Lower 48 Upstream Surviving the trough

Transcription

1 Lower 48 Upstream Surviving the trough PECD Luncheon October 30, 2015

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4 The 4Q 2015 reality of Lower 48 upstream An onshore production slide Rig count at cyclical lows and onshore production heading to a spring 2017 trough of 6.6 million b/d 2016 upstream activity outlook Cost reductions are slowing, so additional cuts are necessary to maintain cash flow and debt neutrality Remarkable gas resiliency New gas completions, using the latest tight oil techniques, greatly improve play metrics Tight oil cost of supply evolves Breakeven prices fall, core locations grow, and higher cost plays have ground to make up Lower 48 under amplified scrutiny Flexible, not necessarily marginal, barrels become ever more important Prices to respond to fundamentals Project deferrals and demand support both work to rebalance the market in

5 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Million b/d Rigs Million b/d US onshore flexes: production declines underway and higher prices are needed US onshore liquids production and rig count US tight oil outlook by play Oil/Cond Production Hz Oil Rigs Mid-Continent Bone Spring Bakken / Three Forks Vertical / Other HZ Niobrara Wolfcamp Eagle Ford Source: Wood Mackenzie 5

6 Pioneer Energen Encana Continental SM Occidental Newfield Whiting Hess Range ConocoPhillips Concho Marathon Noble Devon CRC Anadarko Apache Murphy EP EOG Chesapeake Cimarex US$/bbl Brent Balance sheet constraints hurt even as prices improve Brent price required for upstream portfolio to be cash flow neutral in Buybacks Dividends Exploration Base business Peer-group avg. WM Low case Companies have disclosed little concrete guidance on 2016 spend and development plans, though some have provided ranges which indicate flexibility and cash flow neutrality are key objectives. Our models assume a mix of spending trajectories, based on how companies indicated they would adjust activity if prices recover in Including the impact of hedges rolling-off, none of these companies would generate free cash flow in 2016 at US$50/bbl Brent under our base assumptions. Companies which may take a counter-cyclical approach and outspend cash-flow in 2016 include Pioneer. Companies which we expect to be cash-flow-positive at US$60/bbl Brent include EOG and Cimarex, both of which have top-tier portfolios and have demonstrated conservative approaches to spending thus far. Source: Wood Mackenzie Corporate Benchmarking Tool Q Additional calculations undertaken for companies not covered in CBT. This chart includes cash flows from development, financing and all other costs, but excludes cash flows from M&A, equity issuance and other one-off items. Antero, Southwestern, and Cabot are excluded due to significant gas-weighting. 6

7 Declines in the value of hedging matter The impact of unrealised H will dwarf Antero Energen Concho Range Pioneer Devon EP SM Encana Noble Newfield Chesapeake Cabot CRC Whiting Marathon EOG Anadarko Southwestern Murphy Occidental Hess Continental ConocoPhillips Cimarex Apache H2 2015: % of revenue from hedging WM High WM Base WM Low -20% -10% 0% 10% 20% 30% 40% 50% % of revenue from hedging EP Antero Concho Pioneer SM Newfield Range Encana Noble Whiting Energen Anadarko Marathon CRC Murphy Cimarex Continental Occidental Chesapeake Cabot Southwestern ConocoPhillips Devon Apache Hess EOG 2016: % of revenue from hedging WM High WM Base WM Low -20% -10% 0% 10% 20% 30% 40% 50% % of revenue from hedging Source: Wood Mackenzie, company reports, calculated using Wood Mackenzie s Q3 price assumptions 7

8 bcfd Is pivoting to gas an option as demand growth accelerates? A second phase of LNG projects is expected, and low prices preserve power growth US demand growth relative to 2013 Global GDP, global gas LNG US GDP, coal fundamentals, policy 8 Global GDP, oil prices 6 4 Power Industry Mexico energy policy and GDP 2 0 Mexico Transport State policy, oil prices, US GDP -2 Heating Policy, oil prices Source: Wood Mackenzie 8

9 Well performance underpins lower cost supply Breakevens fall, the supply curve flattens, and the ceiling becomes stronger EURs in major Northeast sub-plays EURs in major Haynesville sub-plays Bradford Area Susquehanna Core bcf Carthage Greenwood- Waskom Woodardville Greene Dry Gas Pittsburgh Area Rich Gas Core SW Rich Gas Caspiana Core WV Rich Gas Spider bcf Haynesville Combo Southern Wet Gas bcf Lean Gas Core bcf Shelby Trough 9

10 Additional North American gas reserves continue to be commercialized, and their market influence is concentrated Remaining cheap gas (tcf) Utica Haynesville Marcellus Montney Deep Basin Duvernay Barnett Eagle Ford Woodford Granite Wash Permian oil Fayetteville Mid-Con oil Rockies oil Horn River ~900 ~ Remaining cheap (<$4/mmbtu/<$60/bbl) gas (tcf) Source: Wood Mackenzie 10

11 bcfd bcfd Is there demand risk to the upside around LNG and industrial gas projects? Gas-intensive industrial projects LNG exports by destination and flexibility Firm Possible Probable Speculative Source: Wood Mackenzie Asia (firm) Europe (firm) LatAm (firm) Flexible Unsold Pre-FID 11

12 2015$/mmbtu Gas prices do recover, but long-term supply growth hinges on many moving parts Price outlook 7 6 Upside to prices based on the pace of oil and gas drilling recovery Dominion South Point MichCon Midwest expansion Transco Leidy Line Transco Z5 Southeast expansion Perryville Henry Hub Source: Wood Mackenzie 12

