BoyarMiller Breakfast Forum: Perspectives on the Energy Industry March 2013

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  • 1. Perspectives on the Energy Industry Breakfast Forum www.boyarmiller.com March 21, 2013
  • 2. Regulatory Overview or: How I Learned to Stop Worrying and Love the EPA? David Pursell March 21, 2013 **IMPORTANT DISCLOSURES ON PAGE 9 OF THIS DOCUMENT**
  • 3. Regulatory Overview or: How I Learned to Stop Worrying and Love the EPA?  What do we care about today: □ Keystone □ Hydraulic fracturing □ Rin – No really?  Party is not important. D’s and R’s equally inept.  Political cycles are much shorter than energy cycles.
  • 4. Keystone Kops….err….Pipeline  Keystone will happen or □ Keystone existing pipes will be reversed □ Rail will transport oil to Gulf Coast □ Or both
  • 5. Unintended Consequences of Government  1Q`12 - US carbon emissions hit a 20-year low  Reduced CO2 emission over the past 5 years  Last 5 years – Power generation from coal down 25%, from natural gas +35% Source: Forbes, EIA
  • 6. Rin – Renewable Identification Numbers $1.20 $1.00 2013 RIN Price $0.80 2012 RIN Price $0.60 $0.40 $0.20 $0.00  Government mandates an amount of ethanol sales  Companies do not want to blend more than 10% ethanol into gasoline  Companies either buy credits or export gasoline (without ethanol)
  • 7. Shales Are Disruptive…but a Policy Win! For Gas 70 U.S. Natural Gas Production (bcf/d) 65 60 55 50 45 Jan-06 Source: EIA Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
  • 8. … And Crude Oil! 5,000 U.S. Onshore Oil Production (kbpd) 4,500 4,000 3,500 3,000 2,500 2,000 Jan-05 Source: EIA Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
  • 9. Location, location, location “According to this map we have gone 4 inches” Harry, Dumb & Dumber Source: Bloomberg, TPH
  • 10. Analyst Certification: I, Dave Pursell, do hereby certify that, to the best of my knowledge, the views and opinions in this research report accurately reflect my personal views about the company and its securities. I have not nor will not receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report. Important Disclosure: The above mentioned analyst does not own any securities mentioned in this report. Ratings: B = buy, A = accumulate, H = hold, T = trim, S = sell, NR = not rated For detailed rating information, distribution of ratings, price charts and other important disclosures, please visit our website at www.tudorpickering.com. To request a written copy of the disclosures please call 800-507-2400 or write to Tudor, Pickering, Holt & Co. Securities, Inc. 1111 Bagby, Suite 5000, Houston, TX 77002. Institutional Communication Only. Under FINRA Rule 2210, this communication is deemed institutional sales material and it is not meant for distribution to retail investors. Recipients should not forward this communication to a retail investor. Copyright 2013, Tudor, Pickering, Holt & Co. This information is confidential and is intended only for the individual named. This information may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Tudor, Pickering, Holt & Co. This communication is based on information which Tudor, Pickering, Holt & Co. believes is reliable. However, Tudor, Pickering, Holt & Co. does not represent or warrant its accuracy. This message should not be considered as an offer or solicitation to buy or sell any securities. OTHER DISCLOSURES Trade Name Tudor, Pickering, Holt & Co. is the global brand name for Tudor, Pickering, Holt & Co. Securities, Inc. (TPHCSI) and its non-US affiliates worldwide. Legal Entities Disclosures U.S.: TPHCSI is a member of FINRA and SIPC. U.K.: Tudor, Pickering, Holt & Co. International, LLP is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. OC349535. Registered Office is 5th Floor, 6 St. Andrew Street, London EC4A 3AE. Canada The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offense.
