ELM RIDGE ON ENERGY - ValueWalk RIDGE ON ENERGY February 2016 . ... Saudi/Iraq Increase YoY 400 Iran YoY 450 Rest of OPEC YoY ... Liquids Supply, kbd

ELM RIDGE ON ENERGY February 2016

February 2016 1 ELM RIDGE

Please see Elm Ridge Disclosures on Slide 25.

What We Think

Oil is unlike other commodities because it depletes and requires constant reinvestment

Depressed prices will hit future supply. US production has begun to fall

and will leave the world undersupplied by mid-2016 Higher oil prices are needed to incentivize enough new production to

meet demand

Price, not economic growth, has a greater impact on trend demand Our holdings have enormous upside

How Did We Get Here?


Lower For Longer?



U.S. Shale – Quicker Payback, Faster Declines

Quicker payback periods and easy credit drove the shale boom



The U.S. Would Have Eclipsed Saudi Arabia By 2016

Estimated Production as of Fall 2014 2010 2011 2012 2013 2014 2015 2016E

U.S. Crude Production, kbd 5,476 5,636 6,475 7,452 8,705 9,435 10,200

Global Liquids Production, kbd 87,418 88,670 90,930 91,350 93,740 96,205 96,970

U.S. Crude Market Share % 6.3% 6.4% 7.1% 8.2% 9.3% 9.8% 10.5%

Saudi Arabia Crude Market Share % 9.3% 10.2% 10.5% 10.3% 10.2% 9.9% 9.8%

Note: Saudi Arabia market share is based on their maintaining flat production in 2015 & 2016

Source: IEA, EIA, Elm Ridge Analy sis



That Did Not Sit Well With The Saudis

Saudi Arabian production, level since 2012, jumped 800kbd, but has since flattened

1Q-14 2Q-14 3Q-14 4Q-14 1Q-15 2Q-15 3Q-15 4Q-15

OPEC Crude Production (kbd)

Saudi Arabia 9,467 9,483 9,617 9,530 9,770 10,290 10,270 10,160

Iraq 3,297 3,333 3,217 3,480 3,500 3,940 4,240 4,240

Iran 2,810 2,827 2,780 2,800 2,820 2,850 2,870 2,890

Rest of OPEC 14,427 14,453 14,913 14,700 14,410 14,420 14,360 14,380

Total 30,000 30,097 30,527 30,510 30,500 31,500 31,740 31,670

Saudi Arabia Market Share % 10.3% 10.2% 10.2% 10.0% 10.3% 10.7% 10.6% 10.5%

Source: IEA

2014-2015 Liquids Supply/Demand (kbd)

2014 Excess Production 948

2015 Demand Grow th (1,788)

Saudi Arabia YoY Increase 593

Iraq YoY Increase 650

Rest of OPEC YoY change (103)

Non-OPEC, Non-US YoY change 445

U.S. Grow th 880

2015 Excess Production 1,625

Source: IEA



Investment Has Been Slashed

U.S. Activity Continues To Fall All Basins Are Down

Non-U.S. Spending Will Decline In Consecutive Years For The First Time Since 1986



Yet U.S. Production Grew As Prices Fell

Drilling appears profitable at low prices



An Economic Slowdown Could Kill Demand

The market fears a repeat of 2008-09



And The Stocks Do Not Look Cheap

1. The sector has traded below this range in only 6 out of the last 80 quarters through 2014; Bernstein Research, “North American E&P: Understanding Upstream Enterprises”, dated February 19, 2015



But…



While GDP vs. Demand Looks Like A Pretty Picture



OECD Demand Is Price Elastic

Demand Fell Despite a Strong Economy

Changes in Prices Produce Changes In Trend Demand



Non-OECD Consumption Just Grows

You don’t re-steel a building but you do refill a car



Producing Oil Is Not Like Turning A Faucet

It Takes Time To Get Oil Out of The Ground U.S. Producers Scaled Back To Their Best Rigs

The Gulf of Mexico Grew As Multi-Year Projects Came Online



U.S. Production Is Declining We analyze production by basin based on operating rigs, production per rig, and estimated decline rates

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

ER Eagle Ford Forecast

Total Crude Production (kbd) 889 1,004 1,115 1,165 1,278 1,410 1,501 1,592 1,683 1,620 1,528 1,362 1,240 1,163 1,097 1,045

Pre 2013 Wells 613 548 532 493 446 405 414 336 404 487 409 334 286 276 263 246

1Q13 277 166 118 100 87 78 71 65 60 56 53 50 47 44 41 39

2Q13 290 183 129 110 95 85 78 71 65 61 57 54 51 48 45

3Q13 282 167 119 101 87 79 72 66 60 56 53 50 47 44

4Q13 276 187 130 110 95 86 78 71 65 61 58 54 51

1Q14 330 195 139 118 102 92 84 77 71 66 62 59

2Q14 406 245 173 147 127 115 105 96 88 82 78

3Q14 349 199 143 122 105 95 87 79 73 68

4Q14 449 282 198 169 146 132 120 110 100

1Q15 316 127 81 69 59 54 49 45

2Q15 200 77 50 43 37 33 30

3Q15 242 89 58 50 43 39

4Q15 168 62 41 35 30

1Q16 131 48 32 27

2Q16 101 38 25

3Q16 87 33

4Q16 86

Est. New Well Production (30-day IP Rate) 549 583 508 521 545 660 531 698 546 406 682 676 670 626 618 618

Source: EIA and Elm Ridge Analysis

1Q-15 2Q-15 3Q-15 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16

Crude Production (kbd)

