Energy: Election Week 'Clarity'

November 4, 2020 10:59 PM GMT

MORGAN STANLEY & CO. LLC Energy | North America Devin McDermott EQUITY ANALYST AND COMMODITIES STRATEGIST [email protected] +1 212 761-1125 Election Week 'Clarity' - Key Stephen C Byrd EQUITY ANALYST [email protected] +1 212 761-3865 Stock & Sector Impacts Benny Wong EQUITY ANALYST [email protected] +1 212 761-9626 Connor Lynagh Latest data points to a "divided" government, likely limiting EQUITY ANALYST legislative action. While the possibility remains for a more [email protected] +1 212 296-8145 Mark Carlucci, CFA stringent regulatory backdrop under a potential Biden victory, EQUITY ANALYST much of this "risk" is already priced into Energy equities, [email protected] +1 212 761-6586 underpinning an increasingly attractive risk-reward. MORGAN STANLEY & CO. INTERNATIONAL PLC+ Amy Sergeant, CFA EQUITY ANALYST AND COMMODITIES STRATEGIST Divided government policy paths suggest a more constructive backdrop for [email protected] +44 20 7677-6937 Martijn Rats, CFA Energy vs. pre-election expectations. Into election day, investors broadly EQUITY ANALYST AND COMMODITIES STRATEGIST anticipated Democrats would gain control of both the presidency and Congress, [email protected] +44 20 7425-6618 relying on polls that heavily favored a "blue wave." Under such an outcome, we MORGAN STANLEY & CO. LLC had outlined a wide range of potential policy implications, that in some of the Todd Castagno, CFA, CPA EQUITY STRATEGIST more extreme scenarios, could meaningfully constrain the oil & gas industry (see [email protected] +1 212 761-6893 US Election Playbook). While final vote counts remain outstanding, polling results Mark Savino now suggest a greater possibility of a split Congress, with clarity on the EQUITY STRATEGIST [email protected] +1 212 761-8576 presidency potentially taking several days (see our Public Policy team's note, Robert S Kad Three Early Lessons from a Late Night). Importantly, lack of single party control EQUITY ANALYST in Congress means legislative options to constrain the oil & gas industry could be [email protected] +1 +1-212-761-0065 James A Lizzul effectively "off the table" — a key tailwind for the sector. More broadly, fiscal RESEARCH ASSOCIATE stimulus is likely to be smaller or "reactive," a modest negative for the energy [email protected] +1 212 296-4324 Joe Laetsch, CFA macro. Net-net, we see a potential divided government as positive for the Energy RESEARCH ASSOCIATE sector relative to pre-election expectations, regardless of the outcome of the [email protected] +1 212 761-8804 presidency. Jeremy Fraser RESEARCH ASSOCIATE Control of the White House remains uncertain, but the impacts are more limited [email protected] +1-212-761-1202 Max P Yaras under a split Congress. Under a possible Biden presidency, we would still see RESEARCH ASSOCIATE potential for more restrictive regulatory policy, though much more moderate [email protected] +1 212 761-6071 Grace G Kim relative to pre-election expectations. Conversely, under a second Trump term, RESEARCH ASSOCIATE "status quo" energy policy would have limited direct financial benefits for oil & [email protected] +1 212 761-1704 gas companies, though remove key risks such a resurgence in Iranian oil supply or TDoadndi eCl aKsutatgzno is a senior member of Morgan Stanley’s GREloSbEaAlR VCaHl uAaStSioOnC,I ATcEcounting & Tax (GVAT) team. He is not drilling restrictions on federal land — a scenario we expect would drive a sharp eDxapnr.Kesustzin@gm roercgoamnsmtaennledya.ctioomns on equity secu+ri1ti-e2s1.2-761-0899 rally in most exposed equities — EOG, XEC, COP, CXO & DVN. MThoorgmana sS tCanlaleys d Jooehs nasnod nseeks to do business with cRoEmSEpAaRnCiHes A cSoSvOeCreIAdT inE Morgan Stanley Research. As a Now, we see an increasingly favorable risk-reward for energy equities. Broadly, rTehsoumlta, sin.Jvoehsntsoorsn @shmoourlgda nbset anwleayr.ec othmat the firm+ 1m 2a1y2 h76a1v-e4 6a28 cBornyfcliec tH ouf mintpehrersety that could affect the objectivity of we believe energy equities already trade at valuations that reflect potential MREoSrEgAaRnC SHt aAnSlSeOy CRIeAsTeEarch. Investors should consider Democratic policy changes for oil & gas. Since the beginning of June, when polling MBroycrgea.Hnu Smtpahnrleeyy@ Rmesoergaarncsht ansl eoyn.clyo ma single fac+t1o-2r 1in2 -m76a1k-0in4g36 data began to shift more in favor of Biden and investor focus began to shift from Athdeiar min vJe sGtmraeynt decision. FRoESr EaAnRaClyHs tA cSeSrOtiCfiIcAaTtEion and other important disclosures, the Covid-driven oil price collapse to the US election, the sector's EV/EBITDA rAedfaemr t.Jo. Gthraey D@imscolorgsaunrset aSnelecyt.icoonm, located at the+1 e 2n1d2 o7f6 t1h-2is571 valuation discount relative to the S&P 500 has meaningfully widened from report. +E=x Apnlaolryasttsi oenm p&lo Pyerdo dbyu cnotino-Un.S. affiliates are not registered with ~30% to ~45%. Moreover, some energy subsectors are beginning to offer cash FNIoNrRtAh, Ammaye rniocta be associated persons of the member and may not flow profiles competitive with the broader market for the first time in recent bIne dsubsjtercytV toie FwINRA restrictions on communications with a sIunb-jeLcitne cIonmtepganray,t peudb lOici lappearances and trading securities held by a history. In particular, E&Ps and midstream now offer attractive median 2021 free research analyst account. North America

1 cash flow yields of 12% and 18% at $45 WTI. Fundamentally, upstream energy IndustryView In-Line companies now intrinsically reflect a long-term oil price of $41, below the MLPs & Midstream Energy Infrastructure North America average strip price of $43 over the next 5 years. Top picks to add exposure to the IndustryView In-Line energy sector are CVX in integrated oil, COP in US E&P, ENB in midstream, SLB in Refining & Marketing oil services and MPC in refining, and SU in Canadian E&P. North America IndustryView In-Line Charting the policy path. Under a potential Biden presidency and split Congress, Oil Services, Drilling & Equipment we outline our view for "reasonably likely" outcomes for the sector. In general, North America we believe the actual energy path could trend more moderate relative to Biden's IndustryView Attractive pre-election platform, in part driven by lack of a Senate majority, which could Canadian Oil & Gas North America moderate key appointees to federal agencies. Moreover, most of the more IndustryView In-Line meaningful energy sector reforms require legislation, something that would have a very low likelihood of being implemented under a split government. As a result, a clean energy standard, carbon tax, or an infrastructure bill with outsized support of clean energy (wind, solar, carbon capture, hydrogen, battery storage and electric vehicles) may no longer be feasible. Similarly, major tax changes appear unlikely, including those that could compromise the sector's favorable tax treatment. We see the following impacts across the energy value chain: Upstream. While Biden has discussed a ban of oil and gas production on federal lands, he has softened his stance on this issue as we moved closer to the election. We think that the negative impacts on employment and tax revenue make an outright ban unlikely, but limitations on new leasing and more stringent permitting review (including more strict limits on flaring and methane leakage) are stronger possibilities but have a more limited financial impact on oil & gas producers.

Midstream & Infrastructure. While infrastructure permitting is already challenging, we expect an even more onerous approval process for new interstate pipelines and export terminals. Such a backdrop could limit new growth projects for midstream companies, and assuming US production resumes growth, potentially result in infrastructure constraints over time (although significant excess pipeline capacity exists in most key oil basins today).

Downstream. We would expect a potential Biden administration to reverse fuel efficiency standards back to the Obama era CAFE (Corporate Average Fuel Economy), or something similar potentially reducing gasoline demand by 200 billion gasoline gallons equivalent, or 5.6%, over 30 years. Such a change can be accomplished via regulatory agencies (the Environmental Protection Agency) and does not require legislation. Uncertainties remain for foreign policy, particularly as it relates to Iran. Under a potential Biden administration, a change in foreign policy toward Iran, such as a renegotiation of the Joint Comprehensive Plan of Action (JCPOA), could bring as much as 2 MMbbl/d of non-US supply back to the market (though likely not all at once). Such an outcome would be bearish for global oil prices and create challenges for OPEC cohesion. However, the feasibility and timeline of such as a deal is unclear — and arguably more challenging without Congressional support.

Implications Across Energy

Moving beyond the 'election overhang.' Under a potential divided government, we view the Energy sector as better positioned relative to pre-election expectations, regardless of the outcome of the presidency. While a potential Biden administration could bring more restrictive regulatory policy, lack of single party control in Congress removes some of the more extreme scenarios. Conversely, under a second Trump term, 'status quo' energy policy would likely drive a sharp rally in most exposed equities.

Energy stocks already reflect risk of potential Democratic policy changes for oil & gas, underpinning an increasingly attractive risk-reward. Since the beginning of June, when polling data began to shift more in favor of Biden and investor focus shifted from the Covid-driven oil price collapse to the US election, the sector's EV/EBITDA valuation discount relative to the S&P 500 has meaningfully widened from ~30% to ~45%. In many cases, other metrics, including free cash flow yield, screen similarly attractive. Top picks to add exposure to the energy sector are CVX in integrated oil, COP in US E&P, ENB in midstream, SLB in oil services and MPC in refining, and SU in Canadian E&P.

