Natural Gas Market Overview

Presented by:

Brian Habacivch

The data and information contained in this presentation are gathered and provided to Fellon-McCord & Associates through proprietary and public sources and are published with the intention of being accurate. Fellon-McCord & Associates, and any affiliates cannot, however, insure against or be held responsible for inaccuracies and further assumes no liability whatsoever arising from use of such data or any information contained in this presentation.

The material in this presentation does not, in any way, represent a recommendation of any kind that you or your company purchase or sell any commodity. Discussions or representations of past market performance do not predict future market results. Any forecast of potential future energy prices or market trends are for discussion purposes only and are expressly not intended to induce the purchase of any commodity of any kind.

Disclaimer

September 25, 2012 2

Proprietary and Confidential

1998-2006 Natural Gas Production Falling

September 25, 2012 3

Proprietary and Confidential

1998-2006 Natural Gas Production Falling

Source: EIA

52.1 51.6

52.6

53.7

51.9 52.3

50.9

49.5

50.7

U.S. Natural Gas Production Billion Cubic Feet per Day

September 25, 2012 4

Proprietary and Confidential

2007-2012 Major Shift in Natural Gas Supply

September 25, 2012 5

Proprietary and Confidential

Production Increasing

45

50

55

60

65

Bcf

per

Day

Total U.S. Natural Gas Production

Source: EIA

September 25, 2012 6

Proprietary and Confidential

Growth in domestic production driven by shale plays has placed significant pressure on natural gas prices; reduced volatility

Shale Production Effect on Natural Gas Pricing

Source: EIA, NYMEX

$2

$4

$6

$8

$10

$12

$14

48

51

54

57

60

63

66

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

$ p

er M

MB

tu

Bcf

pe

r D

ay P

rod

uct

ion

U.S. Natural Gas Production vs. Price

Dry Gas Production NYMEX Natural Gas Price

September 25, 2012 7

Proprietary and Confidential

Regulation of Hydraulic Fracturing

Coal Retirements LNG Exports

What Can Rebalance the U.S. Natural Gas Market?

September 25, 2012 8

Proprietary and Confidential

Congress directs EPA to study fracking’s drinking water impacts.

DOE appoints panel on fracking safety and environmental concerns.

90-day interim DOE report published.

SEC asks for fracking fluid disclosure

DOE issues Final Report.

EPA report expected, with 2014 follow-up.

12/2009

11/18/2011

8/25/2011

8/18/2011

5/5/2011

Late 2012

DOI submits fracking rules to OMB for review.

2/15/2012

Regulation of Hydraulic Fracturing Federal Agency Involvement to Date

September 25, 2012 9

Proprietary and Confidential

Announced U.S. Coal Retirements

Source: SNL Financial

September 25, 2012 10

Proprietary and Confidential

Natural Gas Needed to Fill Coal Gap

Risk # of GW

Additional Natural Gas Required by

2020 % Increase in Total

U.S. Demand

Clean Air Regulations

50-78 10-15.5 Bcf/day 15-23%

Replacement of Retired Coal Generation

September 25, 2012 11

Proprietary and Confidential

Existing LNG Import Terminals

U.S. LNG Import Terminals Requesting Approval to Export

Source: FERC

LNG Terminals 2012

Import

Capacity

Bcf/d

Requested

Export

Capacity

Everett 1.0

Northeast Gateway 0.8

Neptune 0.4

Cove Point LNG 1.8 1.0

Elba Island 1.6

Lake Charles 2.1 2.0

Cameron 1.8 1.7

Sabine Pass (EXPORTS APPROVED)

4.0 2.2

Golden Pass 2.0

Freeport 1.5 1.4

Gulf Gateway 0.5

Gulf Coast LNG* 2.8

Jordan Cove* 1.2

TOTAL 17.5 12.3

Cameron

Elba Island

Cove Point

Everett

Lake Charles

Sabine Pass

Golden Pass

Freeport

Gulf Gateway

NE Gateway

Neptune

* New Terminals

Terminals Requesting Export Approval

Terminals Approved for Exports

September 25, 2012 12

Proprietary and Confidential

LNG Exports – Historical Global Price Disparity

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$ p

er

MM

Btu

NYMEX NBP JKMSource: Platt’s

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$ p

er

MM

Btu

Liquefaction & Shipping to Asia Liquefaction & Shipping to Europe

September 25, 2012 13

Proprietary and Confidential

Natural gas “Shale Revolution” in North America since 2007 and revolution in oil now underway

