75004809 Global 2012 E P Spending Outlook BarCap 12052011

EQUITY RESEARCH 5 December 2011

GLOBAL 2012 E&P SPENDING OUTLOOK Spending to Reach Record Levels

Worldwide Capital Budgets Approaching $600bn: Global E&P spending in 2012 will approach $600bn and is expected to increase 10% to $598bn, versus $544bn in 2011. The acceleration in worldwide spending is expected to be led by increased expenditures internationally (up 11%), in addition to solid growth in North America (up 8% y/y). This compares to international spending growth of 20% in 2011, and spending increases in North America of 31%. We believe the majority of companies have taken a conservative approach in setting their initial 2012 budgets, and current oil prices levels (if sustained) would suggest that there is considerable upside to our current forecasts as we move throughout the year. By region, exploration and production spending is expected to rise most meaningfully in Latin America, Africa, Europe, the Middle East and Russia.

Higher Oil Prices Driving the Spending Increase: In aggregate, oil and gas companies are basing 2012 capital spending budgets on an average oil price of $87 WTI and $98 Brent. This compares to current WTI and Brent prices of $101 and $110, indicating that oil and gas companies are likely taking a conservative view on oil prices, given the uncertain economic environment.

Exploration Activity Heating Up: Recent exploration success in various regions of the world confirm our view that exploration is likely to be at the forefront of spending growth in 2012. In 2010, 32% of respondents planned on increasing the percentage of the budget dedicated to exploration. This percentage grew to 38% in 2011 and 42% in 2012.

Remain Bullish on the Group: We remain bullish on the oil service, equipment and drilling companies and believe the group will significantly outperform the broader equity market over the next several years. The results of our capital budget survey support this view. Our favorite stocks at current levels are the large-cap diversified companies. We are recommending all of the "big four" – Schlumberger, Baker Hughes, Halliburton and Weatherford. In addition, we find two of the capital equipment companies – Cameron and National Oilwell Varco – particularly attractive. For the offshore drillers, we are recommending many of the higher-spec asset companies, including ENSCO plc, Seadrill and Rowan Companies. We also think Noble presents good value and Transocean is, in our minds, an exceptional value at current levels and a stock with solid catalysts as liquidity and execution improve. Our European colleagues are positive on the seismic stocks and their favorite is Petroleum GeoServices. They are also positive on offshore construction and prefer Saipem.

Barclays Capital does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report.

Investors should consider this report as only a single factor in making their investment decision.

This research report has been prepared in whole or in part by research analysts based outside the USwho are not registered/qualified as research analysts with FINRA.

PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 33.

INDUSTRY UPDATE U.S. Oil Services & Drilling 1-POSITIVE Unchanged

U.S. Oil Services & Drilling James C. West 1.212.526.8796 [email protected] BCI, New York Anthony Walker 1.312.609.8183 [email protected] BCI, New York Zachary Sadow 1.212.526.7930 [email protected] BCI, New York Rachel Nabatian 1.212.526.8284 [email protected] BCI, New York Sean Meakim, CFA 1.212.526.4420 [email protected] BCI, New York European Oil Services & Drilling Mick Pickup +44 (0)20 3134 6695 [email protected] Barclays Capital, London Tom Ackermans +44 (0)20 7773 4457 [email protected] Barclays Capital, London

Barclays Capital | Global 2012 E&P Spending Outlook

5 December 2011 2

CONTENTS

The 2012 Global Exploration and Production Spending Update..................................................... 4 We Remain Bullish on the Group............................................................................................................ 4 Growth in Global E&P Spending Continues.......................................................................................... 6

Higher Oil Prices Likely to Drive Spending Increase Higher ....................................................... 8 2012 Oil Price Forecasts Likely to Prove Conservative ................................................................ 9

In the Early Stages of a Multi-Year International Upcycle; Swings in North America Becoming Less Volatile ...........................................................................................................................11

Oil Prices Increasingly Driving Budget Decisions in North America.......................................11 Movement in Oil Prices Supports View of Long-Term Trend in Spending...........................12

North America Resilient; International Spending to Lead the Way...............................................13 Spending Increases Broad-Based Across Regions and Company Types ..............................14 Actual Spending Likely to Exceed Current Expectations...........................................................15 Exploration Activity Heating Up......................................................................................................15 Pricing Moving Up, But So Are Costs.............................................................................................16

2011 Results Well Above Initial Expectations ....................................................................................17 Company Type and Regional Breakout...............................................................................................18

Supermajors: Second Consecutive Year of Double Digit Spending Increase .......................18 North America: Oil Renaissance Increasing Predictability of Cycles ......................................18 Strength in Oil to Mostly Offset Weakness in Gas Markets......................................................20 Stimulation Market Remains Undersupplied in Most Regions ................................................22 Gas Price Forecasts Continue to March Lower ...........................................................................22 The Gulf of Mexico Recovery Adds Further Upside to Our Estimates ...................................24 GOM Permitting Picture Normalizing ............................................................................................25 GOM Lease Sale Announced...........................................................................................................25 North American Independents Reallocating Int’l Spend to Domestic Mkts .........................26 Latin America: Out in Front of the Pack........................................................................................27 Africa: Emerging Markets Driving Investment Higher...............................................................28 Europe: Norway Driving Activity Increase ....................................................................................29 Middle East: Iraq, Saudi and Kuwait to Lead the Way................................................................30 Russia: Aggressive Campaign Announced by Lukoil .................................................................31 India, Asia and Australia ...................................................................................................................32

FIGURES

Figure 1: 1-Overweight Stocks................................................................................................................ 5 Figure 2: Worldwide E&P Capital Spending By Company Type/Region, 2011-2012 ................. 6 Figure 3: Worldwide E&P Capital Spending By Company Type/Region, 2011-2012 ($ in millions)........................................................................................................................................................ 7 Figure 4: Worldwide E&P Capital Spending By Company Type/Region - 2012........................... 7 Figure 5: WTI Price Thresholds to Increase 2012 Spending............................................................ 8 Figure 6: WTI Price Thresholds to Decrease 2012 Spending ........................................................... 8 Figure 7: Sensitivity to $80/bbl Oil in 2012.......................................................................................... 8 Figure 8: Oil Price Budget Assumptions versus Actual Prices, 2000-12 ($/barrel) .................... 9 Figure 9: Barclays Capital Oil Forecasts ($/barrel) ............................................................................. 9 Figure 10: Barclays Capital WTI Historical Price Forecasts vs Actuals ($/barrel)......................10 Figure 11: Barclays Capital Brent Historical Price Forecasts vs Actuals ($/barrel) ...................10 Figure 12: Barclays Capital Multi-Year E&P Spending Forecast.....................................................11 Figure 13: Key Determinants of E&P Spending in 2000-2012E (percentage of responses) ...11


5 December 2011 3

Figure 14: E&P Spending vs Cash Flow in 2011 ................................................................................12 Figure 15: E&P Spending vs Cash Flow in 2012 ................................................................................12 Figure 16: Historical Worldwide E&P Spending vs Inflation Adjusted Oil Prices........................12 Figure 17: Historical Worldwide E&P Spending vs Inflation Adjusted Oil Prices (Indexed).....12 Figure 18: Summary of Oil and Gas Exploration and Production Expenditures ........................13 ($ in millions) ............................................................................................................................................13 Figure 19: North American and Non-North American E&P Spending, 2001 to 2012 ($ in millions)......................................................................................................................................................13 Figure 20: Top 20 Global E&P Spenders ($s inbns)..........................................................................14 Figure 21: Analysis of Historical Report Accuracy............................................................................15 Figure 22: Expected Increase/Decrease in 2011 Exploration and Production Expenditures (2011E vs 2010A).....................................................................................................................................15 Figure 23: 2011 Exploration Budget versus Total E&P Capital Expenditures .............................16 Figure 24: 2012 Exploration Budget versus Total E&P Capital Expenditures .............................16 Figure 25: Economics of Exploration in the U.S., Canada, and Outside North America...........16 Figure 26: Product Areas Expected to Have Decreased Costs in 2012........................................17 Figure 27: Product Areas Expected to Have Increased Costs in 2012 .........................................17 Figure 28: Comparison of Estimated E&P Spending vs Mid-Year Update Expectations ..........17 Figure 29: Aggregate Supermajor E&P Spending, 2006 to 2012E ($s inbns) ............................18 Figure 30: U.S. Spending Breakout by Company Budget Size ($ in millions)..............................18 Figure 31: Canadian Spending Breakout by Company Budget Size ($ in millions) ...................19 Figure 32: Historical and Forecast North American Spending, 2006 to 2012E ($ in millions)19 Figure 33: Gas Share in the U.S. by Region.........................................................................................20 Figure 34: U.S. Oil & Natural Gas Rig Count (2004-2011) ..............................................................21 Figure 35: U.S. Regions with the Greatest Increase in Spending in 2012....................................21 Figure 36: Most Important Technologies (ranked by percentage of responses) ......................22 Figure 37: Barclays Capital Natural Gas Historical Price Forecasts vs Actuals ...........................23 Figure 38: Barclays Capital Natural Gas Forecasts ($/mmbu).......................................................23 Figure 39: Spending Sensitivity to $4/mmbtu of Gas......................................................................23 Figure 40: Gas Price Thresholds to Increase 2012 Spending........................................................24 Figure 41: Gas Price Thresholds to Decrease 2012 Spending .......................................................24 Figure 42: Floaters in the Gulf of Mexico ............................................................................................24 Figure 43: Deepwater Permits Issued in the U.S. Gulf of Mexico ..................................................25 Figure 44: Active Locations in the Gulf of Mexico ............................................................................26 Figure 45: E&P Spending by Select North American-Based E&P Companies Outside of North America, 2006-2012E ($ in millions)...................................................................................................26 Figure 46: E&P Spending by Select Latin American Companies, 2006-2012 ($ in millions) ..27 Figure 47: E&P Spending by Select African Companies ($ in millions)........................................28 Figure 48: E&P Spending by Select European Companies, 2006-2012 ($ in millions).............29 Figure 49: E&P Spending by Select Middle East Companies ($ in millions)................................30 Figure 50: E&P Spending by Select Russian Companies, 2006-2012 ($ in millions) ................31 Figure 51: E&P Spending by Select Indian, Asian & Australian Companies, 2006-2012 ($ in millions)......................................................................................................................................................32


