OUTLOOK FOR CRUDE OIL AND NATURAL GAS MARKETS: BUSY TIMES AHEAD

Transcription

1 OUTLOOK FOR CRUDE OIL AND NATURAL GAS MARKETS: BUSY TIMES AHEAD A Presentation to the IECA 22 nd Annual Canadian Conference May 26, 214 Data and closing prices as of May 16, 214 Martin King, Vice President, Institutional Research Elaine Williams, CFA, Research Associate

2 WORLD CRUDE OIL MARKETS

3 FIRSTENERGY S CRUDE OIL PRICE FORECAST We have tilted to a more neutral stance for WTI and Brent, expecting essentially flat pricing going forward. Geopolitics provides some upside, but is very transitory. Price risks relatively balanced between macroeconomic indicators (e.g. slower China) and potential for continued problems on the supply side of the market (Libya, others). Canadian price diffs stabilizing; expecting more of the same. US $/bbl $11 $1 $9 $8 $7 $6 $5 Nymex WTI $98.5 $97.5 $95.75 $95.5 Forecast Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $13 $12 $11 $1 $9 $8 $7 $6 $5 Brent $18.7 $14.8 $1.5 $1. Forecast Source: FirstEnergy Capital Corp., Bloomberg.

4 PRESENT STATE OF THE GLOBAL MARKET Lots of geopolitical worries are buffeting the market, especially Ukraine; this is more to do with general big political uncertainties in European power alignment than anything to do with a major supply disruption to Russia. Global demand generally holding up on what appears to be steadily improving economies, led by the U.S.; no hard landing for China is expected. Crude inventories are (very) high in the U.S., but at low end of historical ranges for Europe and Japan; refined product inventories looking generally average to tight everywhere. Libya supply restart chances improving, but situation remains very dynamic and unpredictable. Return of Iran being conjectured, but both sides still seem to be far apart on major uranium enrichment issues.

5 WTI CRUDE OIL PRICES US $/bbl $12 $11 $1 $ $12 $11 $1 $9 $8 $7 $6 212 Avg: $ Avg: $ YTD: $99.63 (to May 16, 214) Jan Feb Mar Apr May Jun Source: FirstEnergy Capital Corp., Bloomberg. $8 $7 $6 Jul Aug Sep Oct Nov Dec Jan

6 BRENT CRUDE OIL PRICES US $/bbl $ $13 $12 $12 $11 $11 $1 $9 $8 Jan Feb Mar Apr May Jun Source: FirstEnergy Capital Corp., Bloomberg. 212 Avg: $ Avg: $ YTD: $18.1 (to May 16, 214) Jul Aug Sep Oct Nov Dec Jan $1 $9 $8

7 WTI-BRENT CRUDE OIL PRICE SPREAD US $/bbl $3 $25 $ Avg: $ Avg: $ YTD: $8.39 (to May 16, 214) $3 $25 $2 $15 $15 $1 $1 $5 $5 $ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FirstEnergy Capital Corp., Bloomberg. $

8 THE FUNDAMENTALS STILL MATTER Geopolitical stuff is just noise we do not factor any of this into our price outlooks as it is impossible to predict and nearly impossible to quantify. Fundamentals are still driving the global oil markets, as they always have. Demand has been doing better on solid U.S. recovery and hopeful signs of a pick up in Europe. Supplies outside of North America growing slowly, but balanced by well managed OPEC supplies. OPEC looking for a Brent price near US $1 as ideal. Global inventories have been run down in many regions on supply problems, better economic performance, and weather.

9 WORLD CRUDE OIL DEMAND Million b/d (1.) (2.) World Oil Demand Growth Source: FirstEnergy Capital Corp., IEA. Forecast Advanced Economy Oil Demand Growth Million b/d (.5) (1.) (1.5) (2.) (2.5) (.5).1.1. (.1) (.1) (.1) Source: FirstEnergy Capital Corp., IEA. Forecast We have become much more optimistic on oil demand growth this year given U.S. recovery (and cold winter). Emerging economies are still doing relatively well, despite worries over China Emerging Economy Oil Demand Growth Million b/d Source: FirstEnergy Capital Corp., IEA. Forecast

10 U.S. CRUDE OIL DEMAND Thou. b/d 5 (5) (1,) (1,5) United States Crude Oil Demand (46) (27) (47) (63) Source: FirstEnergy Capital Corp., IEA. Forecast Coming off a seasonal low for demand, but we think that things will pick up quickly as the driving season approaches and the economy recovers further. Better economy and the cold winter have made a big difference in our U.S. outlook. We still expect lower demand growth on long term on efficiency gains and fuel substitution. Thou. b/d 2,5 2, 19,5 19, 18,5 18, U.S. Weekly Implied Oil Demand 18,725 Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA ,5 2, 19,5 19, 18,5 18,

11 CHINESE OIL DEMAND Thou b/d 12, 11, 1, 9, 8, 7, 6, China Monthly Oil Demand 5 Yr. Hi-Lo , 11, 1, 9, 8, 7, 6, Jan Mar May Jul Sep Nov Source: FirstEnergy Capital Corp., U.S. DOE/EIA. We have factored in a moderately paced expansion as the economy shifts from manufacturing intensive to more of a consumer focus in the coming decade. More fuel substitution coming as well. Monthly data should improve ahead as new refineries ramp up into full production. Slower economy will mean more moderate pace of demand expansion going forward. Thou. b/d 1, (2) China Oil Demand Source: FirstEnergy Capital Corp., IEA. Forecast