  • 11. United Kingdom Tudor, Pickering, Holt & Co International LLP does not provide accounting, tax or legal advice. In addition, we mutually agree that, subject to applicable law, you (and your employees, representatives and other agents) may disclose any aspects of any potential transaction or structure described herein that are necessary to support any UK income tax benefits, and all materials of any kind (including tax opinions and other tax analyses) related to those benefits, with no limitations imposed by Tudor, Pickering, Holt & Co International LLP or its affiliates. The information contained herein is confidential (except for information relating to tax issues) and may not be reproduced in whole or in part. Tudor, Pickering, Holt & Co International LLP assumes no responsibility for independent verification of third-party information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including estimates of potential cost savings and synergies) prepared by, reviewed or discussed with the managements of your company and/ or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). These materials were designed for use by specific persons familiar with the business and the affairs of your company and Tudor, Pickering, Holt & Co International LLP materials. This information is intended only for the use of professional clients and eligible counterparties or persons who would fall into these categories if they were clients of Tudor, Pickering, Holt & Co International, LLP, or any of its affiliates. Retail clients must not rely on this document and should note that the services of Tudor, Pickering, Holt & Co International, LLP, are not available to them. Under no circumstances is this presentation to be used or considered as an offer to sell or a solicitation of any offer to buy, any security. Prior to making any trade, you should discuss with your professional tax, accounting, or regulatory advisers how such particular trade(s) affect you. This brief statement does not disclose all of the risks and other significant aspects of entering into any particular transaction. Tudor, Pickering, Holt & Co. International, LLP is a limited liability partnership registered in England and Wales (registered number OC349535). Its registered office is 5th Floor, 6 St. Andrew Street, London EC4A 3AE. Tudor, Pickering, Holt & Co. International, LLP (TPH International) is authorised and regulated by the Financial Services Authority, and is a separate but affiliated entity of Tudor, Pickering, Holt & Co. Securities, Inc. (TPH Securities). TPH Securities is a member of FINRA and SIPC. Unless governing law permits otherwise, you must contact the Tudor, Pickering, Holt & Co. entity in your home jurisdiction if you want to use our services in effecting a transaction. See http://www.tudorpickering.com/Disclosure/ for further information on regulatory disclosures including disclosures relating to potential conflicts of interest.
  • 12. RESEARCH SALES Oil Service / E&C Jeff Tillery 713.333.2964 jtillery@tudorpickering.com Midstream Brad Olsen 713.333.7693 bolsen@tudorpickering.com Houston Clay Co neley 713-333-2979 cco neley@tudorpickering.com Denver Chuck Howell 303.300.1902 chowell@tudorpickering.com Joe Hill 713.333.2963 jhill@tudorpickering.com Joe Herman 713.333.3925 jherman@tudorpickering.com Mike Bradley 713.333.2968 mbradley@tudorpickering.com Jason Foxen 303.300.1960 jfoxen@tudorpickering.com Byron Pope 713.333.7690 bpope@tudorpickering.com Integrated Oils / Refiners Robert Kessler 713.333.7696 rkessler@tudorpickering.com Mike Davis 713.333.2971 mdavis@tudorpickering.com New York George O’Leary 713.333.2973 goleary@tudorpickering.com Klayton Kovac 713-3333866 kkovac@tudorpickering.com Macro Dave Pursell 713.333.2962 dpursell@tudorpickering.com Coal & Power Brandon Blossman 713.333.2994 bblossman@tudorpickering.com Brandon Mei 713.333.7689 bmei@tudorpickering.com Clay Rynd 713.333.3867 crynd@tudorpickering.com E&P Brian Lively 713.333.2970 blively@tudorpickering.com Brad Pattarozzi 713-333-2993 bpattarozzi@tudorpickering.com George O’Leary 713.333.2973 goleary@tudorpickering.com Jo hn Hurd 713.333.2951 jhurd@tudorpickering.com Jo sh Martin 713.333.2982 jmartin@tudorpickering.com Paige Penchas 713.333.2969 ppenchas@tudorpickering.com Ken Johnson 212-610-1650 kjohnson@tudorpickering.com *London Jon Mellberg +44 20 3008 6430 jmellberg@tudorpickering.com Scott McGarvey smcgarvey@tudorpickering.com Seth Williams swilliams@tudorpickering.com TRADING- New York Todd Wood twood@tudorpickering.com *TRADING- London ‡ Chris Wellesley cwellesley@tudorpickering.com +44 20 3427 5833/4 ‡ Harry Grist hgrist@tudorpickering.com +44 20 3427 5832 Win Oberlin +44 20 3008 6431 woberlin@tudorpickering.com ‡ Jonathan Wright +44 20 3008 6436 jwright@tudorpickering.com Matt Portillo 713-333-2995 mportillo@tudorpickering.com Utilities Oliver Do o lin 713-333-2989 odoolin@tudorpickering.com Chris Hart 212-610-1657 chart@tudorpickering.com TRADING - Houston 800.507.2400 Hubert van der Heijden 713-333-3983 hvanderheijden@tudorpickering.com Neel Mitra 713.333.3896 nmitra@tudorpickering.com *London- E&P Anish Kapadia +44 20 3008 6433 akapadia@tudorpickering.com Shola Labinjo + 44 20 3008 6437 slabinjo@tudorpickering.com *Office o f Tudor, Pickering, Holt & Co. International, LLP. Anish Kapadia and Shola Labinjo are employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and arenot registered/qualified as research analysts with FINRA. Mr. Kapadia and Mr. Labinjo are not associated persons of Tudor, Pickering, Holt & Co. Securities, Inc. and as such are not subject to NASD Rule 2711 restrictions on communications with subject companies, public appearances and trading securities held by a research analyst account. ‡ Employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and is not registered/qualifiedwith FINRA and is not an associated person of Tudor, Pickering, Holt & Co. Securities, Inc.
