Sector strategy: improving confidence in recovery

Transcription

1 Sector strategy: improving confidence in recovery Price Objective Change Equity United States Oils 13 April 2015 Sector strategy: improving confidence in a recovery The US energy sector outlook continues to be dominated by an oil price debate anchored on two issues: near term risk and whether there is any value after strong recent sector performance and based on an uncertain long term oil price outlook. In this short note we revisit our strategy that through the downturn has been to layer into greater sector exposure, with a simplified valuation framework anchored on a mid cycle multiple of cash flow. On this basis we suggest the average price discounted by the US oils is currently ~$65. In an accompanying Taking the long term we lay out our case for confidence in a directional recovery but where we contend the strip is not enough. In summary we maintain our view that the US oils on the whole are undervalued and continue to advocate a gradual shift towards higher beta exposure, but with one eye on portfolio quality and balance sheet strength. First upward revisions to PO s since the downturn We continue to believe we are approaching an inflection in near term oil price risk with the very real possibility US shale production rolls over just as US refiners return from maintenance. Notable is that the pace of slowdown in the US rig count has surpassed our service team s prior expectations while the scale and speed of cost reductions in the lower 48 in particular is an increasingly dominant theme emerging from recent industry discussions. In summary the market is running out of reasons for oil to go lower: longer term, the debate turns to what oil price is sustainable. In the accompanying report we lay the BofA ML case that underlines confidence in a necessary recovery. With a medium term oil price outlook of $80 Brent / $75 WTI, revised higher from strip, we introduce the first upward revisions to price targets for the large / SMID E&P s since the collapse in oil prices in late Layering in to higher beta exposure: MRO upgraded to Buy We maintain OXY as our top idea, with beta leverage through midcaps, CLR, PXD, XEC, CXO and CRC. Amongst large caps, COP, HES, DVN and APC offer conservative beta exposure. Underlining our view of an improving balance of sector risk Marathon Oil is added to our Buy list: while this mainly reflects an updated view of recent portfolio developments it also acknowledges that MRO has lagged a strong sector recovery despite favorable oil leverage, with the balance sheet and yield to navigate continued near term volatility. Improving balance of sector risk In our view, the confluence of higher refining demand and a rollover in US shale production is improving the balance of risk for oil prices. Globally we believe the industry is set up a period of under investment akin to 1999 that risks another spike higher at some point precisely what OPEC s attempts to manage oil prices have sought to avoid. Modest downside risk remains, while US refining maintenance winds down: but on anything beyond a short term view we believe that balance of risk for the sector is improving and warrants a gradual shift to higher exposure. Doug Leggate Research Analyst MLPF&S Jason Smith Research Analyst MLPF&S John H. Abbott Research Analyst MLPF&S Kalei Akamine Research Analyst MLPF&S Table 1: PO Changes New PO Previous PO APC $116 $103 APA $85 $75 CHK $10 $9 COG $40 $40 CRC $15 $14 CVX $106 $101 COP $85 $77 CLR $70 $67 DVN $86 $85 EOG $105 $97 HES $100 $95 MRO $36 $32 NBL $65 $62 OXY $101 $98 PXD $200 $190 RRC $86 $85 SWN $47 $46 XOM $103 $101 SMID CXO $138 $129 XEC $140 $134 EPE $14 $14 LPI $9 $8 MRD $26 $29 OAS $18 $17 PDCE $66 $62 ROSE $24 $23 WLL $45 $43 BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 21 to 23. Analyst Certification on Page 19. Price Objective Basis/Risk on page

2 Contents Sector strategy update 3 Greater confidence in the long term 3 Impact on valuation 6 Focus on MRO 10 Summary 11 Appendix 12 2

3 Chart 1: US Oils: pricing off the long term Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 XOI Index BRENT June 2018 BRENT Sector strategy update Greater confidence in the long term While substantial volatility continues to characterize the oil price outlook, the large cap and SMID US oils have staged a solid recovery since the start of the year. On average absolute performance has ranged between 5% and 100%, albeit the most significant rebound has been reserved for the most levered stocks, with greatest exposure to balance sheet risk as shown in the chart below. However, despite strong sector performance we are struck by the extent to which the sector has continue to track the long term price outlook underlining our long standing view that it is confidence in the long term oil price that is the critical determinant of whether value still exists across the large and SMID cap US oils. A glance at the margin chart underlines the relationship we observe between the XOI, as a proxy for the US oils, and the long dated Brent contract on this case, Dec Chart 2: Performance from 12/15/14 to 4/10/15 & Upside to PO 100% 80% 60% 40% 20% 0% -20% -40% While this does not yet capture the full extent of expected cost reductions as the industry adjusts to a lower commodity outlook, we have argued that at strip prices the sector continues to offer material upside albeit for some names this has been eroded by strong performance to date. In recent discussions with investors this has arguably become the single biggest point of debate: if the long term oil futures has only modest upside from here, does the sector continues to offer attractive upside given this already appears discounted. In this note we address two issues: the long term oil price outlook as a driver of perceived value and the assessment of what is discounted. Our conclusion is that on average, we estimate the large and SMID US oils currently discount average oil prices around ~$65; however, given the apparent significance of long term oil prices as a screen for determining fair value, we also take the debate on the outlook for long term oil prices and the implications for our sector coverage. We examine the rationale of BofA Merrill Lynch s long term oil price outlook in an accompanying report Taking the long term. Given the uncertainty that recent price collapse has introduced to market confidence in the commodity, we moved to a strip default to frame our sector view at the start of the year. 3

