16.2%, IEO +13.1%, R&M +8.0%. Brent crude closed at $68.39bbl (+27.1% in 1Q19), WTI closed at $60.14bbl (+32.4%) and Natural Gas at $2.67mcf (-9.2%). Other 1Q19 performance: Mogas +45.58%. S&P 500 Tech +19.37%, S&P Industrials +16.64%, S&P Real Estate +16.64%, NASDAQ +16.49%, S&P Energy +15.42%, Alerian MLP +14.48%, INDU +11.15%, S&P Materials +9.68, S&P Financials +7.90, S&P Health Care +6.12%.

In late March, the Major corporate news last week was the unwinding of the PVAC/DNR combination, the third deal of significance to be cancelled due to the recent period of low prices. MUR sold its Malaysian assets and announced a stock buyback and yet the stock declined. DOE data was impressive and bullish in practically all respects driving oil prices to new 2019 highs. In 1Q19, the oil rig count declined by 69 rigs to 816. US/China trade talks appear back on track and the Fed moved to a more dovish position. OPEC appears intent to keep production curbs in place until June. Energy Aspects expects China, India, and Turkey to see their waivers to buy Iranian crude extended beyond May 4th. Total waivers are estimated to reduce Iran’s production only marginally to 0.8-1.1mmbopd. Clarkson’s expects offshore rig utilization to improve markedly over the next two years. Utilization is expected to rise 7% to 77% at yearend 2019 before reaching 80% at the end of 2020. Floater utilization is expected to rise from 65% at the end of 2018 to 73% at the end of 2019 and to 79% at the end of 2020. Combined offshore rig utilization stood at 71% in early March, up 2% from February and the highest level in over two year. A federal judge from the US District Court for DC order a halt to new drilling activity on more than 300K acres in Wyoming citing impacts on climate change. The leases were not voided and remanded the BLM to cure the situation. Bids for the GOM lease sale #252 were up 50% from the last two such events at 257 with 30 companies participating. High bids totaled $244mm compare to $178mm last August. RDS won 87 blocks. EQNR has the highest winning bid of $24.4mm for MC Block #801. The EIA released its March Drilling Productivity Report for unconventional production. February production estimates for March were raised for both oil and gas to 8.507 from 8.398mbopd and 78.14 from 77.97bcfd. The April outlook is 8.592mbopd and 79.02bcfd. Oil growth is coming from the Permian, Niobrara and Bakken while gas growth is coming from Appalachia, Permian, and Haynesville. Permian unconventional production was estimated at 4.127mmbopd in March and 4.177mmbopd in April. Well productivity improved most in the Bakken and Appalachia. The DUC count estimates for January actually fell to 8,483 from 8,798 wells last month. The estimate for DUC’s in February is 8,576 wells. The Permian is the largest source of that increase. Alberta has raised its oil output limit by 25mbd in May and in June. In June, producers will be limited to 3.71mmbopd of production. The US January factory orders rose 0.1% (E0.3%), similar to December. Durable goods orders rose 0.3% (E0.4%) compared to 0.4% the previous month. Capital goods orders increased 0.8% in line with estimates and December’s figure. The Eurozone composite flash PMI fell to 51.3 in March, down from 51.9 in February. US February existing home sales rose 11.8% MTM to 5.51mm units annualized, the biggest gain since 2015. Median home prices increased 3.6% YOY. US March Markit flash manufacturing PMI was 52.5 (53.5E) compared to 53.0 last month. The service PMI was 54.8 (55.5E) compared to 56.0 in February. The composite figure was 54.3 compared to 55.5 last month.

