Energy - Oil & Gas. Crude Thoughts for a New Year. Summary. Industry Rating: Senior Oil & Gas Market Perform Small/Mid Oil & Gas Market Perform

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1 Industry Rating: Senior Oil & Gas Market Perform Small/Mid Oil & Gas Market Perform Crude Thoughts for a New Year Crude oil prices were relatively stable in 2013 with Brent crude oil prices averaging roughly $109/bbl while West Texas Intermediate (WTI) prices were somewhat more volatile due to the mismatch in U.S. supply growth and pipeline expansions, averaging roughly $98/bbl. For natural gas enthusiasts, 2013 was a much better year than 2012 but prices still fell short of prior years as the Marcellus juggernaut continued to push more gas into the North American market. As we think about 2014, many fundamental factors argue for lower crude oil prices, which is largely what the forward markets are predicting: U.S. supply is continuing to grow, the global economy is still expanding relatively slowly and the U.S. Fed will be winding down its bond buying program. On the other hand, Libyan and Iranian production largely remains off the market. If this continues, we expect crude oil prices to remain where they are; if Libyan production returns to historical levels and there are no offsetting losses elsewhere, we would expect crude oil prices to trade roughly $10/bbl lower. We are forecasting Brent prices of $105/bbl in 2014 and a WTI price of $94/bbl. On the natural gas front, we believe that 2014 will look very similar to 2013; cold weather will support prices through the winter but then prices will ease back with growing Marcellus production. This will also sustain wider basis spreads between Henry Hub and AECO. We are forecasting a Henry Hub price of $3.85/Mcf in 2014 and an AECO price of $3.07/Mcf. In our 2013 outlook we recommended that investors slightly underweight North American oil and gas equities but favour U.S. over Canadian oil and gas equities. For 2014, we are recommending a more balanced positioning and see opportunity for a relative re-rating of Canadian oil-weighted equities. We are also growing more constructive on the overall group and recommend that investors increase exposure to market weight. We believe that the global economy is more stable than it was 12 months ago and that the U.S. Fed s decision to begin tapering its bond purchasing program is a positive signal that could lead to a flatter oil futures curve or perhaps even one that shifts into contango. This would present a more compelling investment backdrop for oil and gas equities, especially Canadian oil sands companies. January 6, 2014 Research Comment Calgary, Alberta Randy Ollenberger (403) BMO Nesbitt Burns Inc. (Canada) Jim Byrne, P.Eng., CFA (403) BMO Nesbitt Burns Inc. (Canada) Dan McSpirit (303) BMO Capital Markets Corp. (U.S.) Gordon Tait, CFA (403) BMO Nesbitt Burns Inc. (Canada) Phillip Jungwirth, CFA (303) BMO Capital Markets Corp. (U.S.) Jared Dziuba, CFA (403) BMO Nesbitt Burns Inc. (Canada) Summary We expect Brent crude oil prices to continue trading in a $ /bbl range and that location discounts will remain relatively wide due to growing inland production. West Texas Intermediate prices are projected to generally trade in a $90 100/bbl range. For natural gas, we think 2014 will largely be a replay of 2013 with Henry Hub prices trading in a $ /Mcf range. We think 2014 looks slightly more favourable than 2013 for oil and gas stocks. The global economy is in better shape than it was 12 months ago, which should translate to fundamental support for crude oil prices. We recommend that investors move to a market weight or slightly overweight exposure to oil and gas equities. We believe that Canadian oil and gas equities could be positively re-rated relative to U.S. equities if the forward curve for oil begins to flatten. Our top three oil and gas investment recommendations are Cimarex Energy, MEG Energy and Ranging River. Please see our in depth 2014 outlook report for full details regarding our investment themes and commodity price outlook. This report was prepared in part by an analyst(s) employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 19 to 20.

