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8/6/2019 Drilling Sept 09 Final2
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7/25/2011 2009 Energy-Redefined. All Rights Reserved.. 1
Gary Howorth
Founder
2009 Trends in the Offshore Drilling Rig Market IBC Global Conferences
29th September
How to Profit and Survive in
Drilling
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Introduction Points to be Covered
Overview of the current drilling marketFuture views- What might the dynamics look like in the next 5 years?- What about carbon how will that affect the oil & gas industryand drilling in particular?
- What will oil & gas prices do to the market?- What might technology and cost saving do to the business?Lessons from downturns from both within and outside of theindustry- What can we learn from downturns and apply now?
What potential business models does this suggest?- Should you merge, innovate, cost reduce or something else?So what does it mean? - the way forward for the drilling industry
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The Order of Play
So how do your customers the oil companies view this?What about GDP and other prices e.g. Steel pricesSo what does that mean for oil prices & the Offshore DrillingIndustryCarbon & Carbon Capture & Storage (CCS)
TechnologySo what have others done in a downturn/recession can welearn anythingOptions and Alternatives
The Way Forward?Conclusions
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Industry Quotes
Our analysis shows that given the recent cost climate present day commodity price levels simply do not allow the Majors to continue to grow the business and pay substantial shareholder returns, - Neil McMahon of SanfordC. BernsteinWhile the drilling rig count, are down sharply from last year
and continue to fall, the key question remains when we willget an upturn in Gas/Oil demand from recoveringautomobile and housing industries.. Once prices recover,then drilling should resume,The challenge for the oil service industry is to gauge the numberof drilling rigs that will be needed once we enter the industryrecovery phase. May need considerably fewer rigs to restore a relative balancebetween supply and demand that is needed to supportreasonable pricing.
Is this right?
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Oil Company Financials
Sources & Uses of Cash
0
10,000
20,000
30,000
40,000
50,000
60,000
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
2 0 2 0
2 0 2 1
2 0 2 2
$ m i l l i o n s
Acquisitions Development Capex Financing - Outflow DividendsBuybacks & other Operating Cash Flow Disposal Proceeds Financing - Inflow
$70/bbl andlarge budget cuts
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Oil Company Free Cash-flow: The Customers Pain
Free Cashflow
-5000
0
5000
10000
15000
20000
2 0 0 8
2 0 1 0
2 0 1 2
2 0 1 4
2 0 1 6
2 0 1 8
2 0 2 0
2 0 2 2
2 0 2 4
2 0 2 6
$70/bbl80$/bbl
Minimum Level of Cashflow?
Many Oil companies in Pain at 70-80$/bbl Will affect drilling
$12 Billion Dev CPX budget, $2 BillionExpro
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Complex Interactions forming Prices and impactingDrilling
7/25/2011 2009 Energy-Redefined. All Rights
Reserved. 7
GDPGrowth
Ex RatesSupply
Oil CompanyCashflows
Oil Demand
CompanyBehavior
Taxes
Wells Drilled
Oil Price
LaborSteel
concreteetc
Costs
Consumer Confidence etc
Govt Taxchangesresulting
indifferentregional
focus
FutureProductionfrom Expro
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So What About the USA
Greater exports and asmaller current accountdeficit less dependence onforeign investors to bail outthe financial sector - Larry
Summers
China Can no
longer behave likeChina because the
US intends tobehave like china -
FT
Probably means impact on Japans , Germanys and Chinas exports (and current surpluses ),
& Dollar Depreciation
Has an impact on the dollar oil price
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GDP Growth?
R
Consensus View
But where is it really going?
China
Historical
Source FT fromvarious forecasts ascredited
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Saving Grace -Steel Prices?
GDP growth has a great impact on steel prices as well as other
input costs
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How does China and US Assumptions Affect Oil Prices
The order in which oil prices occur mattersCost levels and GDP assumptions are important
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0
10
20
30
40
50
60
70
80
90
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
$ / b b l R e a
l
Oil Price and Well Forecast under a Slower GrowthAssumption
Utilization
0
1000
2000
3000
4000
5000
6000
2007 2008 2009 2010 2011 2012 2013 2014
N o o
f W e l
l s
AsiaMiddle EastCaspianSS AfricaN AfricaEuropeLat amNA
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Complex Interactions forming prices and impactingDrilling Now with Carbon
7/25/2011 2009 Energy-Redefined. All RightsReserved. 13
GDPGrowth
Ex Rates Supply
Oil CompanyCashflows
Oil Demand
CompanyBehavior
Taxes
Oil Price
LaborSteel
concreteetc
Costs
Consumer Confidence etc
Emissions
Carbonlegislation /rules
regulations
Subsidies/Tax
Investments/ Technology
Steel Industry etc
Carbon marketStructure
CompanyBehavior
Politicians
Carbon prices
Weather
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Carbon - $15/CO2e te
Small impact our models show an increase in oil price of 80cents/bblTypical oil company might gain $100 -400 million per year - notgoing to change drilling levels muchCarbon prices likely to reduce GDP by ~ 0.15% - resulting in a
oil price reduction of up to 7 $/bbl ie ~ 10%
Higher oil prices of 100$/bbl could result in a reduction indemand through the use of alternative technologies andefficiency gains. This could further reduce oil prices by as muchas $20/bbl
Estimates by Energy-Redefined
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Carbon Storage
Recent Study shows that Scotland has an extremely large CO2storage resource. This is overwhelmingly in offshore salineaquifers (deeply buried porous sandstones filled with salt water)together with a few specific depleted hydrocarbon fields.The resource can easily accommodate the industrial CO2emissions from Scotland (1/10 of the UK) for the next 200years.There is very likely to be sufficient storage to allow import ofCO2 from NE England,Total potential CO2 capacity in the range 4,600 to 46,000 million
tonnes
But what does that mean for Drilling?