In mid-March, oil prices were boosted by OPEC cuts, both voluntary and involuntary and positive DOE/API inventory data. Poor economic data out of Europe lead to yield curve inversion, traditionally a sign of potential recession. Oil prices closed at a new 2019 high on Thursday despite a modestly negative OPEC and IEA Monthly OMR’s and lack of US/China trade news. The IEA left it’s global demand forecasts unchanged for 2018/19 at 99.2 and 100.6mmbopd, respectively, nut sighted sharply slowing demand in 4Q18. Non-OPEC supply for 2018 rose to 62.7 from 62.6mmbopd but 2019 was unchanged at 64.4mmbopd. US production is expected to grow 1.1mmboepd this year after a 1.6mmbopd advance in 2018. The call on OPEC was lowered by 100mbd for both 2018/19 to 31.0 and 30.6mmbopd, respectively. OPEC production for February fell 240mbd to 30.68mmbopd, a four-year low, with 94% compliance. Saudi production declined 100mbd to 10.14mmbopd. Global oil stocks in January rose 8.6MMB to their highest level since November, 2017 (19MMB above five-year average) but early indications point to a sharp decline in February. OPEC has 2.8mmbopd of spare capacity, more than enough to cover shortfalls from Venezuela (1.2mmbopd). The EIA Short-Term Monthly was more bullish than previous reports, principally regarding a slowing of global and US oil supply growth. The 4Q18 earnings season is winding down with mixed results this week. HK effectively put itself up for sale. SND beat and gave a constructive view on the proppant industry in NAM. The Saudis plan to maintain production below 10.0mmbopd in April with exports below 7.0mmbopd. The state of Colorado proposed overhaul of oil and gas laws won approval in the State Senate and is no headed to the House. The IEA raised its forecast for non-OPEC supply growth by 3.3mmbopd for 2024 due to additional production from US shale, Brazil, Norway and Guyana. The US will account for 70% of the growth in global production capacity. Total US liquids production is expected to grow to 19.6mmbopd in 2025 compared to 13.5mmbopd in 2018. Exports of crude oil are expected to expand to 4.2mmbopd over the next five years. Demand for OPEC crude was reduced as a result and will not recover to 2017 levels of 32.0mmbopd until 2024, less than the 33.0mmbopd OPEC was producing prior to production cuts in 2016. Venezuela’s production is likely to fall to 800mbopd this year. OPEC production capacity is set to fall 380mbd to 34.53mmbopd by then but only if Iranian sanctions remain in place. The IEA expects global oil demand to slow but still grow 7.1mmbopd by 2024. The IEA expects upstream capital spending to rise 4% in 2019, similar to 2018’s increase. After some gloomy economic data least week, US retail sales for January rose 0.2% compared to consensus of 0.0%) and December’s 1.6% decline. The US CPI for February was +0.2%, in line with estimates. The core figure was +0.1%, below the estimate of +0.2%. Core inflation rose 2.1% for the year, below expectations of 2.2%. The US PPI for February rose 0.1% compared to a 0.2% consensus. YOY core inflation rose 2.6%. January durables rose 0.4% (B: -0.4%) and capital goods rose 0.8% (B: +0.2%). January construction spending rose 1.3% compared to -0.5% in December. China’s industrial output grew 5.3% for the first two months of the year, the slowest growth in 17 years. US January home sales were 607K annualized, down 6.9% MTM and below consensus of 622K. US February industrial production rose 0.1% compared to the 0.4% consensus and -0.4% in January. February factory output declined 0.4% compared to the +0.1% consensus and -0.5% the previous month. Initial March consumer sentiment was 97.8 (95.6E) compared to 93.8 in February.

The first week in March, The Energy sector was amongst the worst performing groups within the S&P 500. Bloomberg reports Norway is taking measures to divest energy holding from its $1.0Trillion wealth fund. After a year of deliberation, the government approved the removal of 134 companies classified as E&P companies (67 US) but will allow for major integrated companies such as XOM and RDS to remain. The sell-off would total $7.5B. The fund’s largest holdings include EOG, OXY, VLO, CNQ, APC, and PXD according to Platts. Investors continued to digest the XOM analyst day which sent shock waves through the producer and oil services groups. Reduced global economic growth outlooks surprisingly did not put pressure on oil prices. CVX’s analyst day highlighted the growth potential of its Permian position and the potential for added annual returns to shareholders through dividend increases and stock buybacks. CVX and XOM are adding an incremental 600-700mboepd to supply by 2025. DOE data was disappointing but oil markets took it in stride. Prospects for trade and a lower US oil rig count helped oil prices early in the week. China’s February exports fell 20.7% YOY while imports declined 5.2%. YTD exports are down 4.6%. Oil imports rose 2.0% MTM and 22% YOY to 10.27mmbopd. YTD, China’s oil imports averaged 10.17mmbopd, up 12.4% YOY. Natural gas imports fell 22% MTM. The OECD cut its 2019 global forecast for economic growth to 3.3% from 3.5% in November of last year. Kpler estimates OPEC exports fell 669mbd in February to 24.086mmbopd. Russia’s oil production has fallen 118mbopd below October 2018 levels. The country has pledged 230mbd of cuts. OPEC appears to have made significant cuts in production for February. Comments surrounding the trade talks were mixed. The IEA, OPEC and the EIA monthlies were neutral to negative this month. China set its 2019 GDP growth target at 6.0-6.5% from 6.5% in 2018. The Caixin Services PMI for February slipped to 51.1 from 53.6 in January. Libya’s largest field is expected to resume production. The composite Eurozone PMI for February was 51.9 compared to the flash reading of 51.4 and 51.0 in January. The service PMI was 52.8, up from 51.2 the previous month. The Markit US Service PMI for February fell to 56.0 from 56.2 in January. The composite PMI declined to 55.5 from 55.8. US non-manufacturing ISM for February was 59.7 (57.4E) compared to 56.7 the previous month. December new home sales rose 3.7% MTM to 621K annualized (600K E) and 699K in November. The ADP employment figure for February was +183K, below the estimate of 190K and the 300K in January. The Eurozone GDP rose 1.1% YOY in 4Q18, down from an initial 1.2% forecast. The ECB kept rates unchanged and lowered inflation expectations. They lowered Eurozone growth expectations for 2019 to 1.1% from 1.7%. US non-farm payrolls rose by 20K, well below the consensus of 180K and January’s 311K. Unemployment declined to 3.8% from 4.0%. Wages rose 3.4% YOY. January housing starts rose 18.6% MTM to 1,230K annualized, above the consensus of 1,195K and December’s 1,037K.

