Brian M. Gibbons, Jr., CFA [email protected]
Oil & Gas Outlook
2
Presentation Overview
• Oil market trends and outlook
• Natural gas market trends and outlook
• Key industry themes
• Credit trends and outlook
3
Global Crude Demand Outlook
Source: IEA, CreditSights
YoY Global Oil Demand Growth (mmbd)
Top 5 Oil Consumers YoY Growth (mmbd)
(0.6)(0.4)
(0.2)0.0
0.20.4
0.60.8
1.0
2012 2013E 2014E
US50 China JapanIndia Russia
(0.9)
2.8
0.71.1
0.81.1
(1.5)(1.0)(0.5)0.00.51.01.52.02.53.0
2009 2010 2011 2012 2013E 2014E
4
Global Crude Supply Outlook
Source: IEA, CreditSights
Global Crude Supply Capacity Growth (mmbd)
OPEC Spare Capacity (mmbd)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
2010 2011 2012 2013E 2014E
Non-OPEC Growth (ex-biofuels)
OPEC Crude Capacity Growth
Total
-
1
2
3
4
5
6
8/03 8/05 8/07 8/09 8/11 8/13
5
Crude and Products Forward Days Demand Cover
Source: EIA, CreditSights
U.S. Demand Cover European Demand Cover
40
45
50
55
60
65
J F M A M J J A S O N D
20132012
Shaded area is 5-yr range
5-yr Avg
55
60
65
70
75
J F M A M J J A S O N D
2012
5-yr Avg
Shaded area is 5-yr range
2013
6
Crude Price Trends and Outlook ($/bbl)
Source: Bloomberg, CreditSights
52-Week Price Trends 12-Month Futures Curves
$60
$70
$80
$90
$100
$110
$120
$130
$140
10/10 4/11 10/11 4/12 10/12 4/13 10/13
WTIBrentLLS
$90
$95
$100
$105
$110
$115
N D J F M A M J J A S O
WTIBrent
7
Refining Margins Reliant on Crude Discounts, Export Strength
Source: Bloomberg, CreditSights
Crude Price Discounts to Brent ($/bbl)
U.S. Composite Refining Margins ($/bbl)
$7.6
4
$7.4
2 $11.
42 $15.
06
$13.
48
$13.
48
$0
$5
$10
$15
$20
$25
2009 2010 2011 2012 2013E 2014E
Annual Change2011: +45%2012: +36%2013E: -15%2014E: 0%
($30)($25)($20)($15)($10)
($5)$0$5
$10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
WTI
May
LLS ANS
Mars
8
Natural Gas Storage and Production Trends
Source: EIA, Bloomberg, CreditSights
Natural Gas Storage (bcf) Natural Gas Production vs. Rig Count
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
J F M A M J J A S O N D
Shaded area is 5-yr range
5-Yr Avg
2013
2012
0200400600800
1,0001,2001,4001,6001,800
7/03 7/05 7/07 7/09 7/11 7/1345.0
50.0
55.0
60.0
65.0
70.0
Rig
Cou
nt Pro
duct
ion
9
Gas Price Competitiveness, Potential LNG Exports
Source: Bloomberg, EIA, CreditSights
Gas Competitive vs. Coal and Oil ($/mmbtu)
Potential Gulf Coast and East Coast LNG Exports
Location Capacity Freeport 1.8 Bcf/d
Lake Charles
2.0 Bcf/d
Sabine Pass
2.2 Bcf/d
Cove Point 1.0 Bcf/d 10/10 4/11 10/11 4/12 10/12 4/13 10/13
$0
$5
$10
$15
$20
$25Nat Gas App. Coal WTI
10
Natural Gas Production and Demand Outlook
Source: EIA, CreditSights
Dry Gas Production (bcf/d) Demand by Sector (bcf/d)
58.4
62.7
65.766.4 66.8
54
56
58
60
62
64
66
68
2010 2011 2012 2013E 2014E0
10
20
30
40
50
60
70
2010 2011 2012 2013E 2014E
Residential CommercialIndustrial Electric Power
11
Natural Gas Futures Prices
Source: Bloomberg, CreditSights. Note: 2013 strip price is October – December.
