Unconventional Oil & Gas Current Views & Outlook

Transcription

1 Unconventional Oil & Gas Current Views & Outlook 26 th ANNUAL TEXPERS CONFERENECE March 2015 Institutional Sales Material. Not For Distribution to the Public. 1of 20

2 IMPORTANT INFORMATION - FOR AUTHORIZED USE ONLY - Van Eck only serves professional clients in countries where certain funds are registered or where funds can be sold in accordance with local private placement rules. Information contained in this presentation is for information purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by Van Eck Global or its affiliates. This material does not constitute an offer to sell or solicitation to buy any security, including shares of any fund. An offer or solicitation will be made only through the fund s official offering document and will be subject to the terms and conditions contained therein. THIS MATERIAL MAY ONLY BE PROVIDED TO YOU BY VAN ECK GLOBAL AND IS FOR YOUR PERSONAL USE ONLY AND MUST NOT BE PASSED ON TO THIRD PARTIES WITHOUT THE PRIOR EXPRESS WRITTEN CONSENT OF VAN ECK GLOBAL. IF YOU HAVE NOT RECEIVED THIS MATERIAL FROM VAN ECK GLOBAL, YOU ARE HEREBY NOTIFIED THAT YOU HAVE RECEIVED IT FROM A NON- AUTHORIZED SOURCE THAT DID NOT ACT ON BEHALF OF VAN ECK GLOBAL AND THAT ANY REVIEW, USE, DISSEMINATION, DISCLOSURE OR COPYING OF THIS MATERIAL IS STRICTLY PROHIBITED. Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time and portfolio managers of other investment strategies may take an opposite opinion than those stated herein. The information herein reflects prevailing market conditions and our judgments as of the date of this document, which are subject to change. In preparing this document, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Opinions and estimates may be changed without notice and involve a number of assumptions which may not prove valid. There is no guarantee that any forecasts or opinions in this material will be realized. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This information should not be construed as investment advice. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by Van Eck Associates Corporation or its affiliates. 2015, Van Eck Global No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. Van Eck Global 335 Madison Avenue, New York, NY Institutional Sales Material. Not For Distribution to the Public. 2of 20

3 U.S., Canada, Deepwater Have Been the Only Source of Non-OPEC Supply Growth Oil Supply Growth During (with Brent Crude at $105 / bbl) Year-over-Year Growth in Supply U.S., Former Soviet Union (FSU), Non-OPEC ex-u.s. & FSU 95 Million Barrels Per Day (MMbbl/d) North America Other Non- OPEC Saudi Arabia Other OPEC 2014 Source: EIA; Data as of July 31, 2014 (left) and December 2010 (right). Institutional Sales Material. Not For Distribution to the Public. 3of 20

4 Oil Company Response Has Been Dramatic U.S. Oil Production and Rig Count Estimated U.S. Exploration & Production (E&P) Capex Reductions % U.S. Oil Production (MMbbl/d) U.S. Oil Rig Count Estimated U.S. E&P Capex Reductions 35% 30% 25% 20% 15% 10% 17% 28% 31% 34% % 0 0 0% 12/19/2014 1/9/2015 1/20/2015 2/8/2015 U.S. Oil Production (PIWAUSA Index) U.S. Oil Rig Count (BAKEOIL Index) Source: Bloomberg, Van Eck Global; Data as of January Institutional Sales Material. Not For Distribution to the Public. 4of 20

5 Recent Oil and Gas Prices Well Below Breakeven for Most Shale Plays $90 Oil Economics Prices Required for 10% After-Tax Rate of Return (at $4.50/mcf Gas) Breakeven Oil Price, $/bbl $80 $70 $60 $50 $40 $30 $30/bbl $20 Gas Basin Economics Prices Required for 10% After-Tax Rate of Return (at $87/bbl Oil) Breakeven Gas Price, $/mcf $6 $5 $4 $3 $2 $1 Associated gas with oil plays $0.01/mcf $5.25/mcf $0 Source: EIA; Data as of July 31, 2014 (left) and December 2010 (right). Institutional Sales Material. Not For Distribution to the Public. 5of 20

6 U.S. Rig Count Decline Substantial Over Last 3 Months WTI Crude Price ($ / bbl) North American Oil & Gas Rig Count (3-Month Rate of Change) vs. WTI Crude Oil ($ / bbl) 3mo % Change In Rig Count Source: Bloomberg; Data as of January 23, Institutional Sales Material. Not For Distribution to the Public. 6of 20

7 Recent Crude Price Retraction Mimicking Past Cycles WTI Crude Oil Prices 2014 vs. 1985/86 ($/Barrel) WTI Crude Oil Prices 2014 vs ($/Barrel) 2014 WTI Crude Price 1985/86 WTI Crude Price 2014 WTI Crude Price 2009/10 WTI Crude Price Source: Nautilus Capital Research; Data as of January Institutional Sales Material. Not For Distribution to the Public. 7of 20

