People. Ideas. Success.

The Big Questions of 2016: An Update

SECTOR: Energy: Exploration and Production March 1, 2016

We are updating the significant themes of 2016 with 4Q earnings call SUBASH�CHANDRA,�CFA ANALYST
highlights. De-levering remains the primary theme in the space. We prefer subash.chandra@guggenheimpartners.com 212 918 8771
companies that are de-levering proactively, reducing operational leverage
through lower costs and can maintain PDP reserves while spending within MARSHALL�COLTRAIN ASSOCIATE
cash flows. Newfield remains at the top of the list because of last week’s marshall.coltrain@guggenheimpartners.com 212 518 9904
precautionary equity raise, decline in operating costs and a low PDP F&D
cost ($2.19 per mcfe) that should replace PDPs within the 2016 capital
budget of $760mm.

De-levering remains the primary theme

Equity raises, dividend cuts, asset sales, bank redeterminations and
credit rating revisions are all cogs in the de-levering process. While the
immediate goal is to improve liquidity, we believe the sector has to calibrate
leverage to an era of heightened commodity price volatility that has risen
due to OPEC dysfunction and demand concerns. We believe the de-
levering process will continue until credit markets heal. The desire to not
dilute shareholder value is noble, but preserving optionality may be more
valuable.

In our coverage list, Cabot (12% dilution), Devon (16%) and Newfield
(21%) have issued equity since 4Q earnings. Cabot and Devon had short-
term debt outstanding while Newfield did not. Notably, Newfield’s raise was
well-received despite the highest dilution and least necessity (no near-
term debt maturities or bank debt). Our takeaway is that companies with
resource potential can only improve the option value of their inventory by
issuing equity. Newfield’s raise also indicates that eliminating bank debt is
not the main incentive for issuing equity.

Bank debt may not be the only incentive for issuing equity, but it remains
a strong one. The companies in our coverage with meaningful short-term
debt outstanding, including working capital deficits are Antero, Continental,
EP Energy and Whiting. The implied dilution required to eliminate bank
debt and working capital deficits is 19% for Antero and 14% for Continental.
Equity may not be practical for EP and Whiting for whom the implied
dilution is 232% and 123%, respectively.

How will natural gas and oil supply respond to lower prices and
investment?
Natural gas and oil supply could decline 7% and 9%, respectively,
from 4Q-4Q for our coverage list. Few companies have given quarterly
guidance, so 4Q estimates can change as we go. We are directionally
confident, however, and may even see steeper decays if strip prices don’t
improve in the back half of the year. The annual changes are similar with
6% and 9% declines expected on a y-o-y basis in 2016.

(continued on page 2...)

GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 1
 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

Natural Gas Production Oil Production

4Q15 / 4Q16E 4Q15 / 4Q16E
mmcf/d Grow th / Decline mbo/d Grow th/Decline
APC -4% APC 1%
AR 21% AR -48%
CHK -2% CHK -3%
CLR -4% CLR -22%
COG 8% COG 21%
DVN -17% DVN -12%
ECR* -3% ECR* -34%
EOG -6% EOG -8%
EPE -12% EPE -22%
GPOR 32% GPOR -29%
Natural gas and oil supply could decline
NFX -8% 7% and 9% from 4Q-4Q for our
NFX -15%
OAS -26% coverage list, respectively. OAS 1%
RRC -2% We may see even steeper decays if
RRC -3%
RSPP -1% strip pricing does not improve in the RSPP -1%
back half of the year.
SM -11% SM 1%
SWN -22% SWN -11%
WLL -15% WLL -20%
WPX -73% WPX 0%

Total -7% Total -9%

Source: Company Reports, Guggenheim Securities, LLC estimates
*Note: ECR 4Q15 volumes are estimates.

Gas volumes would decline 4% instead of 7% if we restored curtailments of ~ 500 mmcf/d. Chesapeake may have 40-60
mmcf/d of net curtailments remaining in the Marcellus. Cabot has 300 – 400 mmcf/d of volumes curtailed as well, which
may remain so if Constitution doesn’t move forward. Asset sales are less meaningful (Range sold 22 mmcf/d and SM has
guided for the sale of 8 mmcf/d).

