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The View fromHOUSTON

“Seek and ye shall find.”At EPG we are seeking out the best energy stocks and we bring those companies to the attention of our members.

By: Dan Steffens, President

Energy Prospectus Newsletter: "The View from Houston” April 12, 2016 Issue: 120

INSIDE THIS ISSUE

2 The Oil Market Is Cynical

4 OPEC Cannot Meet Global

Demand

5 Natural Gas

5 Sweet 16 Growth Portfolio

8 Small-Cap Growth Portfolio

9 High Yield Income Portfolio

Dan Steffens is the President of Energy Prospectus Group (EPG), a networking orga-nization based in Houston, Texas. He is a 1976 graduate of Tulsa

University with an undergraduate degree in Accounting and a Masters in Taxation.

Mr. Steffens began his career in public accounting, becoming licensed as a CPA in 1978. After four years in public accounting, he transitioned to the oil & gas industry with the bulk of his time (18 years) spent with Amerada Hess Corporation (HES). He served as the Hess United States E&P Division Controller from 1994 to 2001.

On April 2nd I was the first speaker of the day at Value Forum’s annual conference in San Antonio. This was the fourth year in a row that I’ve been one of the speakers at the event, so I thought it a bit strange that I was introduced as the guy who was way off on his prediction for oil prices a year ago.

Forecasting is a tough business, especially when it is about the future.

Having some idea of where commodity prices are heading is critical to investors trying to make money on energy stocks. All I can do is “read the tea leaves” as well as I can and give you my honest opinion.

I told the conference attendees that few analysts expected oil prices to go as low as they have, primarily because none of us thought Saudi Arabia would be willing to accept the huge impact it would have on their wealth. Through the end of 2015, the Saudi Foreign Wealth Fund has lost over $150 Billion. If oil stays under $40/bbl, it is estimated that the nation’s wealth will decline by another $200 Billion in 2016. Whenever you think you’ve had a bad day in the market, think what it must feel like to lose $500,000,000 day-after-day.

The dynamics of the global oil market changed dramatically in

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November 2014, when OPEC made its announcement that it intended to “defend market share” and allow oil prices to weaken, rather than cut output to support higher prices. Global oil prices had enjoyed a stable average at or above $100 per barrel for more than four years. They immediately fell into the mid-$60 range upon this announcement and went on to average just $52 in 2015. When I spoke at the Value Forum in April, 2015 oil prices were stabilizing in the low $60s and all indications were that they would hold in that range.

At the June, 2015 OPEC meeting Saudi Arabia decided to produce above their quota and the other OPEC members did the same in self-defense because most of them need every penny of revenue they can get. That pushed oil’s price off of a cliff until it bottomed in February, 2016.

Everyone knows that Saudi Arabia controls OPEC, so if all they wanted to do was stop the rapid growth in U.S. shale oil production growth, $60/bbl would have done the trick. However, Saudi Arabia may have other agenda’s, like putting the hurt on Russia and Iran. Maybe they just wanted to remind the United States that this world runs on oil and they are a lot more important to global supplies than Iran. I’m sure Mr. Obama’s “Give Iran a Clear Path to a Nuke Deal” did not sit well with the Kingdom.

Fact: Oil is critical to the global economy, so the industry will survive.

The fallout of an extended period of low oil & gas prices is the creation of tremendous investment opportunities for investors that do their homework. During times of distress, even high-quality

companies become oversold. Finding the survivors is hard work, but that’s were market beating results are going to come from and that is why I continue to work hard to find them.

Robert Rapier also spoke at the InvestFest Conference in San Antonio on April 2nd. The slides that both of us spoke from are available on the EPG website. Robert and I had a lot of time to talk at the conference and we are in agreement that oil & gas prices bottomed in the first quarter and should be much higher by year-end. Market fundamentals are now doing their “magic”, which will balance supply & demand in just a few months.

Terry Starling, a Raymond James energy sector analyst, will be the first speaker at our April 25th luncheon in Houston. He is going to present the firm’s outlook for oil prices.

The Oil Market is CyclicalMichael Economides, an expert on the international petroleum markets and author of “The Colors of Oil”, once told me that it was much easier to forecast oil prices over the long-term than to forecast what they will be a few months from now. Michael died late in 2013, but if he were alive today I am sure he would get a kick out of predictions by some analysts that we will never see oil selling for more than $100/bbl again. Many of these same analysts were saying we’d never see oil under $100/bbl less than three years ago.