  • 13. Perspectives on the Energy Industry Capital Markets Tom Hargrove Managing Director GulfStar Group
  • 14. OVERVIEW  Oil & Gas Services  Pipeline Services  Petrochemical / Refining Services
  • 15. MIDDLE MARKET M&A ACTIVITY  Public companies’ stock prices at attractive levels with high cash balances  Large universe of private equity buyers with liquidity  Lenders relatively aggressive and return of cash flow based lending Middle Market ($10-$250mm) EV/EBITDA and Deal Count 250 6.2x Transaction Multiple 6.1x 6.0x 6.0x 200 6.0x 5.9x 150 100 5.5x 50 5.0x 0 2008 Source: PitchBook 2009 TEV/EBITDA 2010 2011 Number of Deals 2012 Number of Deals 6.5x
  • 16. MIDDLE MARKET M&A ENVIRONMENT Middle Market EV/EBITDA by Total Enterprise Value TEV ($MM) $10-25 $25-50 $50-100 $100-250 Source: GF Data 2008 5.4 6.0 6.7 6.7 2009 5.5 6.0 6.5 7.2 2010 5.3 6.2 6.6 6.2 2011 5.3 5.8 7.1 7.7 2012 5.6 6.1 6.8 7.5
  • 17. LENDING ENVIRONMENT  Senior Debt to LIBOR spread is widening  Subordinated Debt pricing relatively flat Yearly Debt Multiples to EBITDA 4.0x 3.5x 3.0x 1.0x 1.0x 2.3x 2.4x 2.4x 2010 1.0x 2011 2012 0.7x 2.5x 1.0x 2.0x 1.5x 1.0x 2.3x 1.8x 0.5x 0.0x 2008 2009 Senior Debt Source: GF Data Sub Debt
  • 18. PRIVATE EQUITY ENVIRONMENT Private Equity Capital Invested and Cumulative Overhang $25 $600 Total Capital Invested ($ in Billions) $400 $15 $300 $10 $200 $5 $100 $0 $0 2005 2006 Cumulative Overhang Source: PitchBook 2007 2008 Under $250M 2009 2010 $250M-$500M 2011 $500M-$1B 2012 Cumulative Overhang ($ in Billions) $500 $20
  • 19. DOMESTIC RIG COUNT Historical and Projected Rig Count 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13E3Q13E1Q14E3Q14E Source: Baker Hughes, Goldman Sachs Research estimates
  • 20. DOMESTIC RIG COUNT BY TRAJECTORY 2,000 80.0% 1,500 60.0% 1,000 40.0% 20.0% 0 Feb-08 Aug-08 Feb-09 Aug-09 Directional Source: Baker Hughes Feb-10 Aug-10 Horizontal Feb-11 Vertical Aug-11 Feb-12 Aug-12 % Non-Vertical 0.0% Feb-13 % Non-Vertical Drilling 100.0% 500 North American Onshore Rig Count 2,500
  • 21. OIL AND GAS SERVICE COMPANIES  Continued high activity in North American oil exploration ⁻ Eagle Ford ⁻ Bakken ⁻ Permian ⁻ Mississippi Lime  Horizontal drilling continues to drive more service revenue ⁻ More horizontal drilling in Permian and Mississippi Lime ⁻ Drilling increasing in efficiency ⁻ Fracing continuing to increase in scope  Gulf of Mexico market has recovered from Macondo ⁻ Deep water activity ⁻ New build rigs entering market  Forecasted increase in NAM rig count in 2013  Oil and gas prices appear range-bound but generate good levels of profitability on oil projects
  • 22. PIPELINE SERVICE COMPANIES  Aging pipeline infrastructure creating good maintenance market ⁻ Stable recurring revenues ⁻ Stricter DOT regulations and enforcement ⁻ Heightened concern over pipeline safety and maintenance with several high profile incidents ⁻ Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011 ⁻ Hydrostatic testing and repairs on all pipelines constructed before 1970  Unconventional oil and gas plays require new pipeline infrastructure ⁻ New pipelines needed to get oil and gas from exploration areas to market ⁻ New pipeline infrastructure required at new or expanded petrochemical facilities ⁻ Shale development wells fall off rapidly after initial production, resulting in more wells drilled and infrastructure needed ⁻ Pipeline construction needed to reduce bottlenecks; GOM crude priced at Brent versus WTI (est. $110 vs. $95)
