OUTLOOK FOR CRUDE OIL AND NATURAL GAS MARKETS: A WORLD OF MIXED MESSAGES

Transcription

1 1 OUTLOOK FOR CRUDE OIL AND NATURAL GAS MARKETS: A WORLD OF MIXED MESSAGES March 12, 215 Data and closing prices as of March 5, 215 Martin King, Vice President, Institutional Research Elaine C. Williams, CFA, Research Associate

2 CANADIAN OIL AND GAS EQUITIES OFF THE LOWS Canadian oil weighted equities down 29% from 214 peak and up 1% since start of 215; finished 214 down 14%. Canadian gas weighted equities down 32% from 214 peak and up 2% since start of 215; finished 214 down 17%. Obviously, a sustained recovery in one or both commodities will lift equity valuations. When, not if, is the key question FCC Can. Gas-Weighted Equity Index 1/1/ 211 = 1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: FirstEnergy Capital Corp., Bloomberg 1/1/ 211 = FCC Can. Oil-Weighted Equity Index Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: FirstEnergy Capital Corp., Bloomberg 2

3 3 CRUDE OIL MARKETS A LOWER AND SLOWER PRICE RECOVERY

4 LATEST CRUDE OIL PRICES AND FORECAST 4 Nymex WTI Near Month Crude Oil Prices US $/bbl $11 $1 $9 $8 $7 $6 $5 $4 Jan Mar May Jul Sep Nov Jan Source: FirstEnergy Capital Corp., Bloomberg. ICE Brent Near Month Crude Oil Prices US $/bbl $12 $11 $1 $9 $8 $7 $6 $5 $ Jan Mar May Jul Sep Nov Jan Source: FirstEnergy Capital Corp., Bloomberg. $11 $1 $9 $8 $7 $6 $5 $4 $12 $11 $1 $9 $8 $7 $6 $5 $4 Nymex WTI - US$/bbl ICE Brent - US$/bbl History Strip Diff. History Strip Diff. Jul 214 $12.39 $18.19 Aug 214 $96.8 $13.4 Sep 214 $93.3 $98.57 Oct 214 $84.34 $88.5 Nov 214 $75.81 $79.63 Dec 214 $59.29 $63.27 Jan 215 $47.33 $45. -5% $49.76 $49. -2% Feb 215 $5.72 $51. 1% $58.8 $55. -6% Mar 215 $5.6 $54. 7% $6.4 $58. -4% Apr 215 $53. $5.76 4% $57. $6.48-6% May 215 $54. $ % $58. $6.96-5% Jun 215 $55. $ % $59. $ % Jul 215 $56. $ % $61. $ % Aug 215 $56. $ % $61. $ % Sep 215 $56. $ % $61. $64.6-5% Oct 215 $58. $57.91 % $63. $ % Nov 215 $58. $ % $63. $ % Dec 215 $58. $59.7-2% $63. $ % Jan 216 $6. $ % $65. $ % Feb 216 $6. $59.96 % $65. $ % Mar 216 $6. $6.38-1% $65. $67.8-3% Apr 216 $65. $6.77 7% $7. $ % May 216 $65. $ % $7. $ % Jun 216 $65. $ % $7. $ % Jul 216 $7. $ % $75. $68.5 9% Aug 216 $7. $ % $75. $ % Sep 216 $7. $ % $75. $ % Oct 216 $73. $ % $78. $ % Nov 216 $74. $ % $79. $ % Dec 216 $75. $ % $8. $ % Strip as of March 5, 215. Source: FirstEnergy Capital Corp., Bloomberg.

5 FIRSTENERGY CRUDE OIL PRICE FORECAST 5 US $/bbl $1 $9 $8 $7 $6 $5 $4 $3 Nymex WTI Price Outlook $92.91 $74.5 $84. $67.25 $ Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $12 $11 $1 $9 $8 $7 $6 $5 $4 $3 ICE Brent Price Outlook $99.45 $79.5 $72.25 $59. $ Source: FirstEnergy Capital Corp., Bloomberg.

6 SIZE OF THE CURRENT OVERSUPPLY Inventory pressures to last into at least mid 2Q15 as the oversupply remains formidable. There could be additional downward pressure on prices, but so far prices have been able to hold firm. We estimate the current oversupply at 1. to 1.5 million bbl/d. million bbl/d Demand Supply thou. bbl/d 2, 1,5 1, 5 (5) (1,) (1,5) (2,) Global Inventory Swing by Quarter Source: FirstEnergy Capital Corp., IEA Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q (1) Implied Stock Change (2) 6

7 WHERE DO THINGS STAND NOW? North American Markets Still oversupplied. U.S. demand has been holding up much better than expected on the pullback in prices. Inventories still rising, but may avoid blowing through tank tops. Waiting and waiting for a supply deceleration. Refinery maintenance season on the cusp of winding down; strike has been holding back activity. Overseas Markets Some tenuous signs that the oversupply is easing, but nothing yet definitive; West African cargoes moving a bit more quickly. Emerging signs of some recovery in demand linked to the price pullback; Saudi oil minister Al Naimi also sounding more upbeat. Floating storage plays appear to have topped out on more narrow Brent contango first sign of real recovery? 7