Exhibit 1: Since the beginning of June, the Energy sector's EV/EBITDA valuation discount relative to the S&P 500 has meaningfully widened from ~30% to ~45% 12M Fwd. Relative Energy EV/EBITDA vs S&P 500 -20% -25% -30% -35% -40% -45% -50% -55% Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Energy EV/EBITDA (Discount)/Premium

Source: Bloomberg, Morgan Stanley Research Views by Energy Subsector Commodities: oil & natural gas. Democratic policies that could be carried out with a split Congress have mixed implications for oil prices. Potential new domestic regulations are most likely — including tighter restrictions on permitting/flaring/infrastructure approvals and limitations on federal lands activity — could restrict supply, a positive for oil prices. That said, since existing federal drilling permits last 2 years the near-term impact should be minimal. On the downstream side, likely changes to vehicle efficiency standards could erode demand over time — negative for prices. Beyond regulatory shifts, a change in foreign policy toward Iran could bring non-US supply back to the market, although the viability of such a move is very unclear. For natural gas markets, we see a

3 somewhat more positive setup: potential positives (regulations that reduce the supply of shale) can be carried out via presidential powers, while negatives (such as clean energy standard) would likely need legislation — unlikely without Democratic control of the Senate.

US E&P & Integrated Oil. Under a potentially divided Congress, we now see more marginal implications for US E&Ps through potential regulatory changes. Most notably, we view a widely discussed 'frac ban' on federal lands as unlikely, but instead less impactful limitations on new leasing and more stringent permitting review. With much of this 'election overhang' removed, the group's valuation screens attractive, offering a 12% median free cash flow yield at $45/bbl WTI. Similarly, our price targets imply ~15% median upside. Most notably, we see mispriced risk for those with federal lands exposure, including OW-rated COP, CXO, and XEC, as well as EW-rated EOG and DVN. Separately, OW-rated CVX's global diversification mitigates potential policy changes, while offering a relatively attractive cash flow and leverage trajectory within Integrated Oil.

Midstream & MLPs. In a potential divided Congress, more sweeping tax policy changes such as higher corporate tax rates (and partial restoration of the relative tax advantages of MLPs) or expansion of the MLP structure to include renewables remain possible but more difficult to enact. With respect to energy and climate change policy, greater industry regulation and efforts to accelerate the energy transition represent more meaningful overhangs that exist in some form independent of election outcomes, but less onerous than would have been expected under a Democratic sweep. We believe relative outperformance within midstream is likely to skew toward value buying within a defensive positioning framework as we look for signs of post-election clarity on regulatory impacts and Covid/stimulus end-market demand path — secure balance sheets, demonstrated capital discipline, limited exposure to key projects and regulatory risk and stable EBITDA with manageable upstream exposure: OW-rated ENB, EPD, MMP, TRP, and WMB. Conversely, we are cautious on ET and OKE due to risks associated with how a potential Biden administration might impact Dakota Access Pipeline (subject to the D.C. Circuit Court affirming the need for an EIS), but requisite Republican Senate confirmation of a new Army Corps of Engineers agency head could perhaps moderate that risk.

Refining & Marketing. While potentially lessened, we still see four main potential areas of risk where the election could add: (1) increased corporate taxes when refiners have historically been high cash tax payers, (2) more aggressive vehicle efficiency standards that moderate the outlook for domestic gasoline demand growth, (3) initiatives that further support demand or economics of alternative fuels and accelerate the displacement of traditional fuel demand, and (4) knock-on effects from increased regulation or more stringent oversight of the upstream and midstream sectors. In the US, this could hamper domestic oil growth and reduce the advantage that abundant and low-cost feedstock US refiners have had over global peers. We think refiners with large operational footprints that drive economies of scale and offer diversification in geography and business lines are better positioned to mitigate these risks. We highlight OW-rated MPC and PSX, as well as EW-rated VLO. Conversely, we are cautious EW-rated PBF and UW-rated HFC given they are smaller in scale with a high concentration of direct refining exposure; HFC also lacks access to exports.

Oil Services. A potential Biden administration would likely present headwinds to

4 US upstream activity, which is the largest market for OFS stocks in our coverage. In our view, shifts in environmental policy & regulation present the most meaningful risks to upstream activity, and consequently, OFS earnings power. However, much of the major OFS suppliers have actively scaled down their presence in the US, and therefore incremental headwinds to a NAm recovery ultimately would shift upstream capital outside of the US, into markets where global OFS suppliers have enjoyed a more significant competitive advantage – we'd highlight OW-rated BKR and SLB as our top picks in this context. Conversely, US-focused pure plays are most at risk in our coverage (most small caps), and we are more cautious EW-rated HAL among diversified services names.

Canadian Oil & Gas. We believe any policies that create a more restrictive and prohibitive environment for the US energy industry will benefit international players through increased market share potential and stronger pricing upon moderated US supply. Canada, which is the largest energy trading partner with the US and which already exports the majority of its production into the country, would be a clear benefactor. Partially offsetting this could be risk of Democrats not supporting major pipeline developments like Keystone XL and the Line 3 Replacement that would support production growth. We therefore prefer integrated companies such as SU, HSE, and to a lesser degree IMO, which would benefit from higher oil prices but be largely hedged against any midstream congestion or egress constraints. We also expect CNQ, CVE, and MEG to benefit from stronger commodity prices, but experience some partial offset from the risk of major pipelines not being built to support future growth (We note the announced merger between CVE and HSE will potentially anchor the stocks with each other and offset relative exposures).

Charting the Policy & Legislative Path Policy & Legislative Implications

Regulatory Policy Environmental policy & regulation. The executive authorities in a potential Biden administration include increased regulatory oversight, such as limitations on methane emissions and flaring, more extensive environmental review of pipelines and energy infrastructure, changes to leasing and permitting policy and/or royalty rates (~25% of US oil production is on federal land), and more stringent fuel efficiency standards. Under a potential Biden presidency and split Congress, more comprehensive legislation becomes less likely, reducing the risk of a clean energy standard and/or carbon tax, new restrictions on fracking and energy exports, and potential anti-OPEC legislation.

Many feasible options exist for a president to constrain (or expand) US oil and gas activity. A president has fairly unilateral power to slow down federal leasing and permitting, increase restrictions to new oil & gas infrastructure, implement stricter methane emissions or potentially flaring limits, and set more stringent fuel efficiency standards. Biden has discussed several policy initiatives that could be carried out without legislative action, including rejoining the Paris Climate Agreement and reducing the impact of oil & gas drilling on federal lands by banning new permits and leases (although these federal lands restrictions were not mentioned in his latest climate plan). More stringent permitting for new pipeline infrastructure could also be a tool to limit future US oil & gas production growth. We note, however, that the rule making process can be a time-consuming and complex one, yielding less unilateral and immediate policy change than expected. For more detail, see our policy team's report US Public Policy: The 'Reregulation' Playbook (3 Aug 2017).

Exhibit 2: The Permian, Bakken, Eagle Ford, Marcellus, and Haynesville Exhibit 3: . . . though Federal acreage is mostly concentrated in the comprise most of current drilling activity. . . New Mexico portion of the Permian and in the Powder River Basin in Wyoming

Source: Enervus. Note: BLM acreage shown constitutes surface acreage in blue and subsurface leases in gray, but may not include all federal subsurface leases.

Source: EIA

Notably, however, federal land comprises just a portion of oil & gas volume and

6 activity for the industry. Currently, ~3 MMbl/d of oil and ~10 bcf/d of gas production comes from federal land, representing ~25% and ~10% of the US total, respectively. Moreover, regulation that restricts permitting on federal land would only impact undeveloped acreage, which is currently shielded by a permit runway of 1-2 years (permits are active for 2 years, and pending request to the Bureau of Land Management, can be extended an additional 2 years). This year, across key oil producing states, ~20% of active land rigs have been on federal land, and we expect many of these would move to non-federal acreage in a scenario that restricts federal drilling.

Exhibit 4: This year, across key oil producing states, ~20% of active land rigs have been on federal land. New Mexico has the highest concentration of federal land, where >80% of rigs in the state have been drilling during 2020. Pecentage of State Drilling Activity on Federal Land 90% 80% 70% 60% Colorado 50% New Mexico North Dakota 40% Texas 30% Wyoming 20% All five states 10% 0% 2014 2015 2016 2017 2018 2019 2020

Source: Rystad Energy; Morgan Stanley Research

Biden could potentially bring a renewed focus on methane emissions. Under the Trump administration, the EPA eliminated emissions limits on methane for the oil & gas industry. These regulations had required oil & gas operators to flare gas, rather than vent it, and to avoid wasteful flaring by capturing a targeted percentage of gas production. While Biden's climate plan does not specifically reference flaring, mitigation could be incorporated into the approval process for oil & gas permits on public lands and waters, directly impacting companies' ability to flare methane on both new and existing sources. Flaring and other emissions restrictions could be supportive of volumes and new pipeline demand for midstream companies in the Permian, an area with high levels of flared gas. However, if combined with more stringent permitting (e.g., limited new pipelines), such restrictions could in effect significantly hinder the oil & gas industry's ability to grow. Many larger producers have already begun to take steps to mitigate volumes of flared gas.

