North America Oil & Gas Exploration & Production · See Disclosure Appendix of this report for...
Transcript of North America Oil & Gas Exploration & Production · See Disclosure Appendix of this report for...
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
North America Oil & Gas Exploration & Production
Energy (Oil & Gas) Market Dynamics:
Investments, Trading and Price Interactions
Bob Brackett, Ph.D. • Senior Analyst • +1-212-756-4656 • [email protected]
September 27, 2018
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 2
North American Oil & Gas Exploration & Production team
Bob Brackett, Ph.D. (Senior Analyst)
Bob Brackett is the Senior Research Analyst covering North American Oil & Gas Exploration & Production. He is currently recognized as All-American
#1 by Institutional Investor (for the 5th year in a row). Previously, Bob was Director of E&P Planning and also Director of Corporate Strategy for Hess
Corporation. Before Hess, Bob was an Engagement Manager with McKinsey & Company's Petroleum Practice, serving the majority of the world’s
largest oil companies across five continents and 30 countries throughout the petroleum value chain. Bob began his career with ExxonMobil,
spending eight years in positions in Exploration, Business Development, Development and Research. As a NASA Space Grant Fellow, Bob received
his PhD in Earth & Planetary Sciences from Washington University – St. Louis. He received his MBA from Rice University in Houston. He also holds a
BS in Geophysics and a BA in Astronomy from the University of Texas.
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 3
Key points
Why US oil supply response matters so muchGlobal supply (outside of 3 countries) isn’t growing
How do E&Ps think about fundingCash in ~ cash out (except when greedy or scared)
How E&Ps won the shale war
Our forecast of US supplyOil price, reinvestment rate, inflation, and well efficiencies drive result
Why the “predator prey” model is so importantLotka-Volterra equation
Midstream the current investment gating factor
Natural gas falls prey to oil market and lack of demand
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 4
Remember – oil supply isn’t growing if we strip out US, Saudi Arabia, and Iraq
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 5
Remember – oil supply isn’t growing if we strip out US, Saudi Arabia, and Iraq(and Saudi Arabia and Iraq follow different ‘feedback’ rules)
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 6
-
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1Q
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3Q
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2Q
18
$/
bo
e
Organic Capex$/boe (left axis) Acquisitions, $/boe (left axis) Cashflow From Operations,$/boe (left axis)
Shale Era Business Model: Cash In ~ Cash Out (except when greedy or scared…)
E&P Sector CFO compared to “organic” capex (capital spent drilling & completing existing acreage) i.e., productive capex
Source: Company Data, Bernstein estimates, Bloomberg
Eagle Ford breaks 0.1 mln bopd
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 7
Price cash flow capital plan updates rig count production
Source: HPDI, EIA; Baker Hughes, Bernstein analysis and estimates
200
400
600
800
1,000
1,200
1,400
8,000
8,500
9,000
9,500
10,000
10,500
11,000
11,500
Rig
s
Pro
du
cti
on
(k
bo
pd
)
EIA Weekly Production Estimates and Actual Monthly Data (with rig count and WTI)
BHI Hz US Rig Count [LHS] Weekly Estimates [RHS] Monthly Actuals [RHS] Oil Price (x10) [LHS]
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 8Source: Company Data, Bernstein estimates, Bloomberg
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Shale Contribution by Quarter (bopd)
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
Lion’s share of CFO goes to capex to create a quarterly wedge…
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 9
How E&Ps won the shale war…
...same way we won the revolutionary war…with help
Source: Corporate reports, Bloomberg, L.P., Bernstein analysis
0
50
100
150
200
250
Jan
-15
Jan
-15
Fe
b-1
5
Mar
-15
Mar
-15
Ap
r-1
5
May
-15
May
-15
Jun
-15
Jul-
15
Jul-
15
Au
g-1
5
Se
p-1
5
Oct
-15
Oct
-15
No
v-1
5
De
c-1
