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PacWest Global Pressure Pumping Market Overview, Sep 2011
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Overview of E&P and pressure pumping market status in key countries outside the US, including regulatory and supply chain constraints and developments

Overview of E&P and pressure pumping market status in key countries outside the US, including regulatory and supply chain constraints and developments

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PacWest Global Pressure Pumping Market Overview, Sep 2011 Presentation Transcript

  • 1. Overview of Key Pressure Pumping MarketsMarket UpdateChristopher Robart (crobart@pacwestcp.com)PrincipalAugust 31, 2011CONFIDENTIALFOR INTERNAL USE ONLYTERMS & 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 Drive, 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. PRESSURE PUMPING MARKET UPDATE Agenda PacWest’s Market Intelligence Services Pressure Pumping Market Overview Frac Crew Deployment Bakken Case Study Questions Client Confidential © PacWest 2011 | All rights reserved | 2
  • 3. PRESSURE PUMPING MARKET UPDATE PacWest Market Intelligence Services PacWest has provided its strategic intelligence capabilities to oil and gas clients for years and has recently begun to make them more widely available. Our suite of Market Intelligence services spans the following: Client Confidential © PacWest 2011 | All rights reserved | 3
  • 4. PRESSURE PUMPING MARKET UPDATE Actionable Intelligence for Decision Makers Actionable Intelligence The PacWest team: ■ 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 | 4
  • 5. PRESSURE PUMPING MARKET UPDATE Comprehensive 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 Research Secondary Research Many of the insights are based on: These sources are regularly consulted: ■ Surveys from operators and suppliers ■ Market research and reports ■ In-depth interviews and conversations with ■ Company annual reports, 10-Ks, 10-Qs operators and suppliers ■ Speeches and presentations by company ■ Industry-leading experts and technical leadership and other industry experts specialists ■ Analyst reports from leading banks ■ Budgetary estimates ■ Government data ■ PacWest proprietary databases Client Confidential © PacWest 2011 | All rights reserved | 5
  • 6. PRESSURE PUMPING MARKET UPDATE Agenda PacWest’s Market Intelligence Services Pressure Pumping Market Overview Frac Crew Deployment Bakken Case Study Questions Client Confidential © PacWest 2011 | All rights reserved | 6
  • 7. PRESSURE PUMPING MARKET UPDATE The US Land pressure pumping market is significantly under-supplied 2011 Supply and Demand Balance – US Land Pressure Pumping 200% 180% Backlog Pressure Pumping Capacity Utilization New Completions 160% 11,935,890 HP 140% 9% 735,890 HP 120% 8,534,250 HP 100% 80% 60% 11,200,000 HP 131% 100% 40% 20% 0% Supply Demand The under-supply is not expected to be relieved until late 2012 or early 2013 Source: CIBC World Markets; Macquarie; PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 7
  • 8. PRESSURE PUMPING MARKET UPDATE The tight supply market is driving up prices for pressure pumping prices, with cost escalation most severe in hot liquids plays Forecast of Pressure Pumping Price Increases (2011 – 2014) 35% 30% 29.3% US Land 26.1% Bakken 25% Annual Cost Increase Eagle Ford 19.4% 20% Marcellus 15% 12.5% 9.9% 10% 8.9% 8.2% 7.4% 6.9% 7.4% 6.7% 5.3% 6.0% 4.8% 3.9% 4.4% 5% 0% 2011 2012 2013 2014 Source: PacWest Shale Market Research Service, 2011 Q2 Release Client Confidential © PacWest 2011 | All rights reserved | 8
