How Does UK Oil & Gas Attract Capital? A View From The World s Largest Asset Manager Mark Hume Portfolio Manager BlackRock Natural Resources December 2018 FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY
Capital Competition Capital will always go where it s needed and stay where it s well treated - Walter Wriston
US Dollars Employee Headcount The Energy Industry Has To Compete With All Sectors Value of Initial US$1,000 Investment from 2008* Industry Headcount Reduction 2017 versus 2013** 2,000 1,300k 81% 1,500 1,100k (18%) 1,000 (22%) 900k 500 World Market (Ex- Energy) Energy Source: Bloomberg. *MSCI All Country World Indices (ACWI). USD returns assuming dividends are reinvested from 21 May 2008 through 25 November 2018. **Industry Headcount sample set of 47 publicly-listed global oil and gas companies. 700k '13YE '17YE FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 3
The 3-Ds of Oil & Gas
The 3-Ds of Oil & Gas Debt Low leverage 1.0x-1.5x Net Debt:Cash Flow Funding sources - live within cash flow Discipline Low Cost of Supply (CoS); Focus on returns not growth; Management/employee incentives Distribution Capital allocation if reinvestment RoR < Weighted Average Cost of Capital (WACC) return cash to shareholders Source: BlackRock, 2018. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 5
Where Are We In The Cycle? History doesn't always repeat itself. Sometimes it just screams, "Why don't you listen to me?" and lets fly with a big stick. - John W. Campbell, Jr.
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Demand Growth Y-o-Y, (%) Oil Consumption, barrels per person Where Are We In The Cycle Framing The Current Cycle Global Oil Demand Growth and Per Capita Consumption, 1950-2017 15% 6 10% 5 5% - 4 3 2 (5%) 1 (10%) - Y-o-Y 50s 60s 70s 80s 90s 00s 10s Consumption [rhs] Sources: BP Statistical Review of World Energy 2018, Bloomberg, EIA, IEA, UN Population Division. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 7
Year-on-Year Growth, %pa Where Are We In The Cycle Supply Global Oil Supply / Demand Growth, %pa 2 1 1 - (1) (1) (2) - 1 2 3 4 Years Demand Supply (Historical) Supply (Today) Source: BlackRock estimates over a 4 year period. There is no guarantee that any forecasts made will come to pass. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 8
Year-on-Year Growth, %pa Where Are We In The Cycle Supply Global Oil Supply / Demand Growth, %pa 2 Cycle Compression 1 1 - (1) (1) (2) - 1 2 3 4 Years Demand Supply (Historical) Supply (Today) Source: BlackRock estimates over a 4 year period. There is no guarantee that any forecasts made will come to pass. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 9
Capex, USD Billions USD per barrel* Where Are We In The Cycle Capital Discipline Upstream Capital Investment Outlook 800 120 700 600 500 400 100 80 60 300 200 100 40 20-2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E IOC E&P REF Oil Px [RHS] - Sources: Bloomberg, as of November 2018. IOC: Integrated Oil Company; E&P:= Exploration & Production; REF:= Refining & Marketing. Capital expenditure estimates from 110 publicly-listed energy companies. *Brent front-month historical and futures pricing. There is no guarantee that any forecasts made will come to pass. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 10
Global Liquids Supply / Demand, mnbpd Where Are We In The Cycle Threat Of Substitution Global Oil Consumption by End-User Investment In Future Supply Is Still Required Global Oil Demand in 2015 (95mnbpd) 120 100 5% 11% Other, 12% Cars, 20% 80 28% Trucks, 24% 60 Substantial investment still required Supply with no investment (3%pa decline) 40 Evolving Transition Faster Transition Even Faster Transition Industry Power Other Transport Source: BP Energy Outlook, 2016. For illustrative purposes only. 20 ICE Ban 1980 1990 2000 2010 2020 2030 2040 Source: BP Energy Outlook, 2018. There is no guarantee that any forecasts made will come to pass. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 11
Where Are We In The Cycle Suppliers Current Supply Chain Capacity and Utilisation 2014 Capacity 100% 75% 70% 75% 65% 50% 45% 50% 25% - Jack-up rigs FPS hull fabrication Vessels Subsea equipment Floating rigs 2018 capacity vs. 2014 2018 utilisation % Source: Wood Mackenzie, September 2018. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 12
