Oil & Gas Price Forecast

[dan_s]

A Step Closer to Bottom, Lowering Price Forecast from Stifel industry update dated December 1, 2015

Fundamentals Dampen Geopolitical Risk

Escalating tensions between Russia and Turkey and a divided policy in Syria that could potentially lead to a broader
conflict have thus far had little impact on oil prices. Instead, a persistent market share battle within OPEC has prolonged a
supply/demand imbalance, pushed global inventories to record levels, and dampened numerous geopolitical risks
emanating from the Middle East. It appears highly unlikely that OPEC will alter its strategy at this Friday’s meeting
although the debate should be heated. While we continue to expect oil market fundamentals to improve in 2H16 and
2017, they could weigh further on prices over the next six to nine months barring a significant supply disruption.

Lowering Price Forecast
We are lowering our 4Q15 and 1H16 NYMEX oil price forecast to $43.50 and $45.00 (9% to 16% below Street
consensus) from $45.00 and $50.00, respectively. We are maintaining our near-consensus 2H16, 2017, and long-term
projections of $55, $60, and $70. We are also lowering our 4Q15, 1H16, and 3Q16 NYMEX natural gas price forecast to
$2.35, $2.50, $2.75 (6% to 16% below Street consensus) from $3.00. We are maintaining our 4Q16, 2017, and long-term
projections of $3.00, $3.00, and $3.50 (2% to 12% below consensus). The changes cause us to lower our 4Q15 and 2016
EPS/CFPS/EBITDA estimates an average of 32%/6%/5% and 29%/6%/6%, respectively (Figures 2 and 3).

2H16 Rebalance Still On Track
Assuming Iran adds 0.5 MMBls/d next year and OPEC production remains flat with current levels, supply and demand
should balance by 4Q16. Balancing the global market long-term (2018 and beyond) will require increased non-OPEC
supply even if demand growth slows to its historical norm of 1.0 MMBls/d/yr. U.S shale is positioned to capture a
significant portion of this market although growth will require higher than current strip prices.

Natural Gas Production Growth Slowing
Like U.S. oil volumes, we expect U.S. natural gas production growth to slow in 2H15 based on the aggregated forecast of
our 33-company universe (Figure 21). Unlike oil, we think the pause is due more to temporary pipeline takeaway capacity
issues and curtailed volumes than it is to reduced drilling activity. Accordingly, we look for natural gas production to
rebound as additional capacity comes onstream and/or northeastern U.S. differentials improve.

Buy High Quality
We would not wait for oil to bottom before buying high quality large-cap stocks such as EOG, CXO, NBL, XEC, and PXD.
Mid -caps that are financially well positioned include MTDR, SM, NFX, GPOR, PDCE, and SYRG. Our large and mid-cap
groups are currently valued at 66% and 63% of our risked NAV estimates (Figure 13). The implied incremental upside in
our small-cap group, valued at 54% of risked NAV does not warrant the additional risk at this point in the cycle.
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U.S. production of oil and gas is now on steep decline. 3rd quarter U.S. crude oil production was down ~360,000 BOPD quarter-over-quarter. I believe it will continue to drop by AT LEAST 100,000 BOPD each month as long as WTI stays under $60/bbl. Drilling budgets are being slashed as more companies go into "hunker down" mode. No matter what happens at the OPEC meeting on Friday, the global oil market is rapidly heading back to a balance and there is now a risk of demand exceeding supply by the end of 2016.

To confirm production decline see: http://www.eia.gov/petroleum/drilling/#tabs-summary-2

[bearcatbob]

Natural Gas Production Growth Slowing
Like U.S. oil volumes, we expect U.S. natural gas production growth to slow in 2H15 based on the aggregated forecast of
our 33-company universe (Figure 21). Unlike oil, we think the pause is due more to temporary pipeline takeaway capacity
issues and curtailed volumes than it is to reduced drilling activity. Accordingly, we look for natural gas production to
rebound as additional capacity comes onstream and/or northeastern U.S. differentials improve.

Mind boggling!

[dan_s]

A lot of the growth in natural gas production has been coming from the associated gas of the horizontal oil wells. Since there are so many fewer wells being completed, gas production is falling in all basins except for the Utica and a bit from the Permian Basin. You can see the decline by basin at: http://www.eia.gov/petroleum/drilling/#tabs-summary-2

Keep in mind that outside of these seven large basins there is almost no drilling activity with the exception of SCOOP/STACK