I don’t believe we will see oil at $100/bbl any time soon, but NEVER is a long time. I do know that oil under $50/bbl is unsustainable. As the saying goes, “low oil prices are the cure for low oil prices”, but it takes time.

In the short-term, both oil supply and demand are essentially fixed. In terms of demand, the number of cars and trucks on the road, the number of airplanes in the sky, and

EPG Coming Events Our luncheons in Houston and Dallas give EPG members and their guests an opportunity to meet the top management of some of the most promising small and mid-cap energy companies that we track. Members and guests need to register on our website.

Our luncheons are free for EPG members and just $40 for non-members that register through our website or $50 at the door.

Monday, April 25: Navport, a private company that tracks unconventional well activity in North America is hosting a special event for us at the Hess Club, 5430 Westheimer, Houston, Texas. We are bringing in speakers to discuss The STACK Play: Money, Momentum & the Market.

A member of the Raymond James energy sector team is going to update us on the firm’s outlook for oil & gas prices for the remainder of 2016 and 2017. This is an event you need to attend because STACK is well on its way to becoming the #1 oil play in North America.

Raymond James & Associates provides financial services to individuals, corporations and municipalities through its subsidiary companies that engage primarily in investment and financial planning, in addition to investment banking and asset management. Raymond James Energy Team based in Houston is highly respected and their commodity price forecasts are relied on by many upstream companies.

Visit energyprospectus.com to register.

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the number of homes heated by oil don’t change materially from month-to-month. Consumers may do a bit more traveling when fuel prices are lower, but not enough to make a big impact on demand in the short-term. Likewise, the output capacity of all the world’s developed oil projects is more or less fixed within a short time frame. Even Saudi Arabia cannot increase production on a moment’s notice by turning a few valves.

Even though the world consumes an enormous amount of hydrocarbon based liquid fuels (over 95 million barrels per day), a relatively small increase in supply (less than 2%) had a dramatic impact on the price of oil. On the flip side of this equation, a relatively small decline in supply can also have a dramatic impact on price. Add the fact that the International Energy Agency (IEA) is forecasting a 1.9 million barrel per day increase in demand over the next few months and the forecast of higher oil prices by the end of this year has a high probability of being the outcome.

Price does impact supply

Over time the global oil market is elastic. When the price of oil falls, the upstream companies (the

producers) take actions that reduce oil supply. Due to the multi-year development and depletion lifecycles of most major oil projects, there is a fairly slow supply-side feedback loop in response to changes in oil prices. However, this is an extremely capital intensive business, and capital is quickly taken away from resource development projects that no longer make economic sense. Upstream budget have been

slashed to the bone and this will have an impact on supply, which will not be quickly remedied.

This is also why oil price cycles, including this one, always overshoot the mark. When supply & demand come back into balance, the upstream companies cannot shift gears fast enough to regain supply growth. Demand growth is “relentless”. As demand zooms past

New ProfilesThe following reports were posted to the website since our last newsletter:

• Updated Net Income and Cash Flow Forecasts for several of our Sweet 16 and other portfolio companies

• A table of our Fair Value estimates for each Sweet 16 company compared to First Call’s 12-month price targets

Company Profiles• Bonanza Creek (BCEI)• Callon Petroleum (CPE)• Continental Resources (CLR)• Earthstone Energy (ESTE)• Jones Energy (JONE)• Lonestar Resources (LNREF)

• Magellan Midstream Partners LP (MMP)• ONEOK Partners LP (OKS)• Ring Energy (REI)• RSP Permian (RSPP)• Sanchez Energy (SN)

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supply, we will need dramatically higher oil prices to attract capital again.

It’s important to bear in mind that oil is unique as an asset because it’s a depleting resource consumed in enormous volumes. Each and every day, this world uses about 95 million barrels of oil, and without the constant renewal of that supply through ongoing investment of new capital in upstream drilling and development, global oil supply-capacity naturally shrinks. Across the entire global oil industry, we have to keep investing hundreds of billions of dollars annually just to maintain the output status quo.

