IADC Drilling Onshore Conference 5/19/16 · IADC Drilling Onshore Conference 5/19/16 ......

IADC Drilling Onshore Conference 5/19/16

James C. West +1 212 653-9047 [email protected]

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Global Market Outlook

2

Agenda

Setting the Stage

Near-Term Fundamentals

U.S. Land – Why It Will Recover First and the Recovery We Envision Global Recovery

Conclusions

3

Setting the Stage

4

Longer-Term E&P Spending Outlook

Global E&P spending fell by ~30% in 2015 to approximately $560 billion For 2016 we expect spending to decline ~50% in NAM and ~20% Internationally We believe oil services investors should increase exposure to the space ahead of

the bottom in the capex cycle

Source: Company reports, EVR ISI Research

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Actual Estimates

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Global Production Is Declining Our analysis of ~200 companies is mostly derived from company guidance figures Our 2015 y/y production increase of 6.8% for the US is ~150 bps below the official EIA 8.3%

y/y increase which may provide downside (greater declines) to our expected 2-4% North American production decline.

Our overall prediction for ~560 kbpd of production declines is in line with the IEA's projection for non-OPEC supply to decline to 57.0 mmbpd this year from 57.7 mmbpd last year.

As demand improves by ~100,000 boepd per month on average this year, the rebalancing of physical supply and demand is coming into balance. The longer under-investment continues, the more physical damage is done to oilfields and the longer the eventual upcycle will be as reinvestment is needed to yield constant output.

Source: Company reports, EVR ISI Research

Region2014

Production (Mboepd)

2015 Production (Mboepd)

Y/Y +/- (Mboepd)

2014 vs 2015 % Change in Production

2016E Production (Mboepd)

Y/Y +/- ($MM)

2015 vs 2016E %

Change in Production

2014 vs 2016E %

Change in Production

U.S. 15,263 16,295 1,032 6.8% 15,920 (375) -2.3% 4.3%Canada 4,113 4,228 115 2.8% 4,077 (151) -3.6% -0.9%International 5,459 5,702 243 4.4% 5,666 (36) -0.6% 3.8%Total 24,835 26,225 1,390 5.6% 25,662 (563) -2.1% 3.3%

2014-2016E Production (Mboepd) - Regional Breakdown

6

Sentiment Remains Poor, But Is Improving

Source: EVR ISI Research

Institutional Equity Energy Allocations are the 2nd lowest of all groups compared to historical averages and long only funds remain underweight. We consider poor sentiment a leading positive stock market indicator. Buy when there’s blood in the streets.

Sector rotation has begun with hedge funds increasing net position to +30%

versus -11% in late’ 14 .

Sector Over Under Net Position Historical Avg Difference +/- Std. DevTechnology 74% 13% +61% +40% +21% 20%Cons. Staples 26% 35% -9% -21% +12% 15%Financials 36% 55% -19% -27% +8% 16%Telecom 26% 61% -35% -42% +7% 8%Industrials 43% 30% +13% +11% 2% 17%Materials 23% 41% -18% -19% 1% 13%Cons. Discretionary 43% 35% +8% +9% -1% 15%Util ities 5% 77% -72% -68% -4% 8%Energy 22% 43% -21% +3% -24% 14%Healthcare 23% 43% -+20% +11% -31% 10%

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Energy Net Position OSX

Sector Over Under Net Position Historical Avg Difference +/- Std. DevCons. Discretionary 27% 36% -9% -33% +24% 27%Technology 50% 10% +40% +22% +18% 21%Telecom 40% 10% 30% 15% +15% 17%Materials 40% 30% 10% +7% 3% 18%Util ities 25% 25% 0% -1% +1% 15%Energy 50% 20% +30% +31% -1% 24%Healthcare 33% 11% +22% +36% -14% 19%Cons. Staples 30% 20% +10% +32% -22% 21%Financials 18% 55% -37% -6% -31% 24%Industrials 18% 36% -18% +13% -31% 21%

Hedge Fund Sector Allocation

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E&P Bankruptcies

Source: EVR ISI Research; Haynes and Boone, LLP

69 North American O&G Producers, representing $34.4 billion in debt, have filed for bankruptcy since the beginning of 2015.

27 occurred this year and the month of April represented both the highest number of filings (11 total) and total debt ($14.9 billion).

