PacWest E&P Vertical Integration Trends, Nov 2011

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Overview of the trend towards vertical integration by US E&Ps

Overview of the trend towards vertical integration by US E&Ps

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  • 1. E&P Operator Trends to Vertical IntegrationStrategic Threat to Service Companies?Houston, TexasNovember 14, 2011TERMS & CONDITIONSInformation furnished in all reports produced by PacWest may be used by Client for internal purposes, as Client deems beneficial, aslong as due care is taken to hold the information confidential within Client’s organization and PacWest is not liable for the information PacWest Consulting Partnersprovided. 920 Memorial City Dr, Suite 160 Houston, TX 77024All rights to the information remain with PacWest. PacWest represents that it will not breach any obligation of confidentiality withrespect to information contained in the study. PacWest will maintain in confidence and not disclose any information related to Client,without prior written consent of the Client. PacWest will not disclose to any person, including, without limitation, any of the Client’scompetitors or suppliers, the fact that Client has engaged PacWest in this project scope, the scope of the assignment or any otherinformation relating to Client.
  • 2. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 2
  • 3. E&P VERTICAL INTEGRATION PacWest is a boutique strategy consultancy and market intelligence firm that specializes in unconventional oil & gas Firm Overview & Capabilities Consulting & Advisory Market Intelligence Products  Provide strategy consulting and  Offer industry-leading analysis of advisory services to Oil & Gas unconventional market  Strength in Oil & Gas supply market  Deep knowledge and strength in the - Often work with operator supply pressure pumping / frac market chain groups analyzing supply/demand, developing  Employ combination of primary sourcing strategies, building intelligence + secondary research capabilities, etc.  Unique in market: apply strategy  With oilfield suppliers, often work at consulting capabilities to turn C-Level or business lead research into actionable intelligence All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other Client Confidential © PacWest 2011 | All rights reserved | 3
  • 4. E&P VERTICAL INTEGRATION A sampling of some of PacWest’s recent projects demonstrate our depth of experience in North American and international shale Sample of Recent PacWest Consulting Projects PacWest Project Client Outcome Analyzed Bakken & Eagle Ford supply/demand; conducted Operator avoided completion demand planning exercise to develop new pressure pumping delays, avoided significant sourcing/contract strategy additional costs Developed Poland unconventional market entry, PE firm focused on high-growth product/service, and JV strategy for a potential shale service segments only, with the right company for a private equity client strategic partners Developed an innovative economic and strategic analysis of Operator understood cost operator all-in water management costs over 20-year implications, made optimal timeframe, for Bakken & Eagle Ford assets economic decisions Conducted a study of frac pump market focused on supplier Equipment manufacturer strategic plans, manufacturing capabilities, and supply chain developed optimal strategic capabilities investment plans Conducted study of evolving service company landscape in Operator made better informed Poland, including equipment, resources, and expansion plans contract award decision We have resources in nearly every major unconventional country/region to support international shale needs Client Confidential © PacWest 2011 | All rights reserved | 4
  • 5. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 5
  • 6. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 6
  • 7. E&P VERTICAL INTEGRATION As oil/liquids-driven activity has increased, vertical integration has become the hot new sourcing strategy amongst some operators New Sourcing Strategy or Near-term Solution? Some operators have been increasing pursuing vertical integration for key goods/services - Is this a sourcing fad or new operator best practice? - What is driving this trend? - What type/size of operators are pursuing this strategy? - What does this mean to service companies? Client Confidential © PacWest 2011 | All rights reserved | 7