4 However, after a detailed reassessment of both the approach and conclusions that frame our long term price outlook, our conclusion is simply that the strip is not enough. Framing our long term oil price view One of the greatest challenges facing the Global Energy Sector is determining a credible outlook for the long term oil price which we view as a necessary starting point for an industry whose resource base extends well beyond short term price volatility. Since 2008, consensus has been increasingly framed by OPEC s apparent defense of $100 oil; but with recent events invalidating confidence in OPEC policy, the market is being forced to rethink the long term price outlook with the challenge of determining a viable frame of reference. With this in, and in concert with our Global Energy team, we present an approach we believe overcomes many of the shortcomings that typically characterize consensus views. While obviously subjective we anchor our analysis on Global coverage that accounts for 90% of non OPEC supply and a framework that looks to free cash flow as the critical screen of capital allocation across the industry. By our analysis the long term oil price necessary to meet the level of investment necessary to sustain long term demand is at least $80 (Brent). The table below summarizes BofA Merril Lynch s current price outlook. Table 2: BofAML Commodity price assumptions 15Q1E 15Q2E 15Q3E 15Q4E 2015FY 16Q1E 16Q2E 16Q3E 16Q4E 2016FY 2017FY 2018E+ BRENT WTI Henry Hub $2.92 $2.50 $2.80 $3.40 $2.91 $3.90 $3.90 $3.90 $ The outlook for long term oil prices is obviously subjective. However, by building on analysis we already employ in our individual stock coverage, we believe we have an intellectually robust approach to determining what level of oil price is reasonable to meet demand. Critically, our approach is deliberately elegant in its simplicity: while we require a number of assumptions, these are familiar to most observers and hence are transparent within their respective ranges. While all assumptions can be challenged, we contend that with reasonable scenarios for the critical assumptions, the puts and takes arrive broadly within a relatively narrow range that spans $75 - $85 Brent, as shown in the chart below. Accordingly we believe that a reasonable starting point to determine long term oil prices in the current cost environment is ~$80 Brent. This becomes BofAML s base case and compares with current strip prices of $75 Brent / $70 WTI that has been the default for sensitivity analysis and BofA ML s dated prior assumptions of $95 Brent / $90 WTI. 4

5 Chart 3: Global Oils: Required oil price to meet incremental non-opec supply % 60% 60% 70% 70% 70% 80% 80% 80% Market share Market share Market share F&D Cost F&D Cost F&D Cost R/P 10 R/P 12.5 R/P 15 With a medium term oil price outlook of $80 Brent / $75 WTI, revised higher from strip, we introduce the first upward revisions to price targets for the large / SMID E&P s since the collapse in oil prices in late The table below summarized our updated sector view. Table 3: US Oils Valuation Summary Mkt Cap Net Debt EV Current EV/DACF Ticker Company ($bn) ($bn) ($bn) Price Current Current Upside Base Large Cap US Oils 2015E 2016E OXY Occidental 60,451 4,545 64, BUY % 10.9x 9.3x HES Hess 21,017 4,288 25, BUY % 8.5x 7.5x PXD Pioneer 25,770 2,449 28, BUY % 11.0x 9.0x APC Anadarko Petro 46,445 8,164 54, BUY % 9.0x 8.3x DVN Devon Energy 26,664 13,485 40, BUY 86 33% 4.1x 4.8x CLR Continental Res. 18,641 5,018 23, BUY 70 40% 11.5x 8.2x RRC Range 9,337 3,235 12, BUY 86 56% 10.0x 8.3x COG Cabot Oil & Gas 12,822 1,197 14, BUY 40 29% 10.4x 7.5x XOM ExxonMobil 358,898 15, , BUY % 9.9x 8.8x CRC CRC 3,243 6,346 3, BUY 15 78% 9.3x 6.9x COP ConocoPhillips 81,929 13,686 95, BUY 85 28% 6.8x 5.3x NBL Noble 19,749 3,657 23, BUY 65 28% 7.7x 6.6x SWN Southwestern 9,330 1,809 11, BUY 47 94% 7.3x 5.6x MRO Marathon 19,702 4,496 24, BUY 36 23% 8.7x 7.0x EOG EOG Resources 52,976 4,242 57, NEUTRAL 105 9% 11.0x 9.0x APA Apache Corp 25,566 8,030 33, NEUTRAL 85 25% 8.6x 7.0x CHK Chesapeake 9,930 12,307 22, UNDERPERFORM 10-26% 6.1x 5.9x CVX Chevron 201,042 7, , UNDERPERFORM 106-1% 9.1x 7.9x 8.9x 7.4x SMID Cap E&P XEC Cimarex Energy 10,959 1,020 11, BUY % 12.2x 9.4x CXO Concho Resources 14,509 3,674 18, BUY % 10.4x 9.2x WLL Whiting Petroleum 7,210 2,247 9, BUY 45 28% 6.9x 7.4x MRD Memorial Resource De 3, , BUY 26 48% 8.4x 5.1x PDCE PDC Energy 2, , NEUTRAL 66 17% 6.5x 6.5x EPE EP Energy Corp 3,109 3,933 7, NEUTRAL 14 10% 4.7x 5.1x OAS Oasis Petroleum 2,354 2,204 4, NEUTRAL 18 6% 5.9x 8.4x ROSE Rosetta Resources 1,617 1,505 3, NEUTRAL 24 11% 5.1x 5.1x LPI Laredo Petroleum 3, , UNDERPERFORM 9-38% 7.2x 8.5x 7.5x 7.2x 5

