Energy Prospectus

Notes below are from John White at Roth Capital.

Once again the ROTH Capital Partners' Energy Team set up on the floor of the George R. Brown Convention Center at our Booth #1628. Though we didn’t hear an exact count of the attendees at the 2018 event it was a no-brainer that attendance was up sharply compared to 2017. And the traffic that stopped at our booth was strong all day Thursday and most of Friday, consisting of long-time acquaintances as well as a strong number of new acquaintances, wanting to share their story or hear about our firm.

In terms of broad themes we noted two: 1) strong interest in buying conventional reserves and production with a healthy proved producing component, and 2) mineral/royalty buyers. We talked with a number of small publicly traded E&Ps and private E&Ps who explained to us their recent efforts to purchase conventional, vertical wellbore producing packages. Alas, we were told, these efforts were frustrated by either too high an asking price or too expensive financing structures or both. Regarding the mineral/royalty buyers, opinions varied on the number of attendees in this category at 2018’s event versus 2017’s event. Some thought there were decidedly fewer compared to 2017 while some thought the number was essentially unchanged.

One takeaway that certainly caught our attention was several executives relating to us the change and overhaul of the business model and financial structures being employed by two very large institutions. One institution is a private equity firm with a very large oil and gas exposure and one is an institution that provides private credit financing. Please call for more details.

There was a good amount of buzz at the Petroquest Energy (PQ-Buy) booth where PQ was showcasing its previously announced entry into an oil focused play in central Louisiana targeting the Austin Chalk formation in Avoyelles Parish, Louisiana. Recent industry interest in this play is on the increase due to an initial EOG Resources (EOG-NC) test well, which PQ states has produced approximately 70,000 barrels of oil during its first 79 days of production. PQ has announced it plans to drill its initial horizontal test well during 2Q 2018. We view this as potentially very positive for PQ. With PQ’s 4Q 2017 production 75% natural gas, and the Louisiana Austin Chalk production to date being approximately 70% oil, this could be an opportunity for PQ to meaningfully increase its oil weighting, from a prospect practically in its backyard.

We heard from several industry professionals about a divestiture package currently on the market by Elevation Resources (private) and which is backed primarily by Pine Brook Road Partners. These assets are in Andrews county on the Central Basin Platform and what makes the package interesting is that the reserves and production are from wells in the Barnett Shale and Devonian formations. Production in this area is primarily from the San Andres formation. Elevation Resources is led by Steven H. Pruett, President and Chief Executive Officer. Mr. Pruett is a friend of ROTH, having participated on our Permian Expert panel at the 2017 ROTH Investor conference.

From Raymond James: "This year, we asked NAPE attendees to share their expected crude oil price exiting 2018 and their forecasted average natural gas price during the full year 2018. As shown below respondents (on average) expect crude oil to exit 2018 at ~$65/Bbl which is well above the futures market at $58/Bbl but below our estimate of $70/Bbl. Attendee expectations for U.S. natural gas were very close to the futures at $2.79/MMbtu (vs futures at ~$2.81/MMbtu). Our gas forecast was slightly lower at $2.75/MMBtu."

"We believe current and projected global oil market supply/demand dynamics warrant crude prices that are more than $10/Bbl higher than the December 2018 futures price. Put as simply as possible, the oil market has been extremely undersupplied for almost a year and we expect further substantial oil inventory drawdowns (seasonally adjusted) to continue through 2018."

"We are constantly amazed to see industry pundits now declare they are now turning more bullish since oil supply and demand are finally coming into balance. The adjacent graph clearly shows an undersupplied oil market for the past year as U.S. crude inventories have declined at a massive ~416,000 bpd versus the 10-year average. Furthermore, the ten-year averages suggests U.S. crude inventories normally build in the first five weeks of the year. So far this year, however, U.S. crude inventories have only built in one out of the five weeks. Yes, U.S. oil supply is growing (and will continue growing), but in our view, the oil market is under-appreciating the rising level of demand and the consequences that falling oil inventories will have upon the physical oil market. That said, it is important to note that U.S. crude inventories should continue to build seasonally for the next few months. Even though we expect these builds to be much lower than normal, the crude markets may remain skittish until actual drawdowns return (probably in April)."