6 Energy Prospectus Newsletter: "The View from Houston April 24, 2018 Issue: 147

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1 The View from HOUSTON 6 Energy Prospectus Newsletter: "The View from Houston April 24, 2018 Issue: 147 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 2 Oil Prices 3 Natural Gas Prices 4 Sweet 16 Growth Portfolio 6 Small-Cap Growth Portfolio 8 High Yield Growth 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 period of low oil prices that began in June, 2014 is coming to a long overdue end. The bottom for this cycle actually occurred in the first quarter of 2016 when West Texas Intermediate (WTI) set a double bottom at less than $30/bbl. However, it has taken over a year for the oil price to move firmly into a range (over $60/bbl) where upstream companies can make a solid return on their capital employed. The fall from over $100/bbl was so painful that investors have been slow to get back into the energy sector. From the double bottom in Q WTI moved quickly back to $50/bbl by mid-2016, but each move up - drawing in some fund managers was followed quickly by a pullback. The ups and downs lasted for over a year and it seemed that no one had any confidence in oil ever getting back to where upstream companies could make a decent return on equity. This cycle is no different than all the others. There are two things to keep in mind when it comes to oil: 1. Crude oil is arguably the most important commodity on Earth. It is the primary source of energy that fuels the global economy. We cannot plant or harvest most of our food without hydrocarbon 1

2 based liquid fuels. There is hardly anything in your home, including most of your clothing, which is not made from oil based feedstock and/or delivered to you by vehicles that run on oil. 2. This world now consumes close to a 100,000,000 barrels per day of oil based products and a small shortage causes a big increase in price. I started my career in Tulsa, Oklahoma in two years after The Arab Oil Embargo. Gasoline prices went from $0.25/gallon in the early 1970s to over $1.00/gallon and we saw fuel rationing in the United States for the first time. I have lived through seven significant oil price cycles. The biggest drop was in 2008 when the global financial crisis caused a big drop in demand and WTI declined from over $140/bbl to under $40/bbl. However, it rebounded to over $80/ bbl in less than a year and mid-2009 to mid-2014 was the best boom period that I ve lived through. Oil Prices Since the last newsletter, the price of WTI has broken through a key resistance level at $66.70/bbl. The front month NYMEX contract for WTI closed on Friday, April 20 at a multiyear high of $68.33/bbl. Brent crude closed at $73.78/bbl on Friday. The gap between Brent and WTI has widened because Europe has more exposure to the tensions building in the Middle East. Technically, there is very little resistance for WTI until $75.00/bbl. The International Energy Agency (IEA) published their monthly Oil Market Report on Friday, April 13 and it shows a much tighter global oil market than expected by most. If you ve been paying attention to my weekly podcast, you knew the tightness was coming because U.S. and European refiners are beginning to ramp up production of transportation fuels. It takes more crude oil to make summer blend gasolines and refined product inventories are lower than normal for this time of year. In my opinion, the key point in the IEA report is After 1Q18's peak refinery maintenance in Europe and the United States, global throughput of crude oil will see a seasonal rampup in 2Q18. From March to July, runs will increase by 3.1 million barrels per day, but supply of refined products will lag behind demand growth. Let that statement sink in for a minute. IEA is telling us that the surplus of oil in OECD inventories, just 30 million barrels at the end of February, will be wiped out by the time they publish their next OMR report. Uncertainty in the Middle East is a problem for important oil producing countries, but Syria and Yemen are not oil exporting countries anymore. However, if the conflict spreads and/ or the United States decides to put new sanctions on Iran, we will see a spike in the price of oil. At this point, any unplanned supply outage will cause an exaggerated oil price spike. I have been getting IEA s monthly Oil Market Reports for many years. They have a pattern of under-stating global oil demand growth at the beginning of each year and then increasing it as we move through the year. Maybe it is because they are funded by governments that want to keep fuel prices lower-forlonger or maybe they just want to be conservative. For whatever reason, 2