5
De
c-1
5
Jan
-16
Fe
b-1
6
Fe
b-1
6
Mar
-16
Ap
r-1
6
Ap
r-1
6
May
-16
Jun
-16
Jun
-16
Jul-
16
Au
g-1
6
Se
p-1
6
Se
p-1
6
Oct
-16
No
v-1
6
No
v-1
6
De
c-1
6
US
$, b
illio
n
Cumulative Cash flow statement, 1Q 2015 to 4Q 2016
Operating Cash Other Sources Cash burn Debt (Net) Asset Sales
Equity (Net) Organic Capex Plus Dividend Plus Acquisitons
“war onshale”OPEC
meeting
“oil cut”OPEC
meeting
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 10
0
20
40
60
80
100
120
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
$/
bb
l
Liq
uid
s P
rod
uct
ion
(kb
oep
d)
US Supply Forecast
Alaska GoM Other Offshore Other Onshore Shale (HZ) NGLs WTI (Right Axis)…
Our forecast of US liquids volumes
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 11
-1,000
-500
0
500
1,000
1,500
2,000
2,500
3,000
14Q1 15Q1 16Q1 17Q1 18Q1 19Q1 20Q1 21Q1 22Q1
US Total Oil & NGL Supply - Yearly Change
Alaska GoM Other Offshore Shale (HZ) Other Onshore NGLs US Liquids Inc. NGLs
Our forecast of US liquids growth…oil price, reinvestment rate, inflation, and well efficiencies drive result
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 12
0
2000
4000
6000
8000
10000
12000
14000
16000
2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
S hale Production Sensitivity to Oil Price
Base $40 $50 $60 $70 $80
Impact of oil price
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 13
0
2000
4000
6000
8000
10000
12000
14000
2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
S hale Production Sensitivity to Reinvestment of CFO
88% 50% 60% 70% 80% 90% 100%
Impact of reinvestment rate
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 14Source: DIDestop, FracFocus, Bernstein analysis and estimates
Productivity has increased in the Delaware largely due to rapid sand/ft increase (and lateral length)
Productivity increases in the Midland were more dominated by other effects (as lateral length and sand count already high years ago)
What drove productivity…the Permian example
73.4
29%
21.2
41%
38.96%
8.7
142.3
0
20
40
60
80
100
120
140
160
180
2014 Due to Lateral Length
From 4,433' to 5,715'
Due to Sand Per Foot
From 785 lb/ft to 2,331
Due to Other Effects 2017
1s
t 1
2 m
ont
hs
cum
ula
tive
oil
(kb
o)
D elaware
67.1
16.7
25%
8.2
10%
31.1
34%
123.2
0
20
40
60
80
100
120
140
160
180
2014 Due to Lateral Length
From 6,798' to 8,492'
Due to Sand Per Foot
From 1,124 lb/ft to
1,877
Due to Other Effects 2017
1s
t 1
2 m
on
ths
cum
ula
tive
oil
(kb
o)
Midland
1
(519)
2
(897)
3
(1,129)
4
(1,247)
5
(1,324)
6
(1,402) 7
(1,511)
8
(1,673)
9
(1,973) 10
(2,691)
y = 45.938ln(x) - 184.58
R² = 0.6759
80
100
120
140
160
180
200
0 500 1,000 1,500 2,000 2,500 3,000 3,500
12
-mo
cum
ula
tive
pro
duc
tion
(kb
oe)
San d (lb/ft)
D elaware Sand vs. Cumulative Production
1
(774)
2
(1,029)
3
(1,122)
4
(1,223)
5
(1,311)
6
(1,401)
7
(1,506)
8
(1,653)
9
(1,888)10
(2,526)
y = 21.444ln(x) - 38.577
R² = 0.2344
80
100
120
140
160
180
200
0 500 1,000 1,500 2,000 2,500 3,000 3,500
12
-mo
cum
ula
tive
pro
duc
tion
(kb
oe)
San d (lb/ft)
Midland Sand vs Cumulative Production
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 15Source: Company Data, Bernstein estimates, Bloomberg
0
10
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30
40
50
60
0
24
48
72
96
12
0
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4
16
8
19
2
21
6
24
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4
28
8
31
2
33
6
36
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38
4
40
8
43
2
45
6
48
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4
52
8
55
2
57
6
60
0
62
4
64
8
67
2
69
6
72
0
74
4
76
8
79
2
81
6
84
0
86
4
88
8
91
2
93
6
96
0
98
4
Predator-Prey Model (Lotka-Volterra)
Rabbits (in thousands) Foxes (in thousands)
Lotka-Volterra (1st order nonlinear differential equations describing biologic systems)
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 16
0
10
20
30
40
50
60
0
24
48
72
96
12
0
14
4
16
8
19
2
21
6
24
0
26
4
28
8
31
2
33
6
36
0
38
4
40
8
43
2
45
6
48
0
50
4
52
8
55
2
57
6
60
0
62
4
64
8
67
2
69
6
72
0
74
4
76
8
79
2
81
6
84
0
86
4
88
8
91
2
93
6
96
0
98
4
Predator-Prey Model (Lotka-Volterra)
Cash Flow Shale Production
Shale is not a thermostat – it induces waves (and needs culling!)