Late February ended the bulk of the energy earnings season. Most E&P results were in line to slightly better than expectations but the outlooks disappointed. OFS results were below expectations with unclear outlooks for NAM activity. OPEC production appears to have fallen further in February. US oil and gas production actually fell on the oil side while gas production growth slowed in December. The President’s tweet regarding high oil prices early in the week has been offset by solid DOE data, OPEC production curbs, and positive US/China trade talk. As witnessed this week, 4Q18 results have put pressure on the group as investors adjust to the new world of financial disciple with lower growth expectations. CO lawmakers introduces legislation to change the COGCC’s mission to focus on regulating drilling and away from fostering development. The legislation would change forces pooling laws so that 50% on mineral owners must consent to development. Finally, local governments would have more authority to regulate oil and gas operations, including land use, siting, and surface impacts. Those governments could establish setbacks as well. Neutral to negative for the industry (APC in better position given control on minerals interests). Alberta raised its oil production limit by 25mbd to 3.66mmbopd. The limit has increased by 100mbd since January. Rystad reported That US production is on pace to exceed Saudi and Russian production combined by 2025 without external financing. US housing starts for December fell 11.2% MTM to 1.078mm annualized, below consensus and a two-year low. Home prices rose 4.2% YOY, the smallest gain in four years. Consumer confidence for February rose to 131.4 from 121.7 in December. US pending home sales for December rose 4.6%, better than consensus and the -9.5% figure in November. Factory goods for December rose 0.1% (+0.6% consensus) compared to -0.5% in November. US GDP growth for 4Q18 was revised higher to 2.6% from 2.2%. The February Chinese manufacturing PMI fell to 49.2 from 49.5 in January while the service PMI declined to 54.3 from 54.7. January personal incomes fell 0.1% compared to +1.0% in December. December personal spending fell 0.5% compared to consensus of -0.3% and +0.6% in November. The February ISM manufacturing figure was 54.2 compared to 56.6 in January. The manufacturing PMI fell to 53.0 from 54.9. The final February consumer sentiment number rose to 93.8 from 91.2 in January but was below the preliminary figure of 95.5. The Caixin manufacturing PMI for February rose to 49.9 from 48.3 in January.

In mid-February, PE and COG joined the list of companies lowering capex/production guidance with more returns to shareholders. On Thursday, QEP, WPX, SM, XEC, SRCI, NE, FTI, CJ all reported and a number of these names were punished for poor results and guidance. DOE’s were mixed to disappointing. Wednesday, several E&P’s reported (NBL, CLR, FANG, DVN, CXO) with mixed reactions to cuts in production and capex with an increasing focus on returns to shareholders. Service earnings were mostly better-than expected but suggested a tough 1H19 slog. The offshore outlook continues to be more promising but appears tied directly to oil prices. The EIA’s February Drilling Productivity Report for unconventional production was released. No major changes to oil basin productivity while natural gas well productivity increased markedly in Appalachia and the Haynesville. Oil production was revised higher for the month to 8.314 from 8.179mmbopd. The forecast for March is 8.398 with 4.024mmbopd coming from the Permian (Niobrara also showing growth). Natural gas production was revised lower for the month to 77.11 from 77.56bcfd. The March forecast is 77.97bcfd with growth in Appalachia, the Permian and the Haynesville Shale. Kpler estimates Saudi crude exports have fallen to 6.2mmbopd in the first two weeks of February, down 1.34mmbopd from the first two weeks in January. BP’s latest annual energy outlook forecasts oil demand will peak by 2035 (was late 2030’s) at 108mmbopd (was 110mmbopd). The company cut its global oil demand growth outlook for 2020-2025 to 650 from 890mbopd per annum. For 2025-2030, global growth per annum is expected to be 0.32mmbopd, down from 0.58mmbopd. US December durable orders rose 1.2% (+1.7%E) compared to +1.0% in November. The US flash composite PMI reading for February was 55.8 compared to 54.8 in January. The manufacturing PMI fell to 53.7 from 54.9 while the services reading rose to 56.2 from 54.2. Existing home sales for January fell 1.2% MTM to a 4.94mm unit annual rate. The Eurozone February flash composite PMI was 51.4 (51.1E) compared to 51.0 in January. The manufacturing PMI reading was 49.2 (50.3E) compared to 50.5 in January.