The expectation for lower gas supplies has been a reason for our bull case for natural gas. Guidance indicates that large
gas producers such as Anadarko, Chesapeake and Southwestern are fading on the commodity. Perhaps other producers,
mainly Appalachian, can fill the gap but sustained growth could be difficult to accomplish. Warm weather has been a
spoiler to the bull gas call. We had assumed 15% temperature aberrations in our 2.25 tcf winter exit storage forecast and
a normal summer for the 4.0 tcf autumn peak. Unfortunately this week’s weather is expected to be 20% warmer-than-
normal and the Climate Prediction Center effectively declares winter to be over. On the other hand, CPC expects a
warmer-than-normal summer. The shoulder will be typically painful, but there is cause for hope.

The market has yet to be convinced the gas supply trend is negative. The 2016 outlook for declining supplies is
considered temporary and hearing Newfield talk about flush, new joint venture Arkoma gas wells is not helpful. We are
looking to Appalachian pipeline delays/cancellations and the devaluation of excess F/T capacity as an indication of a more
structural change in Appalachian productive capacity. The evidence so far is mixed.

National Fuel Gas delayed Northern Access (140 mmcf/d) by one year to November 2017. Constitution (650 mmcf/d) is
indefinitely delayed. FERC will hold a public hearing on Energy Transfer’s Rover (3.25 bcf/d) in April. The line can be
operational in mid-2017 if approval is given by June and construction begins in 3Q. Atlantic Coast pipeline (1.5 bcf/d)
could also be delayed after the National Forest Service rejected the route. It is scheduled for 2018. We will also look to
Antero’s sale of 1 bcf/d of firm transportation capacity to gauge interest in Appalachia. We would think that significantly
devalued F/T capacity would be a sign to pipelines that capacity is being over-built.

GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 2
 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

What will happen to borrowing base redeterminations this Spring?

The takeaway from our Oklahoma City tour in mid-January was that borrowing bases will be reduced 10%-20% for most
issuers. The situation may have deteriorated since our trip. Troubled companies such as Linn Energy, Ultra Petroleum
and Midstates have swept credit commitments. Major lenders such as JP Morgan and Wells Fargo have taken larger
reserves for their energy loans. Lenders had previously expressed that the energy fallout was contained but recent events
suggest it is rapidly evolving. JP Morgan for instance had expected $750mm of reserves over 18 months if oil remained at
$30. They built reserves by $500mm in just the first quarter.

Companies publicly guiding to borrowing base declines were Whiting and SM. Whiting could have their base re-
determined down by 20%-30%. The current base is $4.0b, $3.5b is committed and $800mm is drawn. SM expects a
decrease to their $2b base with $1.5b committed and $200mm drawn. SM doesn’t believe the borrowing base reduction
will fall below the amount committed. In our February 24 note, we reiterated our Buy (but reduced our PT) in recognition of
SM’s better-than-average debt metrics and ability to sustain PDP reserves through the downturn.

Antero expects an increase to their borrowing base given low F&D/operating costs and improving differentials. The base
is $4.5b, $4b is committed, $707mm is drawn and another $702mm in letters of credit.

45% The implied dilution required to

eliminate bank debt and working capital
39%
40% deficits is 19% for AR and 14% for CLR.
Equity may not be practical for EPE and
35% WLL.
31%
WLL and SM have publicly guided to
30%
% Drawn on Credit Facility

reduced borrowing bases.

25% 23%

20% 18%

15% 13% 13%

12%

9%
10%
6% 6% 5%
5%
0% 0% 0% 0% 0% 0%
0%

Source: Company Reports, Guggenheim LLC estimates

*Note: EOG amount drawn reflects the commercial paper outstanding. The bank line is undrawn.
**Note: WPX amount drawn is pro-forma for announced asset sales. The company has stated it will pay the debt off with proceeds.
***COG and DVN amounts drawn are pro-forma for equity raises

What is the outlook for M&A?

The outlook continues to be grim because E&P debt trades at such large discounts. Our 18 companies are trading in
excess of $100b above equity values implied by backing out the market value of debt from PV10 values using strip.
Mergers can’t afford to make debt values whole and recognize positive equity values at the same time, given current
commodity prices.