7 Exhibit 5: Flaring has fallen recently with lower activity; At the Exhibit 6: As a % of US onshore gas production, Bakken producers beginning of 2020 ~1 bcf/d of natural gas was flared across US shale flare the most out of our coverage plays, mostly in the Delaware and Bakken US Onshore Flaring (2019, % of Gross Gas Production) US Shale - Flared Gas Volumes (MMcf/d) 25% 1,600 20% 1,400 15% 1,200 10% 1,000 Other 800 DJ Basin 5% 600 Eagle Ford Midland 0% L L 400 T S Y A E S E X P C N C D R N R R R G G O O Q G M L B L A X P P E P V Q E X A V U R O X

Delaware A O N R O O O W N C A H W C X P C E K D O O P R C C 200 A E M X C Bakken M S F H G

0 C Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Source: Rystad Energy, Morgan Stanley Research Source: Rystad Energy, Morgan Stanley Research

Infrastructure permitting could become more stringent under a potential Biden administration. While specific proposals on new pipeline construction have been limited, greater regulation of permitting could reasonably be expected from a Biden administration. The new administration could support more exhaustive environmental reviews under the Endangered Species Act and National Environmental Policy Act that have been the subject of litigation for several large projects in recent years. A Democratic president would also shift the balance of the five-member FERC and likely require analysis of greenhouse gas emission and other environment impacts as part of FERC’s role in permitting new pipelines. All of this could serve to materially lengthen the permitting process for new projects, expand the grounds for potential legal challenges, and increase the risk that key permits are not obtained and projects are unable to move forward.

Potential reversal of fuel efficiency standards. Under the Safer Affordable Fuel- Efficient (SAFE) rule in 2018, the EPA had rolled back Obama-era Corporate Average Fuel Economy (CAFE) standards for 2022-25 and replaced them with less stringent targets. Moreover, SAFE revoked the capacity of 13 states to set their own emission standards under California's waiver under the Clean Air Act (litigation ongoing). The revised standards effectively lowered targeted average fuel economy by 2025 from 46.7 MPG to 40.4 MPG and could increase fuel consumption by 200 billion gasoline gallons equivalent, or 5.6%, over 30 years. Under a Biden administration, a hypothetical reversal of CAFE would potentially reduce gasoline demand by this same amount.

8 Exhibit 7: CAFE vs SAFE Minimum Fuel Economy Standards

Source: US Federal Register, Morgan Stanley Research Legislation Material changes to US energy policy not expected. Without Democratic control of both the House and Senate, we do not anticipate any potential legislation that would meaningfully hinder the oil & gas industry. As a result, we do not expect a clean energy standard, carbon tax, or an infrastructure bill with outsized support of clean energy (wind, solar, carbon capture, hydrogen, battery storage and electric vehicles).

Tax changes are becoming less likely under a divided government. Under a potential Biden presidency and split Congress, Michael Zezas, Morgan Stanley Chief US Public Policy & Municipal Strategist, believes that tax changes would become less likely given the Tax Cuts and Jobs Act (TCJA) was lauded as a key achievement for the Republican Party. He believes that defending the policy would be a key priority for a Republican controlled senate, with a Democratic sweep likely a necessary condition for tax increases (see Three Early Lessons from a Late Night).

Foreign Policy Foreign policy could look more similar to Obama era, with China an exception. Should he be elected, Biden could adopt a foreign policy stance that more closely resembles that of the Obama era, with possible implications for key oil producing countries, including Iran, Saudi Arabia, and Russia. That said, policy direction with China, a key consumer of US oil and LNG, could remain similar to the Trump administration.

Iran: Former Vice President Biden, who worked on the original Iran Nuclear Deal under President Obama, has stated that he would reenter the deal if Iran returns to compliance. The deal, from which President Trump withdrew the US in 2018, stipulated limits to Iran's nuclear program in exchange for sanctions relief, including resuming international oil sales. Should a potential Biden administration succeed in returning to the agreement, it could bring ~2 MMbbl/d of oil supply back to the market in short order. However, the feasibility and timeline of such as a deal is unclear – and arguably more challenging without Congressional support.

Saudi Arabia, Russia, China: Foreign policy under the Trump administration has

9 pivoted more in favor of Saudi Arabia than it did under the Obama administration, and Biden has suggested he would reassess this support. Should a potential Biden administration pursue a new tack in US-Saudi relations, Morgan Stanley Oil Strategist Martijn Rats sees risk that Saudi Arabia could attempt to gain oil market share back from US shale, a potential negative for prices. Russia supplies a significant amount of natural gas to Europe and China, competing with US LNG exports. On China, Michael Zezas, Morgan Stanley Chief US Public Policy & Municipal Strategist, recently wrote that while the tone or approach to China may be different under a potential Biden administration, he would expect the policy direction to remain the same — a continuation of non-tariff barriers around key technologies and processes, and ongoing, potentially even escalating, criticism of China's trade practices.

Implications for the Energy Sector Oil Market Implications

Martijn Rats and Amy Sergeant

Implications for US oil and gas production, driven by potentially tighter restrictions on permitting/flaring/infrastructure approvals. While we don't anticipate a ban on oil and gas production on federal land, anything that restricts production would be bullish for WTI and Brent prices, all else equal. Production on federal land of ~3 MMbbl/d comprises ~25% of US production. Key areas of production on federal lands includes ~1 MMbbl/d of onshore production in the lower 48 (the New Mexico part of the Permian basin and the Powder River Basin in Wyoming) and ~2 MMbbl/d of offshore and Alaska production. Across both onshore and offshore, an inventory of already permitted wells should support production for two years following a hypothetical ban on oil and gas development on federal land. After that period, production would then decline ~100 Mbbl/d over the first year. Constraining this production would provide support to both US and international benchmark prices.

Exhibit 8: Total US oil production on federal lands is ~3 MMbbl/d. . . Federal Acreage Oil Production (Mbbl/d) 3,500 3,000 2,500 2,000 1,500 1,000 500 - 2017 2018 2019 2020 2021 2022 2023 Producing Drilled, not yet producing Permitted, not yet drilled

Source: Rystad Energy, Morgan Stanley Research

11 Exhibit 9: . . .With ~1 MMbbl/d of onshore federal production in the Exhibit 10: . . .and ~2 MMbbl/d of federal production offshore and lower 48. . . Alaska Lower 48 Federal Acreage Oil Production (Mbbl/d) Offshore + Alaska Federal Oil Production (Mbbl/d) 1,400 2,200 1,200 2,000 1,000 1,800 800 600 1,600 400 1,400 200 1,200 - Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 1,000 2017 2018 2019 2020 2021 2022 2023 Producing Drilled, not yet producing Permitted, not yet drilled Producing Under development Discovery Source: Rystad Energy, Morgan Stanley Research Source: Rystad Energy, Morgan Stanley Research

Separately, reduced infrastructure permitting would be bearish WTI relative to Brent, we think. Making it harder to build infrastructure such as pipelines would slow progress on raising US exports further, while not necessarily affecting existing US production. The domestic refining system is not well set up to process the very light sweet crudes that have dominated US output growth, meaning it needs to find a home in export markets. This is changing slowly (e.g., Exxon’s CDU capacity addition at its Beaumont refinery, which is designed to process domestic crude and is due to come online in 2022), but it will take time. Making it more costly or difficult to export US crude would weigh on WTI prices relative to Brent. It would likely also pressure regional differentials depending on where infrastructure was lacking. However, the recent declines in activity would make this less impactful on prices than it would have been in the past, and we note that some infrastructure projects have already been cancelled for other reasons — e.g., Enterprise cancelling the 450,000 barrels per day Midland-to-ECHO 4 crude oil pipeline project and the Dominion/Duke Energy cancelling the Atlantic Coast natural gas pipeline project.

12 Exhibit 11: Permian takeaway capacity appears sufficient

Source: Company Data, Bloomberg, Morgan Stanley Research estimates

Lastly, a potential ban/restrictions on flaring should be supportive for both WTI and Brent prices as limits on flaring could require lower activity where there isn't sufficient takeaway capacity. However, according to Rystad Energy, wellhead natural gas flaring is already likely to be around 50% below the peak reached last year with lower activity levels and less pressure on takeaway capacity. The Permian basin remains the most significant contributor to flaring but we see less downside risks to production from here than before.

Possibility of a change in foreign policy toward Iran, in particular any renegotiation of the JCPOA Iran Nuclear Agreement With a Biden win, the nuclear deal could be back on the table. Biden, who worked on the original deal as vice president under President Obama, has indicated he would be willing to restart talks and potentially bring the US back into the JCPOA. In our view, all else equal, this would be bearish for global oil prices. First, it could result in more supply. Second, it could create challenges for OPEC cohesion as they have to adjust to these additional barrels. Dubai crude could see the most impact given the barrels that come back would likely be mainly medium sour.

A reinstatement of the Iranian nuclear deal could bring as much as 2 MMbbl/d of oil back to the market, although likely not all at once. Currently, we do not model any increase in Iranian production, but if some volumes were released, this could cushion any impact from lower US production and potentially even outweigh the impacts. On top, any release of Iranian barrels would create challenges for OPEC to negotiate how these barrels come to market and potentially require other members to cut output to make room for them. Given the schedule of cuts already in place until April 2022, agreeing on further cuts may be challenging.

13 Exhibit 12: Around 2 MMbbl/d of Iranian oil has been off the market since late 2018 Iran Oil Exports (MMbbl/d) 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

Source: Bloomberg, Morgan Stanley Research Potential changes to vehicle efficiency standards could have implications for oil demand. In a Biden win, we could see standards returned to something resembling Obama-era policies. As outlined above, this could reduce US gasoline demand by 200 billion gallons over 30 years. This translates into around 435 Mbbl/d over this period, or around 5% of 2019 US gasoline consumption. All else equal, this would be bearish for oil prices but likely less impactful overall than the other items discussed.

