As part of its ongoing Breakfast Forum series, BoyarMiller gathered industry experts for a panel discussion on the energy industry.
Featured panelists covered the current regulatory/political climate, trends and what to look for when the industry recovers.
Speakers included David A. Pursell with Tudor, Pickering, Holt & Co., Matthew G. Pilon with Simmons & Company International and James K. Wicklund with Credit Suisse LLC.
3. Regulatory vs. Legislative
□ Congress – Will not pass anything meaningful in the near term
□ Executive Branch - Will push initiatives via increased regulation
3
Washington Issues
4. Oil exports – Gaining traction
Rail regulation – Crude oil
ESA - Endangered Species
Act enforcement
□ Example - Northern Long-
eared bat
Seismic activity via water
injection
4
What Is On The Agenda
6. Keystone Pipeline
Mexican Energy Reform
6
Longer Term Issues
“According to this map we have gone 4 inches”
Harry, Dumb & Dumber
7. 7
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 I
receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report.
Important Disclosures:
The analysts above (or members of their household) do not own any securities mentioned in this report. John E. Lowe, Senior Executive Advisor at Tudor, Pickering, Holt & Co., serves as a member of the board of
directors of Phillips 66, Agrium Inc., and Apache Corp.
For detailed rating information, distribution of ratings, price charts and disclosures regarding compensation policy and investment banking revenue, please visit our website at http://www.TPHco.com/disclosure or
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associated person of Tudor, Pickering, Holt & Co. Securities, Inc.
Anish Kapadia, Shola Labinjo, and David Gamboa are employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and are not registered/qualified as research analysts with FINRA. Mr.
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companies, public appearances and trading securities held by a research analyst account.
RESEARCH
Oil Service / E&C
Jeff Tillery
713-333-2964
jtillery@TPHco.com
Byron Pope
713-333-7690
bpope@TPHco.com
George O’Leary
713-333-2973
goleary@TPHco.com
Taylor Zurcher
713-333-2974
tzurcher@TPHco.com
Shola Labinjo**
+44 20 3008 6437
slabinjo@TPHco.com
Integrated Oils
Dave Pursell
713-333-2962
dpursell@TPHco.com
Anish Kapadia**
+44 20 3008 6433
akapadia@TPHco.com
David Gamboa**
+44 20 3427 5896
davidgamboa@TPHco.com
Refiners
Chi Chow
303-300-1914
cchow@TPHco.com
Matthew Blair, CFA
303-300-1916
mblair@TPHco.com
TRADINGSALES
Houston
Clay Coneley
713-333-2979
cconeley@TPHco.com
Mike Bradley
713-333-2968
mbradley@TPHco.com
Rusty D’Anna
713-333-2982
rdanna@TPHco.com
Mike Davis
713-333-2971
mdavis@TPHco.com
Oliver Doolin
713-333-2989
odoolin@TPHco.com
John Hurd
713-333-2951
jhurd@TPHco.com
Aly McCaffrey
713-333-2983
amccaffrey@TPHco.com
Houston - (800) 507-2400
Scott McGarvey
smcgarvey@TPHco.com
Seth Williams
swilliams@TPHco.com
Ally Wickman
awickman@TPHco.com
New York - (800) 507-2400
Todd Wood
twood@TPHco.com
London
Harry Grist**
hgrist@TPHco.com
+44 20 3427 5832
Richard Heggs**
rheggs@TPHco.com
+44 20 3427 5833
Denver
Win Oberlin
303-300-1919
woberlin@TPHco.com
New York
Craig Webster
212-610-1652
cwebster@TPHco.com
James Fitzgerald
212-610-1653
jfitzgerald@TPHco.com
London
Jonathan Wright**
+44 20 3008 6436
jwright@TPHco.com
Macro
Dave Pursell
713-333-2962
dpursell@TPHco.com
Brandon Blossman
713-333-2994
bblossman@TPHco.com
Midstream
Jeff Schmidt
713-333-3925
jschmidt@TPHco.com
Colton Bean
713-333-2966
cbean@TPHco.com
Coal
Brandon Blossman
713-333-2994
bblossman@TPHco.com
Utilities / Power
Neel Mitra
713-333-3896
nmitra@TPHco.com
Ryan Caylor
713-333-7694
rcaylor@TPHco.com
E&P
Matt Portillo
713-333-2995
mportillo@TPHco.com
Michael Rowe
713-333-3983
mrowe@TPHco.com
Jeoffrey Lambujon
713-337-7549
jlambujon@TPHco.com
Jamaal Dardar
713-333-3926
