Energy Prospectus

Another packed house in Denver. It was actually difficult to find a seat for most presentations.

Southwestern Energy (SWN) was first up today:
> It is heading back to our Sweet 16, primarily because I want to add more gas heading into the winter heating season.
> Almost 11 Tcfe of P1 reserves.
> F&D costs are around $1.00/mcfe
> 27% production growth this year. 95% natural gas.
> SWN is the 4th largest gas producer in the U.S.
> One more company using a lot more sand per well completion
> Focusing more capital on Marcellus and Utica where they are getting fantastic results
> Over 5,000 low risk HZ locations in Marcellus and Utica
> They confirmed everything RRC said yesterday about an improving market for gas in SE PA

Blueknight Energy Partners LP (BKEP):
> I was very impressed by this small midstream MLP.
> Asphalt business (44 terminals for storage and blending) does very well when oil prices are this low
> They also have crude oil storage at Cushing, pipelines and trucking services
> Strong capital partners are sponsors
> 1.3 DCF coverage
> Candidate for our High Yield Portfolio
> Current yield on common units is 8.4% (tax deferred) and they have preferred units
> Goal is to raise distributions 10% each year

QEP Resources (QEP):
> Has Sweet 16 potential
> Sold assets in 2014 for $3.5 Billion and they now have a rock solid balance sheet
> 4 TCFE of P1 reserves
> Running 8 drilling rigs today, down from 21 in 2014
> One area in Williston Basin (South Antelope) and Permian Basin are still generating good returns on investment at today's oil price.
> Well diversified assets and production mix

Lonestar Resources (LNREF):
> I need to do more work on this one. CEO said they will host a luncheon for us in late September in Houston
> Company has main office in Dallas
> 30,000 net acres in the Eagle Ford. Half is Tier One.
> Current production is ~6,000 boepd
> Well hedged for this year and 2016
> Capex now being funded from cash flows
> Lots of running room in the Eagle Ford
> Brazos co. LH block very close to some great wells recently announce by Apache in there "Area A".
> JV in Williston Basin

Gastar Exploration (GST):
> Capex in Q3 and Q4 being funded by operating cash flows
> $145 million in Liquidity and confident their credit facility will be confirmed because 12 new Oklahoma wells will add a lot of P1 reserves
> If GST can get $2.50/mcf for their gas in 2016, cash flow (net of dividends) will be $65 million.
> IMO both preferred stocks are rock solid

Attendees were very interested in what Gastar had to say about STACK, especially after CLR said STACK was their next big billion barrel oil play:
> Gaster will spud their first STACK well in early Sept.
* DVN and NFX plus several smaller companies are getting outstanding wells in the Meramec all around GST leasehold
* GST has 136 HZ Meramec locations and 213 HZ Woodford locations within their LH
* Woodford is more gas than oil, so GST will focus on Meramec first

Sabrina will e-mail EPG members the slides Russ spoke from today.

GST is hosting our luncheon in Houston on Friday, Sept. 4. Register early as I will cutoff attendance at 120.

Continental Resources (CLR) is definitely an "Elite Eight":
> Outstanding operating results in first half of 2015, coming in $150 million under budget.
> The "BIG THREE" are Bakken, SCOOP, and now STACK.
> STACK is new kid
> SCOOP now moving to development stage. Density test look great. Focus on determining proper distance between wells.
> CLR formed a JV to fund NW Cana. It is above their STACK zones. CLR keeps 100% of STACK. NW Cana adds proven reserves and cash flow "on someone elses money"
> Bakken plan is called "coring up" as CLR will focus on low cost pad development of Tier One leasehold
> If WTI goes to $60/bbl in 2016, clr will generate free cash flow.

PS: I was not able to get into the Cimarex Energy (XEC) presentation, but attendees told me they are also very bullish on SCOOP and STACK.

PetroQuest (PQ):

If you believe gas prices will firm up this winter (as I do), then PQ is a small-cap that you should take a hard look at. They sold some assets in Oklahoma to shore up the balance sheet and I think the Wall Street gang read it as desperate move, but they just wanted to have money to develop their Cotton Valley leasehold where they have over a TCFE of potential. HZ wells in this area come on at 12-15 MMcfe per day and don't have high decline rates. At $2.50/mcf, the RORs are good.
PQ also has a "Home Run" at Thunder Bayou.
PQ has over $2.00 cash per share on their balance sheet and the stock closed at $1.23 today.
This puppy is a double in six months if gas goes to $3.50/mcf this winter.

We will publish an updated profile in PQ early in Sept.

Vanguard Natural Resources (VNR):
> Two mergers (Legacy & Eagle Rock) have confused Wall Street
> 16% annual yield at today's unit price
> LINE going to zero distributions has caused selloff of all upstream MLPs
> CEO: "Confident they can hold distributions at current level through 2016."
> Post mergers, VNR is going to have a great set of assets.
> Eagle Rock gives them exposure to SCOOP and STACK
> Pinedale operated by UPL and QEP (outstanding operators). Pinedale well costs coming down. Each well adds 5 Bcf of proven reserves.
> VNR hiring over 100 people from EROC
> VNR drilling two Haynesville HZ wells this year
> VNR has good production mix

I thought VNR gave a reasonably good presentation as well. Today it's going down in flames. I suspect there's some forced liquidation by a fund. Likely a good buying opportunity.

It would be nice to have CNBC discuss some of the positives from the conference. So far I haven't heard a word as the entire energy sector takes a leg lower. I guess they would rather speculate about what the Fed's next move is on the interest rate.

I stopped by the CNBC studios last week. Appears their take is oil is going to $20 a barrel

If oil goes to $20 there will be a complete shut down of drilling. There is a slide in a recent RRC presentation that shows that U.S. oil production will drop by 2.4 million barrels per day if we stop drilling.