8

E&P Redeterminations

Source: Haynes and Boone, LLP

Tracking 29 companies, we calculate the aggregate borrowing base fell by 19%, in line to slightly better than market expectations.

Market Expectations: Survey of 150 lenders and operators conducted in January; Lenders expected 70% of borrowing bases to decrease by average of 25%; Borrowers expected 67% of their borrowing bases to decrease by average of 28%. JP Morgan (late February): Expects revolvers to contract by 15%-25% Wells Fargo (early February): Expects borrowing base availability to fall by 10%-20% Wells Fargo (1Q Conference Call): 25% of borrowing base redeterminations have been completed;

50%-60% of borrowers have seen a reduction while 25% of clients have seen no change. WFC is using a price deck 20% lower than when borrowing bases were last redetermined in the fall.

Regulators and investors are pressuring lenders to reduce risk and exposure to

O&G

9

E&P Redeterminations


Rating

Ticker Date Fall 2015 Spring 2016 ∆ % ∆ Moody's/S&P

DNR 19-Apr $1,500 $1,050 ($450) -30% Caa2/SDLTS.CN 2-May $550 $250 ($300) -55% Ca/CCC-AXAS 21-Apr $165 $130 ($35) -21%COG 21-Apr $1,800 $1,600 ($200) -11%RSPP 2-May $600 $600 $0 0% B2/B+EPE 2-May $2,750 $1,650 ($1,100) -40%SM 14-Apr $2,000 $1,250 ($750) -38% B2/BB-AR 14-Apr $4,500 $4,500 $0 0% Ba2/BBSGY 14-Apr $500 $300 ($200) -40% Caa2/CCC-EPM 13-Apr $5 $10 $5 100%MRD 11-Apr $1,000 $1,000 $0 0% B2/BCHK 11-Apr $4,000 $4,000 $0 0% Caa2/CCCCPE 11-Apr $300 $300 $0 0%BBG 11-Apr $375 $335 ($40) -11% Caa2/B-UNT 8-Apr $550 $475 ($75) -14% B2/B+EVEP 4-Apr $625 $450 ($175) -28% Caa2/CCC+HAWK.LN 1-Apr $23 $13 ($10) -43%MPOY 1-Apr $252 $170 ($82) -33% Ca/DXCO 30-Mar $375 $325 ($50) -13% Caa2REN 29-Mar $145 $105 ($40) -28% Caa3/CCC-WLL 28-Mar $4,000 $2,750 ($1,250) -31% Caa1/B+WTI 24-Mar $350 $150 ($200) -57% Caa3/CCC-SN 21-Mar $500 $350 ($150) -30% Caa1/BWPX 18-Mar $1,750 $1,025 ($725) -41% B2/BB-HK 17-Mar $827 $700 ($127) -15% Caa2RRC 17-Mar $3,000 $3,000 $0 0% Ba3/BB+REXX 14-Mar $200 $190 ($10) -5% CaEGY 2-Mar $65 $20 ($45) -69%OAS 23-Feb $1,525 $1,150 ($375) -25% B3/B+Total 29 $34,232 $27,848 ($6,384) -19%

Borrowing Base Size

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OFS Bankruptcies


61 oilfield service restructurings since the beginning of 2015, representing more than $9 billion.

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There Will Be/Has Been Blood: U.S. Land Rig Count currently 388, down 79% from the 2014 peak. 2Q average is down 23% QoQ. We believe the rig count is very close to bottoming, but have little hope for material improvement in 2H.

E&Ps stayed ‘on script’ in 1Q, stating the need for sustained prices above $50/bbl before re-activating drilling programs, but the market will closely watch actions vs. words in 2H.

We expect excess cash flows will be first directed to repairing balance sheets, followed by workovers, DUCs, and finally adding incremental rigs.

U.S. Land Rig Count (1Q15-2Q16E)

Source: Baker Hughes, EVR ISI Research

13

Near-Term Fundamentals: Land Drillers Land Rig margins should continue to be pressured, though the companies

currently high grading their fleets should witness robust margin expansion when the recovery unfolds.

We expect U.S. land rig gross income for the big four drillers to trough by 3Q16, with a prolonged recovery thereafter as rigs rolling off term contracts into the spot market offset increases in utilization

U.S. Land Rig Gross Income ($ in millions)

Source: Company reports, EVR ISI Research Source: Company reports, EVR ISI Research

U.S. Land Rig Gross Margins per Day ($ in thousands)

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Near-Term Fundamentals: Pressure Pumpers Pressure Pumping gross margins should remain under pressure through

midyear ’16.

