Production
November 11, 2014
North American Oil & Gas Exploration & Production Bumps in the Boom Will the booming Permian and Midland basins experience a bit of turbulence for operators after flying high for so long? As land prices have soared, some analysts forecast that the money and time spent evaluating and drilling in the area will be tested, and price weakness may set in.
Bob Brackett, Ph.D. • Senior Analyst • +1-212-756-4656 • [email protected] Jean Ann Salisbury • Research Associate • +1-212-969-2427 • [email protected] See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
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 and Natural Gas. He is currently recognized as All American for both sectors by Institutional Investor buy-side surveys (number one and runner-up respectively). 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. He also holds a BS in Geophysics and a BA in Astronomy from the University of Texas.
Jean Ann Salisbury (Senior Research Associate) Jean Ann Salisbury is the Senior Research Associate on the North American Oil and Gas Exploration & Production and Natural Gas team. Previously, Jean Ann was an Engagement Manager with McKinsey & Company's Global Energy Practice, serving the world’s largest oil and gas companies. Prior to McKinsey, Jean Ann spent four years with ExxonMobil Gas and Power Marketing analyzing the US and Asian gas markets, and also worked for two summers for Anadarko Petroleum in field engineering roles. Jean Ann received her Bachelor’s degree from Harvard in Mechanical Engineering and Economics, as well as her MBA from Harvard Business School. 2
North American Oil & Gas Exploration/Production
Bumps in the boom – My role at this conference Cassandra The prophetess of the Fall of Troy
Eeyore "It's snowing still," said Eeyore gloomily. "And freezing. However," he said, brightening up a little, "we haven't had an earthquake lately." “One can't complain. I have my friends. Someone spoke to me only yesterday.”
Piñata Bring a guy from New York City to tell Texans what they’re doing wrong in the oil patch
Mark Twain History doesn't repeat itself, but it does rhyme
Air Traffic Controller Source: Wikimedia Commons
3
North American Oil & Gas Exploration/Production
Bumps in the boom – Four types of turbulence Thermal The ground is sufficiently hot that vertical currents rise
Mechanical The ground is rough and/or obstructed
Aerodynamic Turbulence caused by the aircraft itself
Shear When the wind’s speed or direction changes dramatically in a short period of time
4
North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
5
North American Oil & Gas Exploration/Production
Is the Permian Hot? We Know What’s Not An “historic” (pre-2005, pre-shale) map of US oil (green) and gas (red) wells
Source: HPDI; EIA; USGS; Bernstein analysis
6
North American Oil & Gas Exploration/Production
Is the Permian Hot? A Two State Shale Revolution 9000
Three Year Growth 3 mln BOPD
8500
129
US Oil Production (KBOPD)
141
106
62
18
172
8000 686 7500 7000
8648 6500
1686
TX and ND are 80% of growth
6000 5500 5648 5000 Aug 11
Texas
North Dakota Gulf of Mexico New Mexico
Oklahoma
Colorado
Wyoming
Other
Aug 14
Source: NDIC, EIA, Bernstein analysis
7
North American Oil & Gas Exploration/Production
Eight counties (black) = 50% of shale oil revolution Next 35 counties (red) = 40% of shale oil revolution
Cumulative horizontal oil production by county since 8/1/2011 Source: DI Desktop, Bernstein analysis
8
North American Oil & Gas Exploration/Production
Permian reservoirs rank well 100%
Bakken Canada Bakken
90%
% Oil (2nd month)
80% Wolfcamp Bone Spring
70%
Tonkawa
Niobrara Eagle Ford
60% Cleveland Miss Lime Marmaton
50%
Austin Chalk
40%
Granite Wash
30% 20% 10%
Piceance
Woodford Pinedale Cotton Valley Montney Marcellus Fayetteville
Barnett
Haynesville
0% 0
200
400
600 800 Peak Hydrocarbon Rate in BOEPD
1,000
1,200
1,400
