3 January 2018 HY Corporate Credit HY Multi Sector,Media. Cable & Satellite Natural Gas - normal winter key to absorb coming production surge Flat production mid exports supported gas prices in 2O17 After two consecutive years of gas prices well below $3, the US gas market is set to end 2017 above the $3 mark, but just barely. Despite a second consecutive mild winter for the record books. S/D dynamics have turned more supportive, steadily whittling down an inventory surplus through most of 2016 and ultimately turning it into a modest deficit by mid-November '17. At the start of the 2016 injection season, working gas storage stood at 2.5 Tcf, 874 Bcf higher (or 54% higher) than the 5-year average. A year later, the inventory levels had come down to 2.1 Tcf, only 265 Bcf or 15% higher than the 5-year. By mid-November, inventory levels had turned into a deficit of 121 Bcf (or 3% lower). Two factors have driven this turnaround. First, production has been largely flattish over the last two years - EIA estimates that dry gas production in FY 17E would grow by just 1% YoY despite weak 2016 comps (-2% YoY). Second, export growth has been impressive at +2.3 Bcfld YoY, taking out an additional -840 Bcf of supply for the year. The pipeline exports have seen a robust increase in recent years, but more notable in 2017 was the sharp ramp up in the LNG export market (+1.4 Bcfld YoY). !Figure 4. US working natural gas star zKie Working gas in underground storage compared with the 5-year maximum and minimum tiliontutsickei 4.400 4.000 34600 3.200 2,800 2.400 2,000 1.600 1.200 800 400 0 Ott-16 Jan-16 Apr-16 Jul-16 Oct•16 Jan•17 Apr-17 Jul•17 Oct-17 Steal maximise - nirimumr8846 ••••••LOwer 48 -Scar average Seen* US Caney 1000mboii Adrnmo•trfil.ur ea' A mixed start to 2017-18 winter season drives a volatile gas market Since the start of the year, the outlook for 2018 gas price has been constructive - in the very relative sense of a