February CFA Texas Investor Symposium - Review of the Current Energy Environment

Transcription

1 February 2015 CFA Texas Investor Symposium - Review of the Current Energy Environment

2 North American Energy Landscape A financial perspective Key Themes Over the last 5 years the S&P 500 increased from the low 1,000s to over 2,000 today ( +90%) E&P Sector + 25% (XOP) Midstream Sector +54% (AMZ) Oilfield Services Sector +2% (OSX) The US Shale Revolution has coincided with the Recovery from The Great Recession Readily available capital Very active equity, debt and M&A markets with record new issue volumes and record cash levels within Private Equity Substantial decline in oil prices driven by confluence of weaker global demand and significant increase in Non-OPEC production Crude produced in US shale basins in direct competition with crudes arising in the Middle East Lower commodity prices reflective of over-supply driven by large unconventional production in NAM Significant declines in US shale production likely begin by end of 15 if prices remain in the $50 - $55/bbl range The recent decline in commodity prices has resulted in significant decline in valuations Independents previously priced to perfection now trading below Net Asset Value Liquidity to tighten substantially for many independents as hedges roll off and banks re-determine/shrink borrowing bases A&D asset transactions likely to continue in a lower price environment and could increase if oil prices dip further underscoring the need for liquidity Expect a resurgence in E&P corporate transactions after seller expectations settle Private equity likely to play a substantial role in providing liquidity for growth 1

3 The Recovery from The Great Recession The value of the S&P 500 has doubled in five years, a testament to the truly astonishing recovery we have witnessed since the depths of The Great Recession. 225 E&P Sector Performance +25% 225 Midstream Sector Performance +54% 225 OFS Sector Performance +2% /18/2010 2/18/2011 2/18/2012 2/18/2013 2/18/2014 2/18/2015 E&P Index 50 2/18/2010 2/18/2011 2/18/2012 2/18/2013 2/18/2014 2/18/2015 MLP Index 50 2/18/2010 2/18/2011 2/18/2012 2/18/2013 2/18/2014 2/18/2015 OFS Index 200% Over the past five years, we have witnessed a healthy recovery in the S&P 500. However, commodity prices have been volatile, and as a result of recent over supply are now substantially below where they were five years ago. 175% 150% 125% 100% 75% 50% S&P 500 Performance: +90% (1) WTI Performance: (34%) (2) Henry Hub Performance: (46%) (3) 25% 2/18/2010 8/18/2010 2/18/2011 8/18/2011 2/18/2012 8/18/2012 2/18/2013 8/18/2013 2/18/2014 8/18/2014 2/18/2015 S&P WTI HH 2 Source: Dealogic and FactSet as of 2/18//15. Performance indexed to S&P 2/18/ and 2/18/ WTI 2/18/2010 $79.06 and 2/18/ $ HH 2/18/2010 $5.39 and 2/18/2015 $2.93

4 Yields on 10 Year US Treasuries at Record Lows Multiple installments of quantitative easing have led to lower interest rates, which have allowed for a low cost of financing to help fuel the unconventional development. 7.0% Yields on the 10 Year US Treasury 6.0% 5.0% Average Yield: 4.7% 4.0% 3.0% 2008-Today Average Yield: 2.8% 2.0% 1.0% 0.0% 2/18/2000 2/18/2001 2/18/2002 2/18/2003 2/18/2004 2/18/2005 2/18/2006 2/18/2007 2/18/2008 2/18/2009 2/18/2010 2/18/2011 2/18/2012 2/18/2013 2/18/2014 2/18/ US Treasury Yield Source: Market data as of 2/18/15. 3

5 The US Energy Revolution Has Just Begun The shale revolution has fundamentally changed energy industry dynamics globally and is driving an unprecedented level of energy investment in the US. For decades, the US energy business had been largely viewed as a mature, even stagnant, industry The decline in US oil production, which peaked in 1970, had forced the US into the position of net importer In the last decade, technological advancement and innovation has enabled the drilling of oil and gas that had once been viewed uneconomic or inaccessible The result has been nothing short of revolutionary in terms of its global economic impact has been fortunate to be at the forefront of an unprecedented surge of global deal flow resulting from the shale revolution U.S. expected to grow to #1 oil producer by 2015

