Emerging Trends in the Energy Industry. Paul Horak Partner, Audit and Enterprise Risk Services Deloitte & Touche LLP

Emerging Trends in the Energy Industry Paul Horak Partner, Audit and Enterprise Risk Services Deloitte & Touche LLP August 2016

Agenda Introduction Drilling and Production Trends Crude Oil and Refined Products Stock Levels Oil and Gas Price Spreads Mergers and Acquisitions The Oil Price Cycle and Its Impact on the Industry The Outlook for Recovery Question and answer Copyright 2016 Deloitte Development LLC. All rights reserved. 2

Drilling and Production Trends

Drilling activity trending upwards in North America, with declines in major global producers including Russia, China and Brazil Rotary rig count (June 2016, absolute and trend) Canadian rig count grew 54% month-on-month as drilling resumes with the Alberta wildfires under control * US added 10 rigs this month with the largest increases in the Barnett and Eagle Ford Decrease d No Change Increased *The number only represents the rig count of Russian basins as reported by Baker Hughes, not the complete Russian rig count Sources: Baker Hughes, Rig Count data as of July 18, 2016; U.S. DOE/EIA Copyright 2016 Deloitte Development LLC. All rights reserved. 4

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Boed Count New-well productivity per rig continues to rise in major shale plays, blunting the impact of lower drilling activity on US production US rig count and average new-well productivity per rig 2,000 US rig count (left-axis) 1925 496 500.0 1,700 400.0 1,400 1,100 292 Oil downturn 300.0 800 500 US average shale well productivity per rig (right-axis) 200.0 449 200 100.0 Sources: EIA, Baker Hughes Copyright 2016 Deloitte Development LLC. All rights reserved. 5

US tight oil production continued to fall in July, with tight gas declining 5% from all-time highs US tight oil production by major shale plays (MMbbl/d) US tight gas production by major shale plays (Bcf/d) US tight oil production stands at 4.65 MMbbl/d, 15% below its peak and 2% below last month. Bakken and Eagle Ford saw the greatest declines at 3% and 5% MoM respectively. Eagle Ford accounted for the majority of the decline in absolute terms. Source: EIA, Drilling Productivity Report, July, 2016 Current US shale gas production remains resilient, roughly 5% below its peak. Marcellus and Permian fell marginally, 0.1 percent and 0.8 percent. Eagle Ford declined more substantially at 4%. Copyright 2016 Deloitte Development LLC. All rights reserved. 6

Despite recent oil draw downs, US oil stocks remain high across the value chain Declining production and sustained high refinery utilization led to a marginal decrease in crude stocks Weekly distillate and gasoline stocks are elevated due to low crude prices and high refinery utilization. Gasoline stocks are high across PADD Districts except the West Coast. Distillate stock build is driven mostly by the Gulf Coast. Propane stock continues to increase due to seasonal fluctuations and remains above historical trend. Sources: EIA, Short Term Energy Outlook, July 12, 2016 Copyright 2016 Deloitte Development LLC. All rights reserved. 8

Price spreads have narrowed due to supply disruptions in oil and new pricing structures in natural gas Tight oil boom widened Brent- WTI spread Supply disruptions in Canada and reduction in US supply have narrowed the spread Brexit had more impact on Brent; keeping it close to WTI Both US and global oil inventory builds will limit upward pressure on oil price EIA expects oil prices to average $44/bbl in 2016 and $52/bbl in 2017. Brent is expected to trade at parity to WTI. High oil prices and shale gas boom explain the spread Price spreads have narrowed due to fall in oil prices and new pricing structures Price spreads between major trading hubs reflect liquefaction, shipping, and regasification costs. EIA expects Henry Hub prices to remain under pressure in 2016, nearing $2.36/MMBtu with prices rising 25% in 2017. Sources: EIA, Short Term Energy Outlook, July 12, 2016; Bloomberg. Copyright 2016 Deloitte Development LLC. All rights reserved. 10