  • 23. NEW PIPELINE CONSTRUCTION  Pipeline construction miles are projected to increase to approximately 41,000 in 2013, up from 36,000 in 2012  Total pipeline construction expenditures are projected to increase to over $41 billion in 2013, up from $34 billion in 2012  These increases are driving the growth of all ancillary pipeline service, maintenance and construction spending
  • 24. PETROCHEMICAL AND REFINING SERVICES  Low natural gas prices and availability have resulted in robust petrochemical growth  Increased domestic oil availability is providing domestic refineries with price advantaged crude oil but requires plant retrofits to process light crudes  Market for petrochemical / refining services being driven by several factors: ⁻ The resurgence and growth of domestic crude production and domestic natural gas production ⁻ Rising global demand for refined products ⁻ Attractive economics for U.S. petrochemical plants ⁻ Continued aging of current infrastructures  Capital spending (routine maintenance, turnarounds and general spending) anticipated to reach $17.6 billion in 2013 and grow to $19.9 billion by 2017
  • 25. PETROCHEMICAL / REFINING CONSTRUCTION Project LyondellBasell Feedstock Tesoro SLC Refinery Exxon Port Allen INEOS Chocolate Bayou Exxon Baton Rouge LyondellBasell Ethylene Exxon Mobil Plastics Valero McKee Celanese Corp Methanol Exxon Mobil Chevron Phillips Baytown Chevron Phillips Old Ocean Dow Brazosport Valero Three Rivers Announced Plant Expansions through 2017 Value Plant Location Channelview, TX $500 million Salt Lake City, UT $180 million Port Allen, LA N/A Alvin, TX N/A Baton Rouge, LA $215 million La Porte, TX $500 million Mont Belvieu, TX N/A Sunray, TX N/A Clear Lake, TX $1 billion Baytown, TX N/A Baytown, TX $5 billion Sweeny, TX $5 billion Freeport, TX $4 billion Three Rivers, TX N/A Est. Completion Date 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2017 2017 2017 N/A
  • 26.  BoyarMiller Breakfast Forum Private Equity - Perspectives on the Energy Industry James Wallis March 21, 2013 CONFIDENTIAL AND PROPRIETARY CONFIDENTIAL AND PROPRIETARY
  • 27. Energy Private Equity  What is Energy Private Equity?  Asset Managers   Our investors are pensions, endowments, and charities Source of Capital   Experienced   Patient Disciplined Strategic Partners  Relationship-focused  Energy Finance Expertise  Well-connected to capital, M&A, and talent markets  Prior lessons and relationships applied across the portfolio CONFIDENTIAL AND PROPRIETARY 27
  • 28. Competitors  Energy Private Equity – It’s Competitive OCCASIONAL DIRECT COMPETITORS UPSTREAM OIL AND GAS: SERVICE, E&P ALL ENERGY SECTORS  First Reserve (8.9) PRIMARILY US E&P AND MIDSTREAM PRIMARILY SERVICE OR SERVICE TECHNOLOGY ACQUIRE AND DIRECTLY OPERATE   SCF (0.5)  Altira (0.2)  EnCap (5.0)  epiV (0.1)  Kayne Anderson (1.6)  White Deer (1.3)  Energy Ventures (0.4)  NGP Tech. (0.3)  NGP (3.6)  EnerVest (1.5)  Denham (3.0)  HitecVision (1.4)  Intervale (0.3)  Pelican (0.1)  Quantum (2.5)  KKR/Premier  Cadent (0.5)  4D (0.2)  Basin  Scotia Waterous  Merit