2 2014 Outlook Crude oil prices were remarkably stable in 2013 given the uncertain economic backdrop. Brent crude oil prices averaged approximately $109/bbl in 2013 and have averaged roughly $110/bbl over the last three years with relatively small variations around the average. West Texas Intermediate (WTI) prices have been somewhat more volatile due to the mismatch between growing production and transportation infrastructure but have averaged a relatively steady $96/bbl over the last three years including $98/bbl in Widening location and quality differentials were a prominent theme in 2013 as transportation bottlenecks resulted in oil-on-oil competition in various inland markets due to growing crude oil production (Bakken, Permian, Eagle Ford, Western Canada). North American natural gas prices traded in a wider range than crude oil prices in Henry Hub prices started the year on a strong note as colder weather arrived and ended the year driven by the same influence. However, much like crude oil, growing inland production (Marcellus) resulted in wider location differentials over the course of the year. To us the outlook for 2014 looks better than it did for One year ago the global economic outlook was clouded by the seemingly never ending debt crisis in Europe, slower growth in China and self-inflicted, politically motivated turmoil in the United States. One year later Europe seems to be regaining its feet, China appears to be recovering and despite the best efforts of U.S. politicians the U.S. economy appears poised to deliver stronger economic growth. This is a much better backdrop for crude oil prices. We expect Brent crude oil prices to continue trading in a $ /bbl range and that location discounts will remain relatively wide due to growing inland production. For natural gas, we think 2014 will largely be a replay of 2013 with Henry Hub prices trading in a $ /Mcf range. We are recommending that investors modestly increase exposure to oil and gas equities in While we expect commodity prices to trade relatively flat with 2013, the economic backdrop appears to be improving and that should lead investors to begin discounting additional future opportunities into company valuations. We are maintaining our Market Perform ratings for the Large and Small Cap Oil & Gas Producers. Our top three investment recommendations are Cimarex Energy, MEG Energy and Raging River. We are maintaining our Outperform rating and target price of $120 for Cimarex Energy. We believe that the company s resource potential in the Permian remains undervalued and that the shares could be positively re-rated to trade more in line with Permian peers with addition success in the Wolfcamp. In our opinion, returns achieved by Cimarex in the Wolfcamp could improve significantly in 2014 with longer laterals, increased stages, higher liquids yields from targeting separate Wolfcamp benches and new areas. De-risking of the Wolfcamp in Reeves and Ward/Winkler Counties should also drive resource potential and net asset value higher. The company s recent A Bench results in Culberson were very encouraging and provide a glimpse of the potential improvement in capital efficiency and returns. We believe that Cimarex can sustain mid-teens production growth (+20% liquids) with minimal cash flow outspend. Our $120 target price implies a 2014E EV/EBITDA multiple of 6.7x We are maintaining our Outperform rating and $44 target price for MEG Energy. We expect 2014 to be pivotal year for MEG as it ramps up production and cash flow from its recently completed Phase 2B expansion at Christina Lake, supplemented by incremental production Page 2 January 6, 2014

3 from the company s RISER initiative. MEG s financial results should also be positively impacted by the company s rail-to-barge strategy that will be fully implemented in 2014, which should drive up realized netbacks relative to historical levels and the company s peers. Taken together these initiatives should result in a tripling of cash flow in 2014E compared to 2013E. MEG also provides investors with exposure to improving pricing dynamics for Western Canadian heavy oil. We expect Western Canada Select (WCS) prices to be positively impacted by the much anticipated (and delayed) ramp up of BP s Whiting refinery conversion as well as the start up of the Flanagan South pipeline. We believe that these events should start to shrink the significant discount to underlying net asset value. Our $44 target