...”equilibrium price” is not a static equilibrium
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 17
25
35
45
55
65
75
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov
-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep-
18
Nov
-18
Jan-
19
Mar
-19
May
-19
Jul-1
9
Sep-
19
Nov
-19
Jan-
20
Mar
-20
May
-20
Jul-2
0
Sep-
20
Nov
-20
Jan-
21
Historic and Futures prices for key oil prices ($/bbl)
Brent premium to Gulf Coast Gulf Coast premium to WTI WTI premium to Midland Midland
FutureHistorical
Midstream investment (not upstream) is gating factor for now
Source: EIA; Bloomberg
0
2
4
6
8
10
12
14
16
18
Jan-1
5
Apr-
15
Jul-15
Oct-15
Jan-1
6
Apr-
16
Jul-16
Oct-16
Jan-1
7
Apr-
17
Jul-17
Oct-17
Jan-1
8
Apr-
18
Jul-18
Oct-18
Jan-1
9
Apr-
19
Jul-19
Oct-19
Jan-2
0
Apr-
20
Jul-20
Oct-20
Jan-2
1
Apr-
21
Jul-21
Oct-21
Jan-2
2
Apr-
22
Jul-22
Oct-22
Dry
gas
, bcfd
Permian Gas Outlook vs. Takeaway
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
kb
pd
Permian Oil Production versus Takeaway Capacity (kbd)
Permian Unconstrained Permian Constrained P/L + Local Capacity + Rail + Truck
The Midland – WTI differential currently sits around -$15/bbl and is expected to remain wide until pipelines come online in 2019
Black line below shows takeaway…the Permian would 'like' to grow faster than takeaway next year (but can't). The red area shows 'the lost barrels' which peak at 0.5 mlnbopd…the green line is our forecast with constraints (note that constraints involve both volume and also pricing – higher differentials)
In our model, Permian gas doesn't fill pipes right away, but by 2021 needs more pipes
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 18
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Permian Basin Oil Production (kbopd)
Non-Hz Other Hz Delaware Midland
0
5
10
15
20
25
30
35
40
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E
Bcfd
Capped because of pipeline constraints
Permian gas production outlook, bcfd
Source: EIA; HPDI, Bernstein estimates
Permian wells keep getting better….this brings an astounding amount of gas byproduct
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 19
Future gas demand driven by U.S. energy chessboard
Source: Lawrence Livermore National Laboratory
(2 QBTU ~ 1 MBOEPD)
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 20Source: EIA, DI Desktop, Baker Hughes, Bernstein analysis and estimates
85.6
105.1-4.811.6
4.32.5 0.1
5.8
60
70
80
90
100
110
120
Ga
s S
up
ply
(Bcf
d)
At present rig countdriven by PE spending Balancing for demand
versus supply growth
Supply Outlook to 2020 : This healthy growth means that in addition to “free” associated gas, Haynesville and Marcellus growth are needed at the margin
86.6
104.5
1.4
8.6
2.52.8
1.6 1.0
60
70
80
90
100
110
120
2016
Demand
Rescom/
Industrial
LNG
Exports
Pipeline
Exports
(Net)
NGLs/
Ethane
Other Power 2020E
Demand
Da
ily G
as
De
man
d (B
cfd
)
4.8% CAGR
10 bcfd of capacity starting up
1.5 bcfd of cracker capacity starting up
Mexico growth
Natural gas supply / demand balance 2016-2020Natural Gas Demand Outlook to 2020: healthy growth, but led by LNG exports, Mexico exports, and ethane crackers
107.7
117.6
1.52.5
0.2 1.80.7
3.1
60
70
80
90
100
110
120
2021EDemand
Rescom/Industrial
LNG Exports Net PipelineExports
NGLs/Ethane
Pipeline/Plant Use
Power 2025EDemand
Daily G
as
De
man
d (B
cfd
)
Gas Demand
of which 1.5 Bcfdis not price sensitive
1.9% CAGR
Natural Gas Demand Outlook 2021-25: demand profile slows as fewer LNG terminals are expected to be sanctioned & Mexico's gasification will be complete
107.7
118.0
-7.111.8
2.72.9
60
70
80
90
100
110
120
2021E Total SupplyDeclines Permian Canada Marcellus2025E Total Supply
Ga
s S
up
ply
(Bcf
d)
This is the swing gas supply
Natural Gas Supply Outlook 2021-25: Associated gas can meet almost all of this supply, with minimal growth required from the Marcellus
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 21
0
5
10
15
20
25
30
35
0
2
4
6
8
10
12
14
16
18
MTP
A
Ax
is T
itle
US LNG Capacity Approved Henry Hub Linked Oil Linked
Oil linked cheaper
HH linked
cheaper
Futurecurve signals
parity
US LNG approvedwhen price arbitrage
window open
0
1
2
3
4
5
6
7
2012 2013 2014 2015 2016 2017 2018*
FID
s
CC3
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
(60)
(40)
(20)
-
20
40
60
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
% o
f G
lob
al D
em
an
d
Sp
are
Bas
e C
ap
acit
y (m
mt)
Spare Base Capacity % of Demand
54mtpa of new projects need to be sanctioned by 2020 to meet long-term
market demand in 2025
A wave of LNG FIDs in the US (and Australia) occurred from 2012-15, but they dried up after. It takes 4 years from FID to startup.
