Energy Prospectus

Cut from Simmon's Morning Report dated 7/10/2014:

MACRO
Simmons Fundamental Petroleum Weekly Review (WE 7/4/14):
 Crude Draw: Crude stocks drew by 2.4 mb for the week ended 7/4/14 (roughly in line with
consensus). A large draw on the USGC of 4.2 mb (taking crude stocks to 200.6 mb) was partially offset by a
USWC build of 1.3 mb. These movements were directionally in line with refinery utilization rates. At the
USGC, utilization increased by 1.5% w/w to 94.5% while on the USWC, utilization fell by 0.7% to 80.9%.
As we have been consistently highlighting, with the majority of refinery maintenance out of the way, we
expect refiners on the USGC to run hard over summer and consequently, it is likely that we will see
consistently large draws going forward over the next couple of months. Meanwhile, US imports remained
flat w/w.
 Slight Cushing Build: After a relatively large draw of 1.4 mb in the prior week, Cushing built by 0.4
mb to end the week a little under 21 mb.
 Small Gasoline and Distillate Builds: Gasoline stocks built by 0.6 mb w/w to average 214 mb,
while the consensus view was of a small draw. The build was driven by demand falling by over 0.2 mb/d
w/w while imports rose almost 0.1 mb/d. Distillate stocks were relatively flat w/w compared to consensus
expectation of a 1.4 mb build. There were only small increases in distillate demand and production
supporting the flat w/w figures.
E&P
Simmons E&P Perspectives - 2Q'14 Earnings Preview: With a continued constructive outlook for global oil
and increased policy accommodation on the domestic oil front, the longer-term upside potential and
downside risk for domestic crude oil appears to be in the process of being redefined (see Simmons Oil
Service Ruminations Q2 Possibilities--published 7/9/14). This premise has been amplified in the form of the
FY'17 WTI futures quietly trading around $90/bbl (up ~$7/bbl from last update). Against this backdrop, the
SCI E&P Universe screens substantially more attractive (~35% upside to NAV) than it has for some time.
Although E&Ps have exhibited strong equity performance YTD (EPX up 16% vs. the S&P up 7%), in the
event oil prices continue to normalize in light of the prospect of renewed Libyan production and the stalling
of the ISIS insurgency in Iraq , the stocks will trade lower. In our view this is a trading risk rather than a
fundamental vulnerability and, accordingly, we would be buyer of oil leverage on weakness.