3 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 Approach Resources (AREX) BlueKnight Energy Partners LP (BKEP) Centennial Resource Development (CDEV) Chaparral Energy (CHPE) EnLink Midstream Partners LP (ENLK and ENLC) Halcon Resources (HK) InPlay Oil Corp. (IPOOF) Jagged Peak Energy (JAG) Lonestar Resources (LONE) Magellan Midstream Partners LP (MMP) MPLX LP (MPLX) ONEOK Inc. (OKE) Plains All American Pipeline LP (PAA) the agency has now been forced to admit that global inventories of oil and refined products actually declined in the first quarter of That is the 4th quarterly decline in a row and the forecasted declines for the next three quarters have been increased. It is important to note that crude oil inventories normally build in the first quarter of each year because refiners slow down for annual maintenance and then gear up in the second quarter to meet summer demand for transportation fuels. Here are a few more points about oil that in my opinion are significant. When OPEC and Russia initiated their production quota agreements in November, 2016 there were a lot of experts that said cartel members would cheat. Some analysts went so far as to say that the deal was a fake agreement; just a ploy to artificially raise oil prices. The average production cuts since January 2017 have actually averaged above 100%. The big decline in Venezuela is the primary reason for the OPEC compliance, but I expected other cartel members to fill the gap. Could it be that outside of Saudi Arabia, none of the other members have any excess production capacity? There is also an assumption that when the current agreements end on December 31, 2018, OPEC will flood the market with oil. That would be incredibly dumb on their part and I think there is a better chance that the agreement is extended. It may get modified with quotas for some members being raised, but it is clearing in the cartels best interest to keep the global supply of oil under control. I have seen disappointing production results being reported for Mexico, Brazil, Norway, China, Angola, Algeria, Colombia, Russia and Canada. No one ever seems to focus on the Other Countries that produce over 40% of the world s oil supply. The current paradigm on Wall Street is that U.S. shale production can meet all future demand. Believe me, that is a myth. Even the EIA has total U.S. oil production peaking at 12.0 million barrels per day shortly after That is just 1.5 million barrels per day higher than where U.S. oil production is today. Remember, demand for oil is going up even faster and net production outside of the U.S. and OPEC is clearly falling. In the short-term there are pipeline takeaway capacity issues and other logistical problems that are causing some concerns about how fast Permian Basin production can increase. Outside of the United States there has been a significant decline in funding for long-term oil projects. That lack of investment will cause supply issues for several years to come even if the oil prices moves back to a $100/bbl. Read more on the global oil market HERE. Natural Gas Price For all of my forecast/valuation models I am assuming natural gas prices will average $2.75/MMBtu for all future periods. I am adjusting for seasonal differences; slightly higher in Q1 and Q4 and lower in Q2 and Q3. I also take into consideration regional differentials and each company s hedges. Colder than normal weather in the Great Lakes Region has caused draws from U.S. natural gas storage for the first two weeks of April and we may see two more draws. During April, 2017 gas storage built by over 200 Billion Cubic Feet (Bcf) and this year we could see a net decline. It now looks like gas storage at the end of April will be approximately 900 Bcf lower than it was last year. 3