  • 9. PRESSURE PUMPING MARKET UPDATE Manufacturers of pressure pumping equipment are operating at full capacity and are experiencing order backlogs up to 1-yr for critical parts Frac Pump Backlogs Weir SPM Gardner Denver FMC  Backlog currently extends  Backlog current extends  Backlog extends into 2012 into 2012 Q1, with lead into 2012 Q1 and backlogs with nearly 40% of 2012 times close to 1 year are currently at record capacity tentatively  New Destiny pump line at highs committed, though expect capacity for 2011 as of  Have seen 100%+ YoY to see some of 2012 late July increase in both pump and demand released in H2  Growth driven largely by fluid end orders  Fluid Control backlog OE orders, which were  Current OE/AM mix stands currently at a record 180% ahead of plan; now around 75/25; expect to $421MM account for 55% of input be 60/40 in 1-2 years  Currently looking at 9-12 vs. 36% 1 year ago  Management is concerned month lead time for  Early 2012 customer frac unit and component, pumps and 2-4 weeks for discussions positive; particularly engines, flow iron potential for frac pump constraints holding back business to be $500MM+ pressure pumping market in H2 growth Source: PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 9
  • 10. PRESSURE PUMPING MARKET UPDATE Manufacturers are responding with major capital investments to fuel capacity expansions, and other actions to satisfy demand Frac Pump Capacity Expansion Initiatives Weir SPM Gardner Denver FMC New Entrants  In midst of $40MM  Halfway through  Unclear what portion  AXON: launching 2nd upgrade to Ft. Worth $20MM upgrade of of a $200MM spend is generation frac pumpCapital Investments facility; increase pump Fort Worth and Tulsa going towards pump and expanding capacity 30-35% by pump manufacturing capacity expansion capacity to support it Apr 2012 facilities; doubling  Portion of pump  OFM: recently  Just announced capacity by Apr 2012 capacity expansions expanded mfg. facility incremental $75MM  Aggressively coming online in H2, 40-60% investment; increase increasing aftermarket with full completion  J-Mac: recently pump capacity fluid end capacity; targeted for year-end launched frac pump additional 20-25% by already doubled YoY  Flowline capacity line EOY 2012 and plan on another expansions coming doubling in next year  Dixie/MSI: recently online in H2 launched frac pump  Implemented lean  Implemented lean  Expanding use of  Southwest/Global mfg. and re- mfg. to increase machine tools aroundOther Initiatives Energy: potentially engineered processes throughput the world to extend launching frac pump  Extended H1 capacity frac pump capacity 20-25% through outsourcing components, reliance on 3rd party machining Client Confidential Source: PacWest analysis © PacWest 2011 | All rights reserved | 10
  • 11. PRESSURE PUMPING MARKET UPDATE On the demand side, US Land rig count has rebounded dramatically since 2009, driving demand of pressure pumping services US Land Rig Count (Aug 2009 – Aug 2011) 2,500 2,000 1,500 Land Rigs 1,000 500 0 Nov-09 Nov-10 Sep-09 Feb-10 May-10 Sep-10 Feb-11 May-11 Aug-09 Oct-09 Dec-09 Jan-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Oct-10 Dec-10 Jan-11 Mar-11 Apr-11 Jun-11 Jul-11 Source: Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 11
  • 12. PRESSURE PUMPING MARKET UPDATE The focus on oily plays is evident in the US Land rig count: oil drilling activity finally overtook gas drilling activity in early 2011 US Land Rig Count – Oil vs. Gas (Aug 2009 – Aug 2011) 100% 90% Oil 80% Gas Percentage of Land Rigs 70% 60% 50% 40% 30% 20% 10% 0% Aug-09 Nov-09 Aug-10 Nov-10 Jan-10 Jan-11 Sep-09 Feb-10 Sep-10 Feb-11 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10 Jul-10 Dec-10 Jul-11 May-10 Oct-10 Mar-11 Apr-11 Jun-11 May-11 Source: Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 12
  • 13. PRESSURE PUMPING MARKET UPDATE The dominance of unconventionals is also evident in the US Land rig count: increases in directional drilling has driven the rig count US Land Rig Count – Dir/Hor vs Vert (Aug 2009 – Aug 2011) 2,500 Directional/Horizontal 2,000 Vertical 1,500Land Rigs 1,000 500 0 Aug-09 Nov-09 Aug-10 Nov-10 Jan-10 Jan-11 Sep-09 Feb-10 Sep-10 Feb-11 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10 Jul-10 Dec-10 Apr-11 Jul-11 May-10 Oct-10 Mar-11 Jun-11 May-11 Source: Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 13