price implies a 2014E EV/EBITDA multiple of 12.2x and a 29% discount to estimated 2014E net asset value. We are maintaining our Outperform rating and $7.50 target price for Raging River. The company delivered outstanding share price performance in 2013 that we believe will continue in 2014 as the company delivers more than 50% per share growth (~40% exit to exit). Raging River has achieved the highest netbacks among its peers at ~$60/boe and cash flow of ~$54/boe on our price deck. The company has a very strong balance sheet and will spend ~110% of cash flow in 2014 and exit with D/CF of just x trailing cash flow. Raging River has established a track record of under promising and over delivering (raised guidance five times in 2013) and we expect similar performance in In our opinion, the valuation remains attractive at 6.4x 2014E EV/EBITDA compared to its peers, which are trading in the x range. Our $7.50 target price implies a 2014E EV/EBITDA multiple of 7.0x and an 8% discount to estimated 2014E net asset value. Commodity Price Update We are revising our commodity price estimates for crude oil and natural gas to reflect our updated expectations. We are raising our Brent crude oil estimate in 2014 to $105/bbl from $98/bbl and our 2015 estimate to $100/bbl from $95/bbl. Our long-term estimate of $97/bbl is unchanged. We are modestly lowering our WTI estimates from $95/bbl to $93.58/bbl for 2014E, maintaining our $90/bbl for 2015E, which matches our long-term assumption of $90/bbl. For Henry Hub natural gas, we are maintaining our 2014E estimate of $3.85/Mcf. Our 2015 forward estimates are unchanged at $4.00/Mcf with long-term prices of $4.50/Mcf. We are revising our outlook for select North American refining margins and regional basis differentials. We generally expect a continuation of strong refining margins through 2014; however, we see headwinds in the AECO basis to Henry Hub and expect Canadian gas producers to receive a steep $1.00/Mcf discount through Our commodity price revisions are shown in Table 1. Page 3 January 6, 2014

4 Table 1: Commodity Price Revisions Revised Previous 1Q14e 2Q14e 3Q14e 4Q14e 2014e 2015e 2016e 2017e+ 1Q14e 2Q14e 3Q14e 4Q14e 2014e 2015e 2016e 2017e+ Crude Oil WTI (US$/bbl) Brent (US$/bbl) LLS (US$/bbl) OPEC Basket ( /bbl) Bakken (US$/bbl) Permian (US$/bbl) Maya (US$/bbl) Edmonton Light (C$/bbl) Syncrude (C$/bbl) Western Canada Select (C$/bbl) Bitumen Field Price (C$/bbl) Refining Margins Eastern Canada (C$/bbl) Western Canada (C$/bbl) US East Coast (US$/bbl) US Midwest (US$/bbl) US Gulf Coast (US$/bbl) US West Coast (US$/bbl) Natural Gas Henry Hub (US$/Mcf) AECO (C$/Mcf) AECO-Henry Hub Basis (US$/Mcf) (0.75) (1.00) (1.00) (1.00) (0.94) (1.00) (1.00) (1.00) (1.00) (1.00) (0.75) (0.65) (0.85) (0.50) (0.50) (0.50) Exchange Rate US$/C$ Exchange Rate US$/ Exchange Rate Estimate Revisions Table 2: Canadian Integrated Oils Earnings and NAV Revisions We are updating our financial estimates to reflect our revised commodity price assumptions. Table 2 provides our earnings revisions for the Canadian Integrateds. Our earnings estimates for 2014E and 2015E are buoyed by a combination of stronger refining margins in Canada and improved heavy oil pricing. On average, our earnings estimates increased by 2% in 2014E and by 6% in 2015E. Our net asset value estimates remain largely unchanged on average, decreasing a modest 1% for 2013E with no change for 2014E as the more favourable price deck is offset by our revised company specific assumptions. We have revised our target prices for each of the Canadian Integrateds to reflect the changes to our net asset value estimates. Old New Price Old New EPS (New) EPS (Old) %Change NAV (New) NAV (Old) %Change Ticker Analyst Rating Rating Jan-03 Target Target Cenovus CVE RO OP OP % 25% % -7% Husky Energy HSE RO Mkt Mkt % 9% % 7% Imperial Oil IMO RO Mkt Mkt % -4% % 4% Suncor Energy SU RO OP OP % -4% % -4% Integrated Average 2% 6% -1% 0% RO = Randy Ollenberger, BMO Nesbitt Burns Inc. Table 3 provides our target price, cash flow and net asset value revisions for the Senior Producers. On average, the revisions to our commodity price outlook result in no change to our 2014E or 2015E cash flow per share estimates. Our average 2013E and 2014E net asset value estimates have each increased by 3%, largely reflecting our assumption for stronger Canadian crude prices. Page 4 January 6, 2014

