Diamondback Energy FANG 65,000 26.49 Laredo Petroleum LPI ...

Joseph Bachmann | 504.582.2637 [email protected]

Philip Stuart | 504.582.2554 [email protected]

Brian Corales | 504.582.2555 [email protected]

Blake Fernandez | 504.582.2528 [email protected]

Peter Kissel | 504.582.2881 [email protected]

Holly Stewart | 713.393.4512 [email protected]

David Amoss, CFA | 504.582.2638 [email protected]

January 27, 2014 Blaise Angelico | 504.582.2553 [email protected]
Alonso Guerra-Garcia | 713.393.4511 [email protected]

K. Blake Hancock | 713.393.4502 [email protected]

Richard Roberts | 504.582.2560 [email protected]

Bill Sanchez | 713.393.4505 [email protected]

The “New” Horizontal Permian Basin

Quick Take: Over the past two years, horizontal Figure 1: Delaware Leverage
activity has ramped in the Permian Basin and is likely
to command the lion’s share of drilling capital in the Delaware Basin Acreage Positions
coming years as the stacked pay horizons and thick Independent E&P Operators
oily reservoirs are proving to have greater potential
than originally expected over a larger portion of the Company Ticker Acreage/NEV
basin. Forest Oil FST Acreage ($MM)
Cimarex Energy XEC
Whereas 2013 saw industry establish the potential for Matador Resources 60,250 51.33
horizontal drilling in a variety of pay zones, 2014 Concho Resources MTDR 437,693 47.75
could provide added clarity surrounding Energen Corp. CXO 49,000 33.36
acreage/operator differentiation. With 233 (54% Quicksilver Resources EGN 419,556 30.30
increase Y/Y) horizontal rigs currently running, the Occidental Petroleum KWK 170,505 23.67
delineation of the Permian could occur in a short time Devon Energy OXY 45,000 20.64
period. The Permian now holds ~27% of the total Rosetta Resources DVN 1,355,000 17.43
U.S. rig count and ~20% of the total horizontal rig Whiting Petroleum ROSE 320,000 10.49
count. Additionally, unlike other mature onshore oil Apache Corp. WLL 40,000 10.03
basins, many smaller or private companies remain in Anadarko Petroleum APA 90,000 9.47
the Permian, and we expect consolidation to heat up EOG Resources APC 287,000 7.03
throughout 2014. Linn Energy EOG 330,000 6.43
ConocoPhillips LINE 207,000 4.21
Delaware: The Bone Spring, while more SM Energy COP 74,000 3.74
geologically complex than the Wolfcamp, generates SM 150,000 1.50
some of the highest rates of return in the region and
should continue to drive production. Wolfcamp 2,750 0.37
activity remains in the early stages, but results along
the state line area and further south in Loving, Source: Company data & Howard Weil
Reeves, and Ward counties are encouraging and bode
well for future industry development. Figure 2: Midland Leverage

Midland: The southern horizontal Wolfcamp play is Midland Basin Acreage Positions
in development mode with operators now Independent E&P Operators
concentrating on efficiencies and lower costs. Further
north in the heart of the Midland Basin, initial results Company Ticker Acreage Acreage/NEV
have been very encouraging, but operators are still Approach Resources AREX 149,000 ($MM)
delineating the areal extent and potential for multiple Callon Petroleum CPE 35,000 159.97
horizons. Athlon Energy ATHL 109,000 95.07
Pioneer Natural Resources PXD 900,000 40.17
Top Picks: Our top Permian Basin picks are CXO, Laredo Petroleum LPI 141,230 39.09
Diamondback Energy FANG 65,000 33.88
ROSE, FANG, & ATHL. Devon Energy DVN 644,000 26.49
SM Energy SM 127,000 21.11
Quicksilver Resources KWK 36,000 16.97
Apache Corp. APA 625,000 16.51
Chesapeake Energy CHK 470,000 15.31
Energen Corp. EGN 87,000 12.90
Concho Resources CXO 155,000 12.08
W&T Offshore WTI 25,370 11.19
Range Resources RRC 100,000 11.15
Occidental Petroleum OXY 410,000 6.15
Linn Energy LINE 90,000 5.27
QEP Resources QEP 27,000 4.55
EOG Resources EOG 113,000 2.85
ConocoPhillips COP 90,000 2.30
0.90

Source: Company data & Howard Weil

Howard Weil is a division of Scotia Capital (USA) Inc., a member of the Scotiabank group, and represents Scotiabank’s energy equities
business in the United States. For all relevant disclosures and certifications see Appendix A of this report.

1100 Poydras Street, Suite 3500 New Orleans, LA 70163

January 27, 2014 The “New” Horizontal Permian Basin

Executive Summary

Delaware Basin: The more horizontally mature area of the Permian continues to serve as
the workhorse and foundational area for horizontal development. Anchored by the prolific
Bone Spring, the Delaware has significant growth opportunities emerging through the
Wolfcamp play that is rapidly expanding in the southern and central portion of the basin.
Continued success in the Wolfcamp zones could significantly increase drilling inventory
and lead to more efficient and cost effective development through potential incorporation
of multi-well pads and stacked laterals. We believe CXO is the best way for investors to
gain direct exposure to the Delaware. Concho is the premier operator in the basin with a
proven track record and vast high quality acreage position. In addition, the Company’s
recently announced 3-year HZ drilling program could double current production providing
significant growth opportunities through the drill-bit. While ROSE is not a pure play
operator, its recent acquisition should be better defined horizontally this year. The acreage
is in close proximity to very good recent well results and with 4 horizontal rigs currently
running; ROSE should have a flurry of new wells coming out in 2014. Investors can gain
concentrated Delaware exposure in small and mid-cap names such as XEC, EGN, &
MTDR. In the large cap space, the primary Delaware operators are APA, APC, DVN,
EOG, & OXY.

Midland Basin: In 2013, the Midland emerged as a reinvigorated basin capable of
generating strong returns similar to those achieved to date in the Delaware. What is even
more impressive is the Midland Basin has proven to be more consistent, which should
make it conducive for large-scale developments. Operators are shifting development plans
away from vertical drilling towards horizontal activity and are testing multiple zones.
While we are earlier in the horizontal development life cycle, we see significant
opportunity to increase drilling inventory through decreased density spacing and the
potential incorporation of stacked lateral development programs. The best way for
investors to gain broad exposure to the Midland is through PXD, which has the largest
acreage position and is the most active operator in the basin. While PXD is one of the
premier operators in the basin, the valuation is still a bit rich versus some of the other
Permian operators. In the central portion of the play, our top pure play name is FANG
because of the Company’s rapidly growing horizontal drilling program that is yielding
some of the best results in the basin while consistently decreasing well costs. In the
central/northern portion of the play, our top pure play name is ATHL because it offers
investors exposure to the Company’s recently initiated horizontal program, which we
believe could lead to explosive growth if successful. In the southern portion of the play, the
top pure play operator is AREX; however, the name has been volatile over the past year, as
the Company has transitioned into development mode. While we feel like the name is
relatively cheap versus its Midland peers, we believe AREX could continue to experience
volatility over the next year due to investor concerns over the lumpy production
accompanying development mode. Other small and mid-cap names with meaningful
leverage to the Midland include LPI, CPE, LINE/LNCO, CXO, EGN, QEP, SM, &
WTI

Oilfield Services: While horizontal drilling activity is expected to increase in 2014, the
relative distance from the Permian to other major basins (such as the Eagle Ford) should
keep supply/demand in balance for most service lines. The switch to horizontal drilling
from vertical should benefit the larger land drillers with more AC rigs in the basin, like
HP, PTEN, PDS and NBR. For the more service intensive completion and well servicing
work, we believe that the large cap diversified companies (HAL, BHI, SLB) will be most
successful, with smaller cap more regional players (BAS and KEG) also seeing
improvement in the utilization of equipment.

Page 2 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Market Activity: 2013 proved to be a highly active period for both capital markets
activity and M&A in the Permian. Since May of 2012, there has been ~$8.5 billion of
M&A transactions and several notable initial public offerings. Additionally, Permian-
levered stocks exhibited tremendous success, which we think could continue in 2014.
Looking ahead, we anticipate capital markets activity will remain robust over the coming
quarters and would not be surprised to see consolidation in the region via corporate M&A
activity. The Permian Basin generates strong returns and offers significant exploration and
development opportunities and as such, we continue to favor stocks with direct exposure to
the multiple pay horizons present across the basin.

Whereas this report focuses primarily on the horizontal development of the Permian Basin,
please refer to our previous Permian Basin report (Click Here), which provides a broader
general overview of the Permian and its geological characteristics.

Figure 3: Permian Basin Core Areas

N. Delaware Core Bone Spring

HZ Results Coming in 1H14

Central Delaware Core Bone
Spring & Wolfcamp

W. Midland Core W. Central Midland
Wolfcamp Core Wolfcamp & Cline

S. Delaware Core S. Midland Core Wolfcamp
3rd Bone Spring &
Wolfcamp

Source: Howard Weil & DI Desktop

Page 3 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Delaware Basin

The Delaware Basin, located on the western flank of the greater Permian Basin, is
separated from the Midland Basin by the Central Basin Platform. The Delaware constitutes
a roughly 10,000 sq. mi., or 6.4 million acre area extending from the southeastern New
Mexico counties of Eddy, Lea, and Chaves southward into the western Texas counties of
Culberson, Loving, Reeves, Ward, Pecos, and Jeff Davis. Figure 4 provides a geographical
representation of the Delaware and the associated counties as well as the vertical depth of
the target Bone Spring formation across the basin.

Historically, production in the Delaware Basin has focused on the vertical development of
the commingled Wolfbone formation and the Abo/Yeso in the NW Shelf. However, as
industry has incorporated horizontal drilling and enhanced fracture stimulation
technologies, the majority of activity has shifted to the horizontal development of the 2nd &
3rd Bone Spring & Avalon in the northern portion of the basin, the 3rd Bone Spring and
Wolfcamp in the southern portion of the play, and the 3rd Bone Spring, Abo, and Yeso in
the NW Shelf.

Of the various pay zones present in the Delaware, the Bone Spring formation has attracted
the bulk of industry horizontal activity. However, as activity moves further south, operators
are beginning to develop and delineate the deeper Wolfcamp benches. Continued success
in the Wolfcamp would be an added positive for future development in the Delaware as
many operators have larger prospective acreage positions for the Wolfcamp than for the
Bone Spring, which has the potential to significantly increase drilling locations. In
addition, continued delineation and development of the Wolfcamp could afford operators
the ability to develop the basin using pad drilling and stacked laterals because of the
presence of multiple Wolfcamp benches in the southern portion of the play.

The following sections highlight the active plays, focusing on changes in well profiles and
completion techniques, field results over time, and public company activity.

