CIBC Capital Markets - Real Estate Forums

CIBC Capital Markets - Real Estate Forums

CIBC Capital Markets - Real Estate Forums

CIBC Capital Markets Jon Morrison | +1 403 216 3400 | jon.morrison@cibc.com October 2018 FOR INSTITUTIONAL CLIENT USE ONLY. NOT FOR GENERAL DISTRIBUTION. See "Important Disclosures" section at the end of this report for important required disclosures, including potential conflicts of interest. See "Price Target Calculation" and "Key Risks to Price Target" sections at the end of this report, or at the end of each section thereof, where applicable. The Global Crude Markets Continue To Look Positive, But Canada Has Real Headwinds That Shouldn’t Be Overlooked Stronger-for-longer Oil Thesis Holds, But Canadian Diffs Will Remain Challenging

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Presentation Overview A Breakdown Of What Is Included In This Deck • The Global Crude Picture: A Look At Balances (Pages 3-24) • Battle Of The Barrels: A Look At Canada’s Unique Headwinds (Pages 25 – 33) − Canadian Supply/Demand: WCSB Production Versus Pipeline, Refinery And Rail Capacity (Page 30) − Crude By Rail: A Look At The CBR Loadings Needed To Clear The Market (Page 31) • IMO 2020: Road To Perdition? (Pages 34 - 37)

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Macro Commodity Outlook – Crude Crude – The Price Action Reflects Physical Realities… 2 Source: Bloomberg and CIBC World Markets Inc.

• The last year has been an interesting time for the global crude markets. • Despite some negative data points surrounding various macro events, the oil tape has largely ascended higher with each passing month and is showing ongoing support in the front-month price. • The back-end of the curve has also lifted and the backwardation in the structure has been a positive sign of near-term tightness. • December WTI barrels are trading in the low US$70s, while Brent is in the low US$80s. As such, the price action continues to reflect the ongoing acute tightening in the physical market that we have been emphasizing since H1/17.

$35 $40 $45 $50 $55 $60 $65 $70 $75 $80 1-Oct-17 1-Mar-18 1-Aug-18 1-Jan-19 1-Jun-19 1-Nov-19 1-Apr-20 1-Sep-20 1-Feb-21 1-Jul-21 Last Week (10/4/18) Current Week (10/11/18) High (Last Week (10/4/18)) Low (10/12/17) NYMEX WTI Futures Price (US$/Bbl) $35 $45 $55 $65 $75 $85 $95 1-Oct-17 1-Mar-18 1-Aug-18 1-Jan-19 1-Jun-19 1-Nov-19 1-Apr-20 1-Sep-20 1-Feb-21 1-Jul-21 Last Week (10/4/18) High (Last Week (10/4/18)) Low (10/12/17) Current Week (10/11/18) ICE Brent Futures Price (US$/Bbl) Brent Strip Pricing (Past 52 Weeks) WTI Strip Pricing (Past 52 Weeks)

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The Global Crude Picture: A Look At Balances

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Macro Commodity Outlook – Crude A Look At Balances 4 Source: Bloomberg and CIBC World Markets Inc. • As we have said for the past year, the market is tight. In fact, acutely so. • The chart on the right highlights forecasted global oil/liquids balances. • Although we would typically see an inventory build in the first quarter due to seasonal transportation demand and refinery turnarounds, that failed to materialize in Q1/18 due to the current undersupply situation. • This left the market as arguably being 300-500 MBbl/d tighter than where consensus expectations sat at the start of the year.

-1.8 -1.4 -1.0 -0.6 -0.2 0.3 0.7 1.1 1.5 1.9 2.3 85.0 87.0 89.0 91.0 93.0 95.0 97.0 99.0 101.0 103.0 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018E Q4 2018E Q1 2019E Q2 2019E Q3 2019E Q4 2019E Implied stock change and balance (right axis) (MMBbl/d) World production (left axis) (MMBbl/d) World consumption (left axis) (MMBbl/d) MMBbl/d MMBbl/d

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Macro Commodity Outlook – Crude OPEC Spare Capacity 5 Source: Bloomberg and CIBC World Markets Inc.

• Right now OPEC has ~2.0 MMBbl/d of spare capacity, which is defined as production that can come online within a month and be delivered for upwards of a year. • With that said, if Saudi Arabia needed to add another 1.0-2.0 MMBbl/d of output to the global market on a sustained basis, we believe it would require a 3-5 year investment cycle and likely represent more capital than the KSA would like to be deploying at this stage.

• In addition, spare capacity is typically tapped in times of unexpected outages and is unlikely to want to massively draw on this reserve supply just yet. In fact, if Saudi Arabia added ~650 MBbl/d of supply to the global market through Q1/19, it would take OPEC spare capacity as a % of global production to

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Macro Commodity Outlook – Crude Texas Output Will Remain Constrained Until H2/19 6 Source: Bloomberg and CIBC World Markets Inc. • The Midland differential continues to be volatile and will widen back out if output is increased in any marked way before takeaway capacity comes online.