  • 8. E&P VERTICAL INTEGRATION Vertical integration is driven by two primary factors: pricing and challenges obtaining equipment/services when needed Drivers of Vertical Integration Pricing pressures continue - Supply/Demand fundamentals have driven major pricing increases across nearly every product/service - Significant price escalation is projected to continue through 2012 - Some operators boast significant well cost savings from vertical integration Security of supply is challenged - US onshore operators continue to announce record breaking drilling programs - Large backlogs of uncompleted wells exists for nearly every major onshore player - Infrastructure challenges in key operating regions cause additional supply chain constraints (e.g., Bakken) - Service companies are forced to prioritize supply of key products/services to their key customers In addition to securing supply, some operators boast significant average well cost savings from vertical integration Client Confidential © PacWest 2011 | All rights reserved | 8
  • 9. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 9
  • 10. E&P VERTICAL INTEGRATION : Project Scope A significant number of small- to medium-sized operators are currently pursuing vertical integration strategies Vertically Integrated Operators The following peers have pursued vertical integration in one or more services: Note: List of firms does not include all firms that are vertically integrated Source: PacWest analysis, company presentations, company 10-Ks Client Confidential © PacWest 2011 | All rights reserved | 10
  • 11. E&P VERTICAL INTEGRATION The production base (i.e. cash flows) of operators pursuing vertical integration varies significantly 2010 Production (MMboe) 300 273 250 200 173 150 141 Average = 92 100 70 50 42 21 15 2 - OXY CHK EOG SWN PXD SD Lewis OAS Source: PacWest analysis, company presentations, company 10-Ks Client Confidential © PacWest 2011 | All rights reserved | 11
  • 12. E&P VERTICAL INTEGRATION The scale of activity that vertically integrated operators are undertaking also varies significantly 2010 Capital Spend and Wells Drilled US Land Capex ($billion) US Wells Drilled CHK 8.7 CHK 1,149 EOG 5.1 EOG 895 SWN 2.1 SWN 704 OXY 1.6 OXY 536 PXD 0.9 PXD 473 Lewis 0.6 SD 424 SD 0.5 Lewis 47 OAS 0.3 OAS 29 Average = 532 Average = 2.5 0.0 2.0 4.0 6.0 8.0 10.0 - 500 1,000 1,500 Note: Data is estimated for some operators as not all peers provide sufficient granularity in capital spending guidance; SWN wells drilled figure includes 9 gross wells drilled in Arkoma Conventional asset; Lewis Energy wells estimated based on Oasis wells/spend ratio Source: PacWest analysis, company presentations, company 10-Ks, Oil and Gas Investor Client Confidential © PacWest 2011 | All rights reserved | 12
  • 13. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 13
  • 14. E&P VERTICAL INTEGRATION Some operators have chosen to vertically integrate across just a handful of service categories Vertical Integration by Operator & Category Pressure Operator Proppant Coiled Tubing Rigs Logistics Pumping Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 14
  • 15. E&P VERTICAL INTEGRATION Four operators own a total of 15 pressure pumping fleets (by mid-2012) with an estimated total of 530,000 HHP Pressure Pumping Vertical Integration Chesapeake owns pressure Lewis Energy owns 2 pumping subsidiary Performance fleets/60,000 HHP of pressure Technologies pumping capacity that it Performance operates 2 operates in the Eagle Ford fleets/60,000 HHP in MidCon and adding another 2 fleets/80,000 HHP by EOY 2011 Also has 15% stake in Frac Tech Services (more of a financial/hedging strategy) Pioneer currently owns 8 Spending $24 million to launch fleets/225,000 HHP that it Oasis Well Services subsidiary operates in Spraberry (5 fleets), Committed to buying 1 single Eagle Ford (2 fleets), and Barnett frac fleet to operate in the (1 fleet) Bakken; likely plans to add Expects delivery of 3 additional additional fleet once it has fleets by mid-2012; plans to ramped up operations deploy them to Spraberry Also owns/operates 4 CT units in Eagle Ford and Raton Basin Client Confidential © PacWest 2011 | All rights reserved | 15
