Assessing the Financial Implications of the Oil Price Collapse

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2 Assessing the Financial Implications of the Oil Price Collapse Las Vegas, NV February 18, 2016 Thomas A. Petrie, CFA Petrie Partners, Chairman

3 Introduction Topics Current Macro Petroleum Landscape Near-Term Petroleum Price Outlook Longer-Term Petroleum Price Outlook Implications for Petroleum Sector Participants Trends in Energy Restructuring / Reorganizations Concluding Observations: Following Oil Key Lessons Learned 14

4 Global Oil Demand / Supply (MMBopd) Current Macro Petroleum Landscape Oil Supply Overhang In Perspective 98 Global Supply Historical Projected Global Demand Demand is Greater than Supply Supply is Greater than Demand Source: EIA. 15

5 U.S. Oil Production (MBopd) Current Macro Petroleum Landscape Historical and Projected U.S. Crude Oil Production Historical Projected 12, : 9.3 MMBopd 10,000 8,000 6,000 4,000 2, Source: EIA. 16

6 National Production (MMBopd) Current Macro Petroleum Landscape Top Three World Oil Producers 12.0 Russia 10.0 Saudi Arabia U.S.A Source: EIA. Russia production includes crude oil and other liquids. 17

7 MBopd Current Macro Petroleum Landscape U.S. Oil Production By Type In New Policies Scenario Peak Concerns re: Peak Oil!? 8 6 Light Tight Oil Other Unconventional Oil NGLS 4 2 Crude Oil: Fields yet-to-be found Field yet-to-be developed Currently producing Note: The World Energy Model supply model starts producing yet-to-find oil after it has put all yet-todevelop fields into production. In reality, some yet-to-find fields would start production earlier than shown in the figure. Source: IEA, World Energy Outlook

8 WTI Oil Price ($ / Bbl) Current Macro Petroleum Landscape Increase In Supply vs. Price Decrease (WTI) $ $ $80 $ World Oil Supply (MMBopd) $40 90 $ Source: EIA, Thomson Reuters. 19

9 Current Macro Petroleum Landscape Impact to E&P Sector Total Sector Equity Values ($Bn) $1,750 $1,660 Total Sector Debt as of September 30, 2015 ($Bn) (1) $550 $527 $1,600 $500 $1,450 $450 $1,300 $1,297 $400 $402 $1,150 $350 $1,000 June 30, 2015 Current $300 Note: Market data per FactSet and Bloomberg as of February 12, Includes 86 E&P companies ranging in enterprise value from $15 MM to $375 Bn. (1) Pro forma for recently announced transactions. Book Value Market Value 20

10 Near-Term Petroleum Price Outlook Commodity Price Trends Here Comes $20 Oil Barron s February 8, 2016 Perversely positive Lower for Longer transforms to Lower for Shorter Recovery to $45 low $50 s oil is likely But timing of recovery remains a risk 21

11 Near-Term Petroleum Price Outlook New Drivers to Reconcile Today s Surplus Item Value Current Surplus MMBopd Declining Mature Global Production (3.7) (4.7) MMBopd Potential Expansion of Iranian Production MMBopd New Deepwater and Other Projects MMBopd Arithmetic Result (0.9) (0.5) MMBopd 22

12 Near-Term Petroleum Price Outlook Many Reasons to Expect The Unexpected China chills German economy (et al) Venezuela assembly head pulls no punches (nor does Maduro opposition) * Russia disrupts (Baltics, Ukraine, Syria, IPO s, etc.) * Saudi Aramco actually launches its IPO (upstream? downstream? petrochemicals?) * Rapprochement between Iran and Saudi Arabia in 2016 (subject to five very unlikely conditions) * WSJ Oil poker: Why Saudi Arabia won t fold (yet?) Iran s influence over Iraq escalates significantly * The possible positives would likely translate into another self-defeating V-Shape recovery 23

13 Longer-Term Petroleum Price Outlook Implications of 2014 and 2015 OPEC Meetings Saudi Arabia s goals for the 2014 Thanksgiving surprise have been largely achieved Recovery involves lead time issues North American unconventional supply remains a likely survivor Overstaying today s market conditions is expensive for all of OPEC Geopolitical risks are rising Positioning for a New Normal is critical 24

14 Longer-Term Petroleum Price Outlook U.S. Positioning for Oil Exports Puget Sound, WA Bakken Eastern Canada San Francisco, CA DJ Basin Europe Los Angeles, CA Cushing, OK Permian Houston, TX Eagle Ford Asia via expanded Panama Canal Elimination of the ban on U.S. oil exports is ultimately a price-capping development 25

15 Longer-Term Petroleum Price Outlook The Arab Spring Has Morphed Into Winter Tunisia Iraq Iran Western Sahara Algeria Libya Egypt Kuwait Qatar Saudi Arabia UAE Mauritania Mali Niger Chad Sudan A virtual Cold War condition now exists between Saudi Arabia and Iran 26