6 Impact on valuation Focus on the multiple In our view one of the casualties of the oil price decline is a valuation approach predicated on NAV. With current oil price uncertainty, we believe any expectations of fair value need demand greater emphasis on execution, and reasonable expectations on the line of sight for growth that the market will discount. Confidence in NAV requires confidence in the pace of activity, the proportion of the drilling backlog that is economic at lower prices and the impact of cost reductions, portfolio high grading etc. While these assumptions may be reasonable in a stable oil price environment, they take on an entirely new level of subjective risk in a lower more volatile world. Accordingly, earlier this year we adopted a simple multiple-based approach to setting Price Objectives for the sector. We examine the approach in detail below, but we also make a number of adjustments we believe are reasonable to assess the impact of lower oil prices on the sector outlook. For the majors, we continue to approach valuation as an annuity that assesses long term portfolio stability with consistent assumptions for sustaining capital that adjusts for long life assets etc. For a detailed review of this approach please refer to The Major Debates. For the large cap E&P s we set PO s on a rolling 5 year forward EV/DACF multiple of 5.0x 7.0x benchmarked off the ex-growth super majors and capturing respective growth rates and portfolio structures of individual E&P s and what we believe is a reasonable limit of market visibility. NAV is relegated to a reality check. Across the board we continue to assume capital costs fall by 25% implemented ratably over the next two years. We similarly assume a lower 20% reduction in cash opex consistent with the observed relationship for big oil shown above. On the whole, we assume individual company management s reduce spending to live within cashflow. Unless declared by management we have not adjusted near term development programs to reflect high graded type curves from greater near term portfolio focus, probably leaving some upside potential to assumed growth rates. Valuation framework revisited: Multiple or NAV? For much of the past five years oil prices have been relatively stable. Over the same timeline, the US shale revolution not only reshaped the production landscape for the Energy Sector, but in our view, it also changed the emphasis of the market in terms of how E&P stocks were being valued. Net Asset Value has increasingly dominated valuation assessments and while the reality check has been forward multiples, some combination of the two has been the de facto approach to valuing the sector. With the correction in oil prices we believe NAV will take a back seat as the timeline to develop a given companies drilling inventory has arguably been extended by lower cashflow. This is still critical to assessing total company value but with elevated commodity volatility we expect the market s risk tolerance to shorten the visibility that the market is prepared to recognize, putting greater emphasis on execution and delivery of production growth. Accordingly we believe a multiple approach to achieving price objectives will take on greater prominence given greater visibility. 6

7 Both methods lack precision and have significant drawbacks that can be summarized as follows: Commodity outlook: Both are dependent on the oil price outlook; however NAV is dependent on the pace of development so that when oil prices fall, the impact is compounded by slower growth. Timing: to assume the market will award full value for Net Asset Value is to presume it will pay to recognize full value for long dated production and the associated execution risk that is in part dependent on oil prices. For a multiple approach to valuation the problem of course is to determine the correct multiple? For high growth stocks, some adjustment has to be made for different growth rates and for portfolio depth that will determine the duration of growth. Conversely ex growth stocks or those with deteriorating production or impaired assets such as short life or where low multiples have been confirmed by 3 rd party transactions - should more appropriately carry a discount. In all cases there will be some limit to which the market will recognize growth we assume five years given that this is the timeline routinely cited by management s, recognizing that as the timeline extends so goes the precision of longer dated targets. In our view, the collapse in oil prices shifts the emphasis on the most appropriate basis for assessing fair value or more correctly the value that will recognized by the market in a reasonable timeline. The distinction is between price objective and Net Asset Value assuming that is that the NAV is sufficiently above the value implied by a given multiple. But again, determining the multiple is the tricky bit. Our approach: what is mid cycle? There is no perfect way to assess the right multiple for a given stock. At the simplest level we view the multiple as the output this has been our approach for the refining sector for a decade, but is enabled by the fact that refiners are generally ex growth so that they are essentially annuities with free cashflow the critical input to assessment. The problem for the E&P s is that growth rates vary enormously. Our solution benchmarks the E&P s to similar ex growth annuities which in the oil and gas world is the Supermajors where the lowest risk annuity is XOM. Below we walk through a review of how we derive the multiple for a given stock and the implied value we believe is reasonable for individual names. ExxonMobil as the benchmark Our analysis of the US Oils expands the boundaries of like sector peers to include ExxonMobil and large, domestic E&P s in the same peer group. There are obvious differences in tax structure etc., and so our valuation reference is cash flow (as opposed to EBITDA) although for the domestic E&P s this is essentially the same. We use XOM as the industry benchmark for the following reasons: In our view ExxonMobil is basically an ex growth annuity; at its large scale, it is difficult to growth although portfolio high grading routinely offsets new project growth. XOM typically holds its proven reserves at around 12x-14x; however its resource depth is typically above 70 years, providing ample depth to replace reserves for an extended period. 7

8 This is essentially an annuity, where the value is an assessment of future discounted free cashflow divided by its cost of capital, that we estimate is ~8%. The implied EV / DACF multiple is the output which will obviously vary, dependent on the implied oil price. Over the past few years XOM has traded at ~6x-7x when oil prices were ~$100; however a glance at the chart below shows that the longer term average has routinely been considerably higher. Chart 4: XOM forward EV/DACF (consensus) 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Under our revised long term oil price deck of ~$75 WTI / $80 Brent we estimate the implied multiple for XOM at our fair value PO of $103 is reasonably ~7.5x representative of XOM s through cycle annuity characteristics. Table 4: EV / DACF Analysis for ExxonMobil Implies PO of $103 / share WTI Brent Net Debt 24,463 35,354 41,435 41,773 19,948 DACF 54,538 39,562 44,863 52,453 61,843 Mkt Cap 441, , , , ,484 EV 465, , , , ,432 EV / DACF Multiple 11.8x 10.5x 9.0x 7.5x Again, the reference to XOM is simply reference to its stability as an ex growth annuity, a proxy for a going concern valuation within the energy sector. So where should the US E&P sector trade? Routinely over the past few years, industry commentators have referred to a sector multiple of ~6x or more correctly a range around that level; in actual fact this had crept higher but on the whole a glance at the chart below shows that the large cap E&P s typically trade at a ~15% - 25% discount to XOM. At the simplest level this would imply a 5.0x 7.0x multiple versus XOM s annuity. 8