Margins should improve first with utilization and then pricing.

Pricing remains a knife fight with gross margins at or below breakeven in many cases as larger companies take down pricing to gain market share

U.S. P.P. Gross Income ($ in millions)


U.S. Pressure Pumping Gross Margin %

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Near-Term Fundamentals: Offshore Drillers The offshore rig market remains cyclically oversupplied

Worldwide floater utilization declined to 64.2% in March (down ~1,871 bps

y/y) while supply has declined by 12 rigs y/y as retirements have outpaced newbuild deliveries

Worldwide jackup utilization declined to 65.2% in March (down ~1,279 bps y/y) while supply is down by 9 units y/y

Worldwide Jackup Utilization

Source: IHS, EVR ISI Research Source: IHS, EVR ISI Research

Worldwide Floater Utilization

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Near-Term Fundamentals: Offshore Drillers The worldwide working offshore rig count fell 8 units in March to 458 rigs (down

140 y/y), with about 146 working floaters and 313 working jackups

Worldwide Working Jackups


Worldwide Working Floaters

Global jackup utilization is ~65% while semisub utilization is ~59% and drillship utilization is ~69%. Total offshore rig contracted utilization is about 64%

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Figure 1. Offshore Rig Count Weekly Utilization and Changes

Source: IHS-Petrodata, Evercore ISI Research

Total Contracted Total Contracted Total Contracted Total Contracted Total ContractedChange Contracted Util ization Change Contracted Util ization Change Contracted Util ization Change Contracted Util ization Change Contracted Util ization

Jackups (4) 346 64.6% 0 6 10.5% 0 53 76.8% (2) 12 44.4% 1 64 60.4%Semisubmersibles (1) 109 59.2% 0 8 36.4% 0 35 57.4% 0 6 37.5% 0 21 58.3%Dril lships 1 83 68.6% 0 31 91.2% 0 2 25.0% 0 19 79.2% 1 4 33.0%Total Fleet (4) 538 63.7% 0 45 39.5% 0 90 65.2% (2) 37 52.9% 2 89 57.4%

Asia/AustraliaWorldwide Gulf of Mexico Europe/Mediterranean West Africa

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Near-Term Fundamentals: Offshore Drillers 2015 Fixtures: Average Dayrates Declining:

UDW: $359 kpd – down 24% from $471 kpd in 2014 DW: $295 kpd – down 19% from $364 kpd in 2014 MW: $200 kpd – down 34% from $304 kpd in 2014 JU: $114 kpd – down 18% from $140 kpd in 2014

No DW fixtures have achieved rates above $300 kpd in the past 11 months

Global Jackup Fixtures


Global Deepwater Fixtures

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U.S. Land

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Why U.S. Land Will Lead the Recovery More flexible capital budgets allow U.S. operators to react faster to changes

in commodity prices.

International budgets assumed $30-$35/bbl. Given their stickiness, we see little room for upside in 2016.

International projects also tend to be longer-term, require longer payback periods, giving NAM a first-mover advantage.

When oil recovers, oil-currencies will likely move in tandem, causing higher costs on a USD-basis.

Accommodating equity market in the U.S., particularly for operators who can reassert themselves as growth stocks, give NAM independents access to capital alluding other, non-growth E&Ps.

Offshore isn’t dead, but has its challenges.

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The Recovery We Envision

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The U.S. Cyclical Recovery We Envision

We expect the U.S. land rig count to decline another ~50%-55% y/y in 2016 to average ~440 rigs before rising ~25% next year and 30% in 2018, exiting 2018 at ~780 rigs

Pressure pumping utilization should reach +65% by 3Q17 and rise above 80% by 2Q18 as attrition remains underestimated (assumes 3MM HP will removed from the market over the coming ~2 quarters from BHI, HAL, CJES, FTSI, others)

U.S. Land Rig Count (1Q14-4Q18E) U.S. P.P. Effective Utilization (%)

Source: Baker Hughes, EVR ISI Research Source: PacWest, EVR ISI Research

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Why? U.S. Production In Decline

Oil supply growth will sharply moderate in 2015 and will begin to fall in 2016 as spending remains curtailed.

The EIA expects U.S. crude production to decline through 3Q17.