16 Price ($ / Bbl) Longer-Term Petroleum Price Outlook Two Takes on Oil Break-Evens $120 $90 $60 $65 $61 $39 $49 $46 $30 $32 Brent 12-Month Strip: $37.23 $7 $13 $0 USA Canada China Saudi Arabia Russia Iraq Source: Citigroup Global Commodities Research. Prices per Bloomberg 27

17 Price ($ / Bbl) Longer-Term Petroleum Price Outlook Two Takes on Oil Break-Evens $120 $114 $105 $90 $89 $60 $65 $61 $39 $49 $46 $30 $32 Brent 12-Month Strip: $37.23 $7 $13 $0 USA Canada China Saudi Arabia Russia Iraq Source: Citigroup Global Commodities Research. Prices per Bloomberg 28

18 Implications for Petroleum Sector Participants Overlapping Energy Power Triangles Russia Historical view: To US and West Turkey Saudi Arabia Iran New view to east India? China Conclusion: Like 2015, 2016 is proving to be another year of living dangerously 29

19 Implications for Petroleum Sector Participants Key Country Policies / Strategies and Issues Country Policy / Strategy Issues China Transition from export-driven to greater consumer-driven economy One party rule vs. adequate economic growth? Russia Reasserting broad regional hegemony Sanctions are limiting oil and gas capex reinvestment Iran Awkwardly seeking a return to global respectability Questionable supporter of OPEC Saudi (et al) Coping with multiple serious security challenges in an alien environment Saudi Aramco production capabilities? Europe Struggling with adverse demographics and ineffective economic policy Very limited economic growth immigration burdens United States Attempting to redefine more tightly its superpower status Election outcome, multi-region security needs In Sum: Geopolitical realignments are still evolving 30

20 Implications for Petroleum Sector Participants Prevailing and Evolving Trends Medium and Small Capitalization Producers Surviving until the New Normal price range emerges is critical Focus on specific regional and technical competitive advantage is likely determinant of success Balance sheet challenges a priority Creative mitigation of excessive leverage has become a compellingly attractive option Large Capitalization Independents Growth by acquisition and subsequent execution of drilling opportunities likely to prevail Merger consolidation is likely post emergence of a New Normal price range Success likely to require effective strategies to achieve economies of scale both in upstream and midstream activities Major International Companies Dividend payments are stressed at today s oil price That will remain so even with recovery to a ~$50 per barrel price range High selectivity in sanctioning of deepwater and other frontier projects will prevail Efforts to acquire large cap independents are probable 31

21 Trends in Energy Restructuring / Reorganizations World Events & Oil Nominal Pricing ( YTD) $160 $160 $140 $140 Fiscal Cliff fallout concerns Syrian civil war escalates $120 $120 $100 $100 $80 $80 $60 $60 $40 $40 $20 $20 Iran-Iraq War Saudis abandon begins; swing producer role; oil prices peak oil prices collapse Iranian Revolution Shah deposed OPEC agrees to quotas Prices spike on Iraq war, rapid demand increases, constrained OPEC capacity, low inventories, etc. Prices rise sharply on OPEC cutbacks, increased demand Iranian oil in production precipitates the decline Gulf War ends Back from the abyss Fear of global economic meltdown ISIS on rise Prices fall sharply on 9/11 attacks, 1973 Arab Oil Embargo Iraq invades Kuwait economy weakness $0 $ Source: 1 EIA Russia challenges Ukraine Saudis decline to play a swing producer role again Saudis considering partial sale of Saudi Aramco? 32

22 Trends in Energy Restructuring / Reorganizations The Financial Impact of Levering Up In 2014 Late 2014 Mid 2015 characterized by massive new equity and debt financing in the North American E&P sector By mid 2015 markets were no longer accommodating to new financings Selective debt equity swaps and fully drawn lines of bank credit have recently been utilized where possible Sale of non-strategic assets to pay down debt is very challenging in the current oil and gas price environment Distressed bond prices for E&P issuers can present a debt remediation opportunity 33

23 Concluding Observations Following Oil Key Lessons Learned Markets continuously endeavor to work, but in their own time and at their own pace Flawed economic and policy incentives ultimately cause or exacerbate supply shortfalls (or sometimes even create undesirable surpluses) Black swan events entail especially noteworthy risks It is often darkest just before the dawn Powerful regenerative economic forces result from the application of well-incentivized capital focused on high-priority societal problems or needs Periodic consolidation and reorganization (via mergers and sales) are integral to the evolving natural order of the petroleum-sector economy Shifting global macro-economic drivers can overwhelm even a well-executed plan and thus necessitate midcourse adjustments in strategy for both corporate players and national entities Old geopolitical grudges tend to reemerge, often at inopportune times and with adverse consequences (Ukraine, Syria, South China Sea, China/Japan) 34