PESA Oil and Gas 101

Transcription

1 PESA Oil and Gas 101 Energy Markets We are at the Tail End of a Supply Driven Downturn September 2016 Raymond James Energy Group (800) Raymond James Energy Group (800) Marshall.Adkins@RaymondJames.com Praveen.Narra@RaymondJames.com Please read disclosure/risk information and Analyst Certification beginning on slide Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

2 We turned bearish on crude in mid-2012 Worried about surging U.S. supply Numbers said $65 was correct equilibrium oil price U.S. Research RJ Energy Outlook: Historical Perspective We were wrong for two years as OPEC supply fell by 2.5 million bpd Oil prices fell when outages stabilized 2

3 Supply Interruptions Important 3

4 Why Did Energy Prices Collapse in 2014/15? OPEC flooding the market (Saudi, Iraq, Iran) U.S. supply posting huge growth First time in 40 years Supply was the problem 4

5 Current Energy Overview U.S. Research Very bullish on oil prices relative to futures strip: Crude prices move much higher in 2017 Natural gas rebounds in in 2017: N.E. gas keeps a lid long-term prices volatile differentials Oilfield has overcorrected in 2015/16: Expect a sharp rebound in 2017/ Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. 5

6 No excess oil capacity first time in 40 years U.S. has become lowest cost producer for oil & gas Most underestimate the U.S. efficiency gains Extraction cost falling rapidly U.S. Research How has the Oil & Gas World Changed? U.S. oil supply is cheap, resilient, and substantial U.S. growth displaces offshore/international 6

7 Problem #1: Iraq s Production Surge Iraq Crude Production, E (MMbpd) Up ~1 million bpd! Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Source: IEA, Bloomberg, Raymond James Research IEA Reported Iraq Crude Production Raymond James Forecast 7

8 Problem #2: Iran Returns to Market Iran Crude Production, E (MMbpd) EU embargo is announced Up 720,000 bpd! Final nuclear agreement is announced Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Source: IEA, Raymond James Research IEA Reported Iran Crude Production Raymond James Forecast 8

9 Problem #3: Saudi Production Surged Saudi Arabia Crude Production (excl. Neutral Zone), E (MMbpd) Up ~800,000 bpd! Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E Source: IEA, Raymond James Research IEA Reported Saudi Arabia Crude Production Raymond James Forecast 9

10 Saudi Crude Oil Inventories (Mbbls) If they have it, Why haven t we seen it? U.S. Research Does Saudi Really Have 2 MMbpd More? Why are Saudi inventories falling? 335, , , , , , ,000 Saudi Crude Oil Inventories Why Are Saudi Oil Inventories Falling? Source: JODI 10

11 E Excess Capacity (MMbls/day) U.S. Research The Oil Truck Has No Shock Absorbers Excess OPEC Capacity 16 MMBbls/d in '83 v.s. Almost None Today 15 Yr Bear Market For Oil Sources: IEA, RJ&A, Bloomberg OPEC Excess Capacity 11

12 Total OPEC Crude Production in mmbpd Total U.S. Crude Production in mmbpd U.S. Research Total OPEC and U.S. Production OPEC and U.S. Total Oil Production Forecast OPEC United States - total 12

13 Efficiency Gains are Driving Growth Oil Production (Bbl/day) 1,200 1, Bakken Eagle Ford Niobrara Permian Marcellus* Utica* Haynesville* Production by Rig by Play Haynesville* Niobrara Marcellus* Eagle Ford Bakken Utica* Permian 12,000 10,000 8,000 6,000 4,000 2,000 Natural gas Production (Mcf/day) - Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 - Sources: EIA and Raymond James Research * On Secondary Axis 13

14 E 2016E 2017E 2018E IP-30s (Bpd/well) U.S. Research Well Productivity Growth Should Slow in 2017/ U.S. Oil Productivity Gains Accelerating Efficiencies: 1. Continued Trends from Previous Years 2. High-grading to Most Productive Portions of the Plays 36% 14% 7% % 35% 38% Decelerating Efficiencies: 1. Previous Trends Contribute Less 31% Growth 2. Low-grading to Fringe Portions of the Plays Moving up the Learning Curve: 1. Shift from Verticals to Horizontals 2. Longer Laterals 3. More Stages Sources: EIA, HPDI, and Raymond James Research 14