  • 16. E&P VERTICAL INTEGRATION EOG and Southwestern have each brought a frac sand quarry online in the last few months Proppant Vertical Integration EOG Southwestern  Spent $65 million to set up a frac sand  Spent $30 million in 2008 to acquire quarry and plant in Chippewa, reserves in Arkansas and set up a plant Wisconsin, with a capacity of 1.7  Quarry currently yielding 0.65 million million tpa tpa  Sand planned for use in Eagle Ford  Quarry went live in 2009 Q2 and where C&J is doing the majority of supplies an estimated 70% of company pumping under a dedicated contract sand demand  Rail contract in place with Progressive  Estimates savings of $150,000 per well Rail and Union Pacific and trucking handled by a local company, Chippewa Sand Transport  Estimates savings of $0.5 million/well  Also operates a 2nd frac sand quarry near Ft. Spunky in Texas that it bought in 2007 H1 for Barnett pumping Source: PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 16
  • 17. E&P VERTICAL INTEGRATION Five operators own/operate a total of nearly 200 drilling rigs across their US operations Rigs Vertical Integration Owns a total of ~115 drilling rigs Recently added 3 drilling rigs to across 2 drilling rig subsidiaries bring total company-owned rig Nomac owns ~95 rigs; launched count to 13 in 2001 with $26 million All rigs are operating in South investment Texas Acquired Bronco Drilling (22 rigs) in Apr 2011 for $315 million Set up a drilling subsidiary in Plans to add another ~30 2005, DeSoto Drilling Inc. (DDI), newbuild by 2013; goal is to own which owns 11 rigs 2/3rds of total rigs DDI owns/operates 11 rigs, all but one of the horizontal rigs in Currently owns/operates 15 rigs play; remaining rig is on month- in the Spraberry, 40% of its total to-month contract rig count Also owns/operates 2 additional Owns 20 drilling rigs total: 14 in rigs in its Raton Basin asset Permian, 5 in MidCon, and 1 in WTO Owns a small fleet of workover rigs Client Confidential © PacWest 2011 | All rights reserved | 17
  • 18. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 18
  • 19. E&P VERTICAL INTEGRATION Pioneer’s 2011 capital spend is forecast to be $2.1 billion, with 62% allocated to Permian and 13% to vertical integration Pioneer 2011 Capital Spend ($billion) US Land Capex Pioneer Capex EOG 6.4 CHK 5.2 $0.10 $0.10 APC 2.9 $0.12 OXY 2.8 DVN 2.3 $0.21 PXD 2.1 HES 1.7 $1.30 $0.30 APA 1.7 MRO 1.6 NBL 0.9 MUR 0.3 Average = 2.6 Alaska Other Eagle Ford Barnett Combo Vertical Int./Facil. Spraberry 0.0 2.0 4.0 6.0 8.0 Note: Data is estimated for some peers are not all peers provide sufficient granularity in capital spending guidance Source: PacWest analysis, company presentations, company 10-Ks Client Confidential © PacWest 2011 | All rights reserved | 19
  • 20. E&P VERTICAL INTEGRATION Pioneer’s vertical integration strategy extends to rigs, pressure pumping equipment, and various other surface equipment Pioneer’s Vertical Integration Approach Pioneer has chosen to vertically integrate (i.e. own and operate) many of its critical services that are typically delivered by service companies and are generally the largest spend categories It has vertically integrated in the following service areas: - Drilling rigs: currently owns 15 rigs - Frac fleets: by year-end 2011, it will own 8 frac fleets and it expects delivery of 3 fleets in mid- 2012 for a total of roughly 300,000 HHP that is company-owned - Coiled tubing units: by year-end, it will own 4 CT units - Pulling units: currently owns 31 pulling units - Various other equipment including water hauling trucks, BOPs, frac tanks, etc. - Also includes yards, buildings, and storage facilities to support vertical integration While the company does not own frac sand quarries itself (as does EOG), it does source its frac sand directly, through Carmeuse and potentially suppliers, rather than relying on 3rd parties - It has sand supply in place through 2015 It has also contracted for cementing services through 2016 Pioneer received 12 rigs and 3 frac fleets near year-end 2010; given equipment order lead times, it likely began implementing its vertical integration strategy during the middle of 2010 Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 20