Figure 4: Delaware Basin Bone Spring Vertical Depth Map

Source: Wood Mackenzie Howard Weil
Page 4 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Bone Spring

Formation Characteristics

The Bone Spring formation includes the 1st, 2nd, & 3rd Bone Spring sands and similarly
named carbonate sections that are generally lumped together with their corresponding
sands by public operators. The combined gross column of the Bone Spring sands is
~2,500-3,500’ thick, with the formation getting thicker and deeper as it migrates from West
to East until it disappears abruptly at the Central Basin Platform. To date, the Bone Spring
formation is the most prolific and highly drilled horizontal zone in the Delaware Basin,
with operators predominantly targeting the 2nd & 3rd Bone Spring in the northern portion of
the basin and the deeper 3rd Bone Spring in the southern portion of the basin. While there is
variability in the thickness of the rock and vertical depth of the reservoir as the formation
moves from West to East, operators are generally finding the most success in central Eddy
& Lea counties, the Texas/New Mexico state line, and western Loving & Ward counties.

Well Profiles & Field Results

Overview: Because of the geological and stratigraphic variances throughout the basin,
there are certain areas that are more prospective than others with varying well results and
EURs for the Bone Spring formation. We have examined the changes in well profiles in
the play since our last report (Jan. 2012) and compared how results have improved. We
also studied where horizontal delineation is focusing as operator activity has increased
throughout the Delaware.

Figure 5: Bone Spring Production by Date

Source: DI Desktop & Howard Weil
** 2013 well data is as of 9/30/13

As identified in Figure 5, which depicts the peak month Bopd from horizontal Bone Spring
well results since 2008, there are well-defined hot spots in central Eddy & Lea counties,
the state line area and Ward & Loving counties. Additionally, upon examining drilling rig
locations and recent well results, we expect operators will attempt to delineate the Bone
Spring further into Reeves County west of the Pecos River. The Bone Spring is present in
that area, but to date the majority of successful drilling activity has taken place in the Ward
County area east of the Pecos River.

Page 5 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Production Data: Production throughout the basin has been rapidly increased since
horizontal development essentially began in the area in 2008. As has been in the case in
the other horizontal unconventional developments, well results and importantly, oil
production, have increased as operators enhance their knowledge of the geological
formations and discover the optimal spacing and completion techniques. However, cost
reductions in the Delaware are more difficult to achieve than other unconventional plays
because of the heterogeneous geological structure throughout the Delaware, the deeper
vertical presence of the target formations compared with other plays and the lack of
infrastructure spending. Well results, as outlined in Figures 6 and 7 indicate how the play
has evolved over the past six years, and further confirm the core areas of operations.

Figure 6: Horizontal Bone Spring Production by Date

Ye a r** Bone Spring W e lls by Ye a r % Oil
# of W e lls BOEPD*
2008 71%
2009 24 218 69%
2010 39 275 52%
2011 94 420 65%
2012 215 381 69%
2013 310 486 71%
246 497

Source: DI Desktop & Howard Weil
*BOEPD data is reflective of the 1stpractical month production levels

** 2013 well data is as of 9/30/13

Figure 7: Horizontal Bone Spring Production by County

Bone S pring W e lls by County

C o unty W e ll Count BOE P D * % Oil
811 57%
CULBERSON (TX) 15 440 63%
439 83%
EDDY (NM) 590 437 60%
266 69%
LEA (NM) 188 457 74%
190 83%
LOVING (TX) 100

REEVES (TX) 19

WARD (TX) 43

WINKLER (TX) 15

Source: DI Desktop & Howard Weil
*BOEPD data is reflective of the 1stpractical month production levels

Well Profiles: Well costs throughout the Delaware have significant variances due to the
vertical depth changes from West to East and North to South throughout the basin. Figure
8 identifies our assumptions for the primary Bone Spring operators, Concho Resources and
Cimarex Energy, in their respective acreage positions in the Delaware Basin “hot spots”.
The West Texas 3rd Bone spring area in Western Ward County currently yields the highest
IRR at ~87%. This area appears to yield the most prolific wells based on our research in
both the Bone Spring and Wolfcamp formation; however, it is important to note that the
Ward County area is in the vertically deeper southern portion of the basin, so drilling
depths have a significant impact on increased rates and higher drilling and completion
costs. The central Eddy & Lea counties area also offers a very attractive return for
operators and is by far the most actively drilled area in the Bone Spring due to its high oil
content (84%) and repeatable results. The third “hot spot”, the Culberson and Eddy County
/state line area, also offers competitive returns at ~61% with lower costs than the other
areas because of the vertical depth of the target Bone Spring formation. While the
production in this area contains lower oil content, lower costs and higher production rates
enhance returns to competitive levels.

Page 6 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

One important note about the Bone Spring formation in the Delaware is the lateral length
of the horizontal wells. Operators in the Bone Spring generally complete their wells with
laterals of ~4,500’ as compared with the 7,500’ & 10,000’ laterals that are gaining
popularity in the Midland Basin and have become the norm in more developed
unconventional plays. The primary reasons for the shorter laterals are the heterogeneous
nature of the Bone Spring and its complexity throughout the basin in addition to acreage
lease line restrictions.

Figure 8: Delaware Bone Spring Well Profiles

Delaware Basin HZ Bone Spring Type Curves

Metric W. TX 3rd B.S. Eddy/Lea NM State Line

EUR (MBoe) 1,000 630 1,000

30-day IP (Boe/d) 1,000 670 850

% Oil 80% 84% 58%

Cost ($mm) $6.5 $6.4 $5.4

Spacing 160 160 160

TVD (ft) 10,000 - 11,000' 8,000 - 9,000' <8,000'

Lateral (ft) 4,500' 4,500' 4,500'

Frac Stages 5-8 5-8 5-8

IRR 87% 73% 61%

Source: Company Presentations & Howard Weil

Public Company Activity

The most active public Bone Spring operators in the Delaware include Anadarko (APC),
Cimarex (XEC), Concho (CXO), Devon (DVN), Energen (EGN) and EOG Resources
(EOG). Additionally, several private operators are active participants, including
Mewbourne, Yates Petroleum, Bopco, and Riki Exploration. In addition to these operators,
we expect considerable increases in development from the large independents and majors
who already have substantial lease positions, including Apache (APA), BHP Billiton
(BHP), Chevron (CVX), Conoco (COP), Occidental (OXY), and Shell (RDS). We
believe the Bone Spring and Wolfcamp in the Delaware are onshore plays that could
continue to compete for capital from large independents and majors due to its economic
viability in different commodity price environments. We believe OXY in particular
presents one of the most attractive names to grow horizontal production in the Delaware.
The Company maintains the largest legacy acreage position with over 1.3MM acres, but to
date has remained more focused on its enhanced oil recovery program and vertical drilling.
Additionally, we believe the area could experience consolidation in the coming years as
other larger operators look to add scale in their development of the Permian. Figure 9
depicts horizontal Bone Spring activity by operator.

Page 7 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 9: Bone Spring HZ Production by Operator

Source: DI Desktop & Howard Weil

Many operators effectively divide the Delaware Basin into northern and southern sections
just below the state line “hot spot” and show it extending down through Loving, Ward,
Culberson, Reeves, and Pecos counties. As drilling continues into the southern portion,
operators focus primarily on the 3rd Bone Spring and the emerging Wolfcamp benches. The
Wolfcamp has seen a significant ramp in activity recently and is beginning to supplant the
Bone Spring as the primary target. However, while the 3rd Bone Spring formation in the
southern portion of the narrow window encompassing western Loving and Ward counties
still produces some of the most economic results in the basin, there are not as many
prospective drilling locations compared with the Wolfcamp.

Figure 10: Southern Delaware 3rd Bone Spring Core Area

Source: Energen Resources Company presentation Howard Weil
Page 8 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Energen and Cimarex are currently the leading Bone Spring operators in the southern
portion of the play followed by Anadarko and Shell with the majority targeting the 3rd
Bone Spring. Certain areas in the 3rd Bone Spring produce better well economics than the
2nd Bone Spring in the North albeit with higher costs at deeper formation depths. For
example, Cimarex drilled 33 wells in 2013 in the Ward County area with an average 30-
day IP rate of 1,000 Boepd (~80% oil). Cimarex plans to continue drill the formation due
to its attractive returns and the Company’s significant acreage position in the area. XEC
will also remain active in the other two Bone Spring areas while increasing its activity in
the Wolfcamp formation in the southern portion of the basin. The major catalyst for future
development in the coming months for operators in the 3rd Bone Spring is the delineation
of the play west of the Pecos River into Reeves County. Recently operators are having
more success in the Wolfcamp formation in Reeves County, but we expect operators to
continue to test and develop the 3rd Bone Spring in the area as well.

In general, we believe the Bone Spring formation still has plenty of room to run in the
long-term and anticipate that further delineation to the west could serve as a primary driver
to expand the play boundaries. The different Bone Spring plays offer some of the best
unconventional returns in the onshore U.S. and we believe it will continue to be one of the
most actively drilled plays in the Permian Basin.

Delaware Basin Wolfcamp

Formation Characteristics

Overview: While the Wolfcamp formation is present across the entire Permian region, the
following information focuses on activity within the Delaware sub-basin. The depth trend
of the Wolfcamp is similar to the rest of the Delaware stratigraphy, with an asymmetric
eastern bias and a gradual upward slope as the basin stretches westward. The Delaware
Wolfcamp is largely a horizontal oil play–with the exception of some commingled
Wolfbone verticals–with a median hydrocarbon mix similar to the Bone Spring at 60%
crude, 20% wet gas and 20% dry gas.

Most of the current activity targets the oilier Upper Wolfcamp rather than the significantly
more gas-prone and mature Lower Wolfcamp. The upper sections comprise a roughly
1,000’ gross interval that sits at depths of 10,000 – 12,000’ (though the Wolfbone vertical
wells are drilled to 11,000 – 12,500’). In aggregate, the Wolfcamp interval is ~2,000’ thick.

Well Profiles & Field Results

Over the past two years, there has been an emergence of horizontal Wolfcamp drilling
primarily in the state line area and southern portion of the basin with most operators
targeting the upper Wolfcamp A bench. The core area of the Wolfcamp in the Delaware
lies in the Ward, Loving, and eastern Reeves County areas with the best results coming
from western Ward County. Operators are predominantly drilling the Wolfcamp C & D in
the shallower western portion of the play around the state line area. While it is still early in
Wolfcamp development in the Delaware, operators are delineating acreage positions and
estimating resource potential. Based on information gathered from current operators and
assuming 45MMBoe OOIP per section in each zone and an 8% recovery factor, the
potential resource addition for a successful Wolfcamp development on 10,000 acres is
~56MMBoe per zone or 100 drilling locations based on a 560MBoe type curve.
Furthermore, Figure 11 highlights Delaware Wolfcamp wells to date by age and relative
size.