9 Chart 5: E&P Sector vs XOM: EV/Fwd 12 Month Consensus CF Mar-06 Mar-09 Mar-12 E&P XOM Table 5: EV/DACF based Price Objectives Price Obj EV/DACF Multiple APC x APA x CLR x COG x CRC x DVN x EOG x HES x PXD x NBL x CHK x MRO x XEC x RRC x SWN x CXO x EPE x LPI 9 6.5x PDCE x OAS x ROSE x WLL x In our view this is a reasonable target multiple for high growth E&P s and using the current five year target that is , we believe it is reasonable for the expected value that can be recognized by the market for a given E&P and represents a reasonable limit to the growth that will be recognized by the market. Recognizing the significantly different growth rates for individual names, the outcome for PO s of the large cap US oils is shown in the margin table. Critically, in almost all cases the multiple approach to determining a reasonable level that will be recognized by the market over time is below full cycle NAV. Note that with CRC and APA we push the multiple towards the lower end of the historic range reflecting short reserve life assets where lower value has been confirmed by 3 rd party transactions (APA) and the limited period as a public company (CRC). At the higher end of the scale, SMID cap names XEC and CXO are supported by the prospect of substantially higher growth rates should oil prices stabilize. By simplifying our valuation approach in this manner, assessing some idea of what oil price is discounted becomes a significantly more transparent exercise: by our estimate, for the large cap US oils, the average long term WTI oil price currently discounted stands at around $65 per barrel. Chart 6: Implied Oil Price (WTI) $80 $75 $70 $65 $60 $55 $50 $45 $40 APC HES CRC CLR CLR CLR APA MRO COP EOG PXD XOM CVX CHK Implied WTI Avg 9

10 Focus on MRO Upgrading MRO with revised PO of $36 Consistent with our strategy to layer into greater sector exposure we have upgraded MRO to Buy, with a revised PO of $36. With a portfolio that is 70% liquids MRO stands amongst the most levered names to a recovery. While management has slowed spending, recent industry data suggests MRO s drilling backlog across its three core plays has improved. Near term, MRO s activity levels results in outspending; but with proceeds from last year s Norway sale, the balance sheet stays within a 30% net debt / cap target while allowing growth to pick up at rates that drive the forward multiple to competitive levels vs peers. With a revised l/term $80 oil deck we view MRO as a low risk, levered option on a recovery, with the added bonus of a competitive dividend which at 3% stands apart from similar size E&P peers. Amidst the carnage of the oil price collapse. Marathon has continued to improve its drilling backlog, de-risking both its absolute resource base but with improving well economics through enhanced completions and cost efficiencies. The result is a multi-year drilling inventory, competitive at $50 oil that can sustain growth under our base case of a gradual oil price recovery through Notable are 3 rd party well results in the OK Scoop / Stack play where MRO has only minimal activity but which anchors a 3 rd leg of MRO s growth outlook. With similar de-risking of its upper Eagle Ford position concerns over MRO s resource depth are being addressed. Confidence in the oil price outlook remains a critical first step to any sector view. With a revised long term deck of $80 Brent and an improved US supply demand balance we continue to advocate greater exposure to a recovery. With its leverage, yield and an improving growth outlook we believe MRO offers attractive upside of 25% to our revised PO of $36, based on a 6x EV/DACF multiple on a normalized oil price of $80 Brent. Valuation: PO $36 Our valuation basis of the large cap US oils is anchored on a mid-cycle sector multiple of 6x EV/DACF multiple based on normalized oil and gas prices of $80 Brent, $75 WTI and $4.00 HH natural gas from While oil and gas prices are expected to be lower near term, we do not believe this is sustainable, with any cash shortfalls versus planned spending reflected in balance sheet expansion. Table 6: $36 PO based on 2018 cash flow Net Debt 6,012 6,198 3,993 6,163 7,506 7,766 6,706 Market Capitalization 25,533 25,533 25,533 25,533 25,533 25,533 25,533 Enterprise Value 31,545 31,731 29,526 31,696 33,039 33,299 32,239 Debt Adjusted Cash Flow 4,477 4,913 2,106 2,974 4,167 5,520 Forward $

11 Summary We continue to believe we are approaching an inflection in near term oil price risk with the very real possibility US shale production rolls over just as US refiners return from maintenance. Notable is that the pace of slowdown in the US rig count has surpassed our service team s prior expectations while the scale and speed of cost reductions in the lower 48 in particular is an increasingly dominant theme emerging from recent industry discussions. In summary the market is running out of reasons for oil to go lower: longer term, the debate turns to what oil price is sustainable. In the accompanying report we lay the BofA ML case that underlines confidence in a necessary recovery. With a medium term oil price outlook of $80 Brent / $75 WTI, revised higher from strip, we introduce the first upward revisions to price targets for the large / SMID E&P s since the collapse in oil prices in late We maintain OXY as our top idea, with beta leverage through midcaps, CLR, PXD, XEC, CXO, and CRC. Amongst large caps, COP, HES, DVN and APC offer conservative beta exposure. Underlining our view of an improving balance of sector risk Marathon Oil is added to our Buy list: while this mainly reflects an updated view of recent portfolio developments it also acknowledges that MRO has lagged a strong sector recovery despite favorable oil leverage, with the balance sheet and yield to navigate continued near term volatility. 11

