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Will rathvon's presentation slides from the 2010 World National Oil Companies Congress

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Will rathvon's presentation slides from the 2010 World National Oil Companies Congress that took place in June in London.

Will rathvon's presentation slides from the 2010 World National Oil Companies Congress that took place in June in London.

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  • 1. Industry Themes and Capital Raising Will Rathvon Global Head, Resources & Energy Group Global Banking and Markets June 2010 London
  • 2. 2 Themes • Emerging markets aren’t as dependent on developed economies as they used to be • Who depends on who is unclear today. Trade between emerging economies are growing twice as fast as global world trade • Growth is headed south; debt is headed north • Who’s economic policies are most appropriate? • How will the trillion dollars of capital needs of the oil sector be financed? • How has capital raising and financing been impacted?
  • 3. Capital Raising
  • 4. 4 Sources of financing in Oil & Gas Equity sources • Equity capital markets • Sovereign Wealth Funds • Financial investors Debt sources • Banks (syndicated loans) − Corporate finance − Structured trade finance − Reserve based lending − Project finance • Debt Capital Market (bonds) • Export Credit Agencies
  • 5. 5 Equity capital markets backdrop Lehman’s Chapter 11 insolvency and banking sector deterioration HSBC rights issue and other jumbo rights issues launched in order to strengthen balance sheets and banks’ capital ratios Equity markets recovery and lowered volatility tempered by the sovereign debt crisis 50 60 70 80 90 100 110 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 S&P 500 FTSE 100 DJ Stoxx 50 Source: Bloomberg rebased to 100 Equity capital markets’ capacity has increased significantly over the past decade Equity indices have recovered to a large extent from the lows seen in March 2009 Early 2010 saw a resurgence of confidence in the market although this has been dampened by the recent European sovereign debt crisis in May 2010
  • 6. 6 Deal Value ($bn) Oil & Gas IPO volumes 0 5 10 15 20 35 2005 2006 2007 2008 2009 2010 China Europe North America Other Asian/Oceania ME/Africa/Other Russia & FSU • Oil & Gas IPO issues dominated by emerging markets players • Trend of BRICs players to capitalize on surging interest in these economies • Following peak in 2006, market collapsed in 2009 for Oil & Gas issues • Petrobras is preparing a US$25bn share issue for July; analysts have estimated that the share offering could reach between US$50-60bn which would make it the largest ever launched IPO Source: Dealogic (1) YTD from June 2010 1
  • 7. 7 Source: Dealogic (1) YTD from June 2010 Oil & Gas DCM volumes Deal Value ($bn) • Collapse in IPO volumes coincides with increasing DCM issues • Market dominated by Majors as investor appetite for risk has reduced • Recent activity includes Total (US$2.5bn) and Shell (US$2.75bn) • Record issuance in 2009 as corporates sought to lengthen maturity profile and diversity funding away from the bond market • 2010 volumes lower due to extent of pre- financing in 2009 – Companies willing to incur cost at carry to secure certainty of funding in volatile markets 0 50 100 150 200 250 2005 2006 2007 2008 2009 2010 China Europe North America Other Asian/Oceania ME/Africa/Other Russia & FSU 1
  • 8. 8 0 200 400 600 800 1000 1200 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 0 20 40 60 80 100 iTraxx Main iTraxx Crossover VIX Corporate debt capital markets backdrop 950bps Significant spread compression New issue volumes down significantly on 2009 (c. 50%) But sovereign risk now impacting corporate spreads Increasing risk appetite from investors as they search for yield Banking Sector Collapse Stability and strong corporate performance M&A refinancing progresses strongly Downside risk focus returns lead by sovereign distress 320bps Spread (bps) Equity Volatility Pts
  • 9. 9 PIGS and BRIC CDS Even OECD countries under pressure 0 100 200 300 400 500 600 700 800 900 1,000 01/01/2009 01/02/2009 01/03/2009 01/04/2009 01/05/2009 01/06/2009 01/07/2009 01/08/2009 01/09/2009 01/10/2009 01/11/2009 01/12/2009 01/01/2010 01/02/2010 01/03/2010 01/04/2010 01/05/2010 01/06/2010 Portugal Italy Greece Spain Brazil Russia China Source: Bloomberg