Page 9 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 11: Delaware Wolfcamp Wells by Date

Source: DI Desktop & Howard Weil
** 2013 well data is as of 9/30/13

Well Profiles: Well profiles for the different Wolfcamp benches vary across the play with
the Wolfcamp A bench in the core Ward County area delivering much higher oil content
than the Wolfcamp C & D benches in the state line area. The Ward County area, and to a
lesser extent Reeves and Loving, appear to offer the best economics for the Wolfcamp in
the Delaware and we expect extensive drilling to continue in these areas. Several
operators, namely Cimarex and Chevron, which recently formed a JV in the state line area,
are experimenting with Wolfcamp A drilling hoping to achieve an oilier production mix
than the Wolfcamp C & D wells that have been the main target to date. Outside of the two
core areas, some private operators have had limited success drilling the Wolfcamp in the
NW shelf area, and we are beginning to see activity increase in SW Reeves County down
into Pecos County. Operators have experienced more success drilling the Wolfcamp than
the Bone Spring in the area west of the Pecos River in Reeves County. We see this as an
encouraging sign for the play as operators will look to continue delineating acreage
positions further west and south.

Figure 12: Delaware Wolfcamp Production by Date

Delaware Basin HZ Wolfcamp Type Curves

Metric WC A Ward WC C&D State Line

EUR (MBoe) 900 833

30-day IP (Boe/d) 925 1,033

% Oil 63% 28%

Cost ($mm) $7.3 $7.3

Spacing 160 160

TVD (ft) 8,000 - 10,000' 8,000 - 10,000'

Lateral (ft) 4,500' 4,500'

Frac Stages 8 - 10 8 - 10

IRR 43% 21%

Source: Company Presentations & Howard Weil

Page 10 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 13: Delaware Wolfcamp Production by Year

Ye a r** D e la wa re W olfca mp W e lls by County % Oil
2008 67%
2009 W e ll Count BOEPD * 79%
2010 41 249 73%
2011 13 313 68%
2012 58 506 64%
2013 95 434 64%
111 580
63 480

Source: DI Desktop & Howard Weil
*BOEPD data is reflective of the 1stpractical month production levels

** 2013 well data is as of 9/30/13

Public Company Activity

Exploration and development activity in the Wolfcamp has largely been driven by several
large independents and majors, with the majority of wells targeting the Wolfcamp A in
Ward, Loving, and Reeves counties. The most active operators to date have been
Anadarko, BHP Billiton, Cimarex, Concho, Shell, and Devon. Other operators in the
play who have significant prospective acreage positions, but have tested limited amount of
Wolfcamp wells include: Chevron, Energen, EOG Resources, Occidental, Rosetta,
Whiting and Matador. Figure 14 depicts operator activity in the Delaware Wolfcamp.

Figure 14: Top Delaware Wolfcamp Operators

Source: DI Desktop & Howard Weil

Anadarko, Shell, and Cimarex have arguably the best acreage positions for the Wolfcamp
A in the core of the play in western Ward County, where well results are considerably
higher than neighboring counties (See Figure 15), achieving the highest peak oil rates. We
estimate wells generate rates of return in excess of 40%. Anadarko recently commented
during its 3Q13 earnings call that the Company is currently running 6 rigs in the Ward and
Loving County area targeting the Wolfcamp A and achieved 24-hr. IP rates over 1,000
Boepd with a >70% oil cut on its last 7 wells. Cimarex has also recently provided some
30-day rates from its wells in eastern Reeves County. XEC announced two Wolfcamp A
tests with >900 Boepd average 30-day rates and a 10,000’ lateral test which achieved a 30-
day rate of 1,816 Boepd (56% oil).

Page 11 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 15: Delaware Wolfcamp Production by County

D e la wa re W olfca mp W e lls by County

C o unty W e ll Count BOEPD * % Oil
35%
Culberson (TX) 30 638 66%
81%
Eddy (NM) 77 407 68%
65%
Lea (NM) 4 37 76%

Loving (TX) 45 418

Reeves (TX) 69 278

Ward (TX) 164 579

Source: DI Desktop & Howard Weil
*BOEPD data is reflective of the 1stpractical month production levels

One trend that is clear to see in the play early on is that production mix tends to be much
gassier as operators move west and north from the Ward County core area. BHP Billiton
has been one of the most active operators delineating their acreage position out to the north
and west of Ward County, as is shown in Figure 14, Page 11. It is still very early in the
Wolfcamp development, but thus far, we have not seen any operators drill the Wolfcamp to
the west or south of BHP’s most recent wells. In the more northern section of the
Wolfcamp window, the Chevron and Cimarex JV will be very important to monitor
moving forward. Other operators including BHP, Concho, and Devon are also planning to
continue to drill the state line area testing both the Wolfcamp A and the Wolfcamp C & D.
Successful Wolfcamp A tests could be a real boon for the play as it could open several
intervals that operators could develop using stacked lateral multi-well pads, which would
decrease costs and improve efficiencies.

The Wolfcamp formation is likely to drive the future growth of the Delaware along with
the Bone Spring. We see these two plays as the core of the Delaware development moving
forward with the Wolfcamp providing the strongest growth opportunities because it is still
in the early stages of development when compared with the Bone Spring. As operators
continue to delineate acreage positions and test, the Wolfcamp benches in different
locations we feel valuations in the Delaware and potentially M&A activity could increase
as larger operators look to expand their footprint in the play.

Page 12 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Midland Basin

The Midland Basin is located to the east of the Central Basin Platform and runs north-south
from southern Lamb and Hale counties to northern Crockett County. The basin has a long
history of vertical oil exploration and development dating back to the 1940s. More
recently, and similar to the development of the Delaware, operators have integrated
advanced drilling and completion technologies into vertical multi-zone completions and
horizontal applications. As such, activity in the Midland Basin has increased considerably
over the past few years, unlocking additional hydrocarbon volumes and opportunities for
greenfield activities in additional formations. Historically, the Spraberry was the most
frequent target for single stage completions, but with technological advances, including the
ability to drill deeper and more effective fracking techniques, the Wolfcamp zone has been
added as a primary target for horizontal development. The following sections examine the
development of horizontal drilling in the Midland with the central focus being on the
Wolfcamp in the southern and central portions of the basin.

Figure 16: Midland Basin Overview

Source: Concho Resources Company Presentation Howard Weil
Page 13 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Formation Focus: Midland Basin Wolfcamp

Formation Characteristics

The Wolfcamp formation is present across the entire Permian Basin; however, the Midland
Basin appears to offer the largest potential area for development. The Wolfcamp formation
in the Midland Basin extends from the NW in central Dawson and Gaines counties down to
Crockett County in the SE. Horizontally the Wolfcamp begins in eastern Andrews, Ector,
and Crane and extends eastward into Howard County on down. The formation is ~12,000’
in the deepest section in the central portion of the basin and gradually becomes shallower
as the trend moves to the southern extension in Crockett County, where the Wolfcamp
formation is less than 7,000’ in depth. Furthermore, as the trend moves towards the
Eastern Shelf the formation depth decreases to around 4,000’. Figure 17 (map below)
depicts the vertical depth of the target Wolfcamp formation across the basin, displaying the
current location of horizontal operating rigs as of November 2013 and identifies the
completed horizontal wells to date. The southern portion of the Midland has historically
hosted the majority of horizontal industry activity. However, operators are quickly moving
towards the central and northern areas. The primary effect of the depth of the formation in
the more central/northern portion of the basin is higher pressure in the target formation,
which yields stronger IP rates as well as slightly higher oil content. Additionally, while
determining the thickness of the Wolfcamp formation throughout the basin can be
challenging, recent operator activity suggests the formation may be thicker in central and
western Midland and Upton counties as well as eastern Reagan and Glasscock counties.

Figure 17: Target Wolfcamp Formation Midland Basin Activity

Source: Callon Petroleum Company Howard Weil
Page 14 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Area Overview: Southern Midland Basin Wolfcamp
Well Profiles & Field Characteristics

Figure 18: Southern Midland Wolfcamp Wells by Date

Source: DI Desktop & Howard Weil
** 2013 well data is as of 9/30/13

Overview: Horizontal drilling in the southern portion of the Midland Basin has focused
primarily in northern Crockett, Irion, Upton and Reagan counties. The preponderance of
wells drilled to date have targeted the Wolfcamp B formation with some operators also
testing the Wolfcamp A and C. The Wolfcamp D bench, or Cline Shale as it is often
referred to, is primarily targeted further north into Sterling and Glasscock counties. To date
there has been limited drilling of the D bench in the southern portion of the basin.
Additionally, the target Wolfcamp formation in the southern portion of the play appears to
be ~400-1,000’ thick with estimates for each bench ranging from ~200’- 400’ according to
multiple operators as Figure 19 depicts.

Page 15 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 19: Southern Midland Wolfcamp Formation Thickness

Source: Approach Resources Company Presentation

Given the shallower nature of the Wolfcamp in the Southern Midland Basin, drilling and
completion costs are notably less. As of 3Q13, we are seeing operators such as Approach
Resources, achieve drilling costs as low as ~$5.4 million per well, down from $6.7 million.
Conversely, the primary drawbacks to the southern portion of the play are the lack of
reservoir pressure and slightly lower oil content. The lack of pressure compared with the
more northern counties decreases the IP rates of the wells; however, the returns are not
vastly different between the different areas due to lower well costs and lower decline rates
in the southern portion of the basin.

Figure 20: Southern Midland Wolfcamp Production by County

Southe rn Midla nd W olfca mp W e lls

C o unty W e ll Count BOEPD * % Oil
71%
CRANE (TX) 6 213 72%
76%
CROCKETT (TX) 61 233 85%
65%
IRION (TX) 88 379 63%

REAGAN (TX) 35 269

SCHLEICHER (TX) 4 154

UPTON (TX) 28 359

Source: DI Desktop & Howard Weil
*BOEPD data is reflective of the 1stpractical month production levels

Page 16 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Well Profiles: Well profiles in the southern portion of the Midland have significant
variation as the trend moves from the shallower southern portion of the play around the
Crockett County line up to the deeper portion of the play in northern Upton and Reagan
counties. Operators are primarily targeting laterals of ~7,500 -8,500’ with some beginning
to experiment with longer laterals up to 10,000’ and multi-well pad drilling where leasing
units afford the opportunity. Figure 21 outlines our current well profile assumptions for
the Wolfcamp B in northern Crockett and the Wolfcamp A zone in northern Reagan. In
northern Crockett County, rates of return are estimated to be ~37%, which is aided by
existing infrastructure that helps reduce costs. Further north into the deeper portion of the
play in Reagan and Upton counties, operators are achieving larger IP rates in wells
targeting the A, B, and C benches of the Wolfcamp. Our Wolfcamp A type curve projects
a 47% rate of return.