• Given this, we view there to be the potential to see Permian activity levels contract in the coming months as there continues to be immense congestion in crude and gas takeaway capacity out of West Texas/New Mexico and that isn’t likely to change until H2/19.

• Thus, the Permian will add material growth in the next 3-5 years, but incremental adds within 12 months will be more muted. -$30 -$25 -$20 -$15 -$10 -$5 $0 $5 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 US$/Bbl WTI Midland - WTI Cushing Diff WTI Midland - Gulf Coast Diff

Macro Commodity Outlook – Crude Texas Output Will Remain Constrained Until H2/19 7 Source: Company reports, EIA, IEA, Bloomberg and CIBC World Markets Inc. 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Q1/18 Q2/18 Q3/18 Q4/18 Q1/19 Q2/19 Q3/19 Q4/19 Q1/20 Q2/20 Q3/20 Q4/20 2021E 2022E 2023E 2024E 2025E MBbl/d Permian Gulf Coast ("PGC") Pipeline EPD NGL Conversion Jupiter Gray Oak Expansion EPIC pipeline Cactus II Permian Express III phase 1 Sunrise Expansion BridgeTex Expansion Rail Existing Pipelines Capacity Local Refinery Demand Permian Crude Production Forecast

Macro Commodity Outlook – Crude 8 Source: Bloomberg and CIBC World Markets Inc. • The above chart highlights the acute market tightening that we have been empathizing since last April as it shows the relative changes in U.S. petroleum inventories, including crude and products. • As can be seen, upwards of 80 MMBbls of total petroleum inventories have now been pulled from U.S. storage tanks since the start of 2017 and U.S. crude inventories are now below the five-year average. • In addition, absent the large build in product inventories over the past six weeks due to robust refinery runs, we have seen a relentless draw across the petroleum complex for nearly two years.

(150) (100) (50) 50 100 150 200 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec US Crude + Product Inventories (MMBbl) 10 Year Range 10 Year Average 2016 2017 2018

Macro Commodity Outlook – Crude Crude – U.S. Inventory Levels Are Now Healthy… 9 Source: EIA and CIBC World Markets Inc. U.S. Crude Inventories U.S. Gasoline Inventories U.S. Distillate Inventories U.S. Jet Kerosene Inventories 250,000 300,000 350,000 400,000 450,000 500,000 550,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000s) Bbl 5-Yr Hi-Lo Range 2013-2017 Avg. 2016 2017 2018 180,000 190,000 200,000 210,000 220,000 230,000 240,000 250,000 260,000 270,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000s) Bbl 5-Yr Hi-Lo Range 2013-2017 Avg. 2016 2017 2018 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000s) Bbl 5-Yr Hi-Lo Range 2013-2017 Avg.

2016 2017 2018 30,000 35,000 40,000 45,000 50,000 55,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000s) Bbl 5-Yr Hi-Lo Range 2013-2017 Avg. 2016 2017 2018

Macro Commodity Outlook … And Look Even More Positive When Looking At Days Of Demand Cover 10 Source: Bloomberg, EIA and CIBC World Markets Inc. U.S. Gasoline Days Inventory U.S. Distillate Days Inventory U.S. Crude Oil Days Inventory 21 23 25 27 29 31 33 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Hi-Lo Range 5 Yr Avg 2018 2017 2016 2015 20 25 30 35 40 45 50 55 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Hi-Lo Range 5 Yr Avg 2018 2017 2016 2015 19 21 23 25 27 29 31 33 35 37 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Hi-Lo Range 5 Yr Avg 2018 2017 2016 2015

Macro Commodity Outlook Crude – OECD Inventory Levels Are Also Moving In The Right Direction… 11 Source: IEA and CIBC World Markets Inc. OECD Industry Crude Oil Inventories OECD Gasoline Inventories OECD Industry and Government Crude Inventories OECD Distillate Inventories 340 350 360 370 380 390 400 410 420 430 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MMBbl 5 Yr Range 5 Yr Avg. 2018 2017 2016 2015 900 950 1,000 1,050 1,100 1,150 1,200 1,250 1,300 1,350 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MMBbl 5 Yr Range 5 Yr Avg. 2018 2017 2016 2015 2,200 2,250 2,300 2,350 2,400 2,450 2,500 2,550 2,600 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MMBbl 5 Yr Range 5 Yr Avg.

2018 2017 2016 2015 450 500 550 600 650 700 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec MMBbl 5 Yr Range 5 Yr Avg. 2018 2017 2016 2015

Macro Commodity Outlook … And Also Look Even More Positive When Looking At Days Of Demand Cover 12 Source: IEA and CIBC World Markets Inc. OECD - Crude Oil Inventories Over Daily Demand OECD - Motor Gasoline Inventories Over Daily Demand OECD - Distillate Inventories Over Gasoil/Diesel Daily Demand 18 19 20 21 22 23 24 25 26 27 28 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Range 5-Yr Avg. 2018 2017 2016 2015 23 24 25 26 27 28 29 30 31 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Range 5-Yr Avg. 2018 2017 2016 2015 35 37 39 41 43 45 47 49 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Days 5-Yr Range 5-Yr Avg.