  • 14. PRESSURE PUMPING MARKET UPDATE Most analysts expect the rig count to increase through 2014 US Land Average Rig Count Forecast (2011-2014) 2,500 Current: 1,740 rigs (8/19/11) 2,089 2,020 1,950 2,000 1,709 1,500 Land Rigs 1,000 500 0 2011 2012 2013 2014 Source: PacWest Analysis; Macquarie Client Confidential © PacWest 2011 | All rights reserved | 14
  • 15. PRESSURE PUMPING MARKET UPDATE The Marcellus, Bakken, and Eagle Ford account for nearly 30% of US Land drilling activity Rig Count: Key Plays (Aug 2009 – Aug 2011) 2,500 Other US Land (69% of US Land) California shales (2% of US Land) 2,000 Appalachian (8% of US Land) Bakken (10% of US Land) 1,500 Eagle Ford (12% of US Land)Land Rigs 1,000 500 0 Aug-09 Nov-09 Aug-10 Nov-10 Jan-10 Jan-11 Sep-09 Feb-10 Sep-10 Feb-11 Oct-09 Dec-09 Mar-10 Apr-10 Jun-10 Jul-10 Dec-10 Apr-11 Jul-11 May-10 Oct-10 Mar-11 Jun-11 May-11 Source: Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 15
  • 16. PRESSURE PUMPING MARKET UPDATE Eagle Ford and Bakken are in a major growth phase, California is still an emerging play, and the Marcellus is a relatively mature play Rig Count Growth Rate: Key Plays (Aug 2009 – Aug 2011) 350% Eagle Ford (+309%) 300% Bakken (+276%) 250% Appalachian (+50%) California shales (+258%) 200% US Land (+100%) Land Rigs 150% 100% 50% 0% Jul-10 Jul-11 Nov-09 Nov-10 Sep-09 Feb-10 Aug-09 Oct-09 Dec-09 Jan-10 Mar-10 Apr-10 May-10 Sep-10 Feb-11 Jun-10 Aug-10 Oct-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11 -50% Source: Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 16
  • 17. PRESSURE PUMPING MARKET UPDATE Liquids-rich Eagle Ford is projected to be one of the most active plays in the country Eagle Ford Rig Count & Forecast Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast Land Rigs Land Rigs 350250 Current: 229 rigs (8/19/11) 300 Directional/Horizontal 300 270200 Vertical 240 250 193150 200 150100 100 50 50 0 0 2011 2012 2013 2014 Feb-10 Feb-11 Aug-09 Oct-09 Dec-09 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Apr-11 Jun-11 Source: PacWest Analysis; Macquarie; Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 17
  • 18. PRESSURE PUMPING MARKET UPDATE Frac Tech, BJ, and SLB are the dominant pumpers in 2011 H1 in the Eagle Ford, while Chesapeake is the dominant operator PRELIMINARY ANALYSIS Eagle Ford Pressure Pumping Market (Jan 2011 – Jun 2011) Supplier Market Share Operator Market Share 20% 40% 18% 18% 35% 18% 17% 35% 16% 30% 14% 13% 12% 12%Market Share Market Share 12% 25% 10% 20% 17% 8% 16% 8% 15% 6% 10% 4% 6% 5% 1% 5% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 1% 0% 0% Penn… Shell Chesapeake Pioneer Hess Petrohawk Cabot Enervest Forest Chevron El Paso XTO Talisman Plains Anadarko Source: PacWest Frac DB (under development) Client Confidential © PacWest 2011 | All rights reserved | 18
  • 19. PRESSURE PUMPING MARKET UPDATE Analysts expect higher gas prices through 2014, which will drive significant rig count growth in the Appalachian Appalachian Rig Count & Forecast Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast Land Rigs Land Rigs180 300 Current: 147 rigs (8/19/11)160 Directional/Horizontal 250 250140 Vertical 200120 200 175100 145 150 80 100 60 40 50 20 0 0 2011 2012 2013 2014 Oct-09 Oct-10 Dec-09 Dec-10 Feb-10 Feb-11 Apr-10 Jun-10 Apr-11 Jun-11 Aug-09 Aug-10 Source: PacWest Analysis; Macquarie; Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 19
  • 20. PRESSURE PUMPING MARKET UPDATE Halliburton is the dominant pumper in 2011 H1 in the Marcellus, while Chesapeake is again the dominant operator PRELIMINARY ANALYSIS Marcellus Pressure Pumping Market (Jan 2011 – Jun 2011) Supplier Market Share Operator Market Share 30% 30% 27% 27% 25% 25% 20% 20%Market Share Market Share 16% 15% 14% 15% 11% 11% 11% 11% 10% 10% 9% 8% 7%7% 5% 4% 5%4% 5% 3% 5% 4%3%3% 3%3%2% 1% 2% 1%0% 0% 0% PDC… Energy… Southwes… Atlas Shell Seneca Chesapeake EQT Exco Cabot Range Chevron Talisman Williams EOG XTO Anadarko Source: PacWest Frac DB (under development) Client Confidential © PacWest 2011 | All rights reserved | 20
