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The View fromHOUSTON

“Seek and ye shall find.”At EPG we are seeking out the best energy stocks and we bring those companies to the attention of our members.

By: Dan Steffens, President

Energy Prospectus Newsletter: "The View from Houston” February 24, 2015 Issue: 102

INSIDE THIS ISSUE3 Global Oil Supply

4 Natural Gas

4 Sweet 16 Growth Portfolio

6 Small-Cap Growth Portfolio

7 High Yield Income Portfolio

8-10 EPG Cruise

Dan Steffens is the President of Energy Prospectus Group (EPG), a networking orga-nization based in Houston, Texas. He is a 1976 graduate of Tulsa

University with an undergraduate degree in Accounting and a Masters in Taxation.

Mr. Steffens began his career in public accounting, becoming licensed as a CPA in 1978. After four years in public accounting, he transitioned to the oil & gas industry with the bulk of his time (18 years) spent with Amerada Hess Corporation (HES). He served as the Hess United States E&P Division Controller from 1994 to 2001.

The share price of every one of our model portfolio companies has moved higher since the last newsletter. Although it is encouraging, I do expect to see lots of share price movement (up and down) as the oil & gas sector struggles during the first half of 2015. We are not out of the woods yet, but there is definitely light at the end of the tunnel. Both EIA and IEA are predicting a sharp increase in crude oil demand in the 3rd quarter, about the same time reduced upstream spending begins to impact oil supplies. The oil markets will tighten over the next 6-9 months.

FEAR and GREED drive the markets

You may have noticed that the oil traders are reacting to each mid-week crude oil storage report and each Friday’s active rig count report from Baker Hughes (BHI). There are also an increasing number of “experts” telling us why oil prices will go up or down. I saw an article last week that forecast crude would drop to $10/bbl. Just keep in mind that a lot of the articles with sensational titles are posted on the internet by individuals that get paid by the “hit’. I’m sure the wild predictions and volatility in the oil markets will continue, but fundamentals do eventually matter when it comes to any commodity.

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Known as the “Pipeline Crossroads of the World,” Cushing, Oklahoma is home to the nation’s largest oil storage facility, a massive complex of tanks and pipes capable of holding more than 80 million barrels of crude.

Cushing also is the price point for domestic benchmark West Texas Intermediate (“WTI”) crude. If you buy a NYMEX futures contract for WTI and hold it to the expiration date, “your oil” will be delivered to Cushing and you will be getting a call asking you how you want to handle it. A lot more individuals are taking physical ownership of oil these days because the oil markets are in “contango”. On Friday, the April, 2016 WTI futures contract settled at $60.57/bbl, close to a $10/bbl premium to the front month (April, 2015) contract.

As the price of oil has plummeted over the past seven months, companies and individuals have stockpiled as much as 2.2 million barrels a week at Cushing, rapidly filling it to more than half capacity. As of February 13th, Cushing’s storage tanks held nearly 46.3 million barrels of crude, according to the U.S. Energy Information

Administration. As storage fills up at Cushing, the gap between WTI and Brent widens.

Lower demand period just ahead

During the second quarter a lot of refineries shut down for a couple of weeks to do annual maintenance and make adjustments necessary to produce summer blends of gasoline. Crude oil demand is reduced during

this period. Since there is a record amount of crude oil in storage today, we will see pressure on the oil markets until storage levels return to normal.

Summer driving season in the U.S. is just a few months away. Each year there is a sharp increase in demand for crude oil from the 2nd quarter to the 3rd quarter. This is primarily driven by the increased demand for transportation fuels. Also, refiners cannot blend as many NGLs with crude oil for the summer blends of gasoline, increasing the demand for black oil. Take a look at the IEA Oil Market Report at this website and you will see that IEA is now forecasting more than a 1.5 million barrel per day spike in oil demand during the 3rd quarter.

Weather does have some impact on crude oil supply / demand. The official start of spring is about a month away. For those of you living in the Northeast it can’t come soon enough. This is the region’s second very cold winter in a row. If cold weather continues through March, as predicted by Dr. Joe Bastardi, it will put pressure on heating oil supplies in March. Don’t wait until your tank is empty to call your local supplier if you heat your home with oil.

EPG Coming Events Our luncheons in Houston and Dallas give EPG members and their guests an opportunity to meet the top management of some of the most promising small and mid-cap energy companies that we track. Members and guests need to register on our website.

Our luncheons are free for EPG members and just $40 for non-members that register through our website or $50 at the door.