The seeds of the next oil shortage have already taken root.

I’m sure you’ve heard the argument that the U.S. shale industry has altered the global oil market because our upstream companies are nimbler and can ramp up supply much faster than in the past. Analysts that say this seem to ignore a few very important facts.

1. U.S. shale plays only produce 4 million barrels per day of oil. That is approximately 5% of the world’s oil supply. Expecting this small piece of the supply side pie to keep up with global demand growth is unrealistic.

2. Horizontal wells in the shale plays (both oil & gas) have steep decline curves. The growth rates in the early stages of the Bakken, Eagle Ford and Permian Basin tight oil plays cannot be maintained when tens of thousands of wells are on decline.

3. Like every oilfield ever discovered, when the Tier One leasehold is drilled out, it will be impossible to keep production from falling. For example, there are now more than 15,000 Eagle Ford shale wells and they are all on decline. There are less than 100 drilling rigs working in the Eagle Ford today and they will not come close to drilling enough wells to offset declining production from the wells

completed prior to this year.

4. The U.S. oilfield services industry has been devastated by the oil price collapse. If oil went to $100/bbl next week, I believe it will take over a year to ramp back up the level of activity in the shale plays needed just to stabilize production.

5. The most optimistic forecast that I have seen for U.S. shale oil production is 10 million barrels per day. I doubt we ever come close to that level, but I hope we can because this world will need every drop.

OPEC Cannot Meet Global DemandThere are only three countries (Saudi Arabia, Russia and the United States) that produce enough oil to impact the world’s oil price. Saudi Arabia is also the “Commander-in-Chief” of OPEC, so they have the most power. All Saudi Arabia has to do is announce that they are going to reduce production by 10% and the price of oil would zoom back above $60/bbl and probably not stop until it approached $80/bbl.

So why don’t they do it? My take is that they are tired of leading a group of rouge nations that expect them to do all the work of balancing the global market. Add the fact that half the countries in OPEC are “basket cases” and breeding grounds for (or directly support) terrorist groups and it is easy to see why the Saudis could care less that their OPEC “brothers” are going bankrupt.

OPEC produces about 40% of the world’s oil. Although they probably can add 4-5 million more barrels per day of production by 2020 (assuming they are not consumed by war); they are not expected to go much past that amount. Every oilfield ever discovered eventually goes on decline and that includes all of those big oilfields in the Middle East.

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Saudi Arabia, Russia and several other significant oil exporting countries are set to meet in the Qatari city of Doha on April 17 to work out the details of a production cut. It would be nice if they announced a deal that boosts oil prices, but I don’t expect it to happen. Supply & demand will balance no matter what this cast of characters does. It will just take a few months longer.

Natural GasThe price of natural gas is getting a boost from a late season taste of winter in the Great Lakes area and the Northeast. It was fun to watch the Astros and Yankees playing baseball in their snow suits last week. The cold will last until mid-April when the weather is expected to turn much warmer in the eastern part of the country. Dr. Joe Bastardi, in his WEEKEND UPDATE is forecasting a rapid move from winter to summer. This May is expected to be warmer in the United States than it has been for many years. A long hot summer will boost demand for natural gas, which is now the #1 fuel for our fleet of electrical power plants.

You can find the Gulf of Mexico hurricane forecast at the link above. Last summer, there was very little

tropical storm activity in the GOM. Hurricanes shut in supply and can damage onshore processing facilities for gas and NGLs. Since I live southwest of Houston, I never hope for more hurricane activity, but weather in the GOM does have an impact on natural gas prices.

Longer term, the Pacific Ocean is moving from El Nino to La Nina. That means we should not have a repeat of the recent warm winter. Assuming a normal winter, the U.S. gas market should be 4-6 Bcf per day tighter by Christmas.

Sweet 16 Growth PortfolioThe Sweet 16 is a collection of large and mid-cap upstream companies that are well-positioned to survive an extended period of low oil prices. They all reported 4th quarter results that were in-line with or above my forecast models. I have adjusted my forecasts and valuations to align with their production guidance.

I have added Noble Energy (NBL) to the portfolio. It replaces Laredo Petroleum (LPI). We will be sending out an updated profile on Noble next week, so I won’t get into details here. Laredo will be fine this year because they have so much of their 2016 production hedged at very good prices. However, their production will be flat to down this year and they carry a lot of debt. Noble has more upside and it adds another Core Holding quality company to the list.