13 WTI Breakeven at 10% IRR (US$/bbl) Case in point an evolving US tight oil cost curve In the range between 10 and 50 billion barrels, 1.8 billion barrels added for every US $1.00 increase in price, versus 1.3 billion barrels in early New cumulative liquids resource by breakeven for US assets Q2015 Asset commercial resource (mmbls) 3Q2015 Asset commercial resource (mmbls) - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 Cumulative undrilled commercial resource (mmbls) Source: Wood Mackenzie, GEM 13

14 WTI US$/bbl Service cost deflation the silver lining so far 30% savings in onshore liquids plays lowers WTI breakevens by roughly US$15/bbl Development cost deflation by Category Cost sensitivities on three Bakken areas Onshore drilling Ultra-deepwater drilling Deepwater drilling Shallow water drilling Completion G&A Facilities (Deepwater) Subsea Facilities (Shelf) Pipeline North Williston Williams Core Nesson Anticline -30% -20% -10% 0% Deflation Facilities (Onshore) 40 Base View 10% Savings 20% Savings 30% Savings Costs Source: Wood Mackenzie 14

15 WTI US$/barrel Service costs will not stay low forever though An activity rebound may be less than two years away Will price concessions stick around? Deflation accounts for the bulk of cost reductions % - 35% well cost reductions since 2014 Cyclical savings (Deflation) Optimized development (Structural) Source: Wood Mackenzie 15

16 Change in year-on-year capex guidance (US$ billion) Fluidity in the US sector is good, as it is up to non-opec to balance the market Announced capital spending cuts by operator and development type - Mid/Small- Cap Large-Cap NOC MLP Major Company capital expenditure cut over $220 billion with potentially more coming (5) (10) (15) 7% 1% 8% 2% 22% Offshore Oil Sands Tight/Shale (20) (25) (30) (35) 29% 10% Conventional LNG Midstream Refining Chemicals (40) 21% (45) Source: Wood Mackenzie, company reports 16

17 Million b/d Total non-opec production (million b/d) It took time due to supply momentum in H but low oil prices are affecting the strength in non-opec supply Year-on-year change and total non-opec supply Other non-opec Mexico North Sea Brazil Russia Canada Oil Sands United States Total non-opec (right axis) Source: Wood Mackenzie 17

18 US$/bbl Closing thoughts and what everyone is asking about Quarterly nominal prices and forecast 120 Brent WTI forecast Source: History - Argus; Forecast - Wood Mackenzie 18

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20 Average Recoverable Reserves (mmboe) Discovery Count mmboe Appendix A: How has industry responded to past slow downs? GoM did very well after the Macondo moratorium & tight oil is off to a great start GoM discovery trends pre and post Macondo Lower 48 tight oil EUR trends all regions Gas NGLs Oil/Condensate Average Recoverable Reserves Discovery Count Source: Wood Mackenzie

21 Normalising for one area, the tight oil pencil sharpening exercise becomes more apparent Eagle Ford Karnes Trough wells today are 32% larger Using data from our North American Well Analysis Tool, we isolated one sub-play in the Eagle Ford. In 2013 and the first half of 2014, EURs averaged mmboe from 1,237 wells. In the same geography, wells since then showcase better declines and have an average EUR of mmboe. 21

22 Appendix B: Refracturing Completion technology is evolving quickly and refracturing mature shale wells could add reserves over time Source: Wood Mackenzie. 22

23 Re-fractures may prove a low-cost path to increased production Early refrac likely higher pressure, more proppant, more fluid Advanced re-fracture programme new perforations Source: Wood Mackenzie 23

24 9/1/2002 1/14/2004 5/28/ /10/2006 2/22/2008 7/6/ /18/2010 4/1/2012 8/14/ /27/2014 5/10/2016 Oil (boe) + Gas (boe) Re-fractures can be risky to nearby wells 100,000 10,000 Unsucessful clean out after refrac due to rapid fluid loss BW/hr 1, Frac hit in adjacent well due to hydrualically enhanced natural fracs system John Robert 31X-22 (Refractured) 1 Lesueur 31X-22 (Offset well) Source: Wood Mackenzie, XTO Energy 24

25 Robert Clarke Research Director Global Unconventional Oil and Gas T E robert.clarke@woodmac.com Robert G. Clarke has been with Wood Mackenzie since 2005, originally as a member of the company s US Lower 48 Upstream Research team. He has covered both the Rocky Mountains and Gulf Coast regions specifically, and led much of Wood Mackenzie s initial US shale research. He product managed the Global Unconventional Play Service from 2009 to Now, Robert directs the company s wider global unconventional research effort and he also manages an internal upstream Knowledge Network. Robert s analytical specializations include geologic play description, decline curve analysis, production forecasting, analogue play modelling, and economic benchmarking. He has widespread experience analysing exploratory global unconventional gas assets and has worked on numerous upstream consulting projects, ranging from asset opportunity screenings for E&Ps, to due diligence work for private equity M&A. Robert also regularly contributes to written media and is a frequent speaker and panel moderator at industry conferences. Prior to joining Wood Mackenzie, he worked as a Field Geologist for HMI, a private engineering and consulting firm in Houston, Texas. Robert graduated Cum Laude from Texas A&M University in 2001 with a BA in Geology, and received a MBA in 2005 from the Eller College of Management at the University of Arizona. 25

26 Disclaimer Strictly Private & Confidential This report has been prepared by Wood Mackenzie Limited for delivery to Dallas clients and prospects in October and November, The report is intended solely for the benefit of the recipient and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie s prior written permission. The information upon which this report is based has either been supplied to us or comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. 26

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