Friday, February 27: Hi-Crush Partners, LP (HCLP), one of our High Yield Income Portfolio companies, is hosting a luncheon at The Hess Club, 5430 Westheimer Rd., Houston, Texas. BDO will open the presentation with an update on MLP tax treatment.

Tuesday, March 24: Earthstone Energy, Inc. (ESTE), a candidate for our Small-Cap Growth Portfolio, is hosting a luncheon at The Hess Club, 5430 Westheimer Rd., Houston, Texas

Visit energyprospectus.com to register.

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New ProfilesThe following reports were posted to the website since our last newsletter:

•Updated Net Incomeand Cash Flow Forecasts for several of our Sweet 16 and other portfolio companies

•AtableofourFairValueestimates for each Sweet 16 company compared to First Call’s 12-month price targets

Company ProfilesHi-Crush Partners LP (HCLP)

Plain All American Pipeline LP (PAA)

Vanguard Natural Resources LLC (VNR)

The 3rd quarter spike in demand will balance global supply / demand, but it will take a while to work off the big build in storage.

Global Oil SupplyBy now you all know that the global supply of oil increased much faster than demand growth in 2014, resulting in a temporary “glut” that is the primary reason for the sharp drop in oil prices. A strong U.S. dollar and Saudi Arabia’s refusal to lower exports accelerated the price decline. Many people believe speculators, which now dominate oil markets, have over-reacted and pushed oil prices lower than justified by the physical market.

“The cure for low oil prices is low oil prices”. Upstream companies are slashing capital expenditures and drilling rigs are moving back to the yard in record numbers. IEA is now forecasting that global production capacity growth will slow from 2.1 million barrels per day in 2014 to 860,000 barrels per day in 2015 (see chart). Note that they are predicting a slight increase in supply in 2016. In my opinion, that will only happen if oil prices increase back to the $80/bbl range.

Demand for refined products goes up by about a million barrels per day each year. I believe demand will increase by more than 1.5 million barrels per day this year as lower fuel costs and increasing SUV sales increase demand.

On Friday, February 20th I attended an Energy Summit at Rice University. There were a lot of knowledgeable speakers and they all forecast that West Texas Intermediate (WTI) will be trading in the $60-$80 range by year-end. In my opinion, it will be over $60/bbl early in the 3rd quarter, but we may see a re-test of the low during the next few months.

I do not see much chance of oil prices moving back to $100/bbl anytime soon, unless there is a major supply disruption in the Middle East. Of course this is quite possible. Libya is already a mess and their exports have been slashed because of terrorist activity. Within the territory held by the Islamic State in Syria & Iraq there are no major oilfields, but there is no telling what those idiots will do. I’m sure they realize that attacks on pipelines or large oilfields in Southern Iraq or Saudi Arabia would send oil prices higher and threaten the economies of the “infidels”.

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OPEC production capacity actually declined slightly in 2014 and is expected to decline again in 2015. Future OPEC supply growth is highly dependent on Iraq. In fact, according to IEA, more than half of OPEC’s supply growth will be coming from Iraq from 2016 to 2020. Unless ISIS is pushed back I don’t see it happening. The major oilfield services and supply firms will not risk their capital and people in Iraq if the violence continues. Most of the OPEC nations are expected to report falling production during the next six years.

Natural GasThere is a real “glut” of natural gas supply in the North American market. The only hope of gas averaging over $3.00/mcf this year is if Old Man Winter hangs around into April. Marcellus/Utica gas production continues to grow, reducing the need for cities in the Northeast and upper Midwest to draw down their gas storage levels during the winter.

Near Term: The eastern half of the U.S. is going to get at least one more major cold spell, but I doubt that it

will be enough cold to push gas storage under 1,500 Bcf by April. I sure hope I am wrong about this. If gas storage is above the 5-year average at the end of April, I think natural gas prices will dip below $2.25/mcf this summer.

Long Term: The outlook beyond 2015 is much brighter for gas prices. LNG exports from the U.S. start in the 4th quarter and are expected to ramp up to 8 Bcf per day by the end of next year. There will also be increased demand for power generation and increased industrial demand the next few years. Decreased drilling in the Eagle Ford and Permian Basin will lower the amount of “associated gas” coming to market this year. If we get a cold start to next winter, we could see gas prices pushing back up to $4.00/mcf, but it is much too early to bank on that. Keep your portfolio heavily weighted to oil.

The abundant supply of natural gas in North America will give manufacturers in Canada, Mexico and the United States a big advantage over the rest of the world. Cheap energy and cheap feedstock will continue to offset cheap labor in Asia.

