BEAST ON A LEASH BENPOSIUM 2016 JUNE 13-15

Luke Jackson Senior Energy Analyst

Disclaimer

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Northeast Worldview Changing…

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Agenda

• Northeast production succumbing to drilling slowdown

• 5 reasons Northeast is in trouble

• Regional/US demand surging

• 6 reasons not all might be doom and gloom for Northeast

• What do we think happens?

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Low Prices Slowing Northeast Production

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Bcf

/d

Northeast Gas Production

2013 2014 2015 2016 2016 forecast5 Benposium 2016

Northeast Has Helped US Production Save Face

30 35 40 45 50 55 60 65 70 75 80

Bcf

/d

Northeast vs. Rest of US Production

Rest of US Northeast

2016: 22.1 Bcf/d 31% of US production

2010: 3.1 Bcf/d 5% of US production

2016: Rest of US 49.9 Bcf/d

2010: Rest of US 53.9 Bcf/d

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5 REASONS WHY THE NORTHEAST IS IN TROUBLE…

Reason 1 – Drilling at Record Lows

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Marcellus Dry

Utica/Marcellus Wet

- 20 40 60 80

100 120 140 160 180

Activ

e R

igs

Rigs by Region

Marcellus Wet Marcellus Dry Utica

Reason 2: Well Inventory Disappearing

0102030405060708090

0

500

1000

1500

2000

2500

3000

Nor

thea

st R

ig c

ount

Inve

ntor

y of

wel

ls

Northeast Well Inventory vs. Rig Count

NE PA Dry PA Central Dry PA South DryPA SW Wet Ohio Rig Count

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What Does a World Without DUCs Look Like?

-

5

10

15

20

25

30

35

Bcf

/d

Northeast Production Forecast and Projection Post Well Backlog

Declining History Northeast Forecast Post Well Backlog Projection

Well inventory expected to be depleted in 1Q2017 at which

time production would fall almost 1 Bcf/d in first month

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Reason 3: NGL Uplift Gone

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

$/M

Mbt

u

Marcellus/Utica NGL Fractionation Spread to Mt.

Belvieu

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0%

10%

20%

30%

40%

50%

60%

70%

0

5

10

15

20

25

Bcf

/d

NE Associated Gas vs. Dry Gas Production

NE Dry NE Wet % Associated Gas

Associated Gas Accounts for 1/3 of

NE production

Reason 4: Infrastructure Delays/Cancellations

Cuomo administration rejects Constitution pipeline - Politico

Kinder Morgan shelves $3 billion New England pipeline project – Boston Globe

Penn East pipeline facing seven-month delay – The Morning Call

$(2.00)

$(1.50)

$(1.00)

$(0.50)

$-

$0.50

05

1015202530354045

Bcf

/d

Northeast Production vs. Base Case Pipe Capacity

Production Base Case Pipe CapacityDom South Basis Dom South Futures Basis

Market expecting Northeast basis to tighten in late 2017 because of

new pipeline capacity

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Reason 5: Producers Saddled With Debt

Investment Grade Speculative Grade AAA AA+ AA AA− A+ A A− BBB+ BBB BBB− BB+ BB BB− B+ B B− CCC+ CCC CCC− CC C D

Credit Rating for Northeast Producers AA-

BBB BB+ BB+ BB BB

B+ B B

CCC

Source: S&P Global Market Intelligence 13 Benposium 2016

Producers Back 50% of New Northeast Pipeline Capacity

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0

2

4

6

8

10

12

14

2016 2017 2018

Bcf

/d

Producer Power LDC Marketer LNG Unknown

25 Bcf/d of planned expansions;

12 Bcf/d backed by producers

Shipper Credit Risk Threatens New Expansions

Benposium 2016 15 Source: S&P Global Market Intelligence/Platts Bentek

30%

34%

26%

14%

22%

45%

56%

44%

29%

NYC/New England

Southeast

Midwest

0% 20% 40% 60% 80% 100%

Shipper Credit Ratings by Flow Corridor

Investment Grade Speculative Grade Not Rated

DEMAND PICKING UP STEAM…

Northeast Power Sector Demand Surging

2 3 4 5 6 7 8 9

10

Bcf

/d

Northeast Power Burn

5 Year Range 2016 Year-to-date5 Year Mean Market Call Forecast

NE Power Burn Year-to-Date (Bcf/d)

2013 4.6 2014 4.4 2015 5.2 2016 5.5

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5,000 MW of Additional Coal Retirements by 2021

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

- 1 2 3 4 5 6 7 8 9

10

MW

Bcf

/d

Northeast Coal Retirements vs. Power Demand

Coal Retirements Power Burn Forecast18 Benposium 2016

Northeast Production Meets Almost All US Demand by 2021

(15)

(10)

(5)

