Friday, July 07, 2017

News of Note
- APA announced strategic exit from Canada the co. announced after the close on Thursday that it will
be exiting from its Canada ops. through three separate transactions. The total value of the transactions
amount to ~$713M and will be used to fund a portion of Apaches 2017-2018 capital program, to reduce
debt, or to improve overall liquidity. Press release https://goo.gl/K2D5c4
- Berkshire, Oncor it was reported during Thursdays trading session and confirmed on Friday morning
that Berkshire Hathaway will acquire Oncor Electric Delivery Co. in a deal that values Oncor at $11.25B.
Reuters https://goo.gl/wU1oCs
- US, China oil the WSJ highlights how US oil is gaining market share in China, with total exports to
China rising tenfold in the first half of the year to 100K bpd. This is still well below the amount that Saudi
Arabia and Russia export to China. WSJ https://goo.gl/1db34n
- US exploration On Thursday, US Interior Secretary Ryan Zinke signed an order that would increase
the amount of federal land lease sales and speeds up the permitting process. This comes as the latest
move from the Trump administration that makes exploration and production on federal land easier.
Reuters https://goo.gl/PfxaCY
- US production the WSJ discusses how Wall Street is enabling the US shale industry to ramp
production despite weaker prices via easy access to capital. One analyst says that theres been
insufficient discrimination on the part of sources of capital and the CEO of APC said that The biggest
problem our industry faces today is you guys. WSJ https://goo.gl/fPnBhU

Crude Levels
46 UP
45.41 R
44.64 DP
(06:45:26 AM): No let up in Crude, down ANOTHER 3% to 44.1, support WAS up at 44.64
(08:29:33 AM): Crude trying, 60c off lows, support pivot on the way down was 44.64, right here

Overnight Crude

Todays Research

Bernstein
Bernstein Energy & Power: Oil Price Downgrade - Where could we be wrong?
In no particular order, here are the key positive and negative risks to our view that one should
consider.
(1) Decline rates (+ve)
We assume 5% for non-OPEC overall in our model but there's plenty of evidence out there
showing that $50-ish/bbl oil prices for sufficient time periods leads to worsening production levels. Such
worsening trends across more and more fields/countries would be a positive for oil prices.
(2) Production outages (+ve)
Whilst focus this year centres has been on the returning production from Libya and Nigeria,
there has been little talk about overall unplanned outages levels. Latest data suggests there are around
2Mbpd of unplanned outages which is 0.5Mbpd less than the 5 year average of closer to 2.5Mbpd
(Exhibit 5). Any reversion to the mean here would again be positive for oil prices.
(3) Geopolitical risk (+ve)
Oil and geopolitical instability are often linked. Instability brings higher oil prices and
consequently higher returns for energy investors. While few of these events have acted to boost oil
prices in the last 12 months or so thats a function of elevated inventories. Once they drain then
stronger oil price volatility may return. In that view it's useful to recognize that when we consider
current geopolitical risk relative to that last 100 years, it's high. Some type of geopolitical outage
therefore seems more likely than not to happen. That would be positive for oil prices (Exhibit 6).
(4) International shale - Russia and Argentina (-ve)
Could we see more shale internationally? Activity in Russia's Bashenov and Argentina's Vaca
Muerta shales has been slowly increasing over the last five years. Since my first visit to see Russia's
Bashenov shale in operation in 2013 (Exhibit 7), the operator has moved on. Back then this well (Well
153) did 600bpd. Recently however GazpromNeft is moving into the next phase of development and is
targeting 200kbpd by 2025 from up to 1000 wells. Bashenov is being tested/drilled at the Palyanovsky,
South Priobskoye and Vyngayakhinskoye fields, while fracking at the Salym fields with Shell is also
ongoing. We know costs are higher than the US which is why Russian government assistance is needed
via tax concessions. Equally over in the Argentina's Vaca Muerta oil production form the shale is
estimated around 60kbpd at the first main field: Loma Campana. While this is impressive, progress is
slow impacted by lack of infrastructure, logistical constraints and still high labor costs. New inventive
prices have been promised to international operators this year but given Argentina is short gas and
offered attractive gas prices only to 2020 its likely shale gas is the focus for now. More rapid progress
would be negative for oil prices.
(5) Demand shock/next recession (-ve)
While demand can vary from year to year, oil demand growth shows a high correlation with
GDP growth (Exhibit 8). With the IMF projecting 3.5%, 3.6% and 3.7% global GDP next three years
combined with $50/bbls then we should be in for strong demand. Furthermore refining crack spreads
would suggest demand is probably higher than we assume at the moment. Nevertheless this remains a
significant source of downside risk that would be negative for oil prices.
(6) OPEC Strategy (+ve)
OPEC has three options when they meet later this year, cut, extend or abandon each with its
own risks. We think extend is most likely. Abandoning at the end of March 2018 would see up to 1Mbpd
back on the market, inventory builds, and a likely price collapse. Assuming thats not a high probability
event then we must also remember OPEC has a tendency to deepen cuts (Exhibit 9) which we do not
embed but which would be very positive for oil prices.

