pesa membership luncheon€¦ · pesa membership luncheon james k. wicklund managing director,...
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PESA Membership Luncheon
James K. WicklundManaging Director, Energy Research
DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
November 2013
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Outlook for the Oilfield Services Sector
First, the industry has changed, more dramatically than you think
Dominance of Offshore and Unconventionalshave reduced the volatility and increased the capital required
Strategic drivers of the industry have changed from revenue growth and Ebitda to Return on Capital and Capital Allocation
Compensation has shifted to better accomplish the shift in strategic drivers
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Deepwater
Increased access – 12,000 feet & Tertiary capability, new hydrocarbon systems
$30 billion in NEW deepwater rigs on order
OFS contracts bid on razor thin margins with technology upsell & long duration
Expanding outside of the Golden Triangle
$1.2 million daily spread costs only going higher
Reality – IOC cash flow growth cannot support all new and existing rig activity
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Unconventionals
High capex requirements are not just an issue for E&P companies but OFS as well
Cost of capital and capital charge throughout the system have got to take prominence
Long-term “stationary” operations is not what the industry has been conditioned to operate
Value delivery has got to change. Dayrates for more efficient rigs and stage-count for fracking
Industrial America is poaching, paying up for the privilege, stepping into our shoes
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Let’s Review the PastData Indexed to 2005
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6
Market Capitalization Since 2005
Source – Bloomberg – SLB, HAL, BHI, NOV, CAM, FTI, DRC, DRQ, OII, OIS, SPN
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7
Capital Expenditures Since 2005
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012
Large Cap Manufact Specialty
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8
EV/Ebitda Valuation Since 2005
‐
20
40
60
80
100
120
2005
2006
2007
2008
2009
2010
2011
2012
OFS Land Offs
h
or e
Source – Bloomberg – SLB, HAL, BHI, NOV, PTEN, HP, NBR, RIG, ESV, NE, RDC
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9
Large Cap OFS Metrics Since 2005
‐
50
100
150
200
250
300
350
400
450
2005
2006
2007
2008
2009
2010
2011
2012
Market Cap
CapEx
CFPS
EV/Ebitda
Source – Bloomberg – SLB, HAL, BHI, NOV,
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Manufacturing Co. Metrics Since 2005
‐
100
200
300
400
500
600
2005
2006
2007
2008
2009
2010
2011
2012
Market Cap
CapEx
CFPS
EV/Ebitda
Source – Bloomberg – CAM, FTI, DRC, NOV
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Specialty Co. Metrics Since 2005
‐
100
200
300
400
500
600
700
800
2005
2006
2007
2008
2009
2010
2011
2012
Market Cap
CapEx
CFPS
EV/Ebitda
Source – Bloomberg – SLB, HAL, BHI, NOV, PTEN, HP, NBR, RIG, ESV, NE, RDC
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Shale RevolutionShape of Things to Come
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Shale HighlightsIndustry and macro themes
US I: production momentum: technology is stretching the growth profile in N America Down-spacing & stacked pay zones
US II: it’s about liquids as our cost curve suggests persistent low US gas prices Even the Permian is 50% gas
US III: Shale led multi sector capex cycle: as P Petro-chem, GTL and LNG build out – Chemical Renaissance
US IV: BUT…risk of cost escalations (remember Australia?) Labor pressure already appearing in ‘hotspot’ areas – even as over-capacity reigns
Global shale: 1 step forward, 1 step back… China slowly out of the blocks, mixed signals in
Argentina, Saudi, Australia
Global shale: Capital build-out all over again• International is “woefully under-capitalized for
the coming shale boom”
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Global Shale Regions – Prevalent But Untested
Source: EIA
Global Shale Regions
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3.7bcfd by 2020 in Transport 20 BCFD of Incremental US Gas Demand Growth
Rising US Gas Demand Longer Term
0
50
100
150
200
250
2012 2013 2014 2015 2016 2017 2018 2019 2020NGV LNG Power Sector
Supply growth potential @ $5 (2011 real)
Supply growth potential @ $4.50 (2011 real)
Source: Industry Data and Credit Suisse Estimates
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Passenger Cars
Light Trucks
Buses + Step vans (Class5-7)Heavy Trucks (Class 5-7,ex refuse)Refuse Trucks
Large Trucks (Class 8)
Other heavy trucks (RV,Off Road etc)Locomotives
Eventually North American natural gas demand will increase
US & Canadian LNG & build-out of capacity for the Chemical Renaissance
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US Oil Production – 11MBD in View?