Energy (0.9)  Quintana (0.7)  Kerogen (E&P) (1.5)  Kenda/Shell  Global Energy Capital (0.2)  SFC Partners (0.7)  Quantum Res. (1.2)  EIG Partners (4.1)  OFS Energy  CSL (0.3)  Yorktown (1.3)  Scout Energy  Barclays Nat. Res (0.9)  Statoil  CTV  Sheridan (1.8)  Harvest Partners  Chesapeake NG Ventures  CoP/ETV  Urban (0.1)  Turnbridge  White Rock  Riverstone (6.0)  ArcLight (3.5)  Arcapita  Energy Capital Mgmt./SAEV  Clearlake Capital  ESS  OTHER ENERGY PRIVATE EQUITY INVESTORS MIDSTREAM  Energy Spectrum (0.6) POWER GENERALISTS  Energy Capital Partners (4.3)  Apollo (14.7)  Warburg (15.0)  Advent (1.7)  EnCap Flatrock (0.8)  Goldman (20.3)  Avista (2.0)  Haddington (0.2)  Tenaska (2.4)  KKR (17.6)  Pine Brook Road (1.4)  Energy & Minerals Group (1.4)  Energy Investors Fund (EIF) (1.4)  3i  TPG (17.8)  Gen. Atlantic  Wexford (0.5)  Rockland Power Partners (0.3)  Blackstone  Kelso (5.1)  LS Power Parenthetical numbers represent total capital commitments of most recently raised relevant fund in billions of dollars, if available. CONFIDENTIAL AND PROPRIETARY 28
  • 29. Lime Rock  Who is Lime Rock?  Energy-focused asset managers with two distinct private equity fund strategies  $5 billion of total private capital under management  Founded in 1998  Founded in 2005  Invests in companies  Acquires oil and natural gas properties  Global strategy: E&P and energy service  U.S. strategy: E&P only  E&P portfolio companies operate properties  E&P investments target higher-risk, unconventional resource or exploration- oriented projects  Directly operates properties  Targeting lower-risk, mature, currently producing, high PDP reserves  Headquartered in Houston with field offices in Texas, Oklahoma, and New Mexico  Global team in five locations: Westport, Houston, Aberdeen, London, and Dubai CONFIDENTIAL AND PROPRIETARY 29
  • 30. Today’s Investment Environment  Macro Uncertainty Abounds  World economies are fragile  Global deleveraging cycle will be a drag on growth everywhere  Europe is a mess with no resolution in sight  China is a black box – possibly headed for a “hard landing”  U.S. recovery is nascent, slow, and hooked on fiscal stimulus  Politicians not inspiring confidence  Despite this, U.S. stock market is hitting new highs and debt yields are very low  Timing the markets is incredibly difficult   Diversification within energy is prudent – timing, geography, and commodity   Not a time for bold, market-calling theme bets “Teams over themes” U.S. Oil & Gas Renaissance is providing a big tailwind CONFIDENTIAL AND PROPRIETARY 30
  • 31. Investing in the U.S. Oil and Gas Renaissance  Everyone Has Heard the News… U.S. ANNUAL CRUDE OIL PRODUCTION, 19802012 U.S. ANNUAL DRY GAS PRODUCTION, 19902012 (million barrels per day, excludes NGLs) (billion cubic feet per day) 10 70 8 60 6 50 4 40 1980 1984 1988 1992 1996 2000 2004 2008 2012 1990 1993 1996 1999 2002 2005 2008 2011 Source: EIA CONFIDENTIAL AND PROPRIETARY 31
  • 32. Investing in the U.S. Oil and Gas Renaissance  Basic Technologies Are Well Known and Understood Source: CERA CONFIDENTIAL AND PROPRIETARY 32
  • 33. Investing in the U.S. Oil and Gas Renaissance  But the Technologies Are Not New HORIZONTAL DRILLING RIGS AS A PERCENTAGE OF U.S. TOTAL RIG COUNT, 1991-2012 75% 50% 25% 0% 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Baker Hughes CONFIDENTIAL AND PROPRIETARY 33
