PD F&D and RODD PD F&D and RODD Increased; Data Suggest the Need for Higher Natural Gas Prices

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1 PD F&D and RODD 2011 PD F&D and RODD Increased; Data Suggest the Need for Higher Natural Gas Prices 2011 PD F&D increased versus 2010, but 2011 estimated returns still went up. Though PD F&D and RODD measure costs for all projects (oil, NGLs, and natural gas combined), the data suggest that the gassy companies (and gassy projects) generally need $5+ gas prices to achieve adequate rates of return. The group return for 2011 appears to be just above the cost of capital, and this return assumes ~$100/Bbl oil and $4.12/Mcfe gas for estimating future cash flows. This note summarizes our estimates for PD F&D and RODD. PD F&D higher on service costs. The median PD F&D (ex leasehold) was $3.15/Mcfe in 2011, up 18% from $2.68/Mcfe in Higher service costs and a greater focus on oily and liquids-rich gas plays, which tend to have higher F&D costs and generally are early stage, offset greater efficiencies from more mature, gas-weighted operations. Oil & Gas Exploration & Production / Natural Gas Joseph Allman, CFA AC Jeanine Wai (1-212) jeanine.wai@jpmorgan.com Jessica Lee (1-212) jessica.s.lee@jpmorgan.com J.P. Morgan Securities LLC Higher RODD. The median return, as measured by RODD, increased to 12.5% in 2011 from 11.0% in The increase likely is due to more oil, NGL, and liquidsrich gas production which helped realize better average prices, thereby improving cash margins. PD F&D: A good measure of capital efficiency. PD F&D captures the cost to find and fully develop reserves. The main shortcoming of traditional F&D is that it includes PUDs, reserve volumes for which operators have not incurred drilling and completion costs. 13 companies of the 38 we follow include a PUD conversion table in their 10-Ks. This table has all the data we need to calculate the changes in PUDs and PD reserves. Other companies provide most of the data in text form or upon request. For companies that do not disclose the data, we need to make assumptions about the % of PD reserves acquired, sold and revised from the prior year. We encourage E&P companies to provide the data to more accurately calculate PD F&D (% revisions, acquisitions and divestitures that are PD; % PD by country; and other necessary items). RODD: The returns a company generates from the PD F&D investment. PD F&D is an important measure of capital efficiency, but we think investors should focus on rates of return. Our analysis indicates a good correlation between return measures (RODD and ROIC) and stock price performance. A company could have low F&D costs but relatively low returns or, conversely, high F&D costs and relatively high returns. Return on drilling dollars (RODD) is the expected IRR from a company s E&P (mainly exploration and development) capex. Besides PD F&D (capital investment), a company s operating cash margins and timing of cash flows (PD reserve life) affect the returns it achieves. Need for >$5/Mcf natural gas. In our RODD calculations, the average gas price we assumed to calculate a future cash margin is around $4.12/Mcf. Some gas-weighted companies achieve good returns using this price assumption, but many do not (Tables 8 and 9). The fact that many do not get double-digit rates of return on $4.12 Henry Hub gas, and the fact that these operators likely are some of the most efficient in the industry, suggests a need for a higher gas price for the industry. See page 13 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 2011 PD F&D We calculate proved developed finding and development cost (PD F&D) in two ways: All-in PD F&D and Ex-leasehold PD F&D. The All-in measure includes all capital costs except proved property acquisition costs. One could think of All-in PD F&D as a full-cycle F&D calculation. The Ex-leasehold measure excludes acquisition of unproved property (i.e., leasehold acquisition costs). All-in PD F&D might be a better measure of full-cycle economics, whereas Ex-leasehold PD F&D could be a better metric for current economics. For All-in PD F&D, we use a five-year average for the costs associated with the acquisition of unproved properties. We average leasehold costs because, while the cost of leasehold can be significant, companies do not always add proved developed reserves in the same year that they incur the leasehold costs. To bring oil and natural gas to production, operators need to lease land, conduct predrill activities (prepare the drilling site and infrastructure and possibly shoot seismic) as well as drill and complete wells. The most significant E&P capital costs are the costs of drilling and completing wells. The PD F&D metric tries to incorporate all capital costs associated with bringing oil and gas reserves to production. PD F&D also tries to match the timing of PD reserve adds with the timing of capital costs. Since companies have incurred little or no cost in adding PUD reserves, we exclude PUD reserve adds in the PD F&D calculation. Only when companies convert those PUDs to PD reserves by drilling and completing the PUD wells do those reserves become a part of the PD F&D calculation. We estimate that 2011 Ex-leasehold PD F&D increased 18% yoy and is above the three-year average (see Table 1). 2

