Oil & Gas Outlook Brian M. Gibbons, Jr., CFA bgibbons@creditsights.com
Presentation Overview Oil market trends and outlook Natural gas market trends and outlook Key industry themes Credit trends and outlook 2
Global Crude Demand Outlook YoY Global Oil Demand Growth (mmbd) Top 5 Oil Consumers YoY Growth (mmbd) 3.0 2.5 2.0 1.5 1.0 2.8 0.7 1.1 0.8 1.1 1.0 0.8 0.6 0.4 US50 China Japan India Russia 0.5 0.2 0.0 (0.5) (1.0) (1.5) (0.9) 2009 2010 2011 2012 2013E 2014E 0.0 (0.2) (0.4) (0.6) 2012 2013E 2014E Source: IEA, CreditSights 3
Global Crude Supply Outlook Global Crude Supply Capacity Growth (mmbd) OPEC Spare Capacity (mmbd) 3.0 2.0 1.0 0.0 (1.0) Non-OPEC Growth (ex-biofuels) OPEC Crude Capacity Growth Total 6 5 4 3 2 1 (2.0) 2010 2011 2012 2013E 2014E - 8/03 8/05 8/07 8/09 8/11 8/13 Source: IEA, CreditSights 4
Crude and Products Forward Days Demand Cover U.S. Demand Cover European Demand Cover 65 75 60 55 50 2013 5-yr Avg 2012 70 65 2013 2012 5-yr Avg 45 40 Shaded area is 5-yr range J F M A M J J A S O N D 60 55 Shaded area is 5-yr range J F M A M J J A S O N D Source: EIA, CreditSights 5
Crude Price Trends and Outlook ($/bbl) 52-Week Price Trends 12-Month Futures Curves $140 $130 $120 $110 $100 $90 WTI Brent LLS $115 $110 $105 $100 $80 $70 $60 10/10 4/11 10/11 4/12 10/12 4/13 10/13 $95 $90 WTI Brent N D J F M A M J J A S O Source: Bloomberg, CreditSights 6
Refining Margins Reliant on Crude Discounts, Export Strength Crude Price Discounts to Brent ($/bbl) U.S. Composite Refining Margins ($/bbl) $10 $5 $0 ($5) ($10) ($15) ($20) LLS May Mars ANS $25 $20 $15 $10 Annual Change 2011: +45% 2012: +36% 2013E: -15% 2014E: 0% $7.64 $7.42 $11.42 $15.06 $13.48 $13.48 ($25) ($30) Sep- 10 Mar- 11 WTI Sep- 11 Mar- 12 Sep- 12 Mar- 13 Sep- 13 $5 $0 2009 2010 2011 2012 2013E 2014E Source: Bloomberg, CreditSights 7
Natural Gas Storage and Production Trends Natural Gas Storage (bcf) Natural Gas Production vs. Rig Count 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 Shaded area is 5-yr range 2012 5-Yr Avg 2013 J F M A M J J A S O N D Rig Count 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 70.0 65.0 60.0 55.0 50.0 45.0 7/03 7/05 7/07 7/09 7/11 7/13 Production Source: EIA, Bloomberg, CreditSights 8
Gas Price Competitiveness, Potential LNG Exports Gas Competitive vs. Coal and Oil ($/mmbtu) Potential Gulf Coast and East Coast LNG Exports $25 $20 $15 $10 $5 Nat Gas App. Coal WTI $0 10/10 4/11 10/11 4/12 10/12 4/13 10/13 Location Freeport Lake Charles Sabine Pass Cove Point Capacity 1.8 Bcf/d 2.0 Bcf/d 2.2 Bcf/d 1.0 Bcf/d Source: Bloomberg, EIA, CreditSights 9
Natural Gas Production and Demand Outlook Dry Gas Production (bcf/d) Demand by Sector (bcf/d) 68 66 65.7 66.4 66.8 70 60 Residential Industrial Commercial Electric Power 64 62.7 50 62 40 60 58 58.4 30 20 56 10 54 2010 2011 2012 2013E 2014E 0 2010 2011 2012 2013E 2014E Source: EIA, CreditSights 10
Natural Gas Futures Prices 12-Month Futures Curve Annual Strip Prices $4.10 $3.90 $3.70 $4.50 $4.25 $4.00 $3.75 $3.81 $4.00 $4.14 $4.23 $4.34 $3.50 $3.50 $3.30 N D J F M A M J J A S O $3.25 2013 2014 2015 2016 2017 Source: Bloomberg, CreditSights. Note: 2013 strip price is October December. 11