6 The Unconventional Revolution in North America Draft In Progress US US deepwater deepwater and and shale, shale, and and Canadian Canadian oil oil sands sands are are driving driving the the fastest fastest pace pace of of supply supply growth growth globally. globally. US production could grow +6.6 MMbbl/d by 2020, driven by deepwater and shale % Growth Mbbl/d MMbbl/d (m b/d) Deepwater Shale Oil Alaska Other Conventional/Heavy NGLs Biofuels Source: Bloomberg, CAPP, Woodmac, Pemex, Citi Research. 5

7 Evidence of the Unconventional Revolution Oil/liquids production began rising in late 2010 (MBoe/d) 2, , , ,400 1, MBoe/d 1, WTI ($/bbl) /1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 Bakken Eagle Ford Haynesville Marcellus Niobrara Permian Utica Oil Price (WTI) Source: Bloomberg, EIA, Citi Research 6

8 Exponential Growth in Shale US shale liquids were projected to grow by 3.8 MMbbl/d in the decade ending ,000 4,500 4,000 Upside Potential 3,500 Mbbl/d 3,000 2,500 Permian Midland Permian Delaware 2,000 1,500 Eagle Ford 1, Bakken Bakken Eagle Ford Granite Wash Permian Delaware Permian Midland Niobrara Uinta Barnett Utica Woodford/Anadarko Monterey Upside Potential Source: Citi Research, Woodmac. 7

9 Capital Markets Transactions Have Financed the Revolution Total E&P Equity Offerings Total MLP Equity Offerings Total Proceeds ($MM) $15,000 $12,500 $10,000 $7,500 $5,000 $2,500 $8,718 $9,354 $6,838 $6,442 $11,593 $14,373 Total Proceeds ($MM) $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $7,304 $15,355 $19,499 $30,902 $27,711 $25,365 $ $ Total E&P HY Debt Issuances Total MLP HY Debt Issuances Total Proceeds ($MM) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $43,714 $28,725 $31,545 $18,655 $19,063 $9, Total Proceeds ($MM) $24,000 $20,000 $16,000 $12,000 $8,000 $4,000 $0 $20,625 $15,290 $16,410 $10,218 $7,630 $1, Source: PLS M&A Database 8

10 And the Energy M&A Market Has Remained Vibrant E&P M&A MLP M&A Total Proceeds ($MM) $100,000 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $62,000 $76,000 $84,000 $90,000 $52,000 $94,548 Total Proceeds ($MM) $175,000 $150,000 $125,000 $100,000 $75,000 $50,000 $47,300 $72,100 $50,200 $71 billion acquisition August 2014 $75,400 $174,500 $20,000 $10,000 $25,000 $17,800 $ $ OFS M&A Downstream M&A $50,000 $10,000 Total Proceeds ($MM) $40,000 $30,000 $20,000 $10,000 $11,559 $29,320 $39,548 $25,112 $21,047 $25,806 Total Proceeds ($MM) $8,000 $6,000 $4,000 $2,000 $1,457 $2,529 $4,196 $6,616 $4,678 $5,591 $ $ Source: PLS M&A Database 9

11 The Long March Towards Energy Independence in Draft the In US Progress North America has been growing oil supply rapidly against a background of weak global oil demand and a stronger dollar. US crude imports have been on a steady decline in the past five years, while production has been growing at a moderate pace Bbbl Annualized Figures for US Oil Production US Oil Imports Source: EIA. 10

12 OPEC s New Reality: Cartel Power At Risk Draft In Progress Growth in non-opec production has mitigated and even surpassed production declines caused by OPEC supply disruptions Global geopolitical supply disruptions matched by growth in North American oil production MMbbls/d) US Supply Growth Surpasses OPEC Disruptions -1.5 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Non-OPEC Supply Growth OPEC Supply Disruptions Growth Source: Citi Commodities Research. 11

13 Supply-Demand Dislocation in 2014 Drove Decline in Oil Historical Price of Oil Brent Crude Oil Spot Price ($/Barrel) 160 Financial Crisis Arab Embargo Iranian Revolution Saudi Arabia driven over supply Asian Crisis Expanding Global Demand Oil has been range bound the past 4 years between ~$90 and ~$130 per bbl 80 $ $ Source: EIA, Wall Street research. Market data as of February 18, Represents periods of recession in the U.S. 12