8 HEAVY CONTANGO PRICE STRUCTURE IS DRIVING INVENTORIES U.S. inventories are definitely at record levels, but there still appears to be room to move. No one knows how truly full inventory levels can get before running out of room; modest recovery in WTI so far defying the rising inventory trend. We think prices will remain above January lows. Nymex & Brent Contango/Backwardation $15 $1 $5 $ ($5) ($1) ($15) Nymex M1 Less M12 Brent M1 Less M12 Contango Backwardation Jan-14 Jun-14 Nov-14 Apr-15 Source: FirstEnergy Capital Corp., Bloomberg. United States Crude Oil Inventory Capacity/Current mm bbls Capacity Current % Full Curr. Adj. % Full PADD % % PADD % % Cushing % % PADD % % PADD % % PADD % % Total % % Source: FirstEnergy Capital Corp., U.S. DOE/EIA.; week of Feb. 27, 215. mm bbls U.S. Crude Oil Inventories Yr Hi-Lo Jan-2 Mar-27 Jun-19 Sep-11 Dec-4 Source: FirstEnergy Capital Corp., US DOE/EIA. 8

9 WE WILL NOT FILL TO FULL (AT LEAST WE DON T THINK SO) thou. bbl/d 9, 8, 7, 6, 5, 4, Potential U.S. Oil Supply Growth Profiles thou. bbl/d 1, U.S. Lower 48 Crude Oil Production 8,825 5 Yr Hi-Lo , Jan-2 Mar-27 Jun-19 Sep-11 Dec-4 Source: FirstEnergy Capital Corp., US DOE/EIA. Base Decline Faster Decline Slower Decline Feb-15 Apr-15 Jul-15 Sep-15 Dec-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 8, 7, 6, 5, 4, U.S. Weekly YoY Lower 48 Oil Supply Growth thou. bbl/d 1,5 1,25 1, Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. mm bbls Potential U.S. Oil Inventory Levels Potential Maximum Onshore Capacity Base Decline Faster Decline Slower Decline Feb-15 Apr-15 Jul-15 Sep-15 Dec-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 9

10 U.S. SUPPLY IMPACTS SHOULD EMERGE SHORTLY thou bbl/d 1,6 1,4 1,2 1, (2) U.S. Monthly YoY Oil Supply Growth Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. thou. bbl/d 1,8 1,6 1,4 1,2 1, (2) U.S. Crude Oil Supply Growth 1,13 1, (65)(155) Huge capex cuts, declining rig counts, and natural declines will eventually translate into decelerating supply growth, but it will take time. We think more definitive signs of a supply slowing will emerge in April likely starting with the Bakken. This will be a key moment for the market and will provide price support. thou. bbl/d 2, 1,5 1, 5 U.S. YoY Supply Change by Quarter (5) 212 Q1 213 Q3 215 Q1 216 Q3 Source: FirstEnergy Capital Corp., IEA. 1

11 RIG PRODUCTIVITY VERSUS LAGGED SUPPLY IMPACTS U.S. Petroleum Supply mm bbls/d e 216e Bakken 891 1,19 1,289 1,153 Eagle Ford 1,4 1,456 1,853 2,62 Permian 1,345 1,649 2,7 2,135 Other 4,17 4,436 4,246 3,896 Total Crude 7,445 8,65 9,395 9,246 NGLs 2,66 2,993 3,1 3,1 Total Liquids 1,51 11,643 12,45 12,346 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. bbls/d/rig U.S. Oil Rig Productivity vs. Oil Price Rig Productivity (LHS) Nymex Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. US$/mmbtu $11 $1 $9 $8 $7 $6 $5 $4 U.S. Crude Oil Horizontal Rig Count Rigs ,2 1,1 1, Jan-2 Mar-27 Jun-19 Sep-11 Dec-4 Source: FirstEnergy Capital Corp., Baker-Hughes. Permian/Eagle Ford/Bakken Liquids Supply thou. bbl/d 6, 5, 4, 3, 2, 1, Bakken Eagle Ford Permian Jan-1 Jul-11 Jan-13 Jul-14 Jan-16 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 11

12 WHAT ABOUT CANADIAN SUPPLY? Canadian supplies will see very minimal impacts given that most growth is geared to oilsands. Shut in of oilsands very unlikely given low operating costs. Some indications that LTO production being affected, but overall volumes are small. Canadian Petroleum Supply mm bbls/d e 216e Bitumen 1,11 1,27 1,47 1,617 Synthetic Total Oil Sands 1,947 2,166 2,396 2,612 Light Tight Oil Other Conventional Total Crude 2,871 3,46 3,256 3,477 NGLs Total Liquids 3,22 3,211 3,431 3,627 Source: FirstEnergy Capital Corp., National Energy Board thou. bbl/d (1) Canadian Crude Oil Supply Growth Source: FirstEnergy Capital Corp., IEA. thou. bbl/d 3,5 3, 2,5 2, 1,5 1, 5 Oilsands Production Growth Synthetic Bitumen Souce: FirstEnergy Capital Corp., National Energy Board. 12