  • 21. E&P VERTICAL INTEGRATION Pioneer has pursued vertical integration in all of its core unconventional assets that it is currently developing Pioneer Assets Vertical PXD Asset Details Integration Largest operator in the Spraberry trend and is one of the most active Permian developers in the Permian Raton Largest operator in the Raton CBM basin where it is focused on shale Basin resource development Eagle Ford Owns 310,000 gross acres which it is aggressively developing Barnett Owns significant assets in the wet gas zone of the play in the NW; Combo currently developing Entered the North Slope in 2002 and discovered the Oooguruk gas field Alaska in 2003, which it brought online in 2008 South 45% interest owner with PetroSA in offshore asset that now produces Africa small amount of gas Operates 600+ gas wells and has working interest in 1200+; owns Hugoton majority of gathering/processing infrastructure; new development activity minimal until gas prices recover Edwards Long history in the trend; development minimal until gas prices recover Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 21
  • 22. E&P VERTICAL INTEGRATION Spraberry is Pioneer’s core asset accounting for nearly two-thirds of capex and it has pursued vertical integration most aggressively here Pioneer Spraberry Development 2011 Wells Put on Production Supply Discussion 250 Quarter-by-quarter supply chain activity: - Q1: 4 frac fleets (3 company-owned, 1 230 235 dedicated 3rd party) 200 - Q2: in May increased to 6 frac fleets (4 company-owned, 2 dedicated 3rd party) 150 - Q4: Adding 5th company-owned frac fleet 146 The company owns 14 drilling rigs (40%) 100 110 As of Q4, the company will own 5 frac fleets, representing 71% of capacity, in addition 2 50 dedicated fleets with Baker Hughes - Ordered an additional 3 fleets which it expects to receive in mid-2012 - Q1 Q2 Q3E Q4E The company also owns 23 pulling units and various other equipment, including water Rigs 30 35 45 by YE hauling trucks, frac tanks, BOPs, construction equipment, and fishing tools Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates) Client Confidential © PacWest 2011 | All rights reserved | 22
  • 23. E&P VERTICAL INTEGRATION Pioneer is running 12 rigs in the Eagle Ford and has deployed company- owned frac fleets and coiled tubing units in the play Pioneer Eagle Ford Development 2011 Wells Put on Production Supply Discussion 40 Quarter-by-quarter supply chain activity: - Q2: deployed 1st company-owned frac 35 35 fleet in addition to dedicated fleet 30 - Q3: brought 6th and 7th CGPs online - Q4: Adding 2rd company-owned frac fleet; bringing 8th CGP online 20 As of Q4, the company will own 2 frac fleets, 18 representing 67% of capacity, in addition to a dedicated frac fleet with Weatherford 10 - Second company-owned fleet is expected to be delivered during Q4 4 The company also owns a single coiled tubing - unit and expects delivery of a second CT unit Q1 Q2 Q3E Q4E during Q4 Rigs 8 10 12 12 Testing white frac sand (10 wells) in shallower areas; generating $700 million savings/well Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates) Client Confidential © PacWest 2011 | All rights reserved | 23
  • 24. E&P VERTICAL INTEGRATION The company has also pursued vertical integration in the Barnett and Raton, its other two core unconventional resource plays Pioneer Barnett & Raton Development Barnett Supply Discussion Raton Supply Discussion The company has 2 rigs currently under The company currently owns 2 drilling rigs contract with 3rd parties The company currently owns 1 frac fleets - Plans to increase to 4 rigs by year-end - Does not appear to be using any 3rd party Deployed 1 company-owned frac fleet in pumpers for additional fracs 2011 Q2 The company owns 2 coiled tubing units - Has also used Weatherford and Baker The company owns 8 pulling units Hughes to frac wells The company also owns and operates a frac The company also owns a single coiled tubing fluids laboratory in the Raton basin, which unit and expects delivery of a 2nd CT unit presumably serves all of Pioneer’s frac fleets during Q4 across its assets Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 24