The Sweet 16 was oversold at year-end and the rebound has started. The group is now up 13.7% year-to-date and the outlook continues to improve for this group as oil prices drift higher and the companies align their spending to live within cash flows from operations.

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The SCOOP and STACK plays in Central Oklahoma are arguably the best oil resource plays in North America. Improving well results with estimated ultimate recoveries (“EUR”) now approaching two million BOE per well, lower drilling & competion costs and higher wellhead prices for oil & gas than most of the other areas combine to make the economics quite good in SCOOP & STACK. There are four large-cap upstream companies active in these two areas and they are all members of the Sweet 16. If you don’t have them in your portfolio, I urge you to take a hard look at our recent profiles on each company.

Watch THIS short video first.

Continental Resources (CLR), which is up 40.3% YTD, has the largest

leasehold position in SCOOP. They discovered the play and they hold approximately 75% of the Tier One leasehold. In fourth quarter 2015, total SCOOP net production averaged 64,500 Boe per day, a 60% increase compared with the fourth quarter of 2014. SCOOP production represented 29% of the Company's total production in fourth quarter 2015, compared with 21% of Company’s production for fourth quarter 2014.

• For full-year 2015, Continental completed 74 net operated and non-operated SCOOP wells. These included 54 net wells targeting the Woodford, and 20 net wells targeting the Springer.

• Continental has tested enhanced completions, primarily involving larger proppant volumes, on 15

SCOOP Woodford condensate wells. All are producing in excess of the Company's standard type curve based on a 1.7 MMBoe EUR for a 7,500' lateral. Enhanced completions have increased initial 90-day and 180-day production rates 30% to 35%, compared with offset wells. Based on the performance of the enhanced completed wells, the Company is increasing its SCOOP Woodford condensate EUR by 15% to 2.0 MMBoe per well.

• The incremental cost for the large enhanced completions being done currently is approximately $400,000, bringing the completed well cost for these wells to approximately $9.9 million. This cost is expected to decline during 2016 to a targeted well cost of $9.6 million.

Company Name Primary Product Stock Symbol Share Price EPG Fair Value Estimate Percent Undervalued

4/8/16

ANTERO RESOURCES GAS AR $25.45 $36.50 43.42%

CARRIZO OIL & GAS OIL CRZO $31.69 $43.15 36.16%

CONCHO RESOURCES OIL CXO $105.20 $120.00 14.07%

CIMAREX ENERGY OIL XEC $101.60 $102.20 0.59%

CONTINENTAL RESOURCES OIL CLR $32.25 $38.00 17.83%

DEVON ENERGY OIL DVN $28.77 $40.50 40.77%

EOG RESOURCES OIL EOG $73.47 $81.80 11.34%

DIAMONDBACK ENERGY OIL FANG $81.05 $81.50 0.56%

GULFPORT ENERGY CORP GAS GPOR $28.55 $40.70 42.56%

NEWFIELD EXPLORATION OIL NFX $34.05 $48.25 41.70%

NOBLE ENERGY OIL NBL $31.76 $43.50 36.96%

PARSLEY ENERGY OIL PE $22.67 $24.75 9.18%

PDC ENERGY OIL PDCE $61.35 $88.00 43.44%

PIONEER NATURAL RESOURCES OIL PXD $144.77 $151.00 4.30%

RANGE RESOURCES GAS RRC $34.92 $37.00 5.96%

SM ENERGY OIL SM $20.64 $43.80 112.21%

Sweet 16 Growth Portfolio

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At a target cost of $9.6 million, these wells generate a 25% ROR based on $40 per barrel WTI and $2.25 per Mcf of gas.

• Continental participated in completing two notable non-operated wells targeting the Springer formation in fourth quarter 2015. The first non-operated well flowed at a rate of approximately 2,100 Boe (88% oil) per day, and the second was announced by its operator as flowing at a rate of 1,007 Boe (89% oil) per day.

Continental also has a significant leasehold position in the STACK play where they’ve gotten impressive results and plan to increase their activity in 2016.