12 CALL ON OPEC AND OPEC SUPPLY mm b/d OPEC Supply and Call Call on OPEC OPEC Production Forecast 21 Q1 212 Q1 214 Q1 216 Q1 Source: FirstEnergy Capital Corp., IEA. Note: Difference between line and column represents inventory build or draw Overall supply stays fairly flat in our outlook as drops in Saudi/Kuwait/UAE output offset expected longer-term gains from Iraq (as well as Iran and Libya in the short run). This might be too bearish a view for OPEC should demand perform better than expected and there is a greater push to build inventories in the emerging economies. Those barrels would come from OPEC. Thou b/d 3, 2, 1, (1,) (2,) OPEC Oil/NGL Supply Growth 1,77 (733) 178 (31) (259) (648) (662) Source: FirstEnergy Capital Corp., IEA. Forecast

13 NON-OPEC CRUDE OIL SUPPLY Thou. b/d 2, 1,75 1,5 1,25 1, (25) Non-OPEC Oil Supply Growth 1,313 1,752 1,294 1, Source: FirstEnergy Capital Corp., IEA. Forecast We have also become less pessimistic on supplies from such countries as China, Mexico, Russia, and Brazil. No surprise in that Non-OPEC is seeing a significant multiyear expansion in supply led by Canada and the United States. Thou b/d (2) (4) (6) (8) Non-OPEC Supply Excl. Canada/U.S. (751) (19) Source: FirstEnergy Capital Corp., IEA. Forecast

14 U.S. CRUDE OIL SUPPLY U.S. Petroleum Production Thou. b/d 12, Crude Oil NGLs 1, 8, 6, 4, 2, Jan-5 Jan-7 Jan-9 Jan-11 Jan-13 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. Thou. b/d 1,4 1,2 1, (2) U.S. Crude Oil Supply Growth 1,121 1,71 1, Source: FirstEnergy Capital Corp., IEA. Forecast We just keep revising up this outlook with each passing month, it seems. Eventual shallowing of growth as major basins reach more mature phase, but we have growth well into the 22s. Thou. b/d 9, 8, 7, 6, 5, 4, U.S. Lower 48 Crude Oil Production 5 Yr Hi-Lo , 7,91 Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA. 8, 7, 6, 5, 4,

15 CANADIAN CRUDE OIL SUPPLY Thou. b/d (1) Canadian Crude Oil Supply Growth Source: FirstEnergy Capital Corp., IEA. Forecast Most growth is bitumen related and a majority of that is SAGD in nature. In this timeline, all of these projects are already underway in terms of expansion or being newly sanctioned. Oilsands production plans are on track and there is enough take away capacity for several years at a minimum to allow for this growth. We have also factored in growth in light crude oil supplies. Thou. b/d 3,5 3, 2,5 2, 1,5 1, 5 Oilsands Production Growth Synthetic Bitumen Forecast Souce: FirstEnergy Capital Corp., National Energy Board.

16 U.S. CRUDE OIL INVENTORIES mm bbls U.S. Crude Oil Inventories 5 Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA When measured against refinery demand, high crude oil inventories are only average in terms of inventory cover. Helps to explain why inventory levels appear to be disconnected from WTI prices. New all-time highs for crude stocks for this time of year. We think a rollover is coming within a few weeks as refining activity will be picking up sharply. Days U.S. Refinery Days of Cover 5 Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA.

17 THE WTI PRICING QUESTION: IMPLODE OR NOT IMPLODE? Despite geopolitical noise, WTI pricing and its forward curve continue to be haunted by the concept of super congestion i.e. there will be so much crude in the mid-continent and Gulf Coast due to domestic production increases and insufficient take up by exports and refiners, that prices will have to pull back heavily at some point. This oversupply theory has been telegraphed to the market for some time, and we think that there are enough things happening that the price meltdown scenario can be avoided. There is more storage capacity. Refiners still have more room to the upside. More room for refined product exports. Lower waterborne crude oil imports. More options via pipeline and rail. Potential for re-exports of crude oil.

18 U.S. PADDS 2 AND 3 AND CUSHING INVENTORIES More rail and pipe connections mean that WTI and Gulf Coast prices have to be considered in the context of PADDs 2 and 3 combined. Working capacity for these two regions is 4 million barrels. mm bbls U.S. Crude Oil Stocks PADD 3 5 Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA. U.S. Crude Oil Inventories PADD mm bbls Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp, US DOE/EIA. Right now, PADD 3 is the focus of the very high crude oil inventories; negative price impacts have been minimal. So far, it is does not seem to be a big deal given the capabilities of the region to deal with crude.

