U.S. Oil & Gas Industry Development of both oil and natural gas reserves in the United States is essential to meet future demand for energy The United States currently produces ~11% of global crude oil supply The United States is the largest producer and consumer of natural gas

Oil Market History Lesson 30 Year Chart

Where are we today?

What impacts Oil Prices? Supply and Demand Strength of the U.S. Dollar Global Stability – primarily the Middle

Macro View: Over the long haul, the Supply / Demand Fundamentals will drive up the price of oil Global Demand for energy is “relentless” IEA: Demand for oil is expected to increase by 3.0 million barrels per day from 2014 to Non-OPEC production grow has stopped and is now on decline. U.S. production peaked at 9.6 million barrels per day and will drop to 8.0 million barrels per day by end of Oil “Price Wars” have historically lasted two year. This one is on the same path.

Demand for oil is “Relentless”

U.S Active Rig Count Less New Wells = Falling Production

International Active Rig Count Less New Wells = Falling Production December, 20123,539 December, ,478 December, 20143,570 December, 20151,969 The rate of decline has accelerated since Q1 2015

EIA: Drilling Productivity Report

Total U.S. oil production peaked at 9.6 MMBOPD and now stand at 9.1 MMBOPD: Onshore declines have been offset by offshore increases

Non-OPEC Oil Supply 60% of the World’s Oil Supply

Geopolitical Risk Premium remains part of the equation We are still very dependent on oil supply from the Middle East and N. Africa Iran continues to expand its influence, which is a threat to Saudi Arabia ALL OF THE WORLD’S SPARE OIL PRODUCTION CAPACITY IS ON THIS MAP

What are other analysts saying? Goldman Sachs (Jan. 15, 2016) “The key theme for 2016 will be real fundamental adjustments that can re- balance the markets to create the birth of a new bull market, which we see happening late in 2016.” “Oil will turn into a new bull market before the year is out as the price rout shuts down sufficient production to erode the global glut.” “A flat futures curve near cash costs is historically the buy signal.”

What are the risks? Demand Weakness IEA expects 1.0 MM bbl per day increase Chinese Economy slowdown is a real concern Supply Growth Iran post-sanctions s/b +500,000 BOPD Iraq and Libya: Some growth anticipated U.S. Dollar keeps getting stronger

 The conditions leading to the 2014 oil collapse such as record capex, strong non-OPEC supply growth and weak demand have been reversed.  OPEC’s 2015 supply surge is unlikely to be repeated.  Global decline rate will likely accelerate in 2016 and beyond.  Global inventories remain elevated, and will take at least a year of sizable supply deficits to reduce.  Oil prices are too low to incentivize new supply, the prospects of an oil shortage in 2017 to 2019 are increasing.  Most supply and demand models indicate a balancing market by the 2 nd half of Capex cuts will increasingly impact global supply as we approach  There is an increasing chance that OPEC/Saudi Arabia will act to reduce supply in the next six months if the prices fail to rally above $50 Brent.  OPEC excess capacity is limited, comparisons to the 1908’s are misguided.  Current prices are trading at the cash marginal cost, which has historically represented the bottom for the oil price.  A renewed sharp appreciation in the US dollar from current levels appear highly unlikely. Conclusion “I buy when everyone is selling” - J. Paul Getty