HOUSTON. The View from. By: Dan Steffens, President INSIDE THIS ISSUE

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1 The View from HOUSTON Energy Prospectus Newsletter: "The View from Houston December 31, 2016 Issue: 131 By: Dan Steffens, President Dan Steffens is the President of Energy Prospectus Group (EPG), a networking organization based in Houston, Texas. He is a 1976 graduate of Tulsa University with an undergraduate degree in Accounting and a Masters in Taxation. Mr. Steffens began his career in public accounting, becoming licensed as a CPA in After four years in public accounting, he transitioned to the oil & gas industry with the bulk of his time (18 years) spent with Amerada Hess Corporation (HES). He served as the Hess United States E&P Division Controller from 1994 to INSIDE THIS ISSUE 3 Natural Gas & NGLs 3 Sweet 16 Growth Portfolio 6 Small-Cap Growth Portfolio 7 High Yield Income Portfolio Seek and ye shall find. At EPG we are seeking out the best energy stocks and we bring those companies to the attention of our members. The U.S. oil & gas industry has survived another brutal oil price cycle. During the first quarter of 2016, I saw one analyst predicting that West Texas Intermediate (WTI) would dip as low as $10 per barrel. The price did dip below $30/Bbl for a few weeks, but recovered to the $40s by the end of April. Low natural gas prices, primarily due to last winter s El Nino, inflicted even more pain on the industry. Over 100,000 oilfield jobs were lost and many companies were forced into bankruptcy. They are called cycles for a reason. Now there are several analysts predicting WTI will top $70/Bbl by mid I m not that bullish (yet), but I think $60/Bbl within six months is a reasonable expectation. Oil is arguably the world s most valuable commodity. During the last six months of 2016 this world consumed an estimated 97,000,000 barrels per day of hydrocarbon based liquid fuels, most of which was refined from crude oil. A steady supply of oil is essential to our high standard of living in the United States. However, a small surplus or a small shortage of black oil can cause big swings in the price. The 1

2 EPG Coming Events Our luncheons in Houston and Dallas give EPG members and their guests an opportunity to meet the top management of some of the most promising small and mid-cap energy companies that we track. Members and guests need to register on our website. Wednesday, January 18: Topco Offshore LLC is hosting a luncheon at The Hess Club in Houston, Texas. Topco is a private upstream oil & gas company that is focused on the shallow water Gulf of Mexico ( GOM ). They will be presenting details of their 2017 drilling program. Friday, January 20: Mitcham Industries (MIND) is hosting a luncheon at the Doubletree Hotel Campbell Center in Dallas, Texas. The company engages in the lease, sale, and servicing of equipment to the seismic industry worldwide. It also sells new and used seismic equipment, as well as designs, manufactures, and sells marine seismic equipment. Wednesday, January 25: InPlay Oil Corp. (IPO.TO) is hosting a luncheon at The Hess Club in Houston, Texas. InPlay, based in Calgary, Alberta, has concentrated on exploration and development drilling of light oil prospects in the Province of Alberta, focusing in the greater Pembina area of Alberta. prolonged period of low oil prices caused damage to the oilfield services sector, which will take time to recover. In their recent Oil Market REPORT, the International Energy Agency predicted that demand for oil will increase another 1.3 million barrels per day in In a poll of 29 analysts and economists carried out by Reuters soon after the OPEC agreement to cut production was announced on November 30, Raymond James had the highest 2017 forecast for Brent oil, at $83/Bbl. The average for this poll saw Brent averaging $57/Bbl in The oil price you see posted in the business news is for West Texas Intermediate (WTI), which currently trades at about a $3/Bbl discount to Brent. Raymond James Senior VP Pavel Molchanov is more bullish on oil after the OPEC deal to curtail output because he thinks the global oil market is already tightening. On November 30th, he said that with strong global demand, oil prices in 2017 have to be meaningfully higher, even after the recent rally, to support a more sustainable level of investment. David Purcell at Tudor Pickering Holt & Co. also sees a rapidly tightening global oil market, assuming OPEC members comply with their agreement to curb production. Pavel and David believe there is a good chance we see a global oil shortage by the end of 2018, primarily because so many offshore projects have been cancelled. The common theme for those predicting lower oil prices in 2017 is an expectation for rapidly increasing oil production in the United States, primarily from the Permian Basin. While I do see increasing production in West Texas and from Oklahoma (SCOOP & STACK), I think production in other areas will stay on decline until oil is firmly above $60/Bbl. Keep in mind that the more the U.S. depends on tight oil plays for supply, the harder it will be contend with declining production from existing wells. Horizontal wells in the shale plays come on strong, but they decline rapidly. See the chart in my Final Thoughts. 2