From Simmon's Morning Report dated 7/11/2014

MACRO
IEA Oil Market Report for July: Reduced Call on OPEC 2H'14 . Detailed 2015 Estimates:
 Downward demand and upward supply revisions contribute to a reduced call on OPEC in
2H’14. The IEA adjusted global demand expectations lower based on disappointing submittals from
China, Germany, Italy and Iraq. China added 73 mb (a pace of 0.8 mb/d) to its Strategic Petroleum
Reserves in 2Q. Non-OPEC supply was up an impressive 1.7 mb/d y/y in June, offsetting an OPEC
decline of 765 kb/d. Overdue upward adjustments to the IEA’s US oil supply outlook contributed to a
200 kb/d upward revision to the 2014 supply forecast. The call on OPEC crude for 2H14 declined by
350 kb/d to 30.6 mb/d, yet still exceeds recent OPEC supply of 30.03 mb/d by over 500 kb/d. OECD oil
inventories built by a steeper than normal 44.2 mb in May (5th consecutive monthly build) but remain
well (69.6 mb) below the 5 year average, following a meaningful downward revision to April inventory
data (-29mb).
 2015 Call on OPEC supply flat to down y/y. The IEA is projecting global demand growth of
1.4 mb/d in 2015, compared with non-OPEC supply growth of 1.2 mb/d and OPEC a NGL supply
addition of 0.3 mb/d. The call on OPEC crude supply declines from 29.9 mb/d on average in 2014 and
30.6 mb/d in 2H’14 to 29.8 mb/d in 2015.
 Global oil supply continues to experience volatility. Libya supply averaged 240 kb/d in June,
its 4th consecutive month under 300 kb/d. However, the NOC lifted force majeure at the Ras Lanuf (220
kb/d) and Es Sider (340 kb/d) export facilities and operations have resumed at the Es Sharara (340 kb/d)
field, although it is expected to ramp up slowly as much of the equipment and infrastructure is in
disrepair. The pace and sustainability of supply recovery in Libya remains an open question after a
number of failed restart attempts in recent months. Despite the typical incremental 300 kb/d of seasonal
domestic power demand, Saudi Arabia supply only rose by 70 kb/d to 9.78 mb/d, reflecting reduced
refinery demand in the US, Japan and Europe. Iraq output fell by 260 kb/d in June due to the loss of
production in the North, the closure of the 300 kb/d Baiji refinery, and lower than expected southern
exports due to logistical issues. The majority of Iraq’s major oil fields are located in the south, miles
away from the civil unrest in the north and do not appear to be at risk at this point.
 Plenty of moving parts in the short-term, but uncertainty in Iraq is likely to slow OPEC
supply growth. Iraq is the second largest OPEC oil producer, and it has the most upside to future oil
supply growth of any OPEC country. The IEA’s current projections for Iraq supply show growth from
current 3.34 mb/d, to 4.36 mb/d in 2015, 4.76 mb/d in 2018 and 5.8 mb/d in 2020. In fact, Iraq is
projected to provide 60% of total OPEC supply growth through the end of the decade. This supply
growth assumes massive foreign investment in Iraq by the winners of the bidding rounds held between
2009 and 2012 designed to accelerate the development of Iraq ’s vast oil reserves. The majority of these
field developments are located in southern Iraq , but the threat of civil war within Iraq and the potential
for further destabilization across the region raises questions as to the pace of potential future investment.

Simmons Weekly Natural Gas Review (WE 7/4/14):
 Larger Than Expected Injection: For the week ending 7/4/14, the EIA reported a 93 Bcf
injection which was above the Bloomberg consensus of 90 bcf. Prompt month NYMEX (August
contract) closed down 1% at $4.11/MMBtu for today’s session.
 100 Bcf Injection Streak Ends at Eight: Nearing the halfway point of the injection season, total
storage remains on trend toward our storage expectation of 3.4 Tcf on Nov 1 (in line with the EIA). This
week’s injection again topped the five year average for the week by quite a healthy margin (93 Bcf v 72
Bcf), bringing the cumulative injection (through 14 weeks) to 1,200 bcf vs. 5 year average ('09-'13) of
977 bcf, or 2.28 bcf/d above the 5 year average pace (1,200 bcf - 977 bcf/98 days).
 Weather Forecast Cooler: The 6-10 day forecast below shows a dramatic cool spell focused in
the Midwest but expansive enough to cover rough 2/3rds of the country. If the forecast holds, demand
should fall well below historic norms and allow larger injections to continue through the middle of July.
 Natural Gas Production Growth Remains Focus: As we discuss in our recent note “Simmons
E&P Perspectives - 2Q'14 Earnings Preview”, rapid natural gas production growth has alleviated angst
over lower storage levels. Despite storage projections for Nov 1 remaining below the 5 and 10 year
averages, investors have become immune do to the continued natural gas production expansion.

Global demand has increased by 6 percent since 2008, driven by double-digit consumption growth in every developing region in the world. Global consumption of oil increased by 5.18 million bpd over the past five years, but global oil production only increased by 3.85 million bpd. (BP notes in its Statistical Review of World Energy 2014 that differences between these world consumption figures and world production statistics are accounted for by stock changes and consumption of non-petroleum additives like ethanol.) Further, of the 3.85 million bpd global increase in oil production, the US was responsible for 3.22 million bpd — 83.6 percent of the global total!