Figure 21: Southern Midland Basin Wolfcamp Well Profiles

Southern Midland Basin HZ Wolfcamp Well Profiles

Metric WC "B" N. Crockett Co. WC "A" N. Reagan County

EUR (MBoe) 450 925

30-day IP (Boe/d) 550 832

Oil % 58% 57%

Cost ($mm) $5.4 $7.5

Spacing 120 160

TVD (ft) 5,900 - 6,300' 7,200 - 7,600'

Lateral (ft) 7,500' 7,500

Frac Stages 28+ 19.3

IRR 37% 47%

Source: Company Presentations & Howard Weil

Pad drilling and multi-well stacked laterals should help fuel the future development of the
Wolfcamp in the southern Midland by helping to reduce costs and increase efficiencies.
The stacked nature of the Wolfcamp benches in the Midland Basin creates an optimal
opportunity to exploit the benefits of the more efficient development. Industry has ample
rig/service supply to support the increase in pad drilling and is likely to head more in this
direction. As operators such as Approach Resources move into full development mode in
the play, stacked laterals targeting the multiple Wolfcamp benches could serve to drive
down costs and enhance returns in the play. We expect to see continued development via
pad drilling throughout the southern Midland and into the central and northern Midland
Basin once acreage held and operators have better understanding of the different zones
throughout their acreage. Approach (AREX), Pioneer (PXD), Apache (APA), and
Laredo (LPI) are the primary operators spear heading stacked lateral pad drilling in
the southern portion of the basin.

Page 17 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 22: Midland Basin Stacked Lateral

Source: Laredo Petroleum Analyst Day Presentation

Public Company Activity

Activity in the southern portion of the Midland Basin is primarily led by Apache (APA),
Approach (AREX), Devon (DVN), EOG Resources (EOG), Laredo (LPI), and Pioneer
(PXD). Additional independents public operators include Callon (CPE), Diamondback
(FANG), and BHP Billiton (BHP). Apache is currently running 9 rigs to drill ~93 wells
in 2013 and PXD/Sinochem are running 8 rigs to drill ~100 wells for the year and are the
most active operators in the play. Furthermore, AREX has the most leverage to the
southern portion of the Midland with all of its current and projected drilling currently
taking place in this area. AREX, which focuses its operations in northern Crockett County,
is currently running 3 HZ rigs to drill ~40 HZ Wolfcamp wells in 2013. Additionally
AREX is one of the first companies to enter into full development mode in the play reaping
the rewards of significant infrastructure spending that is allowing the Company to achieve
some of the lowest D&C costs in the basin at $5.4MM/well in 3Q13.

We expect Apache, Pioneer, Approach, and Laredo to continue leading the way in terms of
development of the southern Midland into 2014. Pioneer’s current drilling plans in its JV
will allow the Company to drill ~115 Wolfcamp wells while utilizing 8 horizontal drilling
rigs. The current drilling plan will focus two thirds of projected drilling in the Wolfcamp
B with laterals averaging 9,400’ and a large portion of the drilling program focusing on
pad drilling. LPI’s 2014 drilling should focus primarily on multi-well pad drilling both in
the southern and central portion of the Midland Basin. APA & AREX have yet to release
their 2014 Southern Midland Basin drilling programs; however, it is likely to consist of
developmental drilling in the three upper Wolfcamp benches using stacked laterals and
potentially some D bench tests in northern Reagan and Upton counties.

Page 18 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 23: Sothern Midland Wolfcamp Primary Operators

Source: DI Desktop & Howard Weil

Crockett and Irion counties represent the most heavily drilled areas in the Southern
Midland Basin. Laredo has some of the best acreage in the play in NE Reagan County
with a sizeable contiguous acreage block. This area has generated some of the largest
wells to date, with Laredo averaging a 30-day IP rate of ~885 Boepd on its first 25 Reagan
County Wolfcamp wells with the majority of those wells targeting the Wolfcamp A.
Additionally, Pioneer in southern Reagan, Apache & EOG in the Crockett/Iron counties
line, and AREX in northern Crockett have large contiguous acreage positions that have
yielded very competitive economics.

Emerging Trends: As was previously mentioned, multi-well pad development with the
potential for stacked lateral development ranks as the leading emerging trend in the basin.
AREX, PXD, APA, and LPI are the most active operators that are increasing multi-well
pad development. AREX’s aforementioned infrastructure improvements should also allow
the Company to ramp pad drilling in an effective manner in 2014 focusing a meaningful
portion of drilling on stacked laterals targeting the A, B, & C benches of the Wolfcamp.
Pioneer plans to continue to run its 8 rig HZ program in 2014 and utilize 3 well pads for
most of the program targeting all four Wolfcamp benches. Additionally we expect Apache
to continue running at least 9 HZ rigs in the play and like the other two operators, we
believe they will also focus on pad drilling, specifically in Irion County where the
Company is in full development mode. LPI also recently announced that their 2014
drilling program would consist of 60 laterals utilizing 20 multi-well pads targeting various
zones. However, a significant portion of these wells will be drilled in the central portion of
the basin in Glasscock County, as a meaningful portion their acreage expands beyond
Reagan County. Moreover, Laredo recently announced its’ first 3 well pad in northern
Reagan County that achieved a 3-stream 24-hour IP of 3,778 Boepd targeting the Upper,
Middle, & Lower Wolfcamp. The Laredo result is one of the first multi-well stacked
laterals specifically announced by an operator in the play to date.

Page 19 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 24: Southern Midland Basin Acreage Positions

Source: Approach Resources Company Presentation

The impact of pad drilling should have a significant impact on future drilling plans for the
previously mentioned operators, as well as others in the southern portion of the play. The
reason why operators are beginning to enter full development mode in the southern portion
of the play compared to the more northern counties is twofold: the first being that there
have been more wells drilled in this portion of the play and second, operators have less
fragmented acreage positions. These contiguous acreage blocks, as depicted in Figure 24,
allow operators to spend capital on infrastructure improvements that help drive down costs.
Pad drilling does create a more lumpy production profile but the improved efficiency and
economics trump these variances in production.

To date a large portion of the wells recorded on the Texas RRC have produced very
impressive IP rates, which has driven up expectations for the Midland, more particularly in
the central portion of the basin. A large portion of these wells drilled to date are considered
“virgin” wells as they are being drilled in very under developed horizontal areas leading to
higher IP rates because of increased pressure and lack of reservoir drainage. However, we
expect these well results will begin to revert closer to their type curves once operators start
to drill multiple well pads. We believe the main reasons for the reversion to be the density
of the wells on the acreage position, which will lower reservoir pressure, and the
cumulative draining of the reservoir from the nearby wells.

The southern portion of the Midland Basin has experienced more horizontal drilling than
the more northern counties. As operators begin to rapidly increase activity in the central
and northern portion of the Midland, we believe the southern portion of the play could
begin to become somewhat overlooked by investors. However, this portion of the play
should continue to yield very economic results and could provide investors some untapped
value with companies operating in these areas. The results coming out of the southern
portion of the play are not likely to match the “sexy” IP rates or potential returns of those
in the more northern counties. However, the southern portion of the basin should continue
to deliver very economic returns overtime as costs continue to trend downward and
takeaway capacity rapidly increases.

Page 20 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Area Overview: Central Midland Basin – The Heart of the Midland
The Central Midland Basin, outlined in Figure 25, has a long history of drilling for oil with
production dating pre-1950, but horizontal drilling is currently re-invigorating the play.
While horizontal data points are still in the early stages in the region. Initial results have
been very prolific in multiple pay horizons in the Wolfcamp. Operators are now testing the
Spraberry zones horizontally as well. The play is developing very rapidly with a potentially
staggering inventory emerging, and public operator stock prices have been top performers
in 2013.

Figure 25: Central Midland Basin Region

General Area of Central Midland Basin

Source: Howard Weil

While we are in the early innings of the region’s horizontal evaluation, the basin’s history
of vertical drilling is a major asset in the development of the horizontal play. Vertical well
logs are plentiful in the region, providing more initial data to work with versus other
emerging plays, and the basin’s operators are benefitting from high quality regional
reservoir mapping. This historical data should allow operators to move into full-scale
development mode quicker than other comparable play maturity cycles, assuming
infrastructure capacity is available to accommodate the ramp in production. We estimate
the region we define as the Central Midland Basin shown in the map above spans ~3,600
sq. miles.

In terms of stratigraphy, this region’s primary horizontal target zone is the thick Wolfcamp.
This zone thins in the middle or deepest part of the basin, becoming gradually thicker to
the east and quickly thicker to the west as shown in the cross-section below. The
Spraberry, possibly a shallower second horizontal target zone, is consistent in the middle of
the basin. In total, the Central Midland Basin could have up to 7 prospective zones
including 4 Wolfcamp zones, Lower and Middle Spraberry zones, and the Clearfork.

Page 21 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 26: Midland Basin Stratigraphic Map

Source: Pioneer Company Presentation

The Central Midland Basin has historically produced from vertical wells, which recently
have reached deeper and commingled production, primarily from the Spraberry and
Wolfcamp zones. Over the past several years, even deeper zones have contributed
including the Strawn, Atoka, and Mississippian in certain areas. As the focus has now
shifted to horizontal exploration and development, the primary initial target is the thick
Wolfcamp section with operators also beginning to test horizontal potential in the
Spraberry zones such as the Jo Mill. The general stratigraphy of the basin is shown in
Figure 27.

Figure 27: Midland Basin Stratigraphy

Source: Pioneer Company Presentation Howard Weil
Page 22 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Wolfcamp Formation Characteristics

The Wolfcamp zone in the Midland Basin ~1,500’ to 2,500’ and has attractive geologic
characteristics shown in the following table. Primarily, the reservoir consists of Permian
age organic shales with average net-to-gross pay of ~60%. Average porosity is 6% with
average TOC ~5.4%. The stacked pays yield an immense OOIP per section, which
compares favorably with other onshore oil basins. According to Pioneer Natural Resources,
the OOIP per section for the overall Wolfcamp Shale in the Midland Basin is 80 to 220
MMBo per section. The basin’s crude is an attractive 40-43 degree API gravity with
associated high-Btu gas. In total, the Midland Basin has been estimated to contain 50 BBoe
of recoverable resource from the Wolfcamp A, B, and D plus the Jo Mill with further
upside from the additional Spraberry zones, Strawn, Atoka, etc.

Figure 28: Midland Basin Wolfcamp Reservoir Characteristics

Source: Laredo Petroleum Company Presentation

Early Horizontal Wolfcamp Drilling Data

While the horizontal exploration and development in the Midland Basin began in earnest in
the southern extent of the region, operators have quickly moved further north, and with
even better initial results. From what we know now, the Central Midland Basin may
provide the best and most consistent horizontal well returns in the play, although we do not
fully know the areal extent and prospectivity for multiple zones. Figure 29 shows selected
horizontal wells in multiple Wolfcamp zones, which depict the early geographic
concentration and prolific results.

Page 23 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 29: Selected Horizontal Wolfcamp Wells

Source: Company reports and presentations

The history and evolution of drilling in this part of the basin yields important information
about horizontal prospectivity and the future potential of the play. Until recently, vertical
wells targeted the Spraberry with the completion stage count gradually increasing over
time. The Wolfcamp was not a primary target in vertical wells until the past decade when
operators began to understand the potential value from commingling the Wolfcamp with
the Spraberry zones. These recent deeper vertical wells were drilled in a circular fashion
around the basin, as shown in the next map, likely because this was the area with the
greatest combination potential from the Wolfcamp and the Spraberry. This drilling pattern
likely has three important consequences:

 Wolfcamp locations within the ring of drilling are likely not to have material
historic production from the zone

 Operators have less Wolfcamp well control within the ring

 The Wolfcamp zone could have different characteristics in this area, yielding
different inventory assumptions

While there are not many active permits to test this region horizontally, we hypothesize
that the wells could be very prolific due to the more-virgin nature of the Wolfcamp
reservoir, although the total well inventory is unknown. PXD plans to drill the region with
a couple of wells in 2014.