15 Jan-1985 May-1986 Sep-1987 Jan-1989 May-1990 Sep-1991 Jan-1993 May-1994 Sep-1995 Jan-1997 May-1998 Sep-1999 Jan-2001 May-2002 Sep-2003 Jan-2005 May-2006 Sep-2007 Jan-2009 May-2010 Sep-2011 Jan-2013 May-2014 Sep-2015 Jan-2017 May-2018 Sep-2019 U.S. Research U.S. Oil Growth Potential Still Staggering! MMBbl/d 14,000 13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 Long-Term U.S. Crude Production Forecast Forecast Source: HPDI, EIA, Raymond James Research 15

16 U.S. Oil Supply Bottoms in Late-2016 MBbl/d 10,000 U.S. Oil Production (MBbl/d) Estimates 9,500 9,000 8,500 * Assuming 500 Average U.S. Rigs in 2016 Source: EIA, HPDI, Raymond James Research Total U.S. Crude 16

17 What is U.S. Supply Sensitivity to Activity? U.S. Rigs U.S. Oil Supply Growth U.S. Rig Count Forecast Rig Count Assumption Y/Y Change Y/Y % 0% -20% Base +20% Base ,858 6% % 2016E % 2017E % 2018E 880 1,100 1,320 38% Source: EIA, HPDI, Ra ymond Ja mes U.S. Liquids Production Growth (y/y growth in MBbl/d) Impact from Rig Count Change 0% -20% Base +20% , E (426) (337) (234) 2017E (171) E 767 1,127 1,490 Source: EIA, HPDI, Raymond James Research 17

18 Rig Count Largest Driver of Production Changes MBbl/d Y/Y U.S. Liquids Production Growth Under Various Rig Count Scenarios Consensus? Impossible Rig Count Average Rig Count Source: RJ Estimates, EIA, Drilling Info Assumes 2016 rig count remains unchanged from current estimate Assumes oil rig percentage of 80% 18

19 U.S. Oil Service Industry is Dying at Strip Prices Cash Flow in Millions $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 U.S. Oilfield Cash Flow and Capex U.S. E&P Capex U.S. E&P Cash Flows Operating Cash Flow Total Capex Source: Raymond James Research; Spears & Associates; EIA; Company Reports; Bloomberg 19

20 E&P Cash Flows Must Recover U.S. Research Cash Flow in Millions $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 U.S. Oilfield Cash Flow and Capex U.S. E&P Capex Assumes $80 Oil U.S. E&P Cash Flows Operating Cash Flow Total Capex Source: Raymond James Research; Spears & Associates; EIA; Company Reports; Bloomberg 20

21 MBbls/d MBbls/d U.S. Research Non-U.S. Supply Assumptions Very Conservative Oil Project Delays and Cancellations, by Start Year 1,375 Non-OPEC/Non-U.S. Y/Y Oil Production Change 1,181 1,179 1, E 2017E 2018E 2019E E 2017E 2018E Source: IEA, Raymond James estimates Sources: IEA, Raymond James Research 21

22 $ MM U.S. Research Global Capex Down 30+% Two Years in a Row? Capital Spending of Large-Cap Oil and Gas Companies $600,000 $500,000 $400,000 Based in the U.S. Based Outside the U.S. Global Spending Down +/- 50%! $300,000 $200,000 $100,000 $ E Source: Company filings, Raymond James research Source: IEA, Raymond James Research 22

23 Geopolitical Disruption U.S. Research Nigeria Venezuela 23

24 Structural Declines China Colombia 24

25 Structural Declines (Continued) Angola Mexico 25

26 OIL DEMAND HAS NOT BEEN THE PROBLEM 26

27 E E Bbls of Oil per $1,000 GDP (2000$) Bbls of Oil per $1,000 GDP U.S. Research Long-Term Efficiency Trends Are Real, But 1.6 Oil Consumption Intensity - Select Developed Countries 4.5 Oil Consumption Intensity - China vs. India 1.4 Germany Japan 4.0 China India U.S. UK Japan U.S. UK Germany Source: EIA, IEA, World Bank, CIA World Factbook Source: EIA, IEA, IMF, World Bank 27

28 Cheap Gasoline is Slowing U.S. Efficiency Trend Average MPG for New Vehicles Sold Downward trend after oil price crash Source: University of Michigan Transportation Research Institute 28

29 Vehicle-miles (in billions) Driving Trends Are Changing U.S. Research U.S. Vehicle-Miles Traveled (Monthly Average) Why the Stagnation? - Urbanization? - Demographics? - Low Employment? - High Gasoline Prices? - Internet? Vehicle miles driven up 3.5% in 2015, and up 3.3% YTD 2016! 175 Source: U.S. Department of Transportation 29

