Countdown to Natural Gas: Beginning this Year, the Dynamics

of the U.S. Natural Gas Market Will Change Forever

Alan Lammey, Sr. Energy Markets Analyst

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Take A Seat On The Natgas Tour Bus!

I’m Going to Back-up the Microscope and Paint the ‘Bigger Picture’ of

Developments in the Natgas Market

Some Factors Influencing Natgas Prices Energy Headlines

Futures Market Speculators – new futures trading rules (Dodd-Frank/CFTC Rules)

Shale Production – triggered 6 yr bear market in gas

The Economy

Politics/Geopolitics

Gas Relationship to Oil

Climate Change

Pipeline Issues

Production Issues

Capacity Issues

Outages: Gas, Coal, Nukes, Renewables

Storage Inventories

Factors Influencing Natgas Prices: • Most recently, one of the biggest factors that will

influence oil and natural gas in coming months are the tens of thousands of job layoffs by oil field service providers… To name a few, companies such as:

• Baker Hughes (BHI) • Schlumberger (SLB) • Halliburton (HAL) • Weatherford (WFT) Overall: 75,000 Job Losses and Counting in 1 year

Major Decline in Capex Spending…

• Capital expenditure (capex) spending reductions coming from a vast amount of producers as well as oil field service providers. It appears that capex is being slashed by 20% to as much as 60% nearly across the board.

• Almost 50 companies have announced cumulative domestic CAPEX reduction of at least 26% for 2015, from $45 billion in 2014 to $33 billion in 2015.

• And in fact, oil companies such as Halcon Resources (HK) and Laredo Petroleum (LPI) have cut their capex for 2015 by more than 60%.

Oil and Gas Rig Counts Falling off a Cliff

• In October of last year (2014), active working oil rigs stood at 1,609 rigs, according to Baker Hughes data.

• Since then, week after week, drillers have been idling rigs at lightening speed.

• Present the oil rig count stands at only 703 rigs as of Apr 24, which is down 906 rigs or 56% from the peak in October. Never before has the rig count tanked this far, this fast!

• Natgas rigs are down by 30% in the last 12-mos

How Much U.S. Oil and Gas Supply Is There? Oil:

Despite the drop in oil and gas rigs, the result of massive drilling efforts still has U.S. stocks presently sitting at 80-year highs at 489 million barrels. U.S. producing 9.2 million barrels per day!

How Much U.S. Oil and Gas Supply is There? Natgas:

As of December 2014 – U.S. Natural Gas ‘wellhead’ production hit a record of just over 80 Bcf/day. Presently, wellhead production oscillates between 78 Bcf/d to about 80 Bcf/d.

The Gas Fracking ‘Gush Factor’

This is where 70% to 80% of a shale gas well’s initial production is exploited during the first 12 months and then the well transitions to 20% to 30% marginal production thereafter.

The Gas Fracking ‘Gush Factor’ • The ‘gush factor’ will exacerbate gas production declines

in the months ahead. • Producers must continue drilling to maintain same level

of production we’ve been accustomed to seeing in recent years, but they’re not likely to continue to do so due to poor economics.

• Because of the pullback in E&P efforts, it won’t take forever for production declines to begin to show-up at some point later this year and into 2016 and beyond.

• A majority of the ‘Hold by Production’ mandates in many of the areas of the U.S. have been largely met – therefore ‘forced drilling’ activity will be incrementally dying off rather quickly.

Let’s Get on the Bus and Tour Some Price History

Natgas Prices: 2012 vs 2015

No Natgas $5-handle to be Found

• As of Monday, Apr 27 there was not one single $5-handle for natural gas futures going out the way out to 2027, which is where the futures contract offerings end. Furthermore: 2016 Calendar Price: $3.02/MMBtu 2017 Calendar Price: $3.30/MMBtu 2018 Calendar Price: $3.44/MMBtu

The Difference Between 2012 and now…

2012 vs 2015… now Oil and NGLs half-off!!