Page 24 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 30: Midland Basin Drilling History

Lack of historical Wolfcamp well penetrations

Source: IHS, Pioneer presentation

Horizontal Permitting

Permitting has accelerated in the Central Midland Basin as operators ramp activity testing
multiple zones, spacing assumptions, drilling and completion design, etc. Active horizontal
permits since 2010 are shown in the following map with most recent rig locations. PXD
has the most horizontal permits followed by APA, LPI, and FANG.

Figure 31: Horizontal Permits Since 2010

Source: DI Desktop & Howard Weil Howard Weil
Page 25 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Early Well Profiles & Field Characteristics

While it is still early in the evaluation phase and important characteristics such as areal
extent, optimal spacing, and total horizontal inventory remain unknown, we have enough
data to begin to make type well and economic assumptions. We list early public operator
assumptions in Figure 32, and it is apparent that these assumptions are trending towards
similar outcomes. Average EURs in the Wolfcamp A and B range from 600 to 925 MBoe.
There is more conflicting data about the Wolfcamp C and D (Cline) – some of this may
arise from the fact that different operators classify the zones differently; i. e. one operator’s
“Lower Wolfcamp” may include parts of another operator’s Wolfcamp B, C, and/or D.
Some operators separate the Wolfcamp D from the Cline shale while others use the two
names synonymously.

Figure 32: Horizontal Wolfcamp Well Profiles

Central Midland Basin HZ Wolfcamp Well Profiles

Metric LPI Cline LPI Upper WC FANG WC B PXD WC A&B
EUR (MBoe) 800
30-day IP (Boe/d) 796 925 600 900
Oil % 73%
Cost ($mm) 889 832 700 $8.0
Spacing 160
TVD (ft) 47% 57% 71%
Lateral (ft) 7,000 - 7,800
Frac Stages $8.4 $7.5 $7.3 7,000
IRR 30
160 160 160 60%

9,000 - 9,500' 7,200 - 7,600 7,800 - 8,100

7,500 7,500 7,500

26 19 28

33% 46% 35%

Source: Company presentations & Howard Weil

Well Evolution and Efficiencies

As much of the horizontal drilling so far in the Central Midland Basin has been
exploration, we have not yet seen what a true development program may look like.
However, because of the legacy of drilling in the region and very good log and core-driven
mapping, we expect operators will quickly move into a more optimal development mode.
Currently, the Wolfcamp has seen longer laterals with operator consensus around 7,000’ to
7,500’ lateral lengths. While this may continue to get longer, we think this is a reasonably
fair estimate of average lateral length going forward, possibly with some longer laterals
mixed in where lease parameters allow.

Operators in the region are also moving into more pad drilling. Currently, 2-well pads have
become more popular, and we expect the pad size to increase to 3-4 wells per pad in 2014.
Pad drilling allows for greater efficiency although results in lumpier production, especially
at the onset. LPI estimates efficiency gains of ~40 days for a 4-well pad (10 days per well
vs. individual drilling). Because of the potential benefit to operators, the higher spec rigs
with better walking/skidding capabilities should continue to gain market share from lower
spec rig classes. As time goes on, the batch drilling concept will likely become the norm
with operators trying to reduce mobilization times and using common drilling fluid
systems between wells.

Generally accepted spacing assumptions are 120-160 acre spacing equivalents per zone
(660’ lateral spacing), although operators in the more southern part of the Midland Basin
are now testing much tighter spacing. We expect that this trend will be similar for the
Central Midland Basin, and optimal spacing levels could be better known by the early/mid
2015.

Page 26 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

On the completion side, we expect central Midland horizontal wells will be able to take
advantage of some of the recent innovation in other oily shale plays. We are already seeing
operators begin to switch from premium proppants to sand where they do not see a
production uplift. The average completion is increasing in number of stages with ~250’ per
stage now popular. Proppant amounts are also on the rise with some operators pumping
250,000 pounds per stage. Perf clusters are becoming tighter with most operators using the
plug and perf method. Hybrid or slick-water fracs are most common, and zipper fracs are
showing positive initial results.

Upcoming Important Data

In 2014, we expect horizontal drilling activity in the Central Midland Basin to increase
dramatically. Operators are ramping up rig counts in the region, and by the end of 2014, it
is likely that the areal extent and core regions by section are much better known. In terms
of the meaningful data we are keeping an eye on, the following well results could be
forthcoming:

 ATHL 3 Wolfcamp A wells in Howard County (1H14) – could extend the
geographic boundary of positive well results to the east and north

 FANG stacked Wolfcamp B/Lower Spraberry laterals (1Q14)

 PXD additional Spraberry wells (1Q14)

 PXD wells further in the circular area where the least Wolfcamp data exists
(1Q14)

 SM wells in Andrews County

Other Zone Evaluation and Potential

The Spraberry and Clearfork sections, both shallower than the Wolfcamp, are currently
being evaluated as additional horizontal targets. In addition, deeper zones such as the
Strawn, Atoka, or Mississippian could provide future upside, although the depths and
higher well costs increase the exploration risk. To date, the Spraberry has been tested
horizontally with promising results considering the lower well cost. IP rates have ranged
from ~400 to ~700 Boepd with laterals from 2,500’ to 5,000’. We expect considerably
more data to emerge about Spraberry prospectivity in 2014, with the best areas likely in the
central part of the Midland Basin (east to west). The Clearfork is emerging as a potential
target zone with limited horizontal data to date. We expect that this zone will not be tested
in significant scale until late 2014/2015. Like the Wolfcamp, the classification of the
different benches within the Spraberry is not clear-cut and varies from operator to operator.
The lower Spraberry (or Jo Mill) has seen the majority of the activity so far with PXD, and
FANG leading the effort. While we do not spend much time in this report evaluating the
potential of non-Wolfcamp zones, this could add additional inventory, and we should know
more about the prospectivity over the next 12 months.

Public Company Activity

Independents dominate the operator activity in the Central Midland Basin thus far with
Pioneer Natural Resources having the largest acreage position in the region. Additional
active public operators with acreage in this region include Laredo Petroleum (LPI),
Diamondback Energy (FANG), Apache (APA), Athlon Energy (ATHL), Energen
Resources (EGN), SM Energy (SM), Concho Resources (CXO), Callon Petroleum
(CPE), LINN Energy (LINE), and Occidental Petroleum (OXY). The area we have
defined as Central Midland Basin houses a whopping 160 total rigs, of which 58 are

Page 27 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

horizontal. Pioneer is running the most rigs currently with 9 vertical rigs and 10 horizontal
rigs. Apache and Laredo are the second and third most active operators in this area of the
basin. We expect these same companies to continue to lead the horizontal exploration and
development in the region for the next several years, followed by a period of consolidation
once the ultimate inventory and economic value of the resource is better known.

Figure 33: Central Midland Basin Drilling Rig Activity

P ub lic T ota l HZ
Compa ny R ig s R ig s

PXD 19 10
APA 14 7
LPI 11 6
ATHL 9 1
CVX 9 9
OXY 9 5
CXO 7 3
FANG 6 5
EGN 6 3
DVN 3 1
CPE 2 2
COP 2 2
SM 2 2
EOG 1 1
W&T 1 0

Source: Drilling Info

Central Midland Basin Summary Findings

Based on the analysis we have completed to date, the Central Midland Basin is beginning
to take shape in terms of regional horizontal prospectivity. Activity in the region is
accelerating rapidly, and we should have a more complete view of the play by the end of
2014, including full evaluation of multiple Wolfcamp zone potential, optimal
spacing/D&C methodology, and an initial outline of Spraberry and Clearfork potential. In
general, the core Wolfcamp areas within the Central Midland Basin to date look to be the
eastern and western extents of the play. On the western side, the area from the bottom of
Midland County to the top of Martin County has seen prolific wells in multiple benches.
On the eastern extent, the east half of Glasscock and Reagan counties has also seen very
good results in all four Wolfcamp benches. Two areas we are watching closely in 2014
include the four-way intersection of Midland, Glasscock, Upton, and Reagan counties
where we have the least amount of data on the Wolfcamp due to historical drilling patterns.
The Wolfcamp section could be untapped in this region although we do not know the
inventory implications. Second, we expect near-term results from Howard County, which
we will compare to the rest of the play. Also, the Spraberry should see an increase in
exploration activity in 2014 and could provide even greater inventory. Drilling and
completion methods should become more efficient in 2014, leading to lower costs, better
efficiencies, and faster drilling times. At the end of the day, the results to date indicate that
this region could prove to be one of the best onshore oil plays in the U.S.

Page 28 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 34: Central Midland Basin Additional tests forthcoming
Positive Initial Results from Wolfcamp A, B, & D
Positive initial results
from Wolfcamp A, B,
C, & D

Not much Wolfcamp data to date, testing upcoming

Source: Howard Weil

Oilfield Services Overview

Rig Count
The most elemental method of constructing a view of the Permian from a service
standpoint is to first look at the rig count and mix of rigs working. Since the beginning of
2011, the Permian rig count has grown more than 25% (Figure 35), and now makes up
roughly 27% of the total U.S. rig count. The most meaningful change during this period
though has been the switching from vertical drilling to horizontal drilling with the
horizontal rig count growing over 250% from this point.

Figure 35: Permian Rig Count

600
500
400
300
200
100

0

02/04/11
04/04/11
06/04/11
08/04/11
10/04/11
12/04/11
02/04/12
04/04/12
06/04/12
08/04/12
10/04/12
12/04/12
02/04/13
04/04/13
06/04/13
08/04/13
10/04/13
12/04/13

Total Horizontal

Source: Baker Hughes Rig Count

Page 29 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 36: HZ Rig Count as Percent of Total

60%
50%
40%
30%
20%
10%

0%

02/04/11
04/04/11
06/04/11
08/04/11
10/04/11
12/04/11
02/04/12
04/04/12
06/04/12
08/04/12
10/04/12
12/04/12
02/04/13
04/04/13
06/04/13
08/04/13
10/04/13
12/04/13

Source: Baker Hughes Rig Count

As the horizontal rig count continues to grow, we would expect to see the service intensity
continue to increase as well. While an increase in activity is always welcomed, the flip side
for current market participants is that this uptick in horizontal drilling may also attract
more supply and greater competition, putting additional pressure on pricing and/or
utilization. We would note that it does not seem that this greater competition level has
materialized yet. With the Eagle Ford being so close geographically, there has been some
equipment moving to the Permian to help maintain utilization, but there has not been a
mass migration to the Permian from other basins or the appearance of new entrants en
masse. We suspect the competitive landscape in the Permian though is greater than in the
Bakken, for example, on the magnitude of ~3 competitors to 1. This is probably
exaggerated to some extent as a large number of service providers in the basin only do
vertical work, so looking at the more service-intensive horizontal providers the ratio could
be closer to 1.5 or 2 to 1. One barrier to entry that could keep many new companies from
entering the Permian is the labor supply. We hear service providers have difficulties adding
crews and even had to use commuter crews from other regions to be able to maintain their
24-hour pumping crews.