  • 25. E&P VERTICAL INTEGRATION Pioneer claims that its vertical integration model will generate a 45% IRR on a third-party savings basis, excluding managerial burdens Pioneer Vertical Integration Savings Pioneer has spent $440 million on vertical integration over 2011: - $300 million for equipment delivered in 2011 - $140 million for equipment to be delivered in the middle of 2012 (3 frac fleets and other) - Likely spent additional capital in 2009 to reserve orders Pioneer claims that the $440 million investment will generate a 45% IRR before taxes, though that is strictly on a cash savings basis and does not include incremental managerial burdens of these “businesses”; does not consider cost of capital Service Area/Savings Spraberry Eagle Ford Barnett Total Frac Fleets YE Fleets 5 2 1 8 Fracs/Fleet/Year ~115 ~55 ~60 ~93 Savings/Frac $0.35MM $1.70MM $0.75MM $0.58MM Annual Savings $200MM $185MM $45MM $430MM Rigs & Other Services Annual Savings $30MM - - $30MM Annualized Cash Savings $230MM $185MM $45MM $460MM Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 25
  • 26. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 26
  • 27. E&P VERTICAL INTEGRATION Southwestern forecasts that it will spend $2 billion in capital over 2011, with nearly 2/3rd of that spend in the Fayetteville 2011 Capital Spend ($billion) US Land Capex Southwestern Capex Fayetteville Appalachia New Ventures EOG 6.4 CHK 5.2 Midstream Corp Other Areas MRO 3.0 3%2% APC 2.9 10% OXY 2.8 DVN 2.3 9% PXD 2.1 SWN 2.0 HES 1.7 15% 61% APA 1.7 MRO 1.6 NBL 0.9 MUR 0.3 Average = 2.6 0.0 2.0 4.0 6.0 8.0 Note: Data is estimated for some peers are not all peers provide sufficient granularity in capital spending guidance Source: PacWest analysis, company presentations, company 10-Ks Client Confidential © PacWest 2011 | All rights reserved | 27
  • 28. E&P VERTICAL INTEGRATION Since 2007 Q1, Southwestern’s new producing wells per quarter has increased 25% YoY, while its rig count has decreased 11% YoY Fayetteville Development, wells put on production (2007 Q1 – 2011 Q2) 2010: 553 286 170 159 160 2009: 446 149 150 143 145 137 140 130 2008: 329 122 120 120 2007: 255 111 110 106 97 93 100 90 83 74 77 75 74 80 70 58 60 50 46 40 30 20 10 - 2007 2007 2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Rigs 19 18 16 14 12 Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 28
  • 29. E&P VERTICAL INTEGRATION Southwestern has succeeded in reducing drilling days per well by 17% YoY for an average 53% reduction since 2007 Fayetteville Development Days to Drill Well Cost 20 $4.00 17 $2.90 $3.00 $2.90 14 $3.00 $2.80 $2.80 12 11 10 $2.00 8 $1.00 - $- 2007 2008 2009 2010 2011 H1 2007 2008 2009 2010 2011 H1 Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates) Client Confidential © PacWest 2011 | All rights reserved | 29
  • 30. E&P VERTICAL INTEGRATION Southwestern has chosen to pursue a vertical integration strategy only in its core Fayetteville asset Southwestern Assets Proved Vertical SWN Asset Reserves Details Integration (Bcf) Focus of the company’s E&P operations; the company owns nearly 1 million net acres in the play; as of EOY Fayetteville 4,345 2010, company had spud 2,445 wells in play since commencement in 2004 Traditional area of operations located in western Conventional Arkansas; have recently expanded activity to the 226 Arkoma south and east of the traditional fairway area, but has significantly reduced capital spend Owns nearly 175,000 net acres in play in NE Appalachia 38 Pennsylvania and have participated in a total of 25 wells since drilling commenced in 2009 Active in region since 2000 in Cotton Valley and has East Texas 321 expanded activities to target Haynesville/Bossier Source: PacWest analysis, company presentations Client Confidential © PacWest 2011 | All rights reserved | 30