3 Natural Gas & NGLs As I said in the last edition of this newsletter, December weather would set the stage for higher natural gas prices in Two weeks of colder than normal weather in December, combined with increasing exports and industrial demand, has pushed natural gas storage levels below the 5-year average. After a brief warm-up in the eastern half of the U.S., the forecast is now for very cold weather across most of the U.S beginning early in January that is expected to hang around through February. It appears that Florida is the only state that will not have below normal temperatures over the next two months. Global Warming, Climate Change or whatever the fear mongers want to call it these days, may be real. However, it is the weather in each region that drives demand for space heating fuels. Natural gas prices, and NGL prices to a lesser extent, are set on regional markets. Global warming over 100% of Greenland has no impact on energy demand because no one lives there. If January in the U.S. is colder than normal, it will push natural gas storage levels more than 200 Bcf below the 5-year average by the end of the month. If utility companies think they may run short on gas for their distribution systems before the winter heating season ends, they will compete with each other in the spot market for supply. If the speculators who set the gas price in the NYMEX futures market sense that this is going to happen, they will go long. That is what causes gas prices to spike. Cold weather in the Midwest during the first quarter will also reduce the surplus we have today in propane inventories. Combine that with increasing demand for ethane and the stage is set for higher NGL prices in Sweet 16 Growth Portfolio The Permian Basin companies got the most love from Wall Street in As a result, they are all trading at healthy valuations. Well level economics in Oklahoma s SCOOP & STACK plays are as good as or better than the Permian, so the four companies in the Sweet 16 which dominate that play should report strong year-end reserve reports. Higher natural gas and NGL prices will help our three gassers the most, but all of these companies produce a mixture of oil, gas and NGLs. The Sweet 16 is down 9.7% since my last newsletter. It finished the year up 47.0%, which compares to the S&P 500 Index that finished the year up just 9.5% YTD (up 2.3% since my last newsletter). This was the 2nd best year for the Sweet 16 in its sixteen year history. The best year was 2010, when it was up more than 54%. In case you are wondering, 2011 was also a very good year for the Sweet 16. The dip in the Sweet 16 during December is somewhat surprising since the outlook for crude oil, natural gas and NGL prices is a lot better than it was a month ago. I am expecting this group to report solid 4th quarter results and impressive year-end reserve reports. My guess is that a lot of hedge fund managers wanted to lock in their big gains on some of these stocks before the holidays. Their fees are based on their net gains for the year. My valuations are what I believe each company s stock is worth today, based on the assumptions in my forecast models. On the main Sweet 16 spreadsheet, which you can download from the EPG website, I compare my valuations to the First Call 12-month price forecasts. Just note that current valuations and where analysts think a stock price is going to be a year from now are two different things. First Call is a service of Reuters. Range Resources (RRC) stepped in to speak at our December 14th luncheon in Dallas. During the presentation, Laith Sando - VP Investor Relations made the point that Range spaced out a lot of their drilling in the Marcellus Shale to hold as much of their leasehold as possible by production. Range now has over 200 well pads that are already built out that the company plans to drill development wells from. Using existing pads will lower their completed well costs by 15-3