  • 10. 10 Upstream financing • Pre-export finance (including Contract Pre-payment) Downstream financing • Warehouse finance (for inventories of exchange traded commodities) • Tolling and processing • Receivables finance (for trade and other receivables) • Funding investment in capital equipment or production assets • Borrowing Base finance (funding a revolving asset base) • Development or refurbishment or production facilities (with or without project risk) • Provision of payment guarantees for sellers of crude oil and refined products Structured Trade Finance Structured Trade Finance 1. Structured Trade Finance Facilities involve monetization of commercial long term agreements, thereby shifting focus from the “strength” of the borrower to the underlying cash flow and structures to enhance safety of financing Examples of Structured Trade Financing Products in Oil & Gas
  • 11. 11 Strategies for Success in Raising Financing Reserve Based Lending Products available at different stages of a field’s life EquityDebtinstruments $[50-100] million cash to fund long lead items Tenor: 12-18 months Warrants instead of some upfront fees Based on discounted NPV of cashflow Additional value given to remaining portfolio Potential to fund 100% of development cost Terminate at completion/ continue corporate facility Based on discounted NPV of project cashflows Tenor: 7 years Freedom to bring in and remove assets every 6 months (at redeterminations) Letter of Credit backed by NPV / Cash Collateral Commercial Threshold passed FDP Approval Bridge Facility (based on market value multiple of P90 reserves or Contingent Resources) Conversion to Project Finance/Borrowing Base (based on P90 reserves) Potential to increase Borrowing Base (P50 reserves) Provisioning for Abandonment Discovery Appraisal Development Production Abandonment
  • 12. 12 Export Credit Agencies A key source of Term Debt • A reliable source of long term financing, reaffirmed during the peak of the financial crisis • Significant risk capacity • A deep understanding of the oil and gas sector increasing flexibility of the product offering for major corporates, including framework agreements and ECA wrapped bonds • Halo effect of ECA involvement in financing • Highly competitive in pricing versus other sources of finance, and a relatively stable debt source throughout market fluctuations • Value as a diversification play BBB- Rated 5 Year CDS vs. estimate of ECA all in Spread 56.0 44.8 23.827.0 0 20 40 60 2006 2007 2008 2009 Source: Dealogic All ECA Backed Loans US$ billions Source: Bloomberg (18/06/10), ECA website premium calculators, HSBC estimate of all in spread 0 100 200 300 400 500 600 700 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10
  • 13. 13 0 100 200 300 2006 2007 2008 2009 2010E 2011E Equity Bonds Loans Government/Multilateral suppor The Project Finance market has been a historical provider of funds • A source of structured long term financing tailored to cash flows of a project (LNG, refining, expansions) for sponsors • Industry understanding is a key to tailor the financing package to sponsors needs • Increasing links with ECA and Islamic Financing. Project Bonds are increasing Largest Project Finance transactions Source: Infrastructure Journal – Global Infrastructure Finance Review 2009, estimates from HSBC Global Project Finance Volumes US$ billions Source: Factiva, HSBC analysis Dec 2009 US$14bn Financing of the US$16.5bn-plus liquefied natural gas project in Papua New Guinea June 2010 US$14bn Financing of the 400,000bpd Jubail Refinery in Jubail Industrial City, Saudi Arabia Ongoing / Oct 2009 >US$1.0bn / US$1.7 Odebrecht Oil & Gas and Delba Financing the construction and operation of two dynamically positioned drillships
  • 14. Industry Themes Impacting Financing
  • 15. 15 Global Oil & Gas trends Oil prices Source: Brokers’ (details in Appendices), Bloomberg, Wood Mackenzie, CERA Brent oil price futures/forwards and forecasts (US$/bbl) Source: Bloomberg 20 40 60 80 100 120 140 2004 2006 2008 2010 2012 Broker high/ low range Historical Brent ICE Brent futures (Jun-10) Wood Mackenzie (Mar-10) CERA Asian Phoenix (Jun-10) Broker average (Jun-10) OPEC ‘acceptable’ range
  • 16. 16 Oil & Gas Supply & demand balances Eurasia Africa North America Europe Asia Pacific Net supply region Net demand region (15.7)(15.4) (15.6) 3.74.55.0 (10.4) (11.1) (12.0) 2010 2015 2020 (4.4)(3.9) (4.1) 19.219.218.4 14.5 15.1 14.8 2010 2015 2020 (9.4)(7.3) (8.3) 37.634.230.8 23.5 25.9 28.2 2010 2015 2020 Middle East Latin America (4.1)(3.3) (3.6) 13.113.211.8 8.5 9.6 9.0 2010 2015 2020 (19.5)(17.5) (18.4) 9.19.78.7 (8.8) (8.7) (10.4) 2010 2015 2020 Net position (mmbpd) Demand (mmbpd) Production (mmbpd) (22.0)(21.4) (21.9) 12.111.810.9 (10.5) (10.1) (9.9) 2010 2015 2020 (9.6)(8.2) (8.8) 11.611.110.8 2.6 2.3 2.0 2010 2015 2020 Rebased to 100 97 99 101 103 105 107 2010 2012 2014 2016 China OECD The China Factor
  • 17. 17 Offshore development: drilling deeper and deeper Higher cost of development will require capital raising Source: IFP Depth (m) 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1,852 1,650 1,027 752 540 312 1.709 1997 Marlim Sul 1997 Mensa 1978 Cognac 1989 Jolliet 1991 Marlim 1994 Marlim 4 1999 Roncador Shallow Water: <200-500m of Water Depth (WD) Deep Offshore: WD = 500m – 1,500 Ultra Deep Offshore: WD = 1,500m – 3,000m Very Deep Offshore: Next target depth = 3,000m
