opec+ & u.s. shale: the great tug o’ war...

©2019 Morningstar. All Rights Reserved.

OPEC+ & U.S. Shale: The GreatTug O’ War Continues

David Meats, CFASenior Equity Analyst, EnergyNovember 14, 2019

2

Presentation Outline

Weak Demand Blunts Effectiveness of OPEC Cuts in 2019

Investment Implications: Tread Carefully in Shaky Macro Environment

Disruptive Forces: EVs, AVs, and Ride-Hailing

Appendix

3

OPEC: Still Too Soon for “Mission Accomplished”

Source: Morningstar, IEA

Oversupply: U.S. shale boom at the core of the glut that caused the 2015-16 downturn

(1.50)

(1.00)

(0.50)

0.00

0.50

1.00

1.50

2.00

90.0

92.0

94.0

96.0

98.0

100.0

102.0

104.0

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19

mmb/dmmb/d

Implied Build/Draw (RHS) Global Supply (LHS) Global Demand (LHS)

Rebalancing: OPEC withholds1.8 mmbpd

Rebound: relentless U.S. growth nullifies OPEC cuts

4

20,000

22,000

24,000

26,000

28,000

30,000

32,000

Jan-

17Fe

b-17

Mar

-17

Apr-1

7M

ay-1

7Ju

n-17

Jul-1

7Au

g-17

Sep-

17Oc

t-17

Nov-

17De

c-17

Jan-

18Fe

b-18

Mar

-18

Apr-1

8M

ay-1

8Ju

n-18

Jul-1

8Au

g-18

Sep-

18Oc

t-18

Nov-

18De

c-18

Jan-

19Fe

b-19

Mar

-19

Apr-1

9M

ay-1

9Ju

n-19

Jul-1

9

mbpd OPEC (Exc. Iran, Venezuela) Nov 16 Quota Dec 18 Quota

Has OPEC Found a New Normal?

20,000

22,000

24,000

26,000

28,000

30,000

32,000

mbpd OPEC (Exc. Iran, Venezuela) Venezuela Iran

Source: OPEC

Anticipating Iran declines, core producers, inc. Saudi, ramped up in 2H18 but the increase, combined with robust U.S. growth, overwhelmed the market and dragged crude prices down.

OPEC (Exc. Iran, Venezuela) Venezuela IranOPEC (Exc. Iran, Venezuela) Nov 16 Quota Dec 18 Quota

5

Restored Sanctions Severely Denting Iranian Exports

Source: OPEC, EIA, Morningstar (as of 9/4/19)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

1Q19

2Q19

3Q19

E

4Q19

E

mmbpd Implied Consumption Exports (EIA) Exports (Mstar Est.)

6

0.0

0.5

1.0

1.5

2.0

2.5

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov-

15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov-

16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov-

17

Jan-

18

Mar

-18

May

-18

Jul-1

8

Sep-

18

Nov-

18

Jan-

19

Mar

-19

May

-19

Jul-1

9

Sep-

19

Nov-

19

mmbpd Consumption (BP) Consumption (Mstar Est.) Implied Exports

Venezuela Recovery Looks Far-fetched Under Maduro

Source: OPEC, BP, Morningstar (as of 9/4/19)

7

2019: Oil Market Well Supplied, Despite Steep OPEC Cuts

Even after steep capex cuts, we expect the U.S. to add ~2 mmbpd in 2019. Demand growth outlook now only 1.1

mmbpd (previously 1.5mmbpd). Even if OPEC stays the course with

planned cuts, we expect a modest surplus.

Source: IEA, OPEC, Morningstar (as of 9/4/19)

97.5

98.5

99.5

100.5

101.5

102.5

103.5

FY18 Supply U.S. Brazil Other (Net) OPEC FY19E Supply

mmbpd FY18 Demand FY19 Demand (8/18) FY19E Demand (8/19)

8

Trade Fears Suppressing Demand Growth Outlook

Economic outlook is weakening, with multiple downward revisions to the IMF outlook for global GDP growth in the last 18 months.