12-Month Futures Curve Annual Strip Prices
$3.30
$3.50
$3.70
$3.90
$4.10
N D J F M A M J J A S O
$3.81
$4.00
$4.14$4.23
$4.34
$3.25
$3.50
$3.75
$4.00
$4.25
$4.50
2013 2014 2015 2016 2017
12
Key Industry Themes
• Activist risk remains elevated > Share price underperformance > Discounted valuations > Room for leverage
• Returns-focused capital spending > Oil play returns dominate the IRR matrix > Efficiency gains - Pad drilling, horizontal drilling, hydraulic fracturing > Cost controls - Reining in oilfield services and drilling costs, G&A expenses
• Infrastructure developments across the commodity complex > Pipes, rails, and processing plants
13
Existing and Potential Targets for Activists
• Apache Corp (APA; A3/A-) • Devon Energy (DVN; Baa1/BBB+) • Hess (HES; Baa2/BBB) • Murphy Oil (MUR; Baa3/BBB) • Occidental Petroleum (OXY; A1/A)
• Chesapeake Energy (CHK; Ba3/BB-) • Forest Oil (FST; B3/B-) • Newfield Exploration (NFX; Ba1/BBB-) • Quicksilver Resources (KWK; Caa2/CCC)
• Transocean (RIG; Baa3/BBB-)
14
Natural Gas: Returns Drive Strategic Direction
Play Returns Marcellus 20%
Fayetteville 10%
Haynesville 10%
Woodford 20%
Pinedale 20%
Play Returns Cleveland / Tonkawa
40%
Miss. Lime 45%
Granite Wash
40%
Eagle Ford 45%
Marcellus Wet / Utica
20%
Source: Bentek, CreditSights estimates ($3.25/mcf, $80/bbl, NGLs at 30% of crude price)
Dry Gas Liquids-Rich Gas
Play Returns Eagle Ford 45%
Permian 45%
Bakken 55%
Niobrara 45%
Utica 45%
Crude
15
Domestic Crude Production and Takeaway Capacity
Source: IEA, CreditSights
Light Tight Oil Production Planned Pipeline Projects Capacity
Crude Oil Pipeline Project Region kbd Start-upWest TX Gulf Expansion Permian-GC 110 1Q13Permian Express 1 Permian-GC 90 1Q13Longhorn Reversal 1 Permian-GC 135 1Q13Longhorn Reversal 2 Permian-GC 90 3Q13BridgeTex Permian-GC 278 2Q14Permian Express 2 Permian-GC 200 2Q14Permian-GC, total 903
Seaway Reversal Cushing-GC 150 2Q12Seaway Expansion Cushing-GC 250 1Q13Keystone XL Cushing-GC 700 3Q13Seaway Twin Cushing-GC 450 3Q14Cushing-GC, total 1,550
Rail expansions Bakken-All 400 2012Plains Bakken North Bakken-Cushing 50 4Q12Butte Loop Bakken-Eastern Mkts 150 4Q12Enbridge BEP 2 Bakken-Eastern Mkts 145 1Q13Rail expansions Bakken-All 75 2013Keystone XL Bakken-Cushing 100 2Q15Bakken, total 920 Koch Pipeline Eagle Ford-GC 250 4Q12Enterprise Eagle Ford-GC 350 2Q13Eagle Ford, total 600
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
MontereyBarnettNiobraraEagle FordOther Tight OilWilliston Basin
16
Credit Market Trends: Oil & Gas Issuance ($ bn)
Source: Bloomberg, CreditSights.
Investment Grade Issuance High Yield Issuance
$31.2
$62.4 $64.6
$0
$10
$20
$30
$40
$50
$60
$70
YTD '11 YTD '12 YTD '13
$28.5
$43.1$39.1
$0
$10
$20
$30
$40
$50
YTD '11 YTD '12 YTD '13
17
Leverage Comparisons
Source: Company filings, Bloomberg, CreditSights.
Investment Grade E&Ps: Debt/Total Capital
High Yield E&Ps: 2013E Debt/Ebitda(x)
15%19%
27% 28% 30% 31% 31%34%
36%
25%25%
0%
15%
30%
45%
OXY HES MUR MRO PXD APA NBL EOG COP DVN APC
Average
1.6 1.7 2.0 2.4 2.5 2.6 3.14.0
9.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
WLL CLR CXO DNR CHK NFX FST LINE KWK
Average ex-KWK
18
Leverage Comparisons
Source: Company filings, Bloomberg, CreditSights.
Oilfield Services & Drillers: Debt/Total Capital
Refiners: Debt/Total Capital
22% 24%28%
39% 41%
0%
10%
20%
30%
40%
50%
BHI SLB ESV HAL RIG
Average
22%27%
39%
23%
0%
10%
20%
30%
40%
50%
MPC PSX VLO TSO (High Yield)
Average
19
Enterprise Valuation Comparisons: EV/2014E Ebitda(x)
Source: Bloomberg, CreditSights.