5 December 2011 4

The 2012 Global Exploration and Production Spending Update

Similar to prior years, we surveyed roughly 350 oil and gas companies worldwide about their spending intentions for the following year. We began this process in early November and concluded the data gathering last Friday, December 2nd. We attempt to include in our report all meaningful spenders on exploration and production on a worldwide basis and, where necessary, rely on estimates from our global equity research teams. Although directionally our survey of oil and gas company CAPEX programs tends to be accurate, the budgeting process for many companies is still under way and in many cases our June CAPEX update indicates higher spending than originally forecast in the December reports. We expect this trend to occur again this year, especially as many budgets were formulated in a modestly lower-than-current oil price environment and against an uncertain macro economic environment. In addition to securing capital budget data we also ask companies detailed questions about the assumptions for their budgets and composition of the budgets themselves. All capital budgets in this report and the supplemental spreadsheet are Barclays Capital estimates and are derived from a variety of sources. We intend to update this report once again in June.

Please reach out to us directly for a detailed excel spreadsheet with 2011 and 2012 capital budgets for every company in the survey.

We Remain Bullish on the Group We remain bullish on the oil service, equipment and drilling companies and believe the group will significantly outperform the broader equity market over the next several years. The results of our capital budget survey support this view. We think the industry is on the cusp of a major upcycle – one which is very much under way in North America and one which is gaining momentum abroad. For the oil service group, we think the outlook is clear – higher oil prices – driven by tight physical markets and spare capacity, and added geopolitical risk premiums will drive up oil company spending, and this rise will be a net positive for the oil service group which serves as the bottleneck for the industry. Within the broader energy complex we view oil service, equipment and drilling equities as the most attractive subsector and believe there is considerable upside in the group at these levels.

Our favorite stocks at current levels are the large-cap diversified companies which benefit from the resilient North American market and also have substantial leverage to the unfolding international upturn. We are recommending all of the "big four" – Schlumberger, Baker Hughes, Halliburton and Weatherford. In addition, we find two of the capital equipment companies – Cameron and National Oilwell Varco – particularly attractive investments. The oilfield equipment revolution is under way and is driving orders and backlog for those companies higher as the industry seeks to re-tool and expand in anticipation of the upcycle which is now under way. For the offshore drillers, we are recommending many of the higher-spec asset companies including ENSCO plc, Seadrill and Rowan Companies. We also think Noble presents a good value and Transocean is, in our minds, an exceptional value at current levels and a stock with solid catalysts as liquidity and execution improve.

Within the small- and mid-cap area, the supply vessel companies are our favorite way to invest in the expansion offshore and our preferred stock is Hornbeck. We also like two of the seismic companies – ION Geophysical and Global Geophysical – and the emerging small cap that will be the next go-to mid cap is Superior Energy Services. A final theme we are


5 December 2011 5

encouraged by is the growth in energy infrastructure and we are recommending both Chart Industries and Dresser-Rand.

Our European colleagues are positive on the seismic stocks and their favorite is Petroleum GeoServices. They are also positive on offshore construction and prefer Saipem.

We are also recommending several other stocks and a detailed list of our 1-Overweight recommendations and current price targets are listed below.

Figure 1: 1-Overweight Stocks

Ticker Price (12/02/11) Price TargetPotential Upside To

Price TargetU.S. Large Cap Oil Service & EquipmentBaker Hughes BHI $53.62 $83 55%Cameron International CAM 52.87 69 31%Halliburton HAL 36.58 60 64%National Oilwell Varco NOV 71.05 105 48%Schlumberger SLB 75.01 98 31%Tenaris TS 37.43 52 39%Weatherford International WFT 15.08 24 59%

U.S. Mid & Small Cap Oil Service & EquipmentChart Industries GTLS $60.31 $66 9%Core Laboratories CLB 117.10 109 -7%Dresser-Rand Group DRC 53.95 68 26%Dril-Quip DRQ 71.06 68 -4%Global Geophysical GGS 7.42 17 129%ION Geophysical Corporation IO 5.82 11 89%Oceaneering International OII 47.72 50 5%Superior Energy Services SPN 30.46 42 38%Thermon Group THR 15.78 17 8%

U.S. Offshore Contract Drilling & Supply VesselsEnsco ESV $51.20 $61 19%GulfMark Offshore GLF 44.65 54 21%Hornbeck Offshore HOS 33.41 41 23%Noble Corporation NE 34.65 48 39%Rowan Companies RDC 33.25 49 47%Seadrill SDRL 34.83 43 23%Tidewater TDW 49.40 54 9%Transocean Inc. RIG 42.76 64 50%

European & Russian Oil Services & DrillingEurasia Drilling Co. EDCL.L $28.30 $42.00 48%CGGVeritas GEPH.PA EUR17.49 EUR30.5 74%Hunting HTG.L GBp 698 GBp 1030 48%Integra Group INTEq.L $2.10 $4.50 114%Petroleum Geo-Services PGS.OL NOK 61 NOK 120 97%Saipem SPMI.MI EUR 33.04 EUR 48 45%Subsea 7 SA SUBC.OL NOK 112.40 NOK 185 65%Wood Group WG.L GBP 6.63 GBP 9.20 39%

Source: Company data and Barclays Capital estimates


5 December 2011 6

Growth in Global E&P Spending Continues

For the second consecutive year, global exploration and production expenditures are expected to rise by double digits. Over the past six weeks we have had discussions with close to 350 oil and gas companies to assess the health of the industry and the outlook for future growth. The total budgets and regional breakout in this report are Barclays Capital Research estimates.

Global E&P spending in 2012 will approach $600bn and is expected to increase 10% to $598bn, versus $544bn in 2011. The acceleration in worldwide spending is expected to be led by increased expenditures internationally (up 11%), in addition to solid growth in North America (up 8% y/y). This compares to international spending growth of 20% in 2011, and spending increases in North America of 31%. We believe the majority of companies have taken a conservative approach in setting their initial 2012 budgets and current oil prices levels (if sustained) would suggest that there is considerable upside to our current forecasts as we move throughout the year. By region, exploration and production spending is expected to rise most meaningfully in Latin America, Africa, Europe, the Middle East and Russia.

