James C. West Oil Services, Equipment & Drilling March 2015

Transcription

1 James C. West Oil Services, Equipment & Drilling March 2015

2 Analyst Biography James C. West joined ISI in September of 2014, as a Senior Managing Director and Partner covering the Oil Services & Equipment sector. Before joining ISI, James spent 15 years at Barclays Capital and Lehman Brothers. Since assuming lead coverage in 2011, Mr. West has been top ranked in Institutional Investor, including number three in 2011, number two in 2012 and number one in 2013 and Prior to joining Lehman Brothers, Mr. West worked at Donaldson, Lukfin & Jenrette. He earned a B.A. from the University of North Carolina at Chapel Hill. 2

3 Agenda What Happened What s Going To Happen How the Recovery Will Unfold In 2016 The Coming Rebirth For Deepwater 3

4 What Happened

5 What Happened Weakness in oil prices is driving a cut in global capex spending and a recession in the oil patch. $900 $800 Global Spending Estimate Rest of the World Canada United States EVR ISI Estimate $120 $110 WTI Oil vs. U.S. Land Rig Count 2,000 1,800 $700 $100 1,600 $600 $90 1,400 $500 $80 $400 $70 1,200 $300 $60 1,000 $200 $ $100 $ $ Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 WTI Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 U.S. Land Rig Count Feb-15 Mar-15 5

6 What Happened Offshore Drillers have been the most pressured, turning an oversupplied rig market to a full blown cyclical downturn. Corruption scandals and geopolitical issues adds to market supply and demand uncertainty. 2015E Net Debt to Forward 2016E EBITDA 11.0x 10.0x 10.9x 11.0x 9.0x 8.3x 8.0x 7.0x Group Average 5.0x 6.8x 6.0x 5.0x 5.0x 5.2x 4.0x 3.0x 2.0x 2.3x 1.9x 2.6x 3.3x 3.2x 2.5x 2.3x 1.0x.0x ATW DO ESV HERO NADL NE ORIG PACD PGN RDC RIG SDRL VTG 6

7 What s Going To Happen

8 What s Going To Happen Global exploration and production spending is now expected to fall significantly in 2015 particularly in North America and high cost areas like the North Sea. Lower Oil Prices Squeezing Cash Flows Capital Austerity from Majors Capex Contraction for NOCs Lower Capex Spending 8

9 What s Going To Happen Lower Global Capex Driven by lower oil prices E&P companies defer investments until project economics improve Stalled Revenues & Higher Costs Downward dayrate momentum put pricing pressure on existing contracts Asset utilization falls and some assets reach the end of their useful life Decreased Margins Margins to test recent troughs despite lower cost inflation OFS companies renew internal cost initiatives 9

10 What s Going To Happen Companies that can improve productivity and lower well costs for oil & gas companies should be the primary beneficiaries of this capital constrained environment. Pricing is a knife fight as OFS companies have been racing to cut pricing in an effort to minimize costs given commodity prices have rendered many plays uneconomical. Operators are seeking cost concessions in excess of 30% 20% pricing is more likely, with the balance from increase efficiency and logistics A healthy balance sheet is crucial during a downturn. Several private operators have already gone bankrupt Well capitalized companies are looking for M&A opportunities 10

11 How The Recovery Will Unfold In 2016

12 How The Recovery Will Unfold In 2016 We believe the sharp drop in E&P spending will lead to lower production, which coupled with rising demand should push oil prices higher throughout the year leading to a recovery in E&P spend in E&P Spending Production Low Oil Prices + Policy Moves to Accelerate GDP Demand Oil prices 2016 E&P Spending 12

13 How The Recovery Will Unfold In 2016 We believe the North American market will be the fastest to recover due to the cash-flow driven nature of CAPEX for North American independents. U.S. land-levered small cap beta names such as PTEN, SPN, KEG, CJES and two Canadian pressure pumpers TCW and CFW will lead stock performance in the group There will be many doubles and triples in small-cap North Americanleveraged stocks The rig count is a proxy for spending and stocks anticipate both the impending rig count peak and trough, with stocks rising ahead of rig count trough. 13

14 How The Recovery Will Unfold In 2016 Investor sentiment has shifted from conversations revolving around the macro/oil price outlook to stock specific discussions. By the time the CAPEX cycle bottoms, we believe the shares could be up % in many cases. Institutional Equity Investor Overweight Allocations To Energy 50% 45% Institutional equity sector allocation towards energy has dropped 1300 bps since August and remains well below 2012 weightings 40% 35% 30% 25% J-12 A-12 J-12 O-12 J-13 A-13 J-13 O-13 J-14 A-14 J-14 O-14 J-15 14

