13 January 2016
HY Corporate Credit
Energy
In US natural gas, estimated development breakeven costs (excluding finding
costs) have declined by roughly USD0.60/mmBtu in the last year owing to well
cost reductions, more extensive use of pad drilling, and increased numbers of
wells per pad. Production growth has recovered sharply from freeze-offs in
November to average +4.3 bcf/d yoy.
While we expect this growth to slow to only 2.0 bcf/d yoy in 2015, we believe
the market would be balanced at only 1.3 bcf/d yoy growth. Therefore we
expect storage normalization versus the 10-year average by the end of March,
and building surpluses over the remainder of the year prior to Winter 15-16.
Consequently we lower our 2015 Henry Hub price forecast to USD3.75/mmBtu.
Oveivw.-.7;
Production cost declines have characterized both the global thermal coal and
US natural gas markets in the past year, with further USD cost declines likely
in thermal coal. We expect oversupplied markets to persist over a multi-year
period in thermal coal, and over the whole of 2015 in natural gas.
Consequently, lower costs of production translate into a lower likelihood of
supply curtailments and greater potential downside.
Natural gas supply growth raises oversupply concern.
An extremely cold winter in 2013.14 ended with storage gas at the lowest level
in both percentage terms and absolute terms since 2003. As in 2003, this was
followed by a very strong injection season with 2,770 bcf (59% of working gas
capacity) added, as compared with 2,491 bcf (61%) in 2003 when measured
from the end of March to the first week in November. This was facilitated by
the strongest production growth rate (+3.1 bcf/d) of the last nine years apart
from 2011. Of particular note is that production growth accelerated into the
end of the year, despite the weakest pricing also occurring in Q4-14.
[Figure 35: Dry gas production growth and Henry Hub Figure 36: Dry gas production (bcticlav:
9 moo Jan to Nov prod. growth 74
(bcfld yoy) 2012
8 O Henry Hub Avg 72 - 2013
7 O ($/mmBtu)
O 70 - —2014
6
Forecast A
5 68 November
O O r- % freeze-offs
4 O O 1* 66
3
64
2
1 62
0 60
2006 2008 2010 2014 I Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2012
Sows illoottlerg ArencW. Pena &Ma re Oaa Gas ESP &ay among i Race 11mhol Mow. 0nicA• &ft
Continued strength in production growth poses the greatest risk for pricing in
2015 and we lower our price forecast to USD3.75/mmBtu on expectations that
supply will exceed requirements in a normal-weather scenario. A shift towards
lower costs has been facilitated by tighter well spacing and longer laterals,
while we do not expect reduced drilling for tight oil to detract substantially
from associated gas production growth. We expect these costs to remain
lower in 2015 versus 2013. However, a continued backlog of takeaway
capacity in Northeast Pennsylvania may hold back growth below what it
otherwise could be, owing to negative basis relative to Henry Hub.
Deutsche Bank Securities Inc. Page 43
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