  • 18. 18 0 100,000 200,000 300,000 400,000 500,000 600,000 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Above 7,500ft Between 5,001-7,500ft Below 3,000ft Evolution of drilling costs Average cost of drilling (US$)
  • 19. 19 Development 58% Santos Pre-Salt 17% Exploration 13% International 12% Brazil requires significant capex over next few years Worldwide Oil & Gas Reserves (bboe) Robust investments from Petrobras Breakdown of Petrobras’ Business Plan Investments Total investments of ~US$126bn in E&P through 2014 • Petrobras aims to become one of the five largest integrated energy companies in the world in the short run • Petrobras’ Strategic Plan for 2010-2014 envisages total investments of US$220 billion • In the Santos Basin pre-salt layer alone, Petrobras estimates recoverable Oil & Gas reserves between 9.5 billion and 14 billion boe 100 13 264 138 115 102 99 98 79 44 40 36 30 29 27 15 14 12 12 8 Saudi Iran Iraq Kuwait Brazil Venezu United Russian Libya Kazakh Nigeria US Canada Qatar China Angola Brazil Algeria Mexico Norway E&P 60% RTC 25% G&E 7% Others 8% After pre-salt discoveries ~8.0x Note: (1) Brazil Post Pre-Salt 1
  • 20. 20 Potential impact of unconventional gas Already affected Five to 10 years Not to be ruled out < five years > 10 years Source: Wood Mackenzie’s Unconventional Gas Service; National Petroleum Council; BP Statistical Review of World Energy 37% 47% 17% 8,228 trillion cf North America 1% 61% 37% 3,448 trillion cf South America 83% 17% 39,094 trillion cf Conventional / Unconventional gas split CBM Tight sandsShale gas 63% 17% 20% 6,739 trillion cf Europe 18% 64% 19% 9,678 trillion cf Asia 1% 63% 36% 4,467 trillion cf Middle East and Africa Independents with unconventional gas assets… …Majors with access to capital buying into upside Unconventional Conventional
  • 21. 21 Macondo Effect – winners / losers Winners Anyone who needs DW rig capacity – NOCs with deepwater ambitions, Brazil Players in onshore, unconventional or shallow water plays – good for OFS companies with NOC exposure Players in offshore inspection or maintenance services Established equipment suppliers (when the dust settles) – Possibility renewal or replacement of hardware Oil prices – risk of higher decline rates and delayed or lost new production Losers In the near term players in seismic, well services to be impacted as demand falls or shifts Deepwater drilling in 2011/2012 – lower rates / delayed recovery Smaller E&P with deepwater ambitions – can they afford it? Frontier offshore areas – host governments will likely want larger clean-up funds, local “safety” infrastructure New entrants in drilling or offshore equipment – who will trust them?
  • 22. 22 Impact of six-month moratorium in deepwater drilling Top 10 deepwater GoM producers in 20111 Source: Wood Mackenzie, FitchRatings report (1) BP figures do not include recently acquired Devon 0 50 100 150 200 250 300 350 400 450 500 BP Shell Anadarko BHP Chevron ExxonMobil Eni Hess Statoil Marathon Workinginterestproduction(000'boe/d) 0 5 10 15 20 25 30 35 40 GoMas%ofTotalProductionin2009(%) 2011 Production Delayed Production (%)
  • 23. 23 Opportunity for other deepwater players? • Three areas (Brazil, West Africa and Gulf of Mexico) formed the Golden Triangle of deepwater drilling Deepwater “Golden Triangle” Newbuild rigs with contracts in deepwater GoM Selected rigs and companies affected by drilling moratorium SubseaDrillship1 • GSF Development Driller I• GSF CR Luigs • GSF Development Driller II, Development Driller III, West Sirius • Discoverer Enterprise • Discoverer Deep Seas, Discoverer Inspiration, Discoverer clear Leader • Noble Paul Romano • Ocean Confidence • ENSCO 8501, Noble Clyde Boudreaux • Frontier Driller, Noble Danny Adkins, Noble Jim Thompson, Deepwater Nautilus • Maersk Developer• Discoverer Americas • Ocean Saratoga • Ocean Voyager • Noble Lorris Bouzigard • ENSCO 8500, Noble Amos Runner, Ocean Monarch • Discoverer Spirit Subsea • ENSCO 8502 • ENSCO 8503 • Noble Jim Day • Scarabeo 9 Drillship1 • Bully 1 • Deep Ocean Ascension • Deep Ocean Clarion • Deepwater Pathfinder Source: Wood Mackenzie Note: (1) Rigs are semi-submersibles unless otherwise noted
  • 24. Will Rathvon Global Head, Resources & Energy Group Global Banking and Markets +44 20 7991 6284 will.rathvon@hsbcib.com Americas John Robinson john.m.robinson@us.hsbc.com +1 212 525 4157 Evan Hazell evan_hazell@hsbc.ca +1 403 693 3700 Middle East Darren Davis darren.davis@hsbc.com +971 44235744 Jerome Fileni jerome.fileni@hsbc.com +971 45093531 Asia Jonathan Drew jonathandrew@hsbc.com.hk +852 2841 8162 David Gardner davidgardner@hsbc.com.hk +852 2841 8133