4 That is one of the largest year-toyear differences on record. The colder than normal winter has been responsible for some of the deficit, but clearly non-weather related demand for gas has been and remains much higher than EIA was forecasting. When gas is produced it enters the midstream distribution/storage system. The gas is consumed, primarily for industrial demand, space heating and power generation or it is exported via pipeline or as liquified natural gas (LNG) via ship. The difference between supply & demand goes into the massive U.S. storage system, which can hold over 4.2 Trillion Cubic Feet (TCF). EIA s weekly storage reports prove that demand over the last twelve months has exceeded supply by a rather significant amount; more than 700 Bcf compared to the 5-year average for the recent 52-week period. Natural gas is off the radar screen today. This does not mean the price of natural gas will go up anytime soon, primarily because we are in a seasonally low demand period. However, storage must be refilled before the next winter heating season arrives. April weather has shortened the refill season by a month. At the end of April utility companies will only have six months / 184 days (May to October) to build up enough natural gas in storage to meet residential and commercial demand for space heating. If the winter begins with storage under the 5-year average it can get wild in the spot market. I ve seen gas sell in the Northeast for over $100/MMBtu during a harsh winter. I believe there were some spot market sales over $60/MMBtu in December, If weather across Texas and the South, where there are hundreds of gas fired power plants, gets HOT this summer, we may see utility companies bidding up the NYMEX futures contracts. On April 20th the January 2019 NYMEX contract for natural gas closed at $3.06/MMBtu. In December, 2017 a brief cold spell caused the front month contract to spike to over $3.60/MMBtu. As I posted to the EPG Forum on Saturday, Wall Street has almost zero interest in the gassers. The Wall Street Herd can change direction quickly, especially when it comes to natural gas. Go look at a twenty year chart for natural gas and you will see that there have been MAJOR natural gas price spikes in the not too distant past. Natural gas trades on regional markets. The U.S. is very dependent on a steady supply of natural gas, especially in the winter months. The U.S. is also a closed gas market with relatively little import capacity. Just keep that in mind. The natural gas liquids (NGL) market tightened in the 4th quarter with NGL prices coming in higher than my forecasts for all of our model portfolio companies. I am expecting 1st quarter NGL prices to be 5% to 10% lower, but the NGL market is in much better shape than it was a year ago. Sweet 16 Growth Portfolio The Sweet 16 is our Flagship Portfolio. It is made up of upstream companies that have strong production and proven reserve growth locked in and the financial strength to fund aggressive growth. All of the companies in the portfolio reported positive 4th quarter earnings and full-year Adjusted Earnings for They are all expected to report positive Adjusted Earnings for the first quarter of Since several of the Sweet 16 companies have a significant amount of their future production hedged, they may be required by SEC / GAAP accounting rules to make large non-cash mark-to-market adjustments to their derivatives. These adjustments run through the Income Statement and can cause significant differences between Reported Earnings and Adjusted Earnings. Learn to focus on Cash Flow From Operations, not Earnings. Updated profiles and forecast/ valuation models for each company can be downloaded from our website. On March 28, 2018 Concho Resources (CXO) and RSP Permian (RSPP) announced they have entered into a definitive agreement under which Concho will acquire RSP in an allstock transaction valued at approximately $9.5 billion, inclusive of RSP s net debt. The consideration will consist of shares of Concho common stock for each share of RSP common stock. The transaction was unanimously approved by the board 4

5 of directors of each company and it is expected to close by the end of the 3rd quarter. CXO pulled back initially, but it has bounced back and moved higher. "The acquisition adds approximately 92,000 net acres to Concho s already vast Permian portfolio. We estimate the deal value at ~$75,000 per net undeveloped acre a significant premium to recent public deals in the area (~$35-45K on average), which could generate higher valuations for other operators in the basin and help close the gap between recent private and public deal valuations. Concho has an attractive Midland acreage position (~217,000 net acres after the RSPP acquisition). We think the market undervalues Concho s core Midland position and we see potential for NAV upside as the company pursues its large-scale development strategy." Raymond James Raymond James sees higher