Bloomberg
FGE Sees No 2Q Drop in Global Stockpiles
FGE says oil stockpiles probably didnt decline in 2Q. Bank of China cuts its forecasts as
inventory balancing remains elusive.
- Global oil stockpiles probably didnt drop in 2Q
- Contrary to the expectations and projections of many in the oil market, global stockpiles
probably were little changed in 2Q
- Onshore OECD stockpiles were likely unchanged in 2Q
BofA ML
The Oil Gusher
Capex getting scaled back (again), no growth post 2017
Capex getting scaled back, 10% rise in 17E, flat in 18/19E
As we move through the midpoint of 2017, we revise our capex forecast for the Global Oil &
Gas sector, and see the recent oil price weakness filtering into lower capex forecasts. We have seen
capex fall by 50% since the 2013 peak to US$343bn in 2016. While European spend is muted, we
forecast US shale and Asia/Australia driving an increase in capex this year, before flattening in 2018. We
now forecast global capex growth of +10% in 2017 and 0% in 2018 and 2019.
Capex discipline still crucial towards path of pain exits
With >50% of capex cuts from structural rather than cyclical trends, Big Oils ongoing quest for
FCF neutrality below $60/bbl in our view means our more cautious oil price outlook translates into more
caution on capex given many medium-term budgets are still based around $60/bbl. However, we remain
concerned that capex cuts do not just reflect improved efficiency but also lower activity levels, project
deferrals and ultimately higher decline rates in the medium-term. We believe it is crucial to understand
where capex cuts more credibly reflect e.g. a portfolio shift towards longer life assets.

Cowen
Oil Field Services 2Q Preview- Reit Market Weight... Lower macro assumptions reduce 2018
EBITDA estimates by 15% now 23% lower than consensus. $45-$55 the new normal for WTI and more
downside could exist. Expect frac services and frac sand companies to have most upside to 2Q and 3Q,
but unlikely to provide follow through support to stocks given uncertain '18 macro. We explore an
alternative valuation approach which reveals only limited value in the group after the pullback. SLCA
/HLX/ HCLP remain Top Picks. Focus names are BHGE /HAL /SLB /WFT /NOV /FTI /DRQ /FET /OII /OIS
/TESO /HLX /BRS /HP/ICD/ NBR/ PDS /EMES /FMSA /HCLP /SLCA /CRR /CLB /NR /TS /TTI

Credit Suisse
DoE Data Flash
Large Draws Across Crude, Gasoline, Distillate
Commercial crude draws ~6.3 mbs versus a ~0.1 mbs build last week as exports rise ~240 kb/d,
imports fall ~270 kb/d, refinery runs rise ~250 kb/d, and the SPR draws by ~0.4 mbs this week versus
~1.4 mbs last week. A ~90 kb/d bounce in production is offset by a decrease in the adjustment factor.
Gasoline draws ~3.7 mbs versus ~0.9 mbs last week as implied demand rises ~170 kb/d and
production falls ~270 kb/d despite higher refinery runs and no change in the gasoline-to-distillate
production ratio. Imports rise ~170 kb/d and exports rise ~50 kb/d.
Distillate draws ~1.9 mbs versus ~0.2 mbs last week as implied demand rises ~300 kb/d and
production falls ~140 kb/d despite higher refinery runs and no change in the gasoline-to-distillate
production ratio. Imports fall ~30 kb/d and exports fall ~230 kb/d.
Guggenheim
Spark Energy (SPKE) - Upgrading to BUY as Recent Weakness Presents an Opportunity
Shares underperform materially - the shares of SPKE have significantly underperformed the
market recently with the stock down 17% in the last month (vs. NASDAQ down 2.94%).
...against a fundamentally strong backdrop: This underperformance is occurring against a
reasonably constructive fundamental backdrop for the company.
Specifically:
- SPKE has successfully closed the acquisition of Verde. The deal was announced
earlier this year and is expected by SPKE to be immediately accretive and add
145K RCE to the company's book;
- NY PSC has recently issued an order to continue SPKE's eligibility to operate in
the state, thus removing the overhang (see decision here);
- Weather volatility across the company's regions remains low.
Therefore, we view this as an attractive entry point and upgrade the stock to BUY from Neutral:
our fundamental view of the company remains unchanged. We value the shares at $23 and we would be
buyers on this weakness.

