Energy Prospectus

Report on this topic from Credit Suisse:
"Permian takeaway concerns have increased since early April as the Midland-MEH
differential has widened to a peak of $20/Bbl currently. Given the uncertainty, Permian focused
E&Ps have underperformed the group while oil prices and XOP rallied, as
widening basis has left Midland prices essentially flat over the past couple months. As all
the Permian operators have provided promises of flow assurance through either firm
transport agreements (FT) or firm sales agreements with 3rd party markers, we’ve seen
questions from investors shifting from “who’s best/worst positioned?” to “what’s baked in?”

"As operators uniformly claim flow assurance, it’s difficult to assess whose barrels
are more likely to face physical constraint and which companies are more willing to
slowdown for economic reasons. Until proven otherwise, investors seem skeptical of
existing 2H18-2019 growth estimates for most Permian E&Ps except for those with true
firm transport agreements (OXY, PXD, WPX best positioned, followed by APC, DVN, EOG
that have FT on a portion of Permian volumes). Companies with Gulf Coast linked firm
sales agreements (PE, PDCE, and QEP) are also relatively better positioned."

If you'd like to see the full report, send an email to me at dmsteffens@comcast.net.

What can remove Permian operational overhang?

Certainly, the best case scenario is for Permian operators to indeed bring production to
market via current marketing agreements and maintain development plans thanks to
higher WTI prices, disproving existing investor concerns. Otherwise, we see two paths
for the market to lift the uncertainty overhang around Permian stocks.

Path #1: The harder way is any signal for potential deferral or slow down of activity
level, leading to negative estimate revisions. As we have shown in the downside
scenario implications above, lower activity would be most impactful to growth estimates
and valuation. We believe company comments, whether official or unofficial, could surface
later in the year if differential remain at or wider than current levels, physical constraints
worsen, or as company evaluate 2019 plans, they could point to a more back-end
weighted than consensus estimates today. Already, ConocoPhillips CEO indicated at a
conference last week that the company is evaluating whether to reallocate capital away
from the Permian as a result of wider differential.

Path #2: The easier solution (albeit with a higher level of market skepticism and only
available to a limited number of companies) may be more firm sales marketing
agreements, such as the one PDCE signed, that provides flow assurance and
removes the uncertainty of a worst-case differential scenario that could put late
2018-2019 operations at risk. PDCE stood out as it was the only E&P that announced a
new Permian marketing agreement with 1Q results. Based on our analysis of that
marketing contract, the terms are overwhelmingly favorable to PDCE due to Brent-linked
nature of the contract (more details below). It's difficult to see contract terms as favorable
as PDCE's is still available today (or rationalize how that was ever an option from
midstream perspective). However, we'd view it as a positive if E&Ps can sign multi-year
contracts even on a NPV-neutral basis today (i.e. In-the-money contract prices in the near
term offset by higher costs in the outer years). Notably, such options are exactly what
FANG is actively evaluating, as the company has publicly stated that they are exploring
ways to leverage their LT commitment on the Grey Oak pipeline to get better than market
pricing in the very near term. We believe the takeaway concerns and perhaps perception
of an exceptionally tight market may be substantially alleviated if more E&Ps follow suit
with new marketing agreements.
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Keep in mind that PDCE is not a pure play on the Permian Basin. Most of their production comes from the DJ Basin.

Credit Suisse adjusted price targets for the companies in our two growth portfolios.

CDEV $22
CPE $14
CXO $168
DVN $45
EOG $120
FANG $140
JAG $14
LPI $9
PDCE $61
PE $36
PXD $245
RSPP $54 < Merging with CXO in Q3
SM $25
XEC $114