Still In mid-February, capex reductions continued along with lower guidance. The reactions to those results/outlooks continue to vary, although free cash flow generation/growth appears to be the central component to outperformance. We have been heartened that investors have looked thru 4Q18 disappointments in some strong long term fundamental favorities like APC and PXD. Service earnings continued to disappoint though the companies do suggest a bottoming. Oil prices received a boost from reports the Saudis would make further cuts to production and exports in March. DOE data and energy agency monthlies were neutral to negative this past week. Optimism on trade and a solution to the government shutdown also supported crude. This week, earnings estimates for companies who have announced reporting dates fell for SLCA, FANG, MDR, LNG, OAS, and CNQ. Estimates rose for the PES, PUMP, CHK, PVAC, and PDCE. Production estimates increased for CHK, PDCE, CLR, and MGY. We are now getting deeper into Energy 4Q18 earnings/guidance season and the results/outlooks have been decidedly mixed. January US industrial production fell 0.6% compared to consensus of +0.1% and +0.1% in December. US December Retail sales fell 1.2% (+0.1% consensus) compared to +0.1% in November. The US PPI reading for January was -0.1%, similar to December and below the consensus of +0.1%. The core rate rose by 0.3%. YOY inflation rose 2.1%. The US CPI for January was unchanged (+0.1%E) compared to unchanged in December. Core inflation was in line at +0.2%, similar to December. YOY, the reading was up 1.6% compared to 1.9% in December while the core figure was 2.2%, unchanged from last month. US December Retail sales fell 1.2% (+0.1% consensus) compared to +0.1% in November. The US PPI reading for January was -0.1%, similar to December and below the consensus of +0.1%. The core rate rose by 0.3%. YOY inflation rose 2.1%. For the week, the Dow was 3.09% higher, the NASDAQ +2.39% and S&P 500 +2.50%. S&P 500 Energy (+4.75%), Industrials (+3.53%), and Materials (+3.36%) led the markets while the S&P 500 Utilities (-0.25%) was the worst performer, followed by Telecom (+1.02%) and Real Estate (+1.06%). Risk was back on after the government shutdown was avoided and US/China trade optimism grew. Crude oil prices rose 5.44% (mogas +8.75%), while natural gas advanced 1.65%, still off more than 45% from late November highs. The Energy index/ETF’s performance last week: R&M +3.66%, the XOI +4.32%, the XLE +5.05%, the OSX +6.40%, the IEO +7.07%, and the XOP +9.31%. The higher risk sectors outperformed for the first time in three weeks.

During the week of Feb 8, producers resumed a pattern of being punished for earnings misses or guidance disappointment (SRCI, CRZO, SWN, APC, NOV, PTEN). Rice hosted on conference call regarding its plan for EQT and their rebuttal to statements made by EQT management last week. Simply, the Rice Brothers are proposing changes to EQT management and the board as they do not see the capability to implement the cost saving Rice wishes to implement. Rice believes well cost savings alone (25%) would generate $500mm in annual free cash flow with upside to those numbers. The saving would be through better well design, longer laterals, wider spacing, and more effective planning. The Rice’s believe they can enhance production by 10%, raise returns and EUR’s by 50%, and lower overall F&D by 30-50%. They believe changes can be implemented quickly and savings can be achieved in the first year. Bloomberg suggested QEP’s $1.725B Bakken sale to Vantage Energy may be renegotiated at a lower price. Elliott Management’s all-cash offer at $8.75p/s is not dependent on closing this sale. SLB has scrapped its bid for a stake in Russia’s Eurasia Drilling. HK shareholder Fir Tree Management (7.2%) sent a letter to the board recommending the appointment of two independent directors and sale of the company. OPEC production declined by 930mbopd to 31.02mmbopd in January according to Bloomberg. This is within 170mbd of OPEC’s goal. The Saudis cut by 450mbd to 10.2mmbopd. Iranian production fell 150mbd to 2.74mmbopd. UAE production was down 110mbd to 3.15mmbopd. Libyan production declined 100mbd to 900mbopd. Iraq pumped 4.69mmbopd, above the 4.51mmbopd target but down 10mbd from December. Russian oil production in January was 11.376mmbopd, up 3.9% YOY but down 0.7% sequentially (11.42). Production is down 42mbd from October. WoodMac expects Venezuelan production to fall 18% to 900mbopd as a result of US sanctions. CNPC expects China’s demand for natural gas to rise 11.4% in 2019, down from its previous estimate of 16.6%, due to slower economic growth. US November durable goods orders rose 0.7%, below consensus of 1.5% and 0.8% in October. Factory orders fell 0.6% (B: +0.3%) compared to a 2.1% decline in October. The Caixin China January services PMI was 53.6, down from 53.9 in December (54.7 last year) but better than consensus of 53.4. The US Markit services PMI for January was 54.2, in line with consensus and the previous month. The composite PMI was 54.4 compared to 54.5 in December. The US non-manufacturing PMI for January was 56.7 (57.1 consensus) compared to 58.0 the previous month. The Eurozone composite PMI for January was 51.0 (50.7E) compared to 51.1 in December and 58.8 last year. The European Commission lowered the Eurozone GDP estimate to +1.3% from +1.9% for 2019 and to +1.7% from +1.8% for 2020.