Jefferies
Oil Services & Equipment
Frac Sand: Unimin's Coming to West Texas (And We Just Left)
Unimin's announcement yesterday regarding building a 5MM tpa mine in West TX raises
announced W. TX capacity to (bearish-thesis-supporting) 32MM tpa. We maintain that various
challenges likely slow or constrain development and that industry frac sand demand supports much of
the total, at least by 2019 as more of the supply has been developed, but note also that high fine mesh
composition suggests cost-effective W. TX supply may be limited to 25MM tpa.
SLCA and HCLP remain our top frac sand picks. We find attractive value in their W.TX and low
cost NWS footprints and from their respective last mile solutions that enhance their value proposition to
customers.

JPM
Refining - Cali Product Inventories Mixed, Crude Draws
Weekly data for California were reported this afternoon and showed mixed results relative to
this mornings PADD V product inventories. Specifically gasoline inventories drew by ~17kbbls (albeit still
at the top of the five-year range for this time of year), which compared with a more sizeable draw in
PADD V. Gasoline production decreased to 1.092mmbpd from 1.098mmbpd last week (middle of the
five year range). Diesel inventories built this week by ~186kbbls, more similar to the overall PADD V
result, but are still at the bottom of the five-year seasonal range. Diesel production increased by 39kbpd
w/w. Crude throughput was up w/w at ~1.591mmbpd, below the 5-year average of ~1.696mmbpd.
Crude inventories drew materially by ~1,037kbbls and are at the bottom of the 5-year range.

Mizuho
Oil and Gas Exploration & Production
Model Updates: Marking-to-Market 2Q17 Estimates
We formally true up 2Q17 estimates to reflect actual 2Q17 crude benchmark pricing. Final WTI
and Brent crude pricing for 2Q17 came in $0.60/b and $0.23/b below our final estimates, respectively,
resulting in a modest haircut to 2Q17 estimates. Our price deck for the remainder of 2017/2018 is
unchanged.

Morgan Stanley
Crude (-253bps): Global oil prices extended declines Friday after data showing a rise in U.S.
production more than offset falling crude stockpiles and ongoing efforts by OPEC members to trim
output. The moves follow data from the Energy Information Administration late Thursday which showed
that U.S. crude inventories fell by 6.3 million barrels in the week ending June 30, more than tripled what
analysts had expected, while gasoline stocks declined by 3.7 million barrels to just over 237 million. U.S.
production rates, however, rose 1%, or 88,000 barrels to 9.34 million barrels per day, the EIA said, an
increase of more than 10% from the same period last year. (BB)

Raymond James
Quarterly Highlights
Crude Oil
It was the best of times, it was the worst of times. Dickens neatly summarizes the quarters
jarring disconnect between oil supply/demand fundamentals (generally encouraging) and market
sentiment (intensely negative). This disconnect was exemplified by the 5% oil sell-off on May 25, the day
OPEC and Russia extended their production cut agreement for an additional nine months. Prices
continued to drop through most of June, falling to seven-month lows, i.e. the lowest level since the
original OPEC cut in November 2016. For 2Q as a whole, WTIs $48/Bbl average and Brents $50 average
were both down 7% q/q. As perplexing as the markets current negativity is, we remain of the view that
oil prices will rise towards cyclical highs by the end of 2017 i.e., (crucially) before the 2018 capital
budgets are set. While ongoing recovery in U.S. supply is getting a very high amount of investor
attention, what should not be overlooked is that supply is still declining in several non-OPEC geographies
(China, Mexico, Colombia). Meanwhile, there is a broadly upbeat picture for global demand growth.
Natural Gas
In 2Q, Henry Hub averaged $3.04/Mcf, essentially flat q/q. There continues to be a tug of war
between some improving demand trends but persistently high supply. The ramp-up in wind and solar is
eating into gass market share gains in the power sector compounded in 2017 by the temporary
reversal of some coal-to-gas switching though pipeline gas exports to Mexico are an underappreciated
bullish driver for the market, and LNG exports are on the cusp of becoming needle-moving. Our 2017
gas price forecast marks a three-year high, though followed by a drop in 2018. See page four for details
on our gas price assumptions.
Stocks
After a 1Q gain of 5.5%, the S&P 500 managed a more modest uptick of 2.6% in 2Q. Throughout
the first half of the year, energy stocks for the most part presented a very different picture, being (lets
call a spade a spade) the S&Ps worst-performing sector. The two broadest U.S. energy subsector
indices, E&P and oil service, sharply underperformed the broader market in 2Q, down 15% and 20%,
respectively but the clean tech index gained 9%. We remain upbeat on recovery in the second half (in
the context of our oil forecast), particularly bearing in mind that energys market cap weighting within
the S&P, currently 6.1%, is at the lowest level since 2004 strikingly, screening even lower on this
relative basis than when oil prices had bottomed in February 2016.