• The Company's three new STACK completions were all extended lateral tests targeting the over-pressured Meramec formation in Blaine County. The Boden 1-15-10XH well is a significant step-out test located 16 miles southwest of Continental's first STACK well, the Ludwig 1-22-15XH. The Boden flowed at an impressive 24-hour initial production rate of 1,000 Bbl of oil and 15 MMcf of natural gas

(3,508 Boepd) from a 9,800-foot lateral. It is the Company's deepest test of the Meramec reservoir to date, with the lateral section of the well positioned at an average vertical depth of 12,550 feet. Through the first 80 days of production, the Boden has continued to exhibit strong flowing casing pressure of more than 5,000 psi on a 20/64" choke.

• The Compton 1-2-35XH and Blurton 1-7-6XH wells were closer step-out tests located five miles southwest and three miles northwest, respectively, of the Ludwig. The Compton flowed at an initial 24-hour production rate of 1,817 Bo and 4.4 MMcf of natural gas (2,547 Boepd) from a 9,800-foot lateral. The Blurton flowed at an initial 24-hour production rate of 1,818 Bo and 3.1 MMcf of natural gas (2,328 Boepd) from a 9,600-foot lateral.

• Based on early production from recent Continental completions and other non-operated wells in the over-pressured oil window, the Company is estimating an average estimated ultimate recovery (EUR) of 1.7 MMBoe per well. Continental is targeting a completed operated well cost

of $10 million for a 9,800-foot lateral well, which would generate a 55% rate of return at $40 per barrel WTI and $2.25 per thousand cubic feet (Mcf) of natural gas.

Devon Energy (DVN), which is down 10.1% YTD because it is a company “in transition”, now has the largest leasehold position in the STACK play. They acquired Felix Energy in December for close to $2 Billion to add thousands of low-risk high-potential STACK locations. In their most recent presentation, Devon told analysts that they have 5,300 proven and 10,750 unrisked horizontal drilling locations in STACK. Assume each location will recover 1.5 million boe of oil & gas and you get an idea of how significant this is.

Devon has some work to do before they can focus all of their attention on STACK. They hope to raise over $2 Billion in cash by selling their interest in the Access Pipeline in Canada and three producing upstream packages in Oklahoma and Texas. They hope to have buyers by the end of the 2nd quarter and close the sales in the 3rd quarter. When the dust settles, Devon will have a strong balance sheet and

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accelerate their STACK development program.

Keep in mind that Devon is not being forced to sell these assets. Management has assured me that if they do not get a reasonable offer for the three upstream packages, they will keep them.

If you own Gastar Exploration (GST), take a hard look at the map of Devon’s STACK leasehold and then go to the GST website and look at where the Canadian County leasehold is that Gastar is selling. Devon paid over $20,000/acre for the leasehold in green.

Newfield Exploration (NFX), up 4.6% YTD, is my Top Pick for STACK because it is trading at the deepest discount to my valuation and the company should generate over $200 million of free cash flow from operations this year. “Free Cash Flow” is cash flow from operations in excess of capital expenditures. The cash can be used to pay down debt or make strategic acquisitions, which is one reason I think NFX is the most likely candidate to buy the Gastar package in STACK that is on the market.

• Newfield plans to run an active drilling program this year in its STACK area to hold acreage by production. At year-end 2015, about half of its 225,000 net acres in STACK was HBP.

• The company's 2016 capital budget is expected to be $625 – $675 million, down about 50% from 2015 investment levels of approximately $1.4 billion.

• In Oklahoma, Newfield continues to see strong and consistent well results across its more than 315,000 net acre-position in SCOOP and STACK. The Anadarko Basin is expected to receive approximately $510 million in investment, or about 80% of 2016's total company budget. This includes $50 – $80 million for land costs. The Company plans to run 4 – 6

operated rigs in the basin and expects to drill approximately 80 wells in 2016.

• Anadarko Basin production, which grew nearly 50% in 2015, is expected to grow more than 20% in 2016. Fourth quarter 2015 net production from the Anadarko Basin averaged approximately 75,000 BOEPD.

Cimarex Energy (XEC), up 13.8% YTD, is close to my valuation so I consider it a HOLD for now. They had a 16 rig program going in mid-2015 and they have pulled back to a 4 rig program today. Their main focus this year will be on their Delaware Basin Wolfcamp play. In the Mid-Continent region their primary focus is on the development of the Cana-Woodford. They are in low-risk “development mode” where they are drilling multiple wells from pads and doing a great job of getting completed well costs down.