Source: HPDI, Bernstein analysis
9
North American Oil & Gas Exploration/Production
Permian Basin shift from vertical to horizontal underway
Significant Vertical Drilling Undertaken…
…While Horizontal Drilling Relatively Concentrated but Expanding
Source: EIA, HPDI, Corporate reports, Bernstein analysis
10
North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
11
North American Oil & Gas Exploration/Production
Mechanical Turbulence – Obstructions to Shale Development Barnett Shale Lessons It is possible to drill in populated areas
Marcellus Shale Lessons NIMBY issues exist (Constitution Pipeline)
Niobrara Shale Lessons Activists can influence (Initiative 88)
Utica Shale Lessons Unwarranted fears can be exploited (Earthquakes)
Overall Lessons Need local alignment and need to earn a license to operate
Permian Shale Lessons Can protect the environment Can adapt to the environment Source: US Fish & Wildlife Service, Bernstein analysis
12
North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
…not really
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
13
North American Oil & Gas Exploration/Production
Industry is flocking to the Permian
Permian Hz Rig Growth (100=Feb 12) 2011 Horizontal Rig Count (112)
2012 Horizontal Rig Count (162)
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Oct-13
Nov-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Oct-12
Nov-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
120 115 110 105 100 95 90 85 80
non-Permian Hz Rig Growth (100=Feb 12) 2013 Horizontal Rig Count (217)
2014 Horizontal Rig Count (313)
Source: EIA, HPDI, Baker Hughes; Bloomberg L.P., DOE; Bernstein analysis
14
North American Oil & Gas Exploration/Production
Destroying price is evidence that you’re a legit shale Midland WTI Differential ($/bbl) 5 0 -5 -10 -15 -20 -25 1/2/2008
1/2/2009
1/2/2010
1/2/2011
1/2/2012
1/2/2013
1/2/2014
Source: EIA, HPDI, Baker Hughes; Bloomberg L.P., DOE; Bernstein analysis
15
North American Oil & Gas Exploration/Production
Supply growth closing on Bakken Canada Production Ramp (mln BOEPD) Compared to Eagle Ford / Bakken / Permian (all scaled to May 2014 well count) 4.5 4 3.5 3 2.5 2 1.5 1
0
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14
0.5
Canada
Eagle Ford scaled
Bakken scaled
Permian scaled
Source: HPDI,; Bernstein analysis
16
North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic
…transient
Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
17
North American Oil & Gas Exploration/Production
Shear Turbulence – Falling Oil Price & Equity Prices $200
$90
$180
$80
$160
Strong tie between Brent & XOP $70
$140 $60
$120
$100
$50
$80 $40
Divergence between the two since Jan 2013.
$60
$30
$40
$20 6/22/2006
$20
6/22/2007
6/22/2008
6/22/2009 6/22/2010 Brent ($/bbl) [left]
6/22/2011 XOP ($/sh) [right]
6/22/2012
6/22/2013
6/22/2014
Source: Bloomberg L.P., Bernstein estimates and analysis
18
North American Oil & Gas Exploration/Production
Consensus view is that shale oil is to blame…too cheap and scaring Saudi Arabia into a price war $70
$60
Reutrn per Well at $80 WTI ($mln)
$50
$40
$30
$20
A third of the volume delivered by US horizontal wells is uneconomic at $80/bbl WTI
$10 343
$-
$(10) 0
200
800 600 400 Cumulative Production Added by Horizontal Drilling in 1Q14 (mln BO)
1,000
1,200
We estimate their revenue at $80/bbl WTI oil and $/mcf HH gas (assuming $5 realization discounts on the oil side). Net revenue to E&P is assumed at 1/6th royalty. We estimate undiscounted margin at revenue net of $8 mln well costs (i.e., upstream and gathering facilities capex for typical horizontal) and net of production costs (which vary from $7/boe for a pure gas well to $35/boe for a pure oil well). We then apply a discount factor based on the decline of a typical well and sort by return per well. The chart then shows returns plotted against cumulative oil production added by horizontal drilling.