Source: Credit Suisse Estimates, HPDI
Onshore US Production Still Rising Steadily
2,400
2,900
3,400
3,900
4,400
4,900
5,400
5,100
5,600
6,100
6,600
7,100
7,600Ja
n- 10
Apr-1
0
Jul-1
0
Oct-1
0
Jan- 11
Apr-1
1
Jul-1
1
Oct-1
1
Jan- 12
Apr-1
2
Jul-1
2
Oct-1
2
Jan- 13
Apr-1
3
KBDKB
D
Domestic Monthly Crude Production [LHS] Domestic Monthly Crude Production (ex PADD V & Offshore GoM) [RHS]
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US Shale Oil Sweet Spots Breakeven at $70 WTI or lower WTI Oil Breakeven Price at 15% IRR ($ per Bbl)
$34.
99 $
48.6
6
$52.
00
$52.
13
$52.
32
$53.
42
$57.
47
$60.
44
$61.
89
$62.
26
$64.
15
$65.
33
$66.
89
$71.
26
$73.
93
$78.
68
$79.
07
$80.
17
$85.
64
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
Source: Credit Suisse Estimates17
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Impact & Evolution of The Shale Revolution II
Total drilling & completions spend is closely correlated to total footage drilled.
Fewer rigs can drill more complex wells with longer laterals.
The Permian continues the transition to horizontal drilling and has seen the largest increase
of wells drilled per rig.
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
100
200
300
400
500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
2019E
Total U.S. Footage Drilled (mm feet) Drilling & Completion Spending ($, Bn) 0
2
4
6
8
10
12
14
Q1 ‐ 2012 Q2 ‐ 2012 Q3 ‐ 2012 Q4 ‐ 2012 Q1 ‐ 2013 Q2 ‐ 2013
Permian Eagle Ford Williston Marcellus
Barnett DJ‐Niobrara Mississippian Haynesville
Footage Drilled and Drilling & Completions Spend Wells Drilled Per Rig in Top US Basins
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Projected E&P Capex
E&P capex is expected to be strong—good for OFS. But production growth will outpace capex spending meaning OFS fails to capture the full value of its services.
Gas (mmcfd) Oil (mbbld) Capex ($mm)Company 2013 2014 2015 2013 2014 2015 2013 2014 2015
Large Cap E&P UniverseAPA 2,144 1,989 2,090 347 355 384 $10,851 $10,600 $10,600APC 2,625 2,405 2,376 256 310 332 $7,466 $8,000 $8,000CHK 2,955 2,818 2,976 106 119 131 $7,197 $6,900 $6,900DNR 25 42 41 67 71 77 $1,046 $1,100 $1,200DVN 2,393 2,258 2,297 169 194 216 $6,969 $7,000 $7,200EOG 1,349 1,284 1,248 218 270 313 $7,158 $7,600 $8,000NBL 889 1,021 1,184 103 123 131 $3,729 $4,800 $4,800SWN 1,783 2,029 2,196 0 0 0 $2,276 $2,200 $2,200CXO 209 236 260 58 68 80 $1,802 $1,900 $2,100PXD 391 446 515 77 91 105 $2,957 $3,200 $3,200SD 288 307 328 45 46 48 $1,429 $1,500 $1,600
Large Cap YoY -1% 5% 14% 10% 4% 2%SMID Cap E&P UniverseATHL 13 21 28 7 11 14 $360 $575 $775BCEI 24 33 38 10 16 20 $400 $500 $650CRK 159 139 132 7 11 14 $422 $450 $400CRZO 89 61 64 11 14 16 $675 $575 $575EXXI 102 104 112 30 35 40 $660 $750 $750FANG 5 12 19 6 12 19 $310 $475 $575FST 133 116 110 7 11 13 $375 $475 $475GPOR 26 146 244 8 18 26 $580 $850 $1,000KOG 23 37 43 26 41 46 $1,000 $1,000 $1,100PDCE 55 79 104 8 11 15 $443 $550 $650PVA 40 36 34 10 15 17 $490 $500 $500REXX 63 84 96 3 4 5 $265 $300 $325ROSE 117 141 161 13 17 20 $870 $1,000 $1,000RRC 730 831 1,001 10 12 15 $1,300 $1,600 $1,900SFY 91 96 99 11 12 12 $513 $500 $500WLL 73 77 82 73 84 96 $2,500 $2,500 $2,500
