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21 April 2016
Please refer to important disclosures on the last 6 pages of this document
Andreas Stubsrud
Direct: +47 24 13 21 16 Email: [email protected]
Bård Rosef
Direct: +47 24 13 21 56 Email: [email protected]
Rig market presentation
GCE NODE 2016
2 Source: Pareto Securities Equity Research
Oil market
Current OPEC-driven oil oversupply will evaporate in 2016 and 2017
Significant investments needed
Cost deflation and efficiency gains after pro-longed upcycle makes lower oil price sustainable in the long run
Rig market outlook
The worst demand down cycle in the history of offshore drilling
Supply will adjust due to cost of keeping rigs active and re-investment need building
Today’s topics
4
Oil market summary
Source: Pareto Securities Equity Research
Historic and Pareto Brent Crude Forecast
Oil demand grows 1-1.5mbd every year
Non-OPEC production from 2014 record growth to 2016 largest decline in 25 years
OPEC growth delays balancing: Iraq , Saudi record production - Iran nuclear sanctions lifted
Significant non-OPEC investments and oil prices ~USD 70/bbl needed to balance market long-term
Likelyhood of an «overshoot» increasing
5
2014: From deficit to surplus as OPEC changed strategy However, primarily the psychology of the market changing
Source: Pareto Securities Equity Research
2014 production growth/decline
0.8
-0.5
1.2
1.3
0.5
1.0
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Productiondeficit 2013
US shale Non-OPECgrowth
OPEC growth Demandgrowth
Productionsurplus 2014
mbd
Very high non-OPEC production growth
The OPEC «surprise»
Demand somewhat soft
6
0.81.2
0.5
0.6
1.1
1.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Productionsurplus 2014
US shale Non-OPECgrowth
OPEC growth Demandgrowth
Productionsurplus 2015
mbd
2015: OPEC continues to pump oil into the market «Lag» in production decline for non-OPEC production
Source: Pareto Securities Equity Research
2015 production growth/decline
Non-OPEC production growth halved
Iraq surprise + Saudi continuing to increase
Demand relatively strong
7
1.2
0.5
-0.7
0.2
0.81.0
0.0
0.5
1.0
1.5
2.0
Productionsurplus 2015
US shale Non-OPECgrowth
OPEC growth Demandgrowth
Productionsurplus 2016
mbd
2016: Momentum in production decline building High OPEC growth, with Iran sanctions lifted, delaying balancing
Source: Pareto Securities Equity Research
2016 production growth/decline
U.S. shale reponding rapidly to lower investments
Iran comeback
Assumed «low» demand growth Other non-OPEC
still growing
8
2017: Momentum in production decline building High OPEC growth, with Iran sanctions lifted, delays balancing
Source: Pareto Securities Equity Research
2017 production growth/decline excl. U.S. shale
0.5
-0.8
-0.4 0.4
1.0
-1.0
-0.5
0.0
0.5
1.0
Productionsurplus 2016
Non-OPECgrowth
OPEC growth Demand growth Productiondeficit YE'2017
mbd Significant increase in U.S. shale needed
Already «too late» for offshore production reversal
in 2017
Still «above normal» OPEC production growth
9
0%
5%
10%
15%
20%
25%
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015e
Spare capacity relative to world demand
OPEC production at record levels already
OPEC spare capacity
Structural decline in spare capacity
Non-OPEC production will have to grow also in the future, this in not 1986
Source: Pareto Securities Equity Research, IEA
0
1000
2000
3000
4000
5000
6000
7000
des. 62 des. 77 des. 92 des. 07
Iran production 1965-2016
Saudi production 1962-2016
0
2000
4000
6000
8000
10000
12000
des. 62 des. 82 des. 02
Iraq production 1965-2016
0.0
1.0
2.0
3.0
4.0
5.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Iraq crude production
mbd
10
Stronger than expected cost deflation offshore and onshore 30-40% cost deflation both onshore and offshore
Source: Company reports and data, Pareto Securities Equity Research
-30-35 % -30-35 %
-35-40 %
-20-45 %
-20-25 %
-15-20 %
-20-25 %
-15-35 %
-50 %
-45 %
-40 %
-35 %
-30 %
-25 %
-20 %
-15 %
-10 %
-5 %
0 %
Greenfielddeepwater
development
Greenfieldshallow waterdevelopment
"Full scale"subsea tie-back
Brownfieldprojects
Current prices Sustainable price reduction
-15-30 %
-10-20 %
-5-10 %
-20-40 %
-20-30 %-15-25%
-35 %
-30 %
-25 %
-20 %
-15 %
-10 %
-5 %
0 %
Drilling time per well Drilling & completioncost per lateral ft.
Well cost
2014 2015
Cost deflation U.S. shale Cost deflation offshore
11
US Lower 48 liquids production sensitive to oil price
Oil price > USD 50/bbl to re-ignite growth
Likely USD 70/bbl to balance market long-term
Source: Woodmackenzie, Pareto Securities Equity Research
US Lower 48 Liquids Production 2014-30e
0
2
4
6
8
10
12L48 Oil production (mill bbl/day)
USD 40 flat USD 50 flat USD 60 flat USD 70 flat Base case
-0.3
0.1
0.60.8
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
USD 40 flat USD 50 flat USD 60 flat USD 70 flat
mboed
Production growth p.a. 2017-2020
12
E&P spending falling significantly
Spending estimated down ~25% last year and another ~25% this year
Biggest declines for onshore U.S. which will rebound the most
*Source: Company data; Pareto
E&P spending growth and oil price
-30 %
-20 %
-10 %
0 %
10 %
20 %
30 %
0
20
40
60
80
100
120
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
y/y change
Nominal spending growth (rhs) Average Brent (lhs)
USD/bbl
13 1
3
Oil companies cutting spending because they “have to” do so
Oil companies need to cut their spending capex to bring their near to medum term budgets in balance
Needs ~USD 90/bbl to be able to spend as much as in 2014, which is unlikely but could lead to “overshoot” if required
*Statoil, Shell, Total, ENI, COP. Exxon, Chevron, Lukoil, PTTEP, Apache, OXY, BG , MROl, Husky, Murphy, Lundin, EnQuest
Source: Company data; Bloomberg; Pareto
E&P companies simplified cash flow overview*
46 46 50 52 58 49 51 52 53
155190
217242 232
176139 134 139
227
284 274
247 253
157146
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014 2015 2016e 2017e 2018e
Dividends Capex Operating cash flow
USDbn
USD 65/bbl
USD 55/bbl
USD 45/bbl
14
Project deferrals and cancellations remove > 3 mboepd by 2020
-16%
-37% -36%
-25%
-18%
-43%
-50%
-23%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Majors USIndependents
US onshore Total
15 vs 14 16 vs 15
0
-0.6
-1.6
-2.4
-3.2
-4.6
-6 -7
-6
-5
-4
-3
-2
-1
0
2016 2017 2018 2019 2020 2021 2022
Capex budget reductions % – 2015/16e Annual oil production deferrals*– mill bbl/day
Source: Company Q4/15 reports,, Schlumberger, Pareto Securities Equity Research, * excluding tight oil
15
1.00.4
9.9
0
2
4
6
8
10
World annual demandgrowth
Chinese annual demandgrowth
Saudi Arabia crudeproduction
mbdmbd
15
Demand for new oil mainly driven by decline in existing production
Decline* in existing production is
equivalent to either
3-4x world demand growth
10x Chinese demand growth
1 Saudi Arabia every 3rd year
*Based on IHS Cera, IEA, Wood Mackenzie estimates and company guiding
Source: Pareto
Decline in existing production vs. demand growth and Saudi prod.
