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US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

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Page 1: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

US Lower 48: What’s behind

the competitive cost curve?

Robert Clarke

October 2016

Page 2: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

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Page 3: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

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3

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Page 4: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

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4

Presentation contents

Cycle is turning

Some operators are now guiding for

production growth.

Undrilled inventory grows with

technology-led EUR improvements.

Future activity scenarios

Rigs bottomed in late spring, and

200 could be added by end-2017.

Production trough lags by 6-8

months. The Permian mutes the

decline & then drives the rebound.

Efficiency, efficiency…

A powerful combination of lower

unit costs and better recovery has

lowered breakevens to economic

levels. There is a wide spread

among operators though.

Technology drivers

The ability to better map reservoirs,

design completions, and optimise

production all stemmed from a

slower pace of activity. Diverter

advancements are important.

The latest cost curve

The largest changes are seen in

assets that breakeven between

US$35 and US$50/bbl.

Future wells are delayed, not

removed. Assets that receive

attention show the largest delta.

Let’s not forget gas

Opportunities abound for long

investors to capitalise.

Assets are migrating to businesses

better suited to manage the upside.

Page 5: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

5

Source: Wood Mackenzie GEM

Eagle Ford,

US$8.6Bn

Niobrara,

US$1.9Bn

Utica,

US$1.8Bn

Marcellus,

US$4.2Bn Midland Basin,

US$6.7Bn

Delaware

Basin,

US$6.3Bn

Bakken/

Three Forks,

US$3.6Bn

Haynesville/CV,

US$1.9Bn

SCOOP/STACK

, US$2.5Bn

2016 capex by modelled company key play Capex over time

Reduced 2016 spending for Woodmac modelled companies…

-40%

-20%

0%

20%

40%

60%

80%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Bakken

/Th

ree F

ork

s

Ea

gle

Fo

rd

Uti

ca

Marc

ellu

s

SC

OO

P/S

TA

CK

/Ca

na

Ha

yn

es

ville

/CV

Nio

bra

ra

Mid

lan

d B

as

in

De

law

are

Ba

sin

Cap

ex (

US$

Bill

ion

)

2015 capex 2016 capex

2017 % reduction

Source: Wood Mackenzie North American Play Company Analysis Tool

Page 6: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

6

…..but H2 may yield revisions as cost of supply finds a new bottom

Page 7: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

7

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-500

-400

-300

-200

-100

0

100

200

300

400

500

So

uth

we

ste

rn

De

vo

n

En

can

a

Oc

cid

en

tal

Ne

wfi

eld

Mu

rph

y O

il

Lu

nd

in

Ca

bo

t

Pio

ne

er

Ce

no

vu

s

Fre

ep

ort

-Mc

Mo

Ra

n

Ma

rath

on

Co

no

co

Ph

illip

s

He

ss

Sta

toil

Sh

ell C

han

ge

in

201

6 c

ap

ex

gu

idan

ce

(%

)

Ch

an

ge

in

201

6 c

ap

ex

gu

idan

ce

(U

S$

mil

lio

n)

Conglomerate Diversified IndependentFocused International Focused CanadianFocused US MajorChange in guidance Q2 vs Q1

100%

- US$2 bn - US$1 bn

Select US Independents are nudging budgets up already

Cost cutting still remains an industry theme for many though.

2016 latest upstream guidance vs 2015 spend Change in 2016 budget announced in Q2 2016

Source: Company Reports. Wood Mackenzie

Southwestern: doubled capex spend as it moves

from zero rigs to five rigs by end-Q3

Devon: >US$200 million increase in 2016 spend

to be allocated to the STACK and Delaware Basin

Encana: allocating 75% of incremental spend to

the Permian, adding a rig for the balance of 2016

Newfield: roughly a 12% increase to fund STACK

activity, also supported by its Eagle Ford sale

COP: trimmed the 2016 budget a further 4% –

spend now 68% lower than 2014

Hess: “lean” principles reducing costs and

improving efficiencies

Page 8: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

8

Focusing on oil, can the US fill the impending supply gap?