  • 21. PRESSURE PUMPING MARKET UPDATE California shales are still a question mark in the mind of most analysts and they have not yet factored in its impact on the market California Shale* Rig Count & Forecast Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast Land Rigs Land Rigs 50 35 Current: 43 rigs (8/19/11) 30 45 Directional/Horizontal 30 40 Vertical 26 35 25 22 30 20 18 25 20 15 15 10 10 5 5 0 0 Dec-… Dec-… Aug-… Aug-… Feb-10 Feb-11 Oct-09 Apr-10 Jun-10 Oct-10 Apr-11 Jun-11 2011 2012 2013 2014 Note: California Shale rig count is focused on counties in shale plays. It includes Colusa, Fresno, Kern, Kings, Los Angeles, and Sutter counties, although the majority of drilling activity is in Kern county. Source: PacWest Analysis; Macquarie; Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 21
  • 22. PRESSURE PUMPING MARKET UPDATE Bakken continues to experience growth challenges, which will be discussed later in this presentation Bakken Rig Count & Forecast Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast Land Rigs Land Rigs200 250 Current: 184 rigs (8/19/11)180 Directional/Horizontal 220 210 200160 Vertical 200 180140120 150100 80 100 60 50 40 20 0 0 2011 2012 2013 2014 Feb-10 Feb-11 Aug-09 Oct-09 Dec-09 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Apr-11 Jun-11 Source: PacWest Analysis; Macquarie; Baker Hughes Client Confidential © PacWest 2011 | All rights reserved | 22
  • 23. PRESSURE PUMPING MARKET UPDATE Agenda PacWest’s Market Intelligence Services Pressure Pumping Market Overview Frac Crew Deployment Bakken Case Study Questions Client Confidential © PacWest 2011 | All rights reserved | 23
  • 24. PRESSURE PUMPING MARKET UPDATE Staffing experienced crews is a critical challenge faced by pressure pumping service providers The Quality vs. Quantity Dilemma ■ Completion increases = HHP increases = Frac crew increases = Need for trained staff!! ■ North American pressure pumping industry is expanding rapidly (~20% YoY increase 2010-2011) and needs to add new hires to meet expansion targets ■ Major increases in completions require major increases in frac crews, for example: - Typical 25K HHP frac fleet in the Bakken requires 2-3 crews of 30 staff = 60 – 90 experienced employees - PacWest forecasts an increase in frac fleets in the Bakken from 38 fleets (May 2011) to 52 fleets (year-end 2011) = 840-1,260 experienced employees ■ Fact: Critical driver of oilfield safety = experienced staff ■ Problem: There are no more experienced field workers left; pumpers are forced to manage deployment of large numbers of inexperienced employees Client Confidential © PacWest 2011 | All rights reserved | 24
  • 25. PRESSURE PUMPING MARKET UPDATE Pressure pumpers are deploying equipment and staff from other regions when possible, but there are limitations to this approach Frac Fleet Redeployment Few Existing Deployment Options Majority of US Fleets dedicated  Pumpers are deploying staff and Pressure Pumper % Dedicated equipment from nearby plays BJ Services 50%  However, the prevalence of dedicated Cudd 60% contracts and ‘take-or-pay’ Frac Tech 70% relationships is constraining the Schlumberger 60%-70% number of available staff and Pumpco 74% equipment for redeployment Superior 80%-90% Roughly 60-65% of fleets dedicated ■ For example: Calfrac has redeployed frac fleets from its Colorado base to the Bakken but it still does not have a sufficient facilities for major maintenance so it drives frac trucks back to Colorado every 1-2 months to service equipment Client Confidential © PacWest 2011 | All rights reserved | 25