19 U.S. PADD 2 AND 3 REFINING ACTIVITY Given solid demand in the U.S. and increasingly attractive refining margins, PADD 2 and 3 refiners could up intake by another 5 thousand b/d over previous peaks. Bloated crude stocks likely to move a lower, not higher. mm b/d U.S. PADD 3 Refinery Runs 5 Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA. mm b/d U.S. PADD 2 Refinery Runs 5 Yr Hi-Lo Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA U.S. PADD 2/3 Effective Refining Capacity Thou. b/d 9,5 9, 8,5 8, 7,5 7, 6,5 PADD 3 (LHS) PADD 2 (RHS) Jan-97 Jan-1 Jan-5 Jan-9 Jan-13 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 4, 3,9 3,8 3,7 3,6 3,5 3,4 3,3

20 U.S. REFINED PRODUCT EXPORTS With relatively cheaper crude inputs but refined product prices determined globally, refiners have plenty of reason to still export more refined product and the capacity to do so. Thou. b/d 1,4 1,2 1, U.S. Exports of Diesel Fuel 5 Yr Hi-Lo , ,2 1, Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp. U.S. DOE/EIA. Thou. b/d 4, 3,5 3, 2,5 2, 1,5 1, U.S. Exports of Refined Products 5 Yr Hi-Lo , 3,4 3,5 3, 2,5 2, 1,5 1, Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp. U.S. DOE/EIA. Diesel exports remain the most attractive of the refined products to export. Transportation and power generation use in Latin America and West Africa remain prime destinations.

21 U.S. CRUDE BY RAIL AND PIPELINE MOVEMENTS More and more crude continues to move via rail, expanding the end use options for Bakken production and to avoid the Gulf Coast. More room into PADDs 1 and 5. Crude Movements: PADD 3/PADD 2 Thou. b/d 1,8 1,6 1,4 1,2 1, PADD 2 to PADD 3 PADD 3 to PADD 2 Jan-9 Jan-11 Jan-13 Jan-15 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 1,8 1,6 1,4 1,2 1, Thou. b/d 1,6 1,4 1,2 1, 8 6 U.S. Railcar Movements of Petroleum Range 214 1,6 Jan Mar May Jul Sep Nov Source: FirstEnergy Capital Corp., U.S. DOE/EIA, AAR. 1,4 1,2 1, 8 6 Movements to PADD 3 from PADD 2 should be pushing on 1 million b/d by mid-year. There are no pipeline bottlenecks at Cushing anymore.

22 U.S. WATERBORNE CRUDE OIL IMPORTS Optionality is becoming limited. Contractual obligations and some must-run refineries will limit downside for imports. Next swath of barrels to be backed out could be heavy from Mexico and Venezuela. U.S. PADD 1 Waterborne Crude Oil Imports Thou. b/d 1,8 1,6 1,4 1,2 1, Yr Hi-Lo ,8 1,6 1,4 1,2 1, Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA. Thou. b/d 9, 8, 7, 6, 5, 4, 3, U.S. Waterborne Crude Oil Imports Jun-1 Jun-11 Jun-12 Jun-13 Jun-14 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. U.S. PADD 3 Waterborne Crude Oil Imports Thou. b/d 7, 6, 5, 4, 3, 2, 5 Yr Hi-Lo , 3,363 Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., US DOE/EIA. 6, 5, 4, 3, 2,

23 CRUDE OIL RE-EXPORTS THE KEY CHANGE TO COME? Re-exports of crude oil via the Gulf Coast may prove to be the most important development in many years and also avoid the super congestion thesis can go anywhere, not just Canada. Enbridge has acknowledged it will be re-exporting Canadian crude; Repsol has just re-exported 6 thousand barrels WCS crude in May. Other firms are also being granted licenses to reexport Canadian crude. There are no legal restrictions and no Jones Act issues to contend with. We think this could rise by 4 to 5 thousand b/d in the next two years over and above current data. Thou. b/d U.S. Crude Oil Exports to Canada Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 Source: FirstEnergy Capital Corp., U.S. DOE/EIA.

24 IMPLICATIONS FOR CANADIAN CRUDE OIL We think that the infrastructure issues (pipeline and rail) have now expanded to the point that price blowouts will be much less frequent than in the past. Flexibility to move barrels from Alberta all the way to the Gulf Coast means that Canadian barrels now have to essentially compete more on quality and transportation costs. For WCS pricing, improved take up of heavy oil by the BP Whiting refinery is very beneficial; growing access to the Gulf Coast means that a greater price connection to Mexican Maya has to be considered. For light barrels, preference by refiners is still for synthetic, which should ensure a strong bid and close connection to WTI. Canadian supply growth can be accommodated for the next several years, but by 218/19, more take away capacity will be needed (Keystone XL, Energy East?).

25 CANADIAN LIGHT/HEAVY OIL PRICE DIFFERENTIALS We tightened up the diffs as we were simply too punitive in our previous outlook. The ability to move light barrels around the continent should keep SCO tight to WTI. US $/bbl $5 $4 $3 $2 $1 $ WTI-WCS Price Differential Actuals FCC Forecast (Mar. 214) FCC Forecast (Dec. 213) Discount Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $2 $15 $1 $5 $ ($5) ($1) ($15) SCO-WTI Price Differential Discount Actuals FCC Forecast (Mar. 214) FCC Forecast (Dec. 213) Premium Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., Bloomberg. We widened the spreads slightly to account for some greater competitive pressures against Mexican Maya. Allowing for transportation costs via rail and pipe, we think a diff near US $2 makes the most sense.