3 Table 1: Ex-leasehold PD F&D (Ranked Lowest to Highest for 2011) $/Mcfe Rank Ticker E Antero - $3.12 $1.54 $0.84 $ WPX KWK UPL SWN EQT APC RRC QEP COG PQ XCO CHK DVN CRZO PXD BRY PETD SD CXO VQ XEC EOG CLR NFX GDP DNR SM LPI APA SFY PXP NBL WLL PVA AREX ATPG NA NA MMR Median $3.25 $2.86 $2.68 $3.15 $2.88 Source: Company reports, J.P. Morgan estimates. PD F&D costs include capitalized interest and G&A because these costs are included in exploration, development, and/or acquisition of unproved properties costs. *Note: As far as we know, BRY, VQ, NFX, CRZO and SFY have not disclosed the PD % for Reserves Sold, PD % for Reserves Acquired and/or PD % for Total Revisions. CIE excluded because it has no booked reserves. Antero is not part of the JPM E&P equity research coverage list; it has publicly traded debt but not equity. 3

4 Table 2: All-in PD F&D (Ranked Lowest to Highest for 2011) $/Mcfe Rank Ticker E Antero - $5.43 $2.52 $1.15 $ UPL SWN WPX EQT APC KWK QEP COG RRC PQ DVN BRY XCO PXD PETD SD VQ CRZO XEC EOG CXO CHK CLR SM NFX GDP LPI SFY APA DNR NBL WLL AREX PVA PXP ATPG NA NA MMR Median $3.63 $3.54 $3.12 $3.58 $3.42 Source: Company reports, J.P. Morgan estimates. PD F&D costs include capitalized interest and G&A because these costs are included in exploration, development, and/or acquisition of unproved properties costs. *Note: As far as we know, BRY, VQ, NFX, CRZO and SFY have not disclosed the PD % for Reserves Sold, PD % for Reserves Acquired and/or PD % for Total Revisions. CIE excluded because it has no booked reserves. Antero is not part of the JPM E&P equity research coverage list; it has publicly traded debt but not equity. 4

5 From 2003 to 2006, the group s Ex-leasehold PD F&D increased 2.0x (see Table 3). However, over the past five years the median Ex-leasehold PD F&D has been more variable, ranging between $2.68 and $3.25/Mcfe. 2011E median Ex-leasehold PD F&D increased 18% yoy to $3.15/Mcfe, likely due to increased service costs and a shift to earlier-stage liquids plays. Liquids plays tend to cost more, and the earlystage plays more than offset any greater operating efficiencies from more mature gasweighted plays. Table 3: Historical PD F&D $/Mcfe Year Median Ex-Leasehold PD F&D Median All-in PD F&D 2003 $1.61 $ E Source: Company reports, J.P. Morgan estimates. Figure 1: 2011E Ex-leasehold PD F&D $/Mcfe $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Antero WPX KWK UPL SWN EQT APC RRC QEP COG PQ XCO CHK DVN CRZO PXD BRY PETD SD CXO VQ XEC EOG CLR NFX GDP DNR SM LPI APA SFY PXP NBL WLL PVA AREX ATPG MMR Source: Company reports, J.P. Morgan estimates. Antero is not part of the JPM E&P equity research coverage list; it has publicly traded debt but not equity. 5