Figure 2: Worldwide E&P Capital Spending By Company Type/Region, 2011-12

($ in Millions) 2011E 2012E % Change

North America US Spending 111,735 122,444 10% Canada Spending 36,076 37,260 3%Total North America: $147,811 $159,704 8%

International

Supermajors (Int'l Spending) 88,750 97,500 10% Latam 63,261 76,453 21% Africa 26,338 29,941 14% Europe 36,187 40,976 13% Middle East 21,548 24,220 12% Russia 38,675 43,374 12% India, Asia & Australia 90,565 97,243 7% North American Independents (Int'l Spending) 20,402 20,971 3% FSU/CIS 1,288 1,835 42% Other 9,694 6,307 -35%Total International: $396,707 $438,819 11%

Worldwide E&P Spending $544,518 $598,523 9.9%

*We use companies that spend primarily in their home regions as a proxy for the regional forecasts detailed in the previous charts. Source: Barclays Capita

Latin American companies are expected to lead the way again in 2012 and we forecast capital spending in the region will increase by 21% (compared to growth of 26% in 2011), driven by a significant step up in activity by PEMEX in Mexico, an aggressive capital program for Ecopetrol in Colombia, Petrobras’ continued deployment capital in support of its multi-year pre-salt development plan. Spending in Africa is also projected to rise meaningfully in 2012 (up 14% vs 2011) as civil unrest and political disruptions in North Africa and other areas abate and the Supermajors begin work on large projects and new discoveries in emerging basins in East and West Africa. In Europe, we expect higher expenditures to be led by record spending in Norway following several recent major


5 December 2011 7

discoveries that have resulted in an increased appetite for exploratory work. Higher activity in the Middle East will include the continued ramp up in Iraq and Saudi Arabia’s push to reach its targeted rig count of 118 rigs in 2012, versus 104 currently. Kuwait is also expected to move forward with plans to significantly increase the countries output with targeted production of 4mn barrels per day by 2020, up from just north of 3mn barrels currently. In Russia, Lukoil is expected to be particularly aggressive over the next several years and the company recently announced plans to invest $48bn through 2014 to increase production (including $14bn to be spent in 2012).

Figure 3: Worldwide E&P Capital Spending By Company Type/Region, 2011-12 ($ in millions)

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Figure 4: Worldwide E&P Capital Spending By Company Type/Region – 2012

US Spending21%

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6%

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16%

NAM Independents

(Int'l Spending)4%

Latam13%

Africa5%

Europe7%

Middle East4%

Other1%

FSU/CIS0% India, Asia

& Australia16%

Russia7%

Source: Barclays Capital


5 December 2011 8

Higher Oil Prices Likely to Drive Spending Increase Higher In aggregate, oil and gas companies are basing 2012 capital spending budgets on an average oil price of $87 WTI and $98 Brent. This compares to current WTI and Brent prices of $101 and $110, indicating that oil and gas companies are likely taking a conservative view on oil prices, given the uncertain economic environment. However, a majority of the surveyed companies (60%) would increase spending if WTI averaged above $100/barrel, which suggests that there is considerable upside to our current forecast for 2012 spending. Downside thresholds for cutting back spending were more varied, but over two-thirds of respondents would reduce spending if WTI averaged $70/barrel in 2012. We believe the large spenders of capital such as the IOCs and many NOCs are basing project economics on oil prices well below current levels, closer to $70 per barrel.

Roughly half of the companies we spoke to said they would decrease their capital budgets if oil averaged $80/barrel during 2012, while the other half said $80/barrel would not change their spending plans. Almost one-third would cut back spending by about 10% in that scenario. No companies expressed a desire to increase their budget beyond current plans in an $80/barrel scenario.

Figure 7: Sensitivity to $80/bbl Oil in 2012

Down 5% or Less9%

Down 10%32%

Flat50%

Down 20%9%


Figure 5: WTI Price Thresholds to Increase 2012 Spending

Figure 6: WTI Price Thresholds to Decrease 2012 Spending

$130 7%

$120 7%

$100 60%

$90 7%

$110 11%

$150 4%

Between $100 & $1104%

$80.00 17%

$75.00 17%

$72.50 3%

$70.00 27%

$65.00 12%

$60.00 13%

$50.00 5%

$40.00 3%

$87.50 3%

Source: Company data and Barclays Capital estimates Source: Company data and Barclays Capital estimates


5 December 2011 9

2012 Oil Price Forecasts Likely to Prove Conservative

Our surveyed companies have consistently offered conservative oil price forecasts over the past decade (on average 23% below the actual price in the fall survey and roughly 18% below during the mid-year update). We think this will be the case again this year; the group’s average WTI forecast for 2012 is $87.17, ~21% below the current Barclays Capital forecast of $110.

Figure 8: Oil Price Budget Assumptions versus Actual Prices, 2000-12 ($/barrel)

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In the past, our survey has only offered one blended oil price forecast, given the historically small spread between West Texas Intermediate and Brent (~3% on average over 2000-10). However, with the blowout of the spread in the past year, we asked the companies to specify which benchmark they are using in their budget assumptions. Those tracking Brent offered forecasts in line with the tradition of our survey; the average price forecast is roughly $98, a 15% discount to the Barclays Capital forecast of $115 for 2012.

Figure 9: Barclays Capital Oil Forecasts ($/barrel)

WTI Brent

2011 $95 $112

2012 $110 $115

2013 $125 $125

2014 $131 $130

2015 $137 $135

2020 $185 $184

Source: Barclays Capital estimates


5 December 2011 10

Figure 10: Barclays Capital WTI Historical Price Forecasts vs Actuals ($/barrel)

Actual Average Fall Forecast Difference, % Mid-Year Forecast Difference, %

2000 $30.30 $19.25 -36.5% $22.04 -27.3%

2001 $26.00 $25.25 -2.9% $26.00 0.0%

2002 $26.10 $21.09 -19.2% $22.00 -15.7%

2003 $31.00 $23.22 -25.1% $24.11 -22.2%

2004 $41.50 $25.29 -39.1% $28.44 -31.5%

2005 $56.70 $35.81 -36.8% $40.85 -28.0%

2006 $66.20 $49.89 -24.6% $55.70 -15.9%

2007 $72.40 $55.65 -23.1% $56.90 -21.4%

2008 $99.70 $67.91 -31.9% $85.23 -14.5%

2009 $62.10 $58.30 -6.1% $50.18 -19.2%

2010 $79.60 $70.16 -11.9% $73.56 -7.6%

2011 $95.00* $77.32 -18.6% $87.02 -8.4%

2012 $110.00* $87.17 -20.8% NA NA

Average, 2000-2011 -23.0% -17.6%

Average WTI Oil Price Forecasts v. Actuals

*2011 and 2012 actuals are Barclays Capital estimates Source: Barclays Capital

Figure 11: Barclays Capital Brent Historical Price Forecasts vs Actuals ($/barrel)

Actual Fall Forecast Difference, % Mid-Year Forecast Difference, %

2000 $28.50 $19.25 -32.5% $22.04 -22.7%

2001 $24.90 $25.25 1.4% $26.00 4.4%

2002 $25.00 $21.09 -15.6% $22.00 -12.0%

2003 $28.50 $23.22 -18.5% $24.11 -15.4%

2004 $38.00 $25.29 -33.4% $28.44 -25.2%

2005 $55.30 $35.81 -35.2% $40.85 -26.1%

2006 $66.10 $49.89 -24.5% $55.70 -15.7%

2007 $72.70 $55.65 -23.5% $56.90 -21.7%

2008 $98.40 $67.91 -31.0% $85.23 -13.4%

2009 $62.70 $58.30 -7.0% $50.18 -20.0%

2010 $80.30 $70.16 -12.6% $73.56 -8.4%

2011 $112.00* $77.32 -31.0% $87.02 -22.3%

2012 $115.00* $97.73 -15.0% NA NA

Average, 2000-2011 -22.0% -16.5%

Average Brent Oil Price Forecasts v. Actuals

*2011 and 2012 actuals are Barclays Capital estimates Source: Barclays Capital


5 December 2011 11

In the Early Stages of a Multi-Year International Upcycle; Swings in North America Becoming Less Volatile

We continue to believe we are in the early stages of a multi-year, double-digit growth spending upcycle internationally characterized by increased drilling in complex geologies on land and exploration and development of traditional and emerging deepwater basins. Although North America has historically been a short-cycle market characterized by volatile swings in activity, the shift towards oil-directed and liquids rich activity is reducing the cyclicality in the region and will result in more consistent and growing spending levels. Long-term and across cycles, we expect spending growth in North America to remain in the high single digits through 2015.

Figure 12: Barclays Capital Multi-Year E&P Spending Forecast


Oil Prices Increasingly Driving Budget Decisions in North America In a departure from recent years, our survey indicated that the most important determinant of E&P spending in the coming year is oil prices (54%), followed closely by natural gas prices (47%) and cash flow (46%). We believe the shift in key determinants to oil prices is linked, in part, to the change in the North American market.