Seaport Global
AREX mgmt. quick take Expecting in-line Q2 but elevated leverage remains concerning
($2.95; Sell; $0.50 PT): Q2 production should be down the fairway SGS at 11.7 Mboepd, in-line with
guidance/Street expectations. With AREXs plans calling for five completions (~$3MM/copy) and 6-8
new drills ($1MM each), Q2 capex is likely the heaviest among the year (were now modeling $22MM vs.
$15MM previously and the Street at $15MM). Additionally weve also increased our gas differentials
given weakness at the Waha Hub during the quarter we now see gas differentials of 64c vs. 32c prior,
which takes our EBITDA estimate $0.8MM lower to $14.2MM (Street at $14.6MM). Operationally
management is likely to reiterate the benefits seen from enhanced completions, with the application of
reduced stage spacing, increased proppant loading, diverters yielding well performance on par with a
700 Mboe EUR. On the balance sheet front AREX appears unlikely to ink a sale of its water handling
assets in the Southern Midland basin given prevailing commodity prices, likely making leverage an issue
to contend with for the foreseeable future (FY18 net debt/EBITDA climbs to >7x in our model at a $37.50
average oil price).

CHK mgmt. quick take Q2 likely underwhelming vs. Street expectations ($4.66; Sell; $1.50
PT): We expect a fairly flat sequential trajectory for Q2 volumes predicated on a lower than previously
expected TIL count were now modeling 536 Mboepd (vs. the Street at 540 Mboepd), with our gas
production forecast of 2.34 Bcfpd 2% below consensus estimates. Combined with slightly wider
differentials we now forecast $2.74/Mcf for realized gas prices (vs. $2.80 prior), $18.92/bbl. for NGLs
(vs. $21.83 previously) this takes our EBITDA estimate down $37.5MM to $431MM, 11% below current
consensus expectations. Pertaining to activity levels, CHK seems to be among the most proactive E&Ps
to adjust activity in response to lower commodity prices rather than aiming toward 20% Q4/Q4 oil
growth in a $60 world in 2018 as previously contemplated, management has already released a rig (now
at 18 rigs), and could look to further curtail activity by an incremental 4-5 rigs next year if oil prices stay
in the $40s. CHK pegs the capital required to hold FY18 volumes flat YoY vs. FY17 at <$1.5B (ex
~$200MM in capitalized interest), which in our model results in YE18 net debt/EBITDA of 6.8x. While
asset sales remain the highest priority currently for CHK, management conceded the current commodity
price environment does represent a headwind in its quest to ink $2B-$3B in additional asset
monetizations going forward.

CXO mgmt. quick take Sticking to free cash flow in any environment ($121.78; Neutral; $100
PT): We expect Q2 production to be within CXOs 182 Mboepd-186 Mboepd guidance range; the only
Q2 model change were making is to slightly increase our gas differential, which wont be unique to CXO
in the Permian. Operationally, we expect Q2 will be light from a well catalyst standpoint data from
CXOs big manufacturing concepts (multiple multi-zone wells on each pad) likely start to hit toward the
end of the year. As it pertains to desired activity levels in the current oil price environment, we expect
CXO to reiterate that it simply wants to drill from within cash flow and to also remind investors that its
$1.6B-$1.8B budget for this year was originally drawn up assuming $45/bbl throughout 2017. CXO is
currently running 21 rigs, which is actually two rigs higher than where it planned to be, so shedding a
couple rigs shouldnt have any impact on CXOs ability to hit its FY17 budget of 21%-25% growth and is
currently being contemplated. As it pertains to service costs, management is starting to see inflation
softening post the recent pullback in crude prices.