30 2016 Gasoline Prices Lower Than 2015 $4.00 $3.50 $3.00 $2.50 $2.00 Average Annual Gasoline Price Down ~28% Down ~24% $1.50 $ E 2017E Source: EIA, RJ Research 30

31 2016 U.S. Gasoline Demand (% Change) U.S. Research So, U.S. Gasoline Demand Is Responding! 2.70% 2.57% Too Low? 1.50% -0.18% Source: EIA Average 2015 Actual 2016 YTD Actual 2016 RJ Estimate 31

32 Gasoline Now Driving Chinese Demand 2006 Chinese Oil Demand Breakdown Other (Naphtha, Heating Oil, LPG, Asphalt, Miscellaneous) 28% Fuel Oil 13% Gasoline 19% Diesel 36% Middle class transportation accounts for ~23% Jet Fuel 4% Total average annual oil demand was 7.2 MMBbls/d 2015 Chinese Oil Demand Breakdown Other (Naphtha, Heating Oil, LPG, Asphalt, Miscellaneous) 29% Fuel Oil 5% Diesel 34% Gasoline 26% Middle class transportation accounts for ~32% Jet Fuel 6% Total average annual oil demand was MMBbls/d Source: Bloomberg, IEA, National Bureau of Statistics of China, Raymond Source: Bloomberg, IEA, National Bureau of Statistics of China, Raymond 32

33 China Oil Demand Problem Overstated! Chinese Demand Growth by Product (Million Bpd) Other Middle Class Transportation (Gas/Jet) Estimates Total Transportation accounts for 66% of 3 yr avg. growth Source: Bloomberg, IEA, National Bureau of Statistics of China, RJ Research 33

34 Chinese SUV Sales Steadily Climbing 800,000 China SUV Sales 700, , , ,000 Average annual growth of almost 37% from 2011 through , , ,000 - Source: National Bureau of Statistics of China, Bloomberg 34

35 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16E U.S. Research Lower Oil Prices Have Stimulated Demand Global Oil Demand $100 Oil 1.0 MMBPD Y/Y Growth $55 Oil 1.5 MMBPD Y/Y Growth "Old School" 1.4 MMBPD Y/Y Growth Source: IEA, Raymond James Research 35

36 We Think Global Oil Demand is Stout! Oil Demand: Year-Over-Year Changes Region E 2017E 2018E North America 0.9% 1.0% 0.0% 0.0% Europe 1.9% 0.4% -1.0% -1.0% Pacific (mainly Japan) -0.3% 0.0% -1.0% -1.0% CIS (mainly Russia) -1.0% 1.8% 0.5% 0.5% China 6.4% 3.2% 2.5% 2.5% Other Asia 4.1% 4.9% 3.7% 3.7% Latin America -0.7% -0.7% 1.0% 1.0% Middle East 1.8% 0.8% 2.0% 2.0% Africa 3.7% 2.6% 1.9% 1.9% Total Demand Growth* (Jan. 2016) 1.8 MMbpd 1.4 MMbpd 1.2 MMbpd 1.2 MMbpd Total Demand % Growth* (Jan. 2016) 2.0% 1.4% 1.2% 1.2% Total Demand Growth* (Current) 1.8 MMbpd 1.7 MMbpd 0.9 MMbpd 1.0 MMbpd Total Demand % Growth* (Current) 2.0% 1.8% 0.9% 1.0% IEA Estimate (MMbpd) 1.9 MMbpd 1.2 MMbpd 1.2 MMbpd IEA Estimate (%) 2.0% 1.3% 1.3% Source: IEA, IMF, Raymond James research * After missing barrels 36

37 Where Does That Leave Our Global Oil Model? (Assumes No Additional Interruptions) Source 2014A 2015A 2016E 2017E 2018E Previous Year Build/Draw U.S. Supply Growth Other Non-OPEC Non-U.S OPEC Supply Growth Saudi Arabia Iraq Iran Total Global Supply RJ Demand (incl. "Missing Bbls") IEA Demand Estimate N/A Inventory Build Est Source: IEA, Raymond James research Current Model Oil Supply-Demand: Year-Over-Year Changes (MMbpd) 37

38 Implied Build (Draw) - After Missing Barrels (MMbpd) U.S. Research Supply Cycle s Final Stages? 1.4 Est. Quarterly Global Petroleum Inventory Builds (Draws) E 2017E 2018E CurrentBuild (Draw) Est. Source: IEA, Raymond James research 38