valuations for MTDR, PE, and LPI. The firm also mentioned PXD and FANG as possible acquirers in the Permian. In my opinion, Callon Petroleum (CPE) is another likely Permian Basin takeover target. I will be dropping RSP Permian from the Sweet 16 in the next newsletter. Devon Energy (DVN) is also going to be dropped from the Sweet 16 next month. This is a Growth portfolio and Devon has announced plans to sell off a lot of their assets to pay down debt. At this point DVN is more of a value play than a growth stock. Plus, companies in transition like this often trade in a narrow band until the transactions close. Continental Resources (CLR) leads the pack because none of its future oil production is hedged. If the price of oil pushes over $70/bbl, my valuation of CLR will be going quite a bit higher. On April 10, 2018 Diamondback Energy (FANG) announced that production for the first quarter of 2018 was 102,600 Boe per day (74% oil), an increase of over 10% from Q average daily production and 3,600 Boe per day above my forecast for the quarter. Viper Energy Partners LP (VNOM), a subsidiary of Diamondback, also announced its first quarter 2018 production volumes of 14,100 Boe per day (71% oil), an increase of approximately 14% from Q average daily production. Diamondback is currently running eleven drilling rigs and five dedicated completion crews. "In just over five years as a public company, Diamondback has grown production volumes to over 100,000 barrels of oil equivalent production per day from a starting point of ~2,500 boe/d. Since our IPO in October 2012, our industry has experienced oil prices as high as $110 and as low as $26 per barrel, and Diamondback has grown production over 40 times in spite of these challenges while maintaining a fortress balance sheet. This growth has been a direct result of an unwavering focus on low cost operations, accretive growth through a disciplined returnsfocused acquisition strategy and, above all, best in class execution of our operating plan," - Travis Stice, Chief Executive Officer of Diamondback. Gulfport Energy (GPOR) is lagging the pack (down 31.1% YTD), but they continue to report solid operating results. The company s first quarter production beat my forecast and increased liquids production combined with better oil & NGL prices should push revenues above my forecast. Their natural gas prices, including cash settlements on their hedges was exactly what I forecast; $2.60/Mcf. They are on-track to generate 18% to 20% YOY production growth. Q1 earnings per share should be close to First Call's estimate of $0.41/share and cash 5

6 flow from operations for the quarter should be approximately $1.10/share. After Gulfport s press release on April 19, 2018 two Wall Street firms issued BUY recommendations with $14.00 price targets. Natural gas producers, including AR, RRC and GPOR, remain extremely out-offavor with investors. All three of our "gassers" have a very high percentage of their gas production hedged at good prices (over $3.00/ mcf). In fact, Antero Resources (AR) has more than 100% of forecast natural gas production for 2018 and 2019 hedged at an average price of $3.50/MMBtu. Antero is expected to release first quarter results on Wednesday, April 25 after the markets close. On April 19, 2018 Matador Resources (MTDR) announced the completion and successful start-up of the expansion of their subsidiary San Mateo s Black River cryogenic natural gas processing plant in Matador s Rustler Breaks asset area in Eddy County, New Mexico. The expansion of the Black River Processing Plant adds an incremental designed inlet capacity of 200 million cubic feet of natural gas per day to the previously existing designed inlet capacity of 60 million cubic feet of natural gas per day for a total designed inlet capacity of 260 million cubic feet of natural gas per day. This will support MTDR's northern Delaware development and allows additional processing opportunities for 3rd party producers in the area. The Plant also provides optionality on ethane recovery, which is a positive given low natural gas prices in the basin. When the markets closed on April 20, 2018, the Sweet 16 was trading at a 44.7% discount to my valuations, which are based on lower commodity prices than we have today. There is a lot of upside in this solid group of upstream companies. Disclosure: I have long positions in CLR, CPE, GPOR, HCLP, LONE, MPLX, PDCE, 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. Sweet 16 Growth