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Navigating the downturn
No more calling the bottom this cycle – could be 400 rigs or less
Attrition argument in pumping is overblown in 2016 and beyond
Select group of rigs hold utilization and cash margins do not go to cash breakeven
Lower end commoditized services still have pricing to give
Creditors can force consolidation
Invest in companies with cost advantages and differentiated technologies
Energy Recovery (ERII)7
U.S. Silica (SLCA) 7
2
■ We forecast 2016 offshore capex will be down 30% sequentially and U.S. E&P capital expenditures will be down 40%
■ As we move into 2017, we forecast spending to continue to trend downward in offshore and begin to rebound in U.S. land
■ Our offshore forecast decline is split between cost reductions and activity, with the net effect still leading to less offshore wells drilled in 2017 relative to 2016
■ Our analysis of over 50 NAM independents suggests that operators are planning to outspend cash flow by a mere 24% in 2016, vs. the ~60% average outspend over the past six years
E&P spending forecasted down for 2nd year in a row E&P spending
Majors cash flow outspend U.S. independents cash flow outspend
Source: FactSet, GMP estimates
Market Overview
E&P capital spending outlook
93% 96%
112% 119% 116%
109% 114%
130% 138%
163%
140%
169%
156%
124%
95%
40%
60%
80%
100%
120%
140%
160%
180%
Ou
tsp
end
(%
)
CAPEX / OCF Dividends / OCF Share Buybacks / OCF
91% 88% 91%
105% 107% 105%
142%
132%
116% 120%
143%
127% 127%
116%
97%
20%
40%
60%
80%
100%
120%
140%
160%
Ou
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CAPEX / OCF Dividends / OCF Share Buybacks / OCF
4
Who is running rigs today? 2/12/2016 Net Debt / Net Debt /Summary Ticker LTM EBITDA Capital HP NBR PTEN PD CN CACTUS UNT ESI CN SSE TDG CN PES ICD XDC CN Other TotalMajors 13 16 – 3 2 – 7 1 3 – – 1 16 62Independents 58 6 26 15 15 6 8 6 11 9 6 – 37 203Privates and others 15 23 30 7 10 12 5 9 7 – 2 2 93 215Total 86 45 56 25 27 18 20 16 21 9 8 3 146 480
Majors 1.5x 16%BHP Billiton BHP nm nm 5 – – – – – – – – – – – – 5BP BP 3.8x 15% – 1 – – 2 – – – – – – – 2 5Chevron CVX 1.4x 14% – 3 – – – – 4 – – – – – – 7ConocoPhillips COP 3.2x 35% 8 1 – 1 – – – – 1 – – – 3 14Exxon XOM nm 17% – 7 – 1 – – – 1 2 – – 1 10 22Hess HES 1.5x 15% – 4 – – – – – – – – – – – 4Repsol REP-ES 13.0x 38% – – – – – – – – – – – – 1 1Shell RDSB-LON 1.2x 12% – – – 1 – – 3 – – – – – – 4Statoil STL-NO 0.8x 18% 1 3 – – – – – – – – – – – 4Total 13 16 – 3 2 – 7 1 3 – – 1 16 62
Independents 3.1x 35%Anadarko APC 3.8x 52% 1 – – 5 – – – – 1 – 1 – 1 9Antero AR 7.6x 35% – – 3 3 – – – – – – – – 2 8Apache APA 1.4x 38% – – 1 – 2 – – – 1 4 – – – 8Cabot COG 2.6x 48% – – 1 1 – – – – – – – – – 2Carrizo CRZO 4.3x 65% 1 – – – – – – – – 1 – – – 2Chesapeake CHK 4.3x 60% 4 – – – – – – 3 – – – – – 7Cimarex XEC 0.6x 12% 3 – – – 3 1 – – – – – – 3 10Concho CXO 3.2x 33% – – – 1 – – 2 – 1 – 1 – 6 11Continental CLR 3.3x 59% 14 1 – 3 – – – – – – – – 1 19Devon DVN 2.6x 40% 4 – 1 – 5 – – – – – – – – 10Diamondback FANG 1.3x 16% 2 – – – – – – – – – – – 2 4Encana ECA 4.4x 48% 3 – 2 – – – – – 3 – – – – 8Energen EGN 1.4x 14% – – – – – – – – – – – – 2 2EOG EOG 1.3x 28% 8 – 1 1 – – – – – – – – 2 12Equitable EQT nm nm – – – – – – – – – 1 – – 4 5Gulfport GPOR 1.3x 16% 1 – – – – – – 1 – 1 – – – 3Laredo LPI 4.2x 46% – – – – – – 1 – – – 1 – – 2Matador MTDR 3.3x 31% – – 3 – – – – – – – – – – 3Murphy Oil MUR 1.8x 31% – – – – – – – – 2 – – – – 2Newfield NFX 2.4x 48% – – 3 – 5 – – – – – – – – 8Noble Energy NBL 4.3x 31% 2 – – – – – – – – – – – – 2Occidental OXY 0.8x 12% 4 – – – – – – – – – – – 2 6Parsley PE 2.9x 23% 1 – – – – – – 2 – – 2 – – 5PDC Energy PDCE 2.1x 23% – – – 1 – – 4 – – – – – 1 6Pioneer PXD 2.6x 13% 9 1 4 – – – – – 3 – 1 – – 18QEP Resources QEP 2.1x 25% – – – – – 4 – – – – – – – 4Range Resources RRC 7.3x 49% – – 1 – – – – – – 1 – – 1 3Rice Energy RICE 5.4x 37% – – 3 – – – – – – – – – 2 5RSP Permian RSPP 3.3x 26% – – – – – – – – – – – – 2 2Sanchez SN 4.6x 111% – 1 1 – – – – – – – – – 1 3SM Energy SM 2.9x 46% – 2 – – – – 1 – – – – – 1 4Whiting WLL 9.6x 50% – – 2 – – 1 – – – 1 – – 1 5WPX Energy WPX 7.4x 35% 1 1 – – – – – – – – – – 3 5Total 58 6 26 15 15 6 8 6 11 9 6 – 37 203
5
Land rig market: quality gaining market share
Rig fleet high-grading will continue
Given the greater efficiencies of using a modern AC powered rig, we believe that operators will continue to show a preference for
newer rigs whenever possible
Notably, we estimate that there are currently ~800 AC rigs in the market that are the top of the line and 200 that are best-in-breed
(high hook load, 7500 psi systems, walking, AC 1500 hp).
No newbuild orders in 2016, rig count has to rise back to 750 to promote high-end newbuilds
Rig Specifications 2008 Rig Specifications 2014 Rig Specifications 4Q15
Source: DrillingInfo; GMPe
6
Newbuild Land Rig IRR Scenario Analysis
Newbuild Land Rig
Scenarios Bull Base Bear
20-yr life 16.7% 13.9% 4.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Utilization (%
)Dai
ly M
argi
n
years
Daily margin - Bull Daily margin - Bear Daily margin - Base
Utilization (%) - Bull Utilization (%) - Bear Utilization (%) - Base
Pressure Pumping: Where is attrition coming from?
■ Approximately 1MM HHP has been disassembled thus far this cycle
■ Banks do not want the keys to the equipment – Sanjel
■ Cost to bring back “improperly stacked” or “cannibalized” equipment is 35c to 60c on the dollar
■ We estimate 1.5MM HHP to leave market in 2016, well below HAL estimate of 7MM
■ Our current supply is 1MM HHP below many others current estimates
7
Pumper HHP Market Share (%)Halliburton 2,600,000 15.2%FTS 1,625,550 9.5%Schlumberger 1,550,000 9.1%Baker Hughes 1,140,000 6.7%Weatherford 1,100,000 6.4%C&J 1,060,000 6.2%PTEN (Universal) 1,007,600 5.9%Cudd 920,000 5.4%Keane 872,000 5.1%SPN (PumpCo) 700,000 4.1%Calfrac 689,450 4.0%ProPetro 420,000 2.5%Consolidated (Quintana) 408,000 2.4%Performance Technologies 400,000 2.3%Pioneer 380,000 2.2%Basic 374,000 2.2%Sanjel 355,000 2.1%US Well Services 255,000 1.5%Liberty 185,000 1.1%Lewis 125,000 0.7%Advanced Stimulation 100,000 0.6%Producers 97,500 0.6%Stingray 90,000 0.5%RSI 80,000 0.5%TPLM (RockPile) 78,500 0.5%SWN 70,000 0.4%Quasar 60,000 0.4%Tucker 60,000 0.4%Frac Specialists 50,000 0.3%Oasis 50,000 0.3%Gore Nitrogen 40,000 0.2%Circle Z 35,000 0.2%Elite Well Services 35,000 0.2%J4 28,000 0.2%Python 28,000 0.2%TOPS 27,000 0.2%Stimulation Pumping 15,000 0.1%Trican 0 0.0%Total 17,110,600 100%
New Refurbish First Life (hrs) Total Life (hrs)
Fluid End 100 35 1,500 2,500
Power End 125 65 3,000 7,500
Transmission 250 100 8,000 35,000
Engine 375 250 8,000 40,000
Truck 175 80 8,000 35,000
Equipment Costs and Life
8
Proppant markets tighter than most think
Company Name Capacity
Market
Share (%)
White Sand:
Unimin 8,200 13.0%
U.S. Sil ica 7,500 11.9%
Hi-Crush (including parent) 7,450 11.8%
Emerge 6,300 10.0%
Fairmount 6,220 9.9%
Badger Mining 3,800 6.0%
Eagle Materials 3,500 5.6%
Preferred 3,000 4.8%
Smart Sand 2,500 4.0%
EOG 1,700 2.7%
CARBO Ceramics 1,600 2.5%
Mississippi 1,500 2.4%
Source 1,000 1.6%
Pattison 500 0.8%
Total White Capacity Major Players 54,770 86.9%
Smaller Private Current Capacity 8,250 13.1%
Total White Sand Supply 63,020 100%
Brown Sand:
Unimum 1,600 10.0%
Fairmount 1,500 9.4%
Premier Sil ica (PXD) 1,320 8.3%
U.S. Sil ica 800 5.0%
EOG 650 4.1%
Emerge 600 3.8%
Total Brown Capacity Major Players 6,470 40.5%
Smaller Private Current Capacity 9,500 59.5%
Total Brown Sand Supply 15,970 100%
Ceramics:
CARBO Ceramics 525 46.7%
St. Gobain 300 26.7%
Imerys 250 22.2%
CoorsTek 50 4.4%
Total 1,125 100%
■ Frac sand market
▬ Supply has deteriorated rapidly due to cost advantages of high volume producers
▬ Supply is down approximately 30% from peak
▬ Steepest cost curve in oil services
■ Ceramic market
▬ Dramatic decline in supply whereby the current productive capacity is 61% below the previously planned year-end 2014 capacity
Truck from Mine to Railcar
Load (mins) 30
Unload (mins) 30
Round Trip Travel (mins) 30Total truck time (mins) 90
Trucks per Railcar 4
Total time per 100 Tons 360
Truck cost per hour $75
Total Cost $450Cost per Ton $4.50
Short Line to Class 1
Line Switching Fee ($ per car) $150
Handling Fee ($ per car) 750
Total Cost per 100T Car 900Cost per Ton $9.00
Low Volume User - 1000 Mile Trip
First Car Rate per mile $2.40
Additional Car Rate per mile $1.85
Unhook and Transfer Fee 900Total Cost per Ton $27.78
Unit Train - 1000 Mile Trip
First Car Rate - Volume User $2.00
Additional Car Rate - Volume $1.50Transfer Fee –
Total Cost per Ton $15.05
Location and economies of scale benefits
9
Coiled tubing has no relief in sight
■ Count of 37 CT companies, down from 48 companies two years ago, however, coil supply is down only 15 units from that same count as most equipment was purchased and not retired
■ 2 3/8” CT market: dayrates around $22k/day to $40k/day
■ 2” CT market: remains very weak as we have heard from operators that are working their units at around $8k/day and making up the margin with chemicals, nitrogen or other services
▬ Dour outlook for the foreseeable future as we believe 2” utilization is somewhere between 25% to 35% nationwide
■ No real addressable market for units smaller than 2”
Company Name Spreads
Market
Share (%)
Superior Energy 71 11.9%
Schlumberger 61 10.2%
C&J Coiled Tubing 59 9.9%
Baker Hughes 54 9.0%
Cudd Pressure Control 54 9.0%
Key Energy 42 7.0%
Halliburton 37 6.2%
Quintana Energy 22 3.7%
Red Zone CT Services 18 3.0%
Basic Energy 16 2.7%
Pioneer Energy Services 14 2.3%
Sanjel 11 1.8%
Legend CT 10 1.7%
Coiled Tubing Solutions 9 1.5%
CETCO 8 1.3%
Elite Coiled Tubing Solutions 8 1.3%
Gladiator Energy Services 8 1.3%
MMI Services Inc 7 1.2%
Priority Energy Services 7 1.2%
Titan PetroServices 7 1.2%
Trican Well Service 7 1.2%
Xtreme Coil Dril l ing Corp. 7 1.2%
Pioneer Natural Resources 6 1.0%
Red Back CT Services 7 1.2%
TRB Oilfield 6 1.0%
C.C. Forbes Energy Services 6 1.0%
Calfrac 5 0.8%
Viking Coil Tubing 5 0.8%
ABC Nitrogen 4 0.7%
Cretic Energy Services 4 0.7%
Excalibur 3 0.5%
Pro Petro 3 0.5%
Wise Intervention Services 3 0.5%
Gulf Coast CT 2 0.3%
Mid Atlantic Energy Services 2 0.3%
MMS 2 0.3%