jdardar@TPHco.com
Oliver Huang
713-333-3929
ohuang@TPHco.com
Sameer Panjwani
713-333-2996
spanjwani@TPHco.com
E&P International
Anish Kapadia**
+44 20 3008 6433
akapadia@TPHco.com
Shola Labinjo**
+44 20 3008 6437
slabinjo@TPHco.com
David Gamboa**
+44 20 3427 5896
davidgamboa@TPHco.com
27. Bad, But It Could Be Worse
The Latest in a String of Down-cycles
Managing Director – Energy Research, Credit Suisse LLC
James Wicklund – 214-979-4111 – Oilfield Services
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US
ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
BoyarMiller Energy Breakfast Forum
March 2015
The Energy Industry 2015: What’s Next?
28. The Event is Not New, the Reason is Different
− The current down-cycle is expected to be the 2nd worse in 40
years behind the “lost decade” of the 1980’s
− Oil Prices have been cut in half
− Vallourec’s earnings estimates are down 40% in the last month
• US Steel’s estimates are down 60%+ from 2014
• Tenaris’s 2015 estimates are down 25% in a month
• SLB’s earnings are expected to drop 31% yr-yr
• No One Is Immune
− The US rig count has fallen more and more sharply than any
other US down-cycle, including the 1980’s
All of this because it is a Supply-induced down-cycle
March 2015James Wicklund, Oilfield Services, james.wicklund@credit-suisse.comSource: Credit Suisse estimates and company data
29. This a SUPPLY-based Down-cycle
− Demand can “snap” or “bounce” right back
− E&P is embedded in management’s DNA
− “Killing a Vampire with Toothpicks” – It takes a while
− The US horizontal rig count has to drop by 30-35% and STAY
there for 4-8 quarters in order to get US production growth to
zero
− Leadership – EOG announced a goal to get to zero production
growth in 2015 by cutting its budget by 40%, delay completions
and focus on the Eagle Ford, Delaware Basin and Bakken plays
and on high return-on-capital projects
− Four firms down-graded the stock and it opened down over 8%
− Few Heroes
March 2015Credit Suisse LLC
30. Realities
− US Production growth is needed, just not as much as last year,
yet
− The horizontal rig count won’t go back to Q4 2014 level for some
time
− Once we have bottomed, we will stay down for 1-2 years
− A “bathtub” shaped recovery
− But back to secular growth off the bottom for years…
− At a lower growth rate than 2010-2014
But the world needs US oil production growth over time so
eventually, US activity will recovery and grow
We just think it is at least TWO years away
March 2015Credit Suisse LLC
31. It Isn’t the End of the World – It Just Feels Like It
− US shale oil production has take US production from 5 million
barrels/day in 2009 to 9.5 million barrels today
− Oil production here increased by almost 1.6 million barrels last
year alone
− We are 80% of global production growth over the last 3 years
− The industry is VERY good, almost too good for our own good
• We created the problem and no one will bail us out
• Demand isn’t likely to “bounce” or “snap” back
• We have to slow US production growth close to zero
− Trying to get the E&P industry to not grow production is tough
− And only accomplished by constraint of capital – lower oil prices
− Once we accomplish that, we will see a return to almost secular
growth but at a slower pace than 2010-2014
March 2015James Wicklund, Oilfield Services, james.wicklund@credit-suisse.comCredit Suisse LLC
32. This is the Most Severe Rig Count Drop in History
March 2015Credit Suisse LLC
40
50
60
70
80
90
100
110
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33
Cyclical Rig Drops
1981-86
1997-99
2001-02
2008-09
2014-15
So now the question becomes one of duration
33. Onshore US Shale
− Rig count will drop 1,000 rigs and stay flat at that level for 4-6 quarters
− US oil production growth will slow to flat and stay there a quarter or two
− US drilling activity will begin to slowly, very slowly recover