14 Natural Gas & LNG

Devin McDermott

Additional restrictions on oil & gas drilling could lessen oversupply for natural gas. Unlike oil, which is a global market where US shale represents ~10% of total supply, US natural gas prices remain predominantly driven by domestic factors — and shale is ~80% of supply. Despite a prolonged period of robust structural demand growth over the past several years, US natural gas price have remained low. The primary reasons for low prices have been: 1) abundant "free" associated gas supply from shale oil plays and 2) infrastructure build-out unleashing low cost gas from places like Appalachia. Any regulations that reduce the supply (or growth of) shale oil or that make it more challenging to build additional pipeline infrastructure could lessen the magnitude of US oversupply. At the same time, implementation of a clean energy standard or restrictions on new LNG export projects could reduce future demand, but seem less likely under a split government.

Potential restrictions on federal lands permitting and leasing would be positive for natural gas prices. Currently, there is ~10 bcf/d of gross gas production on federal lands, a significant portion of which is associated with oil. Since the beginning of 2017, associated shale gas production on federal lands has grown by ~2 bcf/d and currently sits at ~3.5 bcf/d. This represents ~20% of the total associated gas growth over the same period. Further restrictions on new drilling permits could remove incremental supply from federal land. Based on the inventory of already permitted wells, we estimate it could take up to two years before any meaningful production declines materialized. Over that time period, we estimate 30-50% of this activity would be shifted to other acreage on state lands — resulting in associated gas growth elsewhere.

Exhibit 13: Associated gas production on federal land is currently ~3.5 bcf/d Associated Gas Production - Federal (Bcf/d) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Jan-23 Producing Drilled, not yet producing Permitted, not yet drilled

Source: Rystad Energy, Morgan Stanley Research

Similarly, potentially more stringent permitting for new infrastructure, could constrain supply growth. While it is already challenging to build new gas pipelines across much of the US, a significant amount of new gas infrastructure has entered service over the past several years. This has helped alleviate infrastructure bottlenecks in key supply areas

15 like Appalachia. While Appalachia has adequate running room for further growth without meaningful infrastructure for the next 1-2 years, by our estimates, additional pipes may be needed thereafter — particularly if low oil prices continue to cap associated gas supply growth. Limitations on permitting new pipelines (including smaller intrastate systems) could constrain natural gas supply growth.

Conversely, a flaring 'ban' could add near-term supply, but would not materially alter supply-demand. Across the US, ~0.5 bcf/d of natural gas production is currently flared (burnt off) rather than put on pipelines, down from over 1 bcf/d at the beginning of 2020 due to lower activity. This is largely due to lack of infrastructure in associated gas plays, where the economics are driven largely by oil rather than gas and the economic incentive to invest in gas gathering, processing and pipelines does not necessarily exist.

Exhibit 14: Flaring has fallen recently with lower activity; At the beginning of 2020 ~1 bcf/d of natural gas was flared across US shale plays, mostly in the Delaware and Bakken US Shale - Flared Gas Volumes (MMcf/d) 1,600 1,400 1,200

1,000 Other 800 DJ Basin 600 Eagle Ford 400 Midland Delaware 200 Bakken 0 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20

Source: Rystad Energy, Morgan Stanley Research

16 US E&P & Integrated Oil

Devin McDermott and Mark Carlucci

Benchmarking E&P risk under a potential Biden presidency. If Biden is elected, he would have fairly unilateral authority to tighten regulations in support of a "green" agenda; however, lack of Congressional control likely limits any significant energy policy shifts or restrictions on domestic oil & gas production.

A potential Biden presidency could bring further regulatory scrutiny. While Biden has indicated he would not ban fracking outright, we believe he could scrutinize federal permitting & leasing — which could limit or reduce drilling activity on federal lands and negatively impact value for those E&Ps with direct acreage exposure. We would also expect roadblocks for infrastructure permitting, potentially weighing on regional price differentials if shale growth resumes. In a more extreme scenario, risks could extend to infrastructure currently in-service, an issue that has already arisen through the ongoing litigation surrounding the Dakota Access Pipeline (see our recent note DAPL Crisis Averted, But Risks Remain – Revisiting Cross-Sector Impacts). Lastly, while Biden has not indicated plans to limit flaring and address methane emissions, we believe it is reasonable to think he would restore regulations. Upstream emission limits could add modest cost and operational challenges for some producers, though further scrutiny of methane emissions in the pipeline permitting process could be another headwind for infrastructure development, and in turn, upstream production growth. In the current oversupplied oil market, less growth would also have positive impacts on the energy macro. Under a potentially split Congress, legislation required for bigger energy policy changes appears unlikely. This would limit the ability for a potential Biden administration to implement his more impactful policy goals, including a clean energy standard (Biden's climate plan includes a zero carbon power sector by 2035) or heavily 'green tinged' infrastructure bill that would provide the support mechanism for clean energy — wind, solar, carbon capture, hydrogen, battery storage and electric vehicles. Other actions such as changes to the Safe Drinking Water Act to regulate fracking fluid or even reinstatement of the crude export ban (lower price realizations) would also require legislation. Even if the Democrats win a majority in the Senate, the margin will be slim, and the need for moderate vote would have likely limited the ability for much of this to advance. Similarly, large tax changes are unlikely under a divided government. E&Ps currently benefit from favorable income tax treatment, immediately expensing 100% of intangible drilling costs (IDCs, 70-80% of well cost), which extends beyond the phase out of bonus depreciation post-2022 (Integrated producers can expense 70% of IDCs). Combined with significant net operating loss carry-forwards (NOLs), E&Ps in most cases do not pay cash taxes.

Equities already reflect these risks, and valuations screen attractive. Our coverage offers a median free cash flow yield of 12% at $45/bbl WTI, the most competitive relative to the market in recent history. Most notably, we see mispriced risk for those with federal lands exposure, including OW-rated COP, CXO, and XEC, as well as EW- rated EOG and DVN. Separately, OW-rated CVX's global diversification mitigates potential policy changes, while offering a relatively attractive cash flow and leverage

17 trajectory within Integrated Oil.

Federal Permitting, Leasing, & Royalties Under a Biden presidency, we view a 'frac ban' on federal lands as unlikely, though expect more stringent regulations on flaring. The president has the power to restrict federal leasing, permitting, and infrastructure development, though we view the much discussed 'frac ban' on federal land as unlikely with Biden recently softening his stance on this issue. We do expect we could see more stringent regulations around natural gas flaring, adding modest gas supply to the market while directionally increasing costs for smaller producers that have tended to flare more gas than larger peers. Currently, ~3 MMbbl/d of oil and ~10 bcf/d of gas production comes from federal lands, representing 25% and ~10%, respectively, of the US total. Since existing permits provide 1-2 years of drilling runway, any potential policy changes would be unlikely to have an immediate impact on production.

Exhibit 15: Production on Federal Land (% of Total) 2020e Production on Federal Land (% of Total) 40% 30% 20% 10% – D M C X H O E C M C C X O W A N C C P R S F A P G E C A E O O P E W R X Q V X E V L O O B P H R X A P U R L R N C A D N O S X L E G M T Y S K C O L P G R O N G R US Onshore US Offshore Median

Source: Rystad Energy, Morgan Stanley Research estimates. DVN estimates are pre-WPX transaction.

Though we view fracking restrictions on federal lands as unlikely, it would be most impactful for oil & gas operations in New Mexico. The Permian is the largest oil- producing region in the US, and it is core to the growth plans for many E&Ps. Part of the Permian sits in southeast New Mexico, a region where companies including DVN, XEC, and EOG have high levels of federal land. However, the remainder of the Permian is largely non-federal, and many exposed companies would likely shift investment to other parts of the basin. Onshore federal acreage is also concentrated in the Powder River Basin (Wyoming) and a subset of Alaska, the latter being heavily reliant on oil & gas production for state revenue. However, only select companies have meaningful development plans in the Powder River Basin (CHK, DVN, EOG), and in our coverage, COP is the only company exposed to Alaska. Offshore US oil and gas development is all federal, though a long runway of already permitted drilling may limit risk for the exposed companies (MUR, HES, OXY, CVX, XOM).

18 Exhibit 16: NAV at risk due to potential loss of inventory on Federal acreage % NAV at Risk from Federal Drilling Moratorium (32%)

(20%)

(13%) (10%)

EOG XEC COP DVN

Note: Includes coverage with highest levels of federal acreage inventory. DVN is pro-forma WPX merger, COP is pro-forma for CXO. Source: Company filings, Morgan Stanley Research

Biden's plan has also discussed an adjustment to royalty rates to include climate change costs, which could reduce the profitability of existing production. Biden has recommended increasing the royalty rate on federal lands from 12.5% to 18.5%. This would both decrease the net value of associated production currently producing on federal lands and negatively impact economics for undeveloped drilling inventory. Exposure varies widely across our coverage. Most exposed include DVN (federal royalty increase would reduce OCF by 7.4%), OXY (federal royalty increase would reduce OCF by 6.8%) and HES (federal royalty increase would reduce OCF by 3.9%).

Exhibit 17: The impact to 2020 operating cash flow would be concentrated among those with a high % of production on Federal acreage. % Change in OCF After Royalty Step-up to 18.5% -8% -7% -6% -5% -4% -3% -2% -1% 0% L Y S K A E P S X E C D R N G G O O M B L X A P P E V P E X V H X O N R O O N C A H X C C P D O C O C C A E X M F

Source: Rystad Energy, Bureau of Land Management, Morgan Stanley estimates. DVN estimates are pre-WPX transaction.