4 20%. Combine this with increasing natural gas & NGL prices and Range's well-level economics should be significantly better when they sit down to prepare their year-end reserve report. In addition to increasing cash flow from operations, improved well-level economics extend the economic lives of the leases and increase proven reserves. I am expecting all of the Sweet 16 to report increased proven reserves when they release 4th quarter results. This will lower their depreciation, depletion & amortization ( DD&A ) expense in 2017 and increase reported earnings. Morningstar analyst Joe Gemino rates Antero Resources (AR) as one Sweet 16 Growth Portfolio Company Name Primary Product Stock Symbol of his top three picks in the energy sector with a Fair Value Estimate of $32/share. Antero Resources is the most active driller in the Appalachia region (Marcellus and Utica plays). We believe it is also one of the most attractively priced. The stock currently trades at a 25% discount to our fair value estimate. Although natural gas still constitutes around 75% of the firm's production, a substantial portion of its acreage is situated in areas with fairly high liquids content, differentiating the company from its peers that are predominantly targeting dry gas. The profitability of Antero's inventory continues to trend higher. Drilling and completion costs have declined steadily over the past two years in the Marcellus and Utica plays, and there is scope for further efficiency Share Price 12/30/16 EPG Fair Value Estimate Percent Undervalued ANTERO RESOURCES GAS AR $23.65 $ % CIMAREX ENERGY OIL XEC $ $ % CONCHO RESOURCES OIL CXO $ $ % CONTINENTAL RESOURCES OIL CLR $51.54 $ % DEVON ENERGY OIL DVN $45.67 $ % EOG RESOURCES OIL EOG $ $ % DIAMONDBACK ENERGY OIL FANG $ $ % GULFPORT ENERGY CORP GAS GPOR $21.64 $ % NEWFIELD EXPLORATION OIL NFX $40.50 $ % NOBLE ENERGY OIL NBL $38.06 $ % PARSLEY ENERGY OIL PE $35.24 $ % PDC ENERGY OIL PDCE $72.58 $ % PIONEER NATURAL RESOURCES OIL PXD $ $ % RANGE RESOURCES GAS RRC $34.36 $ % RSP PERMIAN OIL RSPP $44.62 $ % SM ENERGY OIL SM $34.48 $ % gains that could lower costs further. Meanwhile, the productivity of Antero's wells is likely to increase across the portfolio, due to the widespread adoption of highintensity completions (using at least 1,300 pounds per foot of proppant). Finally, despite perennially weak natural gas prices in the Appalachia region, Antero's extensive firm transport and sales portfolio is enabling it to sell the majority of its production at premium, out-of-basin prices (the firm's realized thirdquarter natural gas price was $0.05 above Henry Hub). Antero and Range Resources have outstanding marketing groups, which allow them to get better prices for their natural gas and NGLs than most of the companies in the Marcellus / Utica shale plays. SCOOP / STACK Continental Resources (CLR) has raised their STACK type curve to 1,700,000 BOE estimated ultimate recoveries ( EUR ). During their 3rd quarter conference call, CLR reported completed well costs of $8.5 million in STACK for horizontal wells with lateral sections more than 10,000 feet. At today s oil & gas prices, SCOOP & STACK wells are paying out in about a year. STACK production is an increasingly important catalyst to our production growth strategy. Our STACK production was up 21% quarter-overquarter in Q3 Harold Hamm, CEO Devon Energy (DVN) and Newfield Exploration (NFX) are my Top Picks for exposure to STACK. Devon recently raised its 2016 capital spending program by $200 million, with incremental activity focused in the STACK and Delaware Basins. The largest portion of spending will be in the STACK, with 37% of the total capital spending budget. Newfield raised it STACK SXLs (super extended laterals) type curve to 1,100,00 BOE, up from the previous 950,000 BOE type curve. Newfield expects to achieve further upside with regard to resource 4

5 New Profiles The following reports were posted to the website since our last newsletter: Updated Net Income and Cash Flow Forecasts for several of the Sweet 16 companies and those in our other model portfolios A table of our Fair Value estimates for each Sweet 16 company compared to First Call s 12-month price targets Company Profiles Callon Petroleum (CPE) Carrizo Oil & Gas (CRZO) Earthstone Energy (ESTE) Evolution Petroleum (EPM) Magellan Midstream Partners (MMP) Matador Resources (MTDR) ONEOK Partners (OKS) PDC Energy (PDCE) Keep in mind that SCOOP & STACK are much newer plays than the Permian Basin. Well results keep getting better as these companies and their service providers figure out how to best complete the wells. The STACK play has already extended further to the northwest into Blaine, Dewey, Majors and Woodward counties. If you think natural gas prices are going higher, Antero Resources (AR), Range Resources (RRC) and Gulfport Energy (GPOR) do well in the first quarter. You can check out