perspectives on the global response to lower

Perspectives on the Global Response to Lower Oil Prices - the "New Normal"

Richard Pollard CEE / Russia Oil & Gas Leader

www.pwc.ru

17 April 2015

PwC

17 April 2015

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I. What is happening in the marketplace?

EBC’s “Law, Banking and Finance” Working Committee meeting

PwC

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Historic oil price (Brent $/bbl)

There has been a huge fall in oil price which has not yet been met by a decrease in supply

Last 6 months

Source: Federal Reserve Economic Data

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Invasion of Iraq

Lehman Brothers Files for Bankruptcy

OPEC cuts targets 4.2 mmbpd

17 April 2015 EBC’s “Law, Banking and Finance” Working Committee meeting

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Reuters.com

Schlumberger to axe 9,000 jobs

“Schlumberger plans to cut 9,000 jobs as a result of the fall in oil

prices and cutbacks in spending by the energy groups that are its

customers”

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US offshore rigs no. WTI price

Activity is down as the first signs of restructuring are emerging

US offshore rigs show a declining trend in line with oil price

Vessel utilisation is showing a similar decline

Reuters.com

The First Shale Oil Casualty: WBH Energy

Files For Bankruptcy

“WBH Energy... has filed for bankruptcy protection, becoming what

may be the first U.S. oil company to do so since crude prices started

tumbling six months ago”

Reuters.com

Oil fall could lead to capex collapse

“DoubleLine Capital's Jeffrey Gundlach said on Tuesday there is a

possibility of a "true collapse" in U.S. capital expenditures and hiring if

the price of oil stays at its current level”

www.ft.com

UK oil groups under scrutiny as crude price falls

“[Cairn Energy, Premier Oil, and Tullow Oil] are set to come under intense

scrutiny from investors this week as they set out plans to cope with a collapse in

prices that — if sustained — could halve the value of current and future

production.

Change in oil prices has hit companies across the value chain

Source: Baker Hughes


The number of rigs has declined by 10% in last 3 months

Utilisation has dropped by 10% since April


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87

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Million bbls

Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Q3 2013 Q2 2013 Q1 2013

Demand Supply

Global Oil Supply and Demand Q1 2013 – Q2 2015

Note: Q4 2014 – Q2 2015 assumes OPEC crude will remain at 30.5m bbls/d

Source: IEA Oil Marker Report December 2014

Supply since Q1 2014 has outstripped demand with a surplus of 2.4m bbls/d forecast by Q2 2015


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Worldwide Rig Count (Onshore & Offshore)

April 2009 – December 2014

Since 2009 rig numbers had grown significantly, while since summer 2014 US rig numbers have eased off

No. Rigs

Note: Baker Hughes Rig Count aggregates onshore and offshore rigs in Latin America, Europe, Africa, Middle East, Asia Pacific, Canada, U.S.

N American numbers does not include GoM


US Rigs by Oil & Gas

June 2014 – Week 23.01.15

1,450

14/1

2/2

014

07/0

9/2

014

30/1

1/2

014

1,400

1,600

1,650

350

250

300

1,500

1,350

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8/2

014

27/0

7/2

014

1,550

05/1

0/2

014

13/0

7/2

014

01/0

6/2

014

19/1

0/2

014

02/1

1/2

014

24/0

8/2

014

21/0

9/2

014

29/0

6/2

014

16/1

1/2

014

15/0

6/2

014

28/1

2/2

014

11/0

1/2

015

25/0

1/2

015

-16%

No. Rigs

Gas

Oil

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+73%


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17 April 2015

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II. Implications for upstream, downstream, OFS. Who is facing the greatest risk?


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The fall in oil price will hit producers with the highest costs first

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Avera

ge

co

st

($/b

bl)

Average cost curve for the oil market ($/barrel)

Production (mb/d)

Sa

ud

i A

rab

ia

Oth

er O

PE

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Ru

ssia

Un

ited

Sta

tes

(ex

cl S

ha

le)

Ka

zak

hst

an

Ch

ina

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rwa

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Oth

er N

on

-OP

EC

Bra

zil

US

Sh

ale

Mex

ico

Ca

na

da

Oil

Sa

nd

s

OPEC average

Global average

Shale lies at the higher end of the non-OPEC marginal cost curve, as infrastructure build outs, decline rates, and high levels of rig activity keep costs high

Europe and North America face high marginal costs relative to Russia and the OPEC nations

Non-OPEC average

Source: IEA

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The nature of the oil field life cycle dictates that companies with committed spend have less scope to cut costs

(30)

(20)

(10)

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Reven

ue

Revenue over Oil Field Life Cycle (Indicative*)

* Note: this is for an individual field – a basin will comprise many overlapping development cycles and may produce for 50 years or more

Equity funded

Debt funded Cash flow funded

Large cash outlay

E&A Development Production Decline and

abandonment

17 April 2015

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We are still negative on the margin outlook – the oil price story does not change our view on fundamentals