19 Midstream & MLPs

Stephen Byrd, Devin McDermott, and Robert Kad

Under a divided Congress scenario where overarching tax reform becomes more difficult to pass, the probability of higher corporate tax rates — which, in turn, could help partially restore the relative tax advantages of MLPs — appears less likely. Biden's proposed tax reform had indicate a desire to raise corporate tax rates back to 28% from the current 21% level (partially reversing the reduction in 2017 from 35% under the Tax Cuts and Jobs Act). Without a Democratic sweep, higher corporate tax rates could become more difficult to enact and the status quo more likely to prevail. Higher corporate tax rates had the potential to make MLPs relatively more attractive from a tax perspective, even after accounting for possible higher marginal ordinary income tax rates and elimination of the qualified business income deduction for partnerships.

Should there not be substantive tax policy changes, MLP management teams might then have better clarity to reconsider whether it would be optimal to remain MLPs or convert to C-Corps. Several remaining MLPs had wanted to see first see the results of this year's presidential election before making any decisions on conversion, which ultimately weighs prospective broader ownership (including greater passive participation) and higher valuation against the imposition of entity-level tax liability and resulting impacts on leverage and dividends.

Exhibit 18: Comparative Investor After-Tax Returns, MLP vs. C-Corp, Assuming No Offsetting Valuation Adjustment (Benefit) for C-Corp Structure $10.00 50.0% MLP C-CORP $9.00 45.0% Effective Tax Rate: Effective Tax Rate: $8.00 22.7% 25.5% 39.6% 36.8% 42.4% 56.5% 40.0% $6.91 $7.00 $6.71 35.0% %

% $5.73 5 . $6.00 6 $5.43 30.0% .

4 $5.24 3 3 3 % 7

$5.00 % 25.0% . % 1

8 $4.10 . 2 . 2 7 6 $4.00 2 20.0% 2 % 5 .

$3.00 0 15.0% 2 $2.00 10.0% $1.00 5.0% $0.00 0.0% Current Tax Policy Proposed Biden Tax Policy Proposed Biden Tax Policy Current Tax Policy Proposed Biden Tax Policy Proposed Biden Tax Policy (Income Below $1mm) (Income Above $1mm) (Income Below $1mm) (Income Above $1mm) Total Gain, Net of Tax Liability (Assumes $20 Initial Investment) Cumulative Total Return on Investment Source: Morgan Stanley Research

Beyond a possible increase in the statutory tax rate, a divided Congress also likely diminishs prospects for a re-established corporate alternative minimum tax and disallowance of bonus depreciation. While NOLs would still be eligible to be used and many energy companies benefit from a large remaining available runway, those changes could conceivably shorten or reshape tax holidays. For midstream C-corps, this had created some level of investor skepticism around the timeframe in which each might become a cash tax payer, particularly as capital investment moderates.

It is unclear whether separate legislative efforts might still move forward that could reinforce the MLP structure and perhaps help attract capital, but they will likely need to find a path as part of a broader legislative package. The Energy Infrastructure Council, a trade association representing MLPs and other midstream companies, has been working to include the Financing Our Energy Future Act (FOEFA), S. 1841/H.R. 3249, in upcoming legislation other than that dealing with immediate COVID-19 response.

20 FOEFA, which is a successor bill to the previous MLP Parity Act, seeks to expand the qualifying income definition for MLPs to include renewable energy. We see potential for this to be considered as part of a broader set of measures to support clean energy development, but caution that this proposal has failed to gain traction over the past decade despite bi-partisan sponsorship.

Concurrent with these efforts, EIC has been working to advance a collection of MLP modernization provisions intended to increase investment in MLPs (awaiting Joint Committee on Taxation scoring) consisting of:

Removing the restriction preventing regulated investment companies (RICs) — including mutual funds, closed end funds and ETFs — from investing greater than 25% of assets in MLPs.

Excluding MLPs held in IRAs from unrelated business taxable income (UBTI) for beneficial owners with positions less than 5% in a given partnership (MLPs trigger tax liability on UBTI in excess of $1,000 in retirement accounts).

Exempting certain foreign investors from certain tax and withholding provisions, including effectively connected income (ECI).

Repealing the separate application of passive loss limitations to individual MLPs, bringing passive loss treatment in-line with that of private partnerships.

It is difficult to gauge what level of support these modernization proposals might have, but it seems reasonable to assume that they would likely only be considered if attached to more comprehensive legislation.

Exhibit 19: Alerian MLP Index (AMZX) & Tortoise North American C- Exhibit 20: Alerian MLP Index (AMZX) & Tortoise North American C- Corp Pipeline Index (TNAPCT) Historical Total Return Comparison Corp Pipeline Index (TNAPCT) Historical Total Return Comparison by Year 160

AMZX TNAPCT 60.0%

% 9

140 AMZX TNAPCT .

4 %

120 40.0% 1

2 8

100 .

1 5

20.0% 1

7 .

80 .

4 4 60 0.0%

40 %

. -

-20.0% 4

0 2

20 1

. %

0 4

8 6

-40.0% .

3 -

2014 2015 2016 2017 2018 2019 2020 %

3 4 Source: Morgan Stanley Research, Bloomberg -60.0% - 2014 2015 2016 2017 2018 2019 2020 YTD Source: Morgan Stanley Research, Bloomberg

While a possibility always exists that Congress could go in the other direction and effectively move to potentially eliminate the MLP structure, we see that probability as quite low. In the Climate Crisis Action Plan put forth by House Democrats, the only direct mention of the MLP structure was a call to expand the qualifying income definition to include renewable energy. References to elimination of oil and gas subsidies in the House plan appeared to focus on deductions and other incentives as well as a proposal to price carbon emissions. We would not expect MLPs to be targeted specifically in tax legislation given their insubstantial revenue contribution if taxed as

21 corporations (pursuant to past JCT scoring), meaning that any change would more likely be addressed as a result of energy policy considerations. Although we had seen this as a fairly low probability outcome even with a unified Democratic Congress, we see materially lower odds a broad-based effort to address oil and gas subsidies in the event of a divided outcome.

With respect to energy and climate change policy, greater industry regulation and efforts to accelerate the energy transition represent more meaningful overhangs, although direct election risks appear more limited in a divided Congress. Relative to the current administration, a potential Biden presidency presents the possibility of a more stringent regulatory backdrop for the US oil & gas industry — a shift that could have come with both positives (potentially higher commodity prices, greater barriers to entry for existing pipeline infrastructure) and negatives (such as increased costs and/or lower growth) for the exposed stocks. A president has fairly unilateral power to slow down federal leasing and permitting, increase restrictions to new oil and gas infrastructure, and implement stricter methane emissions or potentially flaring limits. Without a Democratic sweep, however, it is likely legislation would have more modest goals as far as modifications to oil and gas regulation and overall US energy policy. In such an outcome, there is presumably a lower likelihood of a clean energy standard or carbon tax, revisions to the Safe Drinking Water Act to regulate fracking fluid or reinstatement of the oil export ban. Initiatives that impact drilling on federal lands, more stringent permitting, restrictions on new leases and methane emission or flaring limits could still adversely impact oil and gas production growth and resulting midstream volumes going forward, however. Beyond direct oil and gas industry regulations, initiatives to accelerate decarbonization of various carbon-intensive industries and end markets could also amplify secular demand deterioration and terminal value uncertainty.

We believe relative outperformance within midstream is likely to skew toward defensive positioning, with less dependency on growth capex to justify current stock prices, as we move through the election, particularly as the cadence of production growth and COVID risks remain unresolved. We expect stock selection to favor secure balance sheets, actual demonstrated capital discipline, limited exposure to key projects with regulatory risk, and comparatively stable EBITDA with advantaged or at least manageable upstream exposure where it exists. We see Overweight-rated ENB, EPD, MMP, TRP, and WMB, in particular, fitting these criteria while offering valuation upside relative to asset composition and EBITDA trajectory (EBITDA and growth resiliency are primary differentiators of intrinsic value). In a recent report, Apples to Apples: Comparing Yieldcos, Midstream, and LNG Infrastructure Stocks, we evaluated implied economic useful lives reflected in current stock prices after adjusting for true maintenance capital spending — and potential downside in the absence of growth — with MMP and EPD screening favorably both across our midstream coverage and a larger comp set of well- contracted energy infrastructure stocks (yieldcos, LNG).

22 Exhibit 21: Morgan Stanley Midstream Energy Infrastructure Coverage - Bear Cases (20-Year Asset Life, True Maintenance Capex) in Relation to Last Close

$60.00 -7% -9% 0% -15% -15% -16% -16% -10% $50.00 -27% -29% -20% -33% -33% -38% -30% $40.00 -42% -49% -40% -53% -50% $30.00 -50% -62% -62% -64% -60% $20.00 -75% -70% -80% $10.00 -90%

$0.00 -100%

H B OW-Rated Last Price Bear Case Implied Price Downside Source: Morgan Stanley Research, Thomson Reuters.

23 Refining & Marketing

Benny Wong

While potentially lessened, we still see four main potential areas of risk where the election could add. This includes: (1) increased corporate taxes, (2) more aggressive vehicle efficiency standards, (3) increased support for alternative fuels, and (4) knock- on effects from increased regulation or more stringent oversight on the upstream and midstream sectors. We think refiners with large operational footprints that drive economies of scale and offer diversification in geography and business lines are better positioned to mitigate these risks. We highlight OW-rated MPC and PSX, as well as EW- rated VLO. Conversely, we are more cautious EW-rated PBF and UW-rated HFC given they are smaller in scale with a high concentration of direct refining exposure; HFC also lacks access to exports.