In STACK, Cimarex holds 115,000 net acres. They have completed seventeen 5,000-foot horizontal wells and two 10,000-foot horizontal wells that proven up hundreds of future drilling locations and hold a lot of their leasehold. Production mix on a boe basis is 46% natural

gas, 31% crude oil and 22% NGLs. In 2016, Cimarex will complete an eight well “stacked/staggered” pilot. From one pad they will drill four horizontal Meramec wells and four horizontal Woodford wells. Cimarex is a conservative company that takes their time and does things the right way. They are in no hurry to develop STACK when oil & gas prices are this low.

Disclosure: I have long positions in BBEP, CLR, DDRI, GST, HCLP, LINE, MEMP, MTDR, MPLX, NFX, RRC, and SN. I do not intend on buying or selling any securities mentioned in this newsletter within 72 hours of the publication date on page one. I am not receiving compensation from any of the companies mentioned in this newsletter. See the DISCLAIMER on the last page of this newsletter for more details.

Small-Cap PortfolioSmall-caps have more risk than the larger companies in our Sweet 16, but they also have more potential. Companies with lower production have more exposure to a prolonged period of low commodity prices. I believe by staying focused on the fundamentals we can increase our chances of making profitable investments in this space because it has less analysts’ coverage.

Before you invest in this group you need to decide where you believe oil & gas prices are heading. If we get to the end of 2016 and crude oil is

Company Name

Primary Product

Stock Symbol

Share Price

EPG Fair Value

Estimate

Percent Undervalued

4/8/16

CALLON PETROLEUM OIL CPE $9 .17 $10.75 17.23%

EARTHSTONE ENERGY OIL ESTE $13.25 $17.00 28.30%

GASTAR EXPLORATION OIL GST $1.32 $2.00 51.52%

LONESTAR RESOURCES OIL LNREF $3.38 $10.60 213.61%

MATADOR RESOURCES OIL MTDR $20.21 $22.25 10.09%

RSP PERMIAN OIL RSPP $29.55 $30.85 4.40%

SANCHEZ ENERGY OIL SN $6.17 $9.50 53.97%

SYNERGY RESOURCES OIL SYRG $8.41 $10.25 21.88%

Small-Cap Growth Portfolio

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still trading under $40/bbl and natural gas is trading under $2.00/mcf, these small-caps will be trouble. I believe today’s commodity prices are at unsustainable levels, but that doesn’t mean they will go up. Many things impact commodity prices and the companies have very little control over what they can sell their production for. This is High Risk / High Reward territory, so do not invest your retirement money in small-caps.

I have dropped Bonanza Creek (BCEI) from the portfolio. I took a hard look at it last week and there are too many red flags. I will keep it on the radar screen and it may come back when the outlook stabilizes.

Gastar Exploration (GST) made a lot of progress since the last newsletter.

• The company reported updated production data from its Deep River 30-1H well, its first operated test well of the STACK formation Meramec Shale play in Kingfisher County, Oklahoma. Gross average production for the first 90 days of post-peak production was 713 barrels of oil equivalent ("Boe") per day (61% oil), which was in-line with initial production rates in the independent reservoir engineers' estimated ultimate recovery of 705 MBoe, with oil comprising 50% of total oil equivalent volumes on a wet gas basis. Gastar has a 100% working (80% net revenue) interest in the well.

• The Company also announced that it has completed its second operated Meramec Shale well, the Holiday Road 2-1H, with 34 frack stages using approximately 12 million pounds of proppant. The Holiday Road 2-1H is also located in Kingfisher County and has a lateral length of 4,300 feet. Initial flow back is expected to commence in the next two weeks.

• On April 8, Gastar announced that it has closed the sale of substantially all of its producing assets and proved reserves and

a significant portion of its undeveloped acreage in the Appalachian Basin for $80.0 million, subject to certain adjustments, to an affiliate of Tug Hill Inc. The effective date of the transaction is January 1, 2016. All sales proceeds were transferred to Wells Fargo to pay down their credit facility.

