Putting the Permian Basin in Perspective: Tight Oil & the Long-Term Debt Cycle West Texas Geological Society 2017 Fall Symposium.

Transcription

1 Putting the Permian Basin in Perspective: Tight Oil & the Long-Term Debt Cycle West Texas Geological Society 2 Fall Symposium Art Berman Labyrinth Consulting Services, Inc. Midland, Texas September 27, 2 Slide 1

2 Pu>ng the Shale Revolu4on in Perspec4ve Current $5 Oil Price > 4% Higher Than Jan Dec 24 Average in July 2 Dollars 66 U.S. Incremental Ouput: The Major Cause For Low Oil Prices Canada, Iraq, Iran Saudi Arabia and Russia Also Important Contributors CPI Adjusted WTI Prices (January 2 Dollars Per Barrel) $ $15 $14 $13 $12 $11 $1 $9 $8 $7 $6 $5 $4 $3 $2 $1 $ Oil Shocks --> Massive E&P Investment (North Sea, Mexico, Siberia) <$23/ barrel All Prices in Constant July 2 Dollars 1st Bubble: Debt-Fueled Economic Expansion & Rapid Growth in China & East Asia Over-Supply, Demand Destruction & Price Deflation $5/barrel 2nd Bubble: Massive E&P Investment (Shale, Deep Water, Heavy Oil) Over-Supply, Demand Destruction & Price Deflation Avg $71/barrel Avg $36/barrel Avg $91/barrel Source: EIA,U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc. Jan-7 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-8 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-9 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan- Jan- $48/ barrel Millions of Incremental Barrels of Crude Oil & Condensate Per Day Source: EIA & Labyrinth Consulting Services, Inc. 52 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Libya Angola Venezuela Mexico Algeria Nigeria Base Sep-14 Nov-14 Jan-15 Indonesia-Ecuador-Qatar-Gabon Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan- Mar- May- Canada Jul- U.S. Iraq Iran Russia Brazil Saudi Arabia Kuwait UAE Sep- Nov- The 1st Bubble : oil shocks and price increase from $23 to $1/barrel led to massive E&P investments, over-produc4on, demand destruc4on & oil-price defla4on un4l Second Bubble: : flat global output & growing Asian demand led to increasing oil prices from $ to $148/barrel by 28. ATer the 28 Financial Collapse, OPEC cut produc4on then, declining OPEC spare capacity, falling OECD inventories, & near-zero interest rates led to the longest period of high oil prices in history from Over-investment resulted in a massive over-supply, much of it from the United States. The bubble burst in 214 and prices collapsed. Slide 2

3 Oil Prices & The Long-Term Debt Cycle U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions) $35 $3 $25 $2 $15 $1 $5 $ Oil Prices 2.4 times Higher After 24 Than In 2 Dollars Debt > GDP After Oil Shocks $45/barrel Avg Price $23 Avg Price $5 $48 Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc. $ Oil Price 1974 Oil Shocks $69 Avg Price $34 Avg Price Debt > GDP After $86 Avg Price Debt 212 GDP $12 $11 $1 $9 $8 $7 $6 $4 $3 $2 $1 WTI Price in 2 Dollars Per Barrel CPI-Adjusted Brent Price (December 2 $/barrel) $12 $1 $8 $6 $4 $2 $ No Demand Destruction During The Oil-Price Collapse Brent Price LHS (WTI before 1975) Negative Demand Growth (RHS) Positive Demand Growth (RHS) 1.2 mmb/d 3-Year Avg Source: IEA, EIA, OPEC, BP, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc E 218E Annual Liquids Demand Growth (mmb/d) Petroleum Age ater WWII produced unprecedented economic growth. Oil shocks of threatened to end that party. Demand destruc4on & oil produc4on bubble resulted in 18 years of cheap energy. Debt re-started economic growth & debt-based growth of China challenged oil supply ater 24. Second oil shock made unconven4onal oil possible. Zero-interest rates led to 2 nd oil bubble. Longest period of high oil prices in history. That bubble burst in 214 and oil prices collapsed but without demand destruc4on. Now, we are near the end of long-term debt cycle but denying that the economic basics have fundamentally changed since the post-war era. Slide 3