13 CANADA S OIL ROLE SET TO EXPAND Canadian Exports of Crude Oil via U.S. GOM thou. bbl/d China Germany Korea Italy Singapore Switzerland Spain Jan-14 Mar-14May-14 Jul-14 Sep-14 Nov-14 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 3,5 3,25 3, 2,75 2,5 2,25 2, 1,75 1,5 U.S. Crude Oil Imports from Canada thou. bbl/d Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. As prices slowly recover, Canada s export position is actually going to be better than ever. Capacity constraints not relevant for the near and medium term. Plenty of rail and pipe capacity. Re-export potential through GOM is rising. More market capture in GOM. Canadian Export Capacity vs. Required thou. bbl/d Enbridge/Clearbrook Various into PADD IV 8, Keystone TransMountain 7, Rail Capacity Keystone XL 6, Energy East TMX 5, WCSB Required 4, 3, 2, 1, YE13 YE14 YE15 YE16 YE17 YE18 YE19 Source: FirstEnergy Capital Corp. 13

14 CANADIAN OIL PRICE DIFFERENTIALS Absolute price differentials are expected to remain tight on combined availability of rail and pipelines. Upper limit set by blended cost of pipe and rail. Canada may need more capacity post- 219 for oilsands production. WCS now more directly competing with GOM heavies, including Maya. WTI vs. Canadian Crude Oil Prices US $/bbl $2 WCS Ed Light Syn. $1 $ ($1) ($2) ($3) ($4) ($5) Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $3 $25 $2 $15 $1 $5 $ WTI-WCS Price Differential $25.34 $2.66 $ Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $2 $15 $1 $5 $ WTI-Ed Light Price Differential $15.5 $1.71 $

15 THE FALLING LOONIE Every 5 cent change in the U.S. dollar value of the Canadian dollar is worth about C$.2 per mcf for natural gas and about C$3. per barrel for crude oil. Loonie s meltdown of the past few months is having significant positive impact on Canadian dollar realizations and cash flows, but overall absolute levels are still lower. $ US/$ Cdn Canada-U.S. Dollar Exchange Rate Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: Pacific Exchange Rate Center CAD-USD FX RATE - US$/CN$ History Strip Diff. Jul 214 $.9315 Aug 214 $.9152 Sep 214 $.988 Oct 214 $.892 Nov 214 $.8828 Dec 214 $.8669 Jan 215 $.8259 $.854 3% Feb 215 $.8 $ % Mar 215 $.816 $ % Apr 215 $.8486 $.845 5% May 215 $.848 $.842 5% Jun 215 $.8475 $.839 5% Jul 215 $.8469 $.836 5% Aug 215 $.8464 $.834 5% Sep 215 $.8459 $.832 5% Oct 215 $.8455 $.83 5% Nov 215 $.8451 $.828 5% Dec 215 $.8447 $.828 5% Jan 216 $.8444 $.828 5% Feb 216 $.8441 $.829 5% Mar 216 $.8438 $.831 5% Apr 216 $.8437 $.833 5% May 216 $.8436 $.836 5% Jun 216 $.8435 $.838 5% Jul 216 $.8435 $.84 5% Aug 216 $.8435 $.843 5% Sep 216 $.8435 $.845 5% Oct 216 $.8436 $.847 5% Nov 216 $.8436 $.85 5% Dec 216 $.8436 $.852 5% Strip as March 5, 215. Source: FirstEnergy Capital Corp., NGX. 15

16 DEMAND RECOVERY IS COMING BUT COULD BE LIMITED Emerging economies will lead the way higher in the coming years. We expect that more of a price driven demand recovery will emerge in late stages of 215 or early 216. Recovery will still be modest as efficiency gains, fuel substitution and tax/subsidy changes help to mute the demand response. US $/bbl $125 $1 $75 $5 $25 $ Quarterly Oil Demand vs. Brent Price Demand 4Q Lagged Moving Average Avg. Quarterly Brent Price World Oil Demand Growth mm bbl/d (1.) (2.) Source: FirstEnergy Capital Corp., IEA Source: FirstEnergy Capital Corp., Bloomberg, IEA. mm bbl/d (1.) (2.) (3.) 16

17 OPEC SUPPLY AND OUTLOOK OPEC Crude Oil Supply by Country mm bbls/d e 216e Algeria Angola Ecuador Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia UAE Venezuela Total Source: FirstEnergy Capital Corp., IEA. thou. bbl/d 32, 31,5 31, 3,5 3, 29,5 29, OPEC Crude Oil Supply , 31,5 31, 3,5 3, 29,5 29, Jan Mar May Jul Sep Nov Source: FirstEnergy Capital Corp, IEA. No cuts still means no cuts; we do not expect OPEC to make any production changes at its June meeting. Price is the balancing mechanism for the market for the foreseeable future, not OPEC. We are assuming some recovery in Iran volumes and more upside from Iraq; these two, plus Libya, remain wildcards. thou. bbl/d 1,4 1,2 1, 9,8 9,6 9,4 9,2 9, Saudi Arabia Crude Oil Supply ,4 1,2 1, 9,8 9,6 9,4 9,2 9, Jan Mar May Jul Sep Nov Source: FirstEnergy Capital Corp, IEA. 17