− We won’t reach Q4 2014 activity levels for ~4 years
− A “bathtub” shaped recovery
− From the eventual base, US drilling and completion activity will grow
− The growth rate will be slower than that of 2010-2014, around 4-5%
− The industry will be almost “industrial-like” in longevity, as the expense
of volatility
− Technology and structural business improvements will dominate
− The industry will operate off a return basis rather than a growth basis
All will be right with the world
March 2015Credit Suisse LLC
34. Deepwater – Its Own Little World
− Rolling. Deepwater activity was rolling into a down-cycle even
before oil prices started to drop, and was exacerbated by it
− Death Knell. IOCs were pressured to increase dividends and
buybacks and could either cut capex or redirect incremental capex
to faster cash return and higher overall return projects
− Returns over Growth. Deepwater, with 200% inflation over the last
five years, has a 7 year cash cycle and 11%-14% expected returns
today vs. 3 year cash returns and 40%+ ROIC in the Eagle Ford.
− As a result, incremental $’s leave deepwater, whose production
growth over the last three years is ZERO, and goes to onshore shale
which has been 80% of GLOBAL production growth over the same
period
− Step Change. We need a dramatic change in the behavior of oil
companies and the technology of subsea. Quick???
March 2015Credit Suisse LLC
35. Deepwater – Part 2
− We have stacked 26 deepwater rigs so far with virtually none
expected to work again. Jack-ups are next
− 18 months ago, the industry insisted no rigs would be stacked for the
foreseeable future
− Competition for capital and returns are increasingly the focus
− FIDs are being delayed to lock in the lowest prices
− Delays in orders kills absorption and earnings
− It is a business cycle and in 2-3 years will have improved returns
and will bring oil companies back to offshore.
− And in a few years, deepwater capex will start growing again but not
like the 10%-12% CAGR seen over the last five years
And then all will be right with the world
March 2015Credit Suisse LLC
36. Offshore has Its Challenges
0
5
10
15
20
25
30
35
New deepwater rig deliveries are shown below.
This sector was rolling into a down-cycle even
before oil prices started to decline
March 2015James Wicklund, Oilfield Services, james.wicklund@credit-suisse.comSource: Credit Suisse estimates and company data
37. Collateral Damage
− US shale growth will go to zero, but we should stabilize at about
10 million bopd, 5 years earlier than expected two years ago.
• 74,000 direct jobs already lost
• 100-140K related jobs lost in Texas alone (CBRE)
• Capex has already been cut by $61 billion yr-yr
− ENI and ESV have already cut dividends and more are likely
− North Sea, Africa and China were already slowing and now are
worse
− US shale-oil production declines at a much faster rate than
conventional but it too will decline – Eastern Hemisphere
production is flat last 3 years with 8% growth for 3 years
− Cyclical pricing, structural realignment
March 2015Credit Suisse LLC)
38. When Does It Break? - Soon We Think
− Cushing (WTI) is slated to reach “full” in mid-April with storage
operators suggesting a $30 price (BP, WMB)
− At the same time OFS companies report worse than expected
Q1 EPS
− DURATION becomes better understood
• This is a supply cycle and while demand can “snap” back,
demand takes a lot to kill
• A statistical model takes 4 full quarters of depressed activity to
fix
• Reality stretches that out
– Equity/debt raises
– Asset sales
– Cost Deflation
– High grading prospects
March 2015Credit Suisse LLC
39. Oil Storage – the Story DeJour
Crude Oil inventories are at record levels and is expected to be “full”
by mid-April
March 2015Credit Suisse LLC
40. Oil Storage
We now have five pipes to take oil from Cushing to the Gulf Coast but
when does that get “full”?