Sweet 16 Growth PortfolioThe Sweet 16 is up more than 10% since our last newsletter. These are all solid companies with seasoned management teams. They will survive a period of low oil prices and they will continue to generate strong cash flows from operations, even if oil prices stay in the $50/bbl range all year. The Sweet 16 will be well positioned for growth when oil prices improve.

At the Rice Energy Summit on Friday there were several speakers that said they expect to see a big increase in merger & acquisition (M&A) activity this year. I predict that at least half of the Sweet 16 will be involved in a large M&A transaction this year. The larger companies (EOG, DVN, CLR and CXO) are potential buyers. The rest of the companies are potential targets. Actually, the large-caps could be targets for the majors (Exxon-Mobil, Shell, etc.) that see this as their best chance to gain strategic advantages in the U.S. shale plays.

Four companies in the portfolio reported 4th quarter results last week. They all came in very close to my forecast, excluding the non-cash mark-to-market adjustments on hedges and impairment charges.

• Cimarex Energy (XEC) finished the year with more than a 25% year-over-year increase in daily production. They will reduce capital expenditures in 2015 to their forecast cash flow from operations, so production will peak in the 2nd quarter and begin to decline in the 3rd quarter. Full-year 2015 production should be up 5% to 6% year-over-year. Cimarex will focus on the more liquid prone areas of their leasehold this year, improving their production mix.

Wunderlich Securities analyst Irene Haas reiterated a Buy rating on XEC and raised the price target from $122.00 to $132.00.

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In the report, she noted, "Cimarex Energy (XEC) is exiting 2014 with a debt-to-cap ratio of 25% and should be able to fund a much-reduced capex of $0.9-$1.1 billion in 2015 with operational cash flow and cash on hand. The company is determined not to increase leverage in this uncertain time. By starting with a very defensive game plan, XEC has plenty of flexibility and the option to ramp up if and when crude prices stabilize. XEC delivered impressive growth in proved reserves and, as a result, we raised our NAV and price target from $122 to $132. Even in a $50/ bbl oil and $3/mcfe gas environment, the combination of lower service costs and optimization is yielding some very strong returns in some of XEC's key plays in the Permian and the Mid-Continent. We reiterate our Buy rating on XEC."

• Devon Energy (DVN) reported a 4th quarter loss of $1.00/share that was caused by a $1.9 billion non-cash impairment charge. Cash flow per share for the quarter beat my forecast and they announced a 7% increase in their proven reserves to 2.8 billion boe on December 31, 2014 despite several large asset sales last year. The most significant reserve growth came from Devon’s U.S. operations, where oil reserves from retained properties increased 65 percent year over year to 351 million barrels. The substantial growth in U.S. oil reserves is largely attributable to the company’s Eagle Ford acquisition and its Delaware Basin operations. During the year, the company’s U.S. drilling programs added 94 million barrels of light-oil reserves through successful drilling (extensions and discoveries). This

represents a replacement rate of approximately 200 percent of the light oil produced during 2014.

Overall, the company’s reserve life index (proved reserves divided by annual production from retained properties) remained at approximately 12 years, and its proved undeveloped reserves accounted for only 25 percent of proved reserves.

• Diamondback Energy (FANG) reported a very strong 4th quarter. Production was up 24.6% quarter-over-quarter and cash flows from operations continued to grow despite lower oil prices. Production growth will slow down a bit in 2015 on reduced capital spending, but the long-term outlook for this mid-cap is fantastic.

Company Name Primary Product Stock Symbol Share Price EPG Fair Value Estimate Percent Undervalued

2/20/15

BAYTEX ENERGY OIL BTE.TO $22.24 $31.00 39.39%

CARRIZO OIL & GAS OIL CRZO $52.23 $53.80 3.01%

CONCHO RESOURCES OIL CXO $117.22 $123.50 5.36%

CIMAREX ENERGY OIL XEC $115.90 $126.80 9.40%

CONTINENTAL RESOURCES OIL CLR $47.35 $53.80 13.62%

DEVON ENERGY OIL DVN $63.82 $88.00 37.89%

EOG RESOURCES OIL EOG $91.08 $111.10 21.98%

DIAMONDBACK ENERGY OIL FANG $75.09 $77.00 2.54%

GULFPORT ENERGY CORP GAS GPOR $43.01 $62.15 44.50%

MATADOR RESOURCES OIL MTDR $23.64 $27.00 14.21%

NEWFIELD EXPLORATION OIL NFX $32.09 $45.00 40.23%

OASIS PETROLEUM OIL OAS $16.65 $28.00 68.17%

RANGE RESOURCES GAS RRC $51.84 $73.20 41.20%

ROSETTA RESOURCES OIL ROSE $23.04 $47.45 105.95%

SM ENERGY OIL SM $47.24 $90.40 91.36%

WHITING PETROLEUM OIL WLL $38.15 $57.80 51.51%

Sweet 16 Growth Portfolio

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FANG is a pure play on the Permian Basin and therefore I consider it a prime takeover target. I plan to publish an updated profile on it next week and I will probably increase my valuation once I have had more time to dig into the details. First Call’s price target has increased to $84.18 since they released 4th quarter results.