2020 supply gap (mmb/d) Breakeven tranche & asset type (mmb/d)

75

80

85

90

95

100

0

2

4

6

8

10

12

Supply gap Reservesgrowth

Yet-to-find Plannedprojects

<$40

Plannedprojects

>$40<$60

Plannedprojects

>$60<$80

Otherdiscoveries

OPECcapacityincrease

Oil Sands

Onshore

Shallow water

Deepwater

US Tight Oil

Source: Wood Mackenzie – Macro Oils Service

Despite a range of breakevens, tight oil projects play a significant role.

Visible new projects under

current development plans

Page 9: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

9

Returning rigs first slow Lower 48 decline, then provide new growth

Supply recovery levered to the Permian, and lower prices actually increases the region’s importance

0

100

200

300

400

500

600

700

800

900

1000

5.0

5.5

6.0

6.5

7.0

7.5

8.0

L48

ho

rizo

nta

l o

il r

igs

L48

cru

de

pro

du

cti

on

(m

illi

on

b/d

)

$70 Case Base Case

$45 Case $30 Case

$30 plus shut-ins $30 Case

$45 Case $70 Case

Base Case

Forecast

This base case assumes no OPEC cuts through

the duration of the forecast

Range of outcomes between $30 & $70 (WTI) Long-term Lower 48 forecast

0

2

4

6

8

10

12

201

6

201

8

202

0

202

2

202

4

202

6

202

8

203

0

203

2

203

4

Oil

pro

du

cti

on

(m

illi

on

b/d

)

Conventional Mid-Continent Bakken

Barnett Bone Spring Eagle Ford

Haynesville Niobrara Re-frac/EOR

Marcellus Utica Wolfcamp

Source: Wood Mackenzie – Upstream Service

Page 10: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

10

Drilled UnCompleted wells (DUCs) mitigate declines do not match

the dramatic reduction in rig count; location and timing matter

We forecast 1,700 abnormal DUCs contribute 250,000 b/d to supply by the end of 2016

Decline in DUC inventory DUC contribution to supply

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Ab

no

rma

l D

UC

co

un

t

Bakken Eagle Ford

Haynesville Marcellus

Utica Wolfcamp/Bone Spring

Source: Wood Mackenzie

0

100

200

300

400

500

600

Oil

Pro

du

cti

on

(m

bo

d)

Eagle Ford Bakken Wolfcamp

Bone Spring Utica Haynseville

Marcellus

Source: Wood Mackenzie

Page 11: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

11

Efficiency gains: nothing shy of incredible…should we be surprised?

GoM did very well after the Macondo moratorium & tight oil followed suit

Lower 48 tight oil EUR trends – all regions GoM discovery trends – pre and post Macondo

0

2

4

6

8

10

12

14

16

18

20

0

20

40

60

80

100

120

140

160

180

200

2004 2007 2010 2013 2016

Dis

co

ve

ry C

ou

nt

Ave

rag

e R

ec

ove

rab

le R

es

erv

es

(m

mb

oe

)

Average Recoverable Reserves Discovery Count

Source: Wood Mackenzie Upstream Data Tool

0

0.1

0.2

0.3

0.4

0.5

0.6

2011 2012 2013 2014 2015

mm

bo

e

Gas NGLs Oil/Condensate

Source: Wood Mackenzie North America Well Analysis Tool

Page 12: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

12

Well Cost Assumptions

Economics

Drilling efficiency example: Parsley Energy (PE) in the Permian

Pad drilling helped minimise year 1 cash impairment, dropping breakeven by US$10/bbl

Assumptions Southern Fairway

Average Well Reduced Cost Well

Total cost (US$MM)

Drilling (US$MM)

7.04

2.30

5.34

1.40

Results Southern Fairway

Average Well Reduced Cost Well

NPV (US$MM) 0.63 1.89

IRR (%) 12.36 20.32

Cost/BOE (US$/boe) 18.73 15.29

Brent Breakeven

(US$/bbl)

58.81 47.70

Pre-Tax Cash Flow

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

2015 2025 2035 2045

Ca

sh

Flo

w (

US

$M

)

Reduced Cost Well Average Well

Source: Wood Mackenzie GEM

Parsley energy reported that it achieved a

lower well cost by introducing Pad drilling

to its southern Midland Wolfcamp acreage.