2018 2017 2016

Macro Commodity Outlook – Crude But U.S. Supply Is Returning To Growth… 13 • To be clear, U.S. crude production has material growth potential, but it will be bottlenecked until H2/19. 7,500 8,000 8,500 9,000 9,500 10,000 10,500 11,000 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Lower 48 Weekly Oil Production (MBbl/d) Source: IEA

Macro Commodity Outlook – Crude … But U.S. Decline Rates Are Relevant And Will Continue To Limit Some Of The Unfettered Growth 14 Source: IHS and CIBC World Markets Inc. • The trailing U.S. base decline rate has accelerated modestly in the past year, but continues to sit >30%. • Tight oil production from the U.S. Bakken, Eagle Ford, Niobrara and Permian plays are the core drivers behind this accelerating decline curve. • And, we continue to be of the view that it is a low- case probability that the entirety of ongoing global decline rates and rising global oil demand can be satisfied solely through short-cycle U.S.

shale growth.

Macro Commodity Outlook – Crude Permian Update 15 Source: IHS and CIBC World Markets Inc. • Permian well results continue to improve when one looks at just the straight peak IPs, IP90s, IP180s and IP365s. IP 90 By Month On-Production IP 365 By Month On-Production 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 100 200 300 400 500 600 700 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 GOR (Mcf/Bbl) Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d) Oil (Bbl/d) GOR (Mcf/Bbl) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 50 100 150 200 250 300 350 400 450 500 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 GOR (Mcf/Bbl) Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d) Oil (Bbl/d) GOR (Mcf/Bbl)

Macro Commodity Outlook – Crude Permian Update 16 Source: IHS and CIBC World Markets Inc. • But the positive rate of change diminishes once one normalizes for completion length. IP 365 By Month On-Production (Normalized by Completion Length) 50 100 150 200 250 300 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d per 1000 meters) Oil (Bbl/d per 1000 meters) Rolling 6 Month Average

Macro Commodity Outlook – Crude Permian Update 17 Source: IHS and CIBC World Markets Inc.

• It diminishes further if one normalizes for proppant loadings. • In fact, IP365s are slipping once normalizing for well size/proppant loadings. IP 365 By Month On-Production (Normalized by Proppant Intensity) 20 40 60 80 100 120 140 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d per 1000 tons) Oil (Bbl/d per 1000 tons) Rolling 6 Month Average

Macro Commodity Outlook – Crude Eagle Ford Update 18 Source: IHS and CIBC World Markets Inc. • Eagle Ford well results also continue to improve when one looks at just the straight peak IPs, IP90s, IP180s and IP365s. IP 90 By Month On-Production IP 365 By Month On-Production 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 100 200 300 400 500 600 700 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 GOR (Mcf/Bbl) Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d) Oil (Bbl/d) GOR (Mcf/Bbl) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 50 100 150 200 250 300 350 400 450 500 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 GOR (Mcf/Bbl) Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d) Oil (Bbl/d) GOR (Mcf/Bbl)

Macro Commodity Outlook – Crude Eagle Ford Update 19 Source: IHS and CIBC World Markets Inc. • But the positive rate of change diminishes once one normalizes for completion length. IP 365 By Month On-Production (Normalized by Completion Length) 50 100 150 200 250 300 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d per 1000 meters) Oil (Bbl/d per 1000 meters) Rolling 6 Month Average

Macro Commodity Outlook – Crude Eagle Ford Update 20 Source: IHS and CIBC World Markets Inc.

• It diminishes further if one normalizes for proppant loadings. • In fact, IP365s are slipping once normalizing for well size/proppant loadings. IP 365 By Month On-Production (Normalized by Proppant Intensity) 20 40 60 80 100 120 140 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Cal Day Production (All Products; Boe/d) Month On Prod Gas (Boe/d per 1000 tons) Oil (Bbl/d per 1000 tons) Rolling 6 Month Average

$0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E WCSB Oil Sands Capital Spending ($ Billions) 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 2,200,000 2,400,000 2,600,000 2,800,000 Brazilian Crude Production (Bbl/d) Macro Commodity Outlook – Crude Outside Of The U.S. There Are Few Other Supply Growth Markets Expected In 2018 - 2020 21 Source: CAPP, PSAC, IHS, ANP, company reports and CIBC World Markets Inc. Canada • Canadian oil sands spending declined for the third consecutive year in 2017, with total annual capex expected to be down nearly 60% from the 2014 peak.

• Although there were eight projects sanctioned in 2016, this was materially below the recent annual growth trend. Brazil • Following three years of robust production adds from pre-salt development, Brazil’s growth is likely to stall out in 2018 with 10% Y/Y and forward development plans require greater capital spending, which will be a challenge for Petrobras given its tight balance sheet and debt repayment plans.