(1) Higher corporate taxes. Refiners are generally high cash tax payers. As such, they directly benefited when corporate taxes were lowered in 2017. We estimate this boosted forward EV/EBITDA multiples by ~1.0x. For modeling purposes, our Tax Policy team currently assumes 25% corporate tax rate under a potential Biden administration, with Biden's stated goal of 28% viewed as more aspirational by our team. We believe expectations for higher taxes would likely result in slight compression of multiples from current levels.

Exhibit 22: Median effective tax rates for our refining coverage fell Exhibit 23: We estimate the 2017 tax cuts boosted multiples for our substantially following Trump's tax cuts coverage by ~1.0x, and would expect to see some multiple compression on the prospect of a higher corporate tax rate 40% 35% 34% 33% NTM EV/EBITDA Average 31% 31% 29% 30% 17x 15x 25% 22% 20% 13x 20% 11x 9x 15% 7x 10% 5x 5% 3x

0 2 4 6 8 9 0

9 0 1 2 3 5 7 9

1 3 4 5 6 7 8 0

1 1 1 1 1 1 2

0 1 1 1 1 1 1 1

1 1 1 1 1 1 2

0% 1

------

- - - -

t t t t t t t t t t t t

r r r r r r r

r r r r

c c c c c c c c c c c c

p p p p p p p

p p p

2013 2014 2015 2016 2017 2018 2019 p

O A O A O A O A O A O A O A O A O A O A O A O Source: Eikon, Morgan Stanley Research Source: Eikon, Morgan Stanley Research

(2) We would view a potential Biden administration as likely to reestablish vehicle fuel efficiency standards that could have a direct impact on the US refining & marketing industry. Biden has been a vocal supporter of more stringent vehicle fuel emissions standards. Gasoline typically makes up ~45% of the refined product output from US refineries. Therefore, policies that potentially affect the gasoline demand outlook in the US could have a material impact on the profitability outlook for refiners.

A potential policy reversal of the recent Safer Affordable Fuel-Efficient (SAFE) Vehicles Rule would reduce our domestic gasoline demand outlook by 5-6%. In 2018, directed by President Trump, the EPA and Department of Transportation's National Highway Traffic Safety Administration (NHTSA) conducted a review to determine if the 2022-25 CAFE standards established in 2012 were achievable. The agencies determined

24 the model year 2022-25 standards were not appropriate and provided a proposal for changes, with seven potential alternatives/scenarios. A final rule making decision was made in March 2020 to increase the stringency of CAFE and CO2 emission standards by 1.5% each year from 2021 through model year 2026, leading to a targeted average fuel economy of 40.4 MPG. In comparison, this seems to be an easing of the standards issued in 2012, which would have required ~5% annual stringency increases and projected 46.7 MPG by 2025. The goal of the change was to reduce vehicle costs and promote the sale of more new vehicles, which are safer, more efficient, and less polluting. It is also estimated the change would result in increased fuel used of 200 Bn gasoline gallons equivalent, or 5.6%, over 30 years. While it is too early to know what move a potential Biden administration would make, a reversal of SAFE rules back to the previous CAFE standards would potentially reduce the gasoline demand outlook by 5- 6%.

Exhibit 24: Fuel Consumption and Increase in Fuel Use by Alternative (Bn gasoline gallons equivalent total for calendar years 2020-50) Final No Rule Fuel Consumption Action Alt.1 Alt.2 Alt.3 Alt.4 Alt.5 Alt.6 Alt.7 Cars 1,482 1,594 1,591 1,583 1,584 1,564 1,560 1,537 Light Trucks 1,889 2,004 2,000 1,988 1,977 1,950 1,932 1,919 All light-duty vehicles 3,371 3,598 3,591 3,571 3,561 3,514 3,492 3,456

Increase in Fuel Use vs. No Action Alternative Cars 112 108 101 101 82 78 55 Light Trucks 115 111 98 88 61 43 29 All light-duty vehicles 227 219 200 189 143 121 84

% Change 6.3% 6.1% 5.6% 5.3% 4.1% 3.5% 2.4% Source: National Highway Traffic Safety Administration (NHTSA), Morgan Stanley Research

(3) Support for alternative fuels could also displace demand for traditional refined products, although there may be opportunity to collect subsidies through green investments. Biden has voiced support for investment in clean energy, and to accelerate deployment of clean technology. As such, under a potential Biden presidency, we would expect investment in alternative fuels to potentially displace demand for traditional refined products derived from fossil fuels. Potentially offsetting, this could add support for green fuel subsidies, which refiners have been increasingly moving to take advantage of through investments in alternative fuels such as renewable diesel and sustainable aviation fuel.

(4) Meanwhile, policies that moderate or increase the cost of US oil and gas production under a potential Biden presidency could reduce the advantage US refiners have over global peers. With low oil prices already reducing upstream E&P activity and recently completed pipeline projects carrying oil directly to the coast, we think restrictive policies or more stringent oversight could further tighten the supply available to inland US refineries. This would reduce domestic crude inventory levels and elevate domestic oil prices relative to international benchmarks (i.e., narrower Brent-WTI or Brent-MEH spreads). As a result the historical advantage of processing domestic crude vs. imported crude, a key factor for higher absolute refining margins compared to the rest of the world, would likely be moderated. Another advantage US refiners have is structurally low North American natural gas prices. If primary and associated gas production is lowered or restricted, the resulting upward pressure on natural gas prices could

25 increase the operating costs and lessen the cost advantage of US refineries.

The US refining complex would likely increase its reliance on imports. The amount of crude imported into the US has steadily declined over the last decade, with shale production offering a growing advantaged feedstock slate. The US currently produces over 12 MMbbl/d of oil, of which ~3.3 MMbbl/d (~25%) comes from federal lands. This compares to the 16-17 MMbbl/d that the US refining complex processes annually, with the ~4 MMbbl/d difference made up through net imports. If domestic supply is reduced, we would expect increased crude imports to be needed to fill in any shortfall in meeting demand (PSX, MPC, VLO, and PBF have historically imported a meaningful amount of crude as a percentage of their feedstock).

A tighter pipeline regulatory environment could decrease the prospect of more efficient crude and product flows domestically. In general, refiners operate most efficiently when they have access to as many crude sources as possible to provide the most feedstock flexibility. This enables them to capture better and less volatile margins. At the same time, they want to be able to move product to as many markets as possible. Restricting the ability for oil or product to flow to where it needs to go often creates regional/locational advantages or disadvantages. Refiners with access to stranded crude have an increased margin capture opportunity by buying discounted crude when others cannot. Refiners that can move product into high demand markets can usually obtain better pricing. We therefore believe winners and losers are potentially created when there are logistical inefficiencies. In prior years, when domestic oil production growth was outpacing pipeline infrastructure, we saw wider Brent-WTI price differences and regional spreads (e.g., WCS, Bakken, Midland, etc.), and this in general provided higher margins for inland refiners vs. coastal refiners. As infrastructure started to build out and catch-up to supply with a lot of pipes designed to bring crude to the coast, this narrowed the relative advantage toward the coastal refiners by providing them with more feedstock optionality (domestic and imports).

While price dislocations could benefit inland refiners, the lower oil price environment and lower rate of supply growth would likely result in less extreme price dislocations than previously seen. Depending on how severe the pipeline regulatory environment gets, it could potentially shift the advantage back to inland refiners (e.g., if DAPL shuts down completely, refiners that are able to run Bakken barrels could be advantaged). However, we would note that beyond the recent infrastructure build-outs (assuming tightening regulations are only on proposed projects outside of DAPL), we are in a structurally lower oil price environment. This would likely moderate domestic production supply growth and cause less congestion and lower price dislocations than previously seen.

26 Canadian Oil & Gas

Benny Wong

We would expect increased reliance on Canadian crude and natural gas supply in the event of more stringent oversight or restrictive policies on US production. We think a potential Biden victory would bring the prospect of more regulation on US production. In our view, this would lead to increased reliance on international oil and gas companies. Canadian crude makes up 55% of the total oil imported in the US, and Canadian natural gas makes up 97% of US natural gas imports. As such, Canadian companies should be clear beneficiaries of restricted US production, which would tighten the supply dynamic and improve pricing.

Exhibit 25: Canadian crude makes up over 50% of crude imported to Exhibit 26: ...And nearly all of US natural gas imports come from the US... Canada

Other, 3%

Ecuador, 2.4% Nigeria, 13.4% Venezuela, 2.8% Iraq, 5.0%

Colombia, 5.1% Canada, 54.8%

Saudi Arabia, 7.7% Canada, 97% Mexico, 8.8%

Source: EIA, Morgan Stanley Research Source: EIA, Morgan Stanley Research

Possible opposition to new pipelines from a potential Biden administration could bring offsetting effects for Canadian oil producers. Thus far, commentary from Biden has not been supportive of pipelines such KXL (which would bring Canadian crude to the USGC) or a Line 3 replacement program. These projects are needed to support future production growth out of Canada, and egress constraints have weighed on the stock prices of Canadian oil producers. That said, we believe very little, if any, KXL potential is being priced into the stocks today. This may be less of an overhang on investor sentiment going forward given some level of long-term egress risk is already discounted in the stocks and there is lower takeaway congestion given the low oil price environment.