Markets are valuing equities as options, which rise in value with volatility and duration. Price volatility is helping option
values. Any duration-extending exercises such as equity raises and asset sales will help valuations until these
opportunities diminish. But companies may have to go at it alone this cycle. M&A candidates should have healthy debt

GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 3
 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

valuations. The companies in our coverage with debt trading at the healthiest levels are Anadarko, Cabot, EOG and
Newfield. The second tier of companies are Antero, Devon, Gulfport, Range Resources and RSP Permian.

What is the outlook and significance of DUCs?

The strategic value of DUCs are increasing, in our view. DUCs allow for stability in volumes and participation in a price
recovery. It will be difficult to reverse declining volumes in 2017 if the momentum is negative in the back half of this year.
Hard-won efficiencies can be reversed if volumes decline for too long. DUCs can mitigate this risk. DUCs were less
meaningful last year because higher rig utilization could enable a price response. But the rig count is expected to decline
for at least another 2 months. As a result, DUCs could play a more prominent role.

The companies in our coverage who are building DUCs through 2016 are Antero and Continental. Most others will reduce
DUCs in 2016 but have meaningful exposure heading into 2017. Chesapeake stands out as planning to reduce their DUC
inventory by 50% this year. Less certain is the economics of the DUCs, or at which price they should be activated. The
Bakken stands out as an area with high DUC inventory (NDIC says 945 wells WOC as of 2/17) but a high activation price
($45 oil or higher).

Expected DUC Trajectory

AR
CLR
WLL
DVN
EPE
NFX
OAS
RRC
RSPP
WPX
APC
CHK
COG
EOG
GPOR
SM
SWN
Source: Company Reports, Guggenheim LLC estimates

GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 4
 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

Companies Mentioned
Ticker Rating Price
APC Neutral $ 37.95
AR Neutral $ 22.85
CHK Neutral $ 2.61
CLR Buy $ 23.18
COG Neutral $ 20.13
DVN Buy $ 19.68
ECR Neutral $ 0.95
ETE NC $ 7.00
EOG Neutral $ 64.74
EPE Neutral $ 1.72
GPOR Neutral $ 24.00
JPM Neutral $ 56.30
NFG NC $ 45.68
NFX Buy $ 27.23
OAS Neutral $ 5.39
RRC Buy $ 23.73
RSPP Neutral $ 23.91
SM Buy $ 9.04
SWN Neutral $ 5.78
WFC Buy $ 46.92
WLL Neutral $ 4.01
WPX Buy $ 4.11
LINE NC $0.42
UPL NC $0.34
MPOY NC $0.23

GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 5
 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

ANALYST CERTIFICATION
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certifies that (i) all of the views expressed in this report accurately reflect the research analyst's personal views about any and all of the subject securities or
issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations
or views expressed by the research analyst.

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BUY (B) - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 10% or more within a 12-month period.
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No price target is assigned.
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Guggenheim Securities, LLC methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected
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on equity (ROE) over the next 12 months.
Prior to 12/8/14, Guggenheim Securities, LLC’s BUY, NEUTRAL, and SELL ratings definitions were as follows (no other ratings definitions were changed):
BUY (B) - Describes stocks that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
NEUTRAL (N) - Describes stocks that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 15% within a 12-month period.
SELL (S) - Describes stocks that we expect to provide a total negative return (price appreciation plus yield) of 15% or more within a 12-month period.

RATINGS DISTRIBUTIONS FOR GUGGENHEIM SECURITIES:

IB Serv./ Past 12Mos.