Macro Commodity Outlook – Crude Crude – Other Key Global Supply Markets 22 • Iran: Iran has shown material growth since the original sanctions have been lifted, but the country needs material investments to continue its growth.

• Specifically, there are critical investments needed in energy infrastructure and oilfield services capacity - both of which are challenged in the current macro environment and further handicapped by the current U.S. Administration. Incremental U.S. sanctions only deteriorate this outlook. • Mexico: Production continues to fade every month, with base spending and activity levels being materially below the level needed to have flat output. • Other Offshore Mega Projects Are Largely Shelved: GoM is completing the last major project sanctions. North Sea is fairly lethargic outside UK maintenance work and offshore Africa is largely at a standstill.

Source: Energy Intelligence and Pemex

Macro Commodity Outlook – Crude Other Key Global Supply Markets 23 • Venezuela: The geopolitical risk in Venezuela continues to deteriorate by the day. January crude output sat at ~1.5 MMBbl/d and current production may be closer to 1.3 MMBbl/d or 1.4 MMBbl/d, or perhaps even lower. This very unfortunate situation is driving downside risk to global supply balances and should the current state of the union continue, there is considerable upside risk to global oil prices. • Colombia: Capital spending levels and development plans have been materially trimmed in the face of trailing oil price volatility and there is no reason to believe upward momentum is on the come, from a country-wide perspective.

• Markets That Will Grow Outside Of North America: Kuwait, Kazakhstan, Russia and possibly Iraq, depending on IOC development plans. Source: Energy Intelligence and OPEC

Macro Commodity Outlook – Crude 24 Source: Bloomberg and CIBC World Markets Inc. • Further, we have highlighted this multiple times in the past, but we’ll harp on it once more. While the forward strip is a great tool to hedge risk as either a producer or consumer of crude/products, it’s a poor predictor of forward prices. • In fact, the long-term correlation between the forward strip looking 12 months ahead and realized crude prices over the past 20 years has an R2 of 0.17.

But to be honest, we probably didn’t even need to run that statistical analysis.

$0 $20 $40 $60 $80 $100 $120 $140 $160 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 $US/Bbl Jan. 2016 May. 2014 May. 2012 Jan. 2009 Dec. 2004 Dec. 2007 Dec. 2008 Dec. 2014 Sept. 2017 Sep.2018 Jun.2018 Mar. 2017 Dec. 2003

Battle Of The Barrels: A Look At Canada’s Unique Headwinds

Battle Of The Barrels: A Look At The Price Action 26 • Canada light and heavy oil diffs have been both under pressure and volatile lately. • Specifically, Ed Par/Mixed Sweet Blend (MSW) pricing has moved from trading at a traditional ~US$4/Bbl discount relative to WTI and a ~US$6/Bbl discount relative to U.S.

Gulf Coast prices to recent peaks of ~US$33/Bbl and ~US$40/Bbl over the past month, respectively. • We have also seen Canadian Synthetic Crude Oil (SCO) move from historically pricing in line to a modest premium to WTI, to a peak discount of US$31/Bbl in the past week.

• Western Canadian Select (WCS) pricing has also moved from trading at a traditional ~US$15/Bbl discount relative to WTI to a recent peak of ~US$50/Bbl over the past week. • Naturally, these spreads will tighten up as select PADD II refineries move out of maintenance in the coming weeks, but there are structural takeaway capacity issues that shouldn’t be glazed over.

Battle Of The Barrels: A Look At The Price Action 27 Source: Bloomberg and CIBC World Markets Inc. • This price action can be seen in the spreads to the right. • Despite a robust global market, Canadian crude prices have been collapsing.

YTD North American Crude Benchmarks (US$/Bbl) $20 $30 $40 $50 $60 $70 $80 US$/Bbl Ed Mixed Sweet Syncrude Blend Western Canadian Select West Texas Intermediate YTD Canadian Crudes Relative To MEH (US$/Bbl) ($60) ($50) ($40) ($30) ($20) ($10) $0 $10 US$/Bbl Ed Mixed Sweet - MEH Syncrude - MEH WCS - MEH YTD Canadian Crudes Relative To LLS (US$/Bbl) ($70) ($60) ($50) ($40) ($30) ($20) ($10) $0 $10 US$/Bbl Ed Mixed Sweet - LLS Syncrude - LLS WCS - LLS YTD Canadian Crudes Relative To WTI (US$/Bbl) ($60) ($50) ($40) ($30) ($20) ($10) $0 $10 US$/Bbl Ed Mixed Sweet - WTI Syncrude - WTI WCS - WTI

Battle Of The Barrels: U.S. Refinery Maintenance Has Been An Issue 28 Source: Bloomberg and CIBC World Markets Inc. • It’s important to note that some of this Canadian price action is driven by U.S. refinery turnarounds caused by seasonally reduced physical demand for Canadian barrels. • Specifically, BP Whiting (~413 MBbl/d nameplate) will be off until later this week. Marathon’s Detroit (~139 MBbl/d nameplate) is set to come back online today. And Holly Frontier’s El Dorado refinery (~160 MBbl/d nameplate) will be offline until mid- November.