5 Table 3: North American Senior E&P Cash Flow and NAV Revisions Old New Price Old New CFPS (New) CFPS (Old) %Change NAV (New) NAV (Old) %Change Ticker Analyst Rating Rating Jan-03 Target Target Antero AR PJ OP OP % -1% % -2% ARC Resources ARX GT OP OP % -3% % -8% Athabasca Oil ATH JD OP(S) OP(S) (0.03) 0.45 (0.02) 0.44 na 2% % 8% Baytex BTE GT OP OP % 4% % 7% Cabot AR PJ OP OP % 2% % 19% Canadian Natural CNQ RO R R R R R R R R R R R R R R R R R Canadian Oil Sands COS RO Mkt Mkt % 15% % 13% Chesapeake CHK DM Mkt Mkt % -4% % 17% Cimarex Energy XEC PJ OP OP % -1% % 5% Concho CXO PJ OP OP % 9% % -3% Crescent Point CPG GT OP OP % -1% % 0% Encana ECA RO OP OP % -11% % -10% Enerplus ERF GT OP OP % 1% % 1% EQT EQT PJ OP OP % 0% % 1% MEG Energy MEG RO OP OP % -1% % -7% Newfield Exploration NFX DM Mkt Mkt % 0% % -6% Noble NBL DM Mkt Mkt % -4% % 3% Pacific Rubiales PRE JD OP OP % 7% % 1% Pengrowth PGF GT Mkt Mkt % -5% % 4% Penn West PWT GT Mkt Mkt % -2% % -1% QEP Resources QEP DM OP OP % -1% % -3% Range Resources RRC DM OP OP % 1% % 15% Southwestern SWN DM Mkt Mkt % 0% % 22% Talisman TLM RO Mkt Mkt % 1% % 1% Vermilion VET GT OP OP % 6% % 4% Whiting Petroleum WLL PJ OP OP % -5% % 3% Seniors Average 0% 0% 3% 3% RO = Randy Ollenberger, BMO Nesbitt Burns Inc. GT = Gordon Tait, BMO Nesbitt Burns Inc. JD = Jared Dziuba, BMO Nesbitt Burns Inc. DM = Dan McSpirit, BMO Capital Markets Corp. PJ = Phillip Jungwirth, BMO Capital Markets Corp. Table 4 provides our target price, cash flow and net asset value revisions for the Intermediate oil and gas producers. On average, the changes to our commodity price outlook have resulted in a decrease of 2% for our cash flow per share estimates in 2014E and a decrease of 3% in 2015E. Our average net asset value estimates for the group remain unchanged in both 2013E and 2014E as the boost to the Canadian producers of stronger Canadian crude pricing is offset by slightly weaker Canadian gas price realizations, while our long term U.S. pricing assumptions remain largely unchanged. Page 5 January 6, 2014

6 Table 4: Intermediate Oil & Gas Producers Cash Flow and NAV Revisions Old New Price Old New CFPS (New) CFPS (Old) %Change NAV (New) NAV (Old) %Change Ticker Analyst Rating Rating Jan-03 Target Target Advantage AAV GT Und Und % -3% % 5% Bill Barrett BBG DM Und Und % -26% % 11% Bonterra BNE GT OP OP % -9% % 0% Bonavista BNP GT Mkt Mkt % -6% % -3% Comstock CRK DM Mkt Mkt % -1% % -17% Crew CR JB Mkt Mkt % 1% % 7% Denbury Resources DNR PJ Mkt Mkt % 8% % 17% Energen EGN PJ OP OP % -24% na na EPL Oil & Gas EPL DM OP OP % -19% % -32% EXCO Resources XCO PJ Mkt Mkt % -14% nm nm Forest Oil FST DM Mkt Mkt % 4% % -20% Laredo Petroleum LPI DM OP OP % 0% % -13% Legacy LEG JB OP OP % 2% % -6% Lightstream LTS JB Mkt Mkt % -2% % -12% Long Run LRE JB Mkt Mkt % -2% % 8% Niko Resources NKO JD Mkt (S) Mkt (S) % 2% % 11% NuVista NVA JB OP OP % -10% % -8% Oasis Petroleum OAS DM Mkt Mkt % 0% % -4% Oryx Petroleum OXC JD OP(S) OP(S) nm nm % 7% Paramount POU JB Mkt Mkt % -10% % 5% Penn Virginia PVA PJ Mkt Mkt % 14% na na Peyto PEY JB OP OP % -9% % 0% Quicksilver KWK DM Mkt Mkt (0.07) nm nm % 0% Rosetta ROSE DM Mkt Mkt % 0% % 15% SandRidge Energy SD PJ Und Und % 16% % 11% SM Energy SM PJ Mkt Mkt % -1% % 0% Trilogy TET GT Mkt Mkt % -2% % -1% Twin Butte TBE GT Mkt Mkt % 4% % 5% Unit UNT PJ Mkt Mkt % 0% % 2% Whitecap WCP JB OP OP % -2% % -2% WPX Energy WPXUS PJ Mkt Mkt % 8% % 7% W&T Offshore WTI DM Mkt Mkt % 1% % 0% Intermediate Average -2% -3% 0% 0% RO = Randy Ollenberger, BMO Nesbitt Burns Inc. GT = Gordon Tait, BMO Nesbitt Burns Inc. JD = Jared Dziuba, BMO Nesbitt Burns Inc. DM = Dan McSpirit, BMO Capital Markets Corp. PJ = Phillip Jungwirth, BMO Capital Markets Corp. Table 5 provides our target price, cash flow and net asset value revisions for the Junior oil and gas producers. On average, the changes to our commodity price outlook have resulted in cash flow per share estimates decreasing 2% in 2014E while our 2015E estimates are unchanged. Our 2013E and 2014E net asset value estimates also remain unchanged, on average. Page 6 January 6, 2014