Source: IMF, OPEC, EIA, IEA, Morningstar (as of 9/4/19)

2.90%

3.10%

3.30%

3.50%

3.70%

3.90%

4.10%

2015 2016 2017 2018 2019 2020 2021 2022 2023

Oct 2017 Apr 2018 Oct 2018 Apr 2019 Jul 2019

IMF GDP Growth Outlook Revised Lower in 2019-20

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Jul 2018

Aug 2018

Sep 2018

Oct 2018

Nov 2018

Dec 2018

Jan 2019

Feb 2019

Mar 2019

Apr 2019

May 2019

Jun 2019

Jul 2019

Aug 2019

mmbpdEIA IEA OPEC Avg.

Consensus for FY19 Crude Demand Declining

9

Weaker Prices Forcing U.S. Producers to Dial Back on Drilling

Historically, crude prices strongly influence U.S. rigs and 2018 now looks like a cyclical peak. WTI averaged $57 through August

this year (12% lower than the FY18 average of $65). Producers are tightening their belts:

hz. rig count down 15% since 1/1/19.

Source: BHI, Morningstar, Company Filings

$0

$20

$40

$60

$80

$100

$120

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19

U.S. Hz. Rigs (LHS) WTI (RHS)U.S. Hz. Rigs (LHS) WTI (RHS)

10

Shale Frackers Have Found Equilibrium for Activity

We think the “Goldilocks” level for light tight oil rigs is about 600. After 15% activity decline during

2019, the industry has found equilibrium. Does not preclude future

volatility!

Source: Morningstar, IEA (as of 9/4/19)

14.0

15.0

16.0

17.0

18.0

19.0

20.0

21.0

22.0

23.0

2019 2020 2021 2022 2023

mmbpd

300 LTO Rigs 400 LTO Rigs 500 LTO Rigs

600 LTO Rigs 700 LTO Rigs Call on U.S. (+1mmbpd)

Call on U.S. (Base Case) Call on U.S. (-1mmbpd)

11

2020: Oil Market Balanced (But Only if Demand Holds)

With fewer rigs in service, U.S. growth will taper off (under 1 mmbpd growth). But OPEC is unlikely to make further

cuts voluntarily. The IEA demand forecast (+1.3

mmbpd) is predicated on benign economy…

Source: IEA, OPEC, Morningstar (as of 9/4/19)

97.5

98.0

98.5

99.0

99.5

100.0

100.5

101.0

101.5

102.0

102.5

FY19E Supply U.S. Brazil Other (Net) OPEC FY20E Supply

mmbpd FY19E Demand FY20E Demand

FY19E Demand FY20E Demand

12

Warning! Consensus Not Yet Pricing in Major Downturn

Economic outlook is weakening, with multiple downward revisions to the IMF outlook for global GDP growth in the last 18 months. Outlook for 2019 demand growth has

tumbled 400 mbpd in the last 12 months. Primarily driven by trade war jitters…

Source: IMF, OPEC, EIA, IEA, Morningstar

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2016 2017 2018

mmbpd Historical Crude Demand Growth 2019E Consensus2020E Consensus Protectionism Scenarios

Historical Crude Demand Growth 2019E Consensus2020E Consensus Protectionism Scenarios

13





Appendix

14

Energy Stocks Are Severely Out of Favor

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 7/31/19

Materials Industrials Consumer Discretionary Consumer Staples

Health Care Financials Information Technology Communication Services

Utilities Real Estate Energy

Source: S&P Dow Jones

15

E&P Cash Flow Inflection

Source: Morningstar (as of 9/4/19)

(4,000)

(2,000)

0

2,000

4,000

6,000

8,000

2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21 3Q21 4Q21 1Q22

$mm WTI @ $45 WTI @ $50 WTI @ $55 WTI @ $60 After years of outspending most U.S. E&P firms are transitioning to cash generators. Cumulatively we expect $1-2 billion

from our coverage (NTM at strip prices). Still free cash positive by 2020 in bear

case (without flexing cost assumptions).