26 CANADIAN LIGHT/HEAVY OIL PRICE DIFFERENTIALS Blowouts may be a thing of the past for several years. We think that security of supply and refiner preference will see more WCS taken up in the Gulf Coast and that Maya will be partially backed out. WTI vs. Canadian Light Oil Prices US $/bbl $2 WCS Ed Light Syn. $1 $ ($1) ($2) ($3) ($4) ($5) Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $ ($1) ($2) ($3) ($4) ($5) WTI-WCS Price Spread Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FirstEnergy Capital Corp., Bloomberg. US $/bbl $ ($1) ($2) ($3) ($4) ($5) WCS-Maya Price Spread Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FirstEnergy Capital Corp., Bloomberg.

27 OTHER CANADIAN OIL ISSUES LOONIE S SWAN DIVE The decline in the value of the Canadian dollar has provided about a 1% uplift to Canadian dollar oil price realizations in the past few months. End of Fed tapering will maintain strength of U.S. dollar against other commodity currencies such as the C $. Worst is probably behind us, but much lower outlook for loonie adds significantly to oil/gas price and cash flow expectations going forward. $ US/$ Cdn Canada-U.S. Dollar Exchange Rate Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: Pacific Exchange Rate Center US $/Cdn $ $1.5 $1. $.95 $.9 $.85 U.S.-Canada Dollar Exchange Rate Actuals FCC Forecast (Mar. 214) FCC Forecast (Dec. 213) Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., Bloomberg. $1.5 $1. $.95 $.9 $.85

28 LIGHT-HEAVY CRUDE OIL PRICE SPREAD FORECAST FirstEnergy Crude Oil Price Differential Outlook WTI-SCO US$ WTI-WCS US$ $/bbl Old NEW Old NEW 213 Average $.77 $.12 $25.87 $ Q1 $11. $.38 $22.33 $22.11 Q2 est. $11. $1.2 $17. $21.9 Q3 est. $1. $2. $18. $21. Q4 est. $1. $1. $19. $22. Average est. $1.5 $1.1 $19.8 $ Q1 est. $8. $2. $17. $2. Q2 est. $7. $1. $15. $18. Q3 est. $5. $. $13. $17. Q4 est. $3. $1. $16. $19. Average est. $5.75 $1. $15.25 $ Average est. ($1.) ($1.) $15.25 $ Average est. ($1.) ($1.) $15.25 $15.75 Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.

29 CONCLUSIONS We think both global price markers are going to remain well supported on a combination of better demand, managed OPEC supplies, and ramifications of inventory builds for crude and refined products. Super congestion scenario for U.S. crudes and WTI may become less potent as the market evolves to deal with higher supplies and looks for more solutions; we think a major WTI price implosion is unlikely to occur. Canadian crude prices looking at smoother profiles going forward as Western Canada has become more fully integrated with the U.S. all the way to the Gulf Coast; price blowouts less likely to occur; differentials to become more transportation cost and quality based. Canadian oil equity names remain relatively more attractive on smoother pricing and growing production.

30 FIRSTENERGY CRUDE OIL PRICE FORECAST FirstEnergy Crude Oil Price Outlook West Texas Brent US $/bbl Old NEW Old NEW 213 Average $97.73 $98.5 $18.52 $ Q1 $94. $98.61 $14. $17.87 Q2 est. $92. $98.34 $1. $15.3 Q3 est. $93.67 $97.5 $99.67 $13.5 Q4 est. $94.67 $97. $99.67 $12. Average est. $93.58 $97.86 $1.83 $ Q1 est. $94. $95. $99. $1. Q2 est. $94. $96. $99. $11. Q3 est. $94. $97. $99. $12. Q4 est. $93. $95. $98. $1. Average est. $93.75 $95.75 $98.75 $ Average est. $93.5 $95. $98.5 $ Average est. $94.5 $95.5 $99.5 $1.5 Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg; est. refers to forecasted value.

31 FIRSTENERGY WTI PRICE FORECAST VS. THE STREET We are near consensus in terms of outlook. Given the price spectrum, does not seem to be a lot of super congestion price bears out there. Expectations for WTI Price in 215 (As of Apr. 29, 214 survey; Nymex value as of May. 16, 214) US $/bbl (Consensus estimate does not include Nymex value) $12 $11 $1 $9 $8 $7 FirstEnergy Consensus Nymex $95.75 $95.44 $ Source: FirstEnergy Capital Corp., Reuters. Analyst $11 $15 $1 $95 $9 $85 Expectations for WTI Price in 214 (As of Apr 29, 214 survey; Nymex value as of May. 16, 214) US $/bbl (Consensus estimate does not include Nymex value) FirstEnergy Consensus Nymex $97.5 $97.5 $ Source: FirstEnergy Capital Corp., Reuters. Analyst We are a little more optimistic than the broader market. We think that super congestion will be avoided in 215 (and probably 216).

32 NORTH AMERICAN NATURAL GAS MARKETS

33 FIRSTENERGY S NORTH AMERICAN GAS PRICE FORECAST We have increased our bullish price call for 214 while maintaining strong US $5+ pricing for Canadian price outlook increased sharply on much better than expected price performance, tighter basis and lower FX. We remain one of the most price bullish calls on the Street. This outlook may be too conservative if the 214 market fails to balance out storage at reasonable levels; tightness will cascade forward into 215 and 216 prices. US$/mmbtu $9. $8. $7. $6. $5. $4. $3. $2. $1. $. Nymex Natural Gas $3.73 $4.9 $5.25 $5.75 $5. $5.5 Forecast Source: FirstEnergy Capital Corp., Bloomberg. Cdn $/mcf $9. $8. $7. $6. $5. $4. $3. $2. $1. $. AECO Natural Gas $5.17 $5.33 $5.18 $5.2 $4.72 $3.18 Forecast Source: FirstEnergy Capital Corp., Bloomberg.