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CCS Well Potential - UK
Estimate by Energy-Redefined - Assuming 4600 million tonnes ofcapacity
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US CCS Potential
US market is 60-80 times biggerBut mostly onshoreBut even with 20% offshore - 500 wells per year potential avery different market !!!US has more storage than it needs from its own industrial
outputNot all Economic right now!!!!!
So this market could be 20% of the world offshore drilling marketand maybe provide bigger margins?
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Impact of Technology over Business As Usual
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%
40.0%45.0%
2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0
% Reduction
Conventional TechnologiesP10
Conventional TechnologiesP50Other Technologies
Impact of Technologies
Estimates by Energy Redefined
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Downturns are times when Smart People makeFortunes
1999:British Petroleum's completed acquisition of Amoco Corp. for $56.5 billion, generated some $18
billion in value over the longer term as oil prices have moved upService Companies: $26 billion of mergers and acquisitions in 1998/99 - representing some ~25% ofthe sector net worth. Cost savings probably generated some $3 billion of value.In 1999 the Drilling Companies Sedco and Transocean merged creating a $3.2 billion entitity. Drivenby cost Savings but created ~$5 billion of value because of higher rig prices
Frontline John Fredriksen made his fortune during the Iran Iraq wars in the 1980s when his tankerspicked up oil at great risk and huge profits. He landed squarely in the sweet spot of the tanker cycle,with the largest fleet of ships. Was counter cyclical creating $1 billion
Bill Hewlett and Dave Packard founded a great company in 1939 from their Garage with innovativeproducts Created ~$60 billion
Chester Carlson patented Dry copying process to create Xerox in the 1930s - ~$4 billion
Revlon quality product with customer focused marketing created ~$150 millionTexas Instruments: Karcher and Mcdermott resigned from Amerada petroleum company in 1930 toset up Geophysical Service Inc. (later TI). Created $28 billion of value starting with a new seismictechnique
Recessions also create great companies
Mergers &risk taking
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Growth Opportunities Increase during EconomicDownturns
It is counter-intuitive but research confirms that economic downturns aregenerally the best times to implement growth initiatives create shareholder value . that the most effective business strategy during boom times is to divest assets or implement similar retrenchment activities.
The Great Depression created more millionaires that any other period of time in UShistory!
Unfortunately, and perhaps not surprising, most companies do the exactopposite!
But How?
Key themes emerge: Efficiencies Deals buy low sell high Innovation Customer (government) focus
Risk taking and opportunity seeking counter cyclical War Chests
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So What does it Mean?
Rigs under-utilized for many years in slow growthscenariosHow do we find alternative uses for them CCS?
Solutions
Understand your customers business. You must understand your business almost as well as they do The more you help them, the more you help yourself
Be creative and Innovative There are plenty of opportunities for us to challenge the way we drill
wells Look for profitable alternatives.
7/25/2011 2009 Energy-Redefined. All RightsReserved. 21
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Opportunities / Alternatives/ Trends
CO2 StorageProduction optimization integration of drillingRig optimization - logisticsConvert the rigs to provide some other function GTL
Transportation Accommodation Production systems
Cost cutting
Seismic while drilling.
Some suggestions
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Short Term Survival Options
Options Internal Acquisition Alliance
Withdrawal
Consolidation
Increased focus on
key sector
Liquidation
Decline or grow withmarket
Divest Managementbuyout
Buyout & shutdown
Subcontractoutsource
JV/Partnering
xxxxx
Technology/Innovation
Buy Expert Co
Cost cutting
New Sector, NewTechnology, R & D
Increase qualityproductivity
Costs/Layoffs/Stacking
Buy key technologiesor licence
? Partnering?
xxxx
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Short Term Survival Options
Trends Internal Acquisition Alliance
Customer focus
Innovation
Prod opti
Liquidation
Decline or grow withmarket
Divest Managementbuyout
Buyout & shutdown
Subcontractoutsource
xxxx
CO2
Buy Expert Co
Alterantive Uses
New Sector, NewTechnology, R & D
Increase qualityproductivity
Costs/Layoffs/Stacking
Buy key technologiesor license
Partnering?
xxxx
JV Partnering
?
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So whats the way Forward
Key - look for alternatives that intersect trendsDoesnt lie in the conventional approaches of acquiring or costcuttingNew Sector approaches have probably have most promise butneed funding
Failing this Profit management not cost cutting Build a war chest for the next downturn
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Conclusions
Oil companies in Cash-flow pain 80$/bbl + needed
Oil prices greatly affected by assumptions on US and Chinesehealth
Oil prices could remain low for many years under a slow growthscenario
Carbon will not affect oil prices that much per say but will affectdemand. At high oil prices this effect could be large.
Utilization of rigs could remain low !!!
Alternative options and uses required to improve profitability
CCS Drilling could add some 15-20%to the drilling stock Key seems to be to have a war chest for future downturns and to
build alternative business lines
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7/25/2011 2009 Energy-Redefined. All Rights Reserved. 27
Thank You
www.Energy-Redefined.com