the production mix of each company in the Sweet 16 by clicking on their logo and bringing up their forecast model on the EPG website. recovery by optimizing lateral placement, drilling longer laterals, and testing emerging completion technology (i.e., diverters)." Cimarex Energy (XEC) has a stacked/ staggered infill pilot program underway in the Mid-Continent. Four wells will target the Meramec, staggered between upper and lower zones, at 10 wells per section. Four wells will target the Woodford at nine wells per section. Cimarex continues to test longer laterals and upsized proppant volumes. Gulfport Energy (GPOR) announced an agreement with Vitruvian II Woodford, LLC ( Vitruvian ), a portfolio company of Quantum Energy Partners, to acquire approximately 46,400 net surface acres in the core of the SCOOP, including approximately 30,500 BOE per day of net production for October 2016 for a total purchase price of $1.85 billion. Total estimated proved reserves at September 30, 2016 were 1.1 Tcfe. Approximately 67% of the current production is natural gas. Gulfport sold off after they announced the SCOOP acquisition, primarily because they announced the sale of 33,350,000 shares of common stock at $21.50 to pay for it. Despite the market s initial reaction, I like the deal because the acquisition will be immediately accretive to cash flow from operations when it closes in February and it adds a second core area for future production and proven reserve growth. Gulfport should also draw more attention from increasing natural gas prices since it holds over 200,000 net acres in the core of the Utica Shale play in Eastern Ohio where it produced 713,000 Mcfe per day in the 3rd quarter. My forecast/valuation model for Gulfport assumes a 2017 production mix of 83% natural gas, 12% NGLs and 5% crude oil. Wall Street is head-over-heals in love with the Permian Basin, which is one of the reasons the Sweet 16 has done so well this year. Concho Resources (CXO), Diamondback Energy (FANG), Parsley Energy (PE) and RSP Permian (RSPP) are all pure plays on the Permian. XEC, DVN, EOG, NBL, PDC, PXD and SM all have extensive exposure in the Permian. One of our members who lives in Midland told me last week that in his opinion, SM Energy acquired the honey pot with their recent acquisition from QStar in the Midland Basin. 5

6 RBC Capital Markets SM has made significant progress to establishing itself as a sizable Permian player and we expect execution on its delineation/ downspacing program in Howard County will help narrow the valuation gap to Permian peers over time. Additionally, we see the acquisition as 13% accretive to our NAV. We are increasing our NAV to $44. Updated profiles and forecast models for all of the Sweet 16 can be downloaded from our website. Disclosure: I have long positions in AR, DVN, EOG, GPOR, LONE, MEMP, MPLX, PE, RRC, and SN. I do not intend on buying or selling any securities mentioned in this newsletter within 72 hours of the publication date on page one. I am not receiving compensation from any of the companies mentioned in this newsletter. See the DISCLAIMER on the last page of this newsletter for more details. Small-Cap Portfolio Small-caps have more risk than the larger companies in our Sweet 16, but they also have more potential. As Wall Street gains more confidence in oil & gas prices, these are the companies that will draw the next wave of attention. The best way to play this sub-sector is to buy a basket of high quality small-caps. In the rebound phase of the last oil price cycle (2008 to 2010) several of our small-caps increased in price by more than 500%. I ve done my best to find companies that are well positioned for production and proven reserve growth. Increasing production combined with increasing oil & gas prices is the recipe for exceptional gains. Callon Petroleum (CPE), Laredo Petroleum (LPI) and Ring Energy (REI) are pure plays on the Permian Basin. Earthstone Energy (ESTE) and Matador Resources (MTDR) and have other producing assets, but most of their attention and capital spending is now focused on the Permian. They are trading at much lower multiples of cash flow from operations than the Permian pure plays in the Sweet 16. Carrizo Oil & Gas (CRZO) is testing various density pilots in the Eagle Small-Cap Growth Portfolio Company Name Primary Product Ford, with six stagger-stack density pilots currently on-line that are testing effective lateral spacing, both single and multi-layer, ranging from 330 down to 165. Downspacing could increase program drilling inventory by up to 185% and increase the company s net asset value. Carrizo is also testing optimized completion techniques, such as shorter stage spacing in the Eagle Ford. To