7 Table 5: Junior Oil & Gas Producers Cash Flow and NAV Revisions Old New Price Old New CFPS (New) CFPS (Old) %Change NAV (New) NAV (Old) %Change Ticker Analyst Rating Rating Jan-03 Target Target Approach Resources AREX PJ Mkt Mkt % 11% % -30% Arcan ARN JB Und Und 0.38 na na % 4% % -32% BlackPearl PXX JD OP OP % 3% % 10% Bonanza Creek BCEI PJ OP OP % 14% % 10% Carrizo CRZO DM Mkt Mkt % -12% % -7% Connacher CLL JD Mkt Mkt 0.17 na na nm nm % 27% Freehold FRU GT Mkt Mkt % -4% % 0% Gastar GST PJ Mkt Mkt % -2% nm nm Goodrich GDP DM OP OP % 0% % -12% Halcon Resources HK DM OP OP % -24% % -17% Kodiak Oil & Gas KOG DM OP OP % 0% % 0% Magnum Hunter MHR DM Mkt Mkt % 0% % 0% Northern Oil & Gas NOG PJ Mkt Mkt % 9% % 8% PDC Energy PDCE PJ OP OP % -6% % -3% Perpetual PMT GT Mkt Mkt % -8% % -6% Raging River RRX JB OP OP % -2% % -1% Resolute Energy REN PJ Mkt Mkt % -15% % 0% REX Energy REXX PJ OP OP % 2% % 0% Southern Pacific STP JD Mkt(S) Mkt(S) 0.20 na na nm nm % 7% Surge SGY JB Mkt Mkt % -2% % 2% TORC TOG JB OP OP % 4% % 11% Triangle Petroleum TPLM DM Mkt Mkt % 29% % 20% Warren Resources WRES PJ Mkt Mkt % 10% % 25% Zargon ZAR GT Mkt Mkt % 1% % 3% Junior Median -2% 0% 0% 0% RO = Randy Ollenberger, BMO Nesbitt Burns Inc. GT = Gordon Tait, BMO Nesbitt Burns Inc. JD = Jared Dziuba, BMO Nesbitt Burns Inc. DM = Dan McSpirit, BMO Capital Markets Corp. PJ = Phillip Jungwirth, BMO Capital Markets Corp. Page 7 January 6, 2014

8 Sector Outlook We are maintaining rating of Market Perform for the Large Cap and Small Cap Oil and Gas Producers. Within the Large Cap group, we continue to favour the Integrated Oils due to their natural hedge against the volatile crude differentials and infrastructure constraints. Integrated Oils Outlook We continue recommend that investors overweight the group. The North American Integrateds are trading at P/E multiples of 13.7x 2014E earnings, a slight discount to the historical multiple of roughly 15x. Our top recommendation in the group is Suncor. We are maintaining our Outperform rating and $46 target price for Suncor Energy. Suncor has evolved into a different company than it was as little as five years ago. The company has adopted a new strategy that is focused on profitably growing the company and returning surplus cash to shareholders through a growing dividend and share buyback program. The company s growth strategy is focused both on growth from the existing assets through a debottlenecking program and new projects in its vast portfolio that together should drive ~6% compound annual growth in production through 2020 as well as rising returns on capital. At the same time, we believe that Suncor could generate roughly $8 billion in surplus cash (cash flow leftover after capital spending and dividends) over the next four years that can be used to buyback shares; this is the highest in its peer group. The shares are trading at a material discount to Canadian and Supermajor peers. Our $46 target price implies a 2014E EV/EBITDA multiple of 5.6x and is roughly in line with our 2014E net asset value estimate of $46.31 per share. Page 8 January 6, 2014

9 Table 6: North American Integrateds and Multi-National Valuation and Operating Comparables Price EPS (diluted) P/E EPS Growth CFPS (diluted) P/CF Ticker Analyst Rating 03-Jan Target Return e 2014e 2013e 2014e 2013/ / e 2014e 2013e 2014e Cenovus CVE RO OP % % -2% Hess HES NR NR NR NR % -4% Husky Energy HSE RO Mkt % % 9% Imperial Oil IMO RO Mkt % % -4% Suncor SU RO OP % % 2% North American Integrateds 17% % 0% BP PLC BP NR NR NR NR % -6% ConocoPhillips COP NR NR NR NR % 18% Chevron CVX NR NR NR NR % -6% Exxon Mobil XOM NR NR NR NR % 4% Royal Dutch RDS.A NR NR NR NR % -3% Total TOT NR NR NR NR % -13% Multi-Nationals na % -1% Shares Mkt Cap Net Debt Ent Val EV/EBITDA Lt Liab D/CF ROCE DPS Yield NAV P/NAV Ticker (mm) ($bn) ($bn) ($bn) 2013e 2014e 2012e 2013e 2014e 2013e 2014e 2013e 2013e 2013e Strip* 2013e Strip* Cenovus CVE % % 11% % Hess HES na 1.4 nm na na % na na na na Husky Energy HSE % % 11% % Imperial Oil IMO % % 12% % Suncor SU 1, % % 11% % North American Integrateds % % 11% 2.1% BP PLC BP 3, na na na % na na na na ConocoPhillips COP 1, na na na % na na na na Chevron CVX 1, (9.0) na nm nm na na % na na na na Exxon Mobil XOM 4, na na na % na na na na Royal Dutch RDS.A 1, na na na % na na na na Total TOT 2, na na na % na na na na Multi-Nationals na na na 4.0% na na Nat. Gas (Mmcf/d) Crude & Liquids (000 b/d) Corporate (000 boe/d) Growth %Oil Proven Resource RLI Ticker e 2014e e 2014e e 2014e e mmboe mmboe Proven Cenovus CVE % 67% 2,175 12, Hess HES na na na na na na na na 1,553 na 10.5 Husky Energy HSE % 73% 1,192 14, Imperial Oil IMO % 89% 3,574 15, Suncor SU % 95% 4,099 30, North American Integrateds 2,598 2,246 1,434 1,320 1,337 1,425 1,224 1,355 1,770 1,799 1,463 1,575 7% 81% 2,519 18, BP PLC BP 6,807 6,609 na na 1,285 1,179 na na 2,420 2,281 na na 2% 52% 11,685 