In late January, XOM and CVX both posted strong results and outlooks boasting the benefits of integration in the Permian. Both are maintaining or increasing their budgets. EIA production growth data for November was negative (11.9mmboepd, 9797.bcfd), however, OPEC production data pointed to significant production cuts in January. US oil rig counts returned to the recent trend of declines after a large increase the previous week. For January, oil prices rose 18.4% while gas prices fell 4.1%. The Fed stated it would be patient regarding any future rate moves. DOE data was much improved over data from the past five weeks. US sanctions against PDVSA supported crude as well. Results were mixed Thursday with COP and VLO sharply higher and CNX lagging, despite results that beat expectations. Financial discipline and measures growth is not the panacea for all E&P companies. Results on Wednesday from HES, HP, and GLOP were better-than expected. Saudi oil production is expected to average 10.2mmbopd in January and fall to 10.1mmbopd in February. The oil minister stated production is likely to remain below its 10.33mmbopd quota for the first half of the year. CVX, VLO and MPC did raise dividends. XOM and CVX where both investing in the downstream to support rising Permian production. Earnings estimates for companies who have announced reporting dates fell for APC, SU, CVE, OXY, PXD, EQT, CXO, MRO, XEC, and PE. Estimates rose for the refiners MPC and HFC. US Home prices rose 4.7% in November compared to 5.0% in October and the slowest pace of growth since early 2015. Consumer confidence for January fell to an 18-month low of 120.2 (124.0E) and 126.6 in December. US December pending home sales fell 2.2% MTM compared to consensus of +0.5%. The January ADP employment figure was +213K compared to +263K in December and consensus of 181K. China’s manufacturing PMI for January was 49.5, up from 49.4 in December and better than the 49.3 consensus. Non-manufacturing PMI rise to 54.7 from 53.8 last month. November new home sales rose 16.9% to 657K annualized (570K consensus). The Caixin January manufacturing PMI was 48.3 (49.5E) compared to 49.7 in December, the lowest level in three years. US non-farm payrolls for January rose 304K compared to 22K in December and consensus of 165K. The unemployment rates rose to 4.0 from 3.9%. Wages grew 3.2% YOY. January US manufacturing PMI rose to 54.9 from 53.8 the previous month. while the ISM figure advanced to 56.6 from 54.3. Consumer sentiment was 91.2 last month compared to 90.7 in December. Most importantly, the Fed signaled it would pause on rate hikes and more QT.