  • 26. PRESSURE PUMPING MARKET UPDATE Most pressure pumpers depend heavily on non-local employees to meet staffing needs Pressure Pumping “flex crews” ■ Flex crews = non-local employees working at a local base on a temporary basis ■ Flex crews typically spend 2-3 weeks working 17 hours or more per day and then have 1-2 weeks off before returning to the local base ■ All service companies have reported using flex crews to some degree - Larger companies (e.g. Halliburton) often meet half of their staffing needs with flex crews in some areas - Smaller new entrants are sometimes forced to depend entirely on flex crews ■ Companies trying to hire locally, but there are few suitable potential hires in many hot areas (e.g. Eagle Ford, Bakken) ■ Pumpers have admitted that they will never be able to eliminate flex crews entirely in more remote areas Client Confidential © PacWest 2011 | All rights reserved | 26
  • 27. PRESSURE PUMPING MARKET UPDATE There are significant differences in the commitment of pressure pumping companies to safety Employee Training & Management … Training Staff Deployment  All pressure pumpers have training  More important is how companies programs to orient ‘greenhats’ to the balance the deployment of oilfield and provide them with the inexperienced employees vs. basic knowledge and skills to safely experienced employees in a crew and effectively operate frac  Good = Majority experienced equipment employees + minority inexperienced,  Programs vary widely in structure, which provides mentors upon which duration, and effectiveness greenhats can depend  However, no training programs can  Bad = Minority experienced + majority substitute for solid field experience inexperienced… a recipe for disaster ■ For example: A former Sanjel employee in the Bakken reports often being deployed in crews where the majority of staff had less than two months of oilfield experience - Outcome: Multiple cases of splitting iron and debilitating injuries Client Confidential © PacWest 2011 | All rights reserved | 27
  • 28. PRESSURE PUMPING MARKET UPDATE Agenda PacWest’s Market Intelligence Services Pressure Pumping Market Overview Frac Crew Deployment Bakken Case Study Questions Client Confidential © PacWest 2011 | All rights reserved | 28
  • 29. PRESSURE PUMPING MARKET UPDATE Overwhelming demand in the Bakken is expected to lead to a significant under-supply of pressure pumping capacity for 2011 Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization 250% 241% 2011 completions + backlog Pressure Pumping Capacity Utilization 42% 201% 200% 2011 completions 35% 161% 150% 28% 121% 21% 199% 100% 100% 166% utilization of 133% 2011 50% 100% capacity 0% 15 20 25 30 Average Stages per Well The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well Sources: CIBC World Markets; Macquarie; PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 29
  • 30. PRESSURE PUMPING MARKET UPDATE Demand will continue to outpace supply for pressure pumping capacity into 2012 in the Bakken Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization 200% 2012 completions + backlog 180% 2012 completions Pressure Pumping Capacity Utilization 159% 160% 152% 146% 140% 140% 45% 100% utilization 43% 120% 42% 40% of 2012 capacity 100% 80% 60% 114% 100% 109% 104% 40% 20% 0% 30% 40% 50% 60% Capacity Growth (2011 – 2012) Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate Source: CIBC World Markets; Macquarie; PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 30
  • 31. PRESSURE PUMPING MARKET UPDATE Drilling & completion activity in the Bakken is up considerably and continued increases are forecast Bakken Rig Count (Aug 2009 – Aug 2011) 200 184 180 160 140 120 Rig Count 100 80 Forecast Bakken D&C Activity 60 49 Metric 2011 2012 2013 2014 Average rig count 180 200 210 220 40 Drilling days / well 32 31 30 30 20 New completions 2,053 2,355 2,555 2,677 0 Sep-09 Nov-09 Feb-10 Sep-10 Nov-10 Feb-11 Mar-10 Apr-10 Jun-10 Jul-10 Apr-11 Jun-11 Jul-11 Aug-09 Oct-09 Dec-09 Jan-10 May-10 Mar-11 Jan-11 May-11 Aug-10 Oct-10 Dec-10 Sources: Baker Hughes, Macquarie, CIBC World Markets, PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 31