68, ConocoPhillips COP 4,516 4,245 na na na na 1,619 1,579 1,626 1,675 4% 55% 8,642 40, Chevron CVX 4,941 5,074 na na 1,849 1,764 na na 2,673 2,610 na na 3% 68% 11,347 62, Exxon Mobil XOM 13,162 12,322 na na 2,312 2,185 na na 4,506 4,239 na na 2% 52% 25,164 87, Royal Dutch RDS.A 8,986 9,449 na na 1,666 1,633 na na 3,164 3,208 3,311 3,401 3% 51% 13,556 60, Total TOT 6,098 5,880 na na 1,226 1,220 na na 2,242 2,200 2,255 2,311 3% 55% 11,400 40, Multi-Nationals 44,510 43,579 na na 9,204 8,852 na na 16,622 16,115 7,191 7,387 3% 55% 81, , , First Call RO = Randy Ollenberger, BMO Nesbitt Burns Inc. Large Cap Producers Outlook In addition to the Integrated Oils, we continue to favour companies within the Large Cap Producers group that are exposed to unconventional assets because of their lower full-cycle cost structures. The North American Senior Producer group is currently trading at roughly 5.7x 2014E cash flow and 0.8x 2013E estimated net asset value. Our top recommendations in the group are Cimarex Energy, EQT, MEG Energy, Range Resources and Vermilion. We are maintaining our Outperform rating and target price of $120 for Cimarex Energy. We believe that the company s resource potential in the Permian remains undervalued and that the shares could be positively re-rated to trade more in line with Permian peers with additional success in the Wolfcamp. In our opinion, returns achieved by Cimarex in the Wolfcamp could improve significantly in 2014 with longer laterals, increased stages, higher liquids yields from targeting separate Wolfcamp benches and new areas. De-risking of the Wolfcamp in Reeves and Ward/Winkler Counties should also drive resource potential and net asset value higher. The company s recent A Bench results in Culberson were very encouraging and provide a glimpse of the potential improvement in capital efficiency and returns. We believe that Page 9 January 6, 2014

10 Cimarex can sustain mid-teens production growth (+20% liquids) with minimal cash flow outspend. Our $120 target price implies a 2014E EV/EBITDA multiple of 6.7x. We are maintaining our Outperform rating and modestly lowering our target price to $115 from $120 for EQT. In our opinion the shares are undervalued on a sum-of-the-parts basis and we believe that the Street is missing the value of its general partner interest in EQM, which we estimate is worth ~$10 15/share. We expect midstream drop downs to accelerate in 2014 and for the value of the General Partner to be better realized. EQT is positioned to deliver ~30% per year production growth over the next three years and we view 2014 guidance as conservative. We believe that the company should begin generating free cash flow in 2017E. Our $115 target price implies a 2014E EV/EBITDA multiple of 11.8x. We are maintaining our Outperform rating and $44 target price for MEG Energy. We expect 2014 to be pivotal year for MEG as it ramps up production and cash flow from its recently completed Phase 2B expansion at Christina Lake, supplemented by incremental production from the company s RISER initiative. MEG s financial results should also be positively impacted by the company s rail-to-barge strategy that will be fully implemented in 2014, which should drive up realized netbacks relative to historical levels and the company s peers. Taken together these initiatives should result in a tripling of cash flow in 2014E compared to 2013E. MEG also provides investors with exposure to improving pricing dynamics for western Canadian heavy oil. We expect Western Canada Select (WCS) prices to be positively impacted by the much anticipated (and delayed) ramp up of BP s Whiting refinery conversion as well as the start up of the Flanagan South pipeline. We believe that these events should start to shrink the significant discount to underlying net asset value. Our $44 target price implies a 2014E EV/EBITDA multiple of 12.2x and a 29% discount to estimated 2014E net asset value. We are maintaining our Outperform rating and raising our target price to $90 from $84 for Range Resources. The company holds a very high quality asset base concentrated in the liquids rich areas of the prolific Marcellus shale. We believe that Range can deliver production growth of roughly 25% per year over the next several years and see the company positioned to achieve a near cash flow neutral state by late 2014 (liquidity will be enhanced with proceeds from sale of Permian Basin properties expected H1/14). In our view, the