Portfolio Company Name Primary Product 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 Stock Symbol Share Price EPG Fair Value Estimate Percent Undervalued ANTERO RESOURCES GAS AR $19.76 $ % CALLON PETROLEUM OIL CPE $14.17 $ % CIMAREX ENERGY OIL XEC $ $ % CONCHO RESOURCES OIL CXO $ $ % CONTINENTAL RESOURCES OIL CLR $63.83 $ % DEVON ENERGY OIL DVN $35.40 $ % EOG RESOURCES OIL EOG $ $ % DIAMONDBACK ENERGY OIL FANG $ $ % GULFPORT ENERGY CORP GAS GPOR $8.79 $ % MATADOR RESOURCES OIL MTDR $33.02 $ % NEWFIELD EXPLORATION OIL NFX $27.91 $ % PARSLEY ENERGY OIL PE $30.39 $ % PDC ENERGY OIL PDCE $56.41 $ % PIONEER NATURAL RESOURCES OIL PXD $ $ % RANGE RESOURCES GAS RRC $13.69 $ % RSP PERMIAN OIL RSPP $48.94 $ % the recipe for exceptional gains. Since my last newsletter, I ve spent the majority of my research time looking closely at the small-cap upstream companies on my Watch List. During April we published initial profiles on four small-caps that all have very strong production growth. Centennial Resource Development (CDEV) Chaparral Energy (CHPE) Halcon Resources (HK) Jagged Peak Energy (JAG) They all look very good, but I want to see a few more quarters on CHPE and JAG before I add them to the portfolio. Centennial Resource Development (CDEV) is a new upstream company (created in 2016), but it has a Top 6

7 Small-Cap Growth Portfolio Company Name Primary Product Shelf management team with decades of industry experience, led by Mark Papa. Mark is the former CEO of one of the Elite Eight in our Sweet 16, EOG Resources (EOG). This company reminds me of Diamondback Energy (FANG), but it has the advantage of ramping up production during a period of much stronger liquids prices. Centennial is a pure play on the Stock Symbol EARTHSTONE ENERGY OIL ESTE Share Price $10.30 EPG Fair Value Estimate Percent Undervalued $ % CARRIZO OIL & GAS OIL CRZO $19.00 $ % CENTENNIAL RESOURCE DEVELOPMENT OIL CDEV $18.92 $ % GOODRICH PETROLEUM GAS GDP $12.97 $ % HALCON RESOURCES OIL HK $5.43 $ % INPLAY OIL OIL IPOOF $1.27 $ % LAREDO PETROLEUM OIL LPI $10.30 $ % LONESTAR RESOURCES OIL LONE $4.91 $ % RING ENERGY OIL REI $16.50 $ % SANCHEZ ENERGY OIL SN $3.17 $ % SM ENERGY OIL SM $22.16 $ % SRC ENERGY OIL SRCI $10.94 $ % Delaware Basin, a sub-basin of the Permian Basin. Their year-over-year production growth in 2017 was 230% to 31,894 Boe per day. The company s guidance is for another 85% production growth in 2018 with an exit rate of more than 75,000 Boepd (approximately 59% crude oil, 27% natural gas and 14% NGLs). If they can maintain this pace, their production will catch up to Diamondback s production level in In 2018, we expect to grow our annual oil production by approximately 85% while maintaining a low and differentiated leverage profile. We remain focused on generating corporate returns for our shareholders and estimate our 2018 total capital program could generate GAAP return on equity and return on capital employed of approximately seven to ten percent, assuming $60 oil. Mark Papa, CEO Centennial s assets are located primarily in Reeves County, Texas in the core of the Southern Delaware Basin, in addition to properties in Lea County, New Mexico in the Northern Delaware Basin. The Permian Basin represents one of the most attractive operating areas in the United States due to its favorable operating environment, stacked pay potential, high oil content, extensive infrastructure base, significant service provider network, and historically high drilling success rates. Centennial believes activity in the Delaware Basin will continue to evolve as new drilling completion techniques and enhanced development practices are employed. Centennial s drilling inventory consists of approximately 2,400 horizontal drilling locations across seven proven zones in the Delaware Basin with upside potential from additional prospective formations across its acreage position. The second new addition to the portfolio is Halcon Resources (HK). 7