12 13 April 2015 Exhibit 1: Large Cap Valuation Table US Large Cap Exploration & Production Appendix % EPS Company Ticker QRQ Rating Price PO Upside Shares Mkt Div EV E 2015E 2016E Anadarko APC C-1-7 BUY % , % 54, Apache APA B-2-7 NEUTRAL % , % 36, Cabot Oil and Gas COG C-1-7 BUY % , % 14, California Resources CRC C-1-7 BUY % 386 3, % 10,685 NA Chesapeake CHK C-3-7 UNDERPERFORM % 665 9, % 17, Chev ron CVX A-3-7 UNDERPERFORM % 1, , % 216, ConocoPhillips COP B-1-7 BUY % 1,231 81, % 99, Continental Resources CLR B-1-9 BUY % , % 24, Devon Energy DVN B-1-7 BUY % , % 36, EOG Resources EOG B-2-7 NEUTRAL % , % 56, Hess Corp HES B-1-7 BUY % , % 24, Marathon Oil MRO B-1-7 BUY % , % 23, Noble Energy NBL B-1-7 BUY % , % 24, Occidental Petroleum OXY B-1-7 BUY % , % 63, Pioneer Natural Resources PXD C-1-7 BUY % , % 27, Range Resources RRC C-1-7 BUY % 169 9, % 12, Southw estern SWN C-1-9 BUY % 385 9, % 16, Ex x onmobil XOM A-1-7 BUY % 4, , % 383, Average 32% 3% CFPS P/E (x) EV/DACF (x) Company Ticker QRQ E 2015E 2016E E 2015E 2016E E 2015E 2016E Anadarko APC C x 21.8x -72.7x 132.5x 5.2x 6.2x 11.4x 9.5x Apache APA B x 11.4x -47.4x 399.1x 4.7x 4.6x 9.3x 6.8x Cabot Oil and Gas COG C x 32.0x 33.7x 17.6x 8.2x 10.8x 10.4x 7.1x California Resources CRC C NA 5.1x -13.3x -42.1x NA NA 13.7x 8.1x Chesapeake CHK C x 10.4x -59.7x 149.3x 4.9x 4.3x 7.8x 8.2x Chev ron CVX A x 11.9x 25.3x 20.4x 5.5x 6.6x 9.1x 8.3x ConocoPhillips COP B x 12.4x 42.6x 22.7x 5.6x 5.4x 8.1x 6.3x Continental Resources CLR B x 14.6x x 57.4x 6.4x 6.3x 14.1x 10.1x Devon Energy DVN B x 13.2x 42.7x 61.2x 5.1x 3.5x 5.5x 5.8x EOG Resources EOG B x 18.8x x 150.9x 4.7x 6.9x 13.8x 11.5x Hess Corp HES B x 17.2x -24.5x -65.3x 3.9x 5.4x 8.3x 7.3x Marathon Oil MRO B x 18.5x -23.5x -45.6x 4.8x 3.9x 11.1x 9.4x Noble Energy NBL B x 21.8x 195.8x 121.2x 5.6x 6.8x 11.0x 10.3x Occidental Petroleum OXY B x 15.6x 56.0x 27.2x 5.9x 11.0x 11.0x 9.4x Pioneer Natural Resources PXD C x 35.9x 203.0x 84.2x 7.2x 7.7x 15.4x 12.3x Range Resources RRC C x 35.0x 55.3x 41.2x 14.4x 8.3x 11.2x 8.9x Southw estern SWN C x 10.7x 56.4x 12.6x 6.4x 4.3x 9.9x 5.5x Ex x onmobil XOM A x 11.9x 19.3x 16.0x 8.4x 7.0x 9.7x 8.6x Av erage 18.7x 17.7x 73.0x 87.6x 6.3x 6.4x 10.6x 8.5x US Large Cap Exploration & Production Net Debt Net Debt / Cap DACF Company Ticker 2014q E 2015E 2016E E 2015E 2016E E 2015E 2016E Anadarko APC 7,723 9,867 7,723 11,039 12,141 29% 26% 32% 34% 9,049 8,930 4,622 5,997 Apache APA 10,476 7,819 10,476 6,778 7,707 18% 27% 20% 22% 10,267 8,682 3,957 4,735 Cabot Oil and Gas COG 1,731 1,124 1,731 1, % 45% 37% 17% 1,139 1,318 1,354 1,968 California Resources CRC 6,346 (2) 6,346 6,155 6, % 71% 72% 73% 1,407 2, ,218 Chesapeake CHK 7,442 12,182 7,442 9,584 10,719 40% 29% 37% 41% 5,424 5,470 2,446 2,578 Chev ron CVX 15,025 4,186 15,025 29,038 36,669 3% 9% 16% 19% 36,386 32,145 25,250 28,632 ConocoPhillips COP 17,503 15,416 17,503 21,358 22,293 23% 25% 30% 31% 16,151 17,518 11,898 15,073 Continental Resources CLR 6,139 4,687 6,139 7,108 7,214 54% 55% 59% 58% 2,722 3,661 1,700 2,538 Devon Energy DVN 9,782 5,956 9,782 9,269 8,971 23% 27% 26% 25% 5,842 6,285 4,754 4,426 EOG Resources EOG 3,823 4,595 3,823 4,884 5,321 23% 18% 22% 24% 7,381 8,356 4,138 5,208 Hess Corp HES 3,543 3,984 3,543 5,668 6,365 14% 14% 21% 24% 6,575 5,315 3,145 3,650 Marathon Oil MRO 3,993 6,198 3,993 6,163 7,506 24% 16% 24% 30% 4,477 4,913 2,106 2,974 Noble Energy NBL 4,920 3,449 4,920 5,197 5,976 27% 32% 32% 35% 3,408 3,231 2,139 2,403 Occidental Petroleum OXY 3,049 3,546 3,049 7,693 11,290 8% 8% 20% 28% 9,910 8,121 5,489 6,685 Pioneer Natural Resources PXD 1,640 2,260 1, % 16% 4% 2% 2,270 2,860 1,693 2,067 Range Resources RRC 3,073 3,140 3,073 2,981 3,150 57% 47% 45% 45% 901 1,096 1,092 1,412 Southw estern SWN 6,914 1,927 6,914 4,922 4,771 35% 60% 40% 37% 2,011 2,308 1,554 2,594 Ex x onmobil XOM 24,463 17,786 24,463 35,354 41,435 9% 12% 16% 18% 51,123 54,538 39,562 44,863 Av erage 38% 30% 55% 38% 12