4 Low Interest Rates Created A Capital Bubble For Tight Oil & The Permian Basin $ Lower Oil Prices Correspond With Higher Interest Rates & End of QE 3 in Late 214 7% 1 Rig Count Weekly Change Suggests Permian Break-Even Price Is $55-$6/Barrel Rig Count Rises & Falls Based on Expectation of $55-$6 Prices $11 $15 CPI-Adjusted WTI Price (2 Dollars Per Barrel) $14 $12 $1 $8 $6 $4 $2 $ Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & Labyrinth Consulting Services, Inc. Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Interest Rates Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 WTI Price (July 2 Dollars) Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 End QE 3 Interest Rate Inc. From.9% to.12% Jul-15 Jan- Jul- Jan- Jul- 6% 5% 4% 3% 2% 1% % Federal Funds Effective Interest Rate (Percent) Labyrinth Consulting Services, Inc. Houston Geological Society The oil-price collapse coincided with the end of QE 3 and the beginning of U.S. interest rate increases. Con4nued low interest rates caused margin hunters to focus first on 4ght oil and later, on the Permian basin. $3 oil prices brought large capital flows to a select group of producers seen as winners. Tight oil and Permian rig counts have more than doubled since August 2. Increased rig count and fear of ongoing over-supply is a major drag on oil prices. Failure of OPEC produc4on cuts to quickly balance oil markets has 4ghtened capital flows since March. Weekly Rig Count Change /1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 $6 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc. 7/1/15 9/1/15 Weekly Rig Count Change 11/1/15 WTI Price Change In Permian Tight Oil Rig Count Lags Price By About 6 Weeks Weeks 1/1/ 3/1/ 5/1/ 7/1/ 9/1/ 11/1/ 1/1/ $55 3/1/ 5/1/ 7/1/ $1 $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 $15 $1 $5 $ WTI Price ($/barrel) Slide 14 Slide 4

5 The False Premise that Tight Oil Plays Are the New Swing Producer: the Call on Shale The "Call on Shale" Thesis is Not Supported By Price Data The "Call on Shale" Thesis is Not Supported By Inventory Data 4.5 $ 4.5 1,2 4. Granite Wash Miss. Lime $14 4. Granite Wash Miss. Lime 1, Niobrara $ Niobrara 1,1 Crude Oil + Condensate Production (mmb/d) WTI (RHS) Eagle Ford Bakken $1 $8 $6 WTI Price ($2/barrel) Crude Oil + Condensate Production (mmb/d) Inventories (RHS) Eagle Ford Bakken 1,5 1, Crude Oil + Refined Products (mmb) 1. $ Permian $2.5 Permian 75. Widespread belief that U.S. shale produc4on controls world produc4on surplus results in over-emphasis on U.S. rig count as a leading indicator. The call on shale thesis: just-in-4me nature of shale supply means that produc4on can start & stop quickly based on price and inventory signals. Implies that U.S. shale is the new swing producer of the world effec4vely replacing OPEC. Being a swing producer means that there is sufficient spare capacity to turn on and off based on market signals. The call on shale is a ridiculous idea: the volume of shale produc4on change cannot be correlated to oil price or inventories as promoters claim. Shale output reacts to price just like all plays slowly & in long-period cycles. Shale plays have no spare capacity they are just-in-4me. Shale producers cannot even control output because they are constrained by comple4on crews and capital. DUCs are not spare capacity because they are not ready to produce. Jan-3 Jun-3 Nov-3 Apr-4 Sep-4 Feb-5 Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May- Oct- Mar- $. Jan-3 Jun-3 Nov-3 Apr-4 Sep-4 Feb-5 Jul-5 Dec-5 May-6 Oct-6 Mar-7 Aug-7 Jan-8 Jun-8 Nov-8 Apr-9 Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May- Oct- Mar- 7 Slide 5

6 How is the Call on Shale Consistent With Flat U.S. Output Since the OPEC Cut? U.S. Output Has Been Flat in 2 43% of U.S. Production is Tight Oil 12. $ mmb/d Aug 2-Dec Millions of Barrels of Crude Oil Per Day April mmb/d Oil Production (LHS) 8.55 Sept Aug Dec 2 WTI Price (RHS) Dec $1 $8 $6 $4 WTI Price ($/Barrel) Oil Production (mmb/d) Tight Oil Conventional Oil 2. mmb/d Apr-15 Sep- Jun- Jul- Aug- Dec- Dec-18 Production Since Apr Since Sep Since Jun Since Jul $ Source: EIA STEO Sept 2 & Labyrinth Consulting Services, Inc. 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 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 $ Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak Jan- Jun- Nov- Apr-1 Sep-1 Feb-2 Jul-2 Dec-2 May-3 Oct-3 Mar-4 Aug-4 Jan-5 Jun-5 Nov-5 Apr-6 Sep-6 Feb-7 Jul-7 Dec-7 May-8 Oct-8 Mar-9 Aug-9 Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr- Sep- Feb- U.S. oil output has been flat since the OPEC produc4on cuts and higher oil prices. 43% of U.S. supply is 4ght oil. Where is the surge in just-in-4me produc4on from the call on shale? Slide 6