Annual decline in existing production: 3-4 mbd *
16 Source: Pareto Securities Equity Research, Petrobras
The impact of increased depletion is often overlooked
Oil growth/decline per year
Non-OPEC1.1 1 - 1.2
1 - 1.5
1
OPEC0.7
0.5
0
0.5
1
1.5
2
2% increase indepletion ex. Shale
U.S. shale & tight oilgrowth at "high" oil
prices
World demandgrowth
Current oversupply
mbd
Iran growth Q2'16-2017
OverprodutionQ2'16
17 1
7
In the short-term, 2010-14 investments limits production decline of long-lead offshore regions
Source: BP; Pareto
North Sea oil production
0
1
2
3
4
5
6
7
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015e
New fields Historic/Base
mbd
18
0
2
4
6
8
10
12
14
16
2008 2009 2010 2011 2012 2013 2014 2015
USDbn
"Conventional" E&P spend down ~40%(2011 to 2015)
Source: Pareto Securities Equity Research, Rystad D-Cube
Estimated Petrobras post-salt capex down ~40% from peak
19 Source: Pareto Securities Equity Research, Petrobras
…which has seen post-salt production down 31% in the same period
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2008 2009 2010 2011 2012 2013 2014 2015
bpd (000)
Post-salt production
Post-salt production down 32%(January 2011 to July 2015)
20 Source: Pareto Securities Equity Research, Petrobras
…while total production is stable as pre-salt has grown
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2008 2009 2010 2011 2012 2013 2014 2015
bpd (000)
Post-salt production Pre-salt production
22
E&P spending falling significantly
Spending estimated down ~25% last year and another ~25% this year
Biggest declines for onshore U.S. which will rebound the most
*Source: Company data; Pareto
E&P spending growth and oil price
-30 %
-20 %
-10 %
0 %
10 %
20 %
30 %
0
20
40
60
80
100
120
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
y/y change
Nominal spending growth (rhs) Average Brent (lhs)
USD/bbl
23
Current downturn (by far) the worst in the history of offshore drilling
Source: Pareto Securities Equity Research
Projected demand development vs. previous down cycles as % of pre-crisis high
New floater demand projections vs. August 2015 projection
50
60
70
80
90
100
110
120
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36
1986 crash - Jackups 1986 crash - Floaters 1998-99 Asia crisis - Jackups
1998-99 Asia crisis - Floaters 2001-04 downcycle - Jackups 2001-04 downcycle - Floaters
2008-10 financial crisis - Jackups Current downturn - Floaters
Demand Peak Current stage in the cycle
Months vs. peak demand
24
Bigger cuts in brownfield drilling than originally projected
Source: Pareto Securities Equity Research
Demand by well type
New floater demand projections vs. August 2015 projection
85 91 104134
156 139107 ~95
2643
51
3833
29
17~15
10282
10090
85
75
60
~40
1 42
11
24
213 216
256266
276254
208
~150
0
50
100
150
200
250
300
apr.10 apr.11 apr.12 apr.13 apr.14 apr.15 des.15 TroughEst.
Development Appraisal Exploration Standby
# of floaters
25
Supply
Source: Pareto Securities Equity Research
Current floater fleet status
Currently Warm Cold Conf.
Contracted stacked stacked Total fleet Scrapped Marketed Total Inc. Scrap
2nd gen 18 7 9 34 19 72 % 53 % 34 %
3rd gen 20 10 9 39 21 67 % 51 % 33 %
4th gen 30 13 11 54 8 70 % 56 % 48 %
5th gen 17 7 17 41 4 71 % 41 % 38 %
6th gen 102 22 3 127 0 82 % 80 % 80 %
Total current fleet 187 59 49 295 52 76 % 63 % 54 %
Utilization
26
Supply expected to respond by delaying newbuilds
Source: Pareto Securities Equity Research
Expected delivery schedule IHS-orderbook vs. expected deliveries
Sete Brasil currenly expected to be moderated to seven rigs
Keppel CAN DO drillship and certain planned/on order semis in China not expected to be built
Newbuilds will continue to be dalayed and «timed to market» as it is better to stack at yard
Nevertheless remains an overhang as they will be bid agressively in tenders
21 20
29
7
11
9
6
4
3
3
70
43
0
10
20
30
40
50
60
70
80
Total orderbook Expected deliveries
Moored drillship
Benign semi
Harsh semi
Sete Brasil
Intl. drillship
0
10
20
30
40
50
60
70
jan
.16
apr.
16
jul.1
6
okt
.16
jan
.17
apr.
17
jul.1
7
okt
.17
jan
.18
apr.
18
jul.1
8
okt
.18
jan
.19
apr.
19
jul.1
9
okt
.19
jan
.20
apr.
20
jul.2
0
okt
.20
Intl. drillship Sete Brasil Harsh semi
Benign semi Moored drillship Original delivery schedule
Current delivery schedule
# of floaters delivered
27
Projected floater rig oversupply thorugh 2020
Source: Pareto Securities Equity Research
# of non-working rigs
-50
0
50
100
150
200
jan 2014 jan 2015 jan 2016 jan 2017 jan 2018 jan 2019 jan 2020
Scrapped Cold stacked Warm stacked/Idle Projected
# of floaters
28
Demand vs. total supply
Source: Pareto Securities Equity Research
Current floater fleet status
0
50
100
150
200
250
300
350
400
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Less than 10 years 10-20 years 20-30 years More than 30 years Total demand
# of rigs
29
Only 3 of 19 projected PDO’s submitted in 2013-14
Source: NPD; Companies; Pareto Securities Equity Research
Submitted field development plans in 2013-14 vs. NPD expectations
What happened to the «booming» NCS market?
19
3
2
9
5
Projected 2013-14PDO's in January 2013
PDO submitted in2013-14
PDO submitted in2015
Delayed Removed frompipeline
2x Barents
Sea
11x North Sea
7x Norwegian
Sea
Flyndre Oseberg Delta 2
Rimfaksdalen J. Sverdrup Maria
Downcycle on NCS primarily driven by reduced development drilling demand
This trend started long before the decline in the oil price
30
Norwegian Continental Shelf is not dead this time either
Source: Pareto Securities Equity Research
31
Dayrate projections
Source: Pareto Securities Equity Research
Current floater fleet status
Another 50-60 rigs must be removed from the market to relance in the long term in our view
FLOATERS
6th gen semis Stacked at $15-30'/d $200'/day @ 60% $325-350'/d @ 90%
6th gen dri l l ships Stacked at $30-40'/d $200'/day @ 60% $350'/d @ 90%
5th gen semis - "High-end" Stacked at 10-20kpd $225-275'/day @ 60%
5th gen semis - "Low end" Stacked at 10-15kpd / Scrapped
5th gen dri l l ships Stacked at 10-30kpd / Scrapped
"High end" 3-4th gen moored semis Stacked at 10-15kpd $150-170'/day @ 0-60% $175-275'/day @ 80-85%
"High end" 3-4th gen Harsh semis Stacked at 10-15kpd $200-275'/day @ 80-85%
"Low end" 2-4th gen rigs Stacked at 5-10kpd / Scrapped
Moored dri l l ships Scrapped
JACKUPS
Heavy duty jackups Stacked at $15'/d $130-200'/day @ 0-60% $225-275'/d @ 80-90%%
Modern 400ft. KFELS/PPL Standard Stacked at $10-15'/d $75'/day @ 80% $90'/day @ 85%
Legacy jackups Low rate, contract depenant on region and cl ient
2016 2017 2018 2019
2016 2017 2018 2019
32 Source: Pareto Securities Equity Research
Oil market
Current OPEC-driven oil oversupply will evaporate in 2016 and 2017
Significant investments needed
Cost deflation and efficiency gains after pro-longed upcycle makes lower oil price sustainable in the long run
Rig market outlook
The worst demand down cycle in the history of offshore drilling
Supply will adjust due to cost of keeping rigs active and re-investment need building
Today’s topics
34
Demand recovery projected during 2018
Source: Pareto Securities Equity Research
Non-OPEC ex. Shale & FSU production growth vs E&P spending: 2000-18e Y-o-Y change in E&P spending, rig spending
Relative loss of market share to shale when the market recovers, with oil price lows reducing the «bear case» on sanctioning of long-cycled offshore greenfield projects
Activity revovery to ~80% of peak levels by YE’2018
Cumulative revenue of covered names down ~45% from the 2014 level reflecting new oil price reality
Initial recovery driven by tie-ins and recovery in brownfield drilling due to long lead times for large greenfield projects
Recovery driven by (1) accelerating depletion, (2) «more for less» prominent also offshore (3) 2018 the year when on-the-shelf projects looks likey to come back (based on Q1’16 oil price trough)
-25 % -25 %
No est. No est.