» Best case had a D&C cost of nearly US$

4.5 million.

Applying the same D&C cost to our

average Wolfcamp Southern Fairway

model, well NPV triples.

» The production profile was kept constant.

Page 13: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

13

How much more will efficiency provide? It’s difficult to quantify fully.

As rigs are added back to non-core areas, increases may not be sustainable.

Bakken IP rates Bakken drilling days

15

20

25

30

35

40

45

50

2011 2012 2013 2014 2015

Dri

llin

g d

ays

Dunn County Fort Berthold

Nesson Anticline North Williston

Northern Mountrail Parshall-Sanish

Southern Bakken Fringe West McKenzie

West Nesson Williams Core

Williams Perimeter

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014 2015 2016

18

0 d

ay I

P r

ate

/la

tera

l le

ng

th (

bb

l/fe

et)

Bakken Dunn County

Elm Coulee Fort Berthold

Montana Frontier Nesson Anticline

North Williston Northern Mountrail

Parshall-Sanish West McKenzie

West Nesson Williams Core

Williams Perimeter

Source: Wood Mackenzie North American Well Analysis Tool

Page 14: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

14

Technology works to address costs and volumes; a doubly effective

strategy if operators and service companies can both succeed

OFS delivers better tools, while producers high-grade acreage and improve execution.

COST

BOE

Enhanced Completions

More effective

reservoir

stimulation

Drilling

Optimization

Fewer drilling

days less labor

Reservoir

Management

Decline curve

and proppant

detection gains

Supply Chain

Management

Removal of

duplicate costs

Pad drilling &

rig

automation

Geo-steering

& slim hole

Higher

resolution

reservoir

mapping

Choking

Diverters

Concentrated

cluster spacing

More sand &

water

Water

recycling

Self-sourced

sand & facility

optimisation

Source: Wood Mackenzie

Page 15: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

15

$20

$25

$30

$35

$40

$45

$50

$55

$60

- 5,000 10,000 15,000 20,000 25,000 30,000

WT

I B

rea

ke

ve

n a

t 1

0%

IR

R (

US

$/b

bl)

Cumulative Undrilled Commercial Resource (million bbls)

1Q2016 Data 3Q2015 Data

1Q2015 Data 3Q2016 Data

Removing anomalies, the current

curve is the lowest it’s ever been

Progression of the US oil supply curve

Truncated at 30 billion barrels to emphasise the shifts in the lowest cost section

New cumulative liquids resource by breakeven for US assets

Source: Wood Mackenzie – Lower 48 GEM

Page 16: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

16

Low cost asset evolution: Permian decline curves EURs have improved by 20% on average

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

400

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Cu

mu

lati

ve p

rod

ucti

on

(m

bo

e)

Pro

du

cti

on

(b

oe/d

)

Months online

Oil (b/d)

NGL (b/d)

Dry gas (boe/d)

Cum. Production (Mboe)

Prev. Update Cum. Production (Mboe)

IP 30 (boe/d) 1,047

180 day cum (mboe) 91

EUR (mboe) 700

Breakeven oil price (US$/bbl) $38.21

Prev. Breakeven oil price (US$/bbl) $64.20

Decline Curve Analytics & Breakevens

47% 20%

33%

72%

14%

14%

Oil NGL Gas

% Revenue

% EUR

Western Fairway Reeves Core

% Revenue

59% 16%

25%

80%

10%

10%

Oil NGL Gas

Source: Wood Mackenzie

% EUR

IP 30 (boe/d) 965

180 day cum (mboe) 128

EUR (mboe) 938

Breakeven oil price (US$/bbl) $37.27

Prev. Breakeven oil price (US$/bbl) $58.16

Decline Curve Analytics & Breakevens

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

350

400

450

500

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Cu

mu

lati

ve p

rod

ucti

on

(m

bo

e)