US economic data was better in late January while global readings were weaker. Oil rose even though DOE data continues to be negative. Midland crude sold at a $1.00bbl premium to WTI for the first time in a year due to the prospect of growing takeaway capacity. The EIA expects US crude oil production to peak at 14.53mmbopd in 2031 and remain above 14.0mmbopd through 2040. Last year the estimate was 11.95mmbopd in 2042. HAL’s better-than-expected results failed to impress as the company’s outlook for pressure pumping was cloudy at best. RES’s results dragged that group even lower. That said, pressure pumpers rebounded yesterday. We appear near the end of the short-covering/unwind phase that began late last year just prior to 4Q18 earnings results. The EIA’s drilling productivity report displayed further growth in US oil and gas production. The IMF lowered its estimates for global growth in 2019 to 3.5% from 3.7% (2020 unchanged at 3.6%). The US is expected to grow 2.5% this year and 1.8% next. China is expected to grow 6.2% in 2019. Aramco is looking to make multi-billion dollar natural gas acquisitions in the US according to Reuters. The EIA expects US crude oil production to peak at 14.53mmbopd in 2031 and remain above 14.0mmbopd through 2040. Last year the estimate was 11.95mmbopd in 2042. The agency expects the US to be a net crude and product exporter in 2020. US gas exports will continue to rise. US transport demand will fall by 2.0mbopd by 2050. Rystad Energy expects the US to produce 24mbopd of crude and liquids in 2025, more than Saudi and Russia combined. The capital required per year to achieve that level is estimated at $150-190B per year. FT reported Dealogic stated there have been no debt deals in the in the upstream sector since November. E&P equity sales have raised only $157mm in the past four months exclusive of acquisitions. There have been no IPO’s in over a year. Producers continued to lower production and capex guidance for 2019. US existing home sales fell 6.4% MTM in December to 4.99mm annual units. Sales were up 2.1% the previous month. The Eurozone January composite flash PMI was 50.7 compared to consensus of 51.4, 51.1 in December and 58.8 last January. This is the lowest reading since June 2013. The ECB left interest rates unchanged and stated it would continue to buy back debt post the first rate increase. The January flash composite PMI for the US rose to 54.5 (54.4E) from 54.4 in December and 53.8 last year. This was due to better manufacturing PMI of 54.9 compared to estimates of 53.5 and December’s 53.9 figure. US jobless claims fell to 49-year low, down 13K to 199K, well below consensus of 218K. For the week the Dow was 0.12% higher, the NASDAQ +0.11% and S&P 500 -0.22%. S&P 500 Real Estate (+1.50%), Tech (+1.00%) and Utilities (+0.37%) led the markets while the S&P 500 Energy (-1.45%) was the worst performer, followed by Consumer Staples (-1.39%) and Healthcare (-1.31%). Crude oil prices fell 0.20% (mogas -4.36%), while natural gas declined 8.73%, off some 35% from late November highs. The Energy index/ETF’s performance last week: the OSX -0.66%, the XLE -1.43% , the XOI -1.61%. R&M -2.07%, the IEO -2.38%, and the XOP -3.42%, with defensive names faring a bit better after four weeks of underperformance.

Later in January, GPOR did so as well while announcing a buyback of up to 26% of their stock after an activist called for such action. HSE/CN terminated its $11p/s cash and stock deal for MEG/CN. QEP announced it would explore a move to sell all or part of the company after Elliott managements bid. The situation between EQT and the Rice Brothers continued to heat up. The energy stocks had performed in line with historical patterns of outperformance the first full trading week of the new year with 2018’s laggards outperforming (Service, small cap E&P). The trade talks have boosted both the stocks and the commodities although Chinese trade data was weak for December. The IEA made some slight revisions to demand due to adjustments. Global demand for 2018 was unchanged at 99.2mmbopd, up 1.3mmbopd. next year, demand is expected to be 100.7mmbopd, up 0.1mmbopd and +1.4mmbopd over last year. Non-OPEC supply estimates for 2018/19are now 60.5 and 62.1mmbopd, up from 60.4 and 61.9mmbopd, respectively. However, the call for OPEC last year and this year in unchanged at 31.8/31.6mmbopd. US production is expected to grow 1.3mmbopd this year compared to +2.1mmbopd in 2018. OPEC production fell 590mbd in December to 32.39mmbopd. Saudi production declined 420mbd to 10.64mmbopd. OPEC left its 2018/19 global oil demand forecasts unchanged at 98.78 (+1.50mmbd) and 100.08mmbopd (+1.29mmbd), respectively. Non-OPEC supply for 2018 was revised 50mbd higher to 62.06mmbopd, up 2.61mmbopd YOY. For 2019, supply estimates were lowered by 60mbd to 64.16mmbopd, up 2.10mmbd YOY. OPEC production fell 751mmbopd in December to 31.58mmbopd (Saudi down 468mbd to 10.55mmbopd). Global oil stocks in November fell by 0.7mmb