18 WHAT ABOUT OTHER SUPPLIERS? BRAZIL AND RUSSIA Brazil should see some deceleration as offshore is ramped up this year, but not much extra for 216; Petrobras heavily indebted and facing huge corruption scandal as well. Russian production volumes will take a hit on lower prices and sanctions, despite massive depreciation of the rouble. thou. bbl/d (5) Brazil Crude Oil Supply (38) Source: FirstEnergy Capital Corp., IEA. thou. bbl/d (2) (4) (6) (8) thou. bbl/d (1) (2) Non-OPEC Supply Excl. Canada/U.S. Russia Crude Oil Supply (126) (155) (93) Source: FirstEnergy Capital Corp., IEA. (6) 253 (39) (195) Source: FirstEnergy Capital Corp., IEA. 5 18

19 SHAPE OF THE PRICE RECOVERY AND DRIVERS We see a longer and slower price recovery than in prior price crashes. Market is having to deal with a supply driven overhang, not a demand driven one. No OPEC response to balance out the market as in previous cycles. There is a massive inventory overhang that has to be worked through at the same time a demand recovery is likely to be more tepid than in previous post crash demand episodes. Longer term, we see a recovery to US $89 range for Brent as we expect that OPEC capacity will tighten as we are not that optimistic of Iraq s future growth potential. Assuming U.S. oil exports post-217. $16 $14 $12 $1 $8 $6 $4 $2 $ WTI Price Crashes and Recoveries US $/bbl M-12 M M+12 M+24 M+36 Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $16 $14 $12 $1 $8 $6 $4 $2 $ Brent Price Crashes and Recoveries M-12 M M+12 M+24 M+36 Source: FirstEnergy Capital Corp., Bloomberg. 19

20 CRUDE OIL MARKET CONCLUSIONS Despite the immense inventory situation, price crash may have reached bottom in January; tenuous signs of a rebalancing starting to emerge, but still a long way to go. U.S. supply deceleration and potential decline is the key to a more sustained price recovery, but inventories will hold back any major price upside. U.S. supply growth will be slow to emerge, but eventually the U.S. will have to import a modestly greater amount of barrels from the Atlantic Basin; this will be key in relieving oversupply on a global scale. OPEC will stand firm on its production decision, likely for the remainder of 215 and possibly all of it will no longer act as the balancing mechanism. Global oil demand recovery will be tepid; growing signs that the price drop is finally starting to generate some modest demand response. Price recovery to be slower and lower than in previous cycles; no return to US $1 per barrel in our outlook; Iran and Iraq could be price spoilers to downside. Upside for Canadian industry coming despite low and slow price recovery; better access to U.S. market and overseas markets via GOM; likely to begin backing out Venezuelan and Colombian barrels from GOM as more Canadian heavy arrives. U.S. supply to moderate prices longer term, but must have better global access. 2

21 21 NATURAL GAS MARKETS NEGATIVE PRICE PRESSURES REMAIN WITH ONLY A MODEST RECOVERY (IF YOU CAN CALL IT THAT)

22 22 LATEST NATURAL GAS PRICES AND FORECAST Nymex Near Month Natural Gas Prices US $/mmbtu $7. $6. $5. $4. $3. $2. $1. $ $7. $6. $5. $4. $3. $2. $1. $. J F M A M J J A S O N D Source: FirstEnergy Capital Corp., Bloomberg. Cdn $/mcf $7. $6. $5. $4. $3. $2. $1. $. AECO Daily Natural Gas Price $7. $6. $5. $4. $3. $2. $1. $. J F M A M J J A S O N D J Source: FirstEnergy Capital Corp., Enerdata. Nymex NatGas - US$/mmbtu NGX AECO - C$/mcf History Strip Diff. History Strip Diff. Jul 214 $4.2 $4.12 Aug 214 $3.9 $3.94 Sep 214 $3.93 $3.99 Oct 214 $3.8 $3.68 Nov 214 $4.23 $3.94 Dec 214 $3.51 $3.21 Jan 215 $2.93 $2.75-6% $2.78 $ % Feb 215 $2.75 $2.5-9% $2.78 $ % Mar 215 $2.76 $ % $2.68 $1.89-3% Apr 215 $2.35 $ % $1.89 $ % May 215 $2.5 $ % $2.6 $ % Jun 215 $2.75 $2.92-6% $2.36 $ % Jul 215 $2.75 $2.97-7% $2.36 $ % Aug 215 $2.75 $2.98-8% $2.36 $ % Sep 215 $2.75 $2.97-7% $2.37 $ % Oct 215 $2.5 $ % $2.19 $ % Nov 215 $2.75 $3.8-11% $2.49 $ % Dec 215 $3. $3.23-7% $2.78 $ % Jan 216 $3.5 $3.35 4% $3.55 $3.28 8% Feb 216 $3.25 $3.34-3% $3.26 $3.27 % Mar 216 $3. $3.28-8% $2.96 $3.19-7% Apr 216 $3. $3.13-4% $2.84 $3. -5% May 216 $3.25 $3.13 4% $3.14 $2.94 7% Jun 216 $3.5 $ % $3.44 $ % Jul 216 $3.5 $3.21 9% $3.44 $3. 15% Aug 216 $3.75 $ % $3.73 $3. 25% Sep 216 $4. $3.2 25% $4.3 $3. 35% Oct 216 $4. $ % $4.3 $ % Nov 216 $4.25 $ % $4.27 $ % Dec 216 $4.5 $3.47 3% $4.56 $ % Strip as of March 5, 215. Source: FirstEnergy Capital Corp., Bloomberg, NGX.