Source: EIA, EVR ISI Research

U.S. Crude Oil Output (2013-2017E, kbpd) U.S. Crude Oil Y/Y Output Growth (kbpd)


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U.S. Rig Productivity Peaking


U.S. Shale Oil Rigs Needed To Maintain Production and Production Per Rig (2015-Current)

While oil productivity gains have indeed been impressive (doubling from 4/13 to 3/16; 5-year CAGR of 31%), productivity gains should flatten out in the near future, exhibiting a much slower growth rate – and likely on the verge of peaking

Legacy production declines are accelerating in all basins, though declines have slowed the past ~2-3 months

The next rig replacement cycle could be the kryptonite to our forecast

Legacy Shale Oil Production Changes by Basin (bpd)


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Potential Thesis: Resiliency of U.S. production is due in part to longer laterals, higher stage counts, and greater proppant per stage which has increased production on a gross, but not normalized basis. Core of the core production is the focus.

Benefits of higher quality rigs, more experienced crews, lower service costs and a retrenching to the core of the core will revert

Hess’ 30-Day IP per Stage 3 Major Basins Production/Completed Well

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Why The NAM Shale Production Recovery Will Take Longer Than You Think

Labor – 20% reduction in O&G Extraction/Drilling Jobs according to BLS, but unemployment rates in major crude producing states have remained flat

Between the big four and five pressure pumpers (BAS, CJES, CFW, RES, and SSE), over 130,000 people have been laid off this cycle, with vast majority occurring in the U.S.

Frustration with cyclicality, alternative industries (Construction, PetChems, Manufacturing/Machinery) and a migration out of the oil patch to seek opportunities elsewhere. Unemployment Rates

Source: BLS, EVR ISI Research

O&G Extraction and Operations Support Employment

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“We're joining the rest of everybody else saying the pressure pumping fleet is going to attrite, but not ours” ~RPC’s VP of Corporate Finance, Jim Landers

PacWest estimates that 53% of the industry’s 17.6MM HHP is stacked with slightly over 50% of stacked capacity designated as cold stacked. HAL expects ~4-6MM HHP will permanently exit the market

Constraints won’t expose themselves until the call on incremental crews extends beyond the first handful. First group of incremental spreads will be relatively easy to deploy and crew, though they will likely require an increase in pricing.

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Ticker Stacked/ Parked HHP

% of Fleet Stacked/Parked

Total Fleet

Notes: As of:

RES 372K 40% 930K 60% of HHP capacity is crewed with util ization for that 60% below 40% 1Q CallBAS 134K 30% 443K Stacked C&R HHP 3/31/2016TCW 218K 34% 645K Announced sale of U.S. Pressure Pumping Business to Keane Group on 1/26 January Presentation

CFW 404K 60% 674K ~60% of horsepower is parked and CFW temporarily suspended its fracturing operations in the Fayettevil le

5/12/2016

BHI 768K 50% 1536K*Over 50% of BHI's fleet was idled or impaired in 1Q15, since then segment util ization has underperformed broader activity declines, market intel suggests BHI has just two fleets operating

4Q Followup

HAL 1036K 40% 2589K*

HAL considers its older equipment better than what its competition has now, but it is not better than their Q10 pumps. Company believes there is simply no need for it in this market. It has impaired a large portion of its older, non-Q10 pumping equipment. We believe non-Q10 pumps comprised 40% of total fleet

1Q

FTSI 904K 55% 1646K*As of call: 14 fleets active, 4 fleets warm stacked , 5 fleets cold stacked and requiring consumables/minimal repairs ($1MM per spread in repairs); 9 hard down ($2-2.5MM per spread in repairs, but not permanently impaired)

1Q Call (5/13/16)

CJES 661K 66% 1000K 10/11 horizontal fleets working, down from 16 last quarter and 31 following NBR acquisition, could ramp back to 15/16 fleets pretty easily

1Q Call (5/11/16)

PTEN 540K 54% 1000K In total PTEN has stacked slightly more than half of its fleet of more than 1MM HHP with 140K HHP being stacked since the beginning of 2016

1Q Call (4/28/16)

*According to PacWest

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U.S. Pressure Pumping Capacity: Attrition Rate to Surprise to Upside

With utilization for most product lines at 50% or lower, the attrition rate for many commoditized lines such as fracking is accelerating

We believe some 4 million HHP currently sidelined will never return to the market and about 2 million HHP has gone to auction largely to be bought by spare parts providers (if at all)

Natural attrition rates for fracking are 10-15% per year, although likely much higher this year

Source: PacWest, EVR ISI Research

Total U.S. P.P. S/D (MM HHP) and Utilization (%) Quarterly Change in U.S. P.P. Capacity (HHP)


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U.S. HHP Supply U.S. HHP Demand Effective Utilization


Higher Activity Higher Revenues Higher Capex and Working Capital Lower FCF

Companies with lower quality balance sheets will be more discreet in ramping up activity as they only accept only jobs which generate superior profitability.