•EOG Resources (EOG) reported 4th quarter earnings of $0.81 per share, which included a $536 million impairment charge. They surprised the market with a significant reduction in their 2015 capital expenditure budget to $4.9 to $5.1 billion, a 40% decline from capex in 2014. Management also said they will delay completions on many of their horizontal shale wells until oil prices improve. In my opinion, this is a very wise move. Like XEC, EOG’s production will peak in the 2nd quarter and begin to decline in the 3rd quarter.

In my opinion, EOG is keeping some “dry powder” to make a strategic acquisition. I believe several of the smaller Sweet 16 companies are on their “radar screen”.

I definitely rate EOG a BUY under

$100/share. If you do not own this “Core Holding” quality large-cap, now is your chance to accumulate it at a bargain price.

The rest of the Sweet 16 will be announcing 4th quarter results during the next two weeks. I will update my forecast models and post them to the website shortly thereafter. We will publish updated profiles on all sixteen companies soon.

Disclosure: I have long positions in ALV.TO, BBEP, BTE, CLR, CRK, DDRI, DVN, GST, HCLP, LINE, LNCO, LSTMF, MEMP, MWE, NFX, OAS, PBG.TO, PWE, ROSE, RRC, SN, TOG.TO and TXP.TO. I do not intend on buying or selling any securities mentioned in this newsletter within 72 hours of the publication date on page one. I am not receiving compensation from any of the companies mentioned in this newsletter. See the DISCLAIMER on the last page of this newsletter for more details.

Small-Cap PortfolioSmall-caps have more risk than the mid-caps in our Sweet 16, but they also have more potential. Companies with lower production have more exposure to a prolonged period of low commodity prices. I believe by staying focused on the fundamentals we can increase our chances of making profitable investments in this space because it has less analysts’ coverage.

The last time oil prices sank like they have recently (2008), it was the

Company Name

Primary Product

Stock Symbol

Share Price

EPG Fair Value

Estimate

Percent Undervalued

2/20/15

ABRAXAS PETROLEUM OIL AXAS $3 .16 $4.70 48.73%

APPROACH RESOURCES OIL AREX $7.20 $13.40 86.11%

BONANZA CREEK OIL BCEI $29.31 $37.50 27.94%

CALLON PETROLEUM OIL CPE $7.37 $10.10 37.04%

GASTAR EXPLORATION GAS GST $3.06 $5.55 81.37%

GRAN TIERRA ENERGY OIL GTE $2.61 $6.38 144.44%

LAREDO PETROLEUM HOLDINGS OIL LPI $13.08 $20.25 54.82%

PETROQUEST ENERGY GAS PQ $3.10 $6.95 124.19%

SANCHEZ ENERGY OIL SN $13.92 $17.75 27.51%

TRIANGLE PETROLEUM OIL TPLM $5.28 $10.15 92.23%

UNIT CORP GAS UNT $33.28 $52.00 56.25%

Small-Cap Growth Portfolio

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small-caps that came roaring back as the oil markets tightened up.

None of the companies in the Small-Cap Portfolio reported 4th quarter results, but I did adjust my valuations on Approach Resources (AREX) and Unit Corp. (UNT). My valuations came down a bit, but they are still well above the current share prices. You can find my updated forecast models for each company on the website.

This group is loaded with companies that are prime takeover targets and I am expecting several of them to be “swallowed up” within the next six months.

In March I plan to take a hard look at Earthstone Energy (ESTE), Hemisphere Energy (HME), Jones Energy (JONE) and Ring Energy (REI). They have all been on my radar screen for quite some time. I have been waiting to see their full

year results and their year-end reserve reports.

High Yield Income PortfolioOur Income Portfolio is focused on finding energy sector stocks and MLP units that offer high yield with a reasonable level of risk.

Three of the upstream MLPs (BBEP, LINE and VNR) have decided to reduce their dividends. Based on my forecast models all three now have more than enough distributable cash flow (DCF) to cover their reduced distributions, so there is little risk of additional cuts.