6 Table 4: Ex-leasehold PD F&D by Market Cap $/Mcfe Large caps 2011E 2010 PD F&D PD F&D SWN $1.67 $1.70 APC $1.91 $1.62 CHK $2.43 $2.25 DVN $2.47 $2.96 EOG $3.46 $3.24 APA $4.54 $4.44 NBL $6.12 $9.22 Median $2.47 $2.96 Source: Company reports, J.P. Morgan estimates. Mid caps 2011E 2010 PD F&D PD F&D WPX $1.48 $1.99 KWK $1.58 $1.51 UPL $1.67 $1.80 EQT $1.84 $1.48 RRC $2.07 $2.01 QEP $2.12 $2.59 COG $2.14 $1.46 XCO $2.26 $1.46 PXD $2.95 $2.27 SD $3.09 $1.89 CXO $3.20 $2.32 XEC $3.33 $2.44 CLR $3.84 $9.52 NFX $3.91 $2.09 DNR $4.06 $2.95 SM $4.17 $4.16 PXP $5.11 $5.40 WLL $6.69 $2.99 Median $3.02 $2.18 Small caps 2011E 2010 PD F&D PD F&D PQ $2.20 $3.88 CRZO $2.73 $1.18 BRY $2.99 $2.93 PETD $2.99 $4.09 VQ $3.22 $5.61 GDP $3.93 $2.76 LPI $4.51 $3.37 SFY $4.64 $3.00 PVA $6.82 $1.52 AREX $7.11 $11.65 ATPG $10.10 $6.87 MMR $ $49.55 Median $4.22 $3.63 Some of the larger diversified E&Ps, especially those with long lead time development projects, might have a few years of very high PD F&D because of significant capital expenditures before booking PD reserves. These costs should decline meaningfully as the companies begin adding PD reserves. 6

7 RODD PD F&D is a useful measure by itself, but we view the metric as just the first step in determining which of the companies added value through their operations. Once we derive a company s PD F&D, we calculate the rate of return we expect the company to achieve on its drilling-related investment. We call this measure the return on drilling dollars, or RODD. A company s PD reserve life index (PD RLI) determines the timing of its future cash flow. Companies with shorter PD RLIs get cash from their capital investments quicker than those with longer PD RLIs. For this reason, companies with longer PD RLIs generally need lower PD F&D costs to get the same or better rates of return. 7

8 Table 5: RODD Rankings by Company $/Mcfe 2011E 2011E 3-year Forward 2011E Rank Ticker RODD Ex-leasehold PD F&D Cash Margin PD RLI 1 APC 51.5% $1.91 $ x 2 DNR 49.1% $4.06 $ x 3 CXO 38.5% $3.20 $ x 4 CLR 30.3% $3.84 $ x 5 CRZO 26.4% $2.73 $ x 6 BRY 25.7% $2.99 $ x 7 WPX 21.4% $1.48 $ x 8 LPI 20.5% $4.51 $ x 9 RRC 16.8% $2.07 $ x 10 VQ 16.3% $3.22 $ x 11 EOG 15.5% $3.46 $ x 12 PXD 14.9% $2.95 $ x 13 UPL 14.8% $1.67 $ x 14 XEC 14.8% $3.33 $ x 15 SD 14.8% $3.09 $ x 16 QEP 14.3% $2.12 $ x 17 APA 14.3% $4.54 $ x 18 PXP 13.7% $5.11 $ x 19 SWN 11.2% $1.67 $ x 20 PQ 10.7% $2.20 $ x 21 PETD 10.6% $2.99 $ x 22 NFX 9.6% $3.91 $ x 23 SM 9.4% $4.17 $ x 24 DVN 9.2% $2.47 $ x 25 COG 8.9% $2.14 $ x 26 CHK 8.9% $2.43 $ x 27 WLL 6.6% $6.69 $ x 28 GDP 6.6% $3.93 $ x 29 EQT 5.8% $1.84 $ x 30 SFY 5.2% $4.64 $ x 31 KWK 2.8% $1.58 $ x 32 NBL 2.2% $6.12 $ x 33 ATPG 0.0% $10.10 $ x 34 AREX (1.0%) $7.11 $ x 35 PVA (1.3%) $6.82 $ x 36 XCO (13.2%) $2.26 $ x Median 12.5% $3.15 $ x Source: Company reports, J.P. Morgan estimates. *Note: As far as we know, BRY, VQ, NFX, CRZO and SFY have not disclosed the PD % for Reserves Sold, PD % for Reserves Acquired and/or PD % for Total Revisions. CIE excluded because it has no booked reserves. MMR excluded from RODD calculation. We estimate that the long-term cost of capital for the group is close to 10%. Therefore, a RODD of less than 10% usually means a company is destroying value. E&P companies, which typically focus on single-project rates of return, need to concentrate on total enterprise rates of return, in our view. A focus on total enterprise rates of return might lead companies to invest only in the highest-returning projects and distribute more cash back to shareholders. Table 6 shows our estimate of 2011E, 2010, 2009, 2008, 2007 and three-year average returns generated from capital spent on developing reserves. 8