-14 %
-24 %
-14 %
29 %
-16 %
-23 %-20 %
1 %
-30 %
-20 %
-10 %
0 %
10 %
20 %
30 %
40 %
2015e 2016e 2017e 2018e
Total E&P spending Rig count Rig lease spending
0.5
0.1
0.4
-0.1
-0.3
-0.5
0.0
-0.3-0.1
0.5
0.8
-0.2
-0.8
0.3
1.2
0.8
0.1
-0.4
-0.8 -30%
-15%
0%
15%
30%
45%
-1.0
-0.5
0.0
0.5
1.0
1.5
2000 2002 2004 2006 2008 2010 2012 2014 2016e 2018e
Non-OPEC ex. US shale and FSU yoy Nominal spending growth yoy (rhs)
mbd spending
35
NCS floater market summary Bleak outlook on delayed development projects
Source: Pareto Securities Equity Research
Downturn driven by reduced development activity
Only 3 of 19 projected PDO’s submitted during 2013-14, with the downturn starting long before the oil price decline. Delayed tie-in projects in the Norwegian Sea the biggest disappointment
Exploration activity is expected to remain decent at current oil prices (although lower than in 2012-13) due to tax break, APA 2015 acreage and reduced drilling cost
Project economics to benefit materially for oilco’s on lower drilling cost with project pipeline primarily consisting of tie-back projects where well construction cost is a larger part of total capex than for new developments
Ample supply and limited contract opportunities in 2016
14 floaters available by YE’2016 and 21 of 28 available by YE’2017 with J. Sverdrup contract for Deepsea Atlantic the first long term contract award by Statoil since August 2013
Only 2 active tenders on-going with few other development drilling opportunities in the near-term pipeline other than some roll-overs in at Statoil’s North Sea brownfields
Exploration drilling, largely driven by smaller independents, expected to be short lead-time and short-duration contracts given well supplied market
Several rigs are very old and due for replacement
With very efficient high spec 6th gen semi Deepsea Atlantic getting USD 300’/day on long-term contract, short term work will be at lower rates. Idle time expected for rigs available in 2016
Legacy rigs is expected to largely be cold stacked with crew informed of lay offs for both coming off contracts in 2H’2015. Unlikely to come back unless demand picks up significantly, with more efficient rigs available
36
Significant open capacity following two years «without» contracts
Source: IHS-Petrodata; Pareto Securities Equity Research
NCS floater fleet overview
NCS fleet overview: 14 rigs available by YE’2016, 21 by YE’2017
J. Sverdrup award to Deepsea Atlantic the first contract awarded by Statoil since August 2013
6 rigs available in 2H’2015 including 4 high spec rigs
14 rigs available through YE’2016
21 of 28 contracted (incl. Newbuilds)rigs available through 2017
Rig Owner Built Type Operator Free
West Navigator NADL 2000 5G - jan.15 "Luke-warm"/Cold stacked
Trans. Spitsbergen Transocean 2010 6G - jun.15 Warm stacked
West Venture NADL 2000 5G Statoil jul.15
Trans. Searcher Transocean 1983 3G Edison aug.15
Bredford Dolphin Fred. Olsen 1980 3G AGR sep.15
Transocean Barents Transocean 2009 6G Shell sep.15
Island Innovator Maracc 2012 5G Lundin jan.16
Trans. Arctic Transocean 1986 4G RMN/OMV feb.16
Songa Trym Songa 1976 2G Statoil mar.16
Leiv Eiriksson Ocean Rig 2001 5G Rig share mar.16
Transocean Winner Transocean 1983 3G Det Norske jul.16
West Alpha NADL 1986 4G Exxon jul.16
COSLPioneer COSL 2010 5G Statoil aug.16
Songa Delta Songa 1980 3G Statoil sep.16
Songa Dee Songa 1984 3G Statoil okt.16
Bideford Dolphin Fred. Olsen 1975 3G Statoil jan.17
West Hercules Seadrill 2008 6G Statoil jan.17 Working in Canada Planned return
Stena Don Stena 2001 4G Statoil feb.17
Scarabeo 5 Saipem 1990 4G Statoil jun.17
Deepsea Bergen Odfjell 1983 3G Statoil jun.17
Scarabeo 8 Saipem 2012 6G Eni jul.17
Borgland Dolphin Fred. Olsen 1977 3G Rig share des.17
Deepsea Atlantic Odfjell 2009 6G Statoil mar.19
Transocean Leader Transocean 1987 4G EnQuest mai.19 Leaving to UK
COSLInnovator COSL 2011 5G Statoil sep.19
COSLPromoter COSL 2012 5G Statoil des.19
Songa Equinox Songa 2015 6G Statoil sep.23
Songa Endurance Songa 2015 6G Statoil nov.23
Songa Encourage Songa 2016 6G Statoil mar.24
Songa Enabler Songa 2016 6G Statoil jun.24
Q3
2015 2016 2017
Q1 Q2 Q3 Q4 Q1 Q2 Q4 Q1 Q2 Q3 Q4
37
Exploration drilling likely to be spot contracts
Source: IHS-Petrodata; Pareto Securities Equity Research
Currently active tenders on the NCS
Currently only two outstanding tenders with 2H’16 – 1H’17 start-up
Currently only three active tenders with start up in 2H’2016 to 1H’2017, of which at least one requires high spec rig
Status Operator Area Field Exp. Duration Exp. start-up Exp. award Comments
Actively
tenderingStatoil North Sea J. Sverdrup Ph. 1 3 years Mid-2016 2Q'2015 Targeting award before summer. Min 5,000 ton VDL
Actively
tenderingDetnor North Sea Alvheim Area 250 days 2H'2016 2H'2015
Tendering against the renewal of Transocean Winner
(contract expiry Jul-16). Current tender for 4 wells, but
could be longer term contract
Actively
tenderingWintershall
Norwegian
SeaMaria 580 days 2Q'2017 3Q'2015
4 proucers and 2 injectors from two subsea templates.
Delayed twice. Needs higher spec rig
Other potential demand
Status Operator Area Field Exp. Duration Exp. start-up Exp. award Comments
Likely
retendered.
Pot. jackup
Premier North Sea Vette (ex-Bream) 400 days 2017 2015-16
Expected to be retendered following delay in Jan-15.
Tender which closed in October 2014 saw 5 jackups and 5
semis offered. ~400ft. W.d.
Pre-tendering Repsol Misc. Exploration ~100-150 days mid-2016 N/ARepsol has issued RFI for 2-3 well exploration program in
2016. High spec rig required. Could be part of a rig share
Expects to use
West HerculesStatoil
Norwegian
SeaAasta Hansteen ~500 days 1H'2016 N/A
Plans to use West Hercules for the job. The rig is currently
drilling exploration wells in Canada and is contracted to
Jan 2017 (would likely need short extension to complete
campaign). Statoil also made disoveries of ~100-120m
bbls in 2015 exploration campaign, that will lead to follow
up work ("likely fast track") in Aasta Hansteen area
38
Given well-supplied market, we expect short lead-time/duration contracts
Source: NPD; Pareto Securities Equity Research
Historical # of exploration and appraisal wells by basin (start date)
Exploration activity expected to remain decent at 30-40 wells per year
~40 exploration and appraisal wells expected in 2015 which is down from very high 55-60 level in 2013-14
Statoil the company contributing most to reduction, down from 19 operated wells to 8-12 in 2015
Exploration activity expected to remain decent at ~30-40 wells p.a. going forward even at current oil price level
Modest investment to drill exploration wells on NCS due to tax refund introduced in 2005
46 more blocks incl. in APA 2015 round
In recent years’ tight market, other oilco’s have jointly chartered rigs with well slots to “offer” attractive duration, however going forward, the majority of the exploration contracts will likely be well based as on UK shelf
Exception of Statoil and Lundin which will use 1+ rig for E&A drilling each
0
10
20
30
40
50
60
70
North Sea Norwegian Sea Barents Sea
Exploration tax refund introduced
39
Adapting quickly to the new oil price environment with highest priority
Source: IHS-Petrodata; Pareto Securities Equity Research
Rigs warm stacked while under dayrate
Oil companies pushing hard to reduce investments imminently
Several rigs have been warm stacked while under charter (and dayrate) as oilco’s targets to reduce 2015 budgets as much as possible
Primarily savings on spread costs (~USD 4-500’/day) for the oil company
Statoil released 6th gen semi Transocean Spitsbergen despite the rig drilling very efficiently
Drilled 40% faster than anticipated in 2014 Barents campaign and 2015 Norwegian Sea campaign, with cost savings exceeding the entire dayrate cost of a drilling rig
Suspension period Rig Client Comments
Nov-14 to Jan-15 Songa Trym Statoil
Nov-14 to Jan-15 Trans. Spitsbergen Statoil
Oct-14 to Aug-15* COSLPioneer Statoil *Estimated return to drilling
Oct-14 to Feb-15 Scarabeo 5 Statoil
Jan-15 to Mar-15 Bredford Dolphin RWE Laid-up during 1-well slot of RMN
Apr-15 to Jun-15 Trans. Seacher BG Laid up for rem. of charter
40
35
40
2830
2320
13
0
5
10
15
20
25
30
35
40
45
Snefrid Nord Roald Rygg Bister* Gymir
Expected Actual
days
Trans. Spitsbergen’s 2015 Norw. Sea campaign
40
Decline in demand since 2013 primarily in the more mature basins
Source: IHS-Petrodata; Pareto Securities Equity Research
Floater market by basin NCS floater market by well type
23 floaters contracted following release of Spitbergen, down from 28 in 1H’2014
~6-7 rigs drilling E&A wells down from ~8-10 units
14 rigs drilling development wells down from 16 units
Operations suspended on 2 rigs (May)
North Sea accounting for ~60-70% of demand, Norwegian Sea ~20-30% and Barents Sea 5-15%
Activity has reduced significantly in the Norwegian Sea in 2014-15 vs. 2010-2013
The recent decline in demand has mainly been in the North Sea and Norwegian Sea while Barents have been steady at 1-3 rigs since 2013
0
5
10
15
20
25
30
jan
.09
mai
.09
sep
.09
jan
.10
mai
.10
sep
.10
jan
.11
mai
.11
sep
.11
jan
.12
mai
.12
sep
.12
jan
.13
mai
.13
sep
.13
jan
.14
mai
.14
sep
.14
jan
.15
mai
.15
Development Exploration & Appraisal Suspended* Yard/WoW/Mob etc.