PDCE mgmt. quick take Expecting strong production, positive Permian data points ($41.40;
Neutral; $46 PT): We think Q2 should prove a strong production quarter were modeling 89 Mboepd
(above the Street at 84 Mboepd), with a more favorable oil mix (40% vs. Q1s 38%); unit costs should
also see downward pressure sequentially as volumes ramp. Operationally we expect commentary on a
handful of new well results from the Central and Eastern blocks of PDCEs Reeves County position
(shown on slide 18 of the June slide deck), which management states have been very encouraging to
date. Additionally, initial performance from recent Niobrara SRLs utilizing PDCEs latest optimized
completion design is also likely to be highlighted, although we dont expect a type curve increase until
further production history is gathered. Also likely to garner interest are recent developments on the
regulatory front, following PDCEs 6/26 release notifying investors of a civil complaint by the EPA, DOJ
and the State of Colorado for alleged violations against the Clean Air Act. Post our conversation with
management we understand since the issue originally surfaced in August 2015 (as disclosed in PDCEs
2015 and 2016 10Ks) discussions have been ongoing with the EPA to come to a successful resolution on
the issue. Furthermore, go-forward LOE guidance of $3/boe does bake in the cost associated with
remediating the facilities under scrutiny, and while it is difficult to gauge the outcome pertaining to
potential civil fines we think NBLs 4/22/2015 press release on a similar matter could provide helpful
context. In NBLs case (which involved 3,400 tank batteries) a successful negotiation with the DOJ and
EPA resulted in $13.45MM in penalties/mitigation costs being levied against the company, which could
bode well for PDCE (600 tank batteries) if a similar accord is reached here. Given line of sight toward a
21% production CAGR through 2020 with net debt/EBITDA remaining below 2.5x at $40 oil were
becoming increasingly bullish post the relative underperformance YTD (PDCE down 43% vs. XOP -26%).
Weve updated our estimates post catching up with management.

APA A&D thoughts Strategic Canadian exit shifts focus towards higher return assets
($45.77; Sell; $36 PT): In an expected move APA shed its Canadian portfolio in three succinct
transactions for a total price tag of $713MM (note a 6/1 Reuters article broke news of Apaches
Canadian sell-down strategy). The divested assets produce 300 MMcfepd (22% oil, 9% NGLs, 69% gas),
implying a relatively light, but we think deserved, valuation of $2,377/flowing Mcfepd. In 2016 APAs
Canadian segment, which represents ~10% of overall production, logged the lowest recycle ratio (cash
margin/DD&A) at the company at a mere 0.4x, much lower than the corporate recycle ratio of 1.3x. The
balance sheet implications of the deal are modestly positive on first glance as pro forma liquidity
increases slightly to $5.7B; 2018s net debt/EBITDA remains unchanged at 2.9x as we estimate APA will
lose ~$146MM of EBITDA next year. Overall, while the price received isnt pretty the deal is not
accretive on either an EV/EBITDA or CFPS basis on our math it does provide APA more flexibility to
aggressively delineate its Alpine High position, which remains the critical factor for the stock and thus it
makes sense, in our opinion.

Weekly EIA Scorecard: Crude Stocks Decline 6.3 MMbbls to 502.9 MMbbls. Bullish for oil stock
draw. The EIA estimated US crude oil stocks declined by 6.299 MMbbls to 502.9 MMbbls last week. This
compares to a decline of 2.22 MMbbls in the same weeks one year ago when refiners were utilizing
92.5% of capacity, compared to 93.6% utilization last week. The Street was looking for a crude oil draw
of only 2.8 MMbbls, while the API estimated crude stocks declined by 5.8 MMbbls. Crude oil production
rebounded back after Tropical Storm Cindy. Lower 48 production increased by 105 Mbpd on a weekly
basis, but Alaska production remained slightly below longer-term averages at only 423 Mbpd. We are
wary of the EIA's estimate of implied demand for Other Oils which ballooned by 1.46 MMbpd in a week.