14 Supply-Demand Imbalance Global Supply-Demand Balance Remains Oversupplied Into Early Supply / Demand (million barrels per day) 2008A 2009A 2010A 2011A 2012A 2013A 2014A 2015E 2016E Supply OECD Non-OECD OPEC Non-OPEC Total World Production Consumption OECD Non-OECD Total World Consumption Excess Supply / (Demand) (0.2) 0.7 (0.3) (0.1) The current excess supply is not expected to be absorbed until 2016 at the earliest, producing further pricing pressures throughout 2015 Source: EIA, Wall Street research. 13

15 Recent Price Performance of Crude Oil: How Did We Get Here? While a supply-driven decline in oil prices is generally a positive for the global economy in aggregate, the recent decline in oil prices suggests elements of both supply and demand side factors. Brent Crude Oil Over Last Twelve Months June 19, 2014 $ Week High $ Trouble in Libya and sanctions against Iran; good economic news in U.S. and Europe; instability in Ukraine Continued concerns over Ukraine and Libya Low demand and high North American and Libyan production cancelled out effects of troubles in the Middle East and Ukraine; expected slowdowns in Europe and China drives decreased demand /27/2014 (OPEC 166 th meeting): OPEC meeting concludes with no announced cuts in production $60.53 (45.2%) 40 Feb Apr Jun Jul Sep Nov Dec Feb Source: EIA, Wall Street research, FactSet. Market data as of February 18,

16 Recent Price Performance of Natural Gas Due to historically cold winter months last year, natural gas prices reached 5-year highs; however, a mild start to winter this year has driven gas prices near 52-week lows. Henry Hub Natural Gas Over Last Twelve Months $8 March 4, Week High $7.78 $7 $6 $5 $4 $3 $2.93 $2 Feb Apr May Jul Sep Oct Dec Feb Source: FactSet. Market data as of February 18,

17 What Happened In 2014? Over Supply Driven By: U.S. supply explosion U.S. crude oil production growth continues to pace at ~1.1 MMbbl/d on an annualized basis Non-OPEC members yet to curb production in light of falling prices Continued OPEC Production Increased production in Saudi Arabia - start-up of the Manifa Field Iran continues to grow production Libya reached production levels of ~900K Mbbl/d Decrease in Demand Driven By: Deceleration of global GDP growth destroyed ~200 Mbbl/d of demand growth Reduced demand in China Foreign exchange challenges Demand growth centers experienced currency devaluation Subsidy reductions in emerging economies India, Thailand, Indonesia and Malaysia reduced subsidies Substitution Growing percentage of renewable power generation 16

18 Can OPEC Weather The Storm? Despite choosing to hold production steady to protect market share, the current price environment is not sustainable. Cost Curve for IOC Projects vs. Fiscal Breakeven Prices of Selected Countries and US Half-Cycle Breakeven Costs ($/boe) Iran: 131 Breakeven, (Brent $/boe) Venezuela: 118 Iraq: 111 Russia: 105 Oman: 99 Saudi: 98 UAE: 79 Qatar: 55 Kuwait: 54 Permian (HC) E Production, Mboe/d Eagle Ford (HC) Cost Curve for IOC projects Fiscal Breakeven Prices US Half-Cycle Breakeven Prices Source: Company reports, IMF, IIF, MEES, Wall Street Research, WoodMac. 17

19 Recent Headlines Saudi Prince: Oil Will Never Be $100 A Barrel Again - Huffington Post, Jan. 23, 2015 Halliburton, Baker Hughes to lay off thousands as oil slumps Reuters, Jan. 20, 2015 China Economic Growth Is Slowest in Decades Wall Street Journal, Jan. 19, 2015 Schlumberger cuts 9,000 jobs due to low oil prices Business Insider, Jan. 15, 2015 Despite Slumping Prices, No End in Sight for U.S. Oil Production Boom New York Times, Oct. 17,

20 Prices Take Time to Recover While previous crude downturns have taken different paths to recovery, prices tend to remain ~40% below peak at t+16 months, implying $60-$70/bbl Brent by the end of % Cumulative Brent Oil Price Decline from Peak 20% 10% 0% (10)% (20)% (30)% (40)% (50)% (60)% (70)% OPEC Interventions to Cut Production Historically prices take up to 2 years to undergo a recovery following periods of steep price declines In all the instances shown - with the exception of the period between 1985 and the recovery was triggered by one or more OPEC production cuts OPEC has yet to make production cuts since the beginning of the decline in 3Q2014 Near term oil markets face continued uncertainty (80)% Months from Peak Citi Projections (1) Source: BP Analysis. (1) Citi projections assumes the Brent oil price peak of $ in June Citi research projects Brent oil at $60 for Q1 2015, $55 for Q2 2015, $65 for Q3 2015, $70 for Q and $70 for Q