The industry is evolving toward an ex-growth, higher payout model. With investors already looking for lower growth and higher cash returns from producers, we believe they may be more willing to look past pipeline permitting restrictions that are more geared toward supporting growth. Further, we note that integrated companies such as SU, HSE, and to a lesser degree IMO, would benefit from high oil prices, yet have material downstream operations to hedge against increased pipeline congestion or egress constraints. We also expect CNQ, CVE, and MEG to benefit from stronger commodity prices, but experience some partial offset from the risk of major pipelines not being built to support future growth (We note the announced merger between CVE and HSE will potentially anchor the stocks with each other and offset relative exposures).

27 28 Oil Services

Connor Lynagh

Knock-on effects on upstream investment more important than direct regulatory risk. The OFS industry is likely to see relatively limited incremental regulation, in our view, as most environmental policies are likely to focus on the much-larger upstream, midstream, and downstream sectors. While we see a potential Biden presidency as the less favorable immediate outcome for stocks in our coverage, the more critical debate may be around the potential implementation and scale of impact from plans previously laid out by the Biden campaign. The most meaningful risks to upstream activity, and consequently OFS earnings power, are likely to be from environmental policy and regulation that alters the relative attractiveness of US upstream investment vs. the rest of the word. With a more stringent regulatory backdrop, we see US-focused pure-plays as the most at-risk, but also recognize shifting foreign policy priorities may drive idiosyncratic upside/downside risks for more globally exposed names — we'd highlight the Middle East (e.g., all large caps + NBR, CLB, PDS), as well as companies supplying LNG equipment and related services (BKR, GTLS).

Environmental Policy & Regulation Stricter environmental policies and regulations present the clearest risk to OFS earnings power, though impact will likely be more meaningful over the medium to long term. While we don't anticipate OFS companies will be the primary target of proposed environmental regulations, knock-on effects from a more burdensome regulatory and policy outlook for US upstream activity will be substantial, in our view. The US is the largest market for stocks in our coverage, contributing ~55% of 2019 revenues (see Exhibit 27), albeit a far lower percentage of 2020 revenues given the substantial downdraft in upstream activity in the US this year. The more asset-intensive Pure-play Drillers & Services companies are most exposed, while more geographically diversified Global Services & Equipment companies are least exposed (see Exhibit 28). The greatest headwinds to OFS demand would likely be from elevated regulatory burdens on upstream producers in the US. Key components of previously proposed environmental plans most in focus for us include:

A ban on US oil & gas production or permitting restrictions on federal lands: At certain points in his campaign (though not in his most recent climate plan), Biden called for a ban on new oil & gas permitting on federal lands and waters. In terms of likelihood of implementation, a president has fairly unilateral power to slow down federal leasing and permitting. We estimate that~¼ of US upstream activity would be at-risk here, as 10-15% of US onshore activity, and nearly all offshore drilling activity, takes place on federal land (see Exhibit 29 and Exhibit 30). However, downside to near-term activity on federal land would be helped by permits already in place, which we estimate would allow for 1-2 years of upstream activity runway.

Fracking ban: Biden has stated that he would not ban fracking outright, so we view this as a less likely scenario. However, we believe elevated scrutiny on new upstream activity on federal land could result in a similar outcome. For more, see our note – North American Energy: US 'Frac Ban' — Rhetoric or Reality?

29 Restrictions on flaring: For basins lacking adequate infrastructure for takeaway capacity (Permian), more stringent regulations on gas flaring limits would be a headwind to upstream activity in these locations. As noted in prior sections, we believe stricter regulations around flaring are reasonably likely.

Banning US crude exports: Legislation banning crude exports would have an immediate impact on activity, and the amount of oil exported is roughly the same as crude produced on federal lands (25-30%). Unlike regulation on federal land production, crude exports would not be supported by any form of existing permitting runway.

Reducing infrastructure permitting: We believe the expectation of elevated regulatory scrutiny for new oil & gas infrastructure projects under a potential Biden administration is reasonable. In our view, this could be achieved by introducing policies supporting more comprehensive environmental reviews, which would ultimately extend the permitting process and delay project timelines.

Exhibit 27: The median US revenue exposure for companies in our coverage was ~55% in 2019, though we see this mix shifting in favor of int'l, at least for the foreseeable future. US % 2019 Revenues 100% ** 80% 60% ** 40% ** 20% – L P N W R S H O P G M N H C R T N D S B B S T D L L K E P A E B L I O R I T e H G S R C B E B R d L X L S S R Q V D i S A T N a n

Source: Company Data, Rystad Energy, Morgan Stanley Research estimates. **Note: Includes material revenues from industries outside of energy.

Exhibit 28: On a relative basis, Global Services & Equipment companies are best positioned, in our view, as we see the most material downside risks to upstream activity and OFS earnings power in US markets. US % of 2019 Revenues - Subsector Median 100%

80%

60%

40%

20%

0% Pure-Play Drillers & Niche Services & Global Services & Services Equipment Equipment

Source: Company Data, Rystad Energy, Morgan Stanley Research estimates

30 Exhibit 29: We estimate that ~15% of 2019 US onshore drilling activity occurred on federal land, which we view as most at-risk from environmental policy and regulatory changes, with activity in the Permian basin as most exposed… 2019 US Onshore Rig Count % by Land Type Basin Basin % Total US Onshore Basin Federal Indian State Private % Total ex-Private Permian 19% – 9% 73% 50% 67% Eagle Ford 5% 0% – 95% 10% 2% Midcon 4% 1% – 95% 12% 3% Bakken 17% 3% – 79% 6% 6% Marcellus/Utica 4% 0% – 96% 5% 1% Niobrara 32% – 8% 60% 7% 13% Other 16% 2% 0% 82% 9% 8% Total US Onshore 15% 0% 5% 80% More at-risk Less at-risk Source: Rystad Energy, Morgan Stanley Research estimates. Note: The above figures reflect the % of rig counts excluding activity where data on land type was not available (data was not available for ~30% of rig count).

Exhibit 30: …Meanwhile, US onshore completions data paints a similar picture, ~10% of 2019 completions activity took place on federal land. 2019 US Onshore Wells Completed % by Land Type Basin Basin % Total US Onshore Basin Federal Indian State Private % Total ex-Private Permian 13% – 7% 81% 37% 46% Eagle Ford 3% 0% – 97% 14% 3% Midcon 2% 1% – 97% 9% 2% Bakken 18% 5% – 76% 9% 13% Marcellus/Utica 5% 0% – 95% 9% 3% Niobrara 17% – 6% 77% 12% 18% Other 25% 3% 1% 71% 9% 16% Total US Onshore 12% 1% 3% 84% More at-risk Less at-risk Source: Rystad Energy, Morgan Stanley Research estimates. Note: The above figures reflect the % of wells completed excluding activity where data on land type was not available (data was not available for ~25% of wells completed). Tax Legislation Given our limited expectations for pretax profit generation across our coverage, risks to earnings power from Biden's proposed tax policies would likely be negligeable, in our view. Biden's proposed tax policy changes include increasing the corporate tax rate, doubling the minimum global tax rate (GILTI) on US multinationals' foreign profits, and introducing a book tax. Setting aside potential second-order impacts of tax policy changes, we estimate the direct impact of these across our coverage would be reasonably benign. Essentially, we see fairly limited profitability across our coverage in the near to medium term — on our 2021 estimates, less than ½ of our coverage earns positive pretax profit, and in 2022, we model ~⅓ of our coverage earning negative pretax profits. Of the companies where we do model positive pretax profits in 2021-22, we think the impact to FCF from these changes would be fairly marginal as well, generally in the single-digit percentage range in terms of downside to FCF and EPS in 2021-22.

Foreign Policy Under a potential Biden administration, implications from a shift in foreign policy priorities may pose the biggest upside/downside risks to companies with substantial Middle East exposure. At a high level, there are numerous scenarios where foreign policy changes could shift regional oil supply-demand dynamics, and thus regional OFS activity dynamics. Specifically, if foreign policy under a potential Biden administration were to become more favorable for upstream activity in Iran, we could see further downside pressure on US activity, the biggest market for stocks in our coverage. The resumption of production from Iran would in effect push out the need for new capacity investment globally, further delaying a recovery in upstream activity. In a scenario where foreign policy results in a ramp in OPEC production, OFS stocks in our coverage with

31 more substantial Middle East presence will likely be better positioned (e.g., all large caps, BKR, HAL, NOV, TS, SLB; and select small caps, NBR, PDS, CLB), but generally speaking, any policy shift resulting in an unexpected boost from OPEC production would be a net-negative for our coverage based on the subsequent pressure on non-OPEC activity.

Positioning Post the Election In light of the election outcome, we reiterate our preference for globally exposed service and equipment companies that are actively diversifying operations away from US-onshore focused business lines, and therefore are most constructive BKR and SLB, while we are more cautious HAL (among these larger service companies) given its outsized exposure to US markets, where we see upstream activity most at-risk under a potential Biden administration. Among small caps, our top picks include GTLS and LBRT, as we see value in GTLS's exposure to non oil & gas end-markets, and also think its product offering is favorably positioned in some of the more climate-friendly oil & gas markets such as natural gas infrastructure and LNG equipment and services. For LBRT, we think its commitment to minimizing the environmental footprint of oil & gas well development activity, notably via its digiFrac initiative, positions it well among US onshore focused pure-plays.

Important note regarding economic sanctions. This research references countries which are generally the subject of comprehensive sanctions programs and selective sanctions programs administered or enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), the European Union and/or by other countries and multi-national bodies. Users of this report are solely responsible for ensuring that their investment activities in relation to any sanctioned countries are carried out in compliance with applicable sanctions.