23 23 FIRSTENERGY NATURAL GAS PRICE FORECAST US$/mmbtu $6. $5. $4. $3. $2. $1. $. Nymex Natural Gas $4.26 $4.4 $5. $3.63 $ Source: FirstEnergy Capital Corp., Bloomberg. Cdn $/mcf $6. $5. $4. $3. $2. $1. $. AECO Natural Gas $4.47 $4.52 $5.21 $3.61 $ Source: FirstEnergy Capital Corp., Bloomberg.

24 WHERE DO THINGS STAND NOW? Latest winter heating season has been something of a dud in terms of storage withdrawals; warm December, followed by cold January and February, but cumulative withdrawals still a little below average. U.S. domestic supply growth remains very strong and has been suppressing storage withdrawals. Storage levels in most regions near or above five-year averages. Structural demand growth continuing, but not fast enough to absorb all supply growth. Canadian markets under pressure from high storage and increasing competition from Marcellus/Utica. Current market sentiment remains very price bearish as supply trends look very likely to overwhelm demand growth. 215 looking similar in spirit to 212 in that prices will likely have to be low enough to incentivize additional gas burn in power generation. Summer outlooks calling for above normal temps for east and west coasts; U.S. LNG exports to begin late price impacts uncertain. 24

25 U.S. STORAGE WITHDRAWAL SEASON HAS BEEN SUB-PAR Despite cold of January and February 215, storage withdrawal season has been less than average for the U.S. U.S. winter HDDs have been close to 3 year average, but warm December was key to putting downward pressure on prices for the withdrawal season. U.S. domestic supply growth has been key in moderating stronger withdrawals during the cold snaps. U.S. Weekly Cumulative Withdrawals bcf1 (3) (7) (1,1) (1,5) (1,9) (2,3) (2,7) (3,1) Week 1 Week 8 Week 15 Week 22 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 5 Yr. Avg (3) (7) (1,1) (1,5) (1,9) (2,3) (2,7) (3,1) bcf 4, 3,5 3, 2,5 2, 1,5 1, 5 U.S. Working Natural Gas Storage 5 Yr. Hi-Lo , 3,5 3, 2,5 2, 1,71 1,5 1, 5 Jan-2 Mar-27 Jun-19 Sep-11 Dec-4 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 4, 3,5 3, 2,5 2, 1,5 1, 5 U.S. End Winter Storage Sensitivities bcf Current Cold Cool Cold: 1,396 bcf Cool: 1,562 bcf 5 Yr.: 1,56 bcf 5 Yr. Avg. Oct-31 Dec-6 Jan-11 Feb-16 Mar-24 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 25

26 STORAGE AND STORAGE REFILL IS NOT A PROBLEM bcf 3, 2,5 2, 1,5 1, 5 bcf 4,25 4, 3,75 3,5 3,25 3, 2,75 U.S. End-March Storage Outcomes 1,956 1,968 1, Source: FirstEnergy Capital Corp., US DOE/EIA. U.S. End-October Storage Outcomes 3,861 3,841 3, Source: FirstEnergy Capital Corp., US DOE/EIA. Storage to exit near 1,5 bcf at end March; lower in the mid-1,4s bcf is possible, depending on weather. Not really going to help offset our price bearish outlook for gas. Storage injections showed the power of supply growth in terms of generating a record cumulative injection. Not as much refill needed this season so prices will have to fall further. bcf 3, 2,5 2, 1,5 1, 5 U.S. Storage Summer Injections 2,453 2,733 2, Source: FirstEnergy Capital Corp., US DOE/EIA. 26

27 CANADIAN NATURAL GAS STORAGE LEVELS Canadian storage seeing a weaker than average withdrawal season, except in the East. We expect storage to rise back to historic averages or above by the end of the injection season. U.S. supply growth has been pushing back western gas supplies as the east relies more on Marcellus/Utica gas. bcf Canada West Natural Gas Storage 5 Yr. Hi-Lo Jan-1 Mar-25 Jun-17 Sep-9 Dec-2 Source: FirstEnergy Capital Corp. bcf Canada Working Natural Gas Storage 5 Yr. Hi-Lo Jan-1 Mar-25 Jun-17 Sep-9 Dec-2 Source: FirstEnergy Capital Corp. bcf Canada East Natural Gas Storage 5 Yr. Hi-Lo Jan-1 Mar-25 Jun-17 Sep-9 Dec-2 Source: FirstEnergy Capital Corp. 27