Tucker Energy Services 2 0.3%
Total 597 100%
10
Well service rigs and fluid trucks have pricing to give still
■ Our data is a sampling and includes primarily field contacts and statements such as “we think they have 6 or so rigs” or “I hear they are in trouble”
■ Over 10 companies on our list in 2012 that no longer exist, three more about to fall and possibly more
■ The KEG count is total rigs, although admittedly it has 250 to 300 rigs in yards that likely never re-enter the market
■ We also counted over 130 rigs in auction yards throughout the country, thus, we believe the true count of rigs marketable in an upturn is closer to ~2,400 then the 2,963 we have listed
Private company cost example
Company Name WS Rigs
Market
Share (%)
Key Energy 880 29.7%
C&J Energy 444 15.0%
Basic Energy 421 14.2%
Forbes Energy 172 5.8%
Mercer Well Services 152 5.1%
Pioneer Energy 124 4.2%
Wes-Tex 72 2.4%
SBI Well Services 52 1.8%
J&R / R&S Well Services 50 1.7%
Mesa Well Service 35 1.2%
Sun Well Service 35 1.2%
Crimson Well Service 33 1.1%
Viva Energy Services 30 1.0%
Aztec Well Service 28 0.9%
Monument 28 0.9%
Northstar Well Services 26 0.9%
Northern Production Services 25 0.8%
Standard Energy 25 0.8%
Stride 24 0.8%
Globe 23 0.8%
TEC Well Service 21 0.7%
Joe Mills Well Service 19 0.6%
Lariat Services 18 0.6%
Great Basin Petroleum Services 16 0.5%
Morgan Well Services 15 0.5%
Eunice Well Service 15 0.5%
Big Lake Well Service 15 0.5%
RAPAD Dril l ing & Well Service 15 0.5%
Leed Well Services 14 0.5%
SJL Well Services 14 0.5%
Eastern Oilwell Services 14 0.5%
King Well Service 13 0.4%
Moncla 13 0.4%
Martex Well Service 12 0.4%
Justiss Oil Company 11 0.4%
Reeco Well Service 11 0.4%
Lloyd Jones Well Services 9 0.3%
Tyler Well Service 9 0.3%
C&H Well Services 9 0.3%
United Energex 8 0.3%
North Permian Well Servicing 6 0.2%
Best Well Services 5 0.2%
J&M Well Service 2 0.1%
Total 2,963 100%
Vacuum Trucks Estimated Hourly Cost (60hr work week)
Cost of Operating a Vacuum Truck: Rate Hours Total
Driver - straight time "revenue" $18.00 40.0 $720.00
Driver - overtime "revenue" $27.00 20.0 $540.00
Drive - overtime "non-revenue" (based on 12% of "revenue time") $27.00 7.2 $194.40
Payroll tax 7.65% $111.26
Workman's comp 4.50% $54.43
Estimated Driver Cost per "Revenue Hour"Total cost per driver per week $1,620.09
Estimated Driver Cost per "Revenue Hour" 60.0 $27.00Estmated fuel and lubricants per hr (based on local hauling - 3 hours or less) $8.00
Estimated reparis and maintenance per hr $5.00
Estimated tires and tires repair per hr $2.00
Estimated hoses, connections, and supplies $0.00
Estimated Direct Cost per "Revenue Hour" $42.00Depreciation and interest based on revenue hours per week (based on total investment per truck) $225,000 $12.51
Estimated Direct Cost Plus Depreciation and Interest per "Revenue Hour" $54.51Estimated Overhead (management, supervision, dispatchers, mechanics, and safety) $17.00
Total Cost per "Revenue Hour" based on "Local Hauling" $71.51***Estimated Overhead is based on verhead at each yard averaging an estimated $4,500 per assigned truck
■ Completion trends point to an undersupplied frac sand market in 2017
▬ Robust stage count growth
▬ Sand demand per well/stage continues to increase
■ Logistical cost advantages should drive market share gains
▬ Direct access to Class 1 rail
▬ Competitive pricing agreements
