Energy Prospectus

Notes from Raymond James Energy Sector Team below 4-23-2021

While many of those who are, like ourselves, Texas natives would love to put Winter Storm Uri behind them (along with memories of blackouts,
busted pipes, and a lack of running water), for a few operators it was a boon. In fact, Comstock Resources (CRK/Not Covered) described it "like hitting the jackpot" as it allowed the company to capture natural gas realizations of between $10 to $179/mcf during the storm. Looking
at our coverage, Continental stands as a big winner with management using the windfall profits from the storm (and our estimated $6/mcf+ 1Q21natural gas price) to lower net debt by $600M in the first quarter while at the same time funding its $215M Powder River Basis acquisition.
Among other beneficiaries, Marathon reported realized gas pricing of $6.30/Mcf while Apache saw U.S natural gas realizations soar above the $4/bbl mark.

Others experienced more muted impacts to realizations with Antero Resources (AR) guiding to a ~$0.35/mcf improvement in natural gas diffs due to volumes sold in the Midwest/Gulf Coast during the storm and Diamondback (FANG) seeing realized pricing a touch above $3/mcf. These much improved and, at times, exorbitant prices were the result of the sub-zero temperatures, snow, blackouts, road closures, and other technical issues knocking
out a substantial portion of production at the time of the greatest need for it (wind/solar power generation mostly offline).

Although the higher pricing of natural gas was an unabashed positive, it was, as we said, partially the result of lower output as well as increased
demand. Thankfully, we have not heard of any permanent damage caused by the storm and most of the production taken offline was brought
back in a matter of days or weeks, not months. For example, Matador's management said that at its height the storm knocked out ~30% of its
production, but due to efforts to rapidly bring production back online the impact to the quarter was a mild ~4% of volumes. Others in our coverage
who have quantified the impact on first-quarter production include the following: Devon (~8% of volumes), EOG (4% of volumes), Cimarex (up
to 7% of volumes) Conoco (50 Mboe/d or ~3% of volumes), Continental (~2% of production, 60% oil), Laredo (~5% of volumes), and Occidental
(25 Mboe/d or ~2%). As you can see, the storm's impact to production was pretty mild for our coverage with ~8% of volumes being the largest
estimate provided. This is obviously going to affect revenue (less oil to sell), but what may be less understood is the impact on margins as fixed
LOE costs are spread over a smaller base. In fact, RJe LOE in 1Q20 is ~5% above RJe LOE for the year as a whole due to the lower base as well as
some delayed workovers that were pushed into 1Q21 from 2020. As you can see, the negative impacts of the storm were mild and contained while
the positive of sky-high natural gas pricing created a windfall event for others.

More from RJ:

Theme #2: Capital discipline in a $60+ WTI world leads to massive FCF generation

When 2021 budgets were announced our expectation was that our entire E&P coverage would opt for maintenance mode and simply reap the
benefits of the recovering crude strip. Now with a quarter of the year behind us, our expectation remains the same. Assuming the current strip
(low $60s WTI in 2021) persists for the remainder of the year, our coverage is set to generate total FCF of nearly $32B with an implied reinvestment
rate of 47%. Looking ahead to 2022, we anticipate more of the same. Capital discipline, FCF generation, and shareholder returns remain priorities
with double-digit production growth largely in the past. Despite the backwardated strip, our coverage's hedge exposure declines dramatically
in 2022 enabling the group to finally realize the full benefit of the recovery in the strip. Although the current strip is averaging in the high $50s
in 2022 we don't anticipate a significant ramp-up in activity for the group. We anticipate the majority of our coverage opts to maintain capital
discipline with many having stated long-term maximum growth rates of 5%. Consequently, we're modeling total capex increases just 10% y/y,
but FCF generation actually expands to a whopping $37B all while the reinvestment rate remains constant below 50%.

Recall that during 4Q20 earnings, nearly half of our E&P coverage either implemented the dividend, raised the base dividend, and/or announced
mechanisms for the variable dividend. With reinvestment rates below 50% for the near future, the group should continue to have significant
flexibility to increase shareholder returns.