Pro

du

cti

on

(b

oe/d

)

Months online

Oil (b/d)NGL (b/d)Dry gas (boe/d)Cum. Production (Mboe)Prev. Update Cum. Production (Mboe)

Page 17: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

17

Anadarko 2% Central

Basin Platform

1%

Gulf Coast 15%

Delaware 29% Denver-

Julesberg 10%

Midland 28%

San Juan 1%

San Joaquin

5%

Williston 9%

Source: Wood Mackenzie North America Company Play Analysis Tool

Is it really all about the Permian when we consider to largest, low cost

resource?

Sub-$60/bbl BE Locations by Geography Will inventory exhaustion become an issue?

Plenty of US operators have the option to drill NPV-

positive tight oil wells today, but as the recovery

slowly builds, which companies can continue to drill

economic assets?

High-return sweet spots shrank massively during the

past two years as prices moved lower.

» There could be additional downside risk to the

sustainability of developments that are in the money

today.

Service costs will eventually rise, and reservoir

drainage will increase

» Both will put upward pressure on today's historically

low tight oil breakevens.

Growth companies with large undrilled Delaware and

Midland positions are indeed in a position of strength.

» The market is rewarding this, but many companies

are not capitalised well enough to actually turn all

their acreage into cashflow.

Page 18: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

18

US E&Ps have never really acted in concert though, and there are

recent examples of gas assets being accepted by investors

Range acquires MRD for Deep Cotton Valley

Terryville & Devon sells a Cotton Valley

portfolio with horizontal potential.

PE backing gas-specific teams with gas-

specific funds. Examples in Piceance, Mid-

continent, and Eagle Ford.

Barnett assets transacting, with

opportunistic midstream renegotiations

enabling buyers to create arbitrage.

Marcellus and Utica pure play operators looking to

enhance positions through bolt-on acreage.

Acreage rationalisation is occurring

in gas-heavy plays like Wattenberg

too. Synergy builds even more

scale.

Source: Wood Mackenzie

Page 19: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

19

After the Marcellus and Utica, the Haynesville and Mid-Continent

assets represent the next best L48 economic gas regions

Nearly 85 tcf of commercial resource exclusive of the Marcellus and Utica generates

positive returns at $3.00/mcf gas

Non-Northeast gas breakevens Non-Northeast gas resource competitiveness

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Hayn

es

vil

le

Mid

-Co

nti

ne

nt

Barn

ett

Gre

ate

r G

ree

nR

iver

Fa

ye

ttev

ille

Co

tto

n V

all

ey

San

Ju

an

Pic

ean

ce

Re

ma

inin

g c

om

me

rcia

l g

as

re

so

urc

e (

bc

f)

< $2.00 $2.00 - $2.50

$2.50 - $3.00 $3.00 - $3.50

$4.00 - $4.50 3.50 - $4.00

> $4.50

0.00

2.00

4.00

6.00

8.00

10.00

12.00

Hayn

es

vil

le

Gre

ate

r G

ree

nR

iver

Barn

ett

Faye

ttev

ille

Pic

ean

ce

Mid

-Co

nti

ne

nt

San

Ju

an

Eag

le F

ord

Hen

ry H

ub

Bre

ak

eve

n (

US

$/m

cf)

Source: Wood Mackenzie

Page 20: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

20

$2.56/mcf

$2.80/mcf $2.49/mcf

$4.35/mcf

$3.71/mcf

$3.08/mcf

$3.05/mcf

Green: Breakeven decreased since 2014

Red: Breakeven increased since 2014

Haynesville breakeven metrics are falling and M&A activity is

rising. Continue to watch the private buyers.