7 Shale Cost Reduc4ons Mostly Industry Bust, Threshold For Growth > $5 WTI The Cost of Drilling Oil and Gas Wells Fell 45% After The Oil-Price Collapse; Costs Have Increased 8% Since January 2 3 Tight Oil Rig Counts Fall When Expectations of $55-$6 Oil Prices Fade Change In Horizontal Tight Oil Rig Count Lags Price By About 8 Weeks $115 Normalized WTI & Producer Price Index Dec-85 Sep-86 Jun-87 Mar-88 Dec-88 Sep-89 Jun-9 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 4-Fold Increase in O&G PPI Because of Unconventional Oil & Gas Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar- Dec- Sep-1 Jun-2 Mar-3 WTI Price Dec-3 Sep-4 Jun-5 OIl & Gas Well Drilling Producer Price Index Source: U.S. Federal Reserve Bank, EIA & Labyrinth Consulting Services, Inc. Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Dec-9 Sep-1 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep- 45% Decrease Jun- Tight Oil HRZ Rig Count Change $6 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc. Tight Oil Rig Count 4-week moving average (LHS) 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 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- $54 WTI Price 12-week moving average (RHS) $11 $15 $1 $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 WTI Price ($/Barrel) Lower costs of shale produc4on widely anributed to technology and efficiency. Cost cost defla4on was 9% because of a depression in the oil industry, 1% technology. That is over for now and prices have increased 8% in 2. Rig count data indicates that expecta'on of $55-$6 is necessary for drilling growth. Drilling does not translate into produc4on because of OFS limita4ons. Shale growth has more to do with investor money than break-even prices. Investors need to believe that significantly higher prices are coming. WTI is not the price that producers get. Discount is $5 to $15/barrel. Current Bakken wellhead price is $35.83 but WTI is $5.. Slide 7

8 Compara4ve Inventory Remains The Most Useful Indicator of Future Price Trens Source: EIA & Labyrinth Consulting Services, Inc Data WTI Price ($/barrel) $115 $11 $15 $1 $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 $15 $1 Most Likely December 2 C.I. Range 4-75 mmb $5-$56/barrel C.I. Decreased -3.5 mmb This Week Mid-cycle price Most-Likely Dec. 2 C.I. Range 4-75 mmb $5-$56/barrel Sept 15 Mar-June 215 Optimism Last Week OPEC Production Cut Optimism Mid-Feb $5 Comparative Inventory (C.I.) Millions of Barrels $ $55 $4 Late 215-Early 2 Pessimisim (Cushing > 8% Capacity) Ivnetories of Crude Oil + Products (mmb) 1,2 1,15 1,1 1,5 1, Inventories Have Fallen From Record Levels--Comparative Inventory, The Difference Between Inventories & The 5-Year Average, Remains Near Record Pre-215 Levels 99 mmb Gap WTI Price (RHS) Record Inventory Level Inventories (LHS) 5-Year Inventory Average (LHS) Source: EIA & Labyrinth Consulting Services, Inc. 8 1/1/1 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 1/1/ 1/1/ $12 $1 $8 97 mmb Gap $6 $4 $2 $ WTI Price ($/barrel) Compara4ve inventory (C.I.) is the key to understanding oil prices and poten4al future trends. The oil price collapse resulted in the largest increase in inventories and C.I. on record. C.I. has fallen 1 mmb since mid-february but the gap between inventories & the 5-year average is s4ll very large. Flat yield curve of WTI vs C.I. large decreases in C.I. do not create meaningful price increases. Most-likely range of C.I. indicates possible year-end WTI price range of $5 to $56/barrel. This assumes that C.I. will fall 3.75 mmb/week, the average for the last 3 weeks. Obviously, this must be monitored for changes that would poten4ally result in higher or lower yearend prices. Slide 8