Will allow companies with stronger balance sheets to benefit from opportunity to gain market share from weaker peers and from broader industry-wide pricing discipline.

Aggregated Free Cash Flow for (WFT, CJES, BAS, KEG, PTEN, CFW, TCW, RES)

Source: Company Data, EVR ISI Research

2016 2017 2018EBITDA $876 $1,827 $3,287Interest Expense ($826) ($807) ($753)∆ WC $70 ($373) ($602)Capex ($728) ($1,318) ($1,659)FCF ($608) ($671) $273

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But Isn’t There Too Much Capacity? The Big 4 Land Drillers own 64% of all active AC rigs

Source: RigData, EVR ISI Research

Attrition is underestimated in Pressure Pumping

U.S. P.P. Marketable Supply (MM HHP)


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10.010.511.011.512.012.513.013.514.014.515.015.516.016.517.0

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

E3Q

16E

4Q16

E1Q

17E

2Q17

E3Q

17E

4Q17

E1Q

18E

2Q18

E3Q

18E

4Q18

E

MM

HHP

5/6Company Current Prior ∆ ∆% ∆ ∆% ∆ ∆% Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16

Helmerich & Payne (HP) 61 55 6 11% 63 -2 -3% 68 -7 -10% 272 266 138 126 117 113 64Nabors Industries (NBR) 31 33 -2 -6% 33 -2 -6% 34 -3 -9% 135 133 76 73 61 51 32Patterson-UTI (PTEN) 32 31 1 3% 37 -5 -14% 34 -2 -6% 88 87 76 57 51 43 33Precision Drilling (PDS) 15 16 -1 -6% 15 0 0% 12 3 25% 47 45 28 26 24 21 13Ensign Energy Services (ESI-CA) 16 17 -1 -6% 14 2 14% 17 -1 -6% 44 35 29 24 23 18 15Independence Contract Drilling (ICD) 4 4 0 0% 5 -1 -20% 6 -2 -33% 9 11 7 7 10 11 6Seventy Seven Energy (SSE) 6 6 0 0% 7 -1 -14% 5 1 20% 19 23 15 10 11 11 6Pioneer Energy Services (PES) 7 10 -3 -30% 10 -3 -30% 8 -1 -13% 11 3 6 7 7 10 10Xtreme Drilling & Coil (XDC) 3 4 -1 -25% 2 1 50% 3 0 0% 15 11 9 7 6 4 3Unit Corporation (UNT) 6 5 1 20% 5 1 20% 4 2 50% 1 2 1 3 1 2 6Other 35 34 1 3% 32 3 9% 37 -2 -5% 90 91 70 67 60 51 33

Total 216 215 1 0% 223 -7 -3% 228 -12 -5% 731 707 455 407 371 335 221% of Rig Count 62% 61% 81 bps 59% 318 bps 60% 218 bps 39% 43% 50% 49% 51% 58% 59%% of Rig Count held by Big Four 40% 38% 147 bps 39% 87 bps 39% 107 bps 29% 32% 35% 34% 35% 40% 38%% of AC Rig Count held by Big Four 64% 63% 156 bps 66% -202 bps 65% -56 bps 74% 75% 70% 69% 68% 68% 64%

4 Weeks Ago

End of Q1'16

Beginning Of

What Will Change in North America? An M&A cycle across the oilfield service, equipment and drilling space is

starting.

The strong will get stronger: niche technology providers are likely targets and weak hands will be swallowed up by larger companies.

Scale will become more important as it provides superior supply chain and logistics management. The larger companies also tend to develop the leading edge technologies.

North America is moving from a brute force approach (drill then frac) to a more technologic/scientific drilling approach (drill, evaluation, better placement of fractures, better production management).

The large cap diversifieds are best positioned as well as those mid-caps that are positioning to be the main alternatives.