39 Bearish: Will U.S. Efficiency Gains Continue? Does Saudi Have More Capacity? Hyperbolic U.S. $ Risk? Bullish: Will OPEC Cut? Non-US, Non-OPEC Supply Decline? Middle East Production Risk Still Exists! U.S. Research Where Could We Be Wrong on Oil? 39

40 Gas Should Rally in 2017 Plenty of U.S. Gas Sub- $3.00 Long-Term 40

41 2017 Gas Outlook Very Bullish 2017 Nov/Nov Theoretical Change in Storage U.S. Research TIGHTER LOOSER Supply Cswitching Nuke/Hydro Base Power Industrial Liquids LNG Canada Mexico Weather Total -2.6 BULLISH BEARISH This assumes $3.25 Gas Bcf/day Ending Storage Estimates: Winter: 1,931 Bcf Summer: 3,761Bcf Source: HPDI, EIA, Raymond James Estimates 41

42 Pipelines Are Key to U.S. Gas Supply Bcf/d Total Dry Gas Production Y/Y Growth 9.0 Associated gas production Planned Northeast pipeline additions are not incorporated into our model and help boost production in 2016 and gas production from non-major plays Production from dry gas plays rolls over in mid-2016 Dry Gas Plays Wet Gas Plays Oil Plays Other NE Pipe Adds Total DUCs and Shut-ins Source: HPDI, EIA, Raymond James Estimates 42

43 NE Takeaway Capacity Staggering for Next 3 Years 43

44 Northeast Price Differentials Improve, For Now 44

45 Demand Tailwinds Exist for Gas 45

46 Bcf/d U.S. Research LNG: 7+ Bcf/d of Potential Exports by U.S. LNG Export Forecast (Bcf/d) Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 Cameron LNG Corpus Christi Cove Point Elba Island Freeport Sabine Pass Source: Company reports, Raymond James research 46

47 Natural Gas Rally in 2017! RJ&A Henry Hub Natural Gas Price Forecast (as of July 2016) 2016 Q1 16A Q2 16A Q3 16E Q4 16E 2016E Bloomberg Consensus $2.01 $2.13 $2.33 $2.50 $2.24 NYMEX Futures $2.01 $2.13 $2.91 $3.12 $2.54 Old RJ Gas $2.01 $2.13 $2.05 $2.30 $2.12 New RJ Gas $2.01 $2.13 $2.75 $3.00 $2.47 U.S. Research 2017 Q1 17E Q2 17E Q3 17E Q4 17E 2017E Bloomberg Consensus $2.90 $2.80 $2.90 $3.05 $2.91 NYMEX Futures $3.41 $3.05 $3.08 $3.17 $3.18 Old RJ Gas $2.70 $2.60 $2.55 $2.75 $2.65 New RJ Gas $3.50 $3.25 $3.00 $3.25 $ Q1 18E Q2 18E Q3 18E Q4 18E 2018E Bloomberg Consensus $3.00 $3.00 $3.00 $3.00 $3.00 NYMEX Futures $3.34 $2.86 $2.90 $3.00 $3.02 Old RJ Gas $2.50 $2.50 $2.50 $2.50 $2.50 New RJ Gas $3.25 $3.00 $2.75 $3.00 $ (+) Long-Term Forecast Bloomberg Consensus $3.01 NYMEX Futures $3.24 Old RJ Gas $2.50 RJ Long-Term Gas $2.50 Source: Bloomberg, Thomson Reuters, Raymond James research 47

48 How Will Oilservice Cycle Unfold? 48

49 U.S. Oil Service Industry is Dying at Strip Prices Cash Flow in Millions $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 U.S. Oilfield Cash Flow and Capex U.S. E&P Capex U.S. E&P Cash Flows Operating Cash Flow Total Capex Source: Raymond James Research; Spears & Associates; EIA; Company Reports; Bloomberg 49

50 Our View: E&P Cash Flows Must Recover Cash Flow in Millions $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 U.S. Oilfield Cash Flow and Capex U.S. E&P Capex Assumes $80 Oil U.S. E&P Cash Flows Operating Cash Flow Total Capex Source: Raymond James Research; Spears & Associates; EIA; Company Reports; Bloomberg 50