15 The Coming Rebirth For Deepwater

16 The Coming Rebirth For Deepwater The deepwater market is not dead, it is one of the few resource plays still available to the IOCs. Although the number of discoveries reached an all time low last year, the resource potential is there to support near term activity, particularly as the industry takes delivery of record subsea equipment ordered in But oil price stability of six months or more is needed for utilization and dayrates to normalize, with higher activity levels still trailing by 18 months or more. The industry needs to proactively lower the supply of available rigs by retiring older units and deferring or canceling speculative newbuilds. 16

17 The Coming Rebirth For Deepwater The industry is heading into its largest subsea equipment installation cycle in history. A record ~550 subsea trees were ordered in 2013, about half for >5,000fsw to be delivered between % 24% 37% 17% 12% fsw fsw fsw % 5001+fsw Global Subsea Tree Awards by Water Depth 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 0%

18 The Coming Rebirth For Deepwater New offshore rig orders have stalled, with floaters peaking in 2012 and jackups in Chinese shipyards account for 35% of all jackups, 27% of semisubs, and 6% of drillships ordered since 2005, much of which is not competitive in the global market. Floater Orders Jackup Orders Drillship Semisubmersible

19 The Coming Rebirth For Deepwater Exploration spending has fallen for several years, resulting in record low offshore discoveries in Europe has been hit the hardest, due to E&P capital discipline as several recent discoveries are now considered commercially unviable due to lower oil prices Discoveries by Water Depth fsw fsw fsw Africa Australasia C.I.S. Europe Far East Latin America Middle East United States 19

20 The Coming Rebirth For Deepwater We believe the Gulf of Mexico will continue to be one of the strongest deepwater markets for the next several years. Although the number of new discoveries have fallen, several recent discoveries are still in the appraisal stage, suggesting strong visibility for future development work. Status of GOM Deepwater Discoveries Appraisal Possible Development Producing Decommissioned Abandoned Several recent GOM discoveries are still in the appraisal stage

21 Sources Baker Hughes Bloomberg Company Reports DOE EIA Evercore ISI Energy Research FERC IEA IHS Petrodata RigBase National Energy Board of Canada Offshore Magazine Quest Offshore USGS 21

22 ANALYST CERTIFICATION: The views expressed in this Report accurately reflect the personal views of those preparing the Report about any and all of the subjects or issuers referenced in this Report. No part of the compensation of any person involved in the preparation of this Report was, is, or will be directly or indirectly related to the specific recommendations or views expressed by research analysts in this Report. DISCLOSURE: Neither ISI nor its affiliates beneficially own 1% or more of any class of common equity securities of the subject companies referenced in the Report. Neither the persons preparing this research report or members of their households have a financial interest in the securities of the subject companies of this research report. At various times, the employees and owners of ISI, other than those responsible for preparing this research report, may own, buy, or sell the securities discussed in this research report for the purposes of investing or trading. None of the persons preparing this research report or members of their households serves as director, officer, or advisory board member of the subject company. ISI does not usually make a market in the subject securities, nor is ISI currently making a market in the subject securities. No person(s) preparing this research Report has received noninvestment banking compensation from the subject company in the past 12 months. ISI does and seeks to do business with companies covered in this research Report and may have or has received non-investment banking compensation in the past 12 months (payment for research). DISCLAIMER: This material is based upon information that we consider to be reliable, but neither ISI nor its affiliates guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and ISI is not obligated to update the information contained herein. Past performance is not necessarily indicative of future performance. This material is not intended as an offer or solicitation for the purchase or sale of any security. ISI RATING SYSTEM: Based on stock's 12-month risk adjusted total return. Strong Buy Return > 20% Buy Return 10% to 20% Neutral Return 0% to 10% Cautious Return -10% to 0% Sell Return < -10% ISI has assigned a rating of STRONG BUY to 13% of the securities rated as of 6/30/14. ISI has assigned a rating of BUY to 34% of the securities rated as of 6/3014. ISI has assigned a rating of NEUTRAL to 49% of the securities rated as of 6/30/14. ISI has assigned a rating of CAUTIOUS to 3% of the securities rated as of 6/30/14. ISI has assigned a rating of SELL to 1% of the securities rated as of 6/30/14. Due to rounding the above numbers may add up to more/less than 100%. 22