WTI @ $45 WTI @ $50 WTI @ $55 WTI @ $60

16

Global Cost Curve

Midcycle (Brent)

Low-cost, moaty resources (primarily state-controlled)

Low variable costs will keep producing wells flowing, but most new projects require higher prices for sanctioning

Persistent demand surge required to bring

these high-cost resources into play

The “best” shales actually sit much lower on the curve than simplified schematics

like this one imply

Source: EOG, Morningstar. Note: for illustrative purposes only

17

Economic Moat Supports Sustainable Economic Profits

XXX

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-$10

$0

$10

$20

$30

$40

$50

$60

EOG CLR PXD FANG NBL HES MUR OXY CXO XEC PE MRO APA LPI WPX OAS DVN HKRS CRC

Real

ized

Pric

e ($

/boe

)

FY18 F&D (LHS) FY19 Other Opex (LHS) FY19 Lifting Costs (LHS) FY19 Margin (LHS) FY22 ROIC (RHS) WACC


Moat facilitates excess ROICs

18

Valuation Pillars: Prioritize Asset Quality and Financial Health

APA, 0.87

DVN, 0.78

HKRS, 0.22

HES, 1.10LPI, 0.50

MRO, 0.85

MUR, 0.60NBL, 1.01

OAS, 0.80

OXY, 0.90

PE, 1.03

WPX, 0.98XEC, 0.65

CLR, 0.67

CXO, 1.00FANG, 0.75

EOG, 0.85

PXD, 0.73

10%

20%

30%

40%

50%

60%

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Debt

to C

apita

l (YE

19)

Recycle Ratio (FY18)

No Moat (Ticker, P/FVE) Narrow Moat (Ticker, P/FVE)


19





Appendix

20

Market Underestimating EV Adoption Potential

Battery electric vehicles will reach cost parity with EVs over the next decade. Adoption hinges on regulatory support and

charging infrastructure. We expect EVs to make up 15% of global

auto sales by 2028 (above consensus for 11%).

ContactSeth Goldstein, CFAChair: Electric Vehicle [email protected]

21

EV Requirement #1: Cost Parity with ICE Vehicles

Source: Morningstar, Ricardo, University of California Davis, Edmunds, GEICO, U.S. EIA, U.S. DOE, Nissan, Toyota, Clipper Creek (as of 9/4/19)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

ICE Hybrid EV ICE Hybrid EV

2018 2028e

Purchase cost (ex battery) Purchase cost (battery)Replacement battery Charger and wall mountFuel/energy RepairsMaintenance State fees and taxesInsurance FinancingICE line

22

EV Requirement #2: Supportive Regulatory Environment

Source: Morningstar, EPA, CARB (as of 9/4/19)

U.S. EU China

Auto OEM Regulations

Fuel Standards Force Electrification

Electric Vehicles Specified

Range Specified

Driver Regulations & Benefits

EV (ICE) Driving Permissions (Restrictions)

ICE Purchase Restrictions

EV Subsidies

Strength of Regulatory Push Moderate Strong Very Strong

California/ZEV Non-ZEV U.S.

Auto OEM Regulations

Fuel Standards Force Electrification

Electric Vehicles Specified

Range Specified

Driver Regulations & Benefits

EV (ICE) Driving Permissions (Restrictions)

ICE Purchase Restrictions

EV Subsidies

Strength of Regulatory Push Strong Weak Moderate

23

EV Requirement #3: Adequate Charging Infrastructure

Source: Morningstar, China People’s Daily, World Bank, EU Commission, U.S. DOE, U.S. Census Bureau (as of 9/4/19)

-

0.10

0.20

0.30

0.40

0.50

0.60

0.70

China EU U.S.

Char

ge p

oint

s per

sq. k

m

2018 2028

-

0.05

0.10

0.15

0.20

0.25

-

100,000

200,000

300,000

400,000

500,000

600,000

2018 2028e

ZEV States

Non-ZEV Coastal States

All Other States

ZEV Chargers/sq km (right)

Non-ZEV Coastal Chargers/sq km (right)

Other States Chargers/sq km (right)

U.S. Chargers/sq km (right)

24

EVs and Hybrids to Comprise Over a Third of 2028 Global Sales

We Forecast a 15% Global EV Adoption Rate by 2028 Led by China and the EU. Additionally, we expect hybrids to

account for a further 21% of 2028 global sales.

