Company Peer Group Analysis IHS Herold

Companies & Transactions Company Peer Group Analysis IHS Herold

29 May 2018

Higher oil prices outweigh rising Key implications interest rates so far; debt investors For the 45 companies in the IHS Markit North continue to express confidence in American E&P peer group (composed of Small, Midsized, and Large E&Ps), the April 2018 average bond E&Ps, as most 2018 bond yields to yield to maturity (YTM) declined slightly from maturity lower than 2017 September 2017, dropping from 8.0% to 7.7%, indicating continued debt investor confidence in E&Ps. The Hassan Eltorie, Research and Analysis Associate Director decline is even more encouraging when factoring in recent increases in the federal funds rate, from 1.25% in September 2017 to the current 1.75%. This examination of bond yield-to-maturity (YTM) rates for the 45 companies in the IHS Markit North American Of the 45 companies, 18 had increases in the April 2018 E&P peer group (composed of Small, Midsized, and Large bond average YTM compared with September 2017, but E&Ps) is an update from our previous, 22 September 2017 for almost all of the 18, the increase was 1% or less. For report. During the oil boom, E&Ps financed rocketing 24 companies, there was a decline in the April 2018 production growth and sizable cash flow deficits with average YTM compared with September 2017, with the cheap money during a low interest rate environment. Total largest declines concentrated in the high- and debt for the companies doubled from $125 billion in 2010 moderate-risk E&Ps. For 3 companies, there was no to $250 billion in 2015, as shown in the chart below. As change in YTM. debt ballooned and as oil prices collapsed, as many as 160 North American E&Ps declared bankruptcy or commenced For the companies with investment-grade securities, strategic reviews. the current average spread of 146 basis points versus US Treasuries is significantly lower than the average of 377 As E&Ps emerge from the rubble of the 2014 oil price points reached in February 2016, when oil prices collapse and move solidly into recovery, debt burden bottomed out. Even more encouraging, the current fears remain. Our previous report allayed fears of a debt yield spread is lower than the 182 basis points in early reckoning by showing that high yields on E&P bonds was 2014, when oil was hovering around the $100/bbl mark. an issue for the few, but not the many. In this update, our research reinforces our previous conclusions, drawing continued on next page 3

North American E&P peer group debt trends $250,000 8.0

$225,000 7.0 $200,000 6.0 $175,000 5.0 $150,000

$125,000 4.0

$100,000 3.0 $75,000 2.0 Total debt to EBITDA times EBITDA to debt Total $50,000 1.0 $25,000 Total debt & preferred stocks ($ millions) ($ stocks & preferred debt Total

$0 0.0 2004 Q1 2004 Q2 2004 Q3 2004 Q4 2005 Q1 2005 Q2 2005 Q3 2005 Q4 2006 Q1 2006 Q2 2006 Q3 2006 Q4 2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4

particular support from the recent oil price rally, which has boosted debt investor confidence in oil companies despite Key implications - continued rising interest rates. Whether the rally in oil prices proves For the companies with noninvestment-grade sustainable remains to be seen, but a consensus has grown securities, the current average spread of 421 basis points around a rising interest rate environment. How E&P bond is significantly lower than the average spread of 1,467 yields react to the changing environment is something we points that occurred in early 2016. The current average will be monitoring. spread is higher than the 357 basis points in early 2014 and is in line with the 431 basis points in September For the 45 North American E&Ps in the overall peer group, 2017, the last time we did this report. the average YTM in April 2018 was 7.7%, down slightly from 8.0% in September 2017, indicating continued debt According to our analysis of debt repayment schedules investor confidence in the E&Ps. The decline is even more based on 2017 year-end public filings for the Large, encouraging when factoring in recent increases in the Midsized, and Small E&P subgroups, the amount of federal funds rate, which rose from 1.25% in September principal payments due has declined 15% on a rolling 2017 to the current 1.75%. Of the 45 companies, 18 had five-year basis, compared with 2015 year-end filings. increases in the April 2018 average YTM compared with This likely indicates that most of the companies have September 2017, but for the vast majority of the 18, the increase was 1% or less. For 24 companies, there was a decline in the April 2018 average YTM compared with 2014 to be of little concern, given the radical changes in September 2017, with the biggest declines concentrated in commodity pricing, the evolutionary structural changes in the high- and moderate-risk E&Ps. For 3 companies, there the industry, and the rise in the federal funds rate. was no change in the April 2018 average YTM compared with September 2017. We divided the 45 E&Ps into four groups according to amount of credit risk. Group 1 is high credit risk, For the 45 companies, average YTM rates for April 2018 and containing the 6 companies with April 2018 bond yields September 2017 remain higher than the average of 5.4% in above 10%. Ultra Petroleum’s YTM nearly doubled to 54% 2014, when oil prices were trading at $100/bbl and balance from September 2017, and Petroquest’s YTM increased sheets were more robust. But we consider the difference by 1.9 percentage points. Callon Petroleum’s YTM nearly between the average YTM rate in April 2018 and that of doubled to 11.7%, while W&T’s YTM was halved. For this