Production from the Appalachian Basin assets will be included in Gastar’s first quarter production. Net cash flows from the Effective Date of January 1 to the Closing Date of April 8 will be a Post-Closing Adjustment with the buyer. None of Gastar’s hedges were transferred to the buyer, so approximately 150% of their post-closing natural gas production is hedged at $3.37/mmbtu and approximately 60% of their post-closing oil production is hedged at $77.71/bbl. Based on my forecast model, cash flow from operations should cover the remainder of the capital expenditures for 2016.

Next on the agenda for Gastar is the sale of the South STACK leasehold (approximately 26,000 acres). Several companies are looking at the package and the hope is that an acceptable offer will be announced by mid-May with closing in June.

Gastar will participate in 12-15 STACK wells with other operators in 2016. Even though they have a small working interest in each well, they will receive all of the well logs and get to see various completion methods. This should help Gastar

plan their own STACK development program for 2017. Gastar’s North STACK leasehold has room for over 1,000 horizontal Meramec, Osage and Oswego wells making it an extremely valuable piece of acreage.

We will be sending out an updated profile on Synergy Resources (SYRG) soon after they release their fiscal second quarter results. Synergy’s fiscal year ends August 31st.

I am expecting Lonestar Resources (LNREF) to announce up-listing to the NASDAQ soon. This should draw a lot of attention and bring in more buyers. Catalysts move the small-caps and up-listing is a big one. Read the profile to see why I am so high on Lonestar. I think the share price could double when it moves to NASDAQ.

Speaking of catalyst, Earthstone Energy (ESTE) should close the merger with Lynden Energy during the second quarter. Lynden has Tier One acreage in the Permian Basin.

Updated profiles and forecast models for CPE, MTDR, RSPP and SN can be downloaded from the EPG website.

High Yield Income PortfolioOur Income Portfolio is focused on finding energy sector stocks and MLP units that offer high yield with a reasonable level of risk.

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Primary Stock Share Estimated Annual

Company Name Product Symbol Price Annual Yield Dividend

4/8/16

CALLON PETROLEUM COMPANY OIL CPE-PA $47.19 10.6% $5.00

EVOLUTION PETROLEUM - Pfd Series A OIL EPM-PA $25.47 8.3% $2.1250

GASTAR EXPLORATION - Pfd Series A GAS GST-PA $8.50 25.4% $2.1562

GASTAR EXPLORATION - Pfd Series B GAS GST-PB $9.48 28.3% $2.6875

MEMORIAL PRODUCTION PARTNERS MLP MEMP $2.17 18.4% $0.40

VANGUARD NAT RES (Upstream) MLP VNR $1.72 0.0% $-

HI CRUSH PARTNERS LP MLP HCLP $4.88 0.0% $-

MAGELLAN MIDSTREAM PARTNERS LP MLP MMP $65.75 4.8% $3.14

MPLX LP MLP MPLX $28.99 6.9% $2.00

ONEOK PARTNERS LP MLP OKS $30.84 10.2% $3.16

PLAINS ALL AMERICAN PIPELINE MLP PAA $21.56 13.0% $2.80

PLAINS GP HOLDING MLP PAGP $8.60 10.7% $0.924

High Yield Income Portfolio

Gastar’s preferred stock (GST-PA and GST-PB), Hi-Crush Partners LP (HCLP) and Vanguard Natural Resources (VNR) all remain in the portfolio despite temporarily halting distributions because I believe they will all be positioned to re-instate dividends within a year. Gastar’s preferred stock is cumulative, so they are continuing to accrue dividends each month. They must pay all accrued dividends eventually.

Evolution Petroleum preferred (EPM-PA) is now trading above par. I recommend selling it when it drifts above par and buying it back when it dips. It has a long history of doing just that.

I now believe U.S. natural gas prices are going to rebound big over the next nine month. The price of gas under $2.00/MMBtu is clearly unsustainable and we can see that producers are responding with a big decline in rigs drilling for natural gas. In addition, the “associated gas” from the oil shale plays,

especially the Eagle Ford, is falling fast. Onshore U.S. gas production is now falling by 0.5 Bcf per day each month.

If I’m right about gas prices, the outlook for Memorial Production Partners (MEMP) and Vanguard Natural Resources (VNR) will be much improved by Christmas. This will also increase NGL prices.

