An Updated Reference Guide to What Drives Montney Performance.

Patrick O'Rourke, CFA 403-539-8615

Following our initial reference guide for Montney assets, we are refreshing our detailed look at our updated Montney coverage universe, highlighting the drivers of equity performance and diving into these metrics on a company by company basis.

2019 Has been a Challenging Year for Energy Equity Performance, but we Continue to Advocate for a Disciplined Fundamental Approach with a Focus on Near Term Return on Capital and Long Term Asset Capture
In our view, the Montney levered stocks that deliver the best returns to investors in the near term tend to be those with the best returns on capital. This is why our key drivers for stock selection are:

1. PDP NAV growth potential (the basis of our long term fundamental PDP + Risked NAV Upside Targets) and
2. capital velocity (the basis of our near term capital velocity adjusted cash flow multiples).

Inside the full report, we explain these concepts and their importance on equity returns, and their key determinants, which are asset quality, ability to get products to market (egress) and the ability to access capital. In particular, we are looking for companies that are able to create the most efficient capital velocity in the near term, or which have captured and de-risked large quantities of inventory, which will create high rates of return in the long term. The higher the velocity of capital, the greater the likelihood that assets support a return of capital to investor—something that has clearly become thematic in 2019.

Drivers of PDP NAV Growth & Capital Velocity

1. Assets: We look to identify companies with the assets of the highest quality and depth of inventory. Half cycle well level economics and profitability are defined by revenue in relation to costs. Revenue is framed in terms of IP's, decline curves and EURs and the value of the product stream (commodity mix). Cost structure relates to both operating costs per unit of production (often defined by choices in capital allocation to facilities versus development), and the capital cost structure of wells. Fundamentally, we evaluate how quickly a well pays out, or returns the capital invested to investors, and then what the remaining value of the particular well is.
2. Egress: Egress begins at the wellhead and ends at the point of sale. The market access problems of the WCSB and the need for infrastructure development in the Montney both on the liquids and the gas front are well documented. We look for business plans that maximize revenue received at change of custody, while minimizing the cost to get there. Additionally, good managers of their assets will often diversify end markets in order to mitigate idiosyncratic product market risk.
3. Capital: Businesses are built upon, and investor returns are conceptually predicated upon, the eventual return of capital. Access to capital is therefore critical to any resource play producer. Capital available for investment primarily comes from the cash flow provided by current assets (recognizing that all E&P resource assets are declining in nature if we take a neutral commodity view), bank credit capacity and access to term debt and equity markets.