9 Strong Refined Product Demand & Lower Net Imports Drive Inventory Reduc4ons Csonumption (Product Supplied )(mmb/d) Source: EIA & Labyrinth Consulting Services, Inc /3/14 3/3/14 2 Average Consumption At Record Levels Fell After Gulf Hurricanes But Recovered Above YTD Avg This Week 5/3/14 7/3/14 9/3/14 11/3/14 1/3/15 3/3/15 5/3/15 7/3/15 9/3/15 11/3/15 1/3/ 3/3/ 5/3/ 7/3/ 4-Week Avg 9/3/ 11/3/ Comparative Inventory (RHS) 1/3/ Annual Avg Consumption (LHS) 3/3/ 5/3/ 7/3/ 9/3/ Crude Oil + Refined Products Comparative Inventory (mmb) Net Petroleum Product Imports (mmb/d) ~4.2 mmb/week (6 kb/d) Decrease in Net Petroleum Product Imports Account For Most Inventory Reductions in 2 Comparative Inventories Have Fallen 1 mmb Since Mid-February -2. mmb/d Net Imports Annual Avg (LHS) -4.5 Source: EIA & Labyrinth Consulting Services, Inc. Net Product Imports & Trendline (LHS) Net imports increased 1.7 mmb/d because of Hurricane Harvey FEB mmb/d Comparative Inventory -113 mmb (RHS) SEPT 8 Net imports decreased to YTD avg 3rd week after Harvey Crude OIl + Products Comparative Inventories (mmb) Strong refined product demand and reduced net product imports are driving inventory reduc4on. 2 YTD consump4on is at record levels. It fell ater the hurricanes but has recovered to above the YTD average this week. Net refined product imports have fallen 6 kbpd (4.2 mmb/week) in 2. Lower net crude imports, and falling gasoline and dis4llate stocks are the key components. Slide 9

10 How Effec4ve is OPEC-NOPEC Compliance With Produc4on Cuts? Most Recent OPEC-NOPEC Increases From Nigeria, Libya & Saudi Arabia OPEC-NOPEC Only in Compliance With Production Cuts In March & April Incremental Liquids Production (mmb/d) Nigeria Mexico Qatar 52 Kuwait Libya UAE Saudi Arabia 51.5 Venezuela Iraq Iran Russia Angola, Gabon, Algeria, Ecuador Source: EIA Sept STEO, EIA International Data & Labyrinth Consulting Services, Inc. Base 51 Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Liquids Production Compared With November 2 (mmb/d) Nov- Dec- Jan- Feb- Mar- Apr Source: EIA Sept STEO, EIA International Data & Labyrinth Consulting Services, Inc. May mmb/d Threshold Jun- Jul- Aug Liquids Production (mmb/d) Libya and Nigeria are chief OPEC over-producers. Saudi Arabia has also increased produc4on since Q1 2. Maximum OPEC-NOPEC produc4on cuts were in March and April 2. August output was 1.3mmb/d less than in November 2 vs. sanc4oned cuts of 1.8 mmb/d. Slide 1

11 Oil Futures Have Moved Into Backwarda4on in September WTI Futures Have Moved To Backwardation in September Signaling Increased Supply Tightening $6 Brent Futures Have Also Moved Into Backwardation $54 $59 $53 Sept 26 $58 Sept 26 $52 $57 WTI Futures Price ($/barrel) $51 $5 $49 $48 Sept 15 Sept 2 Sept 5 Brent Futures Price ($/barrel) $56 $55 $54 $53 Sept 2 Sept 5 Sept 15 $47 $52 $46 $51 $45 $5 $44 Source: CME & Labyrinth Consulting Services, Inc. Oct- Dec- Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-2 Apr-2 Jun-2 Aug-2 Oct-2 Dec-2 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 $49 Source: CME & Labyrinth Consulting Services, Inc. Nov- Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-2 Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 WTI has moved into full backwarda4on as of last week. Brent has also moved into backwarda4on. This signals a percep4on of supply 4ghtening that favors selling oil rather than storing it. Slide 11