  • 34. Investing in the U.S. Oil and Gas Renaissance  Pop Quiz: Who was the NFL champion the year of the first hydraulic fracturing operation? CONFIDENTIAL AND PROPRIETARY 34
  • 35. Investing in the U.S. Oil and Gas Renaissance  Since the first hydraulic fracturing operation in 1947, conducted by Halliburton, there have been 1.1 million separate fracturing jobs, most in the United States. CONFIDENTIAL AND PROPRIETARY 35
  • 36. Investing in the U.S. Oil and Gas Renaissance  So What’s New?  Simultaneous hydraulic fracturing and “zipper fracs”  Real-time microseismic  Nano-scale reservoir analysis  Advanced fracturing fluids  Automated AC drilling rigs  Pad drilling  Extended laterals  Geosteering Source: CERA CONFIDENTIAL AND PROPRIETARY 36
  • 37. Investing in the U.S. Oil and Gas Renaissance  Four reasons that this supply renaissance has changed the game. CONFIDENTIAL AND PROPRIETARY 37
  • 38. Investing in the U.S. Oil and Gas Renaissance  1. For U.S. Natural Gas, Upending the Cost Curve: “Bad” Reservoirs Are Cheaper than “Good” Reservoirs THAT WAS THEN (FEB. 2007): Could conventional basins compete with ~$4-6/MCF LNG breakeven import price? LNG VERSUS U.S. NATURAL GAS BASIN ECONOMICS (breakeven gas price, $/mcf) THIS IS NOW: When will we need more supply than can be supplied by ~$3.00-$3.50/MCF Marcellus Shale breakeven price? NYMEX BREAKEVEN PRICE FOR 10% AFTER-TAX RATE OF RETURN Source: Pickering Energy Partners Source: Tudor Pickering Holt & Co. CONFIDENTIAL AND PROPRIETARY 38
  • 39. Investing in the U.S. Oil and Gas Renaissance  “Big Three” Gas Giants – Historical Production vs. Rig Count 350 6.0 300 5.0 250 4.0 200 3.0 150 2.0 100 1.0 50 0.0 0 Barnett Haynesville Marcellus Barnett Rigs Haynesville Rigs Horizontal Rigs 400 7.0 Bcfe/d 8.0 Marcellus Rigs Source: ITG Investment Research, raw data provided by didesktop, Ventyx. CONFIDENTIAL AND PROPRIETARY 39
  • 40. Investing in the U.S. Oil and Gas Renaissance  Remaining Low-Cost Gas Inventory is Mind-Boggling Marcellus Barnett • 19 million acres • 5 million acres • ~3,000 wells produce 7 Bcf/d • ~12,000 wells produce 5 Bcf/d Source: ITG Investment Research, raw data provided by didesktop and state agencies. CONFIDENTIAL AND PROPRIETARY 40
  • 41. Investing in the U.S. Oil and Gas Renaissance  2. Goodbye, Peak Oil… DEMAND SUPPLY Source: BP Energy Outlook 2030 CONFIDENTIAL AND PROPRIETARY 41
  • 42. Investing in the U.S. Oil and Gas Renaissance  U.S. Share of Worldwide Oil Production Growth CONFIDENTIAL AND PROPRIETARY 42
  • 43. Investing in the U.S. Oil and Gas Renaissance  3. United States Is Moving to Either Energy Independence or Energy Less-Dependence OIL DEMAND, FIELD PRODUCTION, AND NET IMPORTS (million barrels per day) NATURAL GAS IMPORTS (billion cubic feet per day) PIPELINE LNG IMPORTS AS % OF DEMAND 2007 8.0 1.4 14.9% 2007 20.7 6.9 12.0 2012 (Jan-Oct) 4.0 0.4 6.4% 2012 (JanOct) 18.7 8.8 7.7 DEMAND Per Credit Suisse, by 2020, the U.S. will have 5.7 BCF per day of LNG export capacity FIELD PRODUCTION NET IMPORTS Forecast range from ~4.5 to ~6.5 million barrels/day of incremental production through 2020, including crude oil, NGLs, and biofuels Source: EIA for import data CONFIDENTIAL AND PROPRIETARY 43