• Low oil prices do not have a significant impact on gross refining margins

• A minor improvement in net refining margins can be expected

• Improved net margins may result in troubled refiner's holding on for longer

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IHS

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cra

ckin

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$/b

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Bre

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real cru

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oil

pri

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$/b

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Brent crude oil price vs. refinery margins (in real terms, 2000-2014)

Brent crude oil price IHS light sweet cracking margins ($/bbl)

Source: IEA, Federal Reserve Economic Data

17 April 2015

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We see OFS preparing for mid-term pain, but not yet in distress

• Producers have been distracted

• No time or space to renegotiate yet

• Contracts are still running and may not have break clauses (average rig contract 7-8* months)

• Much Q1/Q2 activity is constricted

• Years of high profitability mean OFS firms may have reserves, funding lines or goodwill with banks

• Scope to cut costs or staff numbers

• Pain passed down further to smaller Tier 2 or 3 suppliers

• Cuts so far have been in discretionary or uncommitted spend

• Reporting cycle not yet flushing things out – many smaller companies are private held or VC backed

Little incentive for OFS firms to engage yet Eventually pushing pain down will reach a limit

Sources: Riglogix 2011

* Average contract duration between 2000 -2010

17 April 2015

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Oil price fall has been extremely rapid

OFS firms able to absorb short term pain

Pain not necessarily visible yet

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17 April 2015

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III. Industry response – what we see


PwC

The industry and investors are adjusting in real time

Signs of distress emerge

U-shaped oil price recovery

Financial contagion

Acquisition funds being raised

Business plan reconsideration

Change in liquidity of supply

17 April 2015

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PwC

Companies have pulled a number of levers to reduce cost

Response by Sector Players to Oil Price Drop: Selected Examples in Recent Months

Company Reduction 2015 Capex

Pay Freeze Reduction in Headcount

Reduction in Contractors

Renegotiate OFS Rates

Investments Deferred / Abandoned

Change in Business Model

Apache

Baker Hughes

BP

ConocoPhillips

Halliburton

Petronas

Premier

Santos

SBM Offshore

Schlumberger

Shell

Statoil

Talisman Sinopec

Total

Weatherford

Source: Bloomberg; Press; Strategy& Research


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To date there has been limited consolidation across O&G sector, but this may change

17 April 2015

Target Buyer Deal Value Comments

Talisman Repsol US$8.3bn Announced in Dec. 2014. Successful purchase of distressed assets

Baker Hughes Halliburton US$38bn Announced in Nov. 2014. Creation of market leader

EDC Schlumberger US$1.7bn In Jan. 2015 Schlum. invests in troubled Russian driller

Major M&A Deals in Oil & Gas Selected Nov. 2014 – Jan. 2015


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Oil sector keen not to repeat historic mistake of mass redundancies and losing capabilities across the board

17 April 2015 17 April 2015 EBC’s “Law, Banking and Finance” Working Committee meeting

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Industry is already dealing with challenge of ‘Big crew change’

Industry is keen to hang on to engineers and geologists

Layoffs may prove more costly than retaining workers

Oil companies are reluctant to stop hiring altogether

PwC

Across the industry companies have announced substantial capex reductions, with global E&P capex forecast to shrink by ~10%

17 April 2015

Recent Capex announcements Selected Examples

Note: Shell announced in full year results lower capital spending for 2015 curtailing more than US$15bn of potential spending over next three years

Source: Bloomberg; Press; Strategy& Research

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Schlum. Concho

US$bn

-33% -25%

-33% -11% -13%

-28%

Linn Energy

Range Tullow Lundin Encana Santos

-52% -53% -5% -31%

+12%

-26%

-10%

Total Conoco Suncor PTTEP

-19%

Husky CNR

2015

2014


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With oil price in contango, there are storage opportunities plays for traders

17 April 2015

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US$/bbl

Brent ICE Feb. 2015 Futures Contract Jan. 2015 – Dec. 2021


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In fact, since November 2014 floating storage has seen volume increase by 20% to reach ~110m bbls

Global Floating Oil Storage June 2014 – January 2015

17 April 2015

Source: Bloomberg; Lexis Nexis

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In terms of M&A, 2014 already witnessed an increase in deal activity for tanker and storage assets

Global Midstream Asset M&A for Storage & Tankers 2000 - 2014

17 April 2015

Note: All deals US$10m+, all geographies covered, assets only (not Corporate) and across Storage and Tankers only. All gas assets excluded. Oil and NGL captured

Source: Strategy& research

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Deal No.

Deal Value US$m

2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000

Deal Value Deal Number

16 deals announced. 6 made in H2 2014. Majority of transactions were related to tankers


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Moreover, as IOCs shift into ‘austerity’ mode they will seek to squeeze OFS providers for savings and explore options

Reduced capex spend = less construction activity upstream => adverse impact on OFS activity levels

17 April 2015

Source: Bloomberg; Strategy& research


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IOCs likely to negotiate even more on pricing with OFS players

Failure to review and adjust rates downwards => future loss of orders

Some IOCs are already exploring other options in oil services + pushing for increased standardisation for components

Eni has gone one step further recruiting some 2000 employees to bring EPC work in house

Thank you!

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