Page 21: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

21

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

4 5 6 7 8 9 10

An

nu

al

Ind

ex

ed

Pro

du

cti

on

Production Year

Austin Chalk Barnett

Cotton Valley Fayetteville

Haynesville Piceance

8% terminal decline 10% terminal decline

0%

35%

70%

105%

140%Cotton Valley

Haynesville

Barnett

Piceance

Fayetteville

Austin Chalk

Improvement on New Well NPV

Improvement on Mature Well NPV

As public E&Ps continue to shed non-core, mature gas assets, field

rejuvenation specialist are ready to capitalise. Some will generate upside through the drill bit, others through production operations

Benchmarked terminal decline rates Buyer upside – 20% OPEX cut and 20% revenue lift

Source: Wood Mackenzie North America Well Analysis Tool, Wood Mackenzie GEM

Page 22: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

22

Mature assets have a wide range of vales, with gas presenting the

cheapest average acquisition option

Play value benchmarking for flowing volumes

$11,600

$29,200

$41,200

$13,500

$17,200

$39,100

$41,000

$32,600 $31,400

$22,200

$15,500

$40,700

0

20,000

40,000

60,000

80,000

100,000M

arc

ellu

s

Eagle

Fo

rd

Wolfca

mp

Utica

Ha

yn

esvill

e

Bone

Sp

ring

Bakke

n

Mis

sis

sip

pia

n

Nio

bra

ra

Wood

ford

Barn

ett

Thre

e F

ork

s

NP

V10 o

f fl

ow

ing

pro

du

cti

on

(U

S$ p

er

bo

e/d

)

$ per boe/d Weighted average $ per boe/d

Source: Wood Mackenzie Global Economic Model

Page 23: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

23

In closing, despite incredibly strong headwinds, the US onshore

sector has found a way to function in a symbiotic relationship

Low cost tight oil

provides

opportunities for

many public E&Ps to

continue running

their business and

protecting investors.

In many cases that

has to be done by

selling “non-core”

assets. Private

operators are often

willing to buy these

gas projects.

Page 24: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

Trusted commercial intelligence www.woodmac.com

24

Robert Clarke

Robert G. Clarke has been with Wood Mackenzie since 2005, originally as a member of the company’s

initial US Lower 48 Upstream Research group in Houston. He has covered both the Rocky Mountains

and Gulf Coast regions specifically, and led much of Wood Mackenzie’s early shale research. He

product managed the Global Unconventional Play Service from 2009 to 2014, and also manages an

internal upstream Knowledge Network. Now, he works closely with US E&Ps, investors, and service

companies in the North Texas market.

Robert’s specializations include geologic play description, decline curve analysis, production forecasting,

analogue play modelling, and economic benchmarking. He has widespread experience analysing

exploratory global unconventional assets and has worked on upstream consulting projects, ranging from

asset opportunity screenings for E&Ps, to due diligence work for private equity M&A. Robert regularly

contributes to written media and is a frequent speaker and panel moderator at industry conferences.

Prior to joining Wood Mackenzie, he worked as a Field Geologist for HMI, a private engineering and

consulting firm in Houston, Texas. Robert graduated Cum Laude from Texas A&M University in 2001

with a BA in Geology, and received a MBA in 2005 from the Eller College of Management at the

University of Arizona.

Research Director – Lower 48 Upstream

E [email protected]

T +1 214 513 9222

@RobertClarke_WM

Page 25: US Lower 48: What’s behind the competitive cost curve?€¦ · US Lower 48: What’s behind the competitive cost curve? Robert Clarke October 2016

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This report has been prepared by Wood Mackenzie Limited in October 2016. The report

is intended solely for the benefit of its reader and its contents and conclusions are

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industry or comes from our own experience, knowledge and databases. The opinions

expressed in this report are those of Wood Mackenzie. They have been arrived at

following careful consideration and enquiry but we do not guarantee their fairness,

completeness or accuracy. The opinions, as of this date, are subject to change. We do

not accept any liability for your reliance upon them.

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