Source: EIA; HPDI, Bernstein estimates. *CC-3 not yet officially FID-ed but Cheniere says will happen this year
Exports need LNG and Mexico…LNG waiting and Mexico full
This is due to the oversupply that we see in the LNG market from 2019-22…but by 2023 we will need more
Parity at the forward curve…but our deck suggests HH linked cheaper…
6% 10% 11% 11%
33%
51%
70%62%
34%
30%2%
1%
20%
4%
4%9%
8% 5%14% 17%
0%
20%
40%
60%
80%
100%
120%
U.S. 2015 Mexico 2015 Mexico 2021E Mexico 2030E
% o
f Ele
ctr
ic G
en
era
tio
n
Hydro Gas Coal & Oil Nuclear Other Renewable
~310GWh ~366GWh ~444GWh~4,078GWh
Mexican forecast suggests rising imports to 2020…then falling
By 2021 gas will be as fully saturated into power demand as can be expected
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 22
Source: EIA; SENER, Bernstein analysis
Company City Startup Date
Capacity
MTA
Capacity
kbd
ethane
Oxy/Mexichem JV Ingleside 3/1/2017 550 32
Dow Freeport 3/1/2018 1,500 87
Indorama Ventures PCL Lake Charles 7/1/2018 420 24
ExxonMobil Baytown 7/1/2018 1,500 87
Chevron Phillips Cedar Bayou 7/1/2018 1,500 87
FPC USA Point Comfort 4/1/2019 1,250 73
Shin-Etsu Plaquemine 7/1/2019 500 29
SASOL Lake Charles 7/1/2019 1,550 90
LACC LLC Lake Charles 7/1/2020 1,000 58
Exports Enterprise/ETP 7/1/2018 200
BY 2020 total 9,770 767
Dow Freeport 1/1/2021 500 29
Shell Chemical Monaca 1/1/2022 1,500 87
Total Port Arthur 1/1/2023 1,000 58
Exxon/SABIC San Patricio 6/1/2023 1,800 104
Post 2020 total 4,800 174
Next ethane cracker wave likely smaller than the one going on now
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 23Source: Rystad, Bloomberg, Factset, Bernstein estimates.
Comparing historical and projected gas prices
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20
Gas Prices ($/MMBtu)
AECO Waha Premium to AECO Leidy Premium to Waha HH Premium to Leidy HH
HistoricalFuture
A ECO
H H
L e idy
Wah a
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 24
WoodMac Price Assumptions
Brent
Year Low Base High
2018 31.60 52.00 72.40
2019 32.19 53.00 73.81
2020 31.78 53.00 74.22
2021 48.71 70.36 92.01
Henry Hub
Year Low Base High
2018 2.55 3.08 3.61
2019 2.39 2.93 3.46
2020 2.32 2.86 3.41
2021 3.07 3.62 4.18
Source: Rystad, Bloomberg, Factset, Bernstein estimates.
Comparing historical and projected gas prices
0
2
4
6
8
10
12
14
16
De
c-9
4
De
c-9
5
De
c-9
6
De
c-9
7
De
c-9
8
De
c-9
9
De
c-0
0
De
c-0
1
De
c-0
2
De
c-0
3
De
c-0
4
De
c-0
5
De
c-0
6
De
c-0
7
De
c-0
8
De
c-0
9
De
c-1
0
De
c-1
1
De
c-1
2
De
c-1
3
De
c-1
4
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
9
De
c-2
0
De
c-2
1
De
c-2
2
De
c-2
3
De
c-2
4
De
c-2
5
Ga
sPric
e ($
/mc
f)
Gas Marginal Cost Curve
Cash Cost
Rystad (Base)
Henry Hub
Marginal Cost
Forward Curve
Bernstein Forecast
NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 25
Key points
Why US oil supply response matters so muchGlobal supply (outside of 3 countries) isn’t growing
How do E&Ps think about fundingCash in ~ cash out (except when greedy or scared)
How E&Ps won the shale war
Our forecast of US supplyOil price, reinvestment rate, inflation, and well efficiencies drive result
Why the “predator prey” model is so importantLotka-Volterra equation
Midstream the current investment gating factor
Natural gas falls prey to oil market and lack of demand