Land Drillers

As we look at our coverage universe and who has the largest exposure to the Permian, we
find that HP and PTEN have the most rigs drilling horizontal wells in the play (Figures 37
&38).

Figure 37: Horizontal/Vertical Split with Operator Market Share

Source: Drilling Info

Page 30 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 38: Rigs by Operator
60

50

40

30

20

10

0

HP PTEN NBR PDS PES UNT

Source: Drilling Info

We highlight the horizontal rig exposure because as this type of drilling continues to
expand, the demand for AC rigs in the region is likely to continue to grow. Figure 37, on
Page 30, shows what we believe is a highly fragmented market where ~46% of the
horizontal rig market is held by smaller operators. This type of market along with the ease
of moving rigs could cap regional dayrates for land drillers because of the amount of
competition.

As we have seen in other plays with similar maturity cycles, pad drilling is becoming more
prevalent in the Permian, and the demand for rigs with specialized pad movement
capabilities will likely continue to grow. The data points about rig movement capabilities
are sparse, making it difficult to get a true sense of how many rigs are actually drilling on
pads in the region. Many E&P companies are still in delineation mode in the basin, and we
believe that we are still 1-2 years away from full manufacturing mode.

After looking at initial high-level trends in the basin such as horizontal demand and the rise
of pad drilling, the supply/demand model within the region becomes more complex.
Operators are now able to drill more wells per rig as they move to pad drilling, yielding a
more efficient capital spending profile. However, the basin is not likely approaching the
inflection point yet when the horizontal rig demand stabilizes with growing efficiencies.
Even with this as a future possibility, as we move through 2014, we would expect to see
the horizontal rig adds keep up with the decline in vertical rig count. Looking at Figure 37,
the horizontal rigs already outnumber vertical rigs and this is likely to persist through the
year.

In addition to rig activity, it is also important to examine dayrate trends. There has been
very little change in rates between the different rig classes in the Permian over the past
couple of years. The average dayrates for the smaller (less than 1,000 horsepower rigs)
have declined about 1%, while the other two classes of rigs (1,000 hp / 1,500 hp) have seen
dayrates move up slightly (Figure 39).

Page 31 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 39: Historical Dayrates

$25,000
$20,000
$15,000
$10,000

$5,000
$0

Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13

500-999 HP 1,000 hp 1,500 hp

Source: Rig Data – Day Rate Report

Dayrates should be relatively flat going forward, assuming the current environment persists
for the two higher classes of rigs. This is despite our prediction for a slight increase in the
rig count because rig operators have the ability to move rigs relatively easily into the basin,
ultimately keeping pricing increases at bay. For the lower class rigs, a flattish dayrate
environment is plausible, but as most of these rigs are drilling vertical wells, competition to
maintain utilization may create some downward pressure on dayrates for this class.

Utilization since early 2012 (Figure 40), has seen little change within the two larger classes
of rigs, but a decent decline in the <1,000 HP class rigs. This trend is no surprise given the
switching from vertical to horizontal drilling, but the utilization in the <1,000 HP class has
held up slightly better than we would have initially thought with vertical rigs still useful for
leasehold purposes.

Figure 40: Utilization by Class

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

<1000 1000-1499 1500-1999

Source: Rig Data – Biweekly Report

As we dig a little deeper into the <1,000 HP class, the active rig count has declined ~40%
while the utilization rate has only dropped ~20% since early 2012 (Figure 41). This tells us
that as switching has taken place, rig operators have been removing these lower
horsepower rigs from the play in an attempt to keep supply/demand in balance. While that
appears to have helped maintain dayrates to some extent, the increased competition in these
lower horsepower rigs as we enter 2014 will keep continued pressure on that class’
performance metrics.

Page 32 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Figure 41: <1,000 HP Active Rig Count and Utilization 80%
70%
300 60%
250 50%
200 40%
150 30%
100 20%
10%
50 0%
0

Active Utilization

Source: Rig Data – Biweekly Report

For the higher horsepower rigs, particularly the 1,500 to 2,000 HP classes, utilization has
increased slightly while the active rig count has expanded over 140% since early 2012
(Figure 42). This signals that even though demand has been increasing in the basin,
operators have ample amount of flexibility within their fleets to keep supply in line with
demand. Again this is further support that the active rig count for the higher horsepower
rigs should continue to improve, but that overall utilization for this class of rig should
remain relatively stable in the mid to high 80% range.

Figure 42: 1,500 – 1,999 HP Active Rig Count and Utilization

140 100%

120 90%
80%

100 70%

80 60%
50%

60 40%

40 30%
20%

20 10%

0 0%

Active Utilization

Source: Rig Data – Biweekly Report

In summary, we would expect the horizontal rig count to exceed the vertical rig count at
some point in 2014, and feel that there is still opportunity for companies like HP, PTEN,
NBR, and PD to take market share with newer, higher horsepower AC rigs. We believe
that the sub 1,000 HP rigs should continue to engage in a knife fight to maintain utilization
and dayrates, while the higher horsepower rig count should increase with little inflection in
dayrates due to the ease of moving rigs in and out of nearby basins.

Page 33 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Pressure Pumping and Completion Work

Taking the next step down the service chain at least in terms of transparency, we examine
the stimulation and completion services landscape. Here, the Company-specific data points
are a little bit harder to come by, but by viewing the market in aggregate, we believe we
have a fairly good idea of its composition. We first tried to estimate how much horsepower
is currently available within the basin. After combing through data and talking with some
of our companies, we come to the conclusion that there is roughly 3 million horsepower in
the basin. One caveat is that with the Eagle Ford being so close in proximity and the ease
of moving pumping crews between the two, the actual amount of horsepower in each basin
at a given time could vary given the rig count and mix of work.

From a Permian horsepower perspective, we estimate that HAL has the number one market
share with about 400,000 hp, BHI has the number two market share with roughly 300,000
hp, and SLB would be number three in the basin. Even though the horsepower estimates
are round numbers and are fluid estimates, these are the three market share leaders in the
play, and should benefit the most given their presence and size.

One interesting thing to consider when looking at the completion work being done in the
Permian is whether lateral lengths become so long that a coiled tubing unit is no longer
viable, requiring a well servicing truck instead. The cut off for a 2 3/8” coiled tubing unit is
~7,500 lateral feet. In our estimation, ~50% of Permian horizontal locations will be able to
utilize coiled tubing units, while the remainder essentially needs a well service rig to do the
completion work.

Figure 43: Coiled Tubing Well Depth Capabilities

Source: SPN Presentation

While the basin is heading towards using longer lateral well designs, we get the sense
though that the majority of wells drilled today are still able to be completed with a 2 3/8”
coiled tubing unit and fall under that ~7,500 foot lateral cut off. The service providers in
the basin have implied that the coiled tubing business does very well and that only 10-15%
of the well service work done is completion work. Therefore, while part of the basin from a
technical standpoint needs to be completed with something larger than a 2 3/8” coiled
tubing unit, most the work that has been done thus far has not yet used lateral lengths that
would require switching to well servicing rigs.

Page 34 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Midland vs. Delaware
Similar to the migration of equipment and services between plays we see migration within
the Permian. There are two major basins, Midland and Delaware, where we expect to see
most of the migration. Consequently we compare the amount of horsepower, how many
frac stages, and the amount of proppant necessary per well.

The Midland has seen a significant increase in horizontal drilling over the past two years
while the total rig count has remained essentially flat, as many operators have begun
switching from vertical drilling. In contrast, the Delaware Basin has seen its horizontal rig
count additions be incremental to the total rig count.

Figure 44: Midland Rig Count

350
300
250
200
150
100

50
0

Total Midland Horizontal Midland

Source: Baker Hughes Rig Count, Howard Weil Research

Figure 45: Delaware Rig Count

200
180
160
140
120
100

80
60
40
20

0

Total Delaware Horizontal Delaware
Source: Baker Hughes Rig Count, Howard Weil Research

As we look at the Midland Basin, we would expect the horizontal rig count to continue to
expand as more operators look to unlock the value from the prolific Wolfcamp shale. The
Delaware Basin continues to see more horizontal adds and we would expect that to
continue. The leading edge for the amount of horsepower required within the Midland
Basin on a horizontal well is roughly 34,000-36,000 horsepower, with the Delaware Basin
needing slightly less at 28,000-30,000 horsepower per well. These numbers are larger than
previous levels and our expectations but are more likely leading-edge numbers. The
average for the overall basin is probably closer to 20,000 horsepower today. The difference
between leading edge and the average is largely due to the amount of vertical wells still

Page 35 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

being drilled in the basin, and these wells require much less horsepower than the horizontal
wells. In the Midland, the average stage count per well has increased nearly 50% over the
past year from 20-21 stages per well to around 30 stages per well. The Delaware Basin
does not require the intensity in stage count as most of these wells average 15 stages, but
this is still up from 10-12 stages a year ago. While both of these numbers are more likely
leading edge, the average stage count for the Permian Basin is likely around 20 per well.

Given the well depths and number of stages per well, this leads to the thought of a large
tonnage of proppant per well. For the Midland Basin, horizontal wells in the basin are
averaging 8-9 million tons of proppant per well, and the Delaware Basin averages roughly
3-3.5 million pounds. Most of this proppant demand is comprised of white sand with some
resin-coated sand usage as well. Some operators have discussed using brown sand in their
Permian wells because it is so readily available, but results show that while well costs do
come down, so do the long-term production levels. Looking at the possible demand
opportunities for white sand in 2014 for the Midland and Delaware basins, we present both
bullish and bearish cases below. The yellow in both boxes represents where we most likely
are today and what we would expect the next year to look like.

Figure 46: Midland Basin Proppant Demand

Source: Baker Hughes Rig Count, HW Research
Figure 47: Delaware Basin Proppant Demand

Source: Baker Hughes Rig Count, HW Research

While the supply of white sand in the Permian is very fluid, the increase in horizontal
drilling along with the continued discussion around pumping more sand per stage with
more stages per well should help create a tighter sand market come 2H14.

Page 36 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Crude Oil Infrastructure

Takeaway capacity for growing liquids production is an issue for all onshore producing
basins. Over the past few years, the balance between production and infrastructure capacity
in the Permian Basin has been a delicate one, causing differentials between Midland WTI
and Cushing WTI to widen considerably at times (Figure 48). As infrastructure constraints
lessen with new pipeline capacity coming on line we expect to see differentials narrow and
volatility to moderate. Ultimately, we believe the spot price in Midland will be set by
transport differentials to Cushing of ~$1/Bbl, although producers with capacity on
pipelines heading to the Gulf Coast will likely see higher realizations set by LLS.