biggest point of distinction is how the company prices its wet gas production. Range has three ethane solutions in place today, one of which is unique to the company: export of ethane (and propane) from Marcus Hook near Philadelphia (contracted sales volumes increase to 20,000 b/d under a 15-year ethane sales agreement with INEOS Europe AG). These arrangements could take on greater importance in 2014 if Appalachian Basin producers are challenged by potentially wider basis differentials. Range trades at a premium to its gas-leveraged peers that we believe is warranted because of the quality of the asset base, reliable growth and liquids pricing strategy. Our $90 target price implies a 2014E EV/EBITDA multiple of 12.4x and in line with our 2014E net asset value estimate. We are maintaining our Outperform rating and $66 target price for Vermilion Energy. Vermilion provides investors with leverage to global crude oil and natural gas prices. Approximately 60% of the company s oil production is priced directly off of Brent crude oil prices while 80% of its natural gas production is in Europe (Netherlands and Germany) and receives global natural gas prices. Vermilion recently announced a natural gas acquisition in Germany, establishing a new core area for the company. We believe that the company will look for opportunities to expand its operations in Germany similar to the way it has in France Page 10 January 6, 2014

11 and the Netherlands (it is worth noting that Germany s oil and gas industry is roughly five times the larger than that of France). In North America, we expect to see drilling results from the company s Duvernay exploration program in 2014 of which we believe very little is priced into the shares. Vermilion s Corrib Project has been materially delayed, largely for regulatory reasons; however, it is now well under way and as the project moves closer to completion, we believe it will begin to factor into the company s valuation. Corrib is expected boost Vermilion s cash flow by ~20 25% when it is operational in mid-2015 and we would not rule out a dividend increase if Corrib is still on track in mid Our $66 target price implies a 2014E EV/EBITDA multiple of 8.8x and a 6% discount to estimated 2014E net asset value. Page 11 January 6, 2014

12 Table 7: North American Senior Producers Valuation Comparables Price EPS (diluted) P/E CFPS (diluted) P/CF CFPS Growth Ticker Analyst Rating 03-Jan Target Return e 2014e 2013e 2014e e 2014e 2013e 2014e 2013e 2014e Anadarko APC NR NR NR NR % 11% Antero Resources AR PJ OP % (1.09) % 106% Apache APA NR NR NR NR % 3% ARC Resources ARX GT OP % % 10% Baytex BTE GT OP % nm % 11% Cabot COG PJ OP % % 62% Canadian Natural CNQ RO R R R R R R R R R R R R R R R R Canadian Oil Sands COS RO Mkt % % -16% Chesapeake CHK DM Mkt % % 19% Cimarex Energy XEC PJ OP % % 21% Concho Resources CXO PJ OP % % 18% Crescent Point CPG GT OP % % 4% Devon DVN NR NR NR NR % 17% Encana ECA RO OP % % -19% EOG EOG NR NR NR NR % 18% EQT EQT PJ OP % % 38% Marathon MRO NR NR NR NR % 17% MEG Energy MEG RO OP % nm % 104% Murphy MUR NR NR NR NR % 6% Newfield Exploration NFX DM Mkt % % -9% Noble Energy NBL DM Mkt % % -19% Occidental OXY NR NR NR NR % 2% Pacific Rubiales PRE JD OP % % 29% Pengrowth PGF GT Mkt % 0.03 (0.44) 0.12 (14.8) % -7% Penn West PWT GT Mkt % 0.37 (0.31) (0.02) nm nm % -14% Pioneer PXD NR NR NR NR % 10% QEP Resources QEP DM OP % % 11% Range Resources RRC DM OP % % 26% Southwestern SWN DM Mkt % % 16% Talisman TLM RO Mkt % 0.09 (0.17) (0.05) (66.7) (216.3) % -8% Ultra Petroleum UPL NR NR NR NR % -6% Vermilion VET GT OP % nm nm % 7% Whiting Petroleum WLL PJ OP % % 19% Senior Producers 22% % 11% Shares Mkt Cap Net Debt Ent Val EV/EBITDA EV/Boe/d EV/Boe D/CF DPS Yield NAV P/NAV Ticker (mm) ($bn) ($bn) ($bn) 2013e 2014e 2013e 2014e 2012e 2013e 2014e 2013e 2013e 2013e Strip* 2013e Strip* Anadarko APC ,811 60, % na na na na Antero Resources AR , , na na Apache APA ,850 66, % na na na na ARC Resources ARX ,850 88, % na 0.9 na Baytex BTE ,559 94, % na 0.8 na Cabot COG ,024 61, % Canadian Natural CNQ R R R R R R R R R R R R R R R R R Canadian Oil Sands COS ,266 97, % Chesapeake CHK ,471 60, % na Cimarex Energy XEC ,900 73, % Concho Resources CXO , , % Crescent Point CPG , , % na 0.7 na Devon DVN ,170 na % na na na na Encana ECA ,423 33, % EOG EOG ,867 88, % na na na na EQT EQT ,846 67, % Marathon MRO na na % na na na na MEG Energy MEG , , na Murphy MUR ,815 53, % na na na na Newfield