9 Table 6: Return on Drilling Dollars (RODD) Using Ex-leasehold PD F&D E Rank Company RODD RODD RODD RODD RODD RODD 1 APC 20.5% 10.8% 14.8% 64.6% 51.5% 18.9% 2 DNR 30.0% 25.9% 68.4% 25.4% 49.1% 23.2% 3 CXO 58.2% 73.9% 85.5% 64.0% 38.5% 36.1% 4 CLR 16.9% 11.2% 44.0% 0.0% 30.3% 14.8% 5 CRZO 14.8% (3.3%) 56.9% 66.0% 26.4% 20.6% 6 BRY 12.4% 15.2% 26.8% 27.7% 25.7% 19.3% 7 WPX 0.0% (2.2%) 0.0% 2.4% 21.4% 2.3% 8 LPI NA (7.4%) 10.7% 34.9% 20.5% 20.6% 9 RRC 11.8% 1.2% 10.7% 11.3% 16.8% 7.6% 10 VQ (8.5%) (14.9%) 3.6% (1.9%) 16.3% 5.4% 11 EOG 23.9% 6.2% 7.1% 13.7% 15.5% 9.6% 12 PXD 2.6% 3.3% 15.9% 16.3% 14.9% 10.6% 13 UPL 21.2% 14.3% 13.4% 8.6% 14.8% 10.5% 14 XEC 5.8% 0.0% 28.4% 26.4% 14.8% 14.3% 15 SD 1.8% 1.6% (3.4%) 29.2% 14.8% 8.7% 16 QEP 5.4% (10.0%) 6.1% 4.4% 14.3% 6.1% 17 APA 21.2% 14.3% 14.3% 14.8% 14.3% 11.2% 18 PXP 0.0% 3.6% 3.5% 7.1% 13.7% (1.8%) 19 SWN 0.0% 0.0% 4.8% 4.5% 11.2% 4.6% 20 PQ (14.5%) (11.6%) (7.2%) (6.0%) 10.7% (6.0%) 21 PETD 8.7% (5.2%) (10.2%) 0.0% 10.6% 0.0% 22 NFX 1.8% 3.6% 11.6% 30.8% 9.6% 11.2% 23 SM (3.5%) 2.1% 2.2% 5.5% 9.4% 2.6% 24 DVN 11.9% 0.0% 3.1% 2.9% 9.2% 3.0% 25 COG 5.0% (2.0%) (0.0%) 10.7% 8.9% 3.7% 26 CHK 6.2% 1.4% 5.9% 4.8% 8.9% (4.8%) 27 WLL 7.1% 13.4% 21.9% 36.1% 6.6% 14.8% 28 GDP (15.5%) (12.1%) 0.0% 15.7% 6.6% 4.8% 29 EQT 6.1% 0.6% 2.4% 5.4% 5.8% 3.5% 30 SFY 6.1% 8.2% 25.3% 19.6% 5.2% 6.6% 31 KWK 7.5% 4.6% 2.7% 0.9% 2.8% (0.9%) 32 NBL 15.2% (3.4%) 0.0% (6.0%) 2.2% (3.8%) 33 ATPG (27.4%) 0.0% 0.0% 28.5% 0.0% (12.5%) 34 AREX 8.2% 8.0% (2.2%) (5.0%) (1.0%) (3.1%) 35 PVA (5.6%) 0.0% 5.0% 31.2% (1.3%) 5.1% 36 XCO 22.5% (5.4%) (7.8%) 0.0% (13.2%) (11.6%) Median 6.2% 1.3% 5.4% 11.0% 12.5% 5.8% Source: Company reports, J.P. Morgan estimates. *Note: As far as we know, BRY, VQ, NFX, CRZO and SFY have not disclosed the PD % for Reserves Sold, PD % for Reserves Acquired and/or PD % for Total Revisions. CIE excluded because it has no booked reserves. MMR excluded from RODD calculation. The shift away from dry gas drilling to more oil and liquids-rich gas drilling apparently has lead to improved returns for the group. The RODD calculation assumes a production profile that has all reserves produced in 3x the PD RLI. Additionally it assumes that half the reserves are produced in 1/2 the PD RLI. For instance, a company with a PD RLI of 10 will produce its 2011E PD reserve adds in 30 years (3x the 10-year PD RLI) and will produce half of those 9