Tudor Pickering
DOE recap.bullish follow through to APIs (WTI $46/bbl) Trifecta with draws across the
board: crude (6.3mmbbls), gasoline (3.7mmbbls) and distillate (1.9mmbbls). Cushing oil stocks down
1.3mmbbls (now below 60mmbbls). Crude stocks declined as imports down, exports up and refinery
utilization higher w/w. Demand trending positive. Buzzkill was the preliminary L48 US production
estimates up 105kbpd w/w (half of growth was TS Cindy production rebound). Over the past 4 weeks,
US crude oil and key refined product stocks are lower vs. normal by ~3mmbbls/wk. Total US petroleum
stocks are down over 5mmbbls/wk vs. normal over the same time period. Nice trends.but the market
clearly wants to see more consistent/accelerating inventory draws.

Natural Gas Weekly expectations in-line with norms with mild weather offsetting on-going
market under-supply (HHUB $2.90/mmbtu) Gas storage report out this morning a day later than
normal this holiday week. Market looking for a 65bcf injection, up from previous weeks 46bcf build and
directly on top of historic norms. An in-line print would mark another week of a modestly bullish report
with market holding at a ~3bcfd undersupply despite a return of half of the 700mcfd of tropical storm
related Gulf production shut-ins. Week's weather showing 56CDDs driving less power generation
demand than 71CDD historic averages. Weather adjusted market implied at 3bcfd undersupplied...flat
sequentially and back to the trend level seen earlier in the year. No change expected to the storage
overhang currently at +190bcf or ~7% above 5-yr average.
 APA exits Canada Positive as strategic A&D brings in solid valuation (APA $45.77 H; POU-
TSE C$18.74 NR) Adding on to last months newsflow regarding the monetization of its
Weyburn/Midale and House Mountain assets, Apache has now fully exited Canada via two incremental
transactions inclusive of (i) another June agreement to sell its Provost assets in Alberta to an undisclosed
private and (ii) todays announcement to sell its Apache Canada Ltd. subsidiary to Paramount Resources.
Total transaction value of $713mm compares to TPHe $550-600mm inclusive of PDP and undeveloped
Montney/Duvernay. Strategic rationale makes sense as APA brings cash in the door for an asset that
would take several more years to ramp, falling in priority vs. its Alpine High. Financially, (i) savings on
Canada subsidiary overhead / planned capex / other undisclosed costs (reported Canada total PV-10 of
<$30mm) and (ii) ~$1.2B in proceeds from asset sales announced YTD cover the short-term outspend
necessary to scale up in southern Reeves. Awaiting Q2 earnings for a guidance true-up, and watchful for
future deals in the Mid-Con, E. TX Eagle Ford, and Permian ex-Alpine High.
APA Alpine High Midstream Thoughts Were gonna need a bigger pipe ($45.77 H)
Recent infrastructure transactions between operators and midstream companies have signaled a
transformative shift in our view, in which operators are able to unlock significant value via existing
infrastructure investments and future acreage dedications. With a ~400k gross acre footprint in a
previously dormant region of the Permian, APA stands uniquely positioned to take advantage of this
phenomenon after taking on the initial geologic risk and infrastructure build-out burden of the Alpine
High (~$1.2B of planned infrastructure spend from 2H16-2018). While we maintain a conservative
stance towards this large, young asset base, even a heavily-risked success scenario could be highly
significant for APA, to the tune of TPHe $3.2B in gross midstream value by YE18, which could be realized
through partial monetization. Please contact your TPH representative for a copy of our APA Alpine High
Were gonna need a bigger pipe report.
APA Alpine High Midstream Thoughts TPHe NPV gain from portfolio acceleration offsets
any margin loss ($45.77 H) We reach our valuation by taking a stringent and detailed look at capital
allocation at strip through 2025. With the primary governor on investment being internally generated
cash flows, and the Alpine High as the first call on capital, APAs core Midland assets go undercapitalized
until the end of the decade. However, a TPHe 50% sell-down by YE18 allows for investment outside of
cash flow over the medium-term, allowing both the Alpine High and legacy-Permian assets to thrive. In
summary, the loss of go-forward margin in the event of a midstream sale is more than offset by the NPV
gained from acceleration across the portfolio in a capital constrained environment, all without stressing
out the balance sheet.
APA Stock Thoughts NAV +38% to $60/sh at $55/bbl WTI LT primarily on more fulsome
Alpine High wrap-up ($45.77 H) Giving credit where credit is due, we now ascribe value for the
acceleration and midstream ownership in the Alpine High. Execution over the next 12-18 months will be
instrumental in proving out this thesis, as there are still only a handful of wells with relatively limited
history behind them in relation the extensive size of the acreage footprint. While not an outright game
changer as things stand today, our analysis shows another potential positive angle of this play which
could, in tandem with good consistent results, be very impactful to the enterprise later on. We remain
watchful for (i) long-term well deliverability and the impact of optimized completions, (ii) the ultimate
size of the plays economic fairway given variance in BTU/depth across the footprint and (iii) the
prospectivity of shallower zones such as the Penn, Bone Spring and Wolfcamp, which could provide an
additional leg of liquids growth to the story longer-term.