% of companies in our sample with change in 2018 YTM compared with 2017 YTM

40%

53%

Group 1 2018-2017 2018-2014 2017-2014 S&P YTM YTM YTM % Debt credit Company Ticker 2018 YTM 2017 YTM 2014 YTM difference difference difference to cap rating Ultra Petroleum Corp UPL 51.5 27.2 4.7 24.3 46.7 22.5 34% B+ Halcon Res Corp HK 21.0 26.3 8.2 -5.3 12.8 18.1 81% B- Petroquest Energy Inc PQ 19.1 17.2 8.0 1.9 11.1 9.2 54% CCC+ EP Energy Corp EPE 15.2 20.2 6.2 -5.0 9.0 14.0 91% NA Group 1 Callon Petroleum CPE 11.7 5.8 10.8 5.9 0.9 -5.0 191% B W&T Offshore Inc WTI 10.1 19.6 6.9 -9.5 3.2 12.7 53% CCC Source: IHS Markit © 2018 IHS Markit

Group 2 2018-2017 2018-2014 2017-2014 S&P YTM YTM YTM % Debt credit Company Ticker 2018 YTM 2017 YTM 2014 YTM difference difference difference to cap rating Sanchez Energy Corp SN 9.6 11.9 6.2 -2.4 3.4 5.8 101% B Athabasca Oil Corp ATH.TO 9.5 11.4 8.9 -1.9 0.6 2.4 26% B- Comstock Res Inc CRK 9.5 14.8 6.9 -5.3 2.6 7.9 17% CCC+

Group 2 Denbury Res Inc DNR 8.2 17.3 5.6 -9.1 2.6 11.7 32% CCC+ Approach Resources Inc AREX 8.1 11.6 6.5 -3.5 1.7 5.1 16% NR Source: IHS Markit © 2018 IHS Markit group, the average YTM increased from 19.4% in September average YTM declined from 14.8% to 9.5%. The average 2017 to 21.4% in April 2018. Excluding Ultra’s extremely YTM for the group declined from 13.4% in September 2017 high, outlier YTM, the average yield for the high-risk group to 9.0% in April 2018. actually declined from 17.8% in September 2017 to 15.4% in April 2018. Group 3, dominated by Midsize E&Ps, is low credit risk. For the group, the average YTM declined from 6.5% in Group 2 is moderate credit risk. For this group, average September 2017 to 5.9% in April 2018. Most of the YTM YTM in April 2018 declined from September 2017 for changes were between 0.5 and 1.5 percentage points. Bill all companies, with rates falling to 8.1–9.6%. Denbury Barrett’s YTM decline was the greatest, falling by 3.5 Resources’s average YTM declined the most, falling from percentage points, or about a third. Whiting Petroleum and 17.3% to 8.2%, followed by Comstock Resources, whose Oasis Petroleum, both Bakken-focused, had YTM declines

Group 3 2018-2017 2018-2014 2017-2014 S&P YTM YTM YTM % Debt credit Company Ticker 2018 YTM 2017 YTM 2014 YTM difference difference difference to cap rating Gulfport Energy Corp GPOR 6.9 6.5 6.2 0.5 0.8 0.3 38% BB- Extraction Oil & Gas XOG 6.9 6.7 6.2 0.2 0.8 0.5 37% B Bill Barrett Corp BBG 6.9 9.9 6.5 -3.1 0.3 3.4 N/A N/A Chesapeake Engy Corp CHK 6.4 7.3 4.1 -0.9 2.3 3.2 44% B Oasis Petroleum Inc OAS 6.0 7.6 5.7 -1.5 0.3 1.9 24% B+ SM Energy Co SM 6.0 7.2 5.4 -1.2 0.6 1.8 32% BB- Hess Corp HES 6.0 5.1 3.7 0.8 2.2 1.4 23% BBB- Energen Corp EGN 5.9 5.5 4.9 0.4 1.0 0.6 22% BB