  • 44. Investing in the U.S. Oil and Gas Renaissance  U.S. Energy Less-Dependence Historical CONFIDENTIAL AND PROPRIETARY Projected 44
  • 45. Investing in the U.S. Oil and Gas Renaissance  4. There Are Potential Major Implications for the U.S. Economy and Competiveness INDIRECT DIRECT JOBS CAPITAL INVESTMENT  ~467,000 in oil and gas extraction including support roles  Citibank forecasts doubling of direct jobs but others are more skeptical  Tremendous amount will be spent on well construction, pipelines, processing plants, supporting services and equipment, rail, road infrastructure, etc ENERGY/FEEDSTOCK  U.S. more competitive in chemicals and fertilizer where oil and gas are direct fedstocks  Lower energy and basic material costs lead to more competitive manufacturing BALANCE OF PAYMENTS  Lower current account deficit—strengthen U.S. dollar  Foreign policy implications  Citibank estimates potential for up to 2 million indirect jobs Estimate of U.S. Unconventional Oil and Gas Capital Expenditures and Job Creation (Through 2020) Category Exploration and Production Pipelines NG Processing Plants LNG Manufacturing Rail and Other Infrastructure Total Investment (billions) $60 – $70 $50 – $65 $35 – $45 $20 – $30 $70 – $80 $10 – $20 $245 – $305 CUMULATIVE IMPACT ON U.S. REAL GDP, 2012E-2020E Jobs Created (thousands) 440 – 480 800 – 920 450 – 550 260 – 370 920 – 985 125 – 200 3,000 – 3,505 Source: Citi Investment Research and Analysis Source: Forbes. CONFIDENTIAL AND PROPRIETARY 45
  • 46. Investing in the U.S. Oil and Gas Renaissance  The Big Questions: Will Prices Be High Enough to Continue to Make This Volume Growth Possible? GAS: A QUESTION OF DEMAND U.S. GAS CONSUMPTION, 1970-2012E (billion cubic feet per day) 80 70 60 50 40 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: EIA CONFIDENTIAL AND PROPRIETARY 46
  • 47. Investing in the U.S. Oil and Gas Renaissance  The Big Questions: Will Prices Be High Enough to Continue to Make This Volume Growth Possible? OIL: QUESTIONS OF DEMAND… AND SUPPLY U.S. OIL PRODUCTION AND TWO-YEAR GROWTH UNDER DIFFERENT PRICE SCENARIOS ANNUAL CHANGE IN OIL DEMAND (million barrels per day) (million barrels per day) 1.5 Two Year Production Growth Under Various Scenarios 2012 Production 0.8 $70/ B Oil $85/ B Oil $100/ B Oil Williston 762 96 236 325 Eagle Ford 468 230 318 435 1,216 303 446 582 Permian 0.0 DJ China Rest of World -1.5 2008 2009 2010 2011 2012 11 23 53 104 126 579 -20 -20 -20 Gulf of Mexico 1,359 3 3 3 Other 1,838 -30 -16 0 Total U.S. 1 127 Alaska -0.8 85 Anadarko 6,434 636 1,082 1,474 2013E Source: IEA Source: Simmons & Co. CONFIDENTIAL AND PROPRIETARY 47
  • 48. Investing in the U.S. Oil and Gas Renaissance  Specific Energy Investment Themes  People – Always #1  E&P   Capital discipline and profitability are priorities   Focus on the lowest cost molecules, period Everyone is land rich – be prepared to stay in longer Oilfield Service    North American equipment overbuilt and underutilized – for now North American margins are stabilizing; International margins increasing Infrastructure  Bottlenecks everywhere; $300+ billion needed through 2035 just for pipelines  Completion technology  Export the resource revolution abroad CONFIDENTIAL AND PROPRIETARY 48
  • 49. Questions & Answers