  • 31. E&P VERTICAL INTEGRATION Southwestern’s vertical integration strategy extends to drilling rigs, sand, water sourcing, water hauling, in-field logistics, and civil works Fayetteville Vertical Integration Strategy Drilling Rigs Frac Sand  Set up a drilling subsidiary in 2005, DeSoto  Spent $30 million in 2008 to acquire Drilling Inc. (DDI), which owns 11 rigs reserves in Arkansas and set up plant  DDI owns/operates 11 rigs, all but one of  Quarry went live in 2009 Q2 and supplies the horizontal rigs in play; remaining rig is roughly 70% of company sand demand, on month-to-month contract saving estimated $150,000 per frac job Water Sourcing Water Hauling  Sources all water internally, though this is  Owns a network of water hauling trucks to quite common among operators handle the majority of its water hauling  Experimenting with fracs to reduce water needs internally consumption 10% (~$60,000/job) In-field Logistics Civil Works/Well Site Prep  Owns a network of trucks to handle the  Company handles site work that majority of in-field hauling needs contractors might otherwise do, internally particularly pressure pumpers The company claims to save an estimated $0.3 million per well as a result its vertical integration efforts Client Confidential © PacWest 2011 | All rights reserved | 31
  • 32. E&P VERTICAL INTEGRATION Southwestern employs Schlumberger, Calfrac, and Cudd for its pressure pumping services in the Fayetteville Fayetteville Pressure Pumping Strategy 2011 Frac Jobs Discussion Schlumberger 48%  Southwestern employs three different Pumper Share: Calfrac 32% pressure pumpers in the Fayetteville Cudd 20% - Schlumberger, Calfrac, and Cudd 60  Each pumper is on a 1-year contract that 50 11 10 started in the February-March timeframe; 11 each operates under a slightly different 40 10 9 18 contract 16 16 9 7 - Contracts are bid year-to-year 30 4 14 13  The company’s pressure pumping demands 20 15 13 11 are some of the most basic in the industry 29 29 - Frac depths range from 2,000 to 5,000 25 10 20 21 17 feet with ~5,000 feet laterals 14 15 - Currently running 100% slickwater fracs 0  Company has seen pressure pumping price Jan Feb Mar Apr May Jun Jul Aug increases in the 4-5% range over 2011, Legend: Schlumberger Calfrac Cudd significantly less than most other operators in the area Note: Data from Jun, Jul, and Aug does not yet include all fracs completed during those months Source: PacWest analysis, PacWest FracDB, company presentations (in some cases, exact well counts are estimates) Client Confidential © PacWest 2011 | All rights reserved | 32
  • 33. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration  Drivers  Integrated Operators  Integrated Services  Pioneer Case Study  Southwestern Case Study  Strategic Implications 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 33
  • 34. E&P VERTICAL INTEGRATION If timed properly, vertical integration can yield significant near-term benefits to operators, but the model also entails significant risks Vertical Integration Strategic Considerations Benefits Risks Ensures equipment availability and avoids Bear risk of idle equipment/staff if price delays during a tight supply market environment necessitates activity reduction Potentially lowers per well costs if service Added enterprise complexity can potentially business is operated efficiently serve as distraction for management/staff Potentially increases per well costs if service business is not operated efficiently Implications Model can yield significant benefits during times of tight supply but those benefits become marginal as supply market loosens and turn negative as the market collapses Operators need to be strategic about the “exit opportunity” – requires market foresight to know when the market is going to loosen and when to you should get out of the business North American supply market is just beginning to loosen from its peak in mid-2011 and things appear to be likely to equalize by late-2012 or early-2013 – Market opportunity for vertical integration may be over for operators Client Confidential © PacWest 2011 | All rights reserved | 34