34 PRESENT STATE OF THE MARKET After high volatility in the winter, gas prices have settled down into a US $4.3 to US $4.8 range. Natural gas storage levels at 11-year lows for the U.S. and 9-year lows for Canada. Price direction has been limited by occasional bouts of profit taking, followed by short covering at the top and bottom of recent price ranges; market appears undecided on price direction. Recovering U.S. economy is helping to power industrial gas demand higher, while helping load growth in the power generation sector both price bullish for gas. U.S. supply growth has remained strong on tie-ins from Marcellus, but there is a lack of consensus on the speed and magnitude of near and medium-term U.S. supply growth. Producers showing little interest in ramping up gas focused activity.

35 NYMEX NATURAL GAS PRICES US $/mmbtu $6.5 $6. $5.5 $5. $4.5 $4. $3.5 $3. $2.5 $2. $1.5 $1. $.5 $. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Source: FirstEnergy Capital Corp., Bloomberg Avg: US $ Avg: US $ YTD: US $4.68 (to May 16, 214) $6.5 $6. $5.5 $5. $4.5 $4. $3.5 $3. $2.5 $2. $1.5 $1. $.5 $.

36 AECO NATURAL GAS PRICES Cdn $/mcf $1. $9. $8. $7. $6. $5. $4. $3. $2. $1. $. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Source: FirstEnergy Capital Corp., Enerdata. 212 Avg: $ Avg: $ YTD: $5.29 (to May 16, 214) $1. $9. $8. $7. $6. $5. $4. $3. $2. $1. $.

37 AECO-NYMEX BASIS (PRICE SPREAD) US $/mmbtu $2.5 $2. $1.5 $1. $.5 $. ($.5) ($1.) ($1.5) ($2.) Jan Feb Mar Apr May Jun Source: FirstEnergy Capital Corp., Canadian Enerdata, Bloomberg Avg: $ Avg: $ YTD: $.7 (to May 16, 214) Jul Aug Sep Oct Nov Dec Jan $2.5 $2. $1.5 $1. $.5 $. ($.5) ($1.) ($1.5) ($2.)

38 PREVIOUS STORAGE RECORDS BLOWN AWAY BY RECENT WINTER Multi-decade cold weather east of the Rockies in many locations this past winter led to a combined withdrawal from U.S. and Canadian storage that was more than 3,6 bcf, a full 8 bcf more than the previous combined record. Both countries now facing huge storage deficits to previous year and five-year average at the same time never before seen. Both countries facing record storage injection seasons at the same time to achieve reasonable November 1 storage levels never before seen. Enormous challenges facing both markets in 214 to fill storage, meet end user needs, and grow supply a truly unprecedented market situation. Despite these clear record breaking challenges, broader market s forward pricing structure shows little sign of concern. Complacent and naïve is how we would characterize the forward market.

39 COLDEST WINTER IN MANY YEARS FOR NORTH AMERICA Continental U.S. had it coldest winter since 21/2, but was biased by warm west (warmest California winter on record); parts of the Northeast and Midwest had 3 and 5 year cold winters; Chicago coldest on record since Most of Canada suffered cold east of the Rockies, for the second coldest winter in 35 years; plenty of snow added to chilling effects. HDDs 3,75 3,5 3,25 3, 2,75 2,5 2,25 2, 1,75 1,5 Canada HDDs (Nov-Mar) 211/12 212/ Source: FirstEnergy Capital Corp., Environment Canada. 213/14 U.S. HDDs (Nov-Mar) HDDs 4,5 213/14 4, 211/12 212/13 3,5 3, 2,5 2, Source: FirstEnergy Capital Corp., U.S. NOAA.

40 UNPRECEDENTED STORAGE WITHDRAWALS bcf U.S. Total Winter Storage Withdrawals bcf 3,5 3, 2,5 2, 1,5 1, 5 Canada Winter Storage Withdrawals 2, Source: FirstEnergy Capital Corp. Canadian Enerdata. 2,99 2,215 2,269 1, Source: FirstEnergy Capital Corp., U.S. DOE/EIA. bcf bcf 3, 2,5 2, 1,5 1, 5 Canada End March Storage Levels U.S. End-March Storage Outcomes , Source: FirstEnergy Capital Corp. Canadian Enerdata. 1, Source: FirstEnergy Capital Corp., US DOE/EIA.

41 NOW WE NEED UNPRECEDENTED STORAGE INJECTIONS bcf/d bcf/d Canada Avg. Injection Rates Apr to Oct Source: FirstEnergy Capital Corp. Canadian Enerdata. U.S. Average Injection Rates Apr to Oct To Reach 717 bcf. To reach 3,563 bcf Source: FirstEnegry Capital Corp., U.S. DOE/EIA. bcf Canada Storage Summer Injections Source: FirstEnergy Capital Corp. Canadian Enerdata. bcf 3, 2,5 2, 1,5 1, 5 U.S. Storage Summer Injections 2,453 2,736 2,81 1, Source: FirstEnergy Capital Corp., US DOE/EIA.

