Natural Gas Price forecast raised by Stifel

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Stifel: Tightening Natural Gas Market

Declining supply and steady demand growth underpin a strengthening natural gas market and cause us to raise our 2H16
forecast 10% to $2.90, 18% above consensus.

Much of the current storage surplus is attributable to an extreme El-Nino that created an extraordinarily warm 2015/2016
winter. However, adjusted for heating degree days, the market appeared to be 3-5 Bcf/d tighter y/y last winter. Recent
below normal injections confirm the same trend. Assuming the market remains undersupplied by ~4 Bcf/d y/y during the
summer and weather is normal, storage would end the injection season on 11/1/16 at 4.0 Tcf. While still near the high end
of the 5-year range, this would eliminate the surplus vs last year.

U.S dry gas supply is down approximately 3% y/y and 4% from its February 2016 peak while demand continues to grow.
Assuming next year’s winter is normal, the market could quickly become undersupplied and prices could exceed our 2017
forecast of $3.10. However, this scenario is likely to attract additional investment, reverse a production decline, and
temper any potential winter price spike.

Balance Sheets Remain Challenged
While YE16 debt metrics improve slightly with our new 2H16 gas price forecast, many balance sheets remain stressed.
For example, we project YE16 average debt/2016 EBITDA for our small cap group of 8.0x while 7 of our 21 mid and large
cap groups are expected to exceed 3.0x.

Capital Plans Unchanged Despite Improved Returns
Core areas within the Permian Basin, Bakken, Eagle Ford, Niobrara, and Anadarko Basins are generating returns above
our threshold PVI10 of 1.2x based on recent strip prices. Likewise, the strongest portions of the Appalachian Basin and
other gas prone areas are generating comparable wellhead returns based on recent natural gas strip prices. Despite
improved prices and acceptable rates of return, most management teams have indicated to us that they need to see
further evidence of an oil and gas price recovery before they contemplate any change to their 2016 capital plans.