Texas oil and Gas Association Property Tax Representatives conference commodity price outlook March 7, 2018

Agenda Natural Gas Price Outlook Current Storage Balances and Forward Projections Lower 48 Gas Production Growth Texas Natural Gas Demand Volatility – The Shift From NYMEX to Local Markets Oil Price Outlook Recent Trading Ranges & Term Structure Shape Macro Market Correlation Risk Global Demand Growth Lower 48 Supply Growth – Price Dependency on the WTI/Brent Spread Mid-Cush Differentials

NATURAL GAS STORAGE BALANCES

U.S natural gas storage

U.S natural gas storage – balance projections

balance projection calculation End of March 2018 Market Expectation: 1.375 Tcf Prior Summer (April-October) Injection: 1.739 Tcf End of October 2018 Inventory Level with flat Y/Y S/D: 3.114 Tcf Current Production Growth Rate (Y/Y Winter-to-date Avg): 4.3 Bcf/d Implication of extrapolated Y/Y production growth (cumulative injection): +0.933 Tcf Production growth Adjusted October 2018 Inventory Level: 4.047 Tcf Actual Winter-to-date Weather Adjusted S/D: +2 Bcf/d Realistic End of October Inventory level in current price environment: 3.6 Tcf

LOWER 48 NG PRODUCTION GROWTH

LOWER 48 TOTAL

REGIONAL PRODUCTION

REGIONAL PRODUCTION Dry gas declines continue to outweigh associated gas production growth As a result, overall TX gas production is not in a growth environment Rebounding Haynesville production has unquestionably had an impact on the market However, production growth has waned as Henry Hub prices have fallen back below $3.00/MMBtu

Price impacts on ng production

TX NATURAL GAS DEMAND

TEXAS POWER DEMAND Natural gas consumption in the power sector remains price elastic, and highly sensitive to sub $3.00/MMBtu pricing Additionally, weaker than normal basis pricing will increase the probability of gas fired power plants running ahead of their coal fired counterparts

TEXAS INDUSTRIAL DEMAND Average annual industrial demand growth (NG) in Texas, over the past 6 years, has been +2.1% This is substantially higher than the average U.S. growth rate, which indicates a healthy TX economy despite 2014-2016 O&G price headwinds

Mexican exports

Mexican exports The map at left illustrates recent, and pending pipeline expansions, which will allow for greater deliverability of piped natural gas to Mexico Mexico’s domestic natural gas production has been in structural decline for over 5 years, and at present there are no signs of this trend being reversed At present there is more than 2 Bcf/d of new Mexican natural gas pipeline capacity slated to come online in the next 2.5 years

THE SHIFT FROM NYMEX TO LOCAL MARKETS NG PRICE VOLATILITY THE SHIFT FROM NYMEX TO LOCAL MARKETS

Shifting price volatility

Shifting price volatility

Historical realization vs. forward curve

Historical realization vs. forward curve

NG PRICE OUTLOOK SUMMARY

KEY TAKEAWAYS Price support at $2.75/MMBtu NYMEX is fundamentally driven by both supply and demand side factors Regional pricing in the entire western U.S. gas complex, including Texas, is depressed beyond fundamental support. This is particularly true when considering NYMEX prices have been range bound between $2.50-$3.00 2018 natural gas price realizations are likely to begin reflecting both actual balances, and underlying S/D conditions by mid-to-late Q2

RECENT TRADING RANGES AND TERM STRUCTURE SHAPE WTI RECENT TRADING RANGES AND TERM STRUCTURE SHAPE

WTI Pricing

MACRO MARKET CORRELATION RISK WTI MACRO MARKET CORRELATION RISK

Crude/USD correlation

Crude/Equity correlation

GLOBAL DEMAND GROWTH IMPLICATIONS WTI GLOBAL DEMAND GROWTH IMPLICATIONS

IEA 2018 Global oil demand growth

IEA 2018 Global oil demand growth IEA non-OECD oil demand growth for 2018, is pegged at approximately 1.3 million bbl/d which is slightly better than the long-term average, and importantly the lower bound of market expectations (DOE & OPEC) IEA OECD demand growth for 2018 is substantially lower than both the DOE and OPEC forecast. For reference OECD demand growth has averaged 500K barrels/d for the past 3 years

U.s. oil demand actual

WTI – LOWER 48 SUPPLY GROWTH PRICE DEPENDENCY ON THE WTI/BRENT SPREAD

EIA Petroleum Supply Monthly EIA Weekly Status Report U.s. oil production EIA Petroleum Supply Monthly EIA Weekly Status Report

Rationale for resumed sequential growth

Forward looking indicator

WTI – MID/CUSH DIFFERENTIALS

Realizations vs. benchmark pricing

WTI PRICE OUTLOOK SUMMARY

KEY TAKEAWAYS Oil price support during 2018, and the potential for additional upside tests beyond $65/barrel, will be highly contingent upon an export incentivizing WTI/Brent spread Downside risk over the remained of this year is likely driven by macro trends, such as an equity sell-off, or continually rising interest rates Fundamentals, and A&D activity, indicate that WTI term structure may remain backwardated for the foreseeable future

5847 San Felipe St, Ste 2502 Houston, Texas 77057 713-877-0404 MObius risk group, llc 5847 San Felipe St, Ste 2502 Houston, Texas 77057 713-877-0404 For news, insights and announcements, follow us on Twitter, LinkedIn & our blog.