Paramount scales up with Apache and Trilogy acquisitions (APA $45.77 H; POU-TSE C$18.74
NR; TET-TSE C$4.54 - NR) two transactions will take 16.1 mboe/d of current production up to 90.0
mboe/d (34% liquids) by year end while adding complementary Montney acreage, along with Duvernay
and Deep Basin upside. Total transaction value (including assumed TET debt, net of divestiture
proceeds) pegged at roughly $1.5 bln (APA done with cash TET done with stock) to acquire over 67
mboe/d of production and ~450 mmboe of 2P reserves. Pro forma net debt will be in the $320 million
range on 83.4 mboe production base. Focus will be on liquids rich portfolio which the company sees
growing from current 46 mboe/d to over 130 mboe/d through 2021. Montney portfolio now includes
seven areas with majority residing in the liquids rich and condensate windows. Over 230,000 net acres
of Duvernay rights at Kaybob, Smoky and Willesden Green with Smoky offering the highest liquids yields
at 200bbls/mmcf along with the most industry offsets. In the end, the company emerges with what
appears to be a strong suite of liquids rich asset opportunities without over levering the balance sheet.

Unimin to build a Permian sand mine the largest sand miner in the game is expanding its
regional presence with announced plans to add a 5mmtpa Permian mine; we surmise they share our
belief that frac sand demand outstrips supply for the over the next ~12-18+ months (OIH $24)
Unimin is a private, family owned company and they are the largest US sand miner (industrial and frac)
despite the fact that many public energy investors dont know much aboutem. The company is largely a
Northern White producer with one Texas brown frac sand mine currently in operation. This announced
Permian mine should be operational early 2018 and is backed by customer commitments, which is
unsurprising in our view given the chatter we continue to hear about operators helping pre-fund sand
miner projects.
Were still frac sand bulls (part 1) not surprising to see the largest frac sand player add
supply to a tight market that doesnt appear able to meet 2018 demand expectations (OIH $24) - We
continue to believe you will see ~25-30mmtpa in Permian frac sand mines built out over the next few
years and we already see ~20mmpta+ in line-of-sight additions. Despite the supply growth, we also
remain bullish the frac sand subsector as we see tight supply / demand through 2018 even with a
healthy dose of supply additions absent a meaningful retrenchment US activity. We believe even a $45-
50/bbl crude oil world could keep the frac sand market quite healthy in 2018.
Were still frac sand bulls (part 2) putting some numbers around the frac sand supply-
demand picture bolsters our bullish view (OIH $24) Our official US frac sand demand forecast calls for
~145-150mmtpa of 2018 frac sand assuming 14-16mmlbs of frac sand per horizontal well based on our
bottoms-up model. Given historical utilization of US frac sand mines (~70%), this would imply necessary
nameplate capacity of ~210mmtpa, which is a pipe dream by year-end 2018 in our view; however,
logistical issues, mix preferences, physics (e.g. crush strength limitations), and the fact that only a subset
of E&Ps truly fancy regional frac sand in our view potentially drive the necessary nameplate even higher
(i.e. these factors lower the effective utilization of nameplate). We had ~100-110mmtpa of nameplate
frac sand capacity at YE 2016 and see ~20-40mmtpa in incremental nameplate sand supply coming
online by YE 2018, hence our view demand outruns supply through at least 2018.
 Were still frac sand bulls (part 3) what if were wrong on demand? (OIH - $24) Fair
question given current market sentiment and US onshore activity concerns. Assuming were too high on
2018 demand despite continued well intensity tailwinds (increasing lateral lengths, stage count,
sand/stage) and that demand lands more in the 100mmtpa ballpark (2014 demand was ~54mm tons),
we still believe youd need to see ~140mmtpa+ in nameplate capacity and that the market likely stays
fairly tight in 2018. Wed need to believe in a meaningful retrenchment in US rig count to get our
underoos in a bunch and if you believe in sub $40/bbl crude or less long-term, you should probably punt
all your OFS positions today. Its worth noting that we do believe our 2018 frac sand demand estimate
is too lofty and represents an unconstrained estimate (i.e. what E&Ps would like to do based on planned
activity and well designs). We dont think the market can meet these demand estimates hence our
bullishness on sand price and sand stocks.