Figure 13: Key Determinants of E&P Spending in 2000-12E (percentage of responses)

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Oil Prices 54% 49% 45% 49% 39% 39% 51% 50% 44% 43% 51% 47% 59%Natural Gas Prices 47% 42% 54% 55% 51% 53% 61% 52% 73% 55% 67% 66% 68%Cash Flow 46% 53% 48% 48% 47% 42% 36% 60% 54% 53% 59% 65% 68%Capital Availability 32% 26% 35% 29% 23% 28% 23% 32% 39% 36% 37% 43% 52%Prospect Availability 32% 22% 18% 23% 45% 42% 53% 58% 51% 55% 39% 60% 45%Drilling Success 31% 25% 21% 26% 39% 35% 34% 43% 43% 30% 30% 44% 41%Drilling Costs 29% 24% 24% 31% 36% 37% 40% 41% 38% 35% 49% 35% 31% Source: Barclays Capital estimates

In addition, we expect cash flow to remain an important key determinant of spending. While oil prices may fluctuate, we believe companies will continue to drill as long as it is economic and they have the cash flow to support drilling. The majority of companies we surveyed (62%) expect to spend within their cash flow during 2012, with 37% projecting expenditures to be equal to cash flow and 25% expecting spending to be less than cash

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5 December 2011 12

flow. The total percentage of companies expecting to live in cash flow is flat versus 2011, which included 18% of companies spending less than cash flow and 44% with expenditures that equal cash flow.

Equal To44%

Greater Than38%

Less Than18%

Equal To37%

Greater Than38%

Less Than25%

Source: Barclays Capital estimates Source: Barclays Capital estimates

Movement in Oil Prices Supports View of Long-Term Trend in Spending The increase in global capital expenditure budgets forecast for 2012 (and beyond) in tandem with higher oil prices (and consequently higher oil price expectations) is consistent with historical trends. The correlation between exploration and production spending and inflation adjusted oil prices is significant and we expect a high oil price environment to persist over the next several years driven by accelerating decline curves, continued difficulty finding and developing large reserves, increased demand especially in emerging markets, tight spare capacity and the risk of a reduction in supply due to potential geopolitical events. This is setting the stage for further growth in spending in 2013 and beyond and we believe double-digit spending growth is likely for the next several years.

Figure 14: E&P Spending vs Cash Flow in 2011 Figure 15: E&P Spending vs Cash Flow in 2012

Figure 16: Historical Worldwide E&P Spending vs Inflation Adjusted Oil Prices

Figure 17: Historical Worldwide E&P Spending vs Inflation Adjusted Oil Prices (Indexed)

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2011

Inflation Adjusted WTI Prices (indexed) Global E&P Spending (indexed)

Source: Barclays Capital estimates and Bloomberg Source: Barclays Capital estimates and Bloomberg


5 December 2011 13

North America Resilient; International Spending to Lead the Way

The increase in global E&P capital expenditures during 2012 will largely be led by the international markets; however, activity levels in North America are likely to remain healthy. We believe there is upside to both our international and North American E&P spending forecasts. Internationally, we believe higher spending could arise from the resolution of the economic crisis in Europe, a resumption of activity in certain North African countries and oilfield service cost inflation, while domestically spending could be revised higher dependent on the pace of the acceleration of drilling activity in the Gulf of Mexico and as companies gain confidence in the oil price. For the international markets the strongest regions are expected to be Latin America, Africa (with upside in North Africa), Europe, the Middle East and Russia. Spending is also expected to rise in India, Asia and Australia although the results are skewed somewhat by lower spending for select large companies primarily due to the completion of several large projects (including Woodside and PTT Exploration and Production).

Figure 18: Summary of Oil and Gas Exploration and Production Expenditures ($ in millions)

2011 2012 % diff count

US Spending 111,735.0 122,444.4 9.6% 173Canadian Spending 36,076.0 37,260.0 3.3% 96International Spending 396,707.5 438,818.6 10.6% 135Worldwide Spending $544,518.5 $598,522.9 9.9% 339


Figure 19: North American and Non-North American E&P Spending, 2001-12 ($ in millions)

0

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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5 December 2011 14

Spending Increases Broad-Based Across Regions and Company Types The top 20 exploration and production spenders globally account for nearly 57% of total spending. Of these companies, all 20 are expected to increase capex during 2012 (by an average of 13%).

Exxon remains the largest capital spender on oil and gas in the world in 2012; however, Petrochina is gaining ground. According to its multi-year plan, Petrobras could also close the gap in the next several years and Chevron is also aggressively increasing its spending.

Figure 20: Top 20 Global E&P Spenders ($s in billions)

Exxon Mobil

Petrochina

Chevron Corp.

Petroleo Brasiliero SA (Petrobras)

Petroleos Mexicanos (Pemex)

Royal Dutch/Shell

Total

Petronas

Statoil

BP

Eni

ConocoPhillips

Gazprom

Sonangol

CNOOC

Lukoil

Saudi Aramco

Sinopec

Rosneft

Petroleos de Venezuela, SA

(PDVSA)

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000

2012 E&P Spending 2011 E&P Spending



5 December 2011 15

Actual Spending Likely to Exceed Current Expectations Although directionally accurate, our spending forecasts tend to capture budgeting activity as a snapshot in time and in many cases overall spending tends to be higher than forecast. The only year since 2000 where capital spending has fallen below forecasts was 2010, and the miss was very modest.

Figure 21: Analysis of Historical Report Accuracy

(20)%

(10)%

0%

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20%

30%

40%

2000

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Forecast Outcome


During 2011, actual spending in both North America and abroad exceeded our expectations.

Figure 22: Expected Increase/Decrease in 2011 Exploration and Production Expenditures (2011E vs 2010A)

December June December2010 Survey 2011 Survey 2011 Survey

U.S. Spending 8.1% 18.4% 30.9%Canadian Spending 4.8% 10.2% 29.4%International Spending 12.1% 15.5% 20.1%Worldwide Spending 10.8% 15.7% 22.8%


For 2012, this is likely to hold true again due to the likelihood of pricing leverage for oil service and drilling companies operating internationally as capacity utilization increases, and the likelihood of budget revisions higher in North America, given a higher-than-expected oil price environment pushing the oil-directed and liquids rich rig count higher (partially offset by lower gas-directed activity).

Exploration Activity Heating Up Recent positive industry commentary and exploration success in various regions of the world confirm our view that exploration is likely to be at the forefront of spending growth in 2012. As the exploration upcycle continues to unfold, we are seeing a greater emphasis placed on these activities within capital budgets. In 2010, 32% of respondents planned on increasing the percentage of the budget dedicated to exploration. This percentage grew to 38% in 2011 and 42% in 2012.


5 December 2011 16

Increasing38%

Decreasing52%

Stable10%

Increasing42%

Decreasing40%

Stable18%


The outlook for the economics of exploration improved across-the-board for 2012 versus the prior year. For all regions, the proportion of companies that responded “poor” reduced dramatically in 2012. International exploration economics continue to be viewed best among the regions in our survey, and 68% of companies believe the economics for 2012 are “excellent” or “good,” up from 61% in our last survey. The outlook in the US also improved, and the percentage of companies which responded “excellent” moved up to 15% from 8% in our prior survey. We believe the better outlook this year is tied to the continued shift towards oil and liquids-rich drilling in the US. The outlook in Canada has also gotten better. For 2012, 87% of companies believe conditions are “good” or “fair,” up from 68% in 2011.

Figure 25: Economics of Exploration in the US, Canada and Outside North America

2012 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 2007

United States 15% 8% 2% 5% 11% 14% 42% 38% 44% 53% 49% 54% 42% 37% 43% 34% 35% 27% 2% 17% 11% 8% 4% 5%

Canada 9% 9% 0% 5% 4% 6% 48% 35% 21% 32% 32% 47% 39% 33% 62% 51% 50% 43% 4% 23% 17% 12% 14% 4%

International 26% 24% 26% 18% 23% 14% 42% 37% 53% 37% 43% 57% 32% 28% 12% 39% 30% 24% 0% 11% 9% 5% 4% 5%

Excellent Good Fair Poor


Pricing Moving Up, But So Are Costs Overall, service prices are expected to increase in 2012; however, costs are also expected to trend higher. Internationally, we expect pricing to increase in excess of higher input costs, as capacity utilization increases and equipment becomes tight, while in North America we expect higher prices to mostly offset rising labor costs. About 53% of respondents indicated a likely increase of oilfield service completion costs (primarily Fracturing and Stimulation), while 16% expect drilling costs to trend higher. Of the costs expected to decline, the highest number of respondents expect seismic costs to go down in 2012. We disagree and believe seismic pricing offshore and in the international markets is likely to move higher as equipment and crews go back to work. We believe the high-spec marine seismic market could be sold out by mid-year. We do expect a moderation in North American stimulation pricing in 2012 and this is already unfolding in dry gas areas.