42 WHERE STORAGE STANDS NOW bcf bcf 4, 3,5 3, 2,5 2, 1,5 1, 5 Canada Working Natural Gas Storage 5 Yr. Hi-Lo Jan-1 Mar-25 Jun-17 Sep-9 Dec-2 Source: FirstEnergy Capital Corp. U.S. Working Natural Gas Storage 5 Yr. Hi-Lo , 3,5 3, 2,5 2, 1,5 1,16 1, 5 Jan-3 Mar-28 Jun-2 Sep-12 Dec-5 Source: FirstEnergy Capital Corp., U.S. DOE/EIA bcf (1) (2) (3) bcf 1, (25) (75) (1,25) Canada Gas Storage Surplus/Deficit Jan-12 Source: FirstEnergy Capital Corp. Vs. 1 Yr Ago U.S. Gas Storage Deficit/Surplus Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Source: FirstEnergy Capital Corp., U.S. DOE/EIA. Year-over-Year 5-Year Average Vs. 5 Yr Avg (1) (2) (3) Aug-12 Mar-13 Oct-13 May-14 1, (25) (75) (1,25)

43 THE ENORMOUS CHALLENGE TO REFILL STORAGE IN 214 Despite market s seeming complacency, we think it will be very challenging to refill both Canadian and U.S. gas storage to levels that are reasonable by November 1. Structural demand improvements are taking place in the industrial and power generation sectors that are biased toward more gas demand; strong prices will be needed to back out demand. Supply growth looks to be challenging as Marcellus is pipe constrained to at least 216, and other basins are not making up for constrained Marcellus growth. U.S. market also tasked with larger role of gas for export to Mexico, Canada, and to LNG (LNG starting in late 215). Strong to rising prices needed to satisfy one, some, or all of the following: incentivizing much stronger supply growth, backing out demand, and taking on higher risks for the coming winter in the event of a low storage refill.

44 U.S. NATURAL GAS WE NEED MORE SUPPLY, NOT LESS! bcf/d U.S. Natural Gas Supply Growth Forecast Source: FirstEnergy Capital Corp., US DOE/EIA. There is no doubt that the U.S. has the supply base to pull off a major expansion in supply; nearly 3% by 218. We think it just takes higher prices than seen in the past few years to make this happen. Slow down of 213 is a consequence of slower drilling, pipeline constraints in key plays, and declines in other shale and conventional gas plays. A major supply acceleration is needed in the next few years. bcf/d U.S. Long Term Natural Gas Supply Source: FirstEnergy Capital Corp., U.S. DOE/EIA.

45 SHALES WILL LEAD THE WAY, BUT MORE IS NEEDED We have added up all the shale and non-shale supply with reasonable outlooks for 214/15 growth; we are still struggling to meet our 214 supply growth number of 2.7 bcf/d; 215 requires a supply response to occur. Marcellus is growing significantly in this outlook (subject to take away capacity), but small gains in other shales and sharp declines in other dry gas plays are holding back supply (think Haynesville). More shale growth needs to be done in other plays outside of the Marcellus. Current forward price curves are far from incentivizing E&Ps to shift away from liquids/oily focused drilling in their capex programs. U.S. Total Marketable Gas and Shale Gas bcf/d vs. 212: +.8 bcf/d 214 vs. 213: +1.8 bcf/d 215 vs. 214: +3.3 bcf/d Forecast Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy capital Corp., U.S. DOE/EIA. Other Shale Bakken Eagle Ford Marcellus Haynesville Woodford Fayetteville Barnett Antrim Non-Shale

46 MARCELLUS WILL SAVE THE DAY, RIGHT? MAYBE NOT. Historical/Forecast Marcellus/Utica Supply bcf/d Pipe Capacity Forecast Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., U.S. DOE/EIA.

47 BUT IS THERE ANYTHING ELSE THAN THE MARCELLUS? U.S. Weekly Dry Marketable Gas Supply bcf/d Jan Mar May Jul Sep Nov Source: FirstEnergy Capiral Corp., Bloomberg. Without the Marcellus, U.S. supply has actually been declining since the uplift from the Haynesville in 211. More work needs to be done in dry gas plays outside of the Marcellus to power growth Market is recovering from well head freeze-offs of winter and has recently regained the record highs of November 213. We think the YoY gains may slow once we get past April. bcf/d U.S. Weekly Supply Less Marcellus Jan Mar May Jul Sep Nov Source: FirstEnergy Capiral Corp., Bloomberg

48 RETURNS TO PRODUCERS

49 OIL/NGLS AND GAS DRILLING BY BASIN So far, Producers are showing little interest in drilling gas focused plays beyond the Marcellus. Most have shifted focus to more liquids rich prospects over the past 3 years. U.S. Oil Rig Count by Basin Rigs 6 Eagle Ford Permian Williston Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FirstEnergy Capital Corp., Baker Hughes. Rigs U.S. Natural Gas Rig Count by Basin Eagle Ford Barnett Haynesville Permian Fayetteville Marcellus/Utica Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: FirstEnergy Capital Corp., Baker Hughes. The big 3 shale oil plays (and their associated gas output), have not shown much additional drilling, aside from Permian. Low NGL prices have held back some liquids focused returns.