On January 27th, Memorial Production Partners LP (MEMP) announced that the board of directors of its general partner

declared a cash distribution of $0.55 per unit for the fourth quarter of 2014. This distribution represents an annualized amount of $2.20 per unit and was paid on February 12, 2015 to unitholders of record as of the close of business on February 5, 2015. The MLP has not indicated that they will need to cut distributions this year, although it does remain a possibility.

Linn Energy (LINE) has more than enough liquidity to pursue more strategic acquisitions and I am expecting them to do just that.

Keep in mind that these four upstream MLPs have a very high percentage of their 2015 production hedged at prices well above the current strip. They can always increase distributions if commodity prices improve.

I am expecting both of the sand companies (EMES and HCLP) to

Primary Stock Share Estimated Annual

Company Name Product Symbol Price Annual Yield Dividend

2/20/15

CALLON PETROLEUM COMPANY OIL CPE-PA $48.25 10.4% $5.00

EVOLUTION PETROLEUM - Pfd Series A OIL EPM-PA $26.58 8.0% $2.1250

GASTAR EXPLORATION - Pfd Series A GAS GST-PA $21.48 10.0% $2.1562

GASTAR EXPLORATION - Pfd Series B GAS GST-PB $24.48 11.0% $2.6875

BREITBURN ENERGY PARTNERS LP MLP BBEP $7.59 13.2% $1.00

LINN ENERGY (Upstream) MLP LINE $12.75 9.8% $1.25

MEMORIAL PRODUCTION PARTNERS MLP MEMP $17.41 12.6% $2.20

VANGUARD NAT RES (Upstream) MLP VNR $17.28 14.6% $2.52

EMERGE ENERGY SERVICES LP MLP EMES $55.43 10.0% $5.52

HI CRUSH PARTNERS LP MLP HCLP $37.15 7.3% $2.70

MARKWEST ENERGY PARTNERS MLP MWE $61.85 5.8% $3.60

PLAINS ALL AMERICAN PIPELINE MLP PAA $51.60 5.2% $2.70

SOUTHCROSS ENERGY PARTNERS MLP SXE $13.17 12.1% $1.60

High Yield Income Portfolio

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maintain or raise their cash distributions this year. They both have more than 80% of their sand production capacity tied to long-term take-or-pay contracts with major oilfield service firms. Hi-Crush is hosting our luncheon in Houston on Friday, February 27.

The midstream MLPs (MWE, PAA

and SXE) are in good shape. PAA will definitely raise distributions to unitholders this year (see updated profile we sent out last week).

The preferred stocks of CPE and GST should continue to drift up to par. EPM’s preferred is now trading above par, a reflection of the company’s very strong balance

sheet. Yield investors are hard pressed to find dividend rates this high.

Check under the MLP and Watch List tabs on our website for updated forecast models and profiles on the companies in the High Yield Income Portfolio.

EPG CRUISE - 2015

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© 2015 Energy Prospectus Group

EPG DisclaimerThe analysis and information in this newsletter and the reports & financial models on our website are for informational purposes only. No part of the material pre-sented in this NEWSLETTER and/or reports on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed herein constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the PUBLISHER (Energy Prospectus Group, a division of DMS Publishing, LLC) and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the PUBLISHERS, editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided ''as is'' without warranty of any kind, either expressed or implied. Al-though the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

The information contained in the NEWSLETTERS is provided by Energy Prospectus Group, a division of DMS Publishing, LLC. Employees and affiliates of Energy Prospectus Group may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. PUBLISHER will indicate whether he has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publica-tion and may change thereafter without notice.

Index returns are price only and do not include the reinvestment of dividends. The S&P 500 is a stock market index containing the stocks of 500 large-cap corpora-tions, most of which are US companies. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

EPG Cruise 2015We had a fantastic time on this year’s EPG Cruise to the Western Caribbean. 35 EPG members and their significant others joined Susan & I on RCL’s Navigator of the Seas as we sailed to Roatan (an island off Honduras), Belize and Cozumel. The weather was perfect!

Susan, our “Cruise Coordinator” is already talking to Royal Caribbean’s group department to set up EPG

Cruise 2016. Next January we will depart from Ft. Lauderdale, Florida on RCL’s Allure of the Seas, the world’s largest cruise ship. Susan is also setting up exciting group excursions at each port. I will send out details in March.

Our goal is not to tell you what to invest in, but to give you a lot of good choices. Not all of the stocks we discuss in this newsletter or on the website are going to go up, but the majority of them have since 2001 when I launched EPG. If you stay

focused on owning companies that have strong fundamentals and growth locked in, I believe you will have an edge in the market.

Thank you for your support.

Keep an eye on the macro-environment, but look closely at the details before you invest in anything and good luck!

Dan Steffens, PresidentEnergy Prospectus Group