10 reserves by the end of year 5 (1/2 the 10-year PD RLI). This production profile approximates a hyperbolic-type curve (see Figure 2). Figure 2: Assumed Production Profile (PD RLI = 10 years) A Source: J.P. Morgan estimates. Point A: Years = 50% of PD RLI Cumulative Production = 50% of PD Reserves Point B: Years = 3x PD RLI Cumulative Production = 100% of PD Reserves B The three-year forward cash margin is spread across the production profile and is used as the cash flow for the IRR (RODD) calculation. Our calculation of the 2011E group RODD at 12.5% suggests that RODD has increased and is above the 10% cost of capital. Figure 3: RODD Ranking 55.0% 45.0% 35.0% 25.0% 15.0% 5.0% APC DNR CXO CLR CRZO BRY WPX LPI RRC VQ EOG PXD UPL XEC SD QEP APA PXP SWN PQ PETD NFX SM DVN COG CHK WLL GDP EQT SFY KWK NBL ATPG (5.0%) AREX PVA XCO (15.0%) Source: Company reports, J.P. Morgan estimates. 10

11 Table 7: RODD by Market Cap Using Ex-leasehold PD F&D Large Caps 2011E 2010 RODD RODD APC 51.5% 64.6% EOG 15.5% 13.7% APA 14.3% 14.8% SWN 11.2% 4.5% DVN 9.2% 2.9% CHK 8.9% 4.8% NBL 2.2% (6.0%) Median 11.2% 4.8% Mid Caps 2011E 2010 RODD RODD DNR 49.1% 25.4% CXO 38.5% 64.0% CLR 30.3% 0.0% WPX 21.4% 2.4% RRC 16.8% 11.3% PXD 14.9% 16.3% UPL 14.8% 8.6% XEC 14.8% 26.4% SD 14.8% 29.2% QEP 14.3% 4.4% PXP 13.7% 7.1% NFX 9.6% 30.8% SM 9.4% 5.5% COG 8.9% 10.7% WLL 6.6% 36.1% EQT 5.8% 5.4% KWK 2.8% 0.9% XCO (13.2%) 0.0% Median 14.8% 11.0% Small Caps 2011E 2010 RODD RODD CRZO 26.4% 66.0% BRY 25.7% 27.7% LPI 20.5% 34.9% VQ 16.3% (1.9%) PQ 10.7% (6.0%) PETD 10.6% 0.0% GDP 6.6% 15.7% SFY 5.2% 19.6% ATPG 0.0% 28.5% AREX (1.0%) (5.0%) PVA (1.3%) 31.2% Median 10.6% 19.6% Source: Company reports, J.P. Morgan estimates. *Note: As far as we know, BRY, VQ, NFX, CRZO and SFY have not disclosed the PD % for Reserves Sold, PD % for Reserves Acquired and/or PD % for Total Revisions. CIE excluded because it has no booked reserves. MMR excluded from RODD calculation. 11