Investment Grade E&Ps
High Yield E&Ps
10.1
6.8 6.3 6.0 5.5 5.2
3.2 3.0
4.8 4.74.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
PXD HES NBL EOG APC OXY DVN COP APA MRO MUR
Average
11.8
7.6 7.0 6.8 6.6 6.14.5
4.95.3
0.02.04.06.08.0
10.012.014.0
KWK CXO LINE CLR DNR CHK NFX FST WLL
Average ex-KWK
20
Enterprise Valuation Comparisons: EV/2014E Ebitda
Source: Bloomberg, CreditSights.
Oilfield Services & Drillers
Refiners 5.5 5.2
4.73.9
0.0
1.0
2.0
3.0
4.0
5.0
6.0
PSX TSO (High Yield) VLO MPC
Average
8.8
6.65.9
5.35.5
0.0
2.0
4.0
6.0
8.0
10.0
SLB HAL ESV BHI RIG
Average
21
Equity Performance 2013 YTD
Source: Bloomberg, CreditSights.
Investment Grade E&Ps
High Yield E&Ps
22
Equity Performance 2013 YTD
Source: Bloomberg, CreditSights.
Oilfield Services & Drillers
Refiners
0%
-7%
44%
22%29%
-10%
0%
10%
20%
30%
40%
50%
HAL SLB BHI RIG ESV
-1%
10%
4%
14%
-4%
0%
4%
8%
12%
16%
VLO PSX MPC TSO (High Yield)
23
Bond Comparisons
Source: Bloomberg, CreditSights.
Investment Grade E&Ps: YTM (sorted by maturity)
High Yield E&Ps: YTW (sorted by workout date)
3.2% 2.9%3.5% 3.4% 3.6% 3.7%
4.3%3.9% 3.7%
3.3% 3.6%
0.0%
2.0%
4.0%
6.0%
HES8.1%2019
APC8.7%2019
NBL4.2%2021
OXY3.1%2022
APA3.3%2022
DVN3.3%2022
MUR4%
2022
PXD4%
2022
MRO2.8%2022
COP2.4%2022
EOG2.6%2023
7.3%
10.6%
7.7%
5.3% 4.9%6.0% 5.5%
4.5%5.7% 5.8%
0.0%
3.0%
6.0%
9.0%
12.0%
LINE7.8%2021
KWK9.1%2019
FST7.5%2020
CXO5.5%2023
WLL5.8%2021
TSO(Refiner)
5.4%2022
CHK5.8%2023
CLR4.5%2023
DNR4.6%2023
NFX5.6%2024
24
Bond Comparisons
Source: Bloomberg, CreditSights.
Oilfield Services & Drillers: YTM (sorted by maturity)
Refiners: YTM (sorted by maturity)
3.7%3.1% 3.1% 3.3%
4.7%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
ESV 4.7%2021
BHI 3.2% 2021 SLB 3.3%2021
HAL 3.3%2021
RIG 6.4% 2021
3.4%
4.2%3.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
VLO 6.1% 2020 MPC 5.1% 2021 PSX 4.3% 2022
25
Cash Bond Total Returns 2013 YTD
Source: Bloomberg, CreditSights.
Investment Grade: Top 10 Total Return YTD
High Yield: Top 10 Total Return YTD
2.0% 1.9%1.6% 1.5%
1.3% 1.1% 1.1% 1.1% 1.1% 1.1%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
PXD5.9%2016
RIG5.1%2016
APC5%
2016
RIG6%
2015
APC6.4%2017
PXD7.5%2020
DVN2.4%2016
RIG2.5%2017
MPC3.5%2016
VLO4.5%2015
25.9%
12.1%9.6%
6.7% 6.7% 6.5% 6.3% 5.7% 4.0% 4.0%
0.0%
5.0%10.0%
15.0%20.0%
25.0%30.0%
KWK7.1%2016
KWK9.1%2019
CHK7.3%2018
CHK6.5%2017
FST7.3%2019
CHK6.6%2020
CHK6.1%2021
CHK6.9%2020
CLR7.1%2021
CLR8.3%2019
26
Conclusion
+ Ongoing oil and natural gas price strength
+ Favorable production growth and unit cost control outlook
+ Improving free cash flow outlook
= Robust equity and credit performance potential
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