Figure 23: 2011 Exploration Budget versus Total E&P Capital Expenditures

Figure 24: 2012 Exploration Budget versus Total E&P Capital Expenditures


5 December 2011 17

0%5%

10%15%20%25%30%35%

No Servi

ce C

osts

Seism

ic

Stim

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ice Costs

Frac

turin

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Drill Bits

Chemica

ls/Pro

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of R

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2011 Results Well Above Initial Expectations The overall increase in global exploration and production expenditures in 2011 is estimated to be well above the growth forecast in our mid-year 2011 report. This is primarily due to the fact that many companies overspent both their initial budgets and budgets that were revised higher during the year (38% overspent globally). This was particularly true in the US and Canada where roughly 41% and 43% of companies overspent their budgets. We believe this was primarily due to higher oilfield service costs (particularly in the fracturing and stimulation market) and the continued shift towards oil and liquids rich reservoirs which are more complex and consequently, more expensive. Internationally 27% of companies spent more than was anticipated by our mid-year survey.

Figure 28: Comparison of Estimated E&P Spending vs Mid-Year Update Expectations

U.S. Canada InternationalUnderspent 16% 22% 28%About the Same 43% 35% 45%Overspent 41% 43% 27%


Figure 26: Product Areas Expected to Have Decreased Costs in 2012

Figure 27: Product Areas Expected to Have Increased Costs in 2012


5 December 2011 18

Company Type and Regional Breakout

Supermajors: Second Consecutive Year of Double-Digit Spending Increase Spending by the Supermajors in 2012 is expected to increase globally by 12%, led by active drilling and exploration programs for BP, ConocoPhillips, Total, Chevron and Shell (all up by greater than 10%). Spending by Exxon is also projected to rise, although by a more modest 5%. We believe continued high spending levels for the Supermajors is being driven by years of flat spending and underinvestment in the early to mid 2000s, resource nationalization which has resulted in the expansion of deepwater drilling activity (particularly in Brazil and West Africa) and the need to find and replace large pockets of reserves and increase production. Active exploratory programs in emerging offshore markets in West Africa and East Africa and the continued ramp up in activity levels in Iraq are also contributing to the y/y growth. The Supermajors are increasing spending in North America by 25% and by 10% internationally.

Figure 29: Aggregate Supermajor E&P Spending, 2006-12E ($s in billions)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2006 2007 2008 2009 2010 2011 2012


North America: Oil Renaissance Increasing Predictability of Cycles North American exploration and production spending is slated to increase by 8% in 2012 to $160bn from $148bn in 2011, led by spending gains in the United States. Exploration and production expenditures in the U.S. are projected to rise by 10% to $122bn while Canadian spending is expected to grow by 3% to $37bn.

Figure 30: US Spending Breakout by Company Budget Size ($ in millions)

Year-to-Year CompaniesU.S. Spending Breakout 2012E 2011E % Change Surveyed

Spending Less Than $50 Million 984 787 25.0% 70Spending btw $50 and $100 Million 1,402 1,038 35.0% 15Spending Under $100 Million 2,386 1,825 30.7% 85

Spending btw $100 Million and $1 Billion 23,726 22,293 6.4% 53Spending More Than $1 Billion 96,333 87,617 9.9% 35

Total U.S. Spending $122,444 $111,735 9.6% 173



5 December 2011 19

Figure 31: Canadian Spending Breakout by Company Budget Size ($ in millions)

Year-to-Year CompaniesCanadian Spending Breakout 2012E 2011E % Change Surveyed

Spending Less Than $50 Million 770 646 19.2% 35Spending btw $50 and $100 Million 595 674 -11.8% 9Spending Under $100 Million 1,365 1,320 3.4% 44

Spending btw $100 Million and $1 Billion 15,326 15,377 -0.3% 42Spending More Than $1 Billion 20,570 19,379 6.1% 10

Total Canadian Spending $37,260 $36,076 3.3% 96


In contrast to 2011 where spending growth was broad-based, the North American independents are expected to lead the way in 2012 with significant spending increases expected from Apache, Pioneer Natural Resources, Noble Energy and Williams Companies (all in excess of 15%). Joint venture activity with national oil companies and spending increases by international independents are also expected to contribute to the gains with (historically) primarily international spenders such as BHP Billiton, Statoil, and ENI expected to increase their US expenditures by greater than 35% versus 2011. A recovery in drilling activity in the Gulf of Mexico is also contributing to the projected y/y increase with active programs planned by both BP and Apache.

Figure 32: Historical and Forecast North American Spending, 2006-12E ($ in millions)

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2006 2007 2008 2009 2010 2011 2012

CanadaUS


Although North America has historically been a gas-directed drilling market, with the continued push into oil and liquids rich plays the importance of natural gas prices is diminishing. We expect this trend to continue and despite an expected decline in the natural gas rig count during 2012, the US land market is likely to remain resilient with oil-directed drilling mostly offsetting this weakness. The percent of rigs drilling for gas in the U.S. continues to decline. The overall gas share has dropped across-the-board, with the most dramatic shifts occurring in the Gulf Coast and the Midcontinent.

In Canada, the results of our survey are likely understated and reflect oil price forecasts significantly below current levels. Many Canadian budgets appear to have been set during the late October/early November time-frame when oil prices were in the mid-$80 range (compared to above $100 currently). We expect the Canadian market to remain solid and actual spending levels are likely to be roughly in-line with US levels.


5 December 2011 20

Strength in Oil to Mostly Offset Weakness in Gas Markets

What a difference a month makes for the North American market and in particular the US land business. While estimate cuts were rampant in early October on an impending fall in the US rig count due to WTI prices in the $80’s, a rig count collapse now looks unlikely. WTI is over $100/bbl, E&P cash flows are recovering, E&P companies are tapping the capital markets, and the E&P's are also hedging out production at these elevated oil prices. While we think there will be some seasonality in the rig count and some drop in the gas rig count as a result of sub $4/mcf natural gas, this is well discounted in the stocks. Y/y we expect a flat to modestly higher rig count in the U.S. and believe a key component of next years spending increase reflects the impact of oilfield service cost inflation. For natural gas directed drilling, we expect the majority of the rig count decline to occur in late 2011 and early 2012 as operators are likely to drop rigs during the seasonally slow period. The gas rig count has already started to decline from its recent peak.

Figure 33: Gas Share in the US by Region

Date Gulf Coast Permian Basin Midcontinent Rockies South Texas ArkLaTex

14-Jan-11 72% 6% 83% 37% 60% 99%

28-Jan-11 69% 7% 83% 35% 47% 99%

11-Feb-11 66% 6% 76% 39% 63% 98%

25-Feb-11 64% 6% 76% 37% 53% 98%

11-Mar-11 63% 7% 77% 33% 54% 99%

25-Mar-11 64% 8% 76% 35% 57% 98%

8-Apr-11 66% 8% 74% 36% 53% 99%

22-Apr-11 66% 8% 74% 36% 52% 98%

6-May-11 61% 7% 65% 34% 51% 99%

20-May-11 65% 8% 63% 34% 53% 98%

3-Jun-11 67% 8% 60% 33% 48% 99%

17-Jun-11 73% 7% 62% 38% 52% 98%

1-Jul-11 70% 8% 61% 35% 51% 98%

15-Jul-11 63% 8% 62% 34% 51% 97%

29-Jul-11 61% 7% 60% 35% 51% 98%

12-Aug-11 62% 7% 62% 33% 53% 98%

26-Aug-11 61% 8% 64% 33% 52% 98%

9-Sep-11 55% 8% 62% 31% 51% 97%

23-Sep-11 63% 7% 60% 32% 48% 97%

21-Oct-11 60% 6% 60% 32% 49% 97%

4-Nov-11 62% 6% 63% 32% 52% 98%

18-Nov-11 60% 7% 62% 28% 53% 97%

Gas Share (in %)

Source: Land Rig Newsletter


5 December 2011 21

This year, the oil rig count overtook the natural gas rig count for the first time since the end of 1993. We believe the North American market will be less cyclical going forward, given an increased exposure to oil and liquids-rich drilling.

Figure 34: U.S. Oil & Natural Gas Rig Count (2004-2011)

0

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600

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1,000

1,200

1,400

1,600

1,800

1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011

Oil Rig Count Gas Rig Count

Source: Baker Hughes

During 2011, company respondents spent 62% of their budget on shale plays while 64% allocated spending for shale plays in 2012. The majority of companies plan to increase spending in the Permian Basin/West Texas (20%), primarily an oil basin. Other areas that should have increased expenditures directed toward them are the Mid-Continent (18%), the Bakken (11%) and the Marcellus (7%).