2016 Production Mix on a boe basis:

• MEMP: 54% natural gas, 18% NGLs, and 28% crude oil

• VNR: 66% natural gas, 15% NGLs, and 19% crude oil

All of the midstream MLPs (MMP, MPLX, OKS and PAA) will benefit from higher gas and NGL prices.

If commodity prices move higher as expected, demand for frac sand will ramp up. Upstream companies continue to get better horizontal wells by using more sand during

completions. We are going to send out updated profiles on HCLP and Emerge Energy Services (EMES) later this month.

This is a good place to remind you that knowing the production mix of each company is extremely important. The production mix of all of our model portfolio companies is shown at the bottom of each forecast model on the EPG website.

Final ThoughtsI have been working in the energy sector since my graduation from Tulsa University in May, 1976, so I now have close to 40 years of experience in this industry. During that period there have been six major oil price cycles. The only one that lasted more than two years started in 1986 when oil dropped below $10/bbl and stayed below $20/bbl for almost five years. That one was different because OPEC had more than 13 million barrels per day of excess production capacity. It ended when Iraq invaded Kuwait and

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we had the first Gulf War. Oil spiked to $40/bbl, but it did not stay there for long.

After the war, oil prices flopped around in the $15 to $25 range until late 1999. Then the global oil markets began to tighten, there was a lot of talk about “Peak Oil” and the price of oil zoomed past $50/bbl in 2005 and peaked at $147/bbl in early 2008.

Just for the record, conventional oil production did peak in 2005, just has King Hubbert predicted it would. We still have abundant and affordable energy today thanks to our brilliant petroleum engineers who figured out how to drill wells horizontally. Other scientists at the oilfield services firms figured out that fracking with millions of pounds of proppant could unlock the reserves trapped in the shale. Believe me, life on this planet would be a lot harder for us poor humans if not for a steady supply of oil & gas.

Thanks to a bunch of very greedy and stupid Wall Street bankers, with the aid of our even dumber political hacks in Washington, we had a financial market collapse in 2008 that almost took down the global economy. You all need to watch the movie The Big Short. If half of what’s in that movie is accurate, a lot of bankers and politicians should be in prison.

From $147/bbl in May, 2008, West Texas Intermediate (WTI) dropped to $38/bbl by January, 2009. I lost a lot of money in the market and I’m sure most of you did too. By the 3rd quarter of 2009 WTI had rebounded to $70/bbl and proceeded to march up to $100/bbl where it flopped around for over four years. Profits were quite good for energy sector investors.

The U.S. shale revolution increased America’s oil production by four million barrels per day. We had been on steady decline since the North Slope of Alaska went on decline in the 80’s. U.S. oil production reached 9.7 million barrels per day in May, 2015 and we are now back on steady decline.

All of the talk (even from Barack Obama) about energy independence has faded away. We are back on the

path of depending on nations that hate us for oil supply and watching our trade deficit grow. Yet there is not a peep said about this by the pack of nuts, cheats and liars we have running for president this year. Surely we can do better than Bernie, Hillary, Ted and Donald. This is America for God sake and this is the best we can come up with?

Through all of this and the lack of leadership in this country, the oil & gas industry has survived and it will again. Oil is simply too important for the price to stay below the finding & development costs of new supplies we will need in the not too distant future.

One thing to keep in mind is that when there is excess oil supply in the world, the speculators who determine the daily price of oil don’t pay a lot of attention to supply disruptions in the garden spots of the world like Nigeria, Libya, Angola or Iraq. As supply & demand tighten later this year, we will see a geopolitical premium enter the oil futures market again. With so much of the Middle East and North Africa in near meltdown, this could add more than $10/bbl to the price of oil.

Our goal is not to tell you what to invest in, but to give you a lot of good choices. Not all of the stocks we discuss in this newsletter or on the

website are going to go up, but the majority of them have since 2001 when I launched EPG. If you stay focused on owning companies that have strong fundamentals and growth locked in, I believe you will have an edge in the market.

Thank you for your support.

Keep an eye on the macro-environment, but look closely at the details before you invest in anything and good luck!

Dan Steffens, PresidentEnergy Prospectus Group

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© 2016 Energy Prospectus Group

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