The Kickoff Point

Giving the Commodities a Rain Check

After updating our models for 10-K’s and our 2014E/2015E production estimates, we wanted to provide clients
with a snapshot of hedging profiles for the companies in our Universe.

The run-up in the gas curve has provided operators with the opportunity to lock-in relatively attractive gas
prices for the 2014 calendar year. Over the course of 4 months, the average % hedged on the gas side has
risen from just shy of 40% to the current 53%. However, from our conversations with management teams, we
get the sense that operators are not yet willing to ramp up gas drilling. At this point, they feel more
comfortable locking in gas prices and re-investing the cash flows into liquids-rich opportunities. Makes sense,
in our view -- at $4.55/MMBtu, the 12mo NYMEX strip is up 9% both YTD and over the past year. Most
companies we have spoken with need to see prices sustained in the mid-$4’s for a prolonged period, or even
the high-$4’s in some cases, to shift back to gas drilling.

On the oil side, the % hedged was relatively unchanged since November. In fact, it ticked down slightly as our
2014E production rose for many companies in our universe. The average currently stands at 59% hedged for
2014E -- operators have been reluctant to add additional hedges given the backwardation exhibited in the WTI
curve. So far, this has worked to their benefit as contracts have typically rolled-up to the high-$90-to-
$100/bbl range as front month contracts expire.

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The reluctance of operators to add crude hedges in a backwardated crude environment.  For 2015E, the average % crude hedged stands at 21% -- while we expect this number to rise over the
coming months/quarters, most management teams we have spoken with believe they will be selling crude
above the current curve’s pricing and are thus delaying additional hedges. So far, this has worked to their
benefit as the 2015 WTI strip has risen $1.65/bbl over the past 6 months to $90.50/bbl. They should be
rewarded if contracts continue to behave and roll up the curve -- but if the front end of the curve shifts down,
investors will be quick to scrutinize crude hedging programs.

The average 2015E percent gas prod’n hedged within our universe is currently 26%. Similar to crude, we
expect this number to rise as we get closer to 2015. The 2015 NYMEX strip currently stands at $4.27/MMBtu,
up ~$0.15/MMBtu over the past 6 months. Similar to crude, operators have again benefited from delaying
adding gas hedges -- but we could see companies move to layer them on fairly quickly if the curves start to
move against them