to 2,871mmb, 32mmb below last year but 23mmb above the five-year average. Russia is expected to lower its output by 130mbd in 1H19 to 11.47mmbopd. They are expected to cut production by a total of 228mbopd. North Dakota oil production fell 16mbd in November to 1.376mmbopd, in part due to gas plant constraints, gas capture requirements, and sharply lower completion activity. Completions declined to 63 in November from 135 in September. Well permits fell to 92 in December from 183 in October. The rig count has been steady around 64-68. Rystad Energy estimates US oil shale production will rise 1.5mmbopd by 2020 due to a 10% drop in drilling activity this year. Crude output is expected to rise to 12.7-12.8mmbopd by the end of 2019 from 11.7-11.8mmbopd last month. CNPC estimates China’s 2019 oil demand will grow 6.9% with imports up 9.8%. Natural gas demand is expected to grow 11% YOY while imports rise 14%. China’s production may grow slightly to 190mm tons this year from 189mm tons (3.8mmbopd) in 2018 (down 1% YOU) while gas production is expected to grow 6.3% in 2019 after growing 7.0% last year. Saudi Aramco now expects to launch its IPO in 2021. China’s oil imports for December fell 1.1% sequentially but rose 29.9% YOY to 10.35mmbopd from the record set in November of 10.47mmbopd. Imports for 1018 were 9.28mmbopd, up 10.1% YOY. Natural gas imports rose 31.9% YOY. CO’s Supreme Court overturned a lower court ruling that would have required energy regulators to prioritize public health and environmental concerns when issuing oil and gas permits. The EIA’s Short-Term Oil Outlook was mixed at best with non-OPEC production up dramatically. At least global demand estimates still hover around +1.5mmbopd per annum. The US December PPI was -0.2% compared to consensus of -0.1% and November’s +0.1%. YOY inflation rose 2.5%. The core PPI fell 0.1% compared to consensus of +0.2% and +0.3% the previous month. YOY, core inflation rose 2.7%. US industrial production for December rose 0.3%, better than expectations of +0.2% but below the 0.4% in November. For the week the Dow was 2.96% higher, the NASDAQ +2.66% and S&P 500 +2.87%. S&P 500 Financials (+6.12%), Industrials (+3.30%) and Energy (+2.89%) led the markets while the S&P 500 Utilities (-0.18%) were the worst performers, followed by Consumer Staples (+1.53%) and Telecom (+1.83%). Crude oil prices rose 4.28% (mogas +3.72%), while natural gas advanced 12.36%, a second week of gains, still off some 30% from late November highs. The Energy index/ETF’s performance last week: the OSX +4.66%, the XOP +3.98%, R&M +3.33%, the IEO +3.31%, the XLE +2.95% , and the XOI +2.45%. with the defensive names lagging for a fourth straight week.

In mid-January, earnings/cash flow estimates were raised for VLO and lowered for HES, BHGE, XOM and CVX (HES, XOM, and CVX cash flow unchanged). AR announced a budget of $1.3-1.45B in 2019 compared to $1.35-1.4B this year. Production growth is expected to rise 17-20% to 3.15-3.25bcfd from 2.69bcfd this year. The company had forecasted $150-200mm in free cash in 2018 and $400mm this year. The long-term forecast had been for 18% production growth between 2018 and 2022, 23% debt adjusted with at least $1.6B in free cash flow generated. Now the guidance is 10-15% growth, 10% at $50bbl and $2.85mcf with cash flow neutrality. At $65bbl and $3.15mcf, production would grow 15% with $2.5-3.0B in free cash flow, similar to previous guidance. NBR plans to cut its quarterly dividend from $0.06 to $0.01 in 2Q19. Capex for 2019 is expected to be $400mm (2018 now less than the $500mm guidance). Debt is expected to be reduced by $200-250mm this year as a result. Net debt was reduced by about $230m last year to $3.12B. M&A has returned with the $8.75p/s all-cash bid for QEP by Elliott Management. The Rice Brothers posted a presentation and submitted a letter to the EQT board putting forth their plan to improve drilling efficiencies and boost free cash flow by $400-600mm to over $1.0B per annum with mid-single digit production growth. DE Shaw sent a letter to the EQT board to consider the Rice plan. The board is set to meet with the Rice Brothers later this month. OXY outlines a flat to down capex program with 8%-plus production growth. Estimates were essentially unchanged for the few companies slated to report this month with the exception of SLB which saw negative revisions. SU’s 4Q18 production was 831mboepd, up 12% over 3Q18 but below consensus of 854.5mboepd. No changes to 2019 guidance of 780-820mboepd, up 10% YOY and adjusted for Alberta curtailments with a budget similar to 2018, $4.9-5.6B. RRC reported it will spend $20mm below the 2018 budget of $941mm due to efficiencies and lower costs. Production is expected at 2.15bcfed for 4Q18, below the 2.26bcfed consensus due to MarkWest processing facility downtime. HCLP suspended its quarterly distribution, sees 4Q18 sand volumes at 2.0mmt compared to 2.8mmt in 3Q18 and guidance of 2.3-2.5mmt. The January start to OPEC