51 Million Horsepower 10% 9% 8% 7% 6% 5% 4% U.S. Supply Constraints U.S. Research Balance Sheets, Labor, Frac Equipment U.S. Unemployment Rate, 2006-present High 2010 unemployment eased search for oil & gas workers in last downturn Source: Bureau of Labor Statistics, U.S. Department of Labor This oil & gas downturn, U.S. unemployment is only 5% U.S. Pressure Pumping Fleet vs. Demand U.S. Horsepower Supply Range Frac HP Demand 4Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q173Q174Q171Q182Q183Q184Q18 Supply Denotes Active and Available HHP with Minimal Incremental Capex Source: Company Reports, IHS, Baker Hughes, Raymond James Research Pressure Pumpers Regain Pricing Power in 2017 to Incentivize Restoration and Repair of Stacked Equipment Implied 2018 HP Shortfall 51

52 Million Horsepower U.S. Research Legacy Equipment Must be Rebuilt 20 U.S. Pressure Pumping Fleet 15 Permanently Retired Stacked, Refurbishable 10 5 Marketable Legacy Equipment Refurbs Newbuilds 0 Source: Company Reports, Raymond James Estimates Black line designates total marketable equipment 52

53 Offshore Will Take Much Longer 300 Floater Supply vs. Demand Idled Capacity and Potential Stacking 150 Incremental Demand 100 Already Contracted Rigs 50 Contracted Newbuilds 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16E 2Q16E 3Q16E 4Q16E 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E Sources: IHS Petrodata, RJ Estimates 53

54 Conclusions Supply cycle is in its late stages U.S. can find a lot of $60+ and takes market share U.S. rig activity surges in 2017/18 Gas gets bounce in 2017, but remains challenged long-term 54

55 World Oil Supply (Millions of barrels per day) SUPPLY 2014 YOY% 2015 YOY% 1Q16 2Q16E 3Q16E 4Q16E 2016E YOY% 1Q17E 2Q17E 3Q17E 4Q17E 2017E YOY% 2018E YOY% United States - non-bio % % % % % United States - bio % % % % % North America % % % % % Europe % % % % % Pacific % % % % % Total OECD % % % % % CIS % % % % % Other Europe % % % % % China % % % % % Other Asia % % % % % Latin America % % % % % Middle East % % % % % Africa % % % % % Total NON-OECD % % % % % Other Biofuels % % % % % Processing Gains % % % % % Total Non-OPEC % % % % % Saudi Arabia % % % % % Iran % % % % % Venezuela % % % % % Iraq % % % % % Nigeria % % % % % United Arab Emirates % % % % % Kuwait % % % % % Libya % % % % % Angola % % % % % Algeria % % % % % Qatar % % % % % Neutral Zone % % % % % Ecuador % % % % % Indonesia % % % % OPEC Crude % % % % % OPEC NGLs % % % % % Total OPEC % % % % % TOTAL SUPPLY % % % % % Implied Inv. Build/(Draw)-RJ Est Implied Inv. Build/(Draw)-After Missing Bbl Adj Source: IEA, RJ&A Estimates 55

56 World Oil Demand (Millions of barrels per day) 3.2% DEMAND 2014 YOY% 2015 YOY% 1Q16 2Q16E 3Q16E 4Q16E 2016E YOY% 1Q17E 2Q17E 3Q17E 4Q17E 2017E YOY% 2018E YOY% North America % % % % % Europe % % % % % Pacific (mainly Japan) % % % % % Total OECD % % % % % CIS (mainly Russia) % % % % % Other Europe % % % % % China % % % % % Other Asia % % % % % Latin America % % % % % Middle East % % % % % Africa % % % % % Total NON-OECD % % % % % TOTAL DEMAND (RJ Est.) % % % % Actual Missing Barrels Missing Bbls Adjustment (1/2 actual) TOTAL RJ DEMAND (inc. Miss. Bbls Adj) % % % % % IEA DEMAND EST % % % Y/Y bbl/day Change (IEA Est.) Y/Y % Change (IEA Est.) 1.1% 2.0% 1.5% 1.2% 1.0% 1.4% 1.3% Y/Y bbl/day Change (Before Missing Bbl Adj.) Y/Y % Change 1.0% 2.0% 1.5% 1.6% 1.3% 2.0% 1.6% 0.9% 0.7% 1.2% 0.9% 0.9% 1.0% Y/Y bbl/day Change (After Missing Bbl Adj.) Y/Y % Change 1.2% 2.0% 1.9% 1.6% 1.3% 2.0% 1.6% 0.6% 0.7% 1.2% 0.9% 0.9% 1.0% World Real GDP Growth 3.4% 3.1% 3.4% 3.6% Source: IEA, RJ&A Estimates 56

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