8 It is also a pure play on the Permian Basin, but quite a bit smaller than Centennial. Halcon holds over 59,000 net acres in the Permian Basin with up to 2,000 low-risk high-return horizontal drilling locations. Fourth quarter 2017 production was only 6,283 Boe per day, primarily because they sold off a large portion of their asset base last summer to shore up the balance sheet and focus on their core area in the Delaware Basin. Halcon expects to triple their production to approximately 22,000 Boe per day by the end of this year. In January, Roth Capital Partners raised its target price for HK from $9 to $13 based on 1) a further review of HK s production guidance for 2018 and HK s estimated production for 2019 and 2020, and 2) additional review of HK s recently completed wells and further examination of recently completed wells by other offset operations located in the vicinity of HK s acreage position. Roth Capital and Stephens have issued fresh reports on Halcon. Both firms rate it a BUY with $13.00/share price targets. Frank Bracken, CEO of Lonestar Resources (LONE) spoke at our luncheon in Dallas on April 17th. Lonestar is going to report big increases in production quarter-afterquarter, starting in the 2nd quarter. They are running two operated drilling rigs and a dedicated completion crew, that should deliver steady production and proven reserve growth. High Yield Income Portfolio On the EPG website we have added a new tab that is just for those of you that are investing for high yield dividends and distributions from MLPs. If you are retired and want your portfolio to generate strong cash flow, then this is a good place to seek out some good investment ideas. For our High Yield Income Portfolio we are primarily focused on companies that have solid balance sheets and strong cash flow from operations. We want companies that can sustain their current dividend payout rate and increase it in the near future. Potential for capital appreciation is a close second on our list of desires. Within this group are common and preferred stocks that pay regular dividends and Master Limited Partnerships ( MLP ). MLPs are publicly traded Limited Partnerships or Limited Liability Companies ( LLC ) that have elected to be treated as partnerships for Federal Income Tax purposes. Their shares are called Units and they trade on major exchanges just like common and preferred stock. The MLP structure is a good fit for High Yield Income Portfolio Primary Stock Share Estimated Annual Company Name Product Symbol Price Annual Yield Dividend CALLON PETROLEUM COMPANY OIL CPE-PA $ % $5.00 EVOLUTION PETROLEUM OIL EPM $ % $0.40 MITCHAM INDUSTRIES SERVICES MINDP $ % $2.25 ANTERO MIDSTREAM PARTNERS LP Midstream AM $ % $1.46 BLUEKNIGHT ENERGY PARTNERS LP Asphalt BKEPP $ % $0.71 ENLINK MIDSTREAM, LLC (C-Corp) Midstream ENLC $ % $1.04 ENLINK MIDSTREAM PARTNERS (MLP) Midstream ENLK $ % $1.56 HI-CRUSH PARTNERS LP Frac Sand HCLP $ % $0.90 MAGELLAN MIDSTREAM PARTNERS LP Midstream MMP $ % $3.68 MPLX LP Midstream MPLX $ % $2.43 ONEOK, INC. Midstream OKE $ % $3.08 PLAINS ALL AMERICAN PIPELINE Midstream PAA $ % $1.20 VIPER ENERGY PARTNERS LP Minerals VNOM $ % $1.92 8

9 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 home page. Our luncheons are free for EPG members and just $40 for non-members that register through our website or $50 at the door. Wednesday, May 23: InPlay Oil Corp. (IPO.TO and IPOOF), an upstream oil & gas company based in Calgary, Alberta, Canada with operations in the Cardium Formation in the Pembina and Willesden Green pools located in West Central Alberta will be hosting our luncheon at The Hess Club in Houston. Thursday, May 24: InPlay Oil Corp. (IPO.TO and IPOOF) will be hosting our luncheon at the Doubletree Campbell Center in Dallas, Texas. midstream companies that generate steady cash flow. Demand for midstream services is extremely high today. There is a shortage of takeaway capacity in West Texas which has the fastest pace of production growth on Earth. Plains All American Pipeline LP (PAA and PAGP) have the most to gain from oil production growth in the Permian Basin. ONEOK, Inc. (OKE) is also serving West Texas producers. To learn more about the midstream sector, read the update profiles on these companies which you can download from our website. On April 19, 2018 Hi-Crush Partners LP (HCLP) announced a quarterly cash distribution of $0.225 per unit on all common units, or $0.90 on an annualized basis, for the first quarter of This is a 12.5% increase quarter-over-quarter. I am expecting them to increase their distributions by $0.025 each quarter this year, so the 4th quarter distribution should be $0.30/unit. "Our business continues to benefit from a steady strengthening of demand for frac sand. The strong underlying market fundamentals we experienced in the first quarter, and our outlook for further growth, provided the backdrop for our management team and the Board of Directors to increase our quarterly distribution to $0.225 per unit, up