  • 32. PRESSURE PUMPING MARKET UPDATE Pressure pumping companies are significantly expanding their capacity in the Bakken in response to increased demand… Bakken Pressure Pumping Supply (May 2011) Halliburton 7 5 2 Sanjel 3 4 2 Schlumberger 5 1 1 Frac Tech 3 3 Bakken Pressure Pumping Equipment BJ Services 2 1 2 Current dedicated 25 Current spot 14 Superior 2 1 Fleets Total current 38 Calfrac Future additions 14 2 1 Total year-end 52 Pumpco 1 1 1 Current 773 HHP Year-end 1,074 Cudd 2 0 2 4 6 8 10 12 14 Current dedicated fleets* Current spot fleets* Future 2011 fleet additions Note: “Spot” fleets are not necessarily available; only implies not in long-term dedicated Sources: company documents, interviews contract; little to no scheduling availability remains for most spot fleets in the 2011 Client Confidential © PacWest 2011 | All rights reserved | 32
  • 33. PRESSURE PUMPING MARKET UPDATE … but supply chain constraints are holding back the deployment of new equipment and the ability to consistently supply pumping services Bakken Supply Chain Constraints Logistics ■ Railway (primarily BNSF) import capacity into the Bakken is limited for all products, particularly proppant due to the large volumes required (1 railcar has capacity of 200K lbs of proppant; average 3 million lbs frac job requires 15 railcars) Proppant ■ Global proppant consumption has reached unprecedented levels and most domestic producers are essentially sold out of product ■ Greatest constraint is in 20/40 raw sand Guar ■ Demand has reached record highs and the guar supply chain is not highly responsive due to its length (90% of raw guar seed grown in rural India) Equipment ■ Manufacturers of pumping equipment reporting order backlogs of up to 1 year Labor ■ Local labor force in the Bakken is limited and unemployment is extremely low Client Confidential © PacWest 2011 | All rights reserved | 33
  • 34. PRESSURE PUMPING MARKET UPDATE Bakken pressure pumping supply has been unable to keep pace with demand so well completion backlogs are growing Days Required for D&C in North Dakota 180 172 Spud and Completion Days between Well 120 103 107 118 90 85 76 87 96 81 82 81 99 95 98 103 93 67 72 67 80 60 57 50 0 Bakken Well Count (May 2011) 500 Number of Wells 400 300 200 100 0 Uncompleted Drilling Permitted Bakken 429 162 413 Montana 57 6 67 North Dakota 372 156 346 Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 34
  • 35. PRESSURE PUMPING MARKET UPDATE Operator D&C performance varies, in some cases depending on contracting practices Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011) Well Backlog Rigs Anschutz/OXY 1.0 7 7 Continental Resources 1.8 45 25 Whiting Oil & Gas 1.9 29 15 Zenergy 2.0 12 6 Brigham Oil & Gas 2.4 17 7 ConocoPhillips 2.6 13 5 Hess 2.7 48 18 Slawson 2.8 17 6 Newfield 3.0 15 5 EOG Resources 3.4 34 10 Marathon 3.6 25 7 Oasis Petroleum 4.5 27 6 0 1 2 3 4 5 Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011 Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis Client Confidential © PacWest 2011 | All rights reserved | 35
  • 36. PRESSURE PUMPING MARKET UPDATE The Bakken supply/demand imbalance is not expected to improve drastically anytime soon so operators must contract accordingly Implications for Contracting Strategy in the Bakken ■ It is important to be proactive to develop long-term solutions rather than short-term fixes, while considering other infrastructure challenges ■ Operators should include terms in contract to incentivize for safety improvements, performance improvement ■ Avoid safety incidents by forcing service companies to provide their best crews, when possible ■ Consider using greenhat clauses or crew continuity incentives, similar to drilling contracts Client Confidential © PacWest 2011 | All rights reserved | 36
  • 37. PRESSURE PUMPING MARKET UPDATE Agenda PacWest’s Market Intelligence Services Pressure Pumping Market Overview Frac Crew Deployment Bakken Case Study Questions Client Confidential © PacWest 2011 | All rights reserved | 37