12 Gas Conclusion Using Ex-leasehold PD F&D, the table below shows that the gassiest companies need an average gas price of around $4.81/Mcf to achieve a ~10% RODD and around $5.14/Mcf for a ~15% RODD. Table 8: RODD Analysis for Gassiest Companies Using Ex-leasehold PD F&D RODD Avg. RODD Avg. RODD Avg. Actual Pricing ~10% Pricing ~15% Pricing Company (%) ($/Mcfe) (%) ($/Mcfe) (%) ($/Mcfe) CHK 8.9% $ % $ % $5.97 SWN 11.2% $ % $ % $4.08 COG 8.9% $ % $ % $5.40 EQT 5.8% $ % $ % $5.24 XCO (13.2%) $ % $ % $5.11 KWK 2.8% $ % $ % $6.95 UPL 14.8% $ % $ % $4.32 WPX 21.4% $ % $ % $5.01 PQ 10.7% $ % $ % $5.14 Median 8.9% $ % $ % $5.14 Source: Company reports, J.P. Morgan estimates. The "Gassiest" companies are those with at least 80% gas production. Alternatively, when using All-in PD F&D (full-cycle F&D), it appears that the gassiest companies require $5+ gas. The table below shows that these companies need average gas prices of around $5.41/Mcf and $5.88/Mcf to achieve RODDs of 10% and 15%, respectively. Table 9: RODD Analysis for Gassiest Companies Using All-in PD F&D RODD Avg. RODD Avg. RODD Avg. Actual Pricing ~10% Pricing ~15% Pricing Company (%) ($/Mcfe) (%) ($/Mcfe) (%) ($/Mcfe) CHK (1.7%) $ % $ % $8.75 SWN 6.6% $ % $ % $4.25 COG 5.2% $ % $ % $5.89 EQT 4.8% $ % $ % $5.61 XCO (19.6%) $ % $ % $6.32 KWK (0.0%) $ % $ % $8.27 UPL 12.8% $ % $ % $4.59 WPX 11.2% $ % $ % $5.63 PQ 2.6% $ % $ % $5.88 Median 4.8% $ % $ % $5.88 Source: Company reports, J.P. Morgan estimates. The "Gassiest" companies are those with at least 80% gas production. Our coverage universe of 38 E&Ps produces around 43% of U.S. natural gas production, or around 29 Bcf/d (grossed up for royalties only) of the total estimated marketed production of ~67 Bcf/d. Using Ex-leasehold PD F&D, five companies achieved RODDs below 10%, and these five companies collectively produce around 5.2 Bcf/d net, or 6.5 Bcf/d (grossed up for royalties only). On a gross basis, these five companies produce ~10% of total U.S. gas production. 12

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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-australia) and UK small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, Coverage Universe: Allman, Joseph D: ATP Oil & Gas (ATPG), Anadarko Petroleum (APC), Apache Corporation (APA), Approach Resources (AREX), Berry Petroleum (BRY), Cabot Oil & Gas (COG), Carrizo Oil & Gas Inc. (CRZO), Chesapeake Energy (CHK), Cimarex Energy Co. (XEC), Cobalt International Energy (CIE), Concho Resources, Inc. (CXO), Continental Resources, Inc. (CLR), Denbury Resources Inc. (DNR), Devon Energy (DVN), EOG Resources, Inc. (EOG), EQT Corporation (EQT), EXCO Resources, Inc. (XCO), El Paso Corp. (EP), Goodrich Petroleum (GDP), Laredo Petroleum (LPI), McMoRan Exploration Company (MMR), Newfield Exploration Company (NFX), Noble Energy (NBL), PDC Energy (PETD), Penn Virginia Corporation (PVA), PetroQuest Energy, Inc. (PQ), Pioneer Natural Resources (PXD), Plains Exploration & Production (PXP), QEP Resources (QEP), Quicksilver Resources Inc (KWK), Range Resources Corp (RRC), SM Energy (SM), SandRidge Energy Inc. (SD), Southwestern Energy Company (SWN), Swift Energy Company (SFY), Ultra Petroleum Corp (UPL), Venoco, Inc. (VQ), WPX Energy (WPX), Whiting Petroleum Corporation (WLL) J.P. Morgan Equity Research Ratings Distribution, as of April 3, 2012 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 45% 43% 12% IB clients* 51% 45% 34% JPMS Equity Research Coverage 43% 48% 9% IB clients* 70% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. 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Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 088/04/2012 and Co. Reg. No.: R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box , Dubai, UAE. Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. JPMSAL does not issue or distribute this material to "retail clients". The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms "wholesale client" and "retail client" have the meanings given to them in section 761G of the Corporations Act Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan, Type II Financial Instruments Firms Association and Japan Securities Investment Advisers Association. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein 14

15 or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-u.s. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised April 18, Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P 15