# of contractedrigs
0
5
10
15
20
25
30
jan
.09
mai
.09
sep
.09
jan
.10
mai
.10
sep
.10
jan
.11
mai
.11
sep
.11
jan
.12
mai
.12
sep
.12
jan
.13
mai
.13
sep
.13
jan
.14
mai
.14
sep
.14
jan
.15
mai
.15
North Sea Norwegian Sea Barents Sea Suspended* Yard/WoW/Mob etc.
# of contracted rigs
41
Statoil mainly drilling development wells while other oilco’s are largely exploring
Source: IHS-Petrodata; Pareto Securities Equity Research
Other Oilco’s – Contracted floaters by well type Statoil – Contracted floaters by well type
Marority of Statoil’s demand is development drilling in mature Troll, Tampen and Oseberg areas
Other oilco’s have been steadily exploring
0
2
4
6
8
10
12
14
16
18
20
jan
.09
mai
.09
sep
.09
jan
.10
mai
.10
sep
.10
jan
.11
mai
.11
sep
.11
jan
.12
mai
.12
sep
.12
jan
.13
mai
.13
sep
.13
jan
.14
mai
.14
sep
.14
jan
.15
mai
.15
Development Exploration & Appraisal Suspended* Yard/WoW/Mob etc.
# of contracted rigs
0
2
4
6
8
10
12
14
jan
.09
mai
.09
sep
.09
jan
.10
mai
.10
sep
.10
jan
.11
mai
.11
sep
.11
jan
.12
mai
.12
sep
.12
jan
.13
mai
.13
sep
.13
jan
.14
mai
.14
sep
.14
jan
.15
mai
.15
Development Exploration & Appraisal Suspended* Yard/WoW/Mob etc.
# of contracted rigs
42 Source: Statoil; Pareto Securities Equity Research
Several tie-back prospects in the Norwegian Sea, however for now most have been delayed
Only Wintershall’s Maria project sanctioned from a healthy project list
Shell’s Linnorm & Hasselmus projects on hold
DEA/L1 Group’s Zidane project pushed further out
Statoil’s Trestakk, Mikkel Sør delayed. Limited updates on Asterix
Limited updates on Centrica’s Fogelberg
The Aasta Hansteen development and associated Polarled pipeline, where construction is currently underway, remains an important play opener for gas projects in the Norwegian Sea
Recent discoveries areas surrounding should also lead to additional work in Aasta Hansteen area and increase project robustness
Delayed tie-ins in the area the biggest «disappointment» the recent year
Polarled and certain potential tie-in projects
Norwegian Sea: Multiple modest-size development projects delayed
43 Source: Pareto Securities Equity Research
Pil & Bue discoveries the only “positive” news, with majority of other potential projects on hold
Several with relatively modest economics, however that will likely benefit significantly from reduced drilling cost with tie-in projects more rig intensive than new developments
Norwegian Sea: Current development project (requiring floating rig) pipeline
Project economics often challenging, but will benefit materially from lower drilling cost
Norwegian Sea: Multiple modest-size development projects delayed
Status Operator Area Field Exp. Duration Exp. start-up Exp. award Comments
Prospective
developmentVNG
Norwegian
SeaPil & Bue N/A N/A N/A
Among largest discoveries in Norway in 2014. Two new
exploration/appraisal wells drilled in 2015. Could be tied
back to Draugen or new Njord platform. Likely good
economics.
Development
on hold
RWE Dea /
L1 Group
Norwegian
SeaZidane ~400 days N/A N/A
Originally planned PUD in October 2014. Struggled with
tariff negotiations for tie-in, and need to make the
investment more robust. Also transition of ownership
Prospective
tie-inStatoil
Norwegian
SeaTrestakk N/A N/A N/A
Subsea tie-back to Åsgård A. Statoil originally planned
DG2 in March 2015 on the back of the oil price decline and
need to delay investments. NPD disputing the delay
Prospective
tie-inStatoil
Norwegian
SeaMikkel Sør N/A N/A N/A
Subsea templates tied back to Mikkel. Originally planned
PDO in 2013. PDO now expected in 2016
Prospective
tie-inCentrica
Norwegian
SeaFogelberg N/A N/A N/A Subsea tie-back to Heidrun or Asgard platform. HPHT field
Prospective
tie-inStatoil
Norwegian
SeaAsterix N/A N/A N/A Subsea tie-back
Potential
tie-inStatoil
Norwegian
SeaSnillehorn N/A N/A N/A
Could be developed as a fast-track subsea tieback to the
Hyme facilities.
Development
cancelledShell
Norwegian
SeaLinnorm ~300-500 days N/A N/A
Prev. plan was 4-5 HP/HT subsea wells tied back to
Draugen. Very challenging economics and unlikely to be
developed
Unkown status ShellNorwegian
SeaHasselmus N/A N/A N/A Tie in to Draugen
44 Source: Pareto Securities Equity Research
North Sea: Current development project (requiring floating rig) pipeline
Generally very robust economics due to good infrastructure
North Sea: A handful of fast-track projects will probably mature
Most potential future tie-in projects in the North Sea with very robust economics
Like in the Norwegian Sea, tie-in projects are more rig intensive than greenfield projects and benefit more from reduced drilling cost
Status Operator Area Field Exp. Duration Exp. start-up Exp. award Comments
Prospective
developmentWintershall North Sea Skarfjell N/A N/A N/A
Development options currently being evaluated. Could
be subsea tie-bck to Gjøa or independent
Prospective
tie-inStatoil North Sea Krafla N/A N/A N/A
Likely fast track candidate, with tie-back to Oseberg Sør.
Good economics and recent finds. Could use jackup
(~350ft. W.d)
Prospective
tie-inStatoil North Sea Grane D N/A N/A N/A Fast track cancidate. Tie-in to Grane. Good economics
Prospective
tie-inCentrica North Sea Frigg Gamma/Delta N/A N/A N/A Potential tie-back
Prospective
tie-inCentrica North Sea Fulla N/A N/A N/A ~350ft. W.d. Potentially jackup
Prospective
tie-in?Total North Sea Garantiana N/A N/A N/A
45
North Sea: Mature fields remain key for rig demand
Source: Statoil; Pareto Securities Equity Research
While J. Sverdrup takes the headlines, the mature fields in the Tampen and Oseberg area and the Troll field is the most important source of demand for floating rigs on the NCS
Statoil plans to continue drilling with four (DP) rigs at the Troll field alone to 2020
Equal to ~1/3 of its rigs under charter
Full exploitation of these areas is also one of the main objectives of the government being time-critical
Recent delay of a new Snorre C platform (Tampen)
Tampen-area, Troll and Oseberg area the biggest source of rig demand on NCS
# of rigs working at the Troll field
0
1
2
3
4
5
6
7
jan
.09
mai
.09
sep
.09
jan
.10
mai
.10
sep
.10
jan
.11
mai
.11
sep
.11
jan
.12
mai
.12
sep
.12
jan
.13
mai
.13
sep
.13
jan
.14
mai
.14
sep
.14
jan
.15
mai
.15
# of rigs
46 Source: Pareto Securities Equity Research
Barents Sea: Current development project (requiring floating rig) pipeline
Expected to remain a 1-3 rig basin in the forseeable future
Barents Sea: Largely on hold on mixed exploration results
Exploration activity in the Barents Sea remains decent with Statoil the absentee in 2015
Lundin drilling 4 more wells in Alta/Gotha blocks
2016 remains uncertain while new blocks in Barents SE from the 23rd licencing round is expected to increase activity from 2017
No development drilling, other than at the on-going Goliat development, expected in the Barents Sea through at least YE’2016
Alta/Gotha (Lundin) & J. Castberg (Statoil) remains most prospective projects with mixed exploration results
Status Operator Area Field Exp. Duration Exp. start-up Exp. award Comments
Prospective
developmentLundin Barents Sea Alta & Gotha N/A N/A N/A
Could be developed in conjunction with Johan Castberg
for onhore terminal. Exploration/Apprisal drilling on-
going with 3-4x wells in 2015
Development
on holdStatoil Barents Sea J. Castberg N/A N/A N/A
DG2 delayed from Q2'15 to Q3'16. Planned to use the 4th
Cat-D rig, which will arrive in Norway mid-2016 (an is now
unallocated).