Figure 35: U.S. Regions with the Greatest Increase in Spending in 2012

Utica5% Rocky Mountains

2%

Montney4%

Mid-Continent18%

Eagleford4%

California4%

Barnett2%

Woodbine2%

Niobrara5%

Granite Wash2%

East Texas4%

Bakken11%

Appalachia2%

Permian Basin/West Texas20%

Fayetville/Woodford2%

Marcellus7%Gulf Coast (Land)

5%Gulf of Mexico

2%



5 December 2011 22

Stimulation Market Remains Undersupplied in Most Regions

Oil service equipment capacity in North America is likely to remain tight through 2012, including in the fracturing/stimulation market. We believe both the US and Canadian stimulation markets remain currently undersupplied (by as much as 20%) and despite a significant amount of capacity expected to enter the market throughout the year, market activity is likely to continue to outstrip supply. In addition, supplier bottlenecks continue to impact the delivery of equipment and lead times for new pressure pumping units remain in the nine to 12 month timeframe. The availability of skilled labor to staff new crews is also likely to limit or slow the deployment of additional equipment, particularly in Canada. However, pricing for pressure pumping services is flattening and is expected to decline in select regions (particularly natural gas basins). Pricing weakness is already beginning to develop in regions such as the Haynesville shale and Fayetteville shale, and some operators have adopted more flexible contracting structures that allow E&P companies to relocate equipment from gas directed regions to more economic oil or liquid rich plays.

For the fourth consecutive year, Fracturing/Stimulation and Horizontal Drilling were most commonly cited among operators as having the greatest impact on their business. Given where we are in an exploration upcycle, we were not surprised that 3D/4D Seismic placed third again. Directional Drilling, MWD, Reservoir Recovery Optimization, Intelligent Well Completions, and Drill Bit technology were also frequently mentioned as important technologies used in the oilfield.

Figure 36: Most Important Technologies (ranked by percentage of responses)

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Fracturing/ Stimulation 29% 28% 23% 26% 21% 26% 22% 16% 19% 14% 18% 11% 11%Horizontal Drilling 26% 25% 23% 22% 16% 14% 16% 16% 14% 15% 14% 17% 12%3-D/ 4-D Seismic 10% 19% 20% 19% 22% 22% 25% 29% 27% 29% 36% 58% 58%Directional Drilling 9% 7% 7% 7% 11% 10% 9% 9% 11% 11% 11% 4% 4%Measurement-While-Drilling 6% 4% 5% 1% 3% 4% 2% 1% 1% 3% 2% 1% 1%Reservoir Recovery Optimization 5% 6% 7% 7% 10% 9% 7% 8% 9% 10% NA NA NAIntelligent Well Completions 5% 2% 2% 3% 3% 4% 4% 4% 5% 5% 6% 1% 1%Drill Bit Technology 3% 5% 5% 6% 4% 5% 8% 9% 5% 4% 4% 3% 2%Deepwater Technology 3% 1% 2% 1% 2% 0% 1% 1% 1% 2% 2% 1% 4%Artificial Lift 3% NA NA NA NA NA NA NA NA NA NA NA NAUnderbalanced Drilling 1% 1% 2% 1% 2% 2% 3% 2% 4% 4% 2% 2% 3%Wireline Logging 0% 2% 2% 2% 3% 4% 3% 3% 4% 2% 3% 1% 4%Expandable Products 0% 1% 1% 1% 0% 0% 0% 1% 1% 0% NA NA NA Source: Barclays Capital estimates

Gas Price Forecasts Continue to March Lower

The reduction in natural gas directed drilling we forecast in 2012 is primarily being driven by low natural gas prices due to high levels of supply. Natural gas prices have declined steadily since the 2007/2008 timeframe, due to the shale gas revolution and high initial production rates. North American E&P companies are using an average of $4.08 per mcf (Henry Hub) for their 2012 capital budgets. This compares to an average expectation of $4.31 in mid-2011 and $4.27 a year ago. The Barclays Capital commodities team is more bearish, forecasting $3.80/mmbtu for 2012, $3.70 for 2013 and $4.00 for 2015.


5 December 2011 23

Figure 37: Barclays Capital Natural Gas Historical Price Forecasts vs Actuals

Actual Fall Forecast Difference, % Mid-Year Forecast Difference, %

2000 $4.32 $2.38 -44.9% $2.58 -40.3%

2001 $4.05 $3.75 -7.4% $4.40 8.6%

2002 $3.37 $2.83 -16.0% $3.03 -10.1%

2003 $5.49 $3.42 -37.7% $4.10 -25.3%

2004 $6.18 $4.17 -32.5% $4.76 -23.0%

2005 $9.48 $5.39 -43.1% $5.74 -39.5%

2006 $6.98 $7.64 9.5% $6.96 -0.3%

2007 $7.12 $6.70 -5.9% $6.74 -5.3%

2008 $8.89 $6.78 -23.7% $8.07 -9.2%

2009 $4.16 $6.35 52.6% $4.68 12.5%

2010 $4.40 $5.21 18.4% $4.65 5.7%

2011 $4.18* $4.31 3.1% $4.31 3.1%

2012 $3.80* $4.08 7.4% NA NA

Average, 2000-2011 -10.7% -10.3%

Average Natural Gas Price Forecasts v. Actuals


Figure 38: Barclays Capital Natural Gas Forecasts ($/mmbu)

2011 $4.18

2012 $3.80

2013 $3.70

2015 $4.00


North American E&P companies appear uncertain over gas prices (and their impact on capital budgets) for 2012. Despite an average forecast of $4.08/mmbu (and a $4.00 median), half said they would increase their budget if natural gas averaged $4.00 in 2012, while another third would expect to decrease their spending, and the balance (only 17%) plan to maintain their current plan.

Figure 39: Spending Sensitivity to $4/mmbtu of Gas

Down 15%, 8%

Down 10%, 25%

Flat, 17%

Up 5%, 17%

Up 10%, 17%

Up 15%, 8%

Up 25%, 8%



5 December 2011 24

Roughly 27% of the companies surveyed plan on increasing capital spending if natural gas prices average $4.50/mmbtu in 2012, and fully 70% would do so if they average $5.00/mmbu. Nearly half of our surveyed companies would cut back spending if gas averaged $3.50/mmbtu, while $3.00/mmbtu was the most popular threshold for companies to reduce their budgets.

The Gulf of Mexico Recovery Adds Further Upside to Our Estimates

The recovery in the Gulf of Mexico has taken hold and there are now 23 floaters working in the GOM, up from four in August 2010 and compared to over 30 prior to the Moratorium. Recent discoveries by Exxon, Shell, and Anadarko and delayed drilling programs have led to a sense of urgency fuelling the recovery. There is currently a shortage of deepwater rigs that meet heightened safety expectations for near-term projects. As a result, dayrates have recovered to over $500k, up from around $400k following the moratorium, with help from demand in emerging deepwater basins.

Figure 42: Floaters in the Gulf of Mexico

0

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6

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Mar-

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Mar-

09Jul-0

9

Nov-09

Mar-

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Mar-

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Working Total Supply

Source: ODS-Petrodata

Figure 40: Gas Price Thresholds to Increase 2012 Spending

Figure 41: Gas Price Thresholds to Decrease 2012 Spending

$6.00 18%

$5.50 6%

$5.00 40%

$4.75 3%

$4.50 18%

$4.25 6%

$4.00 3%

$7.00 6%

$4.00 14%

$3.75 14%

$3.50 16%$3.25

17%

$3.00 30%

$2.50 6%

$5.00 3%

Source: Company data and Barclays Capital estimates Source: Company data and Barclays Capital estimates

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5 December 2011 25

GOM Permitting Picture Normalizing

Permitting has largely normalized following the “permitorium” that threatened the offshore industry in the aftermath of the moratorium in the deepwater Gulf of Mexico. The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) is in transition following its recent division into two separate agencies: the Bureau of Ocean Energy Management (BOEM), which will focus on permitting and leasing activities, and the Bureau of Safety and Environmental Enforcement (BSEE), which will oversee safety enforcement and environmental regulations.

There were 31 deepwater permits issued in November (including 3 permits for new wells), as shown in figure 43. There were 37 permits in October (10 for new wells), 28 in September (5 for new wells), and 28 issued in August (6 for new wells). New well permits issued for the twelve months prior to the Macondo incident ranged from three to 12 per month with an average of six per month. We attribute only three new-well permits being issued in November to the recent separation between the BOEM and the BSEE and expect new well permits to be more representative of August through October levels in the new-year.

Figure 43: Deepwater Permits Issued in the US Gulf of Mexico

0

5

10

15

20

25

30

35

40

Jan-1

1

Feb-1

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Apr-11

May

-11

Jun-11

Jul-11

Aug-11

Sep-1

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Nov-11

Revised Bypass

Bypass

Revised Sidetrack

Sidetrack

Revised New Well

New Well

Source: Bureau of Ocean Energy Management

GOM Lease Sale Announced

The Department of Interior will hold a lease sale on December 14th for all available unleased areas of the Western Gulf Planning Area offshore Texas. The sale is the first since the Macondo oil-spill and encompasses roughly 3,900 blocks including shallow, deep and ultra-deepwater locations. The sale bodes well for the continued recovery in active locations in the Gulf of Mexico, which bottomed in August 2010, as shown in Figure 44. We believe this is positive for seismic and GOM levered companies, including HOS and SPN.