Exploration NFX ,133 57, na na Noble Energy NBL ,419 77, % na Occidental OXY na na % na na na na Pacific Rubiales PRE ,495 41, % Pengrowth PGF ,691 69, % 7.47 na 0.9 na Penn West PWT ,703 66, % na 0.5 na Pioneer PXD na na % na na na na QEP Resources QEP ,040 56, % na Range Resources RRC ,684 80, % na Southwestern SWN ,798 45, na na Talisman TLM 1, ,324 46, % Ultra Petroleum UPL ,924 45, na na na na na Vermilion VET , , % na 0.9 na Whiting Petroleum WLL ,952 81, na na 0.9 na Senior Producers ,900 68, % RO = Randy Ollenberger, BMO Nesbitt Burns Inc. DM = Dan McSpirit, BMO Capital Markets Corp. PJ = Phillip Jungwirth, BMO Capital Markets JB = Jim Byrne, BMO Nesbitt Burns Inc. JD = Jared Dziuba, BMO Nesbitt Burns Inc. GT = Gord Tait, BMO Nesbitt Burns Inc. Page 12 January 6, 2014

13 Table 8: North American Senior Producers Operating Comparables Nat. Gas (Mmcf/d) Crude & Liquids (000 b/d) Corporate (000 boe/d) Growth %Gas Reserves (mmboe) RLI Ticker e 2014e e 2014e e 2014e e Proven Anadarko APC 2,334 2,495 2,325 2, % 50% 2,539 2, Antero Resources AR % 92% Apache APA 2,262 2,293 na na na na % 49% 2,990 2, ARC Resources ARX % 60% Baytex BTE % 12% Cabot COG ,084 1, % 96% Canadian Natural CNQ R R R R R R R R R R R R R R R R R Canadian Oil Sands COS % na Chesapeake CHK 2,750 3,315 3,217 2, % 76% 3,131 2, Cimarex Energy XEC % 49% Concho Resources CXO % 38% Crescent Point CPG % 9% Devon DVN 2,610 2,563 2,340 na na na na 57% 3,005 2, Encana ECA 3,333 2,981 2,775 2, % 90% 2,273 1, EOG EOG 1,602 1,516 1,329 na na na 46% 2,054 1, EQT EQT , % 92% 894 1, Marathon MRO na na na na 65% 1,800 2, MEG Energy MEG % 0% 708 1, Murphy MUR na na na na % 42% Newfield Exploration NFX % 43% Noble Energy NBL ,068 1, % 55% 1,210 1, Occidental OXY 1,223 1,286 na na na na na 9% 28% 3,176 3, Pacific Rubiales PRE % 7% Pengrowth PGF % 45% Penn West PWT % 37% Pioneer PXD na na na na 41% 1,063 1, QEP Resources QEP % 72% Range Resources RRC % 77% 842 1, Southwestern SWN 1,368 1,547 1,798 2, % 100% Talisman TLM 1,491 1,577 1,455 1, % 65% 1,488 1, Ultra Petroleum UPL na na 4 4 na na na 97% Vermilion VET % 33% Whiting Petroleum WLL % 13% Senior Producers 26,410 27,993 23,644 19,485 3,050 3,571 2,796 2,138 7,452 8,237 8,713 7,065 10% 49% 10.6 See table above for analyst coverage Mid-Cap/Small-Cap Producers Outlook The Intermediate Oil & Gas Producers and Junior Oil & Gas Producers currently trade at 3.9x and 4.4x 2014 P/CF, respectively. Our top recommendations include Goodrich Petroleum and Raging River. We are maintaining our Outperform rating and lowering our target price to $30 from $34 for Goodrich Petroleum. In our view Goodrich is a risk curve trade on the Tuscaloosa Marine Shale (TMS). There has been a lot of positive and negative speculation about the resource potential of the TMS; however, there is not enough data points yet to confirm views. We believe that will change in 2014 as more capital from more operators is invested to explore the play. Goodrich affords the greatest torque to the TMS with more than 300,000 net acres in the play, an aggressive 2014 capital program that s make or break (~$300 million to drill the TMS out of $375 million total and more than 20 net completions planned. Potential upcoming catalysts include results on the Huff 18-7H 1 well expected second week of January followed by the Weyerhaeuser 51H 1 well in late January. Our $30 target price implies a 2014E EV/EBITDA multiple of 9.2x and is in line with our 2014E net asset value estimate. We are maintaining our Outperform rating and $7.50 target price for Raging River. The company delivered outstanding share price performance in 2013 that we believe will continue in 2014 as the company delivers production growth of more than 50% per share (~40% exit to exit). Raging River has achieved the highest netbacks among its peers at ~$60/boe and cash flow of ~$54/boe on our price deck. The company has a very strong balance sheet and will Page 13 January 6, 2014

14 spend ~110% of cash flow in 2014 and exit with D/CF of just x trailing cash flow. Raging River has established a track record of under promising and over delivering (raised guidance five times in 2013) and we expect similar performance in In our opinion, the valuation remains attractive at 6.1x 2014E EV/EBITDA compared to its peers, which are trading in the x range. Our $7.50 target price implies a 2014E EV/EBITDA multiple of 7x and an 8% discount to estimated 2014E net asset value. Page 14 January 6, 2014