Prospective
developmentOMV Barents Sea Wisting N/A N/A N/A
~150mbls discovered today, active exploration program.
Likely need for additional exploration success
Prospective
tie-inStatoil Barents Sea Snøhvit North N/A N/A N/A Seems unlikely to materialise in forseeable future
47
Government pressure mounting for continued investments
Source: Pareto Securities Equity Research
Norwegian authorities (Statoil’s main shareholder) pushing for continued exploitation
Last three Statoil «delays» in 2015 have all been disputed by Norwegian authorities
Veslefrikk
Trastakk
Snorre 2040
48
2825
21
26
21
11
2 1
4
0
5
10
15
20
25
30
YE'2013 Leaving C. stacked YE'2014 Leaving C. stacked Likely C.stacked
YE'2015 Likelyreturning
Newbuilds YE'2016
# of floaters
Cat-D deliveries offset by rigs leaving the shelf
Source: Pareto Securities Equity Research
Oversupply on the NCS is not driven by significant supply increase
W. Hercules to Faroe/Canada
Polar Pioneer to Shell Alaska/Singa
Ocean Vanguard (UK)
Trans. Leader to Premier UK
W. Navigator (NOR)
Bredford Dolphin Songa Cat-D’s
Trans. Searcher
W. Hercules from Canada
14x available incl. 8x 30-40 year old rigs
49
However, it will likely be painful to own legacy rigs
NCS fleet overview – by age
Supply side flexibility remains significant
Average age of ~20 years excl. Cat-D
Supply could decrease to 20 rigs by YE’2016 if all legacy rigs available by then is released
Source: IHS-Petrodats; Pareto Securities Equity Research
4039
38
35 35
32 32 3231
29 29
25
1514 14
76 6
5 54
3 3 3
0 0 0 00
5
10
15
20
25
30
35
40
45
Age (years)
12 legacy rigs8 off contract by YE'2016
50
Offshore project costs down ~30-40% on lower oil service costs ..but in the medium to long term costs will normalize
Source: Pareto Securities Equity Research
Cost deflation by project type Split of generic offshore development capex
Biggest savings for tie-ins and brownfield projects which are more drilling and subsea intensive
0 %
20 %
40 %
60 %
80 %
100 %
Greenfield deepwaterdevelopment
Greenfield shallowwater development
"Full scale" subseatie-back
Pipelines & misc. other Drilling - Other
Drilling - Rig lease Subsea - SURF
Subsea - Equipment Prod. facilities & processing equ.
-30-35 % -30-35 %
-35-40 %
-20-45 %
-20-25 %
-15-20 %
-20-25 %
-15-35 %
-50 %
-45 %
-40 %
-35 %
-30 %
-25 %
-20 %
-15 %
-10 %
-5 %
0 %
Greenfielddeepwater
development
Greenfieldshallow waterdevelopment
"Full scale"subsea tie-back
Brownfieldprojects
Current prices Sustainable price reduction
51
Significantly increased projects efficiency E.g. drilling efficiency improved ~20-40% from 2014
Source: Pareto Securities Equity Research
NCS drilling time/well Pre.salt Brazil well construction time
Total Dalia, Block 17, Angola Chevron USGoM deepwater drilling
0
100
200
300
400
Until 2010 2011 2012 2013 2014 2015eDrilling Completion (incl. WCT)
Days per well
0 %
20 %
40 %
60 %
80 %
100 %
2013 2014e 2015eDrilling time per well
Time per well
0
20
40
60
80
100
2012 2013 2014 2015Drilling time per well
Average days per 10'ft. drilled
-35 %
0 %
20 %
40 %
60 %
80 %
100 %
2014 average Improvedefficiencies
2015
Drilling time per well
Time per well
Significant built-in in-efficiencies after a decade long bull cycle
Improved drilling efficiency all else equal negative for demand, but also
Increases spending capacity of offshore focused E&P’s such as Petrobras
Increases offshore competitiveness
Promotes more subsea intensive developments
52
Onshore costs also continuing to come significantly down 30-40% cost deflation both onshore and offshore
Source: Company reports and data, Pareto Securities Equity Research
-15-30 %
-10-20 %
-5-10 %
-20-40 %
-20-30 %-15-25%
-35 %
-30 %
-25 %
-20 %
-15 %
-10 %
-5 %
0 %
Drilling time per well Drilling & completioncost per lateral ft.
Well cost
2014 2015
U.S. cost efficiencies
53 Source: Pareto Securities Equity Research
Average hurdle rate above current oil prices
Cost deflation accounting for majority of cost savings
65
38
11
16
18%
24%
42%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
10
20
30
40
50
60
70
Aggregateddevelopment
costs
Scope Cost deflation Aggregated MtMdevelopment
costs
Cost savings (%)Aggregated development costs (USDbn)
54
~45% cost deflation and ~25% efficiency improvement in Norway in 2015
Cost deflation and efficiency improvement not only onshore U.S.
Source: Miljødirektorated, NPD, Pareto Securities Equity Research
Days spent on exploration wells 2015YTD Cost per day of drilling a well (assuming spot)
Using spot rates for rigs and OSV vessels, well cost per day in Norway is down ~45% from peak
Backlog «coming to an end» in 2016
27 wells & 7 sidetracks exploration wells completed ~25% faster than estimated on approval
Statoil estimated a 16% reduction in days per well in 2014
0
500
1000
1500
2000
2500
Estimated at approval Actual drilling dates
Days
-24.4%
0
200
400
600
800
1000
1200
2000 2002 2004 2006 2008 2010 2012 2014 2016
Total cost per day of drilling 3G Norway midwater dayrate
USD'day
-45%
USD'day
-45%
56
Wolfcamp (Permian) and Eagle Ford the lowest break-evens
Wolfcamp (Permian) and Eagle Ford the lowest average break-evens
Despite a wide variation within plays, production-weighted breakevens for key liquids plays span <USD15/bbl
Companies with concentrated positions in the Permian basin have the lowest break-evens
48 52
55 58 58 60
62 64
0
10
20
30
40
50
60
70
38 39
45 47 47 51
54 57 58
61
70 71
83 87
0
20
40
60
80
100
Liquids break-evens by key play – USD/bbl Liquids break-evens by company*– USD/bbl
Source: Woodmackenzie, Pareto Securities Equity Research, NPV discounted at 10% nominal, *weighted by 2016 production
57
Total OPEC capacity growth 2015-21e 0.8 mill bbl/day
Iran 2015-21e total capacity growth 340,000 bbl/day to 3.9 mill bbl/day
Iraq 2015-21e total capacity growth 270,000 bbl/day to 4.6 mill bbl/day
Saudi 2015-21e total capacity growth 70,000 bbl/day to 12.3 mill bbl/day
(Libya 2015-21e total capacity growth 190,000 bbl/day to 590,000 bbl/day)
Iran the largest addition increasing capacity 0.3 mill bbl/day to 3.9 mill bbl/day
Source: Pareto Securities Equity Research, IEA
35.64 35.72 35.89 36.02 36.17 36.34 36.44
27
28
29
30
31
32
33
34
35
36
37
2015 2017e 2019e 2021e
OPEC Crude Capacity 2015-21e; mill bbl/day
2015 2016e 2017e 2018e 2019e 2020e 2021e 2015-21e
Algeria 1,15 1,12 1,09 1,06 1,04 1,01 0,99 -0,16
Angola 1,81 1,81 1,77 1,81 1,78 1,76 1,8 -0,01
Ecuador 0,56 0,55 0,55 0,55 0,55 0,54 0,53 -0,03
Indonesia 0,69 0,71 0,71 0,69 0,67 0,65 0,63 -0,06
Iran 3,6 3,6 3,7 3,75 3,8 3,9 3,94 0,34
Iraq 4,35 4,35 4,36 4,4 4,45 4,53 4,62 0,27
Kuwait 2,83 2,87 2,91 2,93 2,94 2,9 2,88 0,05
Libya 0,4 0,4 0,43 0,46 0,49 0,53 0,59 0,19
Nigeria 1,91 1,9 1,84 1,75 1,78 1,85 1,85 -0,06
Qatar 0,68 0,67 0,66 0,66 0,66 0,66 0,66 -0,02
Saudi Arabia 12,26 12,31 12,43 12,45 12,44 12,39 12,33 0,07
UAE 2,93 2,97 3,02 3,07 3,12 3,17 3,2 0,27
Venezuela 2,48 2,46 2,44 2,43 2,45 2,44 2,42 -0,06
Total OPEC 35,65 35,72 35,91 36,01 36,17 36,33 36,44 0,79
OPEC Crude Capacity per Country 2015-21e; mill bbl/day
58
Pareto Oil Market Outlook - Summary
Strong oil demand growth 2015, slowing in 2016
Non-OPEC production from 2014 record growth to 2016 largest decline in 25 years
Strong OPEC growth delays balancing: Iraq , Saudi record production - Iran nuclear sanctions lifted
Market remains oversupplied > 1mill bbl/day - OPEC production freeze could balance market H2/16
11th Pareto E&P Independents Conference London March 31st 2016
Source: IEA, Pareto Securities Equity Research
Oil demand vs supply 2001-21e; mill bbl/day
28.5
29.5
30.5
31.5
32.5
33.5
34.5
Q1'10 Q1'11 Q1'12 Q1'13 Q1'14 Q1'15 Q1'16e Q1'17e
mbd
Call-on-OPEC OPEC production
OPEC production vs call-on-OPEC
75
80
85
90
95
100
105
2001 2003 2005 2007 2009 2011 2013 2015 2017e2019e2021e
Demand Supply
59
US oil rig count and oil production
Source: Baker Hughes, *EIA (Assumes 2016 Brent USD 34/bbl and 2017 USD 40/bbl,), Pareto Securities Equity Research
US Oil Rig Count 1987-2016 EIA: US Crude Production 2012-17e; mill bbl/day*
4.00
5.00
6.00
7.00
8.00
9.00
10.00
2012 2013 2014 2015 2016 2017
US Crude Production US Lower 48 Production (excl. GoM)0
200
400
600
800
1 000
1 200
1 400
1 600
1 800
7.17.1987 7.17.1992 7.17.1997 7.17.2002 7.17.2007 7.17.2012
60
2015 demand growth 5-year high, slowing in 2016
Demand growth 2015 1.8 mboepd highest in 5 years
Demand growth slowing to 1.2 mboepd yoy in 2016
Weaker economic growth in China and major oil producers (Brazil, Russia, Middle East, US)