28 SUPPLY OUTLOOK UNDAUNTED BY LOW PRICES U.S. supply growth remains rampant, powered primarily by Marcellus/Utica volumes. Year-to-date gains in supply have been 5 to 6 bcf/d. We expect growth will moderate into the 3 to 4 bcf/d range later in the year as some pipe constraints hold back Marcellus/Utica volumes. bcf/d U.S. Natural Gas Supply Growth Source: FirstEnergy Capital Corp., US DOE/EIA U.S. Weekly Dry Marketable Gas Supply bcf/d U.S. Gas Rig Productivity vs. Gas Price mmcf/d/rig Jan Mar May Jul Sep Nov Source: FirstEnergy Capital Corp., Bloomberg. Rig Productivity (LHS) Nymex Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. US$/mmbtu $6. $5. $4. $3. $2. $1. $. 28

29 SHALE GAS STILL LEADS THE WAY Largely a Northeast supply growth story as Marcellus/Utica supplies will grow into available pipeline expansions, but still insufficient to meet all Northeast supply growth. Expect more robust growth for 216 and 217 on more pipe adds; estimates place standing Northeast well count well above 1, wells. U.S. Natural Gas Supply by Basin U.S. Total Marketable Gas incl. Shale Gas bcf/d vs. 213: +3.8 bcf/d 215 vs. 214: +4.4 bcf/d 216 vs. 215: +3.3 bcf/d Jan-14 Jan-15 Jan-16 Jan-17 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. Other Shale Bakken Eagle Ford Utica Marcellus Haynesville Woodford Fayetteville Barnett Antrim Non-Shale 213 Change % Change 214 Change % Change 215 Change % Change 216 Change % Change Antrim.27 (.2) -6.2%.25 (.2) -8.6%.23 (.2) -6.1%.23 (.) -.5% Barnett 4.49 (.38) -7.9% 4.14 (.34) -7.7% 3.74 (.41) -9.8% 3.48 (.26) -6.8% Fayetteville % 2.8 (.1) -.4% 2.78 (.2) -.8% 2.72 (.6) -2.% Woodford % % % 1.67 (.3) -2.% Haynesville 4.88 (1.87) -27.7% 3.97 (.91) -18.7% 3.9 (.7) -1.7% 3.81 (.9) -2.4% Marcellus % % % % Utica % % % % Eagle Ford % % % % Bakken % % % % Other (Permian) % % % % Total Shale % % % % Non-Shale (2.41) -6.4% (1.13) -3.2% 33.9 (1.26) -3.7% (1.92) -5.8% Total U.S. Gas % % % % Source: FirstEnergy capital Corp., U.S. DOE/EIA. 29

30 WHAT ABOUT ASSOCIATED GAS? The collapse in crude oil prices is having an impact on drilling in liquids rich areas where gas is a major by-product of production activity. High grading of prospects by Producers is going to offset some of the initial slowdown in drilling, helping to support gas supply volumes. We think there will be some supply slowdown during 215 and 216, but the impacts will be minimal in terms of easing the supply growth picture for the U.S. North Dakota flaring rule went into effect in 214 (Sep. 3), preventing much in the way of upside from associated gas from ND; some shut ins may be necessary, but will have virtually no impact U.S. Associated Natural Gas Supply bcf/d Eagle Ford Bakken Permian 214 vs. 213: +2.2 bcf/d 215 vs. 214: +1.9 bcf/d 216 vs. 215: +1. bcf/d Jan-14 Jan-15 Jan-16 Jan-17 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. U.S. Oil Rig Count by Basin Rigs 6 Eagle Ford Permian Bakken Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Source: FirstEnergy Capital Corp., Baker Hughes. 3

31 CANADIAN NATURAL GAS SUPPLY Producers ramped up activity in 2H14 in response to the strong prices of 1H14; up.9 bcf/d YTD. Nearly all gains have been related to shale gas in the Montney/Duvernay. Given weak pricing outlook and push back from U.S. supplies, we expect another downturn in supply. Little room for growth downpipe. Canadian Natural Gas Supply bcf/d e 216e Alberta British Columbia Saskatchewan Total WCSB East Total Gas Supply Source: FirstEnergy Capital Corp., National Energy Board mmcf/d 15,5 15, 14,5 14, 13,5 13, 12,5 12, WCSB Daily Natural Gas Supply Jan Feb Apr May Jul Source: FirstEnergy Capital Corp ,5 15, 14,5 14, 13,5 13, 12,5 12, Sep Oct Dec 5 25 (25) (5) (75) (1,) (1,25) WCSB Natural Gas Supply Growth (11) (2) (1) Source: FirstEnergy Capital Corp., company pipeline postings. 31