13 13 April 2015 Exhibit 2: SMID Valuation Table US SMID Exploration & Production % EPS Company Ticker QRQ Rating Price PO Upside Shares Mkt Div EV E 2015E 2016E Concho Resources CXO C-1-9 BUY % , % 17,693 $3.53 $4.03 $0.43 $0.78 Cimarex XEC C-1-7 BUY % 88 10, % 11,300 $5.38 $5.76 ($1.60) $0.50 EP Energy EPE C-2-9 NEUTRAL % 245 2, % 7,215 $1.96 $0.87 $0.70 $0.21 Laredo Petroleum LPI C-3-9 UNDERPERFORM % 214 2, % 4,638 $0.56 $0.61 $0.07 $0.03 Memorial Resource Dev MRD C-1-9 BUY % 192 3, % 4,194 NA $0.42 $0.35 $0.86 Oasis OAS C-2-9 NEUTRAL % 139 2, % 4,700 $2.64 $2.23 $0.75 ($0.14) PDC Energy PDCE C-2-9 NEUTRAL % 39 2, % 2,777 $0.06 $0.64 $1.71 $1.24 Rosetta Resources ROSE C-2-9 NEUTRAL % 75 1, % 6,856 $3.87 $2.35 ($0.14) ($0.65) Whiting Petroleum WLL C-1-9 BUY % 204 6, % 8,519 $4.14 $0.49 ($1.15) ($0.42) Average 23% 0.1% CFPS P/E (x) EV/DACF (x) Company Ticker QRQ E 2015E 2016E E 2015E 2016E E 2015E 2016E Concho Resources CXO C x 29.3x 274.7x 151.4x 8.1x 8.8x 12.0x 10.5x Cimarex XEC C x 20.2x -72.8x 233.0x 4.5x 7.1x 14.5x 10.8x EP Energy EPE C x 12.4x 15.4x 51.3x 0.0x 3.3x 5.2x 5.6x Laredo Petroleum LPI C x 22.0x 191.4x 446.7x 9.1x 5.0x 8.9x 11.0x Memorial Resource Dev MRD C-1-9 NA NA 42.4x 50.9x 20.7x NA 6.3x 10.4x 6.4x Oasis OAS C x 84.4x 31.6x 43.6x 4.7x 4.5x 6.5x 9.9x PDC Energy PDCE C x 84.4x 31.6x 43.6x 6.3x 8.2x 6.7x 6.2x Rosetta Resources ROSE C x 7.4x x -26.8x 4.8x 3.8x 7.6x 8.4x Whiting Petroleum WLL C x 65.4x -27.9x -76.3x 4.2x 3.0x 7.6x 7.9x Av erage 125.4x 40.9x 41.2x 98.6x 5.2x 5.5x 8.8x 8.5x Net Debt Net Debt / Cap DACF Company Ticker 2014q E 2016E E 2015E 2016E E 2015E 2016E Concho Resources CXO 3,517 3,630 3,517 3,386 3,364 49% 40% 36% 36% 1,588 1,857 1,469 1,685 Cimarex XEC 1, ,094 1,418 1,383 19% 20% 25% 25% 1,357 1, ,072 EP Energy EPE 4,576 4,370 4,576 4,571 4,611 60% 51% 50% 50% 1,121 2,346 1,445 1,292 Laredo Petroleum LPI 1, ,772 1,249 1,294 40% 53% 36% 36% Memorial Resource Dev MRD 777 NA NA 31% 34% 32% NA Oasis OAS 2,654 2,444 2,654 2,373 2,451 64% 59% 50% 51% PDC Energy PDCE % 36% 28% 33% Rosetta Resources ROSE 1,966 1,306 1,966 1,731 1,735 49% 54% 48% 49% Whiting Petroleum WLL 5,551 1,954 5,551 5,248 5,641 34% 49% 44% 46% 1,758 2,046 1,321 1,544 Av erage 43% 44% 39% 40% 13