Demand growth peaked in Q3/15 at 2.3 mill bbl/day
Demand slowed significantly in Q4/15 with warm start of winter removing 0.5 mill bbl/day demand
US demand has rebounded after declining Sep-Nov
Source: IEA; Pareto Securities Equity Research
0.8 0.6
1.6
3.1
1.4 1
1.5
-0.6 -1
3.1
0.9 1.1 1.2
0.9
1.8
1.2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
2001 2003 2005 2007 2009 2011 2013 2015
1.2
0.6 0.7
1.1
1.6
2.0
2.3
1.2 1.2 1.0 1.0
1.5
0
0.5
1
1.5
2
2.5
Q1/14 Q3/14 Q1/15 Q3/15 Q1/16e Q3/16e
Global oil demand growth 2001-2016e; mbd Oil demand growth Q1/14-Q4/16e; mill bbl/day
61
Less than 15% of US tight oil resources commercial at USD 40/bbl
50% is commercial at WTI USD 55/bbl – 95% of modelled resources commercial at WTI USD 80/bbl
New cumulative US tight oil liquids by break-even
Source: Woodmackenzie, Pareto Securities Equity Research,
62
Saudi Arabia record production - USD 590 bn foreign reserves
Source: Pareto Securities Equity Research, IEA, IMF, OPEC, Bloomberg
Saudi Foreign Reserves – USD mill Saudi production; ‘000 bbl/day
Saudi production from June 2015 all time high 10.6 mill bbl/day to February 2016 10.2 mill bbl/day
Saudi Aramco USD 40 bn annual capex budget to maintain 12 mill bbl/day (official) capacity – IPO proposed
Saudi foreign reserves end-2015 USD 600 bn - down USD 140 bn from peak
2016 estimated Saudi budget deficit at USD 40/bbl crude price USD 90 bn – 15% of GDP
Field Location 2012 Capacity Reserves 2016 additions 2017 additions
Ghawar Onshore 5.8 mill bbl/day 65
Safaniya Offshore 1.2 mill bbl/day 35
Khurais Onshore 1.2 mill bbl/day 0.3
Manifa Offshore 0.9 mill bbl/day 17
Shaybah Onshore 0.75 mill bbl/day 10 0.25
Qatif Onshore 0.5 mill bbl/day
Khursaniyah Onshore 0.5 mill bbl/day
Zuluf Offshore 0.5 mill bbl/day
Abqaiq Onshore 0.4 mill bbl/day
Other 0.25 mill bbl/day
Total 12.0 mill bbl/day 265 0,25 0,3
Saudi Arabia Capacity per field
0
100000
200000
300000
400000
500000
600000
700000
800000
01.03.1970 01.03.1990 01.03.2010
0
2000
4000
6000
8000
10000
12000
01.12.1962 01.12.1982 01.12.2002
63
Iran – lifting of nuclear sanctions
Source: Pareto Securities Equity Research, Bloomberg, OPEC, IEA, Woodmackenzie
Iran crude production 1965-2016
Iran current production 3.0 mill bbl/day (IEA/Bloomberg) – 3.4 mill bbl/day (Iran own data OPEC report)
Lifting of nuclear sanctions – offering 70 upstream projects for foreign investments
Iran pre-sanction levels: 3.6 mill bbl/day in H2/2016 (IEA) – Woodmackenzie 3.7 mill bbl/day H2/2017
Iran 2020: IEA 3.9 mill bbl/day– Woodmackenzie: 4.0 mill bbl/day assuming USD 50 bn foreign investmenst
Projects for foreign investments
0
1000
2000
3000
4000
5000
6000
7000
01.12.1962 01.12.1977 01.12.1992 01.12.2007
Iran scenarios – 2010-2025e
64
Iraq record production, growth stalling from lack of investments
Source: IEA, Bloomberg, KRG MNR, Pareto Securities Equity Research
Iraq infrastructure and IS control Iraq crude production 1965-2016
Iraq record production in January 4.4 mill bbl/day (IEA) – 600,000 bbl/day KRG independent exports
Growth stalling both in Kurdistan and Basra region due to lack of new field and infrastructure investments
IS continues to control large, sunni-dominated areas and to threaten KRG and Iraq Federal Government
Iraq higher long term supply potential than Saudi Arabia > 15 mill bbl/day
0.0
1.0
2.0
3.0
4.0
5.0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Iraq crude production
mbd
Iraq Scenarios & Targets
4.5
9.0
12.0
14.7
0
2
4
6
8
10
12
14
16
IEA 2020 Iraq 2020Target
Iraq 2020Old Target
Contractssignedw/IOCs
Basra region
65
Libya – IS Attacking Key Oil Infrastructure
Libya current oil production 370,000 bbl/day- IS controlling territory and attacking oil infrastructure
Libya oil production 1.6 mill bbl/day before the fall of Gaddafi in 2011
ISIS is conducting a sophisticated, multi-front campaign against Libya oil facilities
Source: The Maghreb and Orient Courier, Bloomberg, Pareto Securities Equity Research
0
500
1000
1500
2000
2500
3000
3500
01.12.1962 01.12.1977 01.12.1992 01.12.2007
ISIS Libya Campaign January – February 2016 Libya Crude Oil Production
66
Contact details
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Paris (France) Pareto Securities AS, Paris Branch 11 BD Jean Mermoz 92200 Neuilly Sur Seine FRANCE Tel: +33 141921234
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Origin of the publication or report This publication or report originates from Pareto Securities AS (“Pareto Securities”), reg. no. 956 632 374 (Norway), Pareto Securities AB, reg. no. 556206-8956 (Sweden) or Pareto Securities Limited, reg. no. 3994976, (United Kingdom) (together the Group Companies or the “Pareto Securities Group”) acting through their common unit Pareto Securities Research. The Group Companies are supervised by the Financial Supervisory Authority of their respective home countries. Content of the publication or report This publication or report has been prepared solely by Pareto Securities Research. Opinions or suggestions from Pareto Securities Research may deviate from recommendations or opinions presented by other departments or companies in the Pareto Securities Group. The reason may typically be the result of differing time horizons, methodologies, contexts or other factors. Basis and methods for assessment Opinions and price targets are based on one or more methods of valuation, for instance cash flow analysis, use of multiples, behavioral technical analyses of underlying market movements in combination with considerations of the market situation and the time horizon. Key assumptions of forecasts, price targets and projections in research cited or reproduced appear in the research material from the named sources. The date of publication appears from the research material cited or reproduced. Opinions and estimates may be updated in subsequent versions of the publication or report, provided that the relevant company/issuer is treated anew in such later versions of the publication or report. Credit ratings are based on the same rating scale as international rating agencies and represent the opinion of Pareto Securities Research as to the relative creditworthiness of securities. A credit rating on a standalone basis should not be used as a basis for investment operations. Pareto Securities Research may also provide credit research with more specific price targets based on different valuation methods, including the analysis of key credit ratios and other factors describing the securities creditworthiness, peer group analysis of securities with similar creditworthiness and different DCF-valuations. All credit ratings mentioned in this publication or report are Pareto Securities Research’s own credit rating estimates unless otherwise mentioned. All descriptions of loan agreement structures and loan agreement features are obtained from sources which Pareto Securities Research believes to be reliable, but Pareto Securities Research does not represent or warrant their accuracy. Be aware that investors should go through the specific complete loan agreement before investing in any bonds and not base an investment decision based solely on information contained in this publication or report. Pareto Securities Research has no fixed schedule for updating publications or reports. Unless otherwise stated on the first page, the publication or report has not been reviewed by the issuer before dissemination. In instances where all or part of a report is presented to the issuer prior to publication, the purpose is to ensure that facts are correct. Validity of the publication or report All opinions and estimates in this publication or report are, regardless of source, given in good faith and may only be valid as of the stated date of this publication or report and are subject to change without notice. No individual investment or tax advice The publication or report is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This publication or report has been prepared by Pareto Securities Research as general information for private use of investors to whom the publication or report has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s particular financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment. Before acting on any information in this publication or report, we recommend consulting your financial advisor. The information contained in this publication or report does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.