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 (count) Uncertainty and a wide bid-ask spread keep M&A deal counts low in 2016 Deal Count by O&G subsectors 300 250 12 19 200 150 100 50 9 12 10 29 18 25 10 12 22 149 133 106 36 194 0 16 32 93 11 15 32 116 8 12 12 22 14 34 35 12 14 8 35 31 157 142 133 116 14 14 31 132 14 21 29 106 8 13 7 49 16 10 16 13 17 11 73 76 11 17 7 88 9 11 12 59 10 11 9 77 0 E&P OFS Midstream R&M Source: PLS Inc. and Derrickk Petroleum Services Global Mergers & Acquisition Database as of 5 July 2016 Copyright 2016 Deloitte Development LLC. All rights reserved. 12

A look at the 1H the year M&A data for the past 9 years shows upstream unconventional plays now make up half of the deals in 2016 M&A deals last nine years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Unconventional plays 0% 1H 2008 1H2009 1H 2010 1H 2011 1H 2012 1H 2013 1H 2014 1H 2015 1H 2016 Source: PLS Inc. and Derrickk Petroleum Services Global Mergers & Acquisition Database as of 5 July 2016 Copyright 2016 Deloitte Development LLC. All rights reserved. 13

Privately held E&P's dominated in M&A deals, followed by mid-caps and small caps for 2016 M&A deals by company size Private E&P Mid Cap E&P Small Cap E&P NOC Micro Cap PE/Fianceriers Others Large Cap Private Downstream Major Small Cap OFS Mid Cap Downstream 0 5 10 15 20 25 30 35 40 Source: PLS Inc. and Derrickk Petroleum Services Global Mergers & Acquisition Database as of 5 July 2016 Copyright 2016 Deloitte Development LLC. All rights reserved. 14

Oil price decline impacts Industry lost 1.5T or 40% of its market value since June-2014 Market value 90 North American E&P s filed for bankruptcy since 2015 with over 50% of them being filed in 2016 Bankruptcies Oil price impact Impairments Companies reported impairments of over $150B since June-2014 Global upstream capital spending fell by over 25% in 2015 with further double digit decline expected in next 2 years Capex cuts Rig count fall Global rig count down by over 50% since oil price started declining after June 2014 Source: EIA; S&P Cap IQ, Haynes & Boone, Oil Bankruptcy Monitor, Jul 2016 release; Baker Hughes- Rig Count Data, Jul 2016 Release Copyright 2016 Deloitte Development LLC. All rights reserved. 17

Dramatic decline in upstream capex raises concerns about future reserves Capital spending (previous vs. expected) 23% 23% 10% Source: Barclays and JP Morgan, E&P Spending Outlook, 2016 Release Copyright 2016 Deloitte Development LLC. All rights reserved. 18

IEA expects global oil market to move close to balance by late 2016 Oil demand supply balance (MMbbl/d) IEA expects a demand growth of 1.2% annually through the forecast period. IEA expects that the supply correction would mostly come from non-opec countries with no major capacity additions in Iran and Iraq. Source: IEA, Medium Term Oil Market Report 2016 Release Copyright 2016 Deloitte Development LLC. All rights reserved. 20

Although oil prices have recovered to $45/bbl, the industry and analysts remain cautious After reaching record lows of $26/bbl in 2016, oil (WTI) prices have recovered to $45/bbl due to production declines and unplanned supply disruptions Optimism Low gasoline price has increased fuel savings and contributed to record auto sales growth in US (5.7% YoY growth in 2015), boosting overall petroleum demand Cost deflation has enabled companies to invest in key projects despite cutting down capex, the upstream capital cost index was down by over 25% in 1Q16 Economic outlook for developing countries like Russia, Brazil, China and others continue to be weak OPEC s decision to continue production at record high levels may keep the oil market oversupplied Iran s role in OPEC remains uncertain as it declined to co-operate on production freeze and is already exporting oil at discounted price to regain market share Caution Higher investments in renewables and climate concerns may keep demand under check Copyright 2016 Deloitte Development LLC. All rights reserved. 21

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