2012 2015

Natgas $1.90 to $3.00 $2.46 to $3.00

WTI Oil $80 to $110 $40s to $50s

NGL's:

Propane 95-cents 55-cents

Butane $1.53 64-cents

Ethane 33-cents 18-cents

Safety Net of Higher Oil and NGL’s prices isn’t there anymore!

No One Wants to Hedge At Near ‘Record Low’ Prices Yet, Banks Won’t Lend to ‘unhedged’ Oil and Gas Producers...

With Oil and Gas Prices Tanking and no one hedged… Banks Aren’t Lending to Oil/Gas

• Even if some producers wanted to expand production efforts, banks are viewing the Oil and Gas Producer Sector as ‘TOO HIGH RISK’.

• This Further Exacerbates a Problem for the Continuation to Production on a Longer-term Basis…

“When a producer isn’t hedged, it complicates the matter in terms of security on loans, therefore new projects and

completion projects will slow due to the limited availability of credit capital resources. And in fact, many investment firms are not making any new loans at all and are only

maintaining what they already have.” – Ray Perira, Houston Investment Banker

Major ‘Take-away’ 2017 Expansion from Marcellus Region:

• New production that’s on pace to change the scope of the market. • Involves large amounts of new ‘take-away’ and ‘bi-directional’ capacity

expansion that is on target to grow to 15 Bcf/d by 2017, which will flood the U.S. markets with supply. This is HUGE!

• This enormous amount of new supply coming out of the Northeast market is by itself a major disincentive for new gas production projects to occur if all the pent-up gas supply in Marcellus will be moving into various other market areas within a 2 year timeframe.

• Could negatively impact the drilling and production economics for locations as far away as Haynesville, Eagleford (which currently has very unfavorable economics for ‘dry natural gas’), and even the Permian Basin.

The Set-up: Cracks in the Gas ‘Production Foundation’ are Quietly Emerging…

What about the ‘Demand Side’ for NatGas?

Coal-fired Power Gen Plants Closing… Largely Replaced with Natgas Generation..

Growing Industrial Consumption for Natgas

• According to recent Energy Information Administration stats: ‘Industrial consumption’ for natural gas is forecast to increase by 5.6% and 2% in 2015 and 2016, respectively, due to new industrial projects coming online. Demand will predominantly come from the fertilizer and chemical sectors. Demand from the residential and commercial sectors is projected to decline in 2015 and in 2016.

Coming LNG Exports: How much natural gas (or LNG) is the United States talking

about exporting? Answer: Over 65% of what is currently being produced.

According to the applications for natural gas exports found on the Energy.Gov website; as of Apr 2015 it appears that the applications for exports total 47 Billion Cubic Feet a day, most of which has already been approved. This compares to the current dry natural gas production of 72 billion cubic feet a day. In fact, if companies applying for exports build the facilities in 2 years (or less), and little additional natural gas production is ramped up, the US could be left with less than half of current natural gas production for our own use. First LNG Export facility goes online this year in 2015! Cheniere Energy’s Sabine Pass, Louisiana terminal begins operation in late 2015. Other LNG Export Facilities go online incrementally over 2016 through 2018.

The Verdict -- Lets Add It Up: The Production Side: * Oil and Gas Field Services Mass Lay-offs • Major Decline in Capex Spending • Record Rig Count Decline • No Safety Net of High Oil and NGL’s Pricing • Near Record Production (for now) • No Producers Hedged, Banks Not Lending to Oil and Gas Producers for

Expansion • Major Marcellus Natgas ‘Take-Away’ Capacity Expansion by 2017

The Demand Side: • Huge amount of Coal-fired Power Generation Going Offline 2015-17 (largely replaced by natgas fired power generation). • Growing industrial demand for natural gas. • LNG Export facilities going online between this year and 2018.

• The potential for real cracks in the foundation of production to make itself

largely known in early 2016-17. Potential for gas futures: $4.50 to $6.50 +

Questions?

Contact info:

Alan Lammey Senior Energy Markets Analyst alammey@pointlogicenergy.com Ph: 281-658-0395

Thank you!