March 2015Credit Suisse LLC)
41. US 'Super Contango' fears are real
Downside oil price risk: Clearly there is reason to worry about fast
building inventories
March 2015Credit Suisse LLC
42. Haven’t Reach Bottom – In Our Humble Opinion
− Oil prices will bottom and then OFS stocks will bottom but the recovery
is expected to be very “U” shaped.
− There is too much “easy money” looking to get rich for the current
market to mark a bottom.
− North American activity has to stay low for at least a year to stem the
over-supply problem and will likely be longer as E&P is hard to contain.
− The goal is to stop US production growth, not see US production
decline
− The collateral damage of lower international capex will likely cause
production declines in many markets
− The re-set of deepwater economics to a more favorable level could take
2-3 years according to industry participants, further delaying projects.
But We are Close
March 2015James Wicklund, Oilfield Services, james.wicklund@credit-suisse.comSource: Credit Suisse estimates and company data
43. Companies Mentioned (Price as of 27-Jan-2015)
National Oilwell Varco (NOV.N, $57.7, UNDERPERFORM, TP $43.0)
Disclosure Appendix
Important Global Disclosures
I, James Wicklund, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and
securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
report.
3-Year Price and Rating History for National Oilwell Varco (NOV.N)
NOV.N Closing Price Target Price
Date (US$) (US$) Rating
03-Feb-12 74.03 77.50 O
30-May-12 60.55 NR
31-Jan-13 66.82 64.89 N *
04-Feb-13 63.24 66.69
30-Jul-13 62.54 73.90
10-Sep-13 70.86 81.11 O
24-Sep-13 70.91 R
05-Jun-14 76.25 90.00 O
29-Jul-14 83.41 95.00
03-Nov-14 70.72 77.00 N
24-Nov-14 73.55 75.00
07-Jan-15 61.79 60.00
* Asterisk signifies initiation or assumption of coverage.
Target Price Closing Price NOV.N
1- Jan- 13 1- Jan- 14 1- Jan- 15
50
60
70
80
90
100
O UT PERFO RM
N O T RAT ED
N EUT RAL
REST RICT ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total
revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return
relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most
attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are
based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings
were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s
coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5%
threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -
10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the
average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of
the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 46% (54% banking clients)
Neutral/Hold* 38% (50% banking clients)
Underperform/Sell* 14% (44% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond
to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.)
An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market
that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to
Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be
used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for National Oilwell Varco (NOV.N)
Method: Our 12-month target price of NOV is $60 per share. Our target price is based on 7.5x our 2015 EBITDA estimate. Since the end of 2008,
NOV's average EV/EBITDA multiple is 7.0x.
Risk: Risks to our $75 target price are twofold: those specific to the company and those that relate to the broader oilfield service industry.
Company-specific risks include (1) the company’s ability to maintain its leading onshore and offshore rig equipment market share position,
(2) a slowdown in the number of onshore and offshore drilling rigs in use globally, (3) delays in deepwater crude oil and natural gas
exploration and development, (4) changes in and compliance with post-Macondo restrictions and regulations, (5) ill-timed or poorly integrated
acquisitions, and (6) successful development and implementation of new technological advancements. In addition, industry-specific risks
include (1) fluctuations in crude oil and natural gas prices, (2) reduced global oil demand, (3) global GDP, (4) global deepwater/offshore
capex spending, (5) interest rate risk, (6) environmental and government regulations, (7) increased competition, and (8) geopolitical risks.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target
price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (NOV.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (NOV.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (NOV.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NOV.N) within the next 3
months.
As of the date of this report, Credit Suisse makes a market in the following subject companies (NOV.N).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (NOV.N) within the past 12
months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS-
-Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not
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