Key Industry Themes Activist risk remains elevated > Share price underperformance > Discounted valuations > Room for leverage Returns-focused capital spending > Oil play returns dominate the IRR matrix > Efficiency gains - Pad drilling, horizontal drilling, hydraulic fracturing > Cost controls - Reining in oilfield services and drilling costs, G&A expenses Infrastructure developments across the commodity complex > Pipes, rails, and processing plants 12
Existing and Potential Targets for Activists Apache Corp (APA; A3/A-) Devon Energy (DVN; Baa1/BBB+) Hess (HES; Baa2/BBB) Murphy Oil (MUR; Baa3/BBB) Occidental Petroleum (OXY; A1/A) Chesapeake Energy (CHK; Ba3/BB-) Forest Oil (FST; B3/B-) Newfield Exploration (NFX; Ba1/BBB-) Quicksilver Resources (KWK; Caa2/CCC) Transocean (RIG; Baa3/BBB-) 13
Natural Gas: Returns Drive Strategic Direction Dry Gas Liquids-Rich Gas Crude Play Returns Play Returns Play Returns Marcellus 20% Fayetteville 10% Haynesville 10% Woodford 20% Pinedale 20% Cleveland / Tonkawa 40% Miss. Lime 45% Granite Wash 40% Eagle Ford 45% Marcellus Wet / Utica 20% Eagle Ford 45% Permian 45% Bakken 55% Niobrara 45% Utica 45% Source: Bentek, CreditSights estimates ($3.25/mcf, $80/bbl, NGLs at 30% of crude price) 14
Domestic Crude Production and Takeaway Capacity Light Tight Oil Production Planned Pipeline Projects 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Monterey Barnett Niobrara Eagle Ford Other Tight Oil Williston Basin Capacity Crude Oil Pipeline Project Region kbd Start-up West TX Gulf Expansion Permian-GC 110 1Q13 Permian Express 1 Permian-GC 90 1Q13 Longhorn Reversal 1 Permian-GC 135 1Q13 Longhorn Reversal 2 Permian-GC 90 3Q13 BridgeTex Permian-GC 278 2Q14 Permian Express 2 Permian-GC 200 2Q14 Permian-GC, total 903 Seaway Reversal Cushing-GC 150 2Q12 Seaway Expansion Cushing-GC 250 1Q13 Keystone XL Cushing-GC 700 3Q13 Seaway Twin Cushing-GC 450 3Q14 Cushing-GC, total 1,550 0.0 2010 2011 2012 2013E 2014E 2015E 2016E 2017E Rail expansions Bakken-All 400 2012 Plains Bakken North Bakken-Cushing 50 4Q12 Butte Loop Bakken-Eastern Mkts 150 4Q12 Enbridge BEP 2 Bakken-Eastern Mkts 145 1Q13 Rail expansions Bakken-All 75 2013 Keystone XL Bakken-Cushing 100 2Q15 Bakken, total 920 Source: IEA, CreditSights Koch Pipeline Eagle Ford-GC 250 4Q12 Enterprise Eagle Ford-GC 350 2Q13 Eagle Ford, total 600 15
Credit Market Trends: Oil & Gas Issuance ($ bn) Investment Grade Issuance High Yield Issuance $70 $60 $50 $40 $30 $20 $10 $31.2 $62.4 $64.6 $50 $40 $30 $20 $10 $28.5 $43.1 $39.1 $0 YTD '11 YTD '12 YTD '13 $0 YTD '11 YTD '12 YTD '13 Source: Bloomberg, CreditSights. 16
Leverage Comparisons 45% 30% Investment Grade E&Ps: Debt/Total Capital Average 27% 28% 30% 31% 31% 34% 25% 25% 36% 15% 15% 19% 0% 12.0 10.0 OXY HES MUR MRO PXD APA NBL EOG COP DVN APC High Yield E&Ps: 2013E Debt/Ebitda(x) 9.8 8.0 6.0 4.0 2.0 Average ex-kwk 1.6 1.7 2.0 2.4 2.5 2.6 3.1 4.0 0.0 WLL CLR CXO DNR CHK NFX FST LINE KWK Source: Company filings, Bloomberg, CreditSights. 17