12 Reserve Es4mate Using 2 1-K SEC Filings (Annual Reports) Table 2. Crude oil production and proved reserves from selected U.S. tight plays, million barrels Basin Play State(s) Production Reserves Production Reserves Williston Bakken ND, MT, SD 387 5, ,3 Western Gulf Eagle Ford TX 497 5, ,295 Permian Bone Spring, Wolfcamp NM, TX Denver Niobrara* CO, KS, NE, WY Appalachian Marcellus* PA, WV Fort Worth Barnett TX Sub-total 1,1 12,657 1,131 1,743 Other tight U.S. tight oil 1,57 13,365 1,214 11,62 Permian 2 Proved Oil Reserves (kbo) 2 Tight Oil Production (kbo) PCT OF Total 2 Production CONCHO 321,26 37, % PIONEER 283,647 45, % ENERGEN 199,575 1, % LAREDO 7,1 9, % RSP PERMIAN 4,7 11,4 2.7% DIAMONDBACK 139,4 14, % PARSLEY 136,536 11, % EP 81,8 3,973 1.% DEVON 81,,211 4.% CIMAREX 74,3,92 4.5% CALLON 71,145 8,59 2.1% SUBTOTAL 1,72,3 186,776 47% TOTAL 3,696,999 41,459 1% EIA 215 proved reserves: 5 billion barrels Bakken, 4.3 bb Eagle Ford,.8 bb Permian. Permian seems low. Es4mated ~3.7 billion barrels of proved Permian 4ght oil reserves using 2 1-K SEC filings of leading operators in the plays. All the companies in the table differen4ated Permian reserves from other company reserves. Those companies accounted for 47% of all 4ght oil produc4on in 2. Used that as a scaling factor to es4mate the contribu4on of companies like Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 1-K filings. The es4mate is founded on a reliable base of 1.7 billion barrels from company filings. The assump4on that undifferen4ated company reserves will follow 2 produc4on ra4os is reasonable but uncertain. Slide 12

13 Shale Plays & Sweet Spots ($4 Commercial Areas) All three plays have considerable commercial areas at $4 wellhead prices. Bone Spring commercial area is almost twice as large as Bakken or Eagle Ford. Bone Spring has 1/3 the well density of the Bakken or Eagle Ford. Bone Spring and Eagle Ford have lower break-even EUR than Bakken. Higher early rates and lower well costs largely account for advantages to Bone Spring and Eagle Ford. Slide 13

14 Tight Oil Produc4on Forecast Tight Oil Production Forecast Permian Crude Oil + Condensate Production (mmb/d) Eagle Ford Bakken.1 Source: EIA & Labyrinth Consulting Services, Inc Permian produc4on should con4nue to increase into the mid-22s. Eagle Ford and Bakken will probably not reach 215 peak produc4on levels. Bakken should decline more than Eagle Ford. Slide 14

15 Bakken EUR, Gas-Oil Ra4os & Water Cut Trends 6 Oil Production Decline Rates For Recent Years Are Greater Than For Previous Years For Top 8 Bakken Producers Gas-Oil Ratio Increases Every Year For Top 8 Bakken Producers 6% Water Cut Increased In The Last 3 Years For Top 8 Bakken Producers 2, % Oil Production (Barrels of Oil Per Day) Declining Faster Than All Previous Years Despite Higher Initial Rates Gas-Oil Ratio (Cubic Feet Per Barrel) 2, 1,5 1, Percent Water 5% 45% 4% 35% % Declining Faster Than Previous Years Declining Faster Than Previous Years Months of Production Source: Drilling Info & Labyrinth Consulting Services, Inc. 5 Source: Drilling Info & Labyrinth Consulting Services, Inc Months of Production 25% Source: Drilling Info & Labyrinth Consulting Services, Inc. 2% Months of Production Pioneer's Permian Basin Gas-Oil Ratio Has Increased 28% Since November 2 2,5 2, 1,5 1, 5 Source: Drilling Info & Labyrinth Consulting Services, Inc. 1/1/12 3/1/12 5/1/12 7/1/12 9/1/12 11/1/12 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 Gas-Oil Ratio (cubic feet/barrel) 11/1/13 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/15 11/1/15 1/1/ 3/1/ 5/1/ 7/1/ 9/1/ 11/1/ 1/1/ 3/1/ 5/1/ 7/1/ EUR decreased & decline rates increased for wells with 1 st produc4on ater 213. Gas-oil ra4os increased & then decreased. Water cuts increased for all wells with 1 st produc4on ater 213. These trends suggest deple4on and that the play has been over-drilled not conclusive without pressure data. Pioneer s Permian basin GOR has increased 28% since November 2. Slide 15