Figure 48: Midland Differentials to Cushing and LLS

$2 Midland - Cushing Differential ($/Bbl) $0 Midland - LLS Differential ($/Bbl)
$0 Jan-11
($2J)an-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
($4) ($5)
($6) ($10)
($8) ($15)
($10) ($20)
($12) ($25)
($14) ($30)
($16) ($35)
($40)

Source: Howard Weil, Bloomberg

Total production out of the Permian Basin in ’13 is estimated at ~1.36MMBbl/d, compared
to takeaway capacity of just under 1.6MMBbl/d. Nearby refining capacity makes up ~25%
of current takeaway capacity at ~400MBbl/d, with the remainder on pipelines heading to
Cushing and the Gulf Coast (Figure 49) and a small amount of rail loading capacity. Over
the next 12-18 months, an additional 760MBbl/d of pipeline capacity is expected to come
on line, predominately heading to the Gulf Coast which should provide better netbacks to
producers than heading up to Cushing.

Figure 49: Pipeline & Refinery Locations

Source: Concho Resources Company Presentation Howard Weil
Page 37 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Rail capacity to the West Coast is a common theme we hear in the market, however we get
the sense producers are reluctant to commit volumes at this time given the outlook for
adequate pipeline capacity over the next few years, which comes at a much lower cost than
rail transport. Figure 50 below depicts expected production growth in the Permian in the
next few years compared to takeaway capacity. Unless production grows at a much faster
than anticipated rate, it appears pipeline capacity and nearby refiner demand will be more
than adequate to handle expected volumes. In this scenario, we see rail as more swing
capacity as needed, but not necessitating the build out of unit train facilities.

Figure 50: Forecast Production vs. Takeaway Capacity

Source: Laredo Petroleum Company Presentation

Page 38 of 82 Howard Weil

Permian Basin Company Updates

Anadarko Petroleum Corporation ..................................................40
Apache Corporation.......................................................................41
Approach Resources .....................................................................43
Athlon Energy ................................................................................45
Callon Petroleum Company...........................................................47
Chesapeake Energy ......................................................................48
Chevron .........................................................................................48
Cimarex Energy.............................................................................50
Concho Resources ........................................................................52
ConocoPhillips ............................................................................... 54
Devon Energy................................................................................55
Diamondback Energy ....................................................................56
Energen Corporation .....................................................................58
EOG Resources, Inc......................................................................60
Forest Oil Corporation ...................................................................61
Laredo Petroleum ..........................................................................62
LINN Energy / Linn Co...................................................................64
Matador Resources .......................................................................65
Occidental Petroleum Corporation.................................................67
Pioneer Natural Resources ...........................................................69
QEP Resources.............................................................................71
Quicksilver Resources...................................................................72
Range Resources..........................................................................73
Rosetta Resources ........................................................................74
Royal Dutch Shell ..........................................................................76
SM Energy.....................................................................................77
W&T Offshore................................................................................79
Whiting Petroleum .........................................................................80

January 27, 2014 The “New” Horizontal Permian Basin

Anadarko Petroleum (APC - $81.09 - SO)

Anadarko maintains a 330,000 net acre position in the Permian, concentrated in the
Delaware Basin in Loving, Ward and Reeves counties. Activity levels have increased, with
3Q13 net sales volumes of 17,000 Boepd, with liquids accounting for ~60% of produced
volumes. Figure 51 depicts Anadarko’s Permian Basin Acreage.

Figure 51: Anadarko’s Permian Position

Source: Anadarko Petroleum

Anadarko exited 3Q13 with 10 operated rigs across the basin: 2 in the Bone Spring, 2 in
the Avalon and 6 in the Wolfcamp. The Bone Spring/Avalon provide a strong base and the
emerging Wolfcamp serving as an exciting new avenue for APC to pursue to grow liquids
volumes in the basin. The Company currently estimates 1,000 Avalon locations and 200
Bone Spring drill sites, both of which have projected EURs of 400+ MBoe. Rates of return
in the Avalon and Bone Spring are projected at 47% and 34%, respectively. In the
emerging Wolfcamp play, as highlighted in Figure 52, Anadarko has completed six wells
to date which have achieved gross IP rates of 1,000-1,600 Boepd and 30-day rates of
greater than 500 Boepd. Given the current rig allocation, we anticipate additional
Wolfcamp results will be provided in subsequent earnings releases and will become a
larger focus for APC’s Permian operations.

Figure 52: Anadarko Wolfcamp Results

Source: Anadarko Petroleum Howard Weil
Page 40 of 82

January 27, 2014 The “New” Horizontal Permian Basin

Apache Corporation (APA - $82.42 - SP)

In the third quarter, Apache achieved a corporate milestone in the Permian, as over half of
the Company’s operated rigs are now drilling horizontal wells as opposed to the traditional
vertical program that defined APA for so many years. Furthermore, given the recent
divestiture of the GOM shelf assets, the sale of certain Canadian assets and the sell down
of interest in Egypt, Apache’s onshore U.S. programs in the Permian (along with the Mid-
Con) look to take on a more central role in growing oil and liquids volumes. With 1.6
million net acres and an estimated inventory of over 34,500 locations, Apache has
significant exposure to various regions within the prolific and reinvigorated Permian Basin.

Figure 53: Apache’s Permian Acreage

Source: Apache Corporation

Over the past few years, Apache has accelerated the exploration and development of
horizontal pay horizons in the Permian Basin, proving the concept in over 11 plays to date.
In 2013, the Company has targeted nine additional plays for horizontal potential. In the
Delaware, Apache will target the Avalon, 1st Bone Spring and Wolfcamp intervals while in
the Midland, the Company is pursuing the Lower Spraberry and Mississippian Lime.
Apache is also incorporating horizontal drilling in the Central Basin Platform.

In 3Q13, Apache’s Permian division drilled 155 net wells with a 45-rig program that
produced quarterly volumes of 131,665 Boepd (76% liquids). We expect Apache to have
maintained its 44-rig count in 4Q13, 23 of which will drill horizontal wells. Cost control
has served as a focal point for APA and the Company has diligently worked to reduce well
costs in the basin by decreasing drilling days and reducing frac costs.

Midland Basin Activity: In the Midland, 3Q13 activity highlights centered on the
horizontal Wolfcamp in the Barnhart area of Irion County, Reagan and Upton counties and
on the Cline Shale. In the Barnhart area, Apache is currently running a 6-rig program and
has drilled 56 net wells year-to-date. In Reagan and Upton, Apache has one rig operating in
each area targeting the Upper and Middle Wolfcamp. In the Cline, where APA maintains a
520,000 net acre position, the Company is operating three rigs to evaluate the pay horizon
potential across its acreage. Activity to date has been focused in the Deadwood area in
Glasscock County. In addition the its horizontal program, Apache controls ~625,000 net
acres in the Midland with vertical drilling potential – an estimated 17,800 locations with
1.7 BBoe of resource potential. The Company continues to focus on building inventory in
the Fusselman play and on high grading its Wolfwood locations.

Page 41 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Delaware Basin Activity: The Delaware serves as an emerging area for Apache. The
Company currently maintains a 287,000 net acres position with exposure to multiple pay
zones. Figure 54 overlays Apache’s Delaware acreage with peer activity. Apache is
currently operating two rigs in the Pecos Bend area of Loving and Reeves counties.
Drilling is targeting the third Bone Spring interval and the Upper Wolfcamp.

Figure 54: Delaware Basin Profile

Source: Apache Corporation

Other Activity: Aside from its holdings in the Delaware and Midland, Apache controls
meaningful acreage positions and strong production in both the Central Basin Platform and
the Northwest Shelf. While the CBP is often synonymous with repeatable vertical drilling
and enhanced oil recovery programs (i.e. waterflood and CO2) Apache is applying
horizontal technology to the CBP to further enhance its Permian program. Apache
estimates that it has 780,000 net acres with estimated 690 MMBoe of resource potential
from 9,800 locations. During 3Q13, three rigs spud a total of six horizontal wells in the
Three Bar Shallow Unit focused on the lower Wichita Albany landing zone. Results are
encouraging with 30-day IP rates of approximately 1,000 Boepd.

Northwest Shelf Activity: 70,000 acres in the Yeso with 1,800 locations. Continue to
drill with two vertical rigs and one hz rig.

Page 42 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Approach Resources (AREX - $20.32 - SO)

AREX is a pure play Permian operator with 95.5MMBoe YE12 proved reserves and more
than 149,000 largely contiguous net acres in the Southern Midland Basin in Crockett and
Schleicher counties and over 2,000 horizontal Wolfcamp drilling locations.

Figure 55: AREX Offset Operators

Source: Approach Resources Company Presentation

A Permian player dating back to 2004, AREX has drilled more than 600 Permian wells to
date, historically targeting deeper objectives such as the Canyon, Strawn and Ellenburger
zones via vertical developments. In recent years, the Company has moved uphole to target
the Wolfcamp and Clear Fork formations in its vertical wells, in addition to testing
horizontal zones in the Wolfcamp. Beginning in 2013 the Company began primarily
drilling horizontal wells and is currently running 3 HZ rigs targeting the Wolfcamp
formations with plans to complete ~40 HZ wells in its $300MM, 2013 capital program

AREX’s acreage is split into two named areas: Pangea (~147,000 gross acres), where the
majority of the Company’s activity to date resides, and Pangea West (~19,000 gross acres).
Since going public in 2007, the vast majority of the Company’s drilling has been in the
North Pangea area of its Southern Midland Basin acreage. The Company primarily drilled
vertical wells targeting the Wolfork formation up until 2011 and has since transitioned to a
horizontal developmental drilling program targeting the Wolfcamp formation.

AREX is one of first Company’s in Midland Basin to be in full HZ development mode and
is benefiting greatly on the cost side, as the Company’s average D&C cost per well during
3Q13 was only $5.4 MM, which is possibly the lowest in all the Permian moving towards
$5.1MM. A partial reason for the lower well costs however is that the Company is in the
more southern portion of the basin, where the target formations are shallower than in
counties like Midland and Glasscock. In addition, AREX’s acreage position yields a
gassier production mix than the more northern counties and in 3Q13 the Company realized
an oil cut of ~39%, which is much lower than other peer Midland Basin operators such as
FANG (75%) and LPI (49%) who operate primarily in the counties north of AREX’s core
acreage position. Despite the gassier production, the Company has still done an impressive
job of investing in infrastructure such as salt-water disposal systems and pipelines that
have aided the Company’s well cost reductions and reduced drilling days down to 12 days
in 3Q13. Additionally we expect oil volumes to move towards 50% of total production as
development mode builds a stable base.