31

Onshore Drilling Rig of the Future Pad Optimal Rigs will become the rig of choice among operators and typically

have the following technical attributes: 1,500 HP Bi-fuel capabilities 7,500 psi mud systems AC VFD Drive Omni-directional walking system – 3 hours release to spud Four day conventional move capability

Bending the industry’s cost curve downward Best Suited for wellbore manufacturing model Ability to participate in Big Data/Digital Oilfield

collection network Capable of more wells per rig thereby optimizing

operator production profiles/cash flows

Source: NBR, EVR ISI Research

32

Global Recovery- A Spending Problem

33

Spending Example: Non-NAM, Non-OPEC Can’t Grow

Non-OPEC, non-NAM nations have struggled to meaningfully increase energy output beyond ~40-41 MMboepd despite large increases in capital expenditures prior to 2013

Lack of spending has a two-fold effect on supply: 1. Exploration: Increasingly difficult to replace reserves 2. Production: Deferred maintenance accelerates production decline rates

Source: IEA, EVR ISI Research

Non-NAM, non-OPEC Capex ($MM) and Energy Output (MMboepd)

35

36

37

38

39

40

41

42

43

44

45

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

2008 2009 2010 2011 2012 2013 2014 2015 2016E

ProductionCapex

Capex Production

“The magnitude of E&P [exploration and production] investment cuts are now so severe that it can only accelerate production decline and the subsequent upward movement in [the] oil price.” – Paal Kibsgaard, CEO of Schlumberger

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Global Spending: Exploration Disappoints Offshore exploration spending stood near record levels in recent years, but did not lead to

the same level of successful discoveries Increased demand + cost inflation = doubling of exploration costs per well from 2005-2014

($34MM to $74MM) Further cost restructuring is needed to bring the economics into parity with lower cost

plays


Global Supply: Exploration Disappoints

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Decrease in well maintenance spending will lead to production declines Operators in U.S. Shales have reportedly let wells “water out” without using

vacuum trucks to empty surface tanks Corrosive scale build-up, sour gas sequestration, and extended periods at

high temperature/pressure will degrade tubing and casing Result: higher workover costs when maintenance resumes

Global Supply: Deferred Maintenance To Take A Toll

U.S. Shale Production Decline (M/M %)

(10%)

(9%)

(8%)

(7%)

(6%)

(5%)

(4%)

(3%)

(2%)

(1%)

0%

Decl

ine

Rate

Bakken Eagle FordPermian Niobrara

Effects of scale buildup and sour gas migration

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Higher incentives are needed to sustain drilling and exploration Rystad estimates NAM shale average breakeven have fallen to $65/bbl Could see shale/offshore activity increase in the $50-$55/bbl band

Global Liquids Cost Curve

Source: Rystad Energy, EVR ISI Research

2016 Global Liquids Cost Curve

37

Global Supply: LatAm Declines

Pemex Quarterly Crude Oil Production (mmbpd)

Source: Pemex, EVR ISI Research

Pemex Q/Q Crude Oil Production Change (mmbpd)

Source: Pemex, EVR ISI Research

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

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

-0.1

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

MEXICO PEMEX Cash Issues- $1.5B Government Emergency Relief In April New Fibra-E tax regulations will not materialize in investment inflow until

crude prices improve

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Petrobras Production Forecast (MMboepd)

BRAZIL Per-barrel levy on production introduced in April (est. total of $522M) Petrobras: unplanned outages (platform fires, corrective maintenance) Political Instability: May 10th, President Dilma Rousseff suspended pending

impeachment hearing


“It’s a coup” – Dilma Rousseff

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2.45

2.50

2.55

2.60

2.65

2.70

2.75

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16

Venezuela Production (MMboepd)

“Since the Supreme Court of Justice closed the legal path (to change), we will take our call for urgent political changes to the streets.”- Maria Corina Machado, leader of Vente Venezuela


VENEZUELA Cash Crunch for PDVSA: SLB, HAL, BHI, WFT all pared back operations due to

PDVSA payment problems. Public outrage: Vente Venezuela calling for Pres. Maduro’s impeachment

despite Supreme Court ruling to keep Maduro in office. Power Outages: low hydroelectric water levels force government to ration

power in cities across the country. Crude output diverted to domestic power generation.