• As such, while some price reprieve is on the way, there are also structural issues working against Canada.

Battle Of The Barrels: U.S. Refinery Maintenance 29 Source: EIA, Bloomberg and CIBC World Markets Inc. • Despite this negative price action and the decline in demand for Canadian crude feedstock into the U.S. refining market, Canadian flows into PADD II and III remain steady. • And it isn’t resulting in any material outsized ballooning in crude stocks in these storage markets. Specifically, U.S. crude export draws have remained healthy while U.S. production is starting to flat line due to crude takeaway challenges.

PADD 3. U.S. Gulf Coast Crude Inventories 120000 140000 160000 180000 200000 220000 240000 260000 280000 300000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec (000s) Bbl 5-Yr Hi-Lo Range 2013-2017 Avg.

2016 2017 2018

Battle Of The Barrels: Structural Takeaway Capacity Issues Exist 30 Source: CAPP, NEB, geoSCOUT, company reports and CIBC World Markets Inc. • Within the exhibit above, we stack our current base and bull-case WCSB production forecasts along with those of the CAPP against current and forecasted WCSB takeaway capacity. As can be seen, the market looks very tight. 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2017A 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E MBbl/d Other Proposed Pipelines (Keystone XL and TMX) Enbridge Line 3 Replacement Enbridge Mainline Optimization + BEP Repurposing Rail Existing Pipelines Western Canada Refineries WCSB Crude Supply (CAPP Forecast) WCSB Crude Supply (CIBC Forecast) CIBC Crude Supply (Bull Case)

Battle Of The Barrels: A Look At CRB Needed To Clear The Market 31 Source: NEB, Bloomberg, CN, CP, CAPP, company reports and CIBC World Markets Inc. • Moreover, as we highlight in the exhibit above, we believe the industry is going to need to materially ramp CBR loadings over the coming six months. This will include the need to take CBR shipments to a level that we have never seen before. • And while we take comfort that Canada should be running upwards of ~450 MBbl/d of CBR loadings by 2018 YE based on comments from CP and CN, the margin for error is small and the industry will need to exercise extreme pragmatism in not overproducing, even under our dampened growth expectations.

-$48 -$44 -$40 -$36 -$32 -$28 -$24 -$20 -$16 -$12 -$8 -$4 $0 50 100 150 200 250 300 350 400 450 500 550 600 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 WCS - WTI Diff ($/Bbl) CBR Loading (MBbl/d) High Case CBR Loadings Needed Base Case CBR Loadings Needed Low Case CBR Loadings Needed Actual CBR Loadings Expected CBR Export Capacity by ~2018 YE WCS - WTI Diff (RHS) WCS - WTI Diff Strip (RHS)

Battle Of The Barrels: Key Takeaways 32 • Canada can no longer be a growth market until long-term egress issues are achieved: The reality is that we do not believe individual Canadian company growth plans are achievable in the context of the current takeaway constraints. Simply said, we believe producers will need to shut in production to keep the spreads reasonable at various points in time over the coming year. • This comes despite field-level economics likely still indicating that it makes sense to keep drilling and adding output for select companies in select plays.

• Canadian producers will need to be logical and pragmatic: While we are operating under the assumption that companies will be rational when it comes to a decision of maximizing production versus cash flow, this is effectively a game of “prisoners dilemma” and sometime prices need to do all of the work before the industry responds as it should.

• With that said, as we witnessed from Cenovus in H1/18, should the diff blow out and it makes sense to dial back production by 1%-2% to increase cash flow by 5%-10%, we believe the latter should take place, eventually.

• Canadian light volumes face other headwinds: The MSW/SCO barrel has rising competition from the Permian, Oklahoma, Rockies and U.S. Bakken, which all sell into the PADD II/PADD III market and are ramping up production. And until there are enhanced egress options to move more production from these markets (particularly the Permian) to the Gulf Coast, this will create crude-on-crude competition that is likely to remain in place for upwards of the next 18 months. • MSW volumes are also being backed out of WCSB refineries: There is ~760 MBbl/d of nameplate refining capacity in Western Canada, of which upwards of 75% of the historical feedstock that has typically been run through these facilities is a Canadian light barrel (i.e., a MSW type of grade).

But these refineries are consistently trying to increase running synthetic or heavy oil sands barrels in order to maximize profits and have strong physical integration with their upstream output.

Battle Of The Barrels: Key Takeaways 33 Source: Bloomberg and CIBC World Markets Inc. • A look at the path forward: • Limit unfettered Canadian light volume growth and be cognizant of these structural issues ahead. • Wait for full Enbridge Mainline expansion/optimization to unfold. • Look at alternative markets to clear output at this juncture, including using CBR into the Eastern Canadian refining market to back out international imports and then into the U.S. Gulf Coast – although there will likely be export bottlenecks arriving due to export capacity. • The industry needs to push other long-term ways to get more production to tidewater.

