Technological & Investment Trends in the Energy Sector: 2017 Joseph R. Dancy Faculty Advisor SMU Spindetop Fund SMU’s Dedman School of Law & Cox School of Business Manager, LSGI Venture Fund L.P. LSGI Advisors Inc.

2017 Trends in the Energy Sector Service Sector Crude Oil & NGL Markets Natural Gas Markets

Energy Services Sector ‘U.S. Shale Oil Wells Get Bigger and are Drilled Faster’ Drilling is becoming much more efficient with technological advances Average per horizontal well Rystad Energy Consultants; Financial Times

These trends extend across all major shale plays Companies are drilling longer laterals and are using more frac sand per foot These trends extend across all major shale plays HIS; Raymond James Research

The trend extends to the Oklahoma STACK and SCOOP reserviors also. More proppant intensity improves the type curve and recoveries, and improves initial test results. The trend extends to the Oklahoma STACK and SCOOP reserviors also. “In core areas of the Permian and Eagle Ford basins of Texas, the amount of crude produced per foot of pipe in the ground has risen between 70-120 per cent from 2012 to 2016, with further gains to come in 2017, according to consultants Wood Mackenzie.” (Financial Times) Newfield Exploration; HIS; Raymond James Research

More fluids are being utilized to inject added proppant into the longer laterals. Meanwhile the rig count is recovering. Average per horizontal well Baker Hughes; Rystad Energy Consultants; Financial Times

While proppant demand is segmented total demand is increasing – and is expect to continue to increase over the next few years A typical shale well in the Permian would use $350,000 worth of frac sand in 2016. Rising prices, longer laterals, and higher intensity could mean that the bill rises to between $800,000 and $1 million this year. Wall Street Journal; Fairmont Santrol Holdings; HIS; Raymond James Research

Raymond James & Associates (Feb. 21, 2017): The topic of utmost importance and current relevance was service cost inflation in 2017. As can be seen to the left, group expectations are currently for ~19% inflation this coming year. Currently, we are modeling ~25% service cost inflation for 2017. Raymond James Research

Proppant Stocks Have Run Wild! 12 Month Chart Select proppant stocks versus crude oil price (USO ETF)

Pressure Pumping Stocks Have Done Well 12 Month Chart 12 Month Chart Select service sector pressure pumping providers versus crude oil price (USO ETF)

Liquids: Crude Oil & NGL Markets Global Oil Demand Growth is Relentless Demand is Inelastic Short Term Geopolitical Issues Abound Note the Volatility Firms can Hedge to Reduce Risks IEA forecast: Global crude oil demand will grow by 1.4 million barrels per day (1.5%) in 2017 after growing 1.6 million bbl/day in 2016 Source: IEA; U.S. Energy Information Administration

Meanwhile crude oil and petroleum product exports are a record levels. U.S. crude oil production has declined with the rig count but has stabilized and now is recovering. Meanwhile crude oil and petroleum product exports are a record levels. U.S. Energy Information Administration

With the shale development natural gas liquid production has spiked and NGL exports are also setting records. Meanwhile NGL prices have stabilized and are increasing. The largest surprise in earnings calls has been how strong NGL prices have become. U.S. Energy Information Administration

Crude oil stocks remain elevated which has depressed prices Houston NAPE participants were not optimistic with regard to 2017 pricing trends – but many industry analysts are much more optimistic that supply and demand will push prices higher in 2017 Raymond James; U.S. Energy Information Administration

Chart of selected oil and liquids producers versus crude oil (USO ETF) 12 Month Chart Equities of oil and liquids rich producers have generally performed well over the last year but have had a volatile ride. Chart of selected oil and liquids producers versus crude oil (USO ETF) SMU Spindletop Fund

Natural Gas Markets Like crude oil, natural gas production is on a strong uptrend. And like natural gas liquids and crude oil natural gas exports are setting records. Demand is being driven by power sector demand and for environmental and economic reasons. Source: U.S. Energy Information Administration

Natural gas exports are expected to continue to increase by both traditional pipeline and liquefied natural gas transport “The United States is expected to become a net exporter of natural gas on an average annual basis by 2018, according to the recently released Annual Energy Outlook 2017.” U.S. E.I.A. Source: U.S. Energy Information Administration

While natural gas storage is dropping to more ‘normal’ levels infrastructure for natural gas and liquids lines will continue to be built out. “The seven projects certificated during the first few weeks of 2017 include more than 1,500 miles of natural gas pipeline construction and expansions, involving combined additions of more than 7 Bcf/d of capacity.” U.S. E.I.A. Source: U.S. Energy Information Administration

Raymond James & Associates (Feb. 21, 2017): NAPE survey “expectations for natural gas came in slightly lower than our estimate for 2017 as well as the current strip. Specifically, NAPE attendees expect gas prices to average roughly $2.93/MMBtu vs. RJ and Strip at $3.25 and $3.31, respectively.” Source: Raymond James & Associates

Concluding Thoughts: If the rig count continues to creep upward the energy service sector should perform very well in 2017 Regardless of rig count, the increased proppant intensity and longer laterals will boost demand for frac and ceramic sand. Prices will most likely increase in 2017 to allocate supplies as new facilities are brought online Increased natural gas, NGL and crude oil production means more volumes will be transported, and more system upgrades and extensions Based on fundamentals crude oil prices should creep upward toward $60 - $65 a barrel year by year end Natural gas markets should remain steady, but growth in exports and domestic demand should push prices slightly higher starting in the fall of 2017 Natural gas liquids prices will surprise substantially on the upside in 2017

Contact information: Joseph R. Dancy SMU Maguire Energy Institute jdancy@smu.edu 214-263-5201 Presented to: The Pipeline Opportunities Conference Houston, Texas March 21, 2017