8 Conventional vs. Unconventional Oil CONVENTIONAL UNCONVENTIONAL High permeability Fracking: minimal Principal evaluations: Trap Seal Source Reservoir Migration Timing Primary risk: geologic Access: vertical wells Seal/Trap Conventional Gas Conventional Oil Permeable rock formations (oil and gas can migrate through) Source rock where oil and gas forms Ultra tight rock Fracking: large, hydraulic Principal evaluations: Kerogen content Maturity Clay content Pressure Bulk volume Hydrocarbon Primary risk: economic Access: horizontal wells Source: Pioneer Natural Resources; Data as of September Institutional Sales Material. Not For Distribution to the Public. 8of 20

9 Three Factors Sparked the U.S. Shale Revolution Horizontal Well With Multi-Stage Fracturing I. Horizontal drilling technology (began 1930 s): allowed access to significantly greater volume of reservoir rock II. Horizontal hydraulic fracture stimulation technology (began 1950s): created porosity and permeability created channels that allow oil and gas to flow III. Historically strong commodity prices Source: EnCana, Pioneer Natural Resources; Data as of September Institutional Sales Material. Not For Distribution to the Public. 9of 20

10 Case Study: Laredo Petroleum More Stratigraphic Layers/More Resources Source: Laredo Petroleum; Data as of September Institutional Sales Material. Not For Distribution to the Public. 10 of 20

11 Some Issues to Consider: Steep Production Declines Unconventional wells have steep declines, but high initial rates and long production tails Unconventional Natural Gas Production Type-Curve* Millions of Cubic Feet (Mmcf) / Day Year 1 Decline = 60% Year 2 Decline = 28% Year 4 Decline = 15% Terminal Decline = 8% *Type curve = curve depicting how oil and gas production rates decrease over time Source: Van Eck Global; Data as of September Institutional Sales Material. Not For Distribution to the Public. 11 of 20

12 Some Issues to Consider: Steep Production Declines High initial rates deliver a growing production profile as long as well count is maintained Production will moderate with reduced drilling Production Profile Constant Well Quality Production Profile by Year Constant Well Quality Gas Production, Billions of Cubic Feet (bcf) Per Day Gas Production, Mmcf Per Day Source: Pickering Energy Partners; Data as of July 31, Institutional Sales Material. Not For Distribution to the Public. 12 of 20

13 U.S. Shale Producers Retain Vast, Profitable Inventories Breakeven Prices for Marginal Cost Producers (assuming 10% hurdle rate on Brent-equivalent basis, $/Bbl) Marginal Breakeven Price ($/Bbl) Incremental Production Liquids Added from Source: Rystad Energy, Wood Mackenzie, Morgan Stanley Equity and Commodities Research; Data as of November Institutional Sales Material. Not For Distribution to the Public. 13 of 20

14 Falling Oil Prices Could Further Impact OPEC Countries Production Budgets OPEC Countries Breakeven Prices OPEC Fiscal Cost Curve for 2013 (Bar width = country s production; Bar height = price estimate range) Fiscal Breakeven Price ($/Bbl) Breakeven Price ($/Bbl) Current Account Breakeven Price, 2015 Cumulative Production Period (mbd) Source: IMF, Evercore, ISI Energy Research (Left) and APICORP Research (Right); Data as of November 2014 (Left) and January 2014 (Right) Institutional Sales Material. Not For Distribution to the Public. 14 of 20

15 Case Study: Cimarex Technology Driving Well Economics Before Tax IRR** (at Varying Oil Prices) Culberson County Wolfcamp D Wells 140% 120% 113% 122% Before Tax IRR 100% 80% 60% 40% 74% 37% 89% 45% 60% 65% 20% 0% $50 $60 $75 $80 Realized Oil Price 5,000 ft. lateral 10,000 ft. lateral *Assumptions: Gas = $3.50 / Mcf; NGL = $25 / bbl Source: Cimarex; Data as of June 30, Institutional Sales Material. Not For Distribution to the Public. 15 of 20

16 Valuations Appear Attractive 2015 Estimated EV / EBITDA of S&P 500 Sub-Sectors S&P 500 Index Sub-Sectors S&P Energy Index Sub-Industries Source: Bloomberg; Data as of January Institutional Sales Material. Not For Distribution to the Public. 16 of 20