Source: HPDI, Bernstein estimates and analysis
19
North American Oil & Gas Exploration/Production
Actually a confluence of OPEC swing and terrible demand
150.00 Commodity Prices ($)
140.00 y = -2.88x + 363.96 R² = 0.80
130.00 120.00
110.00 y = -3.29x + 372.19 R² = 0.83
100.00 90.00 80.00 78.00
79.00
Brent Spot Price
80.00
81.00
82.00 83.00 84.00 US Dollar Index
Commodity Index
85.00
Linear (Brent Spot Price)
86.00
87.00
88.00
Linear (Commodity Index)
Source: IEA, Bloomberg L.P., Bernstein estimates and analysis
20
North American Oil & Gas Exploration/Production
Believe in demand – A fifty year trend Global Per Capita Oil Consumption (bbl/person)
5.50
5.00
4.50
4.00
3.50
3.00
4.5 x 80 mln people per year = 360 mln BO per year = 1 mln BOPD growth Source: Bloomberg L.P., BP Statistical Review of Energy; Bernstein analysis
21
North American Oil & Gas Exploration/Production
E&Ps business model is cash in / cash out Aggregated E&P Peers overview: 2Q14 36
Total Capex
80
8
70
6
60
4 2
50
0
40
-2
30
-4
20
-6
10
-8 -10
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
0
Realization Spread, $/boe (left axis)
0%
1Q04
FCF Organic, $/boe (left axis)
EBITDA Margin%
Production costs – peaked in mid 2008 but flattish now despite mix shift to oil
60
1,200
50
1,100
54%
$50 $45
900 30 800 20
700
Production, mmobe
52%
1,000
40
$/boe
Organic Capex/CF, %
Organic Capex as a % of Cash flow (right axis)
$40 50% $35 48%
$30
46%
$25 $20
44%
$15
10
600
42%
-
500
40%
Pro d uction Co sts
DD&A
Exp lo ration Exp ense
SG&A
In terest
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
Production, mmboe (right axis)
4Q04
Cashflow From Operations,$/boe (left axis)
3Q04
Acquisitions, $/boe (left axis)
2Q04
Organic Capex$/boe (left axis)
$5
1Q04
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
$10
38%
$0
% o f Liq uid s in Pro ductiion (left axis)
Source: Company Data, Bernstein estimates, Bloomberg
22
North American Oil & Gas Exploration/Production
Upstream Costs ($/BOE)
Cash flows from Operation and Capex
1Q14
20%
-15
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
0%
1Q13
0
40%
-10
3Q13
10%
3Q12
10
60%
-5
3Q11
20%
1Q12
30%
3Q10
20
100%
80% 0
1Q11
40%
120%
5
3Q09
30
140%
10
1Q10
50%
160%
15
1Q09
60%
20
1Q08
40
EBITDA Margin %
70%
3Q08
50
Organic Free Cashflow, $/boe
80%
1Q07
90%
EBITDA, $/boe
Revenue, $/boe (right axis)
Organic FCF and Organic Capex – Stable around 100% in recent quarters
60
3Q07
EBITDA Trend: E&P’s maintained a flat EBITDA margin since 2011
EBITDA ($/boe)
90
10
1Q06
Avg. WTI price was $103 /bbland HH was $4.60/mmcf.
11
CF Oprerations
5
Other
2
DD&A
18
Clean Net Income
DD&A
EBITDA
SG&A
Exploration Exp.
Prod. Taxes
Prod. Costs
Reported Revenue
Realization Spreads
18
2
30
12
3Q06
18
Financial Tax
3
Interest
2
38
EBIT
2
Realization Speads, $/boe
14
1Q05
57
3Q05
10
Realization spreads – Highest in the decade (Positive = Discount / Negative = Premium)
3Q04
67
Exp. Revenue
$ per boe
80 70 60 50 40 30 20 10 -
Revenue, $/boe
Overview of the 2Q 2014: Revenue up versus previous year, capital expenditure also rising
Four types of Permian turbulence Thermal
Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic
Activity level
Takeaway response Supply response
Shear
Pretty severe twist in commodity price tailwinds Don’t fly if turbulence makes you uncomfortable Source: Wikimedia Commons
23
North American Oil & Gas Exploration/Production
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24
North American Oil & Gas Exploration/Production
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North American Oil & Gas Exploration/Production
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North American Oil & Gas Exploration/Production
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North American Oil & Gas Exploration/Production
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North American Oil & Gas Exploration/Production
North American Oil & Gas Exploration & Production Bumps in the Boom Will the booming Permian and Midland basins experience a bit of turbulence for operators after flying high for so long? As land prices have soared, some analysts forecast that the money and time spent evaluating and drilling in the area will be tested, and price weakness may set in.
Bob Brackett, Ph.D. • Senior Analyst • +1-212-756-4656 • [email protected] Jean Ann Salisbury • Research Associate • +1-212-969-2427 • [email protected] See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
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 and Natural Gas. He is currently recognized as All American for both sectors by Institutional Investor buy-side surveys (number one and runner-up respectively). 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. He also holds a BS in Geophysics and a BA in Astronomy from the University of Texas.