14 Price objective basis & risk Anadarko Petroleum Corp. (APC) Our price objective of $116 / share is based on a 5 year outlook which assumes a 7x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies, in general, are subject to commodity price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific risks to achieving our price objective are: (1) About 22% of APC's production is derived from the Gulf of Mexico, which could be affected by weather-related or mechanical downtime. (2) Disappointing results in APC's exploratory program in the Gulf of Mexico, Brazil, or West Africa could negatively impact the longer-term growth outlook. (3) A weak commodity price environment could undermine the assumptions in our valuation. Apache Corp (APA) Our price objective of $85 share is based on a 5 year outlook which assumes a 5x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies, in general, are subject to commodity price volatility, commensurate slowdowns in development drilling and delays to large scale projects. Upside risks to achieving our price objective are: higher than forecasted production and commodity prices. Downside risks to achieving our price objective are: (1) A significant portion of APA's production (22%) is in Egypt, where political risk may result in a partial or complete loss of asset value there, (2) Project timing delays could impact our growth rates, and (3) As an oil leveraged company, a weak oil price environment would affect our estimates and valuation. Cabot Oil & Gas Corp. (COG) Our price objective of $40 share is based on a 5 year outlook assumes a 6x DACF multiple which is a slight discount to the majors due to its size and a commodity deck of $75 WTI, and $4.00 Henry Hub. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to price volatility, operating risk regulatory risk and uncertainty of reserve estimates. Company-specific factors are a slower pace of development than we assume, infrastructure constraints in the Marcellus could adversely affect the production estimates. California Resources Corporation (CRC) Our price objective of $15 / share is based on a 5 year outlook which assumes a 5x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies, in general, are subject to commodity price volatility, commensurate slowdowns in development drilling and delays to large scale projects. Company-specific risks to our price objective are: (1) Regulatory risks in California, (2) Project timing delays could impact our growth rates, and (3) As an oil leveraged company, a weak oil price environment would affect our estimates and valuation. 14

15 Chesapeake Energy Corp. (CHK) Our price objective of $11 share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk and uncertainty of reserve estimates. Company-specific risks to achieving our price objective are: (1) Ability to close the funding gap in the near to medium term (2) Ability to reduce debt and continue to grow production (3) A prolonged weak natural gas pricing environment or global recession could undermine the pricing assumptions in our valuation and (4) negative newsflow. Chevron Corp. (CVX) Our price objective of $106/ share is based on a DCF valuation that assumes long term Brent and WTI oil prices of $80/bbl and $75/bbl respectively and a WACC of 8%. The risks to our price objective are (1) the oil and gas price and margin environment (2) significant delays to the new upstream projects critical to its growth targets and (3) inability to capture the price environment due to cost pressures (opex, capex and taxation). Upside risks to our price objective are higher oil prices and lower cap ex spending. Cimarex Energy (XEC) Our price objective of $140 share is based on a 5 year outlook which assumes a 6.5x EBITDA multiple and a commodity deck of $75 WTI. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are basis risk in the Permian Basin and lack of infrastructure in the region. Concho Resources (CXO) Our price objective of $138 share is based on a 5 year outlook which assumes a 6.5x EBITDA multiple and a commodity deck of $75 WTI. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are basis risk in the Permian Basin and lack of infrastructure in the region. ConocoPhillips (COP) Our price objective of $85/share is based on a DCF valuation that assumes longterm Brent and WTI oil prices of $80/bbl and $75/bbl, respectively, and a WACC of 9%. The risks to our price objective are (1) the oil and gas price and margin environment, (2) significant delays to the new upstream projects critical to its growth targets, (3) inability to capture the price environment due to cost pressures (opex, capex, and taxation) and (4) uncertainty surrounding execution and impact of recently announced asset sales and de-leveraging of the balance sheet. 15

16 Continental Resources Inc. (CLR) We base our $70 price objective on a sector multiple of 5x 2017 debt adjusted cash flow. Our long term price deck is $75/Bbl oil and $4.00/Mcf natural gas (from 2017) and we assume an industry standard 10% discount rate. Risks to our price objective: E&P companies in general are subject to price volatility, operating risk regulatory risk and uncertainty of reserve estimates. Company-specific factors include a slower pace of development than we assume and risks that deeper resource opportunities are less contiguous than currently embedded in our 'risked' acreage assumptions. Additionally any decision by senior management to sell down its existing holdings may present an overhang on the stock. Devon Energy Corp. (DVN) Our price objective of $86 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies, in general, are subject to commodity price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific risks to achieving our price objective are: (1) DVN's ability to grow production in the Permian Basin and the Eagle Ford shale (2) A prolonged weak natural gas pricing environment or global recession could undermine the pricing assumptions in our valuation (3) Bottlenecks to takeaway capacity, especially the Canadian oil sands. EOG Resources (EOG) Our price objective of $105 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies, in general, are subject to commodity price volatility, operating risk, regulatory risk, and uncertainty of reserve estimates. Company-specific risks to achieving our price objective are: (1) Ability to close the funding gap in the near to medium term (2) Ability to grow production without increasing debt and (2) A prolonged weak natural gas pricing environment or global recession could undermine the pricing assumptions in our valuation. EP Energy Corp (EPE) Our price objective of $14 share is based on a 5 year outlook which assumes a 5x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company specific factors are sustained cash outspend over next few years, concerns over acreage quality and overhang from significant PE sponsor ownership. ExxonMobil Corp. (XOM) Our price objective of $103/share is based on a DCF valuation that assumes long term Brent and WTI oil prices of $80/bbl and $75/bbl respectively a WACC of 8% and a 0% terminal growth rate. 16

