INTEGRATED OIL/REFINERS:A LOOK INTO INTL GAS PRICING DYNAMICS INTO 3Q FOR THE US DIVERSIFIEDS

Deutsche Bank Markets Research North America United States Industrials Integrated Oil Industry Integrated Oil/Refiners Date 24 October 2016 Industry Update A Look Into Intl Gas Pricing Dynamics into 3Q for the US Diversifieds 3Q Intl Gas Pricing: LNG, Canada tailwinds while Europe remains a headwind ________________________________________________________________________________________________________________ Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Ryan Todd Research Analyst (+1) 212 250-8342 ryan.todd@db.com David Fernandez Research Associate (+1) 212 250-3191 david.fernandez@db.com Joe McKay Research Assistant (+1) 212 250-5717 joseph.mckay@db.com Top picks Devon Energy (DVN.N),USD41.72 Buy Pioneer Natural Resources (PXD.N),USD185.33 Buy Anadarko Petroleum (APC.N),USD62.99 Buy ConocoPhillips (COP.N),USD42.24 Buy Source: Deutsche Bank Following the release of results last week from the land down under (OSH, STO, WPL), we re-examine the impact to the US diversifieds from 3Q intl gas pricing dynamics. In summary, we expect LNG realizations to be at worst sequentially flat (CVX/WPL’s NWS project) with upside to a higher rate of sequential change relative to the underlying spot market for XOM’s PNG LNG (+30% QoQ vs. 20% for landed Japan spot prices). And while European gas is expected to remain a head-wind into 3Q with COP/XOM most exposed (15%/24% of est intl gas vols), a recovery in Canada nat gas (+.70/mcf AECO QoQ) will help on the margin MUR/APA/COP (53%43%/21% of intl gas vols). 3Q LNG and the US Majors: Realizations are likely no worse while volumes are recovering from material 2Q turnaround activity While the spot market is seemingly implying a 20% sequential QoQ improvement in LNG pricing, an initial review of Aussie (OSH, STO, WPL) quarterly results underscores the challenge of overlaying LNG spot pricing trends on corporate quarterly performance metrics with reported project realizations ranging from sequentially flat vs. 2Q16 (CVX NWS project) to an even higher rate of sequential change relative to that of the underlying spot market (XOM’s PNG LNG: +30% QoQ recovery). For CVX, we estimate an ~30% improvement in Australian gas vols following the restart of operations at the Australia NWS project. While Euro gas realizations are anticipated to remain a head-wind into 3Q (COP/XOM) a Canada nat gas pice recovery will help on the margin (APA, COP) Despite contract induced lags, corporate European natural gas realizations have almost without exception tracked sequential quarterly movements in spot market dynamics – details within. With NBP pricing down 10% sequentially, European gas realizations for the US large-cap diversifieds are likely to re-test 2Q pricing lows. With European gas volumes representing ~21%/12% of overall gas production over the last 12 months, we see XOM/COP as most exposed into the quarter. And while European gas realizations are anticipated to remain a head-wind for corporates into 3Q, a recovery in Canada nat gas prices (+.70/mcf sequential improvement in AECO over 2Q16) is expected to provide a more notable uplift to MUR, APA and COP (53%, 43% and 21% of international gas volumes respectively). Valuation and Risk Companies in our integrated/large-cap space are valued on either on an EV/DACF multiple (CVX, XOM, COP, and OXY) or on a blended NAV, EV/DACF methodology. NAVs assume $70/bbl, $65/bbl, and $3.30 for Brent/WTI and HH pricing respectively. Primary downside risks include a decline in global oil demand and a decrease in underlying commodity prices. Upside risks include increased demand increased operator efficiency. Distributed on: 24/10/2016 23:51:43 GMT International Gas Pricing LNG Realizations – Corporate results may not follow directly from underlying sport market dynamics but LNG pricing should offer a tail-wind into 3Q While spot-LNG pricing recovered in 3Q (~20% QoQ based on in-month Japan cargo arrivals), an initial review of LNG realizations from recent Aussie (OSH, STO, WPL) quarterly results underscores the challenge of overlaying LNG spot market dynamics on corporate quarterly performance metrics. However, despite the large degree of variation in this initial (and admittedly small) sample, we expect LNG realizations for US