The BOEMRE recently separated its revenue collections

operations from its regulations and oversight operations


5 December 2011 26

Figure 44: Active Locations in the Gulf of Mexico

0

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60

80

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120

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'03 '04 '05 '06 '07 '08 '09 '10 '11

Workover Locations

Development Locations

Exploration Locations

Source: ODS-Petrodata and Bureau of Ocean Energy Management

North American Independents Reallocating Int’l Spend to Domestic Markets Although spending by the North American Independents internationally is expected to increase again in 2012 (up 3% from 2011), the majority of companies appear to be shifting exploration and production expenditures to the U.S. given the ongoing oil renaissance and improving outlook in the Gulf of Mexico. However, there are several exceptions including Canadian Natural Resources (international spending projected to increase by 59% in 2012), Murphy Oil (up 52%), Noble Energy (up 36%), Nexen (up 26%) and Anadarko (up 13%). Those North American companies expected to significantly decrease expenditures in the international markets include ATP Oil and Gas (down 60%), EOG Resources (down 25%), Occidental Petroleum (down 23%) and Apache (down 16%).

Figure 45: E&P Spending by Select North American-Based E&P Companies Outside of North America, 2006-12E ($ in millions)

0

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10,000

15,000

20,000

25,000

2006 2007 2008 2009 2010 2011 2012

* Our estimates include leading Independent international spenders including, Apache, Hess, Anadarko, Occidental Petroleum Corp., Talisman Energy and others. Source: Company data and Barclays Capital estimates


5 December 2011 27

Latin America: Out in Front of the Pack Latin American E&P spending is projected to rise by 21% in 2012. Spending gains are expected to be led by significant pickups in activity in Brazil (Petrobras up 13%), Venezuala (PDVSA up 62%), Colombia (Ecopetrol up by 25%) and Mexico (a 17% increase slated for PEMEX). In Mexico, spending increased dramatically in the second half of 2011, and this trend is likely to continue next year, as the country battles increasing decline rates at major oil fields. The jackup rig count in Mexico currently stands at 31 compared to 20 in early 2011. Spending in Brazil is also expected to trend higher, although Petrobras underspent its budget in 2011 and appears to be having difficulty deploying capital quickly.

Figure 46: E&P Spending by Select Latin American Companies, 2006-12 ($ in millions)

0

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30,000

40,000

50,000

60,000

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2006 2007 2008 2009 2010 2011 2012

Source: Company data and Barclays Capital estimates. * Our estimates include leading Latin American spenders including, Petrobras, Pemex, PDVSA, Ecopetrol SA, OGX and others.

Despite slower-than-expected spend from Petrobras the national oil company ordered seven of 28 planned deepwater drillships during 2011 to support the company’s ambitious long-term production targets. We expect the company to continue to aggressively deploy capital in the coming years and for exploration activity by both PBR and the Supermajors to remain elevated. Perhaps the largest increases in spending in Latin America could come from the Supermajors and major oil companies due to significant recent investments. Emerging shale opportunities in Argentina could also add to the projected increase in spending in the region during 2012. In 3Q11, Repsol announced the discovery of close to onebn barrels of recoverable oil and gas in Argentina. If proven, the discovery alone would account for 40% of Argentina’s reserves.


5 December 2011 28

Africa: Emerging Markets Driving Investment Higher Exploration and production expenditures in Africa are expected to increase by 14% in 2012 to $30bn from $26bn in 2011. This follows a disappointing 2011 where political instability in several countries, government overhauls and administrative issues resulted in significantly curtailed spending. Although we do expect a recovery in certain traditional markets, such as Nigeria and Algeria, we expect a significant amount of next year’s projected gains to come from emerging developments in areas such as East Africa following several major discoveries made during 2011. The forecast spending increase by our survey is also likely understated as a substantial portion of investment in new frontiers is expected to be made by the Supermajors – which are accounted for in a separate grouping. We have excluded spending from Libya and Egypt in our analysis due to the uncertain timing of a recovery in these regions and challenging geopolitical environments; however, a recovery in either or both regions could provide further upside to projected spending levels. Prior to the geopolitical issues in the respective regions, we believe annual spending from Egyptian General Petroleum and National Oil Corporation were $2-2.5bn and $3.5-4bn, respectively.

Figure 47: E&P Spending by Select African Companies ($ in millions)

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2007 2008 2009 2010 2011 2012

Source: Company data and Barclays Capital estimates. * Our estimates include leading African spenders including, Sonangol, Nigerian National Petroleum Company (NNPC), Sonatrach and others.


5 December 2011 29

Europe: Norway Driving Activity Increase Spending for select European exploration and production companies is expected to increase by 13% in 2012. We believe this is primarily likely to be driven by increased exploration activity in the Norwegian portion of the North Sea, while tax reform in the U.K segment could negatively impact activity in 2012. During 2011, both Statoil and Lundin Petroleum announced major offshore finds in Norway, both of which are among the 10 largest discoveries in history. This has resulted in renewed optimism regarding the productive potential of the often termed “Dead Sea”. A recent quarterly survey conducted by Norway’s statistics agency indicated that oil and gas expenditures in 2012 will be a record $32bn in 2012, compared to $26bn in 2011. The U.K. based, integrated energy company, Centrica, recently purchased over $1.5bn in upstream oil and gas assets from Statoil in the region.

We believe there is upside to our estimate for European E&P expenditures in 2012 pending the resolution of the European debt crisis and the pace of the development of shale gas opportunities in Eastern Europe.

Figure 48: E&P Spending by Select European Companies, 2006-12 ($ in millions)

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2006 2007 2008 2009 2010 2011 2012

Source: Company data and Barclays Capital estimates. * Our estimates include leading European spenders including, Eni, Statoil, BG Group and others.


5 December 2011 30

Middle East: Iraq, Saudi and Kuwait to Lead the Way Spending in the Middle East is expected to increase by 12% next year led by a pickup in activity in Iraq, Saudi Arabia and Kuwait. We continue to view Iraq as one of the largest market opportunities for oil service and drilling companies this decade. The oil services and drilling market in Iraq is currently around $1.5bn and is likely to develop into a $6-8bn market over the next several years. There are about 30 rigs currently drilling in Iraq and we believe this could ultimately surpass 250 rigs.

In Saudi Arabia, the country continues to move forward with plans to increase its rig count to roughly 118 rigs, up from 104 currently. We believe the projected 2012 rig count step up will likely only be the beginning of an uptick in activity, as we expect the country, increasingly, to have a difficult time boosting exports due to escalating domestic demand, tightening service capacity and dwindling spare capacity.

Activity levels in Kuwait are also expected to increase meaningfully in 2012 as the company continues to deploy its 5-year $25bn budget set at the end of 2010. We believe the company is already tracking ahead of its annual budgeted run-rate and during fiscal 2010 to 2011 the company drilled 418 news wells, versus an initial target of 255.

Figure 49: E&P Spending by Select Middle East Companies ($ in millions)

0

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2007 2008 2009 2010 2011 2012

* Our estimates include leading Middle East spenders including Saudi Aramco, Kuwait Oil Company, Abu Dhabi National Oil Co. (ADNOC) and others. Source: Company data and Barclays Capital estimates


5 December 2011 31

Russia: Aggressive Campaign Announced by Lukoil Spending for select companies in Russia is expected to grow by 12% in 2012, led by a significant increase in exploration and production activity by Lukoil. Lukoil recently announced that between 2012 and 2014 the company plans to invest $48bn to increase its productive capacity, including close to $14bn in 2012 ($11bn upstream). Results for other Russian companies are somewhat mixed (flat to modestly higher). We do anticipate further expansion in Russian activity following the upcoming elections.

Figure 50: E&P Spending by Select Russian Companies, 2006-12 ($ in millions)

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2006 2007 2008 2009 2010 2011 2012

* Our estimates include leading Russian spenders including, Gazprom, Lukoil, TNK-BP, Rosneft and others. Source: Company data and Barclays Capital estimates.


5 December 2011 32

India, Asia and Australia Spending for select companies in India, Asia and Australia are expected to increase by 7% in 2012 led by a ramp up in expenditures by CNOOC, Petronas, and Inpex Corp. Asian companies are investing heavily in international joint ventures, particularly in deepwater projects. CNOOC continues with major development plans in the Bohai Bay, and is also increasing activity in Indonesia. Woodside is skewing numbers down next year as the company finishes up its Pluto project. Petronas spending is up over $1.5bn, reflecting strengthening shallow water and deepwater activity in Malaysia. Emerging deepwater plays in the region, including Brunei, offer upside.