Bakken 1,221 1,223 1,209 1,159 1,105 1,045 991 947

Eagle Ford 1,683 1,620 1,528 1,362 1,240 1,163 1,097 1,045

Haynesville 56 56 54 53 52 52 52 52

Marcellus 53 55 55 53 51 49 48 47

Utica 58 69 73 76 77 76 75 74

Niobrara 468 482 474 433 406 388 372 360

Permian 1,795 1,911 1,953 2,007 2,036 2,025 1,992 1,965

Total Shale 5,334 5,414 5,346 5,142 4,967 4,799 4,627 4,490

Total U.S. Crude (excl. NGLs) 9,485 9,496 9,430 9,331 9,058 8,795 8,672 8,490


And These Declines Will Accelerate

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

ER Permian Forecast

Total Crude Production (kbd) 1,281 1,326 1,373 1,417 1,507 1,579 1,656 1,775 1,795 1,911 1,953 2,007 2,036 2,025 1,992 1,965

Pre 2013 Wells 1,134 1,047 982 944 877 867 816 764 738 732 708 672 640 612 583 546

1Q13 148 99 81 72 66 62 58 55 51 48 46 43 40 38 36 34

2Q13 180 110 91 81 74 70 66 62 58 55 51 48 46 43 40

3Q13 200 134 109 97 89 83 78 74 70 65 62 58 55 51

4Q13 177 125 100 89 82 77 72 68 64 60 57 53 50

1Q14 250 167 136 121 111 104 98 92 87 82 77 72

2Q14 212 136 111 99 91 85 80 75 71 67 63

3Q14 262 158 130 116 107 100 94 89 83 78

4Q14 336 208 170 152 140 131 123 116 109

1Q15 241 204 162 143 131 122 115 108

2Q15 241 163 132 117 108 101 95

3Q15 241 163 133 118 108 101

4Q15 261 173 141 125 115

1Q16 245 161 131 117

2Q16 200 131 106

3Q16 168 112

4Q16 166

Est. New Well Production (30-day IP Rate) 243 274 317 283 395 335 385 471 449 452 547 602 593 562 541 541




Yes, Some Drilling Is Profitable At $40…

…But Not Enough



Even The Operators Agree

Occidental Petroleum, 10% of the mighty Permian, has less than 15% of its acreage economic below $50 (with depressed service costs)



Even With Iran, Supply Will Fall Short In 2016

Iranian production will require significant time and investment and will not be enough to offset declines elsewhere

Outside of Iran, OPEC is nearing its theoretical production capacity

2015-2016 Liquids Supply/Demand (kbd)

2015 Excess Production 1,600

2016 Demand grow th (1,500)

Saudi/Iraq Increase YoY 400

Iran YoY 450

Rest of OPEC YoY (100)

Non-OPEC, Non-US YoY (550)

U.S. YoY (at current rig count) (1,000)

2016 Shortfall (700)

Source: IEA, Elm Ridge Analy sis



(More Stats)

Growth in Canada offset by declines in Mexico

Petrobras has lowered production targets 2x in last year

The world will be short oil in 2016, accelerating through the 2nd half of the year

2014 2015 2016E

Liquids Demand, kbd

United States 19,103 19,510 19,698

Other North America 5,030 4,965 4,918

Europe 14,058 14,365 14,498

Fomer Soviet Union 4,920 4,860 4,984

China 10,615 11,250 11,600

Middle East 8,050 8,165 8,374

ROW 31,018 31,465 32,004

Total 92,793 94,580 96,077

Liquids Supply, kbd

United States 11,990 12,870 11,818

Other North America 7,090 6,975 6,916

Fomer Soviet Union 13,870 13,980 13,703

Brazil 2,350 2,528 2,622

OPEC NGLs 6,500 6,598 6,750

OPEC 30,980 32,023 32,643

ROW 20,960 21,233 20,932

Total 93,740 96,205 95,384

Net Supply Balance 948 1,625 (693)



The Futures Curve Is Only A Reflection Of Today’s Price

It has been a bad indicator of future oil prices



Leading E&Ps May Not Be Cheap, But Ours Are

While E&P crowd favorites trade on average at 9x EBITDA assuming $60 oil, ours trade at 4x

1. The sector has traded below this range in only 6 out of the last 80 quarters through 2014; Bernstein Research, “North American E&P: Understanding Upstream Enterprises”, dated February 19, 2015



Averages (1995-2014) ER Holdings 14.7% S&P 500 13.8% E&P Favorites 11.7%

These Are Good Businesses

And Ours Are Just As Good



We’d Rather Own Our Stocks Than Oil

Our holdings offer significant upside vs. the commodity

Note: Stock return is calculated using a steady-state oil price, assumes production costs rise with that steady-state oil price and a 6x EBITDA multiple



“Be Fearful When Others Are Greedy.

Be Greedy When Others Are Fearful.”

― Warren Buffett



Elm Ridge Disclosures

Any projections, targets, or estimates in this report are forward looking statements and are based on Elm Ridge's research, analysis, and assumptions made by the Adviser. All expressions of opinions are subject to change without notice. Due to various risks and uncertainties, actual events, results or the actual performance of the investments may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this Presentation may be relied upon as a guarantee, promise, assurance or a representation as to the future. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.


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ELM RIDGE ON ENERGY - ValueWalk RIDGE ON ENERGY February 2016 . ... Saudi/Iraq Increase YoY 400 Iran YoY 450 Rest of OPEC YoY ... Liquids Supply, kbd