Jean Ann Salisbury (Senior Research Associate) Jean Ann Salisbury is the Senior Research Associate on the North American Oil and Gas Exploration & Production and Natural Gas team. Previously, Jean Ann was an Engagement Manager with McKinsey & Company's Global Energy Practice, serving the world’s largest oil and gas companies. Prior to McKinsey, Jean Ann spent four years with ExxonMobil Gas and Power Marketing analyzing the US and Asian gas markets, and also worked for two summers for Anadarko Petroleum in field engineering roles. Jean Ann received her Bachelor’s degree from Harvard in Mechanical Engineering and Economics, as well as her MBA from Harvard Business School. 2
North American Oil & Gas Exploration/Production
Bumps in the boom – My role at this conference Cassandra The prophetess of the Fall of Troy
Eeyore "It's snowing still," said Eeyore gloomily. "And freezing. However," he said, brightening up a little, "we haven't had an earthquake lately." “One can't complain. I have my friends. Someone spoke to me only yesterday.”
Piñata Bring a guy from New York City to tell Texans what they’re doing wrong in the oil patch
Mark Twain History doesn't repeat itself, but it does rhyme
Air Traffic Controller Source: Wikimedia Commons
3
North American Oil & Gas Exploration/Production
Bumps in the boom – Four types of turbulence Thermal The ground is sufficiently hot that vertical currents rise
Mechanical The ground is rough and/or obstructed
Aerodynamic Turbulence caused by the aircraft itself
Shear When the wind’s speed or direction changes dramatically in a short period of time
4
North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
5
North American Oil & Gas Exploration/Production
Is the Permian Hot? We Know What’s Not An “historic” (pre-2005, pre-shale) map of US oil (green) and gas (red) wells
Source: HPDI; EIA; USGS; Bernstein analysis
6
North American Oil & Gas Exploration/Production
Is the Permian Hot? A Two State Shale Revolution 9000
Three Year Growth 3 mln BOPD
8500
129
US Oil Production (KBOPD)
141
106
62
18
172
8000 686 7500 7000
8648 6500
1686
TX and ND are 80% of growth
6000 5500 5648 5000 Aug 11
Texas
North Dakota Gulf of Mexico New Mexico
Oklahoma
Colorado
Wyoming
Other
Aug 14
Source: NDIC, EIA, Bernstein analysis
7
North American Oil & Gas Exploration/Production
Eight counties (black) = 50% of shale oil revolution Next 35 counties (red) = 40% of shale oil revolution
Cumulative horizontal oil production by county since 8/1/2011 Source: DI Desktop, Bernstein analysis
8
North American Oil & Gas Exploration/Production
Permian reservoirs rank well 100%
Bakken Canada Bakken
90%
% Oil (2nd month)
80% Wolfcamp Bone Spring
70%
Tonkawa
Niobrara Eagle Ford
60% Cleveland Miss Lime Marmaton
50%
Austin Chalk
40%
Granite Wash
30% 20% 10%
Piceance
Woodford Pinedale Cotton Valley Montney Marcellus Fayetteville
Barnett
Haynesville
0% 0
200
400
600 800 Peak Hydrocarbon Rate in BOEPD
1,000
1,200
1,400
Source: HPDI, Bernstein analysis
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North American Oil & Gas Exploration/Production
Permian Basin shift from vertical to horizontal underway
Significant Vertical Drilling Undertaken…
…While Horizontal Drilling Relatively Concentrated but Expanding
Source: EIA, HPDI, Corporate reports, Bernstein analysis
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North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
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North American Oil & Gas Exploration/Production
Mechanical Turbulence – Obstructions to Shale Development Barnett Shale Lessons It is possible to drill in populated areas
Marcellus Shale Lessons NIMBY issues exist (Constitution Pipeline)
Niobrara Shale Lessons Activists can influence (Initiative 88)
Utica Shale Lessons Unwarranted fears can be exploited (Earthquakes)
Overall Lessons Need local alignment and need to earn a license to operate
Permian Shale Lessons Can protect the environment Can adapt to the environment Source: US Fish & Wildlife Service, Bernstein analysis
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North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
…not really
Aerodynamic Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
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North American Oil & Gas Exploration/Production
Industry is flocking to the Permian
Permian Hz Rig Growth (100=Feb 12) 2011 Horizontal Rig Count (112)
2012 Horizontal Rig Count (162)
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Oct-13
Nov-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
Dec-12
Oct-12
Nov-12
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
120 115 110 105 100 95 90 85 80
non-Permian Hz Rig Growth (100=Feb 12) 2013 Horizontal Rig Count (217)
2014 Horizontal Rig Count (313)
Source: EIA, HPDI, Baker Hughes; Bloomberg L.P., DOE; Bernstein analysis
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North American Oil & Gas Exploration/Production
Destroying price is evidence that you’re a legit shale Midland WTI Differential ($/bbl) 5 0 -5 -10 -15 -20 -25 1/2/2008
1/2/2009
1/2/2010
1/2/2011
1/2/2012
1/2/2013
1/2/2014
Source: EIA, HPDI, Baker Hughes; Bloomberg L.P., DOE; Bernstein analysis
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North American Oil & Gas Exploration/Production
Supply growth closing on Bakken Canada Production Ramp (mln BOEPD) Compared to Eagle Ford / Bakken / Permian (all scaled to May 2014 well count) 4.5 4 3.5 3 2.5 2 1.5 1
0
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14
0.5
Canada
Eagle Ford scaled
Bakken scaled
Permian scaled
Source: HPDI,; Bernstein analysis
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North American Oil & Gas Exploration/Production
Four types of Permian turbulence Thermal Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic
…transient
Activity level Takeaway response Supply response
Shear Pretty severe twist in commodity price tailwinds
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North American Oil & Gas Exploration/Production
Shear Turbulence – Falling Oil Price & Equity Prices $200
$90
$180
$80
$160
Strong tie between Brent & XOP $70
$140 $60
$120
$100
$50
$80 $40
Divergence between the two since Jan 2013.