Group 4 2018-2017 2018-2014 2017-2014 S&P YTM YTM YTM % Debt credit Company Ticker 2018 YTM 2017 YTM 2014 YTM difference difference difference to cap rating Antero Resource Corp AR 4.9 4.9 5.3 0.0 -0.3 -0.4 35% BB+ Diamondback Energy Inc FANG 4.9 4.8 6.1 0.1 -1.2 -1.3 21% BB Noble Engy Inc NBL 4.7 4.3 3.9 0.4 0.8 0.4 26% BBB Encana Corp ECA 4.6 4.6 3.8 - 0.1 0.8 0.8 27% BBB- WPX Energy Inc WPX 4.6 5.3 4.5 -0.7 0.0 0.7 38% BB- Continental Res Inc CLR 4.5 5.3 4.5 -0.8 0.0 0.8 28% BBB- Concho Res Inc CXO 4.5 4.6 5.3 - 0.1 -0.7 -0.6 32% BBB- ConocoPhillips COP 4.5 4.5 4.0 0.0 0.5 0.5 32% A- Newfield Expl Co NFX 4.5 4.7 10.6 -0.2 -6.2 -6.0 40% BB+ Apache Corp APA 4.5 3.8 3.5 0.7 1.0 0.3 22% BBB

Group 4 Anadarko Petroleum Corp APC 4.4 4.2 4.1 0.2 0.4 0.2 35% BBB Cimarex Energy XEC 4.4 3.5 5.5 0.9 -1.1 -2.0 20% BBB- Carrizo Oil & Gas Inc CRZO 4.3 6.6 7.2 -2.2 -2.8 -0.6 52% B+ Devon Engy Corp DVN 4.2 3.8 2.7 0.3 1.4 1.1 25% BBB Suncor Engy Inc SU CN 4.1 3.7 3.7 0.4 0.4 0.0 35% A- EQT Corp EQT 4.0 2.8 3.2 1.2 0.8 -0.4 34% BBB Pioneer Nat Res Co PXD 3.7 2.8 2.6 1.0 1.2 0.2 44% BBB Occidental Petroleum Inc OXY 3.7 3.1 2.4 0.6 1.3 0.6 7% A EOG Res Inc EOG 3.6 2.7 2.2 0.8 1.4 0.6 17% BBB+ Source: IHS Markit © 2018 IHS Markit of 1.8 and 1.5 points, respectively, which might reflect For noninvestment grade securities, the current spread of investors’ assessment of improving economic conditions in 421 basis points is significantly lower than the 1,467 basis the play. points in early 2016. The current spread is higher than the 357 basis points in early 2014 and is line with the 431 basis Group 4, dominated by Large E&Ps with diverse asset points at the time of our September 2017 report. Since bases, has the lowest credit risk. The average April the September 2017 report, the yield spread has remained 2018 YTM for the group is 4.3%, nearly identical to the unchanged. September 2017 YTM of 4.2%. This group also has some established Permian (Diamondback, Pioneer and Concho) How long will rates remain low? and Marcellus (EQT and Antero) operators, which have exposure to the best onshore US asset bases. IHS Markit economists expect the federal funds rate to increase from the current 1.75% to about 3% at the Energy bond yield spreads versus US Treasuries beginning of 2019, before leveling off. As the Fed raises reinforce investor confidence rates, bond prices would come under pressure, pushing yields higher and making it more expensive for companies Proprietary IHS Markit energy debt indices, which track a to borrow money. How energy bond prices, yields and yield broad array of fixed-income securities across the oil and gas spreads react to rising interest rates is something we will value chain (midstream, services, rig operators) compared be monitoring. with US Treasuries, indicate debt investor confidence in oil and gas bonds. For investment-grade securities, the Anticipating rate increases, companies current spread of 146 basis points is significantly lower refinanced early and got ahead of rising than the 377 points reached in February 2016, when WTI borrowing costs oil prices hit bottom. Even more encouraging, the current yield spread is lower than the 182 basis points in early 2014, North American E&P debt maturity schedules, as shown when WTI oil prices were hovering around $100/bbl. Since in year-end 2017, 2016, and 2015 annual filings, show that our September 2017 report, the yield spread has remained companies were proactive, refinancing debt and extending the same, even though the federal funds rate has increased maturity dates. This was obviously prudent—not only by 0.5 percentage points. because of weaker commodity prices, but also because the

Investment grade vs high yield spread 1600 $120.00

1400 $100.00

1200

$80.00 1000 WTI price Bond yield Bond 800 $60.00

600 $40.00

400

$20.00 200

0 $-

High Yield Investment grade WTI price Source: IHS Markit © 2018 IHS Markit era of cheap money and low interest rates is expected to Comparing 2017 with 2015 year-end filings, we calculate end, as shown in the US interest rate forecast chart. that, for the 45 North American E&Ps, total debt principal payment due, using a rolling five-year period, declined 15% overall. For the Small E&Ps, the decline in total

IHS Markit forecast for US interest rates, % 3.5

2.5

1.5

0.5

0 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 1/1/2022

principal debt due was a whopping 50%, likely indicating rose 5%. For the Small E&Ps, total principal debt due bankruptcies as well as refinancing. For the Midsized declined by 8%. For the Midsized E&Ps, total principal debt E&Ps, the decline was 17%. For the Large E&Ps, the decline due increased by 16%. For the Large E&Ps, the increase was 4%. was 4%. The rise in total principal debt payment due for the Midsized and Large E&Ps indicates that the principal Comparing 2017 with 2016 year-end filings, the total debt payments that were refinanced in 2015 will likely come principal payment due, using the rolling five-year period, due around 2022–23.