50 CANADIAN NATURAL GAS SUPPLY mmcf/d 1, (25) (75) (1,25) WCSB Natural Gas Supply Growth (11) 3 (841) Forecast Source: FirstEnergy Capital Corp., company pipeline postings. One time uplift thanks to the start up of Deep Panuke late in 213. Gradual declines should start to set in again by 217/18; there is room for more development. More shale and our higher price outlook should incentivize more supply growth after years of losses. There is also a supply build out in anticipation of LNG exports. mmcf/d Canada East Natural Gas Supply Forecast Source: FirstEnergy Capital Corp., NEB.

51 THE DEMAND SIDE OF THE EQUATION bcf/d (1.) (2.) (3.) (4.) U.S. Power Gen. Gas Demand Growth 4.1 (2.6) (.7) Forecast Source: FirstEnergy Capital Corp., US DOE/EIA U.S. Daily Power Generation Gas Burn bcf/d Jan Mar May Jul Sep Nov Jan Source: FirstEnergy Capital Corp., Bloomberg. We think power generation will be the sector that balances out the market in 214; high prices needed to generate more gasto-coal switching. Much was recaptured by coal in 213. MATS and CSAPR upheld by court rulings. bcf/d (1.) (2.) U.S. Natural Gas Demand Growth Forecast Source: FirstEnergy Capital Corp., US DOE/EIA.

52 U.S. GAS POWER GENERATION DEMAND AND CAPACITY Higher gas power burn will be unavoidable with coal retirements, more new builds and likelihood of even tougher coal emission standards; coal inventories are low. Some nuke retirements have occurred or are coming. bcf/d (2.) (4.) (6.) YoY Change in U.S. Gas Power Demand Forecast Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., US DOE/EIA. U.S. Announced Coal Fired Generation Retirements bcfe/d Forecast Source: FirstEnergy Capital Corp., U.S. DOE/EIA. 4 2 U.S. Gas Fired Generation Capacity bcf/d Existing (LHS) Net Additions (RHS) Forecast Source: U.S. DOE/EIA. bcf/d

53 U.S. INDUSTRIAL GAS DEMAND Industrial demand seeing a renaissance thanks to the low gas prices of the past few years. Demand could rise close to 1 bcf/d by end 216; we are more conservative U.S. Daily Industrial Gas Demand bcf/d Jan Mar May Jul Sep Nov Jan Source: FirstEnergy Capital Corp., Bloomberg. bcf/d (.5) (1.) (1.5) U.S. Industrial Gas Demand Growth Forecast (.2) Source: FirstEnergy Capital Corp., US DOE/EIA. Latest data still showing that the general trend remains upward. Even in a US $5 to US $6 environment, U.S. would still have cheap gas compared to most other regions of the world.

54 THE COMING SURGE IN LNG AND MEXICAN EXPORTS LNG exports will provide the largest challenge to U.S. gas supplies ever seen since the industrial build out of the 196s. U.S. LNG exports could be at 6+ bcf/d by end of 218. North of 1 bcf/d is possible by 22. bcf/d U.S. Net Gas Exports to Mexico Forecast Source: FirstEnergy Capital Corp., U.S. DOE/EIA. bcf/d U.S. Annual LNG Exports Forecast Source: FirstEnergy Capital Corp., US DOE/EIA. More export pipelines and more Mexican power generation will see more U.S. sourced gas reaching the northern Mexican states. Another draw on Eagle Ford and Permian gas supplies.

55 U.S. DEMAND AND SUPPLY GROWTH PROFILES U.S. Gas Demand Growth + LNG Exports bcf/d LNG Exports Domestic Demand Supply growth has to start matching the 196s 18.6 bcf/d of supply expansion needed to keep the market at what we think is a reasonable balance. Is this even possible? Source: FirstEnergy Capital Corp., US DOE/EIA. 16 bcf/d of additional demands on the market by 218 and this does not include exports to Canada and Mexico. Such a rate of demand expansion has not been seen since the 196s. bcf/d U.S. Gas Supply Growth to Source: FirstEnergy Capital Corp., U.S. DOE/EIA.

56 OTHER CANADIAN GAS ISSUES BASIS/NET EXPORTS bcf/d Forecast AECO-Henry Hub Differential US $/mmbtu $2.5 $2. $1.5 $1. $.5 $. ($.5) ($1.) ($1.5) ($2.) U.S. Net Gas Imports from Canada Forecast Source: FirstEnergy Capital Corp., U.S. DOE/EIA. Actuals FCC Forecast (Mar. 214) FCC Forecast (Dec. 213) Jan-13 Jan-14 Jan-15 Jan-16 Source: FirstEnergy Capital Corp., Bloomberg. $2.5 $2. $1.5 $1. $.5 $. ($.5) ($1.) ($1.5) ($2.) US $/mmbtu $1.75 $1.5 $1.25 $1. $.75 $.5 $.25 $. AECO-Henry Hub Price Spread US $/mmbtu $2. $1.5 $1. $.5 $. ($.5) ($1.) ($1.5) ($2.) Jan-2 Mar-26 Jun-18 Sep-1 Dec-3 Source: FirstEnergy Capital Corp., Canadian Enerdata, Bloomberg. AECO-Henry Hub Basis $.65 $.21 Forecast $ Source: FirstEnergy Capital Corp., Bloomberg, Enerdata.