Page 43 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

AREX’s is currently planning to continue running three horizontal rigs throughout 2014
and plans to drill ~75% more wells than during 2013 as a result of developmental drilling
and faster completion times. The Company recently completed its best HZ well to date in
central Pangea with an IP of 1,334 Boepd (76% oil) targeting the Wolfcamp B. The
Company has also recently seen an increasing number of its wells outperforming its 450
MBoe EUR type curve because of higher IP rates and shallower decline curves compared
with the Company’s base case models.

Figure 56: AREX’s Permian Position

Source: Approach Resources Company Presentation

AREX’s 2014 plan will continue to focus on development-drilling in its core northern
Pangea acreage in order to most effectively take advantage of its infrastructure investments
and keep costs trending lower while focusing on stacked horizontal targets with ~7,000’+
laterals.

Page 44 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Athlon Energy (ATHL- $28.83 - SO)

Athlon is a pure play Permian player that recently went public in August of 2013. The
Company has ~109,000 net acres in the fairway of the Midland Basin located primarily in
Howard, Midland, and Glasscock counties. At YE12, the Company had ~86.6 MMBoe of
proved reserves and 3Q13 production of ~13 MBoepd. Athlon’s acreage is split across
several counties throughout the Midland Basin including: Howard (52%), Midland &
Upton (~18%), Glasscock (~13%), Iron & Reagan (~8%), and Andrews & Martin (~8%).
As depicted in the map below, the majority of the drilling to date has focused on Howard,
Midland, and Glasscock and the Company plans to continue drilling heavily in these areas
in its newly initiated horizontal drilling program.

Figure 57: ATHL Acreage & Wells Drilled

Source: Athlon Energy Company Presentation

Athlon was formed in 2010 and up until its recent IPO had been an exclusively vertical
operator in the Permian having drilled >300 vertical wells to date with some of the best
vertical IP rates and EUR’s (~149 MBoe) in the basin. To date the Company has ~3,900
vertical drilling locations remaining, which are prospective for multi-formation
completions. The vertical program represents the core value of the Company as ATHL is
currently running 7 vertical rigs with plans to add an 8th rig in 2014. The Company has
been steadily improving operational results in vertical program since its inception and
currently has an average well cost of ~$2MM and a direct LOE/BOE cost of ~$7.19 in
3Q13.

The Company recently raised ~$296MM in its August 2013 IPO using a portion of those
proceeds to initiate a complimentary horizontal drilling program primarily targeting the
Wolfcamp formation. ATHL recently announced the first 2 Wolfcamp B well results in
Midland County from the Company’s recently initiated horizontal drilling program, which
produced very impressive IP rates. The first Wolfcamp B test achieved a 30-day IP rate of
~1,200 Boepd (77% oil) while the second test achieved a 20-day IP rate of 1,759 Boepd
(71% oil). In addition, ATHL has already drilled 2 Wolfcamp A wells in Glasscock
County and is beginning to drill the first of its 3 Wolfcamp A wells in Howard County.

Page 45 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

ATHL plans to continue running their current HZ rig throughout 2014 while adding
another HZ rig in 2Q14 to accelerate drilling in the Wolfcamp in Midland County. With
the success of offset operators and the Company’s first 2 successful tests in the area, it is
no surprise that Midland County will be the initial focus area for Athlon’s horizontal
program. However, the biggest long-term growth driver for the Company will be the
successfulness of HZ drilling in Howard County by both Athlon and the industry where
activity is picking up in both the Wolfcamp A and Cline formations. The only 30-day well
today is the Element Petroleum SFH Unit 23 #1H that achieved a 30-day IP rate of ~649
Boepd targeting the Wolfcamp A. We could receive results from several of the wells
below in the next couple of months in addition to Athlon’s first HZ wells sometime in late
2Q14 or 3Q14.

Figure 58: Howard County Offset operator Wells

Source: Athlon energy Company Presentation

Athlon’s 2014 drilling program has not yet been released; however, we predict it will be in
the range of $525 – 600MM, which the Company is more than capable of funding. ATHL
has ample liquidity with a newly increased borrowing base of $525MM and a debt to book
cap of only 45% and debt to market cap of ~15%.

Page 46 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Callon Petroleum (CPE- $6.66 - SP)

Callon Petroleum recently finalized the sale of its final offshore GOM & Haynesville
assets completing the Company’s transformation into a pure play Permian name. Callon
now holds ~35,000 net acres in the Midland Basin with ~13,300 net acres in the heart of
the Midland Basin fairway prospective for HZ drilling in the Wolfcamp and vertical
drilling in the Wolfberry. The transformation into a Permian player has greatly benefited
Callon shareholders by simplifying the story and improving execution in the Company’s
horizontal drilling program. The recent transaction along with the redemption of half of the
Company’s 13% senior notes has also greatly improved the Company’s balance sheet and
reduced its current debt to book cap to 22%.

CPE divides its Wolfberry/Wolfcamp plays amongst 7 fields in three different areas: the
southern, central, and northern Midland. The core proved value of the Company is its
vertical Wolfberry play in its southern and central Midland fields however, the majority of
the upside remains in the ongoing development of the horizontal Wolfcamp in this same
area in addition to some other zones (Spraberry, Cline, etc.) that the Company has yet to
test.

Figure 59: CPE Permian Field Locations

Source: Callon Petroleum Company Presentation Howard Weil
Page 47 of 82

January 27, 2014 The “New” Horizontal Permian Basin

CPE has made a strategical decision similar to that of many operators in the basin who are
choosing to focus primarily on horizontal drilling and development moving forward. The
Company plans to drill ~22 HZ wells and only 9 vertical wells in its $170MM revised 2013
CAPEX budget. The primary area of focus for Callon has been in its Southern Midland
Basin acreage where the Company currently has 11 HZ wells producing 3 flowing back
and 3 completing primarily targeting the Upper and Lower Wolfcamp B. The ~10,000 net
acres in the area are the most valuable for the Company as it has been largely de-risking by
both industry and Callon and represents ~311 of its remaining HZ drilling locations. We
are currently modeling a ~530 MBoe EUR type curve for the Upper Wolfcamp B in this
area with a ~$6.5MM well cost which generate IRR’s in the range of 35-50% in the current
commodity pricing environment. Callon is also becoming more active in the Wolfcamp
formation of its central Midland Basin position in Midland County where it is currently
drilling 2 Wolfcamp wells. The Company is taking a more passive role in its northern
Midland acreage, which is prospective for two horizontal Mississippian formations. There
has been limited industry activity in Borden and Terry counties but current results will not
influence the Company to redirect a substantial amount of capital from its southern and
central acreage.

Figure 60: CPE HZ Permian Inventory Breakdown

Source: Callon Petroleum Company Presentation

Callon plans to continue to focus on drilling and developing its southern acreage into 2014
probably running 3 HZ rigs however, the Company has not released its 2014 drilling
program. Investors are anticipating some type of acquisition from Callon during 2014 due
to management’s recent comments before and after the sale of its GOM Medusa asset. The
Company still has ~$42MM in net proceeds remaining from its asset sale and we could see
the Company being active in adding bolt on acreage or acreage in another area in the
Permian with a transaction likely not exceeding $200MM.

Page 48 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Chesapeake Energy (CHK- $26.88 - SO)

Seeking to reduce leverage, fund its capital program and reorganize the asset portfolio,
CHK has sold the majority of its assets in the Permian Basin. During the 2Q12 earnings
call the Company announced a transaction to sell producing assets in the Midland Basin to
EnerVest and in September of 2012, Chesapeake announced that it had entered into an
agreement to sell the majority of its remaining Permian assets to Shell and Chevron. In
total, the gross proceeds were $3.3 billion. The Company’s Southern Delaware Basin
acreage was sold to Shell while the northern Delaware acreage was sold to Chevron.
Following the completion of the transactions, which occurred in late October 2012, CHK
maintains ~470,000 net acres of undeveloped leasehold in the Midland Basin. We do not
anticipate that these assets will serve as a primary focal point for the Company and could
ultimately be sold to help the Company further reduce debt or provide additional cash to
fund ongoing operations in the core areas of the portfolio.

Chevron (CVX- $116.29 - SP)

Chevron is currently the second largest producer in the Permian Basin, with 119MBoepd
of production in ’12 and nearly 2MM acres under lease, including ~1MM acres in the
Delaware Basin. By ’17 the Company sees its net production in the Permian reaching
~175MBoepd, a CAGR of ~8%. For ’13 CVX planned to drill 340 gross wells in the
Midland Basin and 100 gross wells in the Delaware Basin, with 23 rigs running by YE.

Page 49 of 82 Howard Weil

January 27, 2014 The “New” Horizontal Permian Basin

Cimarex Energy (XEC- $98.52 - SP)

Cimarex has built a substantial position in the Permian Basin, having accumulated
~438,000 net acres to date. The majority of the Company’s position falls in the Delaware
Basin, though it also has a leasehold position in the Abo play in the Northwest Shelf. Aside
from the vertical Abo play, XEC’s most active plays in the Delaware Basin include a 2nd &
3rd Bone Spring play in central Eddy and Lea counties, a 3rd Bone Spring play in Ward
County, a 2nd Bone Spring in Culberson County, and Wolfcamp A,C, & D plays in
Culberson, Reeves, and Ward counties.

Figure 61: XEC Delaware Basin Acreage

Source: Cimarex Energy Company presentation

As the Company’s more mature Mid-Con. assets have entered into full development mode,
XEC’s Permian plays have shot to the forefront of the Company’s operational focus and
CAPEX spending. At 696.8 Bcfe, the Permian comprises 31% of XEC’s YE12 reserves
and at 352 MMcfe/d, it constituted 49% of the Company’s 3Q13 average daily production.
We are currently projecting a ~19% increase in Y/Y production from the Permian during
2014. Additionally, XEC currently plans to spend ~65% of its ~$1.6B CAPEX budget for
2013 in the Permian and $1.4B in total CAPEX in 2014.

XEC exited 3Q13 operating 12 rigs in the Delaware with 8 drilling the Bone Spring zones
and 4 drilling in the Wolfcamp. The Company also plans to bring 2 additional rigs down
from its Mid-Con operations sometime around YE13 to drill the Wolfcamp. The Company
is currently planning to drill ~140 gross Bone Spring wells in 2013 targeting the 2nd & 3rd
Bone Spring in Eddy and Lea counties, the 3rd Bone Spring in Ward County, and 2nd Bone
Spring in Culberson County. Additionally XEC has ~180,000 net acres prospective for
multiple Wolfcamp horizons including the A, C, & D benches of the play. The Company
has ~100,000 net acres in Culberson County and recently announced a JV with Chevron to
develop the area. XEC/CVX is already producing from the D & C benches of the
Wolfcamp and has begun testing the A Bench in Culberson. In Reeves County, the
Company has ~40,000 net acres and is primarily focusing on the Wolfcamp A where it has
two wells producing at an avg. 30-day rate of 925 Boepd (63% oil) in addition to a 10,000’
lateral well that produced a 30-day rate of ~1,816 Boepd. Finally, XEC continues to run 1
rig targeting the Wolfcamp A in the Company’s 32,000 net acres in Ward County.

Page 50 of 82 Howard Weil