Petrobras divestment program update: joint sale with Chevron of undeveloped Maromba
field in the Campos Basin (PBR $7.85 H; CVX $103 B) Based on recent deals for pre-FID resource
we would expect ~$3/boe or ~$500mm for the assets. Petrobras and Chevron (70/30% stakes) are
selling up to 100% of the pre-FID Maromba heavy oil field in the shallow-water, southeastern Campos
Basin (Concession BC-20A), sandwiched between Statoils Peregrino and PBRs CVX-partnered Papa-
Terra producing fields. The Maromba field contains ~140mmboe in recoverable resource with sizeable
exploration upside (4 identified prospects); the latest development plan is based on a 60kbbl/d capacity
FPSO with first oil as early as 2019 (an initial development plan was submitted in 2012). There are no
local content requirements. To qualify as a purchaser the company must either have experience as an
offshore operator in Brazil or abroad or be classified as operator B by the ANP. This follows PBRs late
June initiation of a binding phase to sell the pre-FID Azulo gas field sale in Amazonas Basin.

UBS
Apache Corp (APA)
Exits Canada at Modest Price, But Improves Capital Allocation & Bridges 2017 Spending Gap
Agrees to sell remaining Canadian assets, exiting Canada at modest price APA agreed to sell its
Canadian subsidiary to Paramount Resources. In June, APA also agreed to sell its Provost assets in
Alberta to an undisclosed private company. With the previously disclosed sale of Midale & House
Mountain assets in Saskatchewan & Alberta to Cardinal Energy for US$244MM, APA is completely
exiting Canada for aggregate proceeds of US$713MM (C$927MM) from the 3 transactions. With 2Q
production of ~50 MBoed (~2/3 natural gas), the total price implies APA is divesting its Canadian assets
for just <6x EBITDX and ~US$14k/Boed, below prices in recent western Canadian deals averaging
~US$30k/Boed given APA's much lower liquids mix (31% vs 65%). While APA stated proceeds go to fund
its 2017-18 capex, reduce debt, or improve overall liquidity, we believe most will be directed to funding
its FCF deficit, which we estimate at >$1 billion/annum in 2017-18 assuming the current futures strip.
Wells Fargo
Oil Services & Equipment
Cutting Ests As US Shale Re-Writes The OFS Playbook--Downgrade HP/NBR/OIS
With an unexpected glut of oil globally and US production starting to rise again, we believe that
the development and innovation in US shale is becoming an increasingly disruptive force in the global oil
and gas industry that is quickly raising the odds of a prolonged stagnation in oil prices and muting the
outlook for growth in global D&C spending for the next several years. Although the most common
reaction to this scenario tends to be entirely negative towards oil service, we actually see some
meaningful valuation disparities and special situations developing within our OFS universe, most notably
in the domestic pressure pumping and proppant segments. In this note, we are reducing our EPS
estimates, global D&C (drilling and completion) spending, and rig count assumptions to account for a
prolonged $45-50 oil price environment and re-setting our price targets, select ratings (we downgrade
NBR, HP, and OIS), and stock preferences across our OFS universe.
Changing Landscape Creating Dislocations & Opportunities In OFS. Although recent trading
activity suggests that the market may be slowly beginning to discount the relative strength in the US
service market in a $45-50 world, we still believe that the market is trying to apply the old OFS
playbook to a potentially new paradigm and, in the process, is creating some of the more notable
valuation dislocations in our OFS universe since the three-year downturn began in late-2014. Broadly
speaking, we believe that the valuations for many NAM-focused Smid cap service and proppant
companies like FRAC, CJ, SLCA, and PTEN suggest a much more attractive risk/reward opportunity
relative to much of our large cap service and equipment universe over the next 12-18 months. Within
our large cap service and equipment universe, where we find valuations challenging in general, we
believe that FTI is the cheapest name relative to long-term fair value while WFT now screens as a
relatively attractive special situation.

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