Competitive Landscape The supply of cheap oil has plateaued - D. King, Director Smith School of Enterprise, University of Oxford (2005)
Competitive Forces Overall Competition Has Evolved But Remains High Rivalry 4 New Entrants New Entrants 2 Customers Suppliers Rivalry Customers 2 Suppliers 5 Substitution Substitution 3 <-- High Comp. Low Comp. --> Source: BlackRock, 2018. For illustrative purposes only. The numbers reflect our interpretation of the degree of competition in each category, with 1 reflecting the highest competition and 5 reflecting the lowest. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 14
Return On Capital You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time. - Abraham Lincoln
Return On Capital High Quality Inventory Low Cost of Supply (CoS) Source: ConocoPhillips corporate presentation, November 2017. Figures shown in USD. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 16
After-tax Rate of Return Return On Capital Don t Be Fooled Full Cycle And Corporate Returns 140% 120% Single-well Economics (Half-cycle) Proportional Facility Costs (Full-cycle) 100% 80% 60% 114% Project Timing / Contingency 40% 20% G&A, Interest, Business Development Corporatelevel Returns - - - - 10% Single-well Facility Capital Project Economics Corporate/Other ROACE Economics Source: Arc Resources corporate presentation, January 2017 and BlackRock estimates. There is no guarantee that any forecasts made will come to pass. G&A refers to the General & Administrative expenses of a company. For illustrative purposes only. The chart reflects returns over the full life of the project (~20 years). FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 17
Conclusion
Conclusion Debt, Discipline and Distribution Survive @ $40/bbl; Investment Framework Low CoS Thrive @ $50/bbl; Returns Inventory Don t Compromise @ $60/bbl ESG Shareholder Alignment Balance Sheet Funding Source: BlackRock, 2018. For illustrative purposes only. Figures shown in USD. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 19
Appendix
Increasing Cost of Capital Capital Allocation Principles Financial Discipline Balance Sheet Strength Stable & Meaningful Dividend Detailed Projectlevel Analysis Full-cycle Profitability Total Corporate Returns Funding Sources Cost of Capital* Cash Debt New Equity Asset Sale (PDP) Midstream JV Upstream JV ~2% ~4-8% ~8-11% ~0-10% ~12-15% ~15-20% Source: Arc Resources corporate presentation, November 2018. *BlackRock estimates of indicative cost of capital. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 21
BlackRock s Mission Statement On Sustainability BlackRock believes environmental, social and governance issues have real financial impacts over the long term. As we work to create better financial futures for clients, we strive to be a leader in the way we incorporate sustainability into our: Investment Processes Investment Stewardship Sustainable Solutions Business Operations To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution Integrating sustainability-related insights and data into BlackRock s investment processes across asset classes and investment styles Engaging companies in index and alphaseeking portfolios alike on sustainabilityrelated issues that impact long-term performance Delivering sustainable investment solutions that help empower clients to achieve their financial objectives Ensuring the long-term sustainability of our own firm in order to deliver the best outcomes for clients and shareholders to society. Larry Fink, 2018 Letter to CEOs Source: BlackRock, October 2018. For illustrative purposes only. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 22
1908 1911 1914 1917 1920 1923 1926 1929 1932 1935 1938 1941 1944 1947 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 % of US households with this technology EV % of global fleet The Pace Of Energy Transition Continues To Be Under-estimated Technology adoption curves 100 90 80 100 90 80 70 60 50 40 30 20 10 0 70 60 50 40 30 20 10 0 Electric power Fridge Colour TV Microwave Internet Smart phone OPEC forecast 2017 - RHS OPEC forecast 2018 - RHS Source: BlackRock and OPEC, October 2018. For illustrative purposes only. There is no guarantee that any forecasts made will come to pass. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 23
Risks Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. FOR PROFESSIONAL CLIENTS / QUALIFIED INVESTORS ONLY 24
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