Record low gas and power prices are fueling the reindustrialization of America

NGL production has increased as well

Three forces* could work to re-balance the market

– Regulation of hydraulic fracturing

– Coal retirements

– LNG exports

– *(possible 4th → reindustrialization of America)

Summary

September 25, 2012 14

Proprietary and Confidential

Current Natural Gas Market Overview

Prompt-month natural gas has remained mostly range-bound between $2.50 and $3.40 per MMBtu since late July

Hurricane Isaac resulted in nearly 28 Bcf of lost natural gas production output

In the midst of a historically weak technical period for pricing

Fundamental market conditions remain bearish as temperatures moderate and cooling demand wanes into the Fall, though recent price action has been counter seasonal

Upside Price Risks – Technical correction leads to increased upside, overshadowing bearish

seasonality

– Storage injections fall shy of end-of-season inventories short of record

Natural Gas Summary

September 25, 2012 16

Proprietary and Confidential

Domestic natural gas production tightening, but remains above 65 Bcf per day in August

Natural Gas Production Continues Near Record Levels

48.0

53.0

58.0

63.0

68.0

Bc

f p

er

Da

y

5-Year Range 2012 YTD 2011

September 25, 2012 17

Proprietary and Confidential

Gas-directed rig count approaching 450 – At 452, rig count is at lowest level since July 1999

– Production continues to be buoyed by crude and liquids exploration

Natural Gas Drilling Activity Falling Sharply

450

500

550

600

650

700

750

800

850

900

950

Rig

Co

un

t

U.S. Gas-Directed Rigs 52-Week Average

September 25, 2012 18

Proprietary and Confidential

Storage injection for recent weeks were affected by Hurricane Isaac

Injections can still lag the 5-year average by more than 20 percent and still set end-of-season storage record

Natural Gas Storage Inventories

September 25, 2012 19

Proprietary and Confidential

800

1,300

1,800

2,300

2,800

3,300

3,800

4,300

Bc

f

5-Year Range 2011 2012 (YTD)

Seasonal Peak Inventories

+ 20%: 4,080 Bcf+ 10%: 4,032 Bcf

Normal: 3,983 Bcf- 10%: 3,934 Bcf- 20%: 3,886 Bcf

5-Yr Avg: 3,705 BcfRecord High: 3,852 Bcf (2011)

Record Low: 2,748 Bcf (2000)

Tropical season has been busy, with 14 named storms to date

Hurricane Isaac resulted in 28 Bcf of production shut-ins

Most recent storms staying to the east

Conditions are currently quiet in the Gulf of Mexico

Hurricane Season

September 25, 2012 20

Proprietary and Confidential

Near-term forecasts show below-normal temperatures for first half of October ushering in moderate heating demand in parts of U.S.

6-10 and 8-14 Day Forecasts

Near-Term Weather Forecast

September 25, 2012 21

Proprietary and Confidential

NOAA’s 3-month outlook calling for mild weather throughout Fall

October, November, December Outlook

Mid-Term Forecast

September 25, 2012 22

Proprietary and Confidential

Coal-switching reduced in August, year-on-year increase in power generation demand narrowed to less than 2.5 Bcf per day

Power generation demand will continue to wane as cooling demand declines

Natural Gas Demand Considerations

12.0

17.0

22.0

27.0

32.0

37.0

Bc

f p

er

Da

y

5-Year Range 2011 2012 YTD

September 25, 2012 23

Proprietary and Confidential

ISM Manufacturing Index remained below 50 in August for the third consecutive month, signaling modest contraction in U.S. manufacturing; lowest since July 2009

Industrial production inched to new recovery high in July

Natural Gas Demand Considerations

ISM Manufacturing Index Industrial Production

30

35

40

45

50

55

60

65

70

ISM

Man

ufa

ctu

rin

g In

de

x

Recession ISM Manufacturing Index

83

85

87

89

91

93

95

97

99

101

Ind

ust

rial

Pro

du

ctio

n In

de

x (2

00

7 =

10

0)

Recession Industrial Production

September 25, 2012 24

Proprietary and Confidential

Industrial demand outpaces 2011 levels in August – Economic slowdown in 2H 2012 would reduce demand from this sector

Natural Gas Demand Considerations

14.0

16.0

18.0

20.0

22.0

Bc

f p

er

Da

y

5-Year Range 2011 2012 YTD

September 25, 2012 25

Proprietary and Confidential

Questions?

Brian Habacivch/ (502) 214-9419 bhabacivch@fellonmccord.com