date, it has completed 15 wells utilizing 200 stage spacing, down from the prior 240, which are exhibiting a 15% productivity increase to offset wells over the first 60 days. If this increases EURs per location, it will increase the company s net asset value. In the Delaware Basin (a sub-basin of the Permian Basin), the company has approximately 22,200 net acres in Culberson and Reeves Counties. Carrizo is in the early stages of delineation in the basin, with only seven wells drilled as of their 3rd quarter operations update. Stock Symbol Share Price 12/30/16 EPG Fair Value Estimate Percent Undervalued CALLON PETROLEUM OIL CPE $15.37 $ % CARRIZO OIL & GAS OIL CRZO $37.35 $ % EARTHSTONE ENERGY OIL ESTE $13.74 $ % EVOLUTION PETROLEUM OIL EPM $10.00 $ % JONES ENERGY OIL JONE $5.00 $ % LAREDO PETROLEUM OIL LPI $14.14 $ % LONESTAR RESOURCES OIL LONE $8.54 $ % MATADOR RESOURCES OIL MTDR $25.76 $ % RING ENERGY OIL REI $12.99 $ % SANCHEZ ENERGY OIL SN $9.03 $ % SYNERGY RESOURCES OIL SYRG $8.91 $ % On December 16 Lonestar Resources (LONE) announced that they were selling 13.8 million shares of common stock. Assuming the full allotment sells, net proceeds should be approximately $79 million. The cash will clean up the balance sheet and fund their Eagle Ford drilling program in However, the big increase in the number of shares outstanding (from 8,022,000 to 21,822,000) lowers my valuation per share. We will be sending out an updated profile on Lonestar early in January. Since closing on their SCOOP/STACK acquisition for $136.5 million in September, Jones Energy (JONE) common stock is up more than 70%. For those of you that own GPOR, keep in mind that after the Wall Street Gang has a chance to evaluate the potential of a large acquisition, the acquiring company s share price often rebounds. This happens because the companies go on the road to explain the value they see in the acquired assets. It helps that commodity prices are also going up. The leasehold that Jones acquired is 6

7 Both of these companies will benefit from higher oil prices and both of them were big winners for us the last time oil rebounded. Rob Capps, CEO of Mitcham Industries, will be the speaker at our luncheon in Dallas on January 20th. Two small-cap gassers that I plan to profile in January are Comstock Resources (CRK) and PetroQuest (PQ). between the core areas of SCOOP and STACK, but it has seven potential pay zones. A good indication that management is telling a convincing story, First Call s price target has increased since our last newsletter to $6.44. Synergy Resources (SYRG) 2017 capital program is based upon a two rig program operating primarily across their Greeley Crescent acreage position in the DJ Basin. The company s development plan envisions drilling 68 gross midlength laterals and 34 gross longlength laterals, spread across all three benches of the Niobrara zone as well as the Codell formation. Synergy expects to complete 52 gross mid-length laterals and 43 gross long-length laterals wells, some of which are from their drilled but waiting on completion (WOC) inventory. Synergy expects its average working interest to be 80% and an average net revenue interest of 64% for all wells drilled and completed in Synergy s preliminary production guidance for 2017 is 17,500 to 20,000 BOE per day (~53% crude oil), which would result in 55% to 80% yearover-year production growth. My 2017 forecast assumes they produce 19,000 BOE per day in 2017, although I believe there is a good chance that actual production exceeds the top end of their guidance. We will be sending out updated profiles on JONE, LONE, REI and SYRG in January. Denbury Resources (DNR) and Mitcham Industries (MIND) have rapidly moved up my radar screen. High Yield Income Portfolio If you ve been paying attention, you ve noticed that upstream companies are using a lot more frac sand to complete their wells and getting much better initial production and EURs as a result. Hi-Crush Partners LP (HCLP) and U.S. Silica Holdings (SLCA) are leading providers of high quality frac sand. David Purcell at TPH recently predicted that demand for frac sand in 2017 will exceed the demand in If so, 2017 is going to be a very good year for stockholders of these companies. High Yield Income Portfolio The companies in this portfolio have the potential for capital appreciation, but my primary focus is on their Primary Stock Share Estimated Annual Company Name Product Symbol Price Annual Dividend Yield 12/30/16 CALLON PETROLEUM COMPANY OIL CPE-PA $ % $5.00 MITCHAM INDUSTRIES OIL MINDP $ % $2.25 ANTERO MIDSTREAM PARTNERS LP MLP AM $ % $1.06 ENLINK MIDSTREAM, LLC MLP ENLC $ % $1.02 MAGELLAN MIDSTREAM PARTNERS LP MLP MMP $ % $3.35 MPLX LP MLP MPLX $ % $2.06 ONEOK PARTNERS LP MLP OKS $ % $3.16 PLAINS ALL AMERICAN PIPELINE MLP PAA $ % $2.20 SANCHEZ PRODUCTION PARTNERS LP MLP SPP $ % $1.70 7