Figure 51: E&P Spending by Select Indian, Asian & Australian Companies, 2006-12 ($ in millions)

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2006 2007 2008 2009 2010 2011 2012

* Our estimates include leading Indian, Asian & Australian spenders including, PetroChina, Sinopec, CNOOC, Petronas, ONGC and others. Source: Company data and Barclays Capital estimates.


5 December 2011 33

ANALYST(S) CERTIFICATION(S)

We, James C. West, Mick Pickup and Tom Ackermans, hereby certify (1) that the views expressed in this research report accurately reflect ourpersonal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, isor will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report,please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barcap.com or call 1-212-526-1072.

The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's totalrevenues, a portion of which is generated by investment banking activities.

Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA.These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSERule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’saccount.

Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in othertypes of research products, whether as a result of differing time horizons, methodologies, or otherwise.

Materially Mentioned Stocks (Ticker, Date, Price)

Baker Hughes (BHI, 02-Dec-2011, USD 53.62), 1-Overweight/1-Positive

Cameron International (CAM, 02-Dec-2011, USD 52.87), 1-Overweight/1-Positive

CGGVeritas (GEPH.PA, 02-Dec-2011, EUR 17.49), 1-Overweight/1-Positive

Chart Industries Inc. (GTLS, 02-Dec-2011, USD 60.31), 1-Overweight/1-Positive

Core Laboratories (CLB, 02-Dec-2011, USD 117.10), 1-Overweight/1-Positive

Dresser-Rand Group Inc. (DRC, 02-Dec-2011, USD 53.95), 1-Overweight/1-Positive

Dril-Quip Inc. (DRQ, 02-Dec-2011, USD 71.06), 1-Overweight/1-Positive

Ensco plc (ESV, 02-Dec-2011, USD 51.20), 1-Overweight/1-Positive

Eurasia Drilling Co., Ltd. (EDCL.L, 02-Dec-2011, USD 28.30), 1-Overweight/1-Positive

Global Geophysical Services (GGS, 02-Dec-2011, USD 7.42), 1-Overweight/1-Positive

GulfMark Offshore, Inc. (GLF, 02-Dec-2011, USD 44.65), 1-Overweight/1-Positive

Halliburton Co. (HAL, 02-Dec-2011, USD 36.58), 1-Overweight/1-Positive

Hornbeck Offshore Services (HOS, 02-Dec-2011, USD 33.41), 1-Overweight/1-Positive

Hunting (HTG.L, 02-Dec-2011, GBp 698.0), 1-Overweight/1-Positive

Integra Group (INTEq.L, 02-Dec-2011, USD 2.10), 1-Overweight/1-Positive

ION Geophysical Corp. (IO, 02-Dec-2011, USD 5.82), 1-Overweight/1-Positive

National Oilwell Varco (NOV, 02-Dec-2011, USD 71.05), 1-Overweight/1-Positive

Noble Corp. (NE, 02-Dec-2011, USD 34.65), 1-Overweight/1-Positive

Oceaneering International (OII, 02-Dec-2011, USD 47.72), 1-Overweight/1-Positive

Petroleum Geo-Services (PGS.OL, 02-Dec-2011, NOK 61.00), 1-Overweight/1-Positive

Rowan Companies (RDC, 02-Dec-2011, USD 33.25), 1-Overweight/1-Positive

Saipem (SPMI.MI, 02-Dec-2011, EUR 33.04), 1-Overweight/1-Positive

Schlumberger Ltd. (SLB, 02-Dec-2011, USD 75.01), 1-Overweight/1-Positive

Seadrill Limited (SDRL, 02-Dec-2011, USD 34.83), 1-Overweight/1-Positive

Subsea 7 SA (SUBC.OL, 02-Dec-2011, NOK 112.40), 1-Overweight/1-Positive

Superior Energy Services Inc. (SPN, 02-Dec-2011, USD 30.46), 1-Overweight/1-Positive

Tenaris S.A. (TS, 02-Dec-2011, USD 37.43), 1-Overweight/1-Positive

Thermon Group Holdings (THR, 02-Dec-2011, USD 15.78), 1-Overweight/1-Positive

Tidewater Inc. (TDW, 02-Dec-2011, USD 49.40), 1-Overweight/1-Positive

Transocean Ltd. (RIG, 02-Dec-2011, USD 42.76), 1-Overweight/1-Positive


5 December 2011 34


Weatherford International (WFT, 02-Dec-2011, USD 15.08), 1-Overweight/1-Positive

Wood Group (WG.L, 02-Dec-2011, GBP 6.63), 1-Overweight/1-Positive

Other Material Conflicts

SUBC.OL: Barclays Capital is acting as Corporate Broker to Subsea7 SA.

HTG.L: Barclays Capital, the Investment Banking Division of Barclays Bank PLC, is Corporate Broker to Hunting Plc.

Guide to the Barclays Capital Fundamental Equity Research Rating System:

Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the "sector coverage universe").

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating

1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.

RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisorycapacity in a merger or strategic transaction involving the company.

Sector View

1-Positive - sector coverage universe fundamentals/valuations are improving.

2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.

3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

Below is the list of companies that constitute the "sector coverage universe":

European Oil Services & Drilling

Aker Solutions (AKSO.OL) AMEC plc (AMEC.L) CGGVeritas (GEPH.PA)

Dockwise (DOCK.OL) Hunting (HTG.L) Maire Tecnimont (MTCM.MI)

Petrofac (PFC.L) Petroleum Geo-Services (PGS.OL) Saipem (SPMI.MI)

SBM Offshore (SBMO.AS) Subsea 7 SA (SUBC.OL) Technip (TECF.PA)

Tecnicas Reunidas (TRE.MC) Wood Group (WG.L)

Russian Oil Services & Drilling

C.A.T. Oil AG (O2C.DE) Eurasia Drilling Co., Ltd. (EDCL.L) Integra Group (INTEq.L)

U.S. Oil Services & Drilling

Baker Hughes (BHI) Basic Energy Services (BAS) Bristow Group Inc. (BRS)

Cameron International (CAM) CARBO Ceramics (CRR) Chart Industries Inc. (GTLS)

Core Laboratories (CLB) Diamond Offshore Drilling (DO) Dresser-Rand Group Inc. (DRC)

Dril-Quip Inc. (DRQ) Ensco plc (ESV) Exterran Holdings Inc. (EXH)

FMC Technologies (FTI) Global Geophysical Services (GGS) GulfMark Offshore, Inc. (GLF)

Halliburton Co. (HAL) Helmerich & Payne Inc. (HP) Hercules Offshore (HERO)

Hornbeck Offshore Services (HOS) ION Geophysical Corp. (IO) Key Energy Services (KEG)

Nabors Industries (NBR) National Oilwell Varco (NOV) Noble Corp. (NE)

Oceaneering International (OII) Parker Drilling (PKD) Patterson-UTI Energy (PTEN)

Rowan Companies (RDC) Schlumberger Ltd. (SLB) SEACOR Holdings, Inc. (CKH)

Seadrill Limited (SDRL) Superior Energy Services Inc. (SPN) Tenaris S.A. (TS)

Tetra Technologies Inc. (TTI) Thermon Group Holdings (THR) Tidewater Inc. (TDW)


5 December 2011 35


Transocean Ltd. (RIG) Weatherford International (WFT)

Distribution of Ratings:

Barclays Capital Inc. Equity Research has 2013 companies under coverage.

44% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 56% of companies with this rating are investment banking clients of the Firm.

41% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 50% of companies with this rating are investment banking clients of the Firm.

12% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 37% ofcompanies with this rating are investment banking clients of the Firm.

Guide to the Barclays Capital Price Target:

Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock willtrade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's pricetarget over the same 12-month period.

Barclays Capital offices involved in the production of equity research:

London

Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)

New York

Barclays Capital Inc. (BCI, New York)

Tokyo

Barclays Capital Japan Limited (BCJL, Tokyo)

São Paulo

Banco Barclays S.A. (BBSA, São Paulo)

Hong Kong

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)

Toronto

Barclays Capital Canada Inc. (BCC, Toronto)

Johannesburg

Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg)

Mexico City

Barclays Bank Mexico, S.A. (BBMX, Mexico City)

Taiwan

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan)

Seoul

Barclays Capital Securities Limited (BCSL, Seoul)

Mumbai

Barclays Securities (India) Private Limited (BSIPL, Mumbai)

Singapore

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

DISCLAIMER:

This publication has been prepared by Barclays Capital, the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates as provided below. It isprovided to our clients for information purposes only, and Barclays Capital makes no express or implied warranties, and expressly disclaims all warranties ofmerchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays Capital will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays Capital is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.

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