V. 04.2016
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Disclaimers and disclosures
Sources This publication or report may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from Pareto Securities Research’ analysts or representatives, publicly available information, information from other units or companies in the Group Companies, or other named sources. To the extent this publication or report is based on or contains information emanating from other sources (“Other Sources”) than Pareto Securities Research (“External Information”), Pareto Securities Research has deemed the Other Sources to be reliable but neither the companies in the Pareto Securities Group, others associated or affiliated with said companies nor any other person, guarantee the accuracy, adequacy or completeness of the External Information. Ratings Equity ratings: “Buy” Pareto Securities Research expects this financial instrument’s total return to exceed 10% over the next six months “Hold” Pareto Securities Research expects this financial instrument’s total return to be 0-10% over the next six months “Sell” Pareto Securities Research expects this financial instrument’s total return to be negative over the next six months Credit ratings: AAA Best Quality AA+ / AA / AA- Strong ability for timely payments A+ / A / A- Somewhat more exposed for negative changes BBB+ / BBB / BBB- Adequate ability to meet payments. Some elements of protection. BB+ / BB / BB- Speculative risk. Future not well secured B+ / B / B- Timely payments at the moment, but very exposed to any negative changes CCC+ /CCC/ CCC- Default a likely option Analysts Certification The research analyst(s) whose name(s) appear on research reports prepared by Pareto Securities Research certify that: (i) all of the views expressed in the research report accurately reflect their personal views about the subject security or issuer, and (ii) no part of the research analysts’ compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analysts in research reports that are prepared by Pareto Securities Research. The research analysts whose names appears on research reports prepared by Pareto Securities Research received compensation that is based upon various factors including Pareto Securities’ total revenues, a portion of which are generated by Pareto Securities’ investment banking activities. Limitation of liability Pareto Securities Group or other associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this publication or report. In no event will entities of the Pareto Securities Group or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report. Neither the information nor any opinion which may be expressed herein constitutes a solicitation by Pareto Securities Research of purchase or sale of any securities nor does it constitute a solicitation to any person in any jurisdiction where solicitation would be unlawful. All information contained in this research report has been compiled from sources believed to be reliable. However, no representation or warranty, express or implied, is made with respect to the completeness or accuracy of its contents, and it is not to be relied upon as authoritative. Risk information The risk of investing in certain financial instruments, including those mentioned in this document, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.
69
Disclaimers and disclosures
Conflicts of interest Companies in the Pareto Securities Group, affiliates or staff of companies in the Pareto Securities Group, may perform services for, solicit business from, make a market in, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report. In addition Pareto Securities Group, or affiliates, may from time to time have a broking, advisory or other relationship with a company which is the subject of or referred to in the relevant Research, including acting as that company’s official or sponsoring broker and providing corporate finance or other financial services. It is the policy of Pareto to seek to act as corporate adviser or broker to some of the companies which are covered by Pareto Securities Research. Accordingly companies covered in any Research may be the subject of marketing initiatives by the Corporate Finance Department. To limit possible conflicts of interest and counter the abuse of inside knowledge, the analysts of Pareto Securities Research are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of the Group Companies and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. It is the policy of Pareto Securities Research that no link exists between revenues from capital markets activities and individual analyst remuneration. The Group Companies are members of national stockbrokers’ associations in each of the countries in which the Group Companies have their head offices. Internal rules have been developed in accordance with recommendations issued by the stockbrokers associations. This material has been prepared following the Pareto Securities Conflict of Interest Policy. The guidelines in the policy include rules and measures aimed at achieving a sufficient degree of independence between various departments, business areas and sub-business areas within the Pareto Securities Group in order to, as far as possible, avoid conflicts of interest from arising between such departments, business areas and sub-business areas as well as their customers. One purpose of such measures is to restrict the flow of information between certain business areas and sub-business areas within the Pareto Securities Group, where conflicts of interest may arise and to safeguard the impartialness of the employees. For example, the Corporate Finance departments and certain other departments included in the Pareto Securities Group are surrounded by arrangements, so-called Chinese Walls, to restrict the flows of sensitive information from such departments. The internal guidelines also include, without limitation, rules aimed at securing the impartialness of, e.g., analysts working in the Pareto Securities Research departments, restrictions with regard to the remuneration paid to such analysts, requirements with respect to the independence of analysts from other departments within the Pareto Securities Group rules concerning contacts with covered companies and rules concerning personal account trading carried out by analysts. Distribution restriction The securities referred to in this publication or report may not be eligible for sale in some jurisdictions and persons into whose possession this document comes should inform themselves about and observe any such restrictions. This publication or report is not intended for and must not be distributed to private customers in the US, or retail clients in the United Kingdom, as defined by the Financial Conduct Authority (FCA). This research report is only intended for and may only be distributed to institutional investors in the United States and U.S. entities seeking more information about any of the issuers or securities discussed in this report should contact Auerbach Grayson & Company at 25 West 45th Street New York, NY 10036 Tel. 1 212-453-3549 or Pareto Securities Inc. at 150 East 52nd Street, New York, NY 10022, Tel. 212 829 4200. Auerbach Grayson & Company is a broker-dealer registered with the U.S. Securities and Exchange Commission and is a member of the FINRA & SIPC. Investment products provided by or through Auerbach Grayson & Company or Pareto Securities Research are not FDIC insured may lose value and are not guaranteed by Auerbach Grayson & Company or Pareto Securities Research. Investing in non-U.S. securities may entail certain risks. This document does not constitute or form part of any offer for sale or subscription, nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements. The information available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Fluctuations in the values of national currencies, as well as the potential for governmental restrictions on currency movements, can significantly erode principal and investment returns. Market rules, conventions and practices may differ from U.S. markets, adding to transaction costs or causing delays in the purchase or sale of securities. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies. Auerbach Grayson & Company and/or Pareto Securities Research may have material conflicts of interest related to the production or distribution of this research report which, with regard to Pareto Securities Research, are disclosed herein. Pareto Securities Inc. is a broker-dealer registered with the U.S. Securities and Exchange Commission and is a member of FINRA & SIPC. U.S. To the extent required by applicable U.S. laws and regulations, Pareto Securities Inc. accepts responsibility for the contents of this publication. Investment products provided by or through Pareto Securities Inc. or Pareto Securities Research are not FDIC insured, may lose value and are not guaranteed by Pareto Securities Inc. or Pareto Securities Research. Investing in non-U.S. securities may entail certain risks. This document does not constitute or form part of any offer for sale or subscription, nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. The securities of non-U.S. issuers may not be registered with or subject to SEC reporting and other requirements. The information available about non-U.S. companies may be limited, and non-U.S. companies are generally not subject to the same uniform auditing and reporting standards as U.S. companies. Market rules, conventions and practices may differ from U.S. markets, adding to transaction costs or causing delays in the purchase or sale of securities. Securities of some non-U.S. companies may not be as liquid as securities of comparable U.S. companies.