  • 35. E&P VERTICAL INTEGRATION Greater operator vertical integration represents a potential strategic threat to service companies Strategic Threat? Larger independents increasing looking at peer’s well cost advantages with a keen eye However, several factors reduce the vertical integration opportunity: - Backlogs for frac fleets and other key equipment currently exceed 9-12 months in many cases - Market tightness in key equipment and services appears to be loosening and moving towards a more stable balance – the ideal time to seize the opportunity was likely 12-18 months ago, when a handful of prescient operators placed orders Given this, PacWest does not believe vertical integration is a new, long-term operator sourcing trend - It is an interesting short- to medium-term trend to note and monitor, but it does not represent a meaningful strategic threat to service companies Client Confidential © PacWest 2011 | All rights reserved | 35
  • 36. E&P VERTICAL INTEGRATION Contents 1. PacWest Snapshot 2. Operator Vertical Integration 3. PacWest Market Intelligence Offerings Client Confidential © PacWest 2011 | All rights reserved | 36
  • 37. E&P VERTICAL INTEGRATION PacWest currently offers multiple unconventional market intelligence product offerings to support subscriber decision-making Market Intelligence Offerings Breakdown of pressure pumping fleets/capacity by basin and supplier with strategic analysis of latest regional supply market trends Interactive database of 100+ critical unconventional suppliers Cost escalation forecast for major D&C categories Detailed breakdown of frac activity by basin, operator, pumper Database of fracs including basin, operator, pumper, chemicals, chemical suppliers Client Confidential © PacWest 2011 | All rights reserved | 37
  • 38. E&P VERTICAL INTEGRATION PumpingIQ provides the only granular breakdown of regional fleets/capacity by pressure pumper and analysis of market trends Fleet/Capacity Breakdown & Trends Focus Markets  On-going monitoring of pressure pumping  Bakken fleets and capacity in major US onshore frac  Eagle Ford markets  Permian  Granular regional breakdowns of  DJ Basin fleets/capacity by pumper  Anadarko  Key customers by pumper  Marcellus  Detailed discussion of major trends and strategic insights for each region and US  Uinta/Piceance/Green River market in aggregate  Haynesville  Fayetteville  Barnett PumpingIQ is the only granular fleet breakdown available in the market Client Confidential © PacWest 2011 | All rights reserved | 38
  • 39. E&P VERTICAL INTEGRATION SupplierIQ is an interactive database of 100+ suppliers that are critical players in shale supply markets Supplier Analysis Profile Contents  Interactive database of 100+ companies that  PacWest Supplier Classification supply critical D&C products/services for  Company Overview & Analysis shale production  Service Offerings  Database is updated quarterly with new  Geographic Footprint suppliers; updates made to existing suppliers bi-annually  Financials  Subscribers can request supplier additions  Customers  Offer two forms of subscription to database:  Organizational Footprint full SupplierIQ access or a subset of suppliers,  Detailed discussion of Service customized to subscriber needs Offerings: 15 product/services that are critical for shale production SupplierIQ provides insightful snapshots of your key suppliers and competitors Client Confidential © PacWest 2011 | All rights reserved | 39
  • 40. E&P VERTICAL INTEGRATION CostIQ provides a forecast of cost increases for key drilling and completion cost drivers Forecast Analysis Cost Segments  3-year forecast of D&C cost escalation,  Drilling segmented into major categories - Land rigs  Includes strategic discussion of trends driving - OCTG increases and/or decreases - Drilling fluids  Updated bi-annually (every 6 months) - Cementing services  PacWest utilizes three quantitative methods  Completion to forecast prices changes for each market segment: - Pressure pumping services - Multi-variable regression - Proppant - Demand/supply models - Frac chemicals - Macroeconomic models - Completion hardware - Completion rigs CostIQ provides 3-year cost forecasts for each key US region Client Confidential © PacWest 2011 | All rights reserved | 40