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Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Baker Hughes Co, Chevron Corporation, Energy Transfer LP, Enterprise Products LP, EQT Corp., Exxon Mobil Corporation, Hess Midstream LP, Kinder Morgan Inc., Marathon Petroleum Corporation, MPLX LP, Nabors Industries Inc., Oneok Inc., Pioneer Natural Resources Co., Range Resources Corp., Suncor Energy Inc, Targa Resources Corp., Transocean Ltd., Williams Companies Inc. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Antero Resources Corp, Baker Hughes Co, Chesapeake Energy Corp, Chevron Corporation, Energy Transfer LP, EQT Corp., Exxon Mobil Corporation, Hess Corp., Hess Midstream LP, Kinder Morgan Inc., Marathon Petroleum Corporation, MPLX LP, Nabors Industries Inc., Oneok Inc., Ovintiv Inc, Parsley Energy Inc, Pioneer Natural Resources Co., Schlumberger NV, Suncor Energy Inc, Targa Resources Corp., Transocean Ltd., Williams Companies Inc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Antero Resources Corp, Apache Corp., Baker Hughes Co, Cabot Oil & Gas Corp., Cactus Inc, Callon Petroleum Company, Chart Industries, Chesapeake Energy Corp, Chevron Corporation, Cimarex Energy Co., Concho Resources Inc., ConocoPhillips, Continental Resources Inc., Devon Energy Corp, Diamondback Energy Inc, Dril Quip Inc., Enable Midstream Partners LP, Enbridge, Enbridge Inc, Energy Transfer LP, EnLink Midstream LLC, Enterprise Products LP, EOG Resources Inc, EQT Corp., Equitrans Midstream Corp, Exxon Mobil Corporation, Gulfport Energy Corp, Halliburton Co, Helmerich & Payne Inc, Hess Corp., Hess Midstream LP, Husky Energy Inc, Kinder Morgan Inc., Liberty Oilfield Services Inc, Magellan Midstream Partners LP, Marathon Oil Corporation, Marathon Petroleum Corporation, Murphy Oil Corporation, Nabors Industries Inc., National Oilwell Varco Inc., Nextier Oilfield Solutions Inc, Noble Midstream Partners LP, Oasis Petroleum Inc., Occidental Petroleum Corp, Oil States International Inc., Oneok Inc., Ovintiv Inc, Parsley Energy Inc, PBF Energy Inc, Phillips 66, Pioneer Natural Resources Co., Plains All American Pipeline LP, Range Resources Corp., Schlumberger NV, Southwestern Energy Co, Suncor Energy Inc, Targa Resources Corp., TC Energy Corp, TECHNIPFMC, Tenaris SA, Transocean Ltd., U.S. Silica Holdings, Inc., Valero Energy Corporation, Western Midstream Partners LP, Williams Companies Inc. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Antero Resources Corp, Apache Corp., Baker Hughes Co, Cabot Oil & Gas Corp., Chart Industries, Chesapeake Energy Corp, Chevron Corporation, Concho Resources Inc., ConocoPhillips, Continental Resources Inc., Delek US Holdings Inc, Devon Energy Corp, Enable Midstream Partners LP, Enbridge, Enbridge Inc, Energy Transfer LP, Enterprise Products LP, EOG Resources Inc, EQT Corp., Exxon Mobil Corporation, Gulfport Energy Corp, Hess Corp., Kinder Morgan Inc., Magellan Midstream Partners LP, Marathon Oil Corporation, Marathon Petroleum Corporation, MEG Energy Corp, MPLX LP, Oasis Petroleum Inc., Occidental Petroleum Corp, Oneok Inc., Ovintiv Inc, Parsley Energy Inc, PBF Energy Inc, Pioneer Natural Resources Co., Plains All American Pipeline LP, Range Resources Corp., Schlumberger NV, Southwestern Energy Co, Suncor Energy Inc, Targa Resources Corp., TC Energy Corp, TECHNIPFMC, Transocean Ltd., Valero Energy Corporation, Western Midstream Partners LP, Williams Companies Inc. 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34 Corp, Halliburton Co, Helmerich & Payne Inc, Hess Corp., Kinder Morgan Inc., Liberty Oilfield Services Inc, Magellan Midstream Partners LP, Marathon Oil Corporation, Marathon Petroleum Corporation, MEG Energy Corp, MPLX LP, Oasis Petroleum Inc., Occidental Petroleum Corp, Oneok Inc., Ovintiv Inc, Parsley Energy Inc, PBF Energy Inc, Phillips 66, Pioneer Natural Resources Co., Plains All American Pipeline LP, Plains GP Holdings, L.P., Range Resources Corp., Schlumberger NV, Southwestern Energy Co, Suncor Energy Inc, Targa Resources Corp., TC Energy Corp, TECHNIPFMC, Transocean Ltd., U.S. Silica Holdings, Inc., Valero Energy Corporation, Western Midstream Partners LP, Whiting Petroleum Corporation, Williams Companies Inc. An employee, director or consultant of Morgan Stanley is a director of Valero Energy Corporation. This person is not a research analyst or a member of a research analyst's household. Morgan Stanley & Co. LLC makes a market in the securities of Antero Resources Corp, Apache Corp., Baker Hughes Co, Cabot Oil & Gas Corp., Callon Petroleum Company, Canadian Natural Resources Ltd, Cenovus Energy Inc, Chart Industries, Chevron Corporation, Cimarex Energy Co., Concho Resources Inc., ConocoPhillips, Continental Resources Inc., Devon Energy Corp, Diamondback Energy Inc, Dril Quip Inc., Enable Midstream Partners LP, Enbridge, Enbridge Inc, Energy Transfer LP, Enterprise Products LP, EOG Resources Inc, EQT Corp., Exxon Mobil Corporation, Gulfport Energy Corp, Halliburton Co, Helmerich & Payne Inc, Hess Corp., HollyFrontier Corporation, Imperial Oil Ltd, Kinder Morgan Inc., Magellan Midstream Partners LP, Marathon Oil Corporation, Marathon Petroleum Corporation, MPLX LP, Murphy Oil Corporation, Nabors Industries Inc., National Oilwell Varco Inc., Occidental Petroleum Corp, Oil States International Inc., Oneok Inc., Ovintiv Inc, Parsley Energy Inc, Patterson-UTI Energy, PBF Energy Inc, Phillips 66, Pioneer Natural Resources Co., Plains All American Pipeline LP, Plains GP Holdings, L.P., Precision Drilling Corp, Range Resources Corp., RPC, Schlumberger NV, Southwestern Energy Co, Suncor Energy Inc, Targa Resources Corp., TC Energy Corp, Transocean Ltd., U.S. Silica Holdings, Inc., Valero Energy Corporation, Western Midstream Partners LP, Whiting Petroleum Corporation, Williams Companies Inc. 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COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIAL INVESTMENT SERVICES CLIENTS (MISC) STOCK RATING COUNT % OF COUNT % OF % OF COUNT % OF CATEGORY TOTAL TOTAL IBC RATING TOTAL CATEGORY OTHER MISC Overweight/Buy 1358 40% 361 45% 27% 597 40% Equal-weight/Hold 1462 43% 357 44% 24% 681 45% Not-Rated/Hold 4 0% 1 0% 25% 3 0% Underweight/Sell 539 16% 85 11% 16% 220 15% TOTAL 3,363 804 1501

Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months. Due to rounding off of decimals, the percentages provided in the "% of total" column may not add up to exactly 100 percent. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a

35 risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. 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37 INDUSTRY COVERAGE: Exploration & Production

COMPANY (TICKER) RATING (AS OF) PRICE* (11/04/2020)

Devin McDermott Apache Corp. (APA.O) E (01/13/2020) $8.73 Callon Petroleum Company (CPE.N) E (12/09/2019) $5.60 Chesapeake Energy Corp (CHKAQ.PK) NR (04/15/2020) $3.66 Cimarex Energy Co. (XEC.N) O (03/16/2020) $25.78 Concho Resources Inc. (CXO.N) O (08/21/2020) $44.18 ConocoPhillips (COP.N) O (07/12/2018) $30.38 Continental Resources Inc. (CLR.N) U (03/16/2020) $12.87 Devon Energy Corp (DVN.N) E (07/12/2018) $9.81 Diamondback Energy Inc (FANG.O) E (03/16/2020) $28.12 EOG Resources Inc (EOG.N) E (07/12/2018) $36.04 Gulfport Energy Corp (GPOR.O) U (12/09/2019) $0.27 Hess Corp. (HES.N) O (07/12/2018) $37.22 Marathon Oil Corporation (MRO.N) U (05/19/2020) $4.27 Murphy Oil Corporation (MUR.N) U (07/12/2018) $7.69 Oasis Petroleum Inc. (OASPQ.PK) NR (05/19/2020) $0.12 Occidental Petroleum Corp (OXY.N) E (08/21/2020) $9.81 Parsley Energy Inc (PE.N) ++ $10.47 Pioneer Natural Resources Co. (PXD.N) ++ $83.50 Whiting Petroleum Corporation (WLL.N) NR (04/15/2020) $15.10

Mark Carlucci, CFA Antero Resources Corp (AR.N) U (04/30/2020) $3.37 Cabot Oil & Gas Corp. (COG.N) E (04/30/2020) $16.01 EQT Corp. (EQT.N) O (10/09/2020) $14.20 Range Resources Corp. (RRC.N) U (04/30/2020) $6.04 Southwestern Energy Co (SWN.N) E (10/09/2020) $2.55