32 CANADA S DECLINING ROLE IN THE U.S. IMPORT EQUATION As U.S. supply continues to grow, Canada has become less important in the overall U.S. supply mix, resulting in the lowest net exports since the early 199s. REX reversal in June 215 will further erode Canada s gas export picture with largest lasting impacts expected by 216. This will place further pressure on Canadian pricing, widen the basis, and further marginalize western Canadian supplies and storage. Some longer term potential for an increase should U.S. supply growth be insufficient to meet all its demands (domestic and export); upside remains limited. mmcf/d 9, 8, 7, 6, 5, 4, 3, 2, Canadian Net Gas Exports to the U.S Jan-1 Mar-25 Jun-17 Sep-9 Dec-2 Source: FirstEnergy Capital Corp. 9, 8, 7, 6, 5, 4, 3, 2, bcf/d U.S. Net Gas Imports from Canada Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 32

33 U.S. DEMAND GROWTH IS LOOKING STRONG United States Natural Gas Demand bcf/d e 216e Residential Commercial Industrial CHP Non-CHP L&P Transporation Power Genetaio Utilities IPPs Total Demand Source: FirstEnergy Capital Corp., U.S. DOE/EIA. bcf/d (1.) (2.) U.S. Natural Gas Demand Growth Source: FirstEnergy Capital Corp., US DOE/EIA. U.S. demand growth has been robust in recent years as lower prices have begun to generate expansion in the power and industrial sectors. U.S. economy doing generally well for 215 and should spur further structural improvements in demand. Lower prices of recent months are already resulting in demand gains in the power generation and industrial sectors beyond what could be expected in terms of weather impacts. Our outlook for power generation and industrial gains is conservative versus other Street estimates, so further upside is possible. Gas burn facing challenges from renewables in the West and Texas. 33

34 U.S. POWER GENERATION WILL RESPOND TO LOWER PRICES Lower prices and new emission restrictions should spur solid expansion of gas power burn. More coal retirements beyond those announced so far are likely, especially if utilities think gas prices will remain sub- US $4.5 long term. Nuke retirements making an impact. Northeast and Southeast likely to see biggest upside for gas power burn. U.S. Coal Fired Generation Retirements bcfe/d Source: FirstEnergy Capital Corp., U.S. DOE/EIA. bcf/d (1.) (2.) (3.) (4.) U.S. Power Gen. Gas Demand Growth (2.6) (.1) Source: FirstEnergy Capital Corp., US DOE/EIA. bcf/d (.5) (1.) (1.5) U.S. Industrial Gas Demand Growth Source: FirstEnergy Capital Corp., US DOE/EIA. 34

35 CANADIAN NATURAL GAS DEMAND Canadian gas demand very weather dependent. Little in the way of structural growth in power generation with Ontario demand flat, more nukes available and all coal plants now retired. Alberta has modest upside on expanding power generation and oilsands. Alberta Oilsands Natural Gas Demand mmcf/d 2,7 2,4 2,1 1,8 1,5 1, ,89 1,758 2, Souce: FirstEnergy Capital Corp., National Energy Board. bcf/d (.2) (.4) Canadian Natural Gas Demand (.3) Source: FirstEnergy Capital Corp. Alberta/Ontario Gas Power Demand mmcf/d 1, Alberta Ontario Source: Firs tenergy Capital Corp. 35

36 U.S. GROWING GAS EXPORT POTENTIAL Rising exports to Mexico and LNG provide the single biggest outlet and upside for growing U.S. domestic supplies. Some potential that rapid expansion could help to tighten the market and push prices back to US $4+ handle. Some LNG projects could be very price sensitive, however. bcf/d U.S. Annual LNG Exports Source: FirstEnergy Capital Corp., US DOE/EIA. U.S. Annual LNG Export Capacity (Year End) bcf/d Corpus Christi T1&2 Jordan Cove T1&2 Sabine Pass T5&6 Cove Point T1 Cameron T1&2 Freeport T1&2 Sabine Pass T3&4 Sabine Pass T1&2 Existing Re-Export Source: FirstEnergy Capital Corp., Reuters. bcf/d U.S. Net Gas Exports to Mexico Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 36

37 U.S. LNG EXPORT PROJECTS POWERING AHEAD United States LNG Export Projects/Proposals Fully Approved or Approved and Under Construction Project Owners Capacity (mmcf/d) Status Sabine Pass Cheniere 2,4 Under Construction, finish late 215 (T 1 & 2), mid-late 217 (T 3 & 4). Freeport LNG Freeport LNG 1,8 Under Construction; early 218 completion. Dominion Cove Point Dominion 8 Under Construction; mid-218 completion. Cameron LNG Sempra 1,7 Under Construction; late 217 early 218 completion. Total 6,7 Likely to Receive Approval Corpus Christi Cheniere 2,1 FERC approved; pending DOE approval. Jordan Cove Energy Jordan Cove Energy 1,2 FERC EIA approval; pending DOE approval. Lake Charles Energy Transfer 2, DOE approved; pending FERC approval; early 219 completion? Oregon LNG Oregon LNG Partners 1,25 DOE approved; FERC pending. Total 6,55 Grand Total 13,25 Source: FirstEnergy Capital Corp., Waterborne Energy Inc., Reuters. 37