  • 41. E&P VERTICAL INTEGRATION FracIQ is the source of frac activity data by operator and pressure pumper, with data broken down US-wide and regionally Product Overview Contents  The definitive subscription publication on  Aggregate US fracs: frac activity across the US - By operator  Summary of fracs by region, operator, - By pressure pumper pressure pumper  Regional breakdown of fracs:  Market share by pumper and operator across - By operator multiple metrics - By pressure pumper  Strategic analysis of frac trends and market dynamics, including implications for - By frac type operators, pressure pumpers, and other  Operator and pumper stakeholders relationships  Updated quarterly  Frac practices, including chemicals usage Your “Land Rig Newsletter” for the frac market – available late 2011 Client Confidential © PacWest 2011 | All rights reserved | 41
  • 42. E&P VERTICAL INTEGRATION FracDB is the definitive database of fracs and frac chemicals that can be used to conduct sophisticated market analyses Product Overview Data Elements  Database of US fracs and frac chemicals, built  Frac date into a rich structured data set  Well number, API number - The data set already contains nearly 7,000  Operator fracs conducted in 2011  TVD  A sophisticated tool that can be used to run a  Water volume variety of analyses:  Pressure Pumper - Pressure pumping/frac market share  Play - Completion chemicals market share  Chemical type - Regional frac design practices  Chemical ingredient - And dozens of other analyses…  Chemical supplier  Updated quarterly Contact us for more detail FracDB is a powerful tool for the sophisticated market analyst – available late 2011 Client Confidential © PacWest 2011 | All rights reserved | 42
  • 43. E&P VERTICAL INTEGRATION The ShaleIQ bundled product provides access to 3 useful products at a reduced price point Bundle Includes Breakdown of pressure Interactive database of Cost escalation forecast pumping fleets/capacity 100+ critical for major D&C categories by basin and supplier with unconventional suppliers strategic analysis of latest regional supply market trends The ShaleIQ bundle is a valuable resource to add to your decision- making toolkit Client Confidential © PacWest 2011 | All rights reserved | 43
  • 44. E&P VERTICAL INTEGRATION PacWest delivers actionable intelligence that is designed to provide strategic recommendations to key decision-makers Actionable Intelligence  Transforms volumes of disparate market data, insider industry activity and expert input into strategic and actionable recommendations for decision-makers  Aggregates, organizes and distills a wide range of data and intelligence to provide information to our clients that is comprehensive, focused and strategic  Analyzes this information to assess its strategic implications and provide a clear path of action for each stakeholder Decision-Makers Client Confidential © PacWest 2011 | All rights reserved | 44
  • 45. E&P VERTICAL INTEGRATION PacWest employs a comprehensive methodology that relies on primary intelligence and rigorous research and analysis Methodology  PacWest uses a multi-pronged approach to develop its market intelligence offerings; the team: 1) Gathers and reviews all information available publicly and via proprietary databases 2) Engages its diverse network of industry contacts to gather real-time intelligence 3) Processes and synthesizes raw information into actionable intelligence Primary Intelligence Gathering Secondary Research Insights are based on: These sources are regularly consulted:  Constant conversations with our source  Market research and reports network of field experts on-the-ground  Company annual reports, 10-Ks, 10-Qs  Surveys from operators and suppliers  Speeches and presentations by company  In-depth interviews and conversations with leadership and other industry experts operators and suppliers  Analyst reports from leading banks  Industry-leading experts and technical  Government data specialists  PacWest internal databases Client Confidential © PacWest 2011 | All rights reserved | 45