Leverage Comparisons 50% 40% Oilfield Services & Drillers: Debt/Total Capital Average 39% 41% 30% 20% 22% 24% 28% 10% 0% 50% 40% BHI SLB ESV HAL RIG Refiners: Debt/Total Capital 39% Average 30% 22% 23% 27% 20% 10% 0% Source: Company filings, Bloomberg, CreditSights. MPC PSX VLO TSO (High Yield) 18
Enterprise Valuation Comparisons: EV/2014E Ebitda(x) 12.0 10.0 10.1 Investment Grade E&Ps Average 8.0 6.0 6.8 6.3 6.0 5.5 5.2 4.8 4.7 4.7 4.0 3.2 3.0 2.0 0.0 PXD HES NBL EOG APC OXY DVN COP APA MRO MUR 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 High Yield E&Ps 11.8 Average ex-kwk 7.6 7.0 6.8 6.6 6.1 5.3 4.9 4.5 KWK CXO LINE CLR DNR CHK NFX FST WLL Source: Bloomberg, CreditSights. 19
Enterprise Valuation Comparisons: EV/2014E Ebitda 10.0 8.8 Oilfield Services & Drillers Average 8.0 6.0 6.6 5.9 5.5 5.3 4.0 2.0 0.0 SLB HAL ESV BHI RIG 6.0 5.5 5.0 4.0 Refiners 5.2 4.7 Average 3.9 3.0 2.0 1.0 0.0 PSX TSO (High Yield) VLO MPC Source: Bloomberg, CreditSights. 20
Equity Performance 2013 YTD Investment Grade E&Ps High Yield E&Ps Source: Bloomberg, CreditSights. 21
Equity Performance 2013 YTD 50% 40% 30% 20% 10% 0% -10% 16% 12% 8% 4% 0% -4% Oilfield Services & Drillers 44% 29% 22% 0% -7% HAL SLB BHI RIG ESV 14% Refiners 10% 4% -1% VLO PSX MPC TSO (High Yield) Source: Bloomberg, CreditSights. 22
Bond Comparisons 6.0% Investment Grade E&Ps: YTM (sorted by maturity) 4.0% 3.2% 2.9% 3.5% 3.4% 3.6% 3.7% 4.3% 3.9% 3.7% 3.3% 3.6% 2.0% 0.0% 12.0% HES 8.1% 2019 APC 8.7% 2019 High Yield E&Ps: YTW (sorted by workout date) 10.6% NBL 4.2% 2021 OXY 3.1% 2022 APA 3.3% 2022 DVN 3.3% 2022 MUR 4% 2022 PXD 4% 2022 MRO 2.8% 2022 COP 2.4% 2022 EOG 2.6% 2023 9.0% 6.0% 7.3% 7.7% 5.3% 4.9% 6.0% 5.5% 4.5% 5.7% 5.8% 3.0% 0.0% LINE 7.8% 2021 Source: Bloomberg, CreditSights. KWK 9.1% 2019 FST 7.5% 2020 CXO 5.5% 2023 WLL 5.8% 2021 TSO (Refiner) 5.4% 2022 CHK 5.8% 2023 CLR 4.5% 2023 DNR 4.6% 2023 NFX 5.6% 2024 23
Bond Comparisons 5.0% 4.0% 3.0% Oilfield Services & Drillers: YTM (sorted by maturity) 4.7% 3.7% 3.1% 3.1% 3.3% 2.0% 1.0% 0.0% 5.0% 4.0% ESV 4.7% 2021 3.4% BHI 3.2% 2021 SLB 3.3% 2021 HAL 3.3% 2021 Refiners: YTM (sorted by maturity) 4.2% RIG 6.4% 2021 3.6% 3.0% 2.0% 1.0% 0.0% VLO 6.1% 2020 MPC 5.1% 2021 PSX 4.3% 2022 Source: Bloomberg, CreditSights. 24
Cash Bond Total Returns 2013 YTD 2.5% 2.0% 1.5% Investment Grade: Top 10 Total Return YTD 2.0% 1.9% 1.6% 1.5% 1.3% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0% 0.5% 0.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% PXD 5.9% 2016 25.9% KWK 7.1% 2016 RIG 5.1% 2016 APC 5% 2016 RIG 6% 2015 APC 6.4% 2017 PXD 7.5% 2020 DVN 2.4% 2016 RIG 2.5% 2017 High Yield: Top 10 Total Return YTD 12.1% 9.6% 6.7% 6.7% 6.5% 6.3% 5.7% KWK 9.1% 2019 CHK 7.3% 2018 CHK 6.5% 2017 FST 7.3% 2019 CHK 6.6% 2020 CHK 6.1% 2021 CHK 6.9% 2020 MPC 3.5% 2016 VLO 4.5% 2015 4.0% 4.0% CLR 7.1% 2021 CLR 8.3% 2019 Source: Bloomberg, CreditSights. 25
Conclusion + Ongoing oil and natural gas price strength + Favorable production growth and unit cost control outlook + Improving free cash flow outlook = Robust equity and credit performance potential 26
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