38 BUT NOT SO FAST. OIL S HAUNTING IMPACT ON GAS Our lower crude oil price outlook is impacting oil-linked LNG prices. Combined with more spot volumes entering the market over the next few years, LNG prices could remain under pressure and below our price outlook. Some projects could face very thin economics and returns if LNG prices hold under US $1 to US $11 range. End result could be bearish for North American pricing as take-or-pay agreements at new U.S. LNG projects US $/mmbtu mean offtakers can pay the fee, but $2 not take the gas, forcing gas back into $16 the North American grid. $12 We suspect that most buyers of the $8 LNG will find a way to make money $4 and work around lower LNG prices. $ U.S. to become second largest LNG supplier in the world by 22. Potential Export Metrics (Using FCC 217 Prices) US $/mmbtu Unit Pricing Cargo Pricing Henry Hub Price $4.4 $14,256, SPA HH factor 115% 115% Henry Hub Purchase $5.6 $16,394,4 Liquefaction/Export Fee $2.75 $8,91, FOB Price $7.81 $25,34,4 Shipping to Japan $3. $9,72, Delivered Price $1.81 $35,24,4 Japan Price $11.57 Implied Netback $.76 $2,66, Source: FirstEnergy Capital Corp., Waterborne Energy Inc. Asia Landed LNG Prices $16.29 $12.95 $11.57 $ Source: FirstEnergy Capital Corp., Bloomberg. 38

39 39 WHAT ABOUT CANADIAN LNG EXPORTS? There are about 2 contenders looking at exporting Canadian gas as LNG from both the east and west coasts; projects on the west coast (British Columbia) remain the most advanced, but also the most in limbo. Pacific NW project still in deferral stage, but Petronas saying it will decide by June 215; is re-examining cost structures to push down overall costs; federal government recently proposed new capital cost allowance rules for LNG related projects to help overall economics (3% for equipment, 1% for buildings). Very tentative signs that Petronas may decide to go ahead with its project. Canada LNG Export Proposals Project Partners Location Capacity Approval to Potential mmcf/d Export? On Stream Comments Pacific Northwest LNG LNG Canada Petronas, Sinopec, Japex, Petroleum Brunei, Indian Oil Corp. Shell Canada, KOGAS, Mitsubishi, PetroChina Prince Rupert 2,6 Yes (25 YR) Kitimat 3,2 Yes (25 YR) Douglas Channel LNG Altagas, Idemitsu, EDF. Kitimat 7 Yes (25 YR) Kitimat LNG Chevron Canada Kitimat 1,3 Yes (2 YR) mid FID decision has been deferred until mid-215? Has pipeline, site, and export permits in place. Has pipeline proposal in place. Has filed EIA with B.C. agencies. Has estimated cost up to US $4 billion. FID in 217? Resurrection of previous proposal, barge based liquefaction. Potential merger candidate with Shell-led project?

40 Cost of gas (US$/mmbtu) 4 CANADIAN LNG PROJECTS ARE FACING THINNING MARGINS With the lower long term oil price outlook, Canadian projects face thinner margins, especially if pricing is to be based on an oil-index link. Even if a project or projects go ahead, there is no clear sign that this will benefit Western Canadian gas pricing since some projects may simply tie their reserves directly into the LNG plant; little spillover impacts and no direct buying of gas from the grid. Table assumptions: liquefaction cost US $3., tanker shipping US $1.75. Estimated Netbacks for Generic BC LNG Export Project 3.5% Net Income Royalty - Post Capital Cost Payout (Pre 237) Realized price (US $ mmbtu) $6.51 $8. $9. $1. $11. $12. $13. $2.5 $.72 $1.69 $2.65 $3.62 $4.58 $5.55 $3. $.24 $1.21 $2.17 $3.14 $4.1 $5.7 $3.5 ($.24) $.72 $1.69 $2.65 $3.62 $4.58 $4. ($.72) $.24 $1.21 $2.17 $3.14 $4.1 $4.5 ($1.21) ($.24) $.72 $1.69 $2.65 $3.62 $5. ($1.69) ($.72) $.24 $1.21 $2.17 $3.14 Source: FirstEnergy Estimates

41 NATURAL GAS MARKET CONCLUSIONS Despite the recent cold snaps, we remain overall price bearish for 215, thinking prices will go lower into the spring. Lower price swill be needed to incentivize additional gas power burn and prevent a storage blowout at the end of October. U.S. supply little impacted by lower prices as most growth is pipeline expansion related from the Northeast; most Producers in the region have already sunk costs into wells and are waiting for tie ins; less price sensitive on low finding costs. Canadian supplies to slow into H215 on lower prices and lack of downstream markets for gas; wider basis expected. Looking for longer term structural growth in U.S. industrial and power generation sectors as lower prices and environmental restrictions force more gas use. Rapid expansion of U.S. gas into Mexican and LNG export markets should help to gradually tighten North American market into 217/18. Canadian markets facing bifurcation as East is increasingly supplied by Northeast U.S. supplies and West is marginalized by U.S. supply/pipeline expansions. Lower oil prices could threaten economics of LNG projects, but U.S. expansion a go. 41

42 42 Thank You and Questions?