Decline in principal debt due in 5-year period, % 0% Large Mid-sized Small

5 - 5%

- 10%

- 15%

- 20%

- 25% year rolling average

- 30% % change in principal payment, principal in change %

- 35%

- 40%

- 45%

- 50%

Appendix

All Groups final 2018-2017 2018-2014 2017-2014 S&P 2018 YTM YTM YTM % Debt credit Company Ticker YTM 2017 YTM 2014 YTM difference difference difference to cap rating Ultra Petroleum Corp UPL 51.5 27.2 4.7 24.3 46.7 22.5 34% B+ Halcon Res Corp HK 21.0 26.3 8.2 -5.3 12.8 18.1 81% B- Petroquest Energy Inc PQ 19.1 17.2 8.0 1.9 11.1 9.2 54% CCC+ EP Energy Corp EPE 15.2 20.2 6.2 -5.0 9.0 14.0 91% NA Group 1 Callon Petroleum CPE 11.7 5.8 10.8 5.9 0.9 -5.0 191% B W&T Offshore Inc WTI 10.1 19.6 6.9 -9.5 3.2 12.7 53% CCC Sanchez Energy Corp SN 9.6 11.9 6.2 -2.4 3.4 5.8 101% B Athabasca Oil Corp ATH.TO 9.5 11.4 8.9 -1.9 0.6 2.4 26% B- Comstock Res Inc CRK 9.5 14.8 6.9 -5.3 2.6 7.9 17% CCC+

Group 2 Denbury Res Inc DNR 8.2 17.3 5.6 -9.1 2.6 11.7 32% CCC+ Approach Resources Inc AREX 8.1 11.6 6.5 -3.5 1.7 5.1 16% NR Gulfport Energy Corp GPOR 6.9 6.5 6.2 0.5 0.8 0.3 38% BB- Extraction Oil & Gas XOG 6.9 6.7 6.2 0.2 0.8 0.5 37% B Bill Barrett Corp BBG 6.9 9.9 6.5 -3.1 0.3 3.4 N/A N/A Chesapeake Engy Corp CHK 6.4 7.3 4.1 -0.9 2.3 3.2 44% B Oasis Petroleum Inc OAS 6.0 7.6 5.7 -1.5 0.3 1.9 24% B+ SM Energy Co SM 6.0 7.2 5.4 -1.2 0.6 1.8 32% BB- Hess Corp HES 6.0 5.1 3.7 0.8 2.2 1.4 23% BBB- Energen Corp EGN 5.9 5.5 4.9 0.4 1.0 0.6 22% BB

Group 3 PDC Energy Inc PDCE 5.7 5.9 6.3 -0.2 -0.6 -0.4 44% BB- Whiting Petroleum Corp WLL 5.6 7.4 4.5 -1.8 1.1 3.0 41% BB- Range Resources Corp RRC 5.6 5.6 5.0 0.0 0.5 0.6 42% BB+ Laredo Petroleum Inc LPI 5.5 6.0 6.1 -0.4 -0.6 -0.2 51% B+ Parsley Energy PE 5.3 5.3 6.7 0.0 -1.4 -1.4 21% NA RSP Permian Inc RSPP 5.1 5.4 3.9 -0.3 1.2 1.5 26% B+ QEP Res Inc QEP 5.0 5.7 5.0 -0.7 0.0 0.7 31% BB+ Antero Resource Corp AR 4.9 4.9 5.3 0.0 -0.3 -0.4 35% BB+ Diamondback Energy Inc FANG 4.9 4.8 6.1 0.1 -1.2 -1.3 21% BB Noble Engy Inc NBL 4.7 4.3 3.9 0.4 0.8 0.4 26% BBB Encana Corp ECA 4.6 4.6 3.8 - 0.1 0.8 0.8 27% BBB- WPX Energy Inc WPX 4.6 5.3 4.5 -0.7 0.0 0.7 38% BB- Continental Res Inc CLR 4.5 5.3 4.5 -0.8 0.0 0.8 28% BBB- Concho Res Inc CXO 4.5 4.6 5.3 - 0.1 -0.7 -0.6 32% BBB- ConocoPhillips COP 4.5 4.5 4.0 0.0 0.5 0.5 32% A- Newfield Expl Co NFX 4.5 4.7 10.6 -0.2 -6.2 -6.0 40% BB+ Apache Corp APA 4.5 3.8 3.5 0.7 1.0 0.3 22% BBB

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