57 CANADIAN LNG EXPORT PROPOSALS Canada LNG Export Proposals Project Partners Location Capacity 1 Approval to Potential mmcf/d Export? On-Stream Kitimat LNG Apache, Chevron Canada Kitimat 1,3 Yes (2 YR) mid-22 Pacific Northwest LNG PETRONAS, Progress Energy, Prince Ruper 2,6 Yes (25 YR) SINOPEC, JAPEX, Petroleum mid-219 Brunei, Indian Oil Corp. LNG Canada Shell Canada, KOGAS, Mitsubishi, Kitimat 3,2 Yes (25 YR) PetroChina Prince Rupert LNG BG Group Prince Rupert 2,8 Yes (25 YR) West Coast Canada LNG Ltd. Imperial Oil, ExxonMobil N/A 3,9 Yes (25 YR) Aurora LNG Nexen (CNOOC), INPEX, JGC Prince Rupert 3,2 Yes (25 YR) Kitsault Energy Project Kitsault Energy Kitsault 2,6 Under Review Douglas Channel Energy Project Gas Suppliers, LNG Buyers Kitimat 2 Yes (2 YR) Woodfibre LNG Project Woodfibre Natural Gas Limited Squamish 3 Yes (25 YR) Triton LNG Limited Partnership AltaGas, Idemitsu N/A 3 Yes (25 YR) Stewart Energy LNG Canada Stewart Energy Group Stewart 4,41 Under Review Discovery LNG Quicksilver Resources Canada Campbell River? N/A Woodside LNG Woodside Petroleum Prince Rupert? N/A Steelhead LNG Steelhead LNG N/A? N/A Goldboro LNG Pieridae Energy Nova Scotia 1,3 Under Review Jordan Cove LNG 2 Veresen Inc. Oregon 1,2 Yes (25 YR) Oregon LNG 2 Oregon LNG Marketing Co., LLC Oregon 1,296 Yes (25 YR) 1 Capacity based on NEB Applications 2 While Terminal is Located in the U.S., Gas for LNG export will be imported from Canada Source: National Energy Board, Company Reports, FirstEnergy Capital Corp.

58 CONCLUSIONS Most bullish we have seen the North American gas market in a decade; structural demand growth, flagging supply growth and storage demands to create strong pricing for 214 to 216 at a minimum. Any short term dip in natural gas prices will be met by increased demand in the power generation sector; coal stocks are low and more delays in terms of shipping coal to generators; gas burn may be preferred where possible. U.S. exports of LNG to begin ramping up late 215; Canadian exports possible by 219. Recommend being as overweight as possible on the North American gas equity space with particular emphasis on Canadian names; market weight for overseas gas names.

59 FIRSTENERGY NATURAL GAS PRICE FORECAST FirstEnergy Natural Gas Price Outlook Nymex US$ Aeco Cdn$ $/mmbtu Old NEW Old NEW 213 Average $3.69 $3.73 $3.16 $ Q1 $3.95 $4.72 $3.73 $5.73 Q2 est. $4.2 $4.79 $3.72 $4.85 Q3 est. $4.5 $4.83 $4.1 $4.84 Q4 est. $4.75 $5.25 $4.23 $5.35 Average est. $4.35 $4.9 $3.92 $ Q1 est. $5.5 $5.5 $5.26 $5.58 Q2 est. $5. $5. $4.39 $4.84 Q3 est. $5.25 $5.25 $4.53 $5.11 Q4 est. $5.25 $5.25 $4.5 $5.16 Average est. $5.25 $5.25 $4.67 $ Average est. $5. $5. $4.33 $ Average est. $5.5 $5.5 $4.83 $5.18 Notes: All historical averages computed using weekday data only. Source: FirstEnergy Capital Corp., Bloomberg, Enerdata; est. refers to forecasted value.

60 FIRSTENERGY GAS PRICE FORECAST VS. THE STREET We fully expect that consensus and forward prices will rise over the course of the year. US $5 average for 214 is entirely possible, especially if supply disappoints. Expectations for Henry Hub Price in 215 (As of Feb. 14, 214 survey; Nymex value as of May. 16, 214) US $/mmbtu (Consensus estimate does not include Nymex value) $8. $7.5 $7. $6.5 $6. $5.5 $5. $4.5 $4. $3.5 $3. FirstEnergy Consensus Nymex $4.26 $4.55 $ Source: FirstEnergy Capital Corp., Reuters. Analyst Expectations for Henry Hub Price in 214 (As of Feb 14, 214 survey; Nymex value as of May. 16, 214) US $/mmbtu (Consensus estimate does not include Nymex value) $6.5 $6. $5.5 $5. $4.5 $4. $3.5 FirstEnergy Consensus Nymex $4.4 $4.57 $ Source: FirstEnergy Capital Corp., Reuters. Analyst We think a US $5+ pricing world is needed to generate better returns for supplies outside of the Marcellus. Without this, the U.S. will struggle to fulfill all domestic and export demands.