$60
$30
$40
$20 6/22/2006
$20
6/22/2007
6/22/2008
6/22/2009 6/22/2010 Brent ($/bbl) [left]
6/22/2011 XOP ($/sh) [right]
6/22/2012
6/22/2013
6/22/2014
Source: Bloomberg L.P., Bernstein estimates and analysis
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North American Oil & Gas Exploration/Production
Consensus view is that shale oil is to blame…too cheap and scaring Saudi Arabia into a price war $70
$60
Reutrn per Well at $80 WTI ($mln)
$50
$40
$30
$20
A third of the volume delivered by US horizontal wells is uneconomic at $80/bbl WTI
$10 343
$-
$(10) 0
200
800 600 400 Cumulative Production Added by Horizontal Drilling in 1Q14 (mln BO)
1,000
1,200
We estimate their revenue at $80/bbl WTI oil and $/mcf HH gas (assuming $5 realization discounts on the oil side). Net revenue to E&P is assumed at 1/6th royalty. We estimate undiscounted margin at revenue net of $8 mln well costs (i.e., upstream and gathering facilities capex for typical horizontal) and net of production costs (which vary from $7/boe for a pure gas well to $35/boe for a pure oil well). We then apply a discount factor based on the decline of a typical well and sort by return per well. The chart then shows returns plotted against cumulative oil production added by horizontal drilling.
Source: HPDI, Bernstein estimates and analysis
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North American Oil & Gas Exploration/Production
Actually a confluence of OPEC swing and terrible demand
150.00 Commodity Prices ($)
140.00 y = -2.88x + 363.96 R² = 0.80
130.00 120.00
110.00 y = -3.29x + 372.19 R² = 0.83
100.00 90.00 80.00 78.00
79.00
Brent Spot Price
80.00
81.00
82.00 83.00 84.00 US Dollar Index
Commodity Index
85.00
Linear (Brent Spot Price)
86.00
87.00
88.00
Linear (Commodity Index)
Source: IEA, Bloomberg L.P., Bernstein estimates and analysis
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North American Oil & Gas Exploration/Production
Believe in demand – A fifty year trend Global Per Capita Oil Consumption (bbl/person)
5.50
5.00
4.50
4.00
3.50
3.00
4.5 x 80 mln people per year = 360 mln BO per year = 1 mln BOPD growth Source: Bloomberg L.P., BP Statistical Review of Energy; Bernstein analysis
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North American Oil & Gas Exploration/Production
E&Ps business model is cash in / cash out Aggregated E&P Peers overview: 2Q14 36
Total Capex
80
8
70
6
60
4 2
50
0
40
-2
30
-4
20
-6
10
-8 -10
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
0
Realization Spread, $/boe (left axis)
0%
1Q04
FCF Organic, $/boe (left axis)
EBITDA Margin%
Production costs – peaked in mid 2008 but flattish now despite mix shift to oil
60
1,200
50
1,100
54%
$50 $45
900 30 800 20
700
Production, mmobe
52%
1,000
40
$/boe
Organic Capex/CF, %
Organic Capex as a % of Cash flow (right axis)
$40 50% $35 48%
$30
46%
$25 $20
44%
$15
10
600
42%
-
500
40%
Pro d uction Co sts
DD&A
Exp lo ration Exp ense
SG&A
In terest
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
Production, mmboe (right axis)
4Q04
Cashflow From Operations,$/boe (left axis)
3Q04
Acquisitions, $/boe (left axis)
2Q04
Organic Capex$/boe (left axis)
$5
1Q04
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
$10
38%
$0
% o f Liq uid s in Pro ductiion (left axis)
Source: Company Data, Bernstein estimates, Bloomberg
22
North American Oil & Gas Exploration/Production
Upstream Costs ($/BOE)
Cash flows from Operation and Capex
1Q14
20%
-15
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
0%
1Q13
0
40%
-10
3Q13
10%
3Q12
10
60%
-5
3Q11
20%
1Q12
30%
3Q10
20
100%
80% 0
1Q11
40%
120%
5
3Q09
30
140%
10
1Q10
50%
160%
15
1Q09
60%
20
1Q08
40
EBITDA Margin %
70%
3Q08
50
Organic Free Cashflow, $/boe
80%
1Q07
90%
EBITDA, $/boe
Revenue, $/boe (right axis)
Organic FCF and Organic Capex – Stable around 100% in recent quarters
60
3Q07
EBITDA Trend: E&P’s maintained a flat EBITDA margin since 2011
EBITDA ($/boe)
90
10
1Q06
Avg. WTI price was $103 /bbland HH was $4.60/mmcf.
