A proverbial 100-year storm has disrupted positive trend lines the O&G industry once took for granted. Understanding the storm’s characteristics and path is essential for survival. High level economic realities of the new O&G paradigm will be explored, with a focus on oil markets, oilfield activity, and workforce trends.

1. Steering Into The Storm
O&G Economic Outlook
Presented by Joseph Triepke | March 2016

2. Extreme Downturn, Epic Proportions, No Exaggeration
Sources: BHI, NOV, SLB, ESV, Haynes & Boone, Company Filings, Bloomberg Intelligence, PacWest, Barclays, Our Estimates
• Global 2016 E&P Capex 42% Below 2014
• Last Time The US Rig Count Was This Low, Abe
Lincoln was President
• ½ US Frac Fleet Is Being Cannibalized
• 68 Projects Representing 3mmbpd Deferred
• 300,000+ Layoffs (75% OFS/Drilling, 25% E&P)
• 50+ Offshore Drilling Rigs Scrapped Is A Start
• Over 80 Chapter 11s, Chapter 7s Still To Come
$0
$200
$400
$600
$800
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016E
E&PSpend($Bn)
E&P Capex Spending Trends
Global E&P Spend
North America

3. Overbuild, Capitulate, Rinse, Repeat
Source: Bloomberg, BP Statistical Review
$0
$20
$40
$60
$80
$100
$120
$140
$160
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Industry Lifestyle Adjusted To High Prices
WTI Spot Price
10-yr Avg ($78)
5-yr Avg ($85)
Hypothetical Cyclical Gyration
(Supply Driven For Past 5 Decades)
Oil Demand
Industry Capacity
High oil prices
encourage
overbuilding
Oversupply sends
oil prices lower and
capacity capitulation
follows
A period of industrial
underinvestment
sets up the next
commodity upcycle
Peak oil theorists
gain traction
Peak oil theory
scoffed

4. Sales/Employee Trends Shed Light On Resizing Impact
Source: Company Filings, Bloomberg
$0.0
$0.1
$0.2
$0.3
$0.4
$0.5
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017E
MillionsOf$PerEmployee(2016$)
MillionsOf$PerEmployee(2016$)
IOC, E&P (Left Axis)
Oil Service, Drilling, Equipment (Right Axis)

5. Oil Price Scenario Analysis: Workforce Resizing
Source: Company Filings, Bloomberg, Our Estimates

6. Hiring In O&G Is Falling To Maintenance Levels
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
0
10
20
30
40
50
60
70
80
90
100
New O&G Job Openings Listed Each Month Are Down About As Much As Oil Prices
O&G Hiring Strength Index
WTI Oil Price
Source: Global Review Of New O&G Job Listings. Note: new job listings indexed to 100 in August 2014.

7. Big Production Response Coming… Timing Is Tricky
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E
$Trillions
Cumulative Capex During The Shale Decade
For 59 NAM Independent E&Ps
- $1 Trillion Spent
- $200 Billion Debt Outstanding
- Lofty Return Expectations
Transforming Into Write-Offs
Source: Bloomberg, Company Filings, Wall Street Research, Our Estimates
Russia
Saudi Arabia
Other OPECOther Non-OPEC
Production
Deepwater
US
Unconventional
Other Non-OPEC
High Cost Cost
Production
US Conventional
Global Oil Production By Source
Barrels from >1/4th
world supply are
cost
disadvantaged

8. This Is Still The Most Important Chart In O&G
Source: Bloomberg, Baker Hughes
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
2,000
4,000
6,000
8,000
10,000
12,000
2005 2007 2009 2011 2013 2015
USOilRigCount
USOilProduction('000sbpd)
US Oil Production US Oil Rig Count
Rig count
peaked
Sep. 2014,
down 75%
Production
peaked
Jun. 2015,
down 5%

9. Oil Won’t Follow The Natural Gas Trajectory
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
0
10
20
30
40
50
60
70
80
90
Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14
US Natural Gas Marketed Production (Bcf/d) US Natural Gas Rig Count
Source: Bloomberg, Baker Hughes

10. Extreme Volatility Usually Marks End Of Price Discovery
Source: Bloomberg
$0
$20
$40
$60
$80
$100
$120
$140
$160
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Mar-83 Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13
Daily % Change & WTI Price
1986
Crash
Gulf
War
Subprime
Financial
Crisis
2015
Crash
Asian
Financial
Crisis
0
20
40
60
80
100
120
May-07 May-09 May-11 May-13 May-15
Oil Fear Index (CBOE Oil VIX)

11. WTI Rallied 60% In 40 Days… But Remember Spring ‘15
Source: Bloomberg
$0
$20
$40
$60
$80
$100
$120
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
WTI Oil Prices, Beware Of False Rallies
+40%
+60%

12. Traders Ignoring Storage? This Overhang Weighs Heavy
Source: Bloomberg
250
300
350
400
450
500
550 Sep-87
Sep-89
Sep-91
Sep-93
Sep-95
Sep-97
Sep-99
Sep-01
Sep-03
Sep-05
Sep-07
Sep-09
Sep-11
Sep-13
Sep-15
MillionBarrelsofOil
5-Yr Range 5-Yr Range US Oil Inventory

13. Downturn Psychology Influences Business Decisions
Feels Normal
Peak
Optimism
Shock
Denial
Aggression
Bargaining
Adjust
Adapt
Acceptance
Peak
Pessimism
1Q16
Feels
Normal?
2Q14
Depression
2H2014 1H2015 2H2015
The Downturn’s
Psychological
Stages
The Evolution Of
Industry Conversation
$100 Oil
$35 Oil
Bears Dismissed
Frustration
Fear Sets In
Brief Relief
Emotions
Run High
Bulls
Dismissed
People
Leave
Industry
Layoffs
Get Personal
“This Is Temporary”
Vultures
Descend

14. In 2016, Value Buyers Arrive
Permian Basin Billboard Offers “Quick Cash For Rigs”
• Value buyers new to the industry are arriving in the US
oilpatch from Europe, Asia, NY, and S. America
interested in bargain purchases in both E&P and
OFS/drilling
• We are also seeing offshore operators and contractors
shifting focus to shorter cycle, lower cost onshore
development
• Experienced oilfield hands are being sought out by
novice O&G investors trying to understand the market
• Setting up a potential buying spree that could support
the industry

15. 2020 Vision: A Wide Cone Of Uncertainty Prevails
• Analysts are struggling with a wide cone of uncertainty on the future of
O&G at this point in the cycle. Every forecast should be taken with a grain
of salt at this time.
• Consensus has become skeptical of the recent rally in oil prices and most
believe it is too early. Most analysts have joined the lower for longer camp.
• However, consensus also sees the downturn as cyclical and finite. We
believe production response clarity will emerge in 2017 that will set the
stage for a modest recovery by 2018.
• Industry’s ability to quickly ramp production is being significantly impaired,
potentially setting up for large oil price spikes in the 2020s.