SMID YoY 16% 18% 35% 20% 13% 9%Total YoY 0% 6% 17% 12% 5% 3%
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Rig Count Projection
Canada is improving as it accelerates out of a trough. In 2012, the 2nd half rig count was down 9%, a period of historical seasonal strength in Canada. Our forecast of 369 for 2013 is flat vs. 364 in 2012, but this represents a 6% improvement in 2H13 vs. 1H13.
U.S. gas drilling appears to have bottomed after being down 37% last year and an estimated 28% this year. Momentum is gradually starting to accelerate but the levels of associated gas still being produced in the country’s “oil” wells could continue to slow the eventual recovery.
U.S. oil drilling as been up 113%, 67% and 39% over the last three years ending in 2012. We are expecting only 3% growth in 2013.
Horizontal drilling has similarly had a 3-year run of growth but we are modeling down 2.5% for the year. It is in horizontal drilling/pad drilling where the greatest efficiencies are being seen so down slightly on the number would still have a very positive impact on spending.
We are estimating total footage up 2.6%, Oil wells up 3% and Natural Gas wells down almost 20% in the year over year calculations.
U.S. Projections: Rig Count, Well Count, Footage2008 2009 2010 2011 2012 2013E 2014E
Rig Count 1,877 1,085 1,539 1,875 1,919 1,791 1,795 Well Count 48,919 29,495 33,227 36,626 39,961 38,674 38,754 Footage Drilled ('000) 334,442 239,491 269,374 315,502 392,178 400,583 399,610
YoY % ChangeRig Count -42% 42% 22% 2% -7% 0%Well Count -40% 13% 10% 9% -3% 0%Footage Drilled -28% 12% 17% 24% 2.1% 0%
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Records are Being Set
Record total revenue for Halliburton
Record revenues in Boots & Coots, cementing, completion tools, drill bits, multi-chem, and testing product lines
Record operating income in Baroid, completion tools, drill bits and testing product lines
New records Europe/Africa/CIS region
Eastern hemisphere had record revenue
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And Others
Record revenue in the United States, the Middle East, Asia-Pacific, Africa, Russia Caspian and industrial segment for Baker Hughes
Record revenue for drilling services, completion systems, artificial lift and upstream chemicals product lines.
Record operating profit in Latin America
Record revenue and operating profit in Russia Caspian
Helmerich & Payne - Record revenues and earnings!
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CEOs Stepping Down
Diamond Offshore
Rowan Drilling
National Oilwell Varco
Ensco
Who’s Next?
Walking Away from a Bonanza?? Not likely
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Be Very Cautious and Focus on Returns It is a cyclical and even hyper-cyclical
industry
When it gets too good to be true, it usually is
The WORLD is now set to GRIND higher
Efficiency, effectiveness, returns will rule
Long-term tweaks replace big initiatives
Oil prices have gone up and cycles still occur
TAKE NOTHING FOR GRANTED
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