▬ High volume transload facilities in basin will force smaller players out of the market place
■ Clean balance sheet places it in an advantageous position to capitalize this cycle
▬ Net debt to cap of 22% and $300Mn of cash on hand
▬ Should prove opportunistic this downturn
■ Internal cost initiatives should result in margin improvement in 2016 on essentially flat revenues
Company Overview
U.S. Silica (SLCA)
Key Takeaways and Investment Thesis Logistics and rail costs analysis
Volumes vs. contribution margin per ton
Source: Company data, GMP estimates
Truck from Mine to Railcar
Load (mins) 30
Unload (mins) 30
Round Trip Travel (mins) 30Total truck time (mins) 90
Trucks per Railcar 4
Total time per 100 Tons 360
Truck cost per hour $75
Total Cost $450Cost per Ton $4.50
Short Line to Class 1
Line Switching Fee ($ per car) $150
Handling Fee ($ per car) 750
Total Cost per 100T Car 900Cost per Ton $9.00
Low Volume User - 1000 Mile Trip
First Car Rate per mile $2.40
Additional Car Rate per mile $1.85
Unhook and Transfer Fee 900Total Cost per Ton $27.78
Unit Train - 1000 Mile Trip
First Car Rate - Volume User $2.00
Additional Car Rate - Volume $1.50Transfer Fee –
Total Cost per Ton $15.05
$4
$9
$14
$19
$24
$29
$34
1,000
1,200
1,400
1,600
1,800
2,000
2,200
CM
/ Ton
($)
Vo
lum
es (
00
0's
of
Ton
s)
Volumes (000's of Tons) CM / Ton ($)
■ Pressure exchanger is a proven technology
▬ Patented with over 15,000 PX devices installed
▬ Emergence into energy space is attacking a new market
▬ NOT a new unproven technology with high risk of failure
■ The VorTeq value proposition
▬ Step change in missile technology for pressure pumping
▬ Longer Pump Life + Less HP = Higher Returns
▬ SLB commitment: $125 million in upfront capital and an annual $1.5Mn fee/unit for 15 years of exclusivity
■ Pipelines, gas processing and petro-chem provide another strong avenue for growth
▬ $2Bn in addressable market opportunities for IsoBoost and IsoGen
■ Stock should be valued as a growth company
▬ Our $12.00 price target is based on a 12.8x 2017E EV/EBITDA (EV includes $75 million cash payment received in Q4) and 18.8x our 2017 EPS estimate
▬ These multiples are in line with historical multiples of other oilfield manufacturers with differentiated technology at various stages in the cycle
Company overview
Energy Recovery (ERII)
Source: Company Data, GMP estimates
Key Takeaways and Investment Thesis Investing in Innovation
~4Bn of Compelling RECURRING Opportunities
What is it and how does it work?
■ The pressure exchanger is manufactured in-house starting with alumina powder through to finished ceramic
■ This core is then placed into a pressure exchanger that has a high pressure inlet and low pressure outlet for one fluid and a low pressure inlet and high pressure outlet for the other fluid
■ The high pressure fluid enters the core and makes actual contact with the low pressure fluid inside the chambers of the core
■ The fluids smash into each other, and much like a cue ball hitting another billiards ball, the high pressure fluid transfers all momentum energy and pressure to the low pressure fluid
■ Meanwhile, the core is spinning allowing for the fluids to exit into corresponding low pressure or high pressure exit pipes
The VorTeq
Energy Recovery (ERII)
The VorTeq Solution Fracking without the VorTeq
Fracking with the VorTeq
Source: Company IR Presentation
14
Disclosures
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