cuts could not come soon enough for the sector as the hedge fund unwind continued these past several weeks and oil prices fell over 40% in 4Q18. Pemex plans to spend $13.7B in 2019 (78% upstream), up 22.3% YOY. Alberta’s oil production curtailment is expected to remain at 325mbopd for February (8.7%). Norway’s oil and gas regulator expects oil and gas production to fall 2.0% in 2019, the lowest level in 30 years. China’s PPI for December increased only 0.9% YOY compared to 2.7% in November. The figure dropped 1.0% MTM, another sign of a slowing Chinese economy. Platts estimates OPEC production fell 630mbd to 32.43mmbopd in December. Saudi output fell 401mbd to 10.60mmbopd while Iran’s production declined 170mbd to 2.80mmbopd. Iraqi production rose 100mbd to 4.67mmbopd. Drillinginfo estimates US Upstream M&A deals totaled $84B in 2018, the highest level since 2014. XOM stated at a conference that producers have become so efficient that it is difficult to extract extra value by acquiring them at premiums. Management’s current M&A focus is on companies that share geographical, geological or logistical synergies. LNG remains a strong growth platform. Platts Analytics estimates US production will grow 9% or 1.0mmbopd YOY to 11.8mmbopd in 2019, down from 15% or 1.4mmbopd increase in 2018 to 10.8mmbopd. The Permian is expected to grow 20% this year or 664mbopd to 3.99mmbopd, down from the 36% growth rate or 880mbopd to 3.35mmbopd last year. WoodMac estimates a record amount of LNG projects will reach a final investment decision in 2019. The firm is forecasting 60mmta will be approved this year compared to the previous record of 45mmta in 2005 and triple 2018’s 21mmta. According to FT, Eurozone economic growth forecasts have been lowered to 1.6% from 2.0% this year compared to 1.9% in 2018. The World Bank lowered its 2019 global growth estimate to 2.9%, down 0.1% from the previous estimate and 3.0% in 2018. The US is unchanged at 2.5%, China is down from 6.3% to 6.2%. The Eurozone is down from 1.7% to 1.6%. The US non-manufacturing ISM figure for December was 57.6 compared to 60.7 in November and consensus of 58.5. The US CPI for December fell 0.1%, in line with consensus compared to no change in November. YOY inflation rose 1.9% compared to 2.2% last month. Core CPI did rise 0.2%, also in line with consensus and +0.2% last month. YOY, core inflation rose 2.2%, both in line with consensus and previous month.

In the first week of the new year, Bloomberg estimated OPEC production fell 530mbd to 32.62mmbopd on the back of Saudi cuts of 420mbd to 10.65mmbopd. Capacity stands at 35.895mmbopd. Iranian production was down 120mbd to 2.92mmbopd while Libyan production declined 110mbd to 1.00mmbopd. Iraqi production increased by 130mbd to 4.70mmbopd while the UAE’s production rose 80mbd to 3.35mmbopd. Saudi exports declined to 7.253mmbopd in December from 7.717mmbopd in November. Reuters estimates OPEC output for December fell 460mbd to 32.68mmbopd. JBC Energy estimates OPEC production fell 825mbopd in December to 32.43mmbopd and will fall a further 870mbopd in January. Russia’s oil production averaged 11.45mmbopd in December, up 0.7% MTM and 4.5% YOY, a post-Soviet record. Production for the year averaged 11.16mmbopd, up 1.6% compared to 10.981mmbopd in 2017, and is expected to remain unchanged for this year. The EIA released monthly production data for October which pointed to further increases in oil and gas production, both to new records. China’s manufacturing PMI for December fell below 50 to 49.4 compared to 50 in November and consensus of 50. This is the first reading below 50 since 2016. The composite PMI fell to 52.6 from 52.8 last month. Caixin reported China’s manufacturing PMI fell to 49.7 in December compared to 50.2 in November. The December US manufacturing ISM figure was 54.1 compared to consensus of 57.5 and 59.3 in November. This was the lowest level since November, 2016. The December ADP employment figure was +271K compared to consensus of +180K and November’s +157K. Weekly jobless claims rose 10K to 231K compared to consensus of 220K. The December US manufacturing ISM figure was 54.1 compared to consensus of 57.5 and 59.3 in November. This was the lowest level since November, 2016. AAPL’s guidance for 4Q18 revenues disappointed, driving equity markets lower Thursday. Caixin’s December composite PMI for China was 52.2 compared to 51.9 in November and 53.0 one year ago. This reading was the highest since July of last year. China cut the bank reserve ratio by 100bps. The Eurozone composite PMI for December was 51.1, down from 52.7 in November and 58.1 last year, December’s reading was the lowest in over four years. The December non-farm payrolls figure of +312K exceeded consensus and the +176K in November. Unemployment actually rose to 3.9% from 3.7%. Wages grew 3.2% YOY compared to 3.1% in November. The US December composite PMI was 54 compared to 54.7 in November and 54.1 one year ago. The flash reading was 53.6.