Source: Morningstar, U.S. EPA, EU ACAE, China People’s Daily, IEA (as of 9/4/19)

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

5

10

15

20

25

30

35

40

45

50

2016 2017 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e

EV # of Vehicles HEV/PHEV # of Vehicles EV % of Total EV/HEV/PHEV % of Total

25

Disruptive Forces Will (Eventually) Erode Gasoline Demand

EV adoption will eventually crush U.S. gasoline demand, but the impact will be modest before 2030. Likely rollback of fuel efficiency standards will

nudge demand higher in the interim. Ride-hailing adoption increases vehicle miles

traveled. AV technology could expand ride-hailing use at

the expense of vehicle ownership.

ContactDave Meats, CFASenior Analyst, [email protected]

26

U.S. Gasoline Demand Could Fall by 70% By 2050

Eventually, EV and hybrids will offset the impact of higher VMT on fuel consumption. But the relaxation of fuel

efficiency standards and more rapid adoption of ride-hailing will keep gasoline ABOVE EIA demand level through 2030.

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0.0

20,000.0

40,000.0

60,000.0

80,000.0

100,000.0

120,000.0

140,000.0

2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050

Annual Gasoline Demand (million gal)

Base High Low EIA Base as % of EIA (RHS)

Source: EIA, Morningstar (as of 9/4/19)

27

Ride-Hailing Adoption Should Drive Up Vehicle Miles Traveled

Ride-hailing draws users from transit services (as well as walking/biking), encourages trips that otherwise wouldn’t happen, and adds “dead-heading” miles.

Source: FHWA, EIA, Morningstar (as of 9/4/19)

28

With AV, Ride-Hailing is Viable Alternative for Vehicle Owners

Only low-mileage drivers likely to consider switching to ride-hailing as their primary mode of transport…

Source: FHWA, Edmunds, Kelley Blue Book, Statista, Morningstar. Note: for illustrative purposes only

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

5,000 6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 15,000 16,000 17,000

$/mile Basic cost Financing Parking

Ride-hailing cost (GM target)

Ride-hailing cost (current)

…but the average mileage distribution in the U.S. is skewed, favoring low-mileage drivers.

0%

5%

10%

15%

20%

25%

30%

35%

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

Average miles driven in 2015

UK survey data US estimates

U.S. Mean

U.S. Median

U.S. Mode


Questions?

30





Appendix

31

Morningstar Research, Curated for You (Direct & Office Cloud)

32

Well Productivity: Delaware Example

XXX

Source: Rystad

0

50

100

150

200

250

300

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

OIL mbbl

Calendar Quarters on Production

2015 2016 2017 2018 2019

33

Well Productivity: Delaware Example

XXX

Source: Rystad

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

OIL mbbl

Calendar Quarters on Production

2015 2016 2017 2018 2019

34

Analysis: Lateral Length and Well Performance Operators are drilling horizontal wells

with longer laterals because the

incremental production benefit

outweighs the uptick in well cost.

But there is diminishing return: the

longer the lateral, the less productive

the well is (on a per-foot basis).

We attribute the observed decrease in

well productivity to longer laterals

(rather than exhaustion of core

acreage).

Source: Rystad (as of 9/4/19)

0

20

40

60

80

100

120

140

boe/d

Lateral Length

IP90/1,000' IP90/1,000' (Fitted)

35

Well Performance Still Beating Expectations

XXX

Permian Bakken

Eagle Ford

Source: Rystad

102

104

106

108

110

112

114

116

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

2016 2017 2018

boe/dfeet

IP90/1,000' Predicted (RHS) IP90/1,000' Actual (RHS)Lateral Length (LHS)

0

20

40

60

80

100

120

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

2016 2017 2018

boe/dfeetIP90/1,000' Predicted (RHS) IP90/1,000' Actual (RHS)Lateral Length (LHS)

110

115

120

125

130

135

140

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

8,000

2016 2017 2018

boe/dfeet

IP90/1,000' Predicted (RHS) IP90/1,000' Actual (RHS)Lateral Length (LHS)


Questions?

opec+ & u.s. shale: the great tug o’ war...

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