Rating Category Count Percent Count Percent

Buy 170 61.15% 35 20.59%

Neutral 108 38.85% 4 3.70%

Sell 0 0.00% 0 0.00%

OTHER DISCLOSURES

This research is for our clients and prospective clients only. Other than disclosures relating to Guggenheim Securities and its affiliates, this research is based
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 Energy: Exploration and Production

SECTOR: ENERGY: EXPLORATION AND PRODUCTION March 1, 2016

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Guggenheim Securities, LLC produces "Tactical Trade Ideas" that identify short-term, catalyst-driven trading opportunities impacting companies within the
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Copyright © 2016 by Guggenheim Securities, LLC, ("Guggenheim") a FINRA registered broker-dealer. All rights reserved. The contents of this report are
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GUGGENHEIM SECURITIES, LLC See pages 6 - 7 for analyst certification and important disclosures. Page 7
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Guggenheim Equity Research

AEROSPACE & DEFENSE
Roman Schweizer, Analyst
roman.schweizer@guggenheimpartners.com
202 747 9471
ENERGY: EXPLORATION & PRODUCTION
Subash Chandra, CFA, Analyst
subash.chandra@guggenheimpartners.com
212 918 8771
Marshall Coltrain, Associate
marshall.coltrain@guggenheimpartners.com
212 518 9904
ENERGY: OIL SERVICES & EQUIPMENT
Michael LaMotte, Analyst
michael.lamotte@guggenheimpartners.com
972 638 5502
Eric Loyet, CFA, Associate
eric.w.loyet@guggenheimpartners.com
212 518 9782
ENERGY: POWER & UTILITIES
Shahriar Pourreza, CFA, Analyst
shahriar.pourreza@guggenheimpartners.com
212 518 5862
FINANCIAL SERVICES: INVESTMENT
COMPANIES, COMMUNITY &
REGIONAL BANKS, SPECIALTY FINANCE
Taylor Brodarick, Analyst
taylor.brodarick@guggenheimpartners.com
212 293 2820
FINANCIAL SERVICES: COMMUNITY &
REGIONAL BANKS, PAYMENTS & CREDIT
SERVICES
David Darst, Analyst
david.darst@guggenheimpartners.com
615 208 1224
Ryan Strain, Associate
ryan.strain@guggenheimpartners.com
615 208 1226
FINANCIAL SERVICES: SUPER REGIONAL,
UNIVERSAL BANKS & BROKERS, PAYMENT
& CREDIT SERVICES, SPECIALTY FINANCE
Eric Wasserstrom, Analyst
eric.wasserstrom@guggenheimpartners.com
212 823 6571
Jeff Cantwell, Associate
jeffrey.cantwell@guggenheimpartners.com
212 823 6543
HEALTHCARE: BIOPHARMACEUTICALS
Tony Butler, Analyst
tony.butler@guggenheimpartners.com
212 823 6540
Kaitlin Sandor, Associate
kaitlin.sandor@guggenheimpartners.com
212 518 9868
HEALTHCARE: BIOTECHNOLOGY
Bill Tanner, Analyst
william.tanner@guggenheimpartners.com
212 518 9012
Matthew Lillis, Associate
matthew.lillis@guggenheimpartners.com
617 859 4618
HEALTHCARE: SPECIALTY PHARMA
Louise Chen, Analyst
louise.chen@guggenheimpartners.com
212 381 4195
Brandon Folkes, Analyst
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212 518 9976
Zenah Hasan, Associate
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RETAIL & CONSUMER: CONSUMABLES;
FOOD & DRUG
John Heinbockel, Analyst
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212 381 4135
Steven Forbes, Analyst
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212 381 4188
Jerry Sullivan, Associate
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212 518 9548
RETAIL & CONSUMER: RESTAURANTS
Matthew DiFrisco, Analyst
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212 823 6599
Matthew Kirschner, Associate
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212 518 5859
RETAIL & CONSUMER: SOFTLINES
Howard Tubin, Analyst
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212 823 6558
Paola Duguet, Associate
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212 823 6556
TMT: DATA & COMMUNICATION
INFRASTRUCTURE
Ryan Hutchinson, Analyst
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415 852 6458
Nate Cunningham, Associate
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212 823 6597
Taylor Reiners, Associate
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212 518 9552
TMT: INTERNET
Jake Fuller, Analyst
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212 518 9013
Mickey Gallagher, Associate
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212 823 6562
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CABLE & SATELLITE TV
Michael Morris, Analyst
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804 253 8025
Curry Baker, Associate
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804 253 8029
Case Taylor, Associate
case.taylor@guggenheimpartners.com
804 253 8053

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