2015 - Present Brent - Ed Mixed Sweet (US$/Bbl) $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 US$/Bbl Series1 Brent Ed Mixed Sweet Brent‐MSW Diff (US$/Bbl)

IMO 2020: Road To Perdition?

IMO 2020: The Regulation Will Challenge Heavy Sour Pricing, But The Canadian Large-caps Should Fare Well 35 Source: Bloomberg and CIBC World Markets Inc. • We believe IMO 2020 has the potential to be one of the larger events in the oil market this decade. The regulation will have broad impacts on pricing for various crude slates and will require tens of billions of dollars of capex to be spread across the refining and maritime shipping industries. Depending on how industry responds to the price action that follows, it also has the potential to cause material inflation globally as middle distillates are effectively the lifeblood of the global economy.

If left unchecked, rising diesel prices will act as a tax on economic growth and come with negative consequences. • Although the regulation does not officially take effect until January 1, 2020 and the global shipping industry will likely continue to burn high sulphur fuel oil (HSFO) in vessels until New Year’s Eve 2019, the spot market for HSFO will drop like a stone before this date. Specifically, anyone that traffics or trades in the HSFO market will be keen to destock their inventories and offload their exposure before the music stops on January 1, 2020. This price action can already be seen in the forward curve between diesel and HSFO, but likely has further to go from here (see the below exhibit).

20 40 60 80 100 120 140 160 180 200 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Jan-24 US$/Bbl Fuel Oil (3.5% Sulphur) Fuel Oil Futures Diesel (ULSD) Diesel (ULSD) Futures Heavy Fuel Oil vs. ULSD Diff ($/Bbl) Although the HSFO futures market is showing a ~US$20/Bbl decline over H1/19 - Q1/20, we believe more pressure is set to arrive...

IMO 2020: The Regulation Will Challenge Heavy Sour Pricing, But The Canadian Large-caps Should Fare Well 36 • The key thing to note is that it would be a mistake to take the simplistic view that the regulation will be negative for heavy sours and neutral for everything else. As we have been harping on for the past 18 months, the global oil market has been going through an acute tightening and after years of delivering a number of large global supply projects that were sanctioned prior to the H2/14 downturn, the forward landscape for incremental production growth around the world is soft outside of the U.S.

in 2020+ and that is not going to change anytime soon, in our view. • The reality is that the world is longing for more crude and while one impact of IMO 2020 will be price dislocation for heavy sours, the market will still need every one of those barrels to keep clearing the market in order to keep the world’s crude supply and demand in some form of a relative check. While heavy sour diffs will widen on the back of IMO 2020, the global reference point will also rise and it’s not inconceivable (maybe even fairly likely) that pricing for WCS and other heavy sour grades will actually increase on the back of the regulation in absolute terms.

As such, should the equity markets start to massively discount Canadian heavy oil and oil sands producers as we march into H2/19 and those producers have solid market access to keep clearing their production (i.e., like the vast majority of Canadian Large-caps/Integrateds have), then that might end up presenting a solid buying opportunity for such equities. • Within our Canadian Large-cap E&P and Integrateds coverage universe, there will be varying degrees of impact from the implementation of IMO 2020. Specifically, we would highlight that we expect the regulation to likely be the most positive for Imperial, Suncor and Husky, then less positive for Cenovus and Canadian Natural (but still likely a positive tailwind for both companies) and then neutral to possibly somewhat negative for MEG, on a relative basis.

IMO 2020: The Regulation Will Challenge Heavy Sour Pricing, But The Canadian Large-caps Should Fare Well 37 Source: Company reports and CIBC World Markets Inc. The exhibit below highlights the 2020 directional impact that a US$1/Bbl wider WCS-WTI diff, a US$1/Bbl increase in the WTI price and a 5% widening in crack spreads would have to each company’s cash flows. You’ll notice there isn’t a legend here and there is good reason for this – this isn’t a linear relationship and we didn’t want to publish a thousand different sensitivities, but felt the chart below gives a better directional read on how to think about impacts outside of our base-case forecasts, which naturally incorporate our IMO 2020 and other market views.