21 Four approaches signal long-term oil prices at $70-90 Two years ago, Citi created a four-pronged analysis to determine a long-term fair value for crude oil. 1 The first model utilizes long-dated futures prices, which indicate medium-term prices could be anchored between $ The second, Citi s Fair Cost Index, provides a predictive model that analyses the relationships between cost inputs to production and prices, and finds that prices could be in the $80-85 range 3 The third model updates the work of energy economist Morris Adelman to analyse the long-term relationship between reserve values and prices pointing to prices between $74 and $88 4 Finally, we examine the cost curve for IOC projects to 2020 and identify the breakeven costs for marginal projects, which point to a $90 ceiling and a $70 floor 20

22 1 Long Dated Futures The first model utilizes long-dated futures prices, which indicate medium-term prices could be anchored between $ Brent Crude Futures (Next Five Years) $/bbl Feb-15 Feb-16 Feb-17 Feb-18 Feb-19 Feb-20 Source: FactSet. Market Data as of February 19,

23 2 Cost Inputs The second, Citi s Fair Cost Index, provides a predictive model that analyses the relationships between cost inputs to production and prices, and finds that prices could be in the $80-85 range. Citi s Fair Value Index for oil prices tracks the relationship between input costs and prices Source: Citi Research. 22

24 3 Adelman Method The third model updates the work of energy economist Morris Adelman to analyse the long-term relationship between reserve values and prices pointing to prices between $74 and $88. F&D costs closely track deferred oil prices Source: Citi Research. 23

25 4 Marginal Fields Finally, we examine the cost curve for IOC projects to 2020 and identify the breakeven costs for marginal projects, which point to a $90 ceiling and a $70 floor. US full-cycle costs for shale are below $80/bbl Source: Citi Research. 24

26 Weak Prices Spurring Capex Reductions Observations Since the beginning of December over 40 publicly held North Americanfocused E&Ps have reduced their 2015 capex guidance by an average 31% from 2014 spending levels to maintain cash flow Select Announced CapEx Reductions ($ in millions) Company 2015E CapEx % from '14 Apache $4,000 (26%) ConocoPhillips 13,500 (20) Continental 4,600 (12) EQT 2,538 (34) Concho 2,000 (23) Cenovus 2,600 (15) Husky 3,400 (29) Lower oil prices can materially impact credit ratings and ability to maintain return on capital In November, we changed to negative from stable our outlooks for the global exploration and production (E&P) and oilfield services and drilling (OFS) sectors... We expect EBITDA for E&P companies to decline 10%-15% in 2015 and EBITDA for OFS companies to decline 12%-17% We expect capital spending to fall by around 20% in 2015, with the possibility of deeper cuts if weak oil prices persist... Nevertheless, we expect the one-year default rate to remain low for oil and gas issuers. December 18, 2014 Source: Wall Street research, FactSet, S&P, Moody s and Reuters news. 25

27 Costs of capital have almost doubled for HY energy names US High-Yield Market Index US High-Yield Market Index - Energy US High-Yield Market Index - Non-Energy Yield to Worst Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Source: YieldBook, Citi Research 26

28 A Wave of Maturities Approaching in 2016 HY US Energy Debt Maturity Schedule $60 $ in Billions Speculative Grade Investment Grade U.S. companies have significantly increased their leverage over the past few years to fund capex driven growth and are approaching the first wave of debt maturates in 2016, potentially forcing distressed companies to explore a sale if the market does not recover Source: Wall Street research, FactSet, S&P, Moody s and Reuters news. 27

29 Weak Commodity Prices Likely To Spur E&P M&A Draft In Progress Current Perspectives Smart Money to Capitalize Activists are poised to unlock value 1) All basins appear to be trading at discounts 2) Growth and returns are not fully valued with premier basins trading at 70-80% of NAV 3) Corporates seeking high quality assets, and are excited by a widening valuation gap 4) Generally a NAV approach to valuation, even in corporate M&A but cognizant of the need to market through near-term accretion / dilution Shareholder activism may continue to result in a wave of restructurings Private Equity as the firstmover Increased conviction around emerging plays, for buyers to get in early (before public market recognizes the potential) In lower priced environments companies will seek efficiencies and a lower cost structure Intra-basin consolidation is a driver in that effort 28