8 ability to sustain their current dividend payout rates. Callon Petroleum (CPE) and Mitcham Industries (MIND) have strong balance sheets. The midstream MLPs are doing fine because they did not have much direct exposure to commodity prices and demand for their services holds up well as long as demand for refined products remains strong, which it has. Mitcham Industries expects to report improvement in their fiscal 4th quarter that ends January 31, Per Rob Capps Co-CEO, The effect of projected shipments, including those delayed from the third quarter will, we believe, result in higher revenues from our Equipment Manufacturing and Sales segment in the fourth quarter. We also expect marginal improvement in our Leasing segment. As we move into fiscal 2018 we expect continued slow improvement in our leasing business, but see a number of exciting opportunities for our manufacturing business. In fact, recently we were awarded contracts to supply equipment for two newbuild vessels in Asia. These projects, which are not related to traditional seismic contractors, total approximately $7.0 million and are scheduled for delivery in fiscal Overall, our strategic intent going forward is to continue to diversify ourselves away from strict dependence on the oil and gas industry and focus on growing our Equipment and Manufacturing business that presents increasing non-energy opportunities. Our capital structure remains solid, and we believe that it positions us to make the most of the opportunities that are likely to arise from this new strategic direction." The MLPs in the portfolio are largecap high quality midstream companies that are well positioned for growth as demand for gathering, processing, transportation and storage continues to grow in North America. The economy of the United States is dependent on a smooth running midstream sector that delivers the transportation fuels, natural gas and feedstock we use each day. We sent out updated profiles on Magellan Midstream Partners LP (MMP) and ONEOK Partners LP (OKS) last week. My plan is to publish updated profiles on the rest of the companies in this portfolio in early January. MPLX LP (MPLX) is the midstream affiliate of Marathon Petroleum Corp. (MPC). It has two primary businesses that have growth locked in because of scheduled drop-down assets from MPC. Logistics & Storage includes transportation and storage of crude oil, refined products and other hydrocarbon-based products (liquids) Gather & Processing includes gathering, processing and transportation of natural gas and the gathering, transportation, fractionation, storage and marketing of NGLs Most of its assets are strategically located to serve the upper Midwest, home of the Marcellus & Utica plays MPLX is committed to double-digit distribution growth. It has stable cash flows with a high percentage of revenues tied to fee-based contracts. It has minimal commodity price exposure. EnLink Midstream Partners, LP (ENLK) is the midstream affiliate of Sweet 16 member Devon Energy (DVN). It has expansive gathering, processing, fractionation, transportation, and logistics assets located in the most prolific oil and gas regions in North America, including the Gulf Coast, Permian Basin, STACK, SCOOP, Cana-Woodford, Arkoma- Woodford, North Texas, Haynesville, Utica, Marcellus, and Eagle Ford. For those of you that prefer not to have to deal with K-1s from partnerships, check out EnLink Midstream, LLC (ENLC). It has elected to be taxed as a C-Corp, so dividends are reported to you on Form Plains All American Pipeline LP (PAA) is the largest crude oil gathering, processing, transportation and storage company in North America. It has exposure to growing oil production in the U.S. and Canada. Its exposure to the Permian Basin and SCOOP/STACK give PAA nearterm growth potential. Did you know that over 50% of the active drilling rigs in the U.S. are working in the Permian Basin and SCOOP/STACK? There is still over-capacity of oil related midstream assets in the major producing areas, so competition for gathering, transportation and storage is high. Size matters in this business and PAA is well positioned to survive and thrive when U.S. oil production grows again. Sanchez Production Partners LP (SPP) is a hybrid MLP that was created by Sanchez Energy (SN) so that they could monetize some of their mature upstream assets and 8