Price Forecast 38 Source: Company reports and CIBC World Markets Inc. 2018E 2019E 2020E Current Current Current Crude Oil Brent (US$/Bbl) $74.00 $85.00 $85.00 Brent - WTI Differential (US$/Bbl) ($5.50) ($10.00) ($9.00) WTI Oil (US$/Bbl) $68.50 $75.00 $76.00 WTI - Ed. Par Differential (US$/Bbl) ($7.86) ($11.00) ($8.75) Forex - US$/C$ $0.780 $0.780 $0.780 Ed. Par (C$/Bbl) $77.74 $82.05 $86.22 Light Heavy Differential vs. C$ WTI ( 36%) (36%) (39%) Light Heavy Differential vs. US$ WTI (US$/Bbl) ($25.00) ($27.00) ($30.00) Western Canada Select (C$/Bbl) $55.77 $61.54 $58.97 Natural Gas NYMEX (US$/Mcf) $3.04 $2.69 $2.62 NYMEX - AECO Differential (US$/Mcf) ($1.79) ($1.55) ($1.50) AECO 30+ Day Spot (C$/Mcf) $1.60 $1.46 $1.44 Dawn Gas (US$/Mcf) $3.02 $2.59 $2.52 Dawn Gas Premium/(Discount) to HH (US$/Mcf) ($0.02) ($0.10) ($0.10) Station 2 Gas (US$/Mcf) $1.18 $0.99 $0.98 Station 2 Gas Premium/(Discount) to HH (US$/Mcf) ($1.87) ($1.70) ($1.65) Chicago Gas (US$/Mcf) $2.91 $2.54 $2.48 Chicago Gas Premium/(Discount) to HH (US$/Mcf) ($0.13) ($0.15) ($0.15) Sumas Gas (US$/Mcf) $2.23 $1.94 $1.88 Sumas Gas Premium/(Discount) to HH (US$/Mcf) ($0.81) ($0.75) ($0.75) Malin Gas (US$/Mcf) $2.48 $2.09 $2.03 Malin Gas Premium/(Discount) to HH (US$/Mcf) ($0.57) ($0.60) ($0.60) Waha Gas (US$/Mcf) $2.32 $2.19 $2.13 Waha Gas Premium/(Discount) to HH (US$/Mcf) ($0.72) ($0.50) ($0.50)

1 I Oil Update - October 18, 2018 I IMPORTANT DISCLOSURES: Analyst Certification: Each CIBC World Markets Corp./Inc. research analyst named on the front page of this research report, or at the beginning of any subsection hereof, hereby certifies that (i) the recommendations and opinions expressed herein accurately reflect such research analyst's personal views about the company and securities that are the subject of this report and all other companies and securities mentioned in this report that are covered by such research analyst and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by such research analyst in this report.

Analysts employed outside the U.S. are not registered as research analysts with FINRA. These analysts may not be associated persons of CIBC World Markets Corp. and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Potential Conflicts of Interest: Equity research analysts employed by CIBC World Markets Corp./Inc. are compensated from revenues generated by various CIBC World Markets Corp./Inc. businesses, including the CIBC World Markets Investment Banking Department.

Research analysts do not receive compensation based upon revenues from specific investment banking transactions. CIBC World Markets Corp./Inc. generally prohibits any research analyst and any member of his or her household from executing trades in the securities of a company that such research analyst covers. Additionally, CIBC World Markets Corp./Inc. generally prohibits any research analyst from serving as an officer, director or advisory board member of a company that such analyst covers.

In addition to 1% ownership positions in covered companies that are required to be specifically disclosed in this report, CIBC World Markets Corp./Inc. may have a long position of less than 1% or a short position or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. Recipients of this report are advised that any or all of the foregoing arrangements, as well as more specific disclosures set forth below, may at times give rise to potential conflicts of interest.

Oil Update - October 18, 2018 Important Disclosure Footnotes for Companies Mentioned in this Report that Are Covered by CIBC World Markets Corp./Inc.: Stock Prices as of 10/18/2018: Canadian Natural Resources Ltd.

(2a, 2b, 2g, 7) (CNQ-TSX, C$37.31) Cenovus Energy Inc. (2g, 7, 9) (CVE-TSX, C$11.29) Husky Energy Inc. (2g) (HSE-TSX, C$19.83) Imperial Oil Limited (2g) (IMO-TSX, C$43.96) MEG Energy Corp. (2g) (MEG-TSX, C$10.79) Suncor Energy Inc. (2a, 2e, 2g, 7) (SU-TSX, C$47.17) Important disclosure footnotes that correspond to the footnotes in this table may be found in the "Key to Important Disclosure Footnotes" section of this report.

Oil Update - October 18, 2018 Key to Important Disclosure Footnotes: 1a CIBC WM Corp. makes a market in the securities of this company. 1b CIBC WM Inc. makes a market in the securities of this company. 1c CIBC WM Plc. makes a market in the securities of this company. 2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months. 2b CIBC World Markets Corp. has managed or co-managed a public offering of securities for this company in the past 12 months.

2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.

2d CIBC World Markets Corp. has received compensation for investment banking services from this company in the past 12 months. 2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months. 2f CIBC World Markets Corp. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.

2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3a This company is a client for which a CIBC World Markets company has performed non-investment banking, securities-related services in the past 12 months. 3b CIBC World Markets Corp. has received compensation for non-investment banking, securities-related services from this company in the past 12 months. 3c CIBC World Markets Inc. has received compensation for non-investment banking, securities-related services from this company in the past 12 months.