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Global Supply: Russia Oil output could decline by as much as 8% (~0.8 mmbpd) due to cuts in Siberian drilling

U.S. sanctions continue to specifically target Rosneft, Novatek, Gazprom Neft, and Transneft, and prohibit the export of goods, services, or technology in support of deepwater, Arctic offshore, or shale projects

Virtually all Western involvement in Artic offshore and shale projects has ceased following the sanctions – which will severely restrict future production growth.

Limited access to international capital markets Oil and natural gas revenues account for more than 50% of federal budget revenues

Russian Crude Oil and Condensate Exports by Destination (2014)

Russian Crude Oil and Condensate Output by Company (2013)

Source: EIA, Evercore ISI Energy Research Source: EIA, Evercore ISI Energy Research

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Other Countries to Watch Algeria

Canada

China

India

Nigeria

Norway

Petroleum products = 95% export revenues. Perhaps the country with most on the line with respect to crude prices

Steady Economic Growth: Oil consumption turning over positively with improved 1Q16 manufacturing

Forest Fires in Alberta knocked 1.6M bpd offline, production ramping up, but how quickly?

2016 investment to decline at least ~13%; delays to startup of Goliat – Eni Norge. North Sea maintenance to cut output

Rapid Increase in Petroleum Demand (30% of total 1Q16 consumption)

Consistent pipeline destruction at the hands of the Niger Delta Avengers militant group

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Iran: Consequences from Implementation Day Failed talks in Doha, Iran/Saudi Arabia standoff over capping Iranian

production with larger OPEC freeze

Production back up to pre-sanction levels (~4.0M bpd) as of late April

Now that output is maximized, Iran ready to discuss longer-term OPEC production management

New IPC replaces the outdated buyback model first introduced in the 1990s

Under the new IPC, developers and investors would receive a more sustained production payment stream (as much as 25-30 years)

Increased risk-sharing likely works only for companies with the strongest balance sheets

Publicly stated need for $100-165 billion of upstream investment, or ~$20-30B/year over the next 5-6 years, plus $28 billion of investment in electricity projects and renewable energy through 2021

Iran introduced over 50 projects including 14 exploration and development blocks as well as major onshore and offshore fields (South Azadegan, North Pars)

Western technologies and products should benefit vs. Chinese and

other Asian suppliers

Is Schlumberger truly a potential winner in easing Iranian sanctions?

2.00

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E

Iran Historical Output WoodMac Forecast ''Consensus'' Forecast

Historical Iranian Output and Forecasts (mmbpd)


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Lost Production Offshore To Grow In 2016

Source: Rystad, Platts, Bloomberg, Evercore ISI Energy Research

Lost Production Lags Lower Drilling Activity

The decline in offshore drilling activity is a prelude to lost production which will likely be increasingly more pronounced in the out years due to the lag effects of decision making and contract rollovers

Faced with a depleting reserve base and with the vast majority of known reserves controlled by NOCs, majors will be forced into higher cost basins (i.e. deepwater) or risk permanently ceding market share

One risk to this thesis is consolidation among the Supermajors, which could result in their replacing reserves via M&A rather than searching offshore

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Stabilizing Global Oil Demand Growth The EIA revised its global demand growth estimate upward to 1.4mmbpd in 2015 and

1.5mmbpd in ’17, up 0.3mmbpd and 0.2mmbpd, respectively. Negative revisions to global GDP forecasts by the IMF and World Bank have moderated. Strong gasoline demand in the U.S. (affordable fuel prices and robust auto sales), strength

from South Korea (transportation and petrochemicals) and stabilization in China (rising auto sales, lower gasoline prices, changes to industrial base and SPR) remain supportive for oil demand in 2016.

Revisions to Oil Demand Projections

Source: IEA, EIA, OPEC, EVR ISI Research

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Conclusions

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Conclusions

Oil supply/demand capacity coming into balance

Oil price spike imminent North America will recover first and the strongest

International will be second, offshore third

A large, strong, sustainable upcycle looms

AC-Pad Optimal rig pricing to recover rapidly

SCR/Mechanical likely very little pricing recovery

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Sources Advanced Resources International Baker Hughes Bloomberg BP Company Reports DOE EIA Evercore ISI Energy Research FERC IEA IMF FactSet National Energy Board of Canada

NBR OPEC PacWest Pemex Petrobras Petroleum Intelligence Weekly Platts Quest Offshore RDC RIG Rystad Energy USGS

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