17 The risks to our price objective are: (1) the oil and gas price and margin environment, (2) significant delays to the new upstream projects critical to its growth targets, (3) the inability to capture the price environment due to cost pressures (opex capex and taxation), and (4) and the impact of XTO on XOM's production mix and profitability. Hess Corp. (HES) Our price objective of $100 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. The risks to our price objective are: 1) the oil and gas price environment, (2) slowdowns in development drilling that leave production below expectations, and (3) news flow around HES' exploratory and appraisal drilling activities that could impact the stock. Laredo Petroleum (LPI) Our price objective of $9 share is based on a 5 year outlook which assumes a 6.5x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are significant insider ownership by the private equity sponsor, basis risk in the Permian Basin and lack of infrastructure in the region. Upside risk to our PO would be potential for M&A given a management team that has sold 3 companies in the past or anything else that could improve the state of the balance sheet. Marathon Oil Corp. (MRO) Our price objective of $36 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. The risks to our price objective are (1) the oil and gas price and margin environment, (2) significant delays to the new E&P projects critical to its growth targets and (3) limited visibility around long-term upstream developments necessary to sustain production Noble Energy (NBL) Our price objective of $65 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. The risks to our price objective are (1) the oil and gas price and margin environment, (2) significant delays to the new E&P projects critical to its growth targets, (3) limited visibility around long-term upstream developments necessary to sustain production. Oasis Petroleum (OAS) Our price objective of $18 share is based on a 5 year outlook which assumes a 6x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. 17

18 Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company specific factors include exposure to volatile Bakken differentials and a drilling program that is weighted toward the Three Forks formation. Occidental Petroleum Corp. (OXY) Our price objective of $101/share is based on an aggregate of two measures: Discounted Cash Flow (DCF) and Net Asset Value (NAV). Our estimated NAV of the existing portfolio, and for the key P1 value we use the SEC declared proven reserves and projected capital to bring PUDs to production. Our DCF valuation assumes long term Brent and WTI oil prices of $80.00 and $75.00/bbl, respectively and assumes a WACC of 10%. Risks to our price objective are (1) the oil and gas price environment, (2) significant delays to large scale projects versus scheduled start dates and, (3), given leverage to the Middle East, political risk associated with growth projects in those emerging market areas. PDC Energy (PDCE) Our price objective of $66 share is based on a five year outlook which assumes a 6.5x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are unrisked position in Utica, lack of infrastructure in key areas and exposure to both natural gas and NGLs. Pioneer Natural Resources (PXD) Our price objective of $200 / share is based on a five year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to price volatility, operating risk, regulatory risk and uncertainty of reserve estimates. Company-specific factors are a slower pace of development than we assume and risks that deeper resource opportunities are less contiguous than currently embedded in our 'risked' acreage assumptions. Rosetta Resources (ROSE) Our price objective of $24 share is based on a 5 year outlook which assumes a 6x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are execution risk in both the Eagle Ford and Permian. Southwestern Energy Corp. (SWN) Our price objective of $47 / share is based on a 5 year outlook which assumes a 6x DACF multiple and a commodity deck of $75 WTI, $80 Brent and $4.00 Henry Hub. The multiple is based on a finite timeline to delivery which is supported by core NAV. 18

19 Risks to our price objective: E&P companies in general are subject to price volatility, operating risk regulatory risk and uncertainty of reserve estimates. Company-specific factors include a slower pace of development than we assume and infrastructure constraints in the Marcellus could adversely affect the production. Whiting Petroleum Corp. (WLL) Our price objective of $45 share is based on a 5 year outlook which assumes a 5.5x EBITDA multiple and a commodity deck of $75 WTI and $80 Brent. The multiple is based on a finite timeline to delivery which is supported by core NAV. Risks to our price objective: E&P companies in general are subject to commodity price volatility, operating risk, regulatory risk, weather and uncertainty of reserve estimates. Company-specific factors are Bakken oil price differentials, cash outspend over next few years and Bakken inventory concerns. Analyst Certification We, Doug Leggate and Jason Smith, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. US - Large Cap Oils Coverage Cluster Investment rating BUY NEUTRAL UNDERPERFORM Company BofA Merrill Lynch ticker Bloomberg symbol Analyst Anadarko Petroleum Corp. APC APC US Doug Leggate Cabot Oil & Gas Corp. COG COG US Doug Leggate ConocoPhillips COP COP US Doug Leggate Continental Resources Inc. CLR CLR US Doug Leggate Devon Energy Corp. DVN DVN US Doug Leggate ExxonMobil Corp. XOM XOM US Doug Leggate Hess Corp. HES HES US Doug Leggate Marathon Oil Corp. MRO MRO US Doug Leggate Noble Energy NBL NBL US Doug Leggate Occidental Petroleum Corp. OXY OXY US Doug Leggate Phillips 66 PSX PSX US Doug Leggate Pioneer Natural Resources PXD PXD US Doug Leggate Range Resources Corp RRC RRC US Doug Leggate Southwestern Energy Corp. SWN SWN US Doug Leggate Apache Corp APA APA US Doug Leggate EOG Resources EOG EOG US Doug Leggate HollyFrontier Corp HFC HFC US Doug Leggate Marathon Petroleum Company MPC MPC US Doug Leggate Northern Tier Energy LP NTI NTI US Jason Smith Tesoro Corp. TSO TSO US Doug Leggate Valero Energy Corp. VLO VLO US Doug Leggate Calumet Specialty Products Partners CLMT CLMT US Jason Smith Chesapeake Energy Corp. CHK CHK US Doug Leggate Chevron Corp. CVX CVX US Doug Leggate Delek US Holdings, Inc. DK DK US Doug Leggate PBF Energy PBF PBF US Doug Leggate 19