16 Tight Oil Is A Marginal Business At Best Tight Oil Is a Marginal Business At Best Most Companies Lose Money or Break Even Only Integrated Companies & Diamondback Made Money in First Half 2 Ratio of Capital Expenditures to Cash From Operations Lose Money Break Even Make Money Parsley Sanchez Energen Whiting Hess Source: Google Finance & Labyrinth Consulting Services, Inc. Carrizo Laredo Callon Pioneer EPE Oasis Newfield Concho EOG Continental Apache Diamondback Oxy Chevron Murphy Marathon Conoco Statoil Despite claims of ever-decreasing costs and break-even prices, company balance sheets and income statements do not reflect profitability for most pure 4ght oil players. Among key 4ght oil-weighted companies, most lose money. A few break even. Only integrated companies with diversified porwolios outside of 4ght oil plays (e.g., Chevron, Conoco Philips, Statoil, Oxy) make money. Diamondback is the only pure 4ght oil player that made money in 2. The disparity between break-even and IRR claims, and corporate financial data: Ø Selec4ve data in claims vs. average well EUR and costs. Ø Exclusion of many costs in claims that are part of the cost of doing business. Ø Misleading emphasis on produc4on costs vs full costs. Slide

17 Energy Stocks Have Suffered in 2, Permian Stocks More Recently Estimated net flows into and out of U.S. energy stock funds $1.billion Vanguard Sep- 12-Oct- 12-Nov- 12-Dec- 12-Jan- 12-Feb- Concho Pioneer Sep- 12-Oct- 12-Nov- 12-Dec- 12-Mar- Note: All data are full-year except 2, which is through July. Source: Morningstar THE WALL STREET JOURNAL 12-Jan- 12-Apr- 12-Feb Mar- 12-Apr- 12-May- 12-Jun- 12-Jul- 12-Aug- 12-Sep- 12-Oct- 12-Nov- 12-Dec- 12-Jan- 12-Feb- 12-Mar- 12-Apr- 12-May- 12-Jun- 12-Jul- 12-Aug- 12-May- 12-Jun- 12-Jul- 12-Aug- Close WTI Close WTI Close WTI Capital flows to 4ght oil have slowed in 2. Share prices have declined as markets 4re of mediocre financial returns. Con4nued capital flow is the chief factor in 4ght oil growth, not reserves or economics. Slide

18 Tight Oil and The Long-Term Debt Cycle 35 3 BP EIA The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough $12 $1 High Oil Prices Plus Massive Debt & Low Interest Rates After 28 Led To Major Credit Bubble & The Shale Revolution WTI Price $2 (LHS) High Oil Prices Credit Bubble High Oil Prices 12% 1% Billions of Barrels of Liquids Venezuela Saudi Arabia Canada Iran Iraq Russia Kuwait UAE Libya United States US Nigeria Kazakhstan China Qatar Brazil Algeria Angola Ecuador Mexico Norway Azerbaijan Oman India Vietnam Australia Malaysia South Sudan Egypt Permian Source: BP, EIA & Labyrinth Consulting Services, Inc. Permian Basin Oil Price in October 2 Dollars $8 $6 $4 $2 $ Debt/GDP (RHS) Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc. Shale revolu4on must be put in perspec4ve. High oil prices plus massive debt & low interest rates ater 28 created a capital bubble that drove 4ght oil development and growth much of it uneconomic! Con4nued availability of external capital is the most cri4cal factor for produc4on growth & maintenance. The true break-even price for 4ght oil is not < $5 but is closer to $6 wellhead price. Tight oil plays are not the new swing producer of the world (i.e., the call on shale ). Compara4ve inventory remains the best indicator of future oil prices. C.I. has 4ghtened in spite of OPEC s modest compliance but will this con4nue? Year-end 2 WTI prices could be $55 but forward curves are in backwarda4on. Permian plays are good but will probably con4nue to deliver low returns and lower produc4on growth than many analysts predict. Enthusiasm for 4ght oil innova4on must be balanced by the desirability of years of depressed oil prices. Falling Oil Prices Low Oil Prices Increasing Debt-To-GDP % 6% 4% 2% % U.S. Public Debt-To-GDP Percent Slide 18