#OM2015

Invest or Divest: The New Financial Imperatives

Julian Mylchreest, Bank of America Merrill Lynch

Ian Catterall, Bank of Tokyo-Mitsubishi

Mike Powell, Barclays

David Staples, Moody’s Investors Service

Jan R. Prins, Chairman:

#OM2015

Observations:

• Global Oil: increased funding gap between cash flow and capex,

• to be addressed by cutting capex, or asset sales?

• or alternatively by curtailment of dividend payments ?

Financial and Operating Trends: Global Oil & Gas *)

Funding Gap

400

420

440

460

480

500

520

540

560

2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2

Annualized Capital Expenditure Annualized Cash from Operation

Source: U.S. Energy Information Agency, Sept. 2015 Jeff Barron. *) Study based on results 99 global oil and gas companies.

#OM2015

Observations:

• In 2015 the global oil and gas industry is cutting/deferring investments by $ 180 bln,

• ca.140 mega-projects (20 bln boe),

• to include: ‒ Canada high cost oil sands; ‒ large capital cost (F)LNG

(Australia, Canada); ‒ deepwater offshore West Africa,

Norway.

0

20

40

60

80

North America

Asia Australia Europe Africa South America

Majors Oil Sands NOCs Independent E&P

Source: Rystad Energy

Capital Expenditure of Global Projects Deferred by mid 2015

Capex $ billion

#OM2015

Observations:

• US E&P firms to balance capital expenditures and cash flows,

• but new investments dependent on available debt finance (bank loans & bonds).

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2001 2003 2005 2007 2009 2011 2013 2015E

Operating Cash Flow Total Capex (including acquistion and facilities)

Source: Raymond James

Financial and Operating Trends: US E&P firms

Funding Gap

$ million

#OM2015

Observations:

• Capital (debt & equity) raising by US E&P firms has slowed down

• H1 2015 fund raising a ‘dead cat bounce’?

• Availability bank debt affected by ‒ growing number of

(“selective”) defaults; ‒ more scrupulous regulatory

environment?

• Periodic “borrowing base” reassessments by banks on the basis of future production and projected oil prices.

0

5

10

15

20

25

30

35

40

2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3

Loans Bonds Equity

$ billion Capital Raising by US E&P Companies

Loans

Bonds

Equity

Source: Dealogic.

#OM2015

Observations:

• Financial leverage (debt as a multiple of annual cash flow) is high and rising from 2 x to over 5 x,

• while debt service as percentage of cash flow increased from 55% (Q3 2013) to over 80% (Q2 2015),

• as interest rates and costs of bond finance may rise.

0

1

2

3

4

5

6

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

Debt Leverage

Sources: Bloomberg; The Economist

Debt $ billion

Leverage *)

*) Leverage: Debt to annualized cash flow before capex.

Leverage of 62 top US E&P firms

#OM2015

Observations:

• Borrowing costs for US E&P firms in US High Yield Bond markets increased;

• Shift from “light covenant” structures towards more restrictive, second lien secured bonds.

Energy Industrials Bloomberg HY CB Index Consumer Discretionary

Source: EIA / Bloomberg

0

2

4

6

8

10

12

14

2014 Jul 2014 Oct 2015 Jan 2015 Apr 2015 Jul

Bloomberg High Yield Corp Bond Index (July 2014 – Sept 2015) Option Adjusted Spreads

%

#OM2015

Observations:

• Many oil producers are worse positioned now than during the 2008-09 price downturn.

• Prolonged weakness will ultimately require both spending cuts and increases in non-oil revenues in most states.

• Most exporters sought short-term tactical responses to lower oil prices this year. Next year, economic pain will force more substantial changes.

-20 -10 0 10

Venezuela

Oman

Algeria

Saudi Arabia

Iraq

Mozambique

Guyana

Kuwait

Iran

Kazakhstan

Russia

Malaysia

Mexico

Nigeria

Angola

Ukraine

Ghana

Brazil

Qatar

Ecuador Government Primary Balance, % of GDP

% Source: EIG Energy Intelligence, Country Risk Evaluations Based on 2016 Forecast IMF World Economic Outlook

Country Risk Oil Producers

Gross Debt,

% of GDP

Gvt. Primary Balance, % of GDP

Current Account Balance, % of GDP

15,4 -10,3 -13,2 Algeria

44,3 -0,5 -4,2 Angola

66,2 2,0 -3,4 Brazil

36,6 3,6 -3,0 Ecuador

67,5 1,7 -6,2 Ghana

71,1 -2,9 -21,9 Guyana

11,9 -2,3 1,2 Iran

56,2 -5,1 -3,6 Iraq

19,1 -2,3 -3,1 Kazakhstan

8,8 -2,9 19,3 Kuwait

54,8 -0,7 1,4 Malaysia

51,7 -0,6 -2,2 Mexico

61,9 -4,5 -45,6 Mozambique

11,2 -0,6 1,3 Nigeria

9,6 -13,1 -13,0 Oman

26,1 2,7 5,0 Qatar

17,1 -2,0 6,3 Russia

1,7 -8,8 3,7 Saudi Arabia

92,6 0,4 7,2 Ukraine

30,6 -18,0 -0,8 Venezuela

#OM2015

Invest or Divest: The New Financial Imperatives

Julian Mylchreest, Bank of America Merrill Lynch

#OM2015

Invest or Divest: The New Financial Imperatives

Ian Catterall, Bank of Tokyo-Mitsubishi

#OM2015

Invest or Divest: The New Financial Imperatives

Mike Powell, Barclays

#OM2015

Invest or Divest: The New Financial Imperatives

David Staples, Moody’s Investors Service