9 their midstream assets. SPP is still in the early stages and it has a lot of moving parts, so I don t have a high level of confidence in my forecast model. SPP s revenues are tied closely to the development by Sanchez Energy of the Catarina Field in the Eagle Ford. So far, everything at Catarina seems to be progressing according to plan. Just keep in mind that SPP is a much smaller company than the other MLPs in this portfolio and it has concentration risk. Add all of this up and you should now understand why it has such a high annual yield (~15%). Final Thoughts 2017 is going to be a rebound year for the U.S. oil & gas industry. Each week we should see more rigs heading back to work, so the industry will be a major source of job growth. President Trump will be much more supportive of the industry than former President Obama. I would love to see the Obamas and Clintons fade off into retirement, but that is probably too much to hope for. As long as groups pay them over $100,000 per speaking engagement, we ll be forced to hear their opinions on what is wrong with America. A common theme in many of the oil price forecasts that I read is the fear that U.S. oil production will come roaring back if oil moves over $60/Bbl. What these analysts need to remember is that the more dependent we become on tight oil plays, the more wells we will need to drill each year just to hold production flat. That s because the horizontal wells completed in the shales and other tight formations, completed with massive hydraulic frac jobs, come on strong but decline rapidly. Heading into 2016, more than 50% of U.S. oil production came from horizontal wells completed in tight formations. First year decline rates are 65% to 80% on these wells and another 30% to 40% in the 2nd year. U.S. oil production is on a treadmill that will run faster each year. The U.S. consumes approximately 16.7 million barrels per day of crude oil ( black oil ) and another 2.5 million barrels per day of natural gas liquids ( NGL ). U.S. oil production peaked in June, 2015 at 9.6 million BOPD, fell to 8.4 million BOPD and has drifted back to 8.8 million BOPD by the end of Most of the recent surge in U.S. oil production has come from companies completing drilled but uncompleted wells ( DUCs ), so they can get more locations included in their year-end reserve report. I expect production to level off in the first quarter of 2017, partially because of weather related delays. Even if oil surges to over $60/Bbl early in 2017 because OPEC countries quickly announce compliance with their November 30th agreement, it will take at least six months before we see a significant increase in capex spending beyond what upstream companies have already announced. It will take a massive effort and lots of money to get U.S. 9

10 oil production back to 9.6 million BOPD and I doubt we see that happen until late in By then the global demand for hydrocarbon based liquids will be near 100,000,000 barrels per day. Our goal is not to tell you what to invest in, but to give you a lot of good choices. Not all of the stocks we discuss in this newsletter or on the website are going to go up, but the majority of them have since 2001 when I launched EPG. If you stay focused on owning companies that have strong fundamentals and growth locked in, I believe you will have an edge in the market. Thank you for your support. Keep an eye on the macroenvironment, but look closely at the details before you invest in anything and good luck! Dan Steffens, President Energy Prospectus Group EPG Disclaimer The analysis and information in this newsletter and the reports & financial models on our website are for informational purposes only. No part of the material presented in this NEWSLETTER and/or reports on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed herein constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the PUBLISHER (Energy Prospectus Group, a division of DMS Publishing, LLC) and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment. Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the PUBLISHERS, editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided. The analysis provided is based on both technical and fundamental research and is provided ''as is'' without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed. The information contained in the NEWSLETTERS is provided by Energy Prospectus Group, a division of DMS Publishing, LLC. Employees and affiliates of Energy Prospectus Group may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. PUBLISHER will indicate whether he has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice. Index returns are price only and do not include the reinvestment of dividends. The S&P 500 is a stock market index containing the stocks of 500 large-cap corporations, most of which are US companies. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill Energy Prospectus Group 10