4a This company is a client for which a CIBC World Markets company has performed non-investment banking, non-securities- related services in the past 12 months. 4b CIBC World Markets Corp. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 4c CIBC World Markets Inc. has received compensation for non-investment banking, non-securities-related services from this company in the past 12 months. 5a The CIBC World Markets Corp. analyst(s) who covers this company also has a long position in its common equity securities. 5b A member of the household of a CIBC World Markets Corp.

research analyst who covers this company has a long position in the common equity securities of this company.

6a The CIBC World Markets Inc. fundamental analyst(s) who covers this company also has a long position in its common equity securities. 6b A member of the household of a CIBC World Markets Inc. fundamental research analyst who covers this company has a long position in the common equity securities of this company. 7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.

Oil Update - October 18, 2018 Key to Important Disclosure Footnotes: (Continued) 8 An executive of CIBC World Markets Inc.

or any analyst involved in the preparation of this research report has provided services to this company for remuneration in the past 12 months. 9 An executive committee member or director of Canadian Imperial Bank of Commerce (“CIBC”), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., or a member of his/her household is an officer, director or advisory board member of this company or one of its subsidiaries.

10 Canadian Imperial Bank of Commerce ("CIBC"), the parent company to CIBC World Markets Inc. and CIBC World Markets Corp., has a significant credit relationship with this company. 11 The equity securities of this company are restricted voting shares. 12 The equity securities of this company are subordinate voting shares. 13 The equity securities of this company are non-voting shares. 14 The equity securities of this company are limited voting shares.

Oil Update - October 18, 2018 V CIBC World Markets Corp./Inc. Price Chart For price and performance charts required under NYSE and NASD rules, please visit CIBC on the web at http://apps.cibcwm.com/pricecharts/ or write to CIBC World Markets Corp., 425 Lexington Avenue, New York, NY 10017 (212-856-4000) or CIBC world Markets Inc., 161 Bay Street, 4th Floor, Toronto, ON M5H 2S8, Attn: Research Disclosure Chart Request.

CIBC World Markets Corp./Inc. Stock Rating System Abbreviation Rating Description Stock Ratings OP Outperformer Stock is expected to outperform similar stocks in the coverage universe during the next 12-18 months.

NT Neutral Stock is expected to perform in line with similar stocks in the coverage universe during the next 12-18 months. UN Underperformer Stock is expected to underperform similar stocks in the coverage universe during the next 12- 18 months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted (due to potential conflict of interest) from rating the stock. Stock Ratings Prior To December 09, 2016 SO Sector Outperformer Stock is expected to outperform the sector during the next 12-18 months. SP Sector Performer Stock is expected to perform in line with the sector during the next 12-18 months.

SU Sector Underperformer Stock is expected to underperform the sector during the next 12-18 months. NR Not Rated CIBC World Markets does not maintain an investment recommendation on the stock. R Restricted CIBC World Markets is restricted (due to potential conflict of interest) from rating the stock. Sector Ratings (note: Broader market averages refer to S&P 500 in the U.S. and S&P/TSX Composite in Canada.) O Overweight Sector is expected to outperform the broader market averages.

M Marketweight Sector is expected to equal the performance of the broader market averages. U Underweight Sector is expected to underperform the broader market averages. NA None Sector rating is not applicable. "Speculative" indicates that an investment in this security involves a high amount of risk due to volatility and/or liquidity issues.

Oil Update - October 18, 2018 VI Ratings Distribution*: CIBC World Markets Corp./Inc. Coverage Universe (as of 18 Oct 2018) Count Percent Inv. Banking Relationships Count Percent Outperformer (Buy) 159 47.6% Outperformer (Buy) 142 89.3% Neutral (Hold/Neutral) 155 46.4% Neutral (Hold/Neutral) 131 84.5% Underperformer (Sell) 8 2.4% Underperformer (Sell) 8 100.0% Restricted 11 3.3% Restricted 11 100.0% *Although the investment recommendations within the three-tiered,relative stock rating system utilized by CIBC World Markets Corp./Inc.do not correlate to buy, hold and sell recommendations, for the purposes of complying with FINRA rules, CIBC World Markets Corp./Inc.

has assigned buy ratings to securities rated Outperformer, hold ratings to securities rated Neutral, and sell ratings to securities rated Underperformer. The distributions above reflect the combined historical ratings of CIBC World Markets Corp. and CIBC World Markets Inc. Ratings Distribution: Energy Coverage Universe (as of 18 Oct 2018) Count Percent Inv. Banking Relationships Count Percent Outperformer (Buy) 35 50.7% Outperformer (Buy) 35 100.0% Neutral (Hold/Neutral) 29 42.0% Neutral (Hold/Neutral) 28 96.6% Underperformer (Sell) 2 2.9% Underperformer (Sell) 2 100.0% Restricted 3 4.3% Restricted 3 100.0% Important disclosures required by applicable rules can be obtained by visiting CIBC World Markets on the web at http://researchcentral.cibcwm.com/.

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