EFTA01385334.pdf

3 January 2018 HY Corporate Credit HY Multi Sector,Media, Cable & Satellite [Figure 21: Gassy E&P names — FY 17E production and cape* guidance changes since start of year %Change In Guidance (PF Acquisitions Total Production (lAboikl) Gas Production (limas/di Ca(ed$91) II Divestitures) Tots Gas Start of year OaOvert Slart of year Quart Start of year az rent Roductoo Roducoaa Capex Maher Quality lines AR 2200 2275 1650 1663 1450 1500 3% 1% 3% GFCR 1073 1063 944 963 1050 1160 1% 1% 10% MN 2466 2480 2189 2189 1225 1225 09 C% 29 SRC 2074 2005 NA 1351 1150 1150 3% NA 0% Lower Quality Names ER 310 318 247 251 300 302 2% 2% 3% OS 3332 3231 2411 2370 2200 2400 1% • NA 9% • hotates 'salters &Austad for A&D IrOscates positwe ree90M Ylatat movie rewsons hthcates Wgely neutral rpm' to gudance laves Sart Canary as Dana fla FCF-growth equation and FCF B/E oil price remain differentiators for us As discussed above, standard credit themes are back to center stage in the sector. We focus on the cash flow model - a good proxy for asset quality from the producing side - as a key differentiator among E&P credits. For the better quality names, our analysis focuses on identifying names with a superior FCF- growth equation. For lower quality names, with their high cost structure and therefore significantly higher vulnerability to commodity downside, we tend to focus on the breakeven oil price needed to keep FCF neutral in a maintenance mode, along with downside asset valuations. The Higher Quality Oily names already have established a fairly stable FCF model for a $50 oil environment with an ability to deliver solid double digit production growth with neutral or modestly negative FCF. PE is the only exception but it is sitting on nearly $1BN of cash. Among the Mid Quality credits, we see a divergence. Among the emerging Permian names, we are positive on WPX (BUY-rated) given an impressive growth outlook (32% production CAGR in FY 17-19E) along with a neutral FCF model by end-FY 19E even at $50 oil. In contrast, QEP (SELL-rated) will grow at almost half the pace during the period and still would have a modestly negative FCF in Pe 19E. Among the non-Permian names, we are more constructive on Oasis versus its larger Bakken player, WLL - both HOLD rated. OAS has meaningfully lower FCF B/E oil price (-$43) vs. closer to $50 for WLL, and just acquired a Permian asset with equity. Apart from greater resilience to lower oil prices, this also implies the former generates much faster volume growth (we see -12% CAGR during FY 16-19E vs. -4% for WLL) with lower FCF burn. Among the Lower Quality Oily names, the three non-shale names - CRC, DNR and MEG - have relatively low capex requirements given their low-decline asset base. DNR and MEG have also driven solid improvements in the opex/capex cost structure. Therefore, despite their high opex cost structure, these credits have FCF B/E oil price closer to $50 oil. In fact, for MEG, that number should go down significantly once their ongoing expansion project is complete in early FY 19. At the other end, EPE, despite significant strides in bringing down maintenance capex and opex costs, still has an FCF B/E oil price well north of $60 given the capital structure and asset base. Deutsche Bank Securities Inc. Page 59 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086618 CONFIDENTIAL SDNY_GM_00232802 EFTA01385334