17 Emerging Shale Plays Heat Map Country Geology Economic Terms Service Availability Market Access / Pricing Infrastructure Water Avail Access to Capital Regulatory / Environmental Acceptance Van Eck Visit China Multiple basins but deep, folded and faulted formations with presence of sulfide gas Supportive of domestic national oil companies (NOCs), but unattractive for most others Mostly domestic, NOCs captives, but foreign joint ventures (JVs) are increasing Nat. Devel. & Reform Commission controls pricing, switch to gas from coal a priority Pipelines can be built relatively quickly, but most of shale areas are lacking water Plenty for NOCs and foreign major JV partners, but others may face high capital costs Process can be slow, but with government support, little local resistance Argentina One of the most prospective shale oil formations in the world Extreme political and foreign exchange (FX) risk Well-developed industry Price of new production allowed to float, but oil continues to be controlled Good Questionable after energy company YPF s expropriation, but majors are undeterred Business as usual Algeria Very large technically recoverable resources (TRR), but questionable commerciality Council of Ministers trying to encourage development Established industry Falling conventional production and increasing demand Remoteness of prospects, water scarcity, security issues all weigh NOC Sonatrach authorized for 11 wells over 7-13 yrs; otherwise a few majors No issues Russia West Siberian source rock Bazhenov Shale seen as very attractive Makes no difference with Western sanctions in place Was good but now declining as foreign providers disengage Reliance upon JVs with established local players Export pipelines in place or planned, but Severely restricted under sanctions Oil & gas is cornerstone of economy Canada Bakken and liquids-rich Alberta Duvernay are hot, other tight resources Attractive Unparalleled outside of U.S. Will improve as export pipelines and facilities are built Excellent World-class Governments are supportive, some resistance by greens, viz. Keystone export pipeline Mexico Extension of Eagle Ford and Permian plays across border Reforma Energetica is promising, but yet to be defined Should be able to grow as needed with access to U.S. Reforma Energetica is promising Water constraints, security issues in cartel-dominated region Strong domestic market and ready access to international money centers Seldom an issue under ending Pemex monopoly; expect similar in future Australia Multiple attractive basins Attractive, but labor costs are issue Well-developed East coast LNG export needs gas, compete with domestic needs Distances are an issue, and water is scarce in places, but overall good Domestic stock market supportive, plus majors participating Supportive Van Eck s View: Positive Neutral Negative Institutional Sales Material. Not For Distribution to the Public. 17 of 20

18 Emerging Shale Plays Heat Map (Cont.) Country Geology Economic Terms Service Availability Market Access / Pricing Infrastructure Water Avail Access to Capital Regulatory / Environmental Acceptance Van Eck Visit South Africa Significant reserves expected in Karoo Basin Onerous legislation held up between Parliament and the executive Would require significant upgrading Country is in dire need of reliable energy, but politics likely to get in the way Infrastructure could be built as needed, but some water scarcity With appropriate terms, capital would be available No issues seen at present Venezuela Not yet exploited but likely world-class A disaster under an incompetent administration, with FX issues also Aging from lack of investment Politics Poor maintenance of existing infrastructure could be issue Foreign investors are either brave or foolhardy Bolivarian PDVSA could not do much worse; at some point population could demand change Poland Baltic Basin has gas, only apparently it cannot be coaxed out in commercial quantities Efforts to spend the windfall before any commercial production has chased NOCs out Initial build-up is reversing Good, if there were anything to sell Good Poor drilling results have brought losses to early investors Significant local opposition to drilling has arisen in places, but government wants offset to Russian gas India Six basins of interest; Oil company ONGC claims a successful first well (no details) Government approaching methodically An existing industry that would need supplementing Good; demand is there Varies in the different basins, but water will likely be an issue With success, likely not a problem Government and regulator are supportive Colombia Promising Middle Magdalena Valley; small part of Maracaibo Basin Attractive Good, but aged equipment Location dependent, but generally good Difficult road access, security is an issue; e.g., kidnappings and pipeline attacks Generally good Indigenous resistance in places, but regulator is supportive Turkey Thrace and SE Anatolian Basins have attracted interest, but little about drilling results known In line with international standards Would require supplementation for significant development Good; increasing demand. Turkey currently imports Major issue is war on the southeast border; water could also be an issue With containment of war in neighboring countries, capital should be there No identified issues UK Purportedly excellent dry gas prospects Attractive Good U.K. needs gas, especially as North Sea production declines Should not be an issue International financial center Strong NIMBY and neo- Luddite opposition but forceful government support Van Eck s View: Positive Neutral Negative Institutional Sales Material. Not For Distribution to the Public. 18 of 20

19 Case Study: Whiting Petroleum More and Bigger Frac Stages Older Style Completion ( Sliding Sleeve ) Annulus (Gaps) Stages Frac Ports / Stage Free fluid between packers Potential Entry Points New Style Completion ( Cemented Liner ) Annulus (Gaps) Stages Perforation Clusters / Stage Potential Entry Points Cemented Source: Whiting Petroleum; Data as of June 30, Institutional Sales Material. Not For Distribution to the Public. 19 of 20

20 Some Issues to Consider: Environmental Impacts (Water) Groundwater contamination risk should be less of a concern as tests on well depth, frac length and corresponding distance from water aquifers often exhibit large separations Sample Map of Frac Treatments Barnett Shale Oil Well, Frac Length, and Aquifer Depth (Feet) Deepest Aquifer Depth Distance between the deepest aquifer and longest frac is approx. 4,000 ft. Frac Length Top Oil Well Top Oil Well Midpoint Oil Well Bottom Frac Length Bottom Source: The American Oil & Gas Reporter; Data as of September Institutional Sales Material. Not For Distribution to the Public. 20 of 20