11
CF Oprerations
5
Other
2
DD&A
18
Clean Net Income
DD&A
EBITDA
SG&A
Exploration Exp.
Prod. Taxes
Prod. Costs
Reported Revenue
Realization Spreads
18
2
30
12
3Q06
18
Financial Tax
3
Interest
2
38
EBIT
2
Realization Speads, $/boe
14
1Q05
57
3Q05
10
Realization spreads – Highest in the decade (Positive = Discount / Negative = Premium)
3Q04
67
Exp. Revenue
$ per boe
80 70 60 50 40 30 20 10 -
Revenue, $/boe
Overview of the 2Q 2014: Revenue up versus previous year, capital expenditure also rising
Four types of Permian turbulence Thermal
Is the Permian Basin hot?
Mechanical Are there obstructions to development?
Aerodynamic
Activity level
Takeaway response Supply response
Shear
Pretty severe twist in commodity price tailwinds Don’t fly if turbulence makes you uncomfortable Source: Wikimedia Commons
23
North American Oil & Gas Exploration/Production
Disclosure Appendix
24
North American Oil & Gas Exploration/Production
Disclosure Appendix SRO REQUIRED DISCLOSURES References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited 盛博香港有限公司, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. OTHER DISCLOSURES A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation. This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Conduct Authority.
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North American Oil & Gas Exploration/Production
Financial Conduct Authority and located at 50 Berkeley Street, London W1J 8SB, +44 (0)20-7170-5000. To our readers in member states of the EEA: This publication is being distributed in the EEA by Sanford C. Bernstein Limited, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority and holds a passport under the Markets in Financial Instruments Directive. To our readers in Hong Kong: This publication is being distributed in Hong Kong by Sanford C. Bernstein (Hong Kong) Limited 盛博香港有限公司, which is licensed and regulated by the Hong Kong Securities and Futures Commission (Central Entity No. AXC846). This publication is solely for professional investors only, as defined in the Securities and Futures Ordinance (Cap. 571). To our readers in Singapore: This publication is being distributed in Singapore by Sanford C. Bernstein, a unit of AllianceBernstein (Singapore) Ltd., only to accredited investors or institutional investors, as defined in the Securities and Futures Act (Chapter 289). Recipients in Singapore should contact AllianceBernstein (Singapore) Ltd. in respect of matters arising from, or in connection with, this publication. AllianceBernstein (Singapore) Ltd. is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C. It is regulated by the Monetary Authority of Singapore and located at 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712, +65-62304600. The business name "Sanford C. Bernstein" is registered under business registration number 53193989L. To our readers in Australia: Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited and Sanford C. Bernstein (Hong Kong) Limited 盛博香港有限公司 are exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 in respect of the provision of the following financial services to wholesale clients: providing financial product advice; dealing in a financial product; making a market for a financial product; and providing a custodial or depository service.
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26
North American Oil & Gas Exploration/Production
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Copyright 2014, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited 盛博香港有限公司, and AllianceBernstein (Singapore) Ltd., subsidiaries of AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved. This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where
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North American Oil & Gas Exploration/Production
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North American Oil & Gas Exploration/Production