-

5

10

15

Bcf

/d

US Natural Gas Demand vs. Northeast Production

Incremental Demand Incremental Northeast Production

Demand + 13 Bcf/d

Production 10.8 Bcf/d

Source: Platts Bentek

Northeast Expected to be Long ~10 Bcf/d by 2021

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(15) (10) (5) - 5

10 15 20 25 30 35

Bcf

/d

Production Demand E CAN Flows MW Flows SE Flows

Demand + 1.6 Bcf/d

E Canada Flows + 0.5 Bcf/d Midwest Flows + 4.0 Bcf/d

Southeast Flows + 4.7 Bcf/d Faces Most Shipper Credit Risk

6 REASONS THE NORTHEAST MIGHT NOT BE IN TROUBLE

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

IRR

IRRs by Basin

$2 HH $3 HH $4 HH

Reason 1: IRRs in Marcellus/Utica the Best

Henry Hub Sensitivity: Natural gas is based on Henry Hub at various prices +/- current regional differentials Oil and NGL prices remains at current 12-month forward curve prices for their respective regions

Reason 2: Efficiency Gains

05

101520253035

Bcf

/d

Marcellus Dry NE PA Projection with 2013 Economics

History 10 Rigs 20 Rigs 30 Rigs 40 Rigs 50 Rigs 60 Rigs

1st Quarter 2013: IP Rate: 5 MMcf/d

Days to Drill a Well: 16

60 Rigs = ~12 Bcf/d by 2021

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Less Rigs But More Production

05

101520253035

Bcf

/d

Marcellus Dry NE PA Projection with 2015 Economics

History 10 Rigs 20 Rigs 30 Rigs 40 Rigs 50 Rigs 60 Rigs

4th Quarter 2015: IP Rate: 10 MMcf/d

Days to Drill a Well: 12

60 Rigs = ~30 Bcf/d by 2021!!!

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Reason 3: No More DUCs? Well, We Have Mega Wells

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01020304050607080

MM

cf/d

Utica Mega Wells - 24 hr/peak rates

Source: Marcellus Drilling News

Utica mega wells on average 10x higher than

the national average

Number of Prolific Wells Growing…

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0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

% o

f Pro

duci

ng W

ells

Peak Production Rate (MMcf/d)

Northeast Gas Peak Production Rates

2010 2011 2012 2013 2014 2015

Since 2013, % of wells with peak IP rates between 5-25

MMcf/d has doubled

Reason 4: Dry Utica Can Replace Associated Gas; Returns Promising

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10% 21% 21%

39% 34%

58% 48%

78%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

$2.00 $2.50 $3.00 $3.50

IRR

Dry Utica IRR Sensitivity Analysis

Assumes no declines in 1st year of production and

$14 million well cost 30 MMcf/d

25 MMcf/d

20 MMcf/d

15 MMcf/d

Local Gas Price ($/MMBtu)

IP Rate

Reason 5: Producers Debt-Strapped, But Capital Markets Open

28 Benposium 2016 Source: S&P Global Market Intelligence/Platts Bentek

$- $500

$1,000 $1,500 $2,000 $2,500 $3,000 $3,500

$USD

mill

ions

Debt/Equity Offerings From NE Producers in Past Year

Debt Equity

Total capital raised through public offerings by NE

producers in past year is $10.7 billion

US Producers Capital Raises $USD billions

2014: $70 2015: $59

2016 YTD: $23

Reason 6: Brownfield Pipeline Expansions Less Likely to Face Delays

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0

5

10

15

20

25

30

35

Bcf

/d

Northeast Brownfield Capacity vs Production

Production Existing Capacity Brownfield Expansions

Project Capacity ISD TETCO Gulf Market 200 11/1/2016

DTI New Market 112 11/1/2016 Dominion Clarington 250 11/1/2016

DTI Leb West II 130 11/1/2016 REX E-W #2 800 12/1/2016

Atlantic Bridge 132 11/1/2017 TGP Broad Run 2 200 11/1/2017

TGP SW Louisiana 900 11/1/2017 Adair SW 200 11/1/2017

Access South 320 11/1/2017 Leb Extension 102 11/1/2017

TETCO Gulf Market 2 450 11/1/2017 WB Express 1300 11/1/2018

~5 Bcf/d of brownfield expansions through 2019 unlikely to alleviate basis

pressure, but can help production grow

So, What Happens to the Northeast?

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Why Northeast Stumbles Why Northeast Survives

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Drilling down

DUCs depleting

NGL uplift gone

Debt-laden producers

Infrastructure delays

IRRs the best in US

Efficiency gains

Mega wells

Dry Utica

Capital availability

Brownfield pipelines

Thank you!

Platts Analytics Luke Jackson Senior Energy Analyst ljackson@spglobal.com 720-264-6662

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