from $0.20 per unit in the prior quarter. These results were achieved despite the widely broadcasted challenges from reduced rail service experienced throughout the industry in the first quarter of We are delivering on our objective of delivering sustainable and meaningful growth in our distribution, and continue to expect increases of approximately 10% per quarter for the foreseeable future, subject to market conditions and periodic review. We will maintain a capital strategy that remains responsive to the market throughout 2018, and the balance between additional distribution growth and ongoing unit repurchases will reflect this flexibility." Laura Fulton, CFO of Hi-Crush Partners LP For the first quarter of 2018, Hi-Crush completed repurchases of an additional 753,090 common units, representing $9.4 million. In addition to the 2,030,163 common units repurchased during the fourth quarter of 2017, repurchases total $29.4 million. Hi-Crush remains committed to executing on the remaining approximately $70 million of repurchases under its $100 million authorized program. My current valuation of HCLP is $24.50/unit. Mitcham Industries (MIND) has had a rough three years because of the world-wide reduction on exploration spending. They have recently seen an increase in demand for seismic rental equipment because exploration budgets are primarily tied to oil prices. Their sales of marine technology products and 9

10 revenues from related services continue to improve. Mitcham remains debt free and dividends on their preferred stock are secure. We will publish an updated profile on MIND late this month. Final Thoughts Most of our model portfolio companies moved higher since our last newsletter, but they are all still trading at very low multiples of cash flow from operations. As the Wall Street Gang gains confidence in oil prices, we should see a significant move up in most of the stocks mentioned in this newsletter. Strong first quarter results should draw more attention to these stocks. The gassers remain quite profitable, but it may take a few months before they get any love from investors. HFI Research, which has been dead on in their supply/demand forecasts for oil, is predicting that WTI will reach $85/bbl later this year. Below is a quote from their recent article on the topic. For the last two years, we have hammered away at a few important points that are still not yet widely understood by the markets. Every analyst you talk to today whether about how oil market fundamentals will be in 2018 or how they will be in 2019 will start with something along the lines of U.S. Shale, the OPEC production cut agreement or Geopolitics. Rarely will you see analysts bring up the consistently disappointing production results out of Mexico, Brazil, Norway, China, Angola, Algeria, Colombia, or any other non-opec ex-u.s., Russian and Canadian oil producers. It's all about U.S. shale today, and this is the hottest topic everyone wants to discuss. Every sell-side analyst spends hundreds of research hours devouring over how Permian well X produced this much oil on IP 30, or how this producer is going to increase productivity. Yet, if just a fraction of these analyst hours were spent on the other ~35 million b/d of global oil supplies, they would see how truly disastrous the upstream capex landscape looks like today. Take Brazil, for example, a supposed supply growth engine for 2018 is not coming close to EIA s production forecast. With global oil storage expected to soon fall into a deficit by the second half of 2018, people will have to start caring about the stuff they didn't care about before. Sure, focusing on U.S. shale might score investment fees for their banks, but if non-opec ex-u.s., Russia and Canada keep disappointing, an impending supply shortage will be the hottest discussion on Wall Street. All oil price cycles overshoot the mark. This cycle has caused a big drop in global exploration spending, which will hatch the next big oil shortage. The Wall Street Gang, which does not have a clue as to how difficult it is for upstream companies to find enough new supply to meet relentless demand growth will be amazed when the shortage of 2019 arrives. It is rising demand that will be the primary reason of higher oil prices. Also, we are starting to see bottlenecks that will slow down production growth in the Permian Basin. 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 10

11 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 11