70
Disclaimers and disclosures
Distribution in Singapore Pareto Securities Pte Ltd holds a Capital Markets Services License is an exempt financial advisor under Financial Advisers Act, Chapter 110 (“FAA”) of Singapore and a subsidiary of Pareto Securities AS. This report is directed solely to persons who qualify as "accredited investors", "expert investors" and "institutional investors" as defined in section 4A(1) Securities and Futures Act, Chapter 289 (“SFA”) of Singapore. This report is intended for general circulation amongst such investors and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of any product referred to in this report, taking into account your specific financial objectives, financial situation or particular needs before making a commitment to purchase any such product. Please contact Pareto Securities Pte Ltd, 16 Collyer Quay, # 27-02 Income at Raffles, Singapore 049318, at +65 6408 9800 in matters arising from, or in connection with this report. Additional provisions on Recommendations distributed in the Canada Canadian recipients of this research report are advised that this research report is not, and under no circumstances is it to be construed as, an offer to sell or a solicitation of or an offer to buy any securities that may be described herein. This research report is not, and under no circumstances is it to be construed as, a prospectus, offering memorandum, advertisement or a public offering in Canada of such securities. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon this research report or the merits of any securities described or discussed herein and any representation to the contrary is an offence. Any securities described or discussed within this research report may only be distributed in Canada in accordance with applicable provincial and territorial securities laws. Any offer or sale in Canada of the securities described or discussed herein will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the recipient. Canadian recipients are advised that Pareto Securities AS, its affiliates and its authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the information contained herein. Distribution in United Kingdom This publication is produced in accordance with COBS 12.3 as Non-Independent Research and approved under part IV article 19 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “FPO”) by Pareto Securities Limited for communication in the United Kingdom only to investment professionals as that term is defined in article 19(5) of the FPO. This publication is issued for the benefit of persons who qualify as eligible counterparties or professional clients and should be made available only to such persons and is exempt from the restriction on financial promotion in s21 of the Financial Services and Markets Act 2000 in reliance on provision in the FPO. Copyright This publication or report may not be mechanically duplicated, photocopied or otherwise reproduced, in full or in part, under applicable copyright laws. Any infringement of Pareto Securities Research´s copyright can be pursued legally whereby the infringer will be held liable for any and all losses and expenses incurred by the infringement.
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Disclaimers and disclosures
Appendix A Disclosure requirements pursuant to the Norwegian Securities Trading Regulations section 3-10 (2) and section 3-11 (1), letters a-b Pareto Securities AS does not alone or - together with affiliated companies or persons – owns a portion of the shares exceeding 5 % of the total share capital in any company where a recommendation has been produced or distributed by Pareto Securities AS. Pareto Securities AS or its affiliates own as determined in accordance with Section 13(d) of the Exchange Act, 1 % or more of the equity securities of Equinox Offshore Accommodation Ltd. Pareto Securities AS may hold financial instruments in companies where a recommendation has been produced or distributed by Pareto Securities AS in connection with rendering investment services, including Market Making. Please find below an overview of material interests in shares held by employees in Pareto Securities AS, in companies where a recommendation has been produced or distributed by Pareto Securities AS. “By material interest” means holdings exceeding a value of NOK 50 000.
Appendix B Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11, letters d-f, ref the Securities Trading Act Section 3-10 Overview over issuers of financial instruments where Pareto Securities AS have prepared or distributed investment recommendation, where Pareto Securities AS have been lead manager/co-lead manager or have rendered publicly known not immaterial investment banking services over the previous 12 months:
Appendix C
Disclosure requirements pursuant to the Norwegian Securities Trading ST Regulation § 3-11 (4)
R ecommendat ion % d ist r ibut ion
Buy 57 %
Hold 33 %
Sell 10 %
R ecommendat ion % d ist r ibut ion
Buy 79 %
Hold 16 %
Sell 5 %
* Companies under coverage with which Pareto Securit ies Group has on-going or completed public investment banking services in the previous 12 months
This overview is updated monthly (last updated 31.03.2016).
D ist r ibut ion o f recommendat ions
D ist r ibut ion o f recommendat ions ( t ransact ions*)
Advanzia Bank Genel Energy Paret o Bank
Af r ica Energy Gener8 Marit ime Paret o Eiendomsf elleskap II
AINMT Golar LNG ParJack
Aker ASA Goodt ech Philly Tankers
Arendal Harkand Finance Pioneer Marine
At lant ic Of f shore Havnegården Prosaf e
At lant ic Pet roleum Höegh LNG Scana Indust r ier
Aust evoll Seaf ood It haca Pet roleum Sea Trucks Group
Axis Of f shore KNOT Of f shore Seaf arms Group
BI7 Kont or Kolon Wat er & Energy Selvaag Bolig
Blue Ocean Drilling Komplet t Bank Sept em Of f shore
Boa Kongsberg Gruppen Sevan Marine
BoDo Const ruct or Libert y Bulkers Solør Bioenergi
Deep Drilling Magseis St er ling Resources
Denison Mines Marine Harvest Group Technip
Det Norske Oljeselskap Monobank TiZir
DigiPlex Navigazione Mont anari TRD Campus
DNO Int ernat ional Nordisk Company Tryg
EnergyOpt imal Ocean Rig UDW Inc. TTS Group
Exmar Ocean Yield Vardia Insurance Group
Faroe Pet roleum OSA Goliat h West ern Bulk
Fornebu Gat eway Oslo Helsebygg World Wide Supply
Front line PA Resources Ya Bank
This overview is updated monthly (this overview is for the period 31.03.2015 – 31.03.2016).
C ompany A nalyst ho ld ings Tot al ho ld ings C ompany A nalyst ho ld ings Tot al ho ld ings
AF Gruppen - 1,675 Opera Software - 2,000
AINM T - 59,000 Orkla - 20,659
AKVA Group - 1,100 Pareto Bank - 1,560,037
American Shipping Company - 2,500 Pareto Eiendomsinvest Nordic - 190,234
Austevoll Seafood - 14,850 Pareto Growth Invest - 9,000
Avance Gas Holding Ltd. - 2,117 Pareto World Wide Shipping - 2,980
Awilco LNG - 40,000 Petroleum Geo-Services - 23,184
Axactor - 849,500 Prosafe - 20,810
B2Holding - 860,400 Protector Forsikring - 534,000
Bonheur - 46,800 Questerre Energy - 110,275
BW LPG Ltd. - 2,169 REC Silicon - 438,087
Det norske oljeselskap - 3,875 SalM ar - 400
DNB - 34,784 Sandnes Sparebank - 15,001
DNO Internat ional - 92,607 Seadrill - 14,500
DOF - 193,500 Selvaag Bolig - 50,000
Farstad Shipping - 16,700 Solstad Offshore - 10,000
Fred Olsen Energy - 21,200 Sparebank 1 Nord-Norge - 130,251
Front line - 6,783 Sparebank 1 SM N - 45,690
Gjensidige Forsikring - 7,751 Sparebank 1 SR-Bank - 54,082
Helgeland Sparebank - 2,000 Sparebanken M øre - 10,764
Hexagon - 6,000 Sparebanken Sør - 7,800
Höegh LNG - 1,368 Sparebanken Vest - 48,326
Jæren Sparebank - 1,000 Sparebanken Øst - 10,000
Kongsberg Gruppen - 3,700 Statoil - 9,219
Lerøy Seafood Group - 13,040 Stolt-Nielsen - 2,335
M arine Harvest Group - 800 Storebrand - 4,064
M onobank - 3,713,000 Subsea 7 - 12,406
Nordic Semiconductor - 4,700 Tanker Investments - 6,881
Norsk Hydro - 101,895 Telenor - 1,295
Norske Skogindustrier - 30,040 TGS-NOPEC - 2,050
Norwegian Finans Holding - 2,000 Vardia Insurance Group - 387,899
Norwegian Air Shutt le - 9,869 XXL - 6,022
Norwegian Property - 150,000 Yara Internat ional - 9,891
Ocean Yield - 27,568 Zenterio - 236,817
Odfjell Drilling - 82,742
This overview is updat ed mont hly ( last updat ed 31.03.2016)
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Disclaimers and disclosures
M agnolia Bostad SciBase Holding
Nobina AB Stillf ront Group
NGEx Resources
Africa Oil Kallebäck Property Invest OrganoClick Tethys Oil
Byggmästare Anders J Ahlström Lundin Gold Rusforest Tribona
Cavotec M agnolia Bostad Saltängen Property Invest Trigon Agri
DDM Holding NAXS SciBase
Delarka Holding Nexst im ShaM aran Petroleum
Episurf NGEx Resources Stillf ront Group
Appendix D
This section applies to research reports prepared by Pareto Securities AB.
Disclosure of positions in financial instruments The beneficial holding of the Pareto Group is 1 % or more of the total share capital of the following companies included in P areto Securities AB’s research coverage universe: Rusforest
The Pareto Group has material holdings of other financial instruments than shares issued by the following companies included in Pareto Securities AB’s research coverage universe: None
Disclosure of assignments and mandates Overview over issuers of financial instruments where Pareto Securities AB has prepared or distributed investment recommendation, where Pareto Securities AB has been lead manager or co-lead manager or has rendered publicly known not immaterial investment banking services over the previous twelve months:
Members of the Pareto Group provide market making or other liquidity providing services to the following companies included in Pareto Securities AB’s research coverage universe:
Members of the Pareto Group have entered into agreements concerning the inclusion of the company in question in Pareto Securities AB’s research coverage universe with the following companies: NoneThis overview is updated monthly (last updated 18.04.2016).