30 While We ve Seen Strategic Activity Driven by A&D Deals US A&D activity continues to outpace Corporate M&A activity. A&D benefiting from active portfolio rationalizations. Influx of new buyers (Private Equity and MLPs). Billions, $USD $70 $61 $62 $56 $60 $42 $45 $46 $45 $38 $26 $28 $14 $15 $17 $15 $12 $21 $21 $6 $2 $6 $1 $ YTD 2015 Pre Bullish on natural gas prices Prices collapse Shale revolution and ensuing land grab dominates Portfolio recapitalizations Consolidation? A&D Activity Public Company M&A >$200mn Source: PLSX. 29

31 Private Equity as Partners in M&A Private Equity E&P Capital Allocated to Every Basin Sponsor Fund Size ($bn) EnCap $9.0 NGP 9.0 Riverstone 8.0 First Reserve 6.0 KKR 4.0 Warburg Pincus 4.0 CCMP 3.6 Quantum Energy Partners 3.5 Blackstone 3.0 Apollo 3.0 Denham 3.0 Kayne Anderson 1.6 Lime Rock Partners 1.6 TPG 1.0 Others 20.0 Total $80.3 Cum. Global Acquisitions Volume 2009 to 2014 US$bn Rockies Warburg EnerVest Encap First Reserve Permian Warburg NGP First Reserve Apollo Encap Quantum Riverstone Kayne GE Capital Bakken Riverstone EnCap Warburg KKR Barnett Brigadier (Encap) EnerVest (EnerVest) Premier (KKR) AEP (Multiple) EagleRidge (Jefferies) Eagle Ford KKR Blackstone Riverstone Encap Mid-Continent Warburg EnerVest EIG CCMP First Reserve Kayne Encap East Texas / EagleBine GE Capital Apollo Highbridge NGP Encap South Texas / Gulf Coast Warburg NGP Kayne Encap Riverstone TPG Appalachia EnerVest Encap Lime Rock Quantum NGP Non-Op / Royalty KKR Warburg Riverstone Encap Blackstone Apollo Gulf of Mexico Warburg Apollo Riverstone Blackstone First Reserve Encap US Non-US Private Equity is a force to reckon with. Several new companies seeded in every basin. Increasing dialogues around strategic partnership transactions

32 2014 Saw a Record Number of Energy LBOs Source: Preqin, Wall Street Research and Pitchbook. 31

33 With Energy Funds Having Significant Dry Powder Capital Raised by Energy Focused Funds; $ in billions $40 $29 $15 $22 $23 $17 $18 $28 $ # of Funds Raised Market Dislocation Provides An Opportunity For Sponsors Source: Preqin, Wall Street Research and Pitchbook. 32

34 but Obtaining Leverage at Recent Levels may be an Issue Recent Transaction Leverage 6.0x 5.3x 5.2x 5.2x 5.2x 4.9x 5.2x 5.4x 5.3x 5.1x 5.5x 5.8x 6.0x 5.7x 6.0x 6.3x 5.7x x 3.8x 3.6x 3.7x 3.8x 3.4x 3.6x 3.7x 4.0x 4.2x 4.0x 4.3x 4.1x 4.3x 4.0x 4.3x 0.0 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 First Lien Incremental Debt Source: Preqin, Wall Street Research and Pitchbook. 33

35 Where We Are Today Key Takeaways The U.S. shale revolution fundamentally changed energy industry dynamics globally Technological advancement and innovation has enabled the drilling of oil and gas that had once been viewed uneconomic or inaccessible We are now the leading oil producer worldwide and production continues to grow at 1.1 MMbbl/d Private equity investments have risen to unprecedented levels and will continue to provide liquidity for growth The energy space is currently at an inflection point as crude oil prices have fallen by ~50% over the past 6 months Significant decline has been the result of weak global demand and increased Non-OPEC production over the last few years We will require considerable production cuts for a rebound in prices to occur When production is ultimately scaled back it could take up to 2 years to see a meaningful recovery of prices Prices tend to remain ~40% below the peak oil price after 16 months from the initial decline, implying $60 - $70/bbl Brent by the end of 2015 Near term oil markets face continued uncertainty 34