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OIL & GAS PRIMER

September 2011 The Credit Suisse Energy Team

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ research disclosures or call +1 (877) 291-2683. U.S. 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.

Credit Suisse Global Energy Team


United States Integrated Oils & Refiners Ed Westlake (New York)) Rakesh Advani (New York) Exploration & Production Arun Jayaram (New York) Mark Lear (New York) David Lee (New York) Oil Services Brad Handler (New York) Eduardo Royes (New York) Jonathan Sisto (New York) MLPs Yves Siegel (New York) Brett Reilly (New York) Utilities Dan Eggers (New York) Kevin Cole (New York) Matt Davis (New York) Katie Chapman (New York) Alternative Energy Satya Kumar (San Francisco) Ed Westlake (New York)) Patrick Jobin (New York) Specialist Sales Tom Marchetti (New York) Charlie Balancia (New York) +1 212-325 6751 +1 212 538 5084 +1 212 538 8428 +1 212 538 0239 +1 212 325 6693 +1 212 325 0772 +1 212 538 7446 +1 212-325-1292 +1 212 325 8462 +1 212 538 3749 +1 212 538 8430 +1 212 538 8422 +1 212 325 2573 +1 212 325 1261 +1 415 249 7928 +1 212-325 6751 +1 212 325 0843 +1 212 325 0667 +1 212-325 6314 edward.westlake@credit-suisse.com rakesh.advani@credit-suisse.com arun.jayaram@credit-suisse.com mark.lear@credit-suisse.com david.lee@credit-suisse.com brad.handler@credit-suisse.com eduardo.royes@credit-suisse.com jonathan.sisto@credit-suisse.com yves.siegel@credit-suisse.com brett.reilly@credit-suisse.com dan.eggers@credit-suisse.com kevin.cole@credit-suisse.com matthew.davis@credit-suisse.com katie.chapman@credit-suisse.com satya.kumar@credit-suisse.com edward.westlake@credit-suisse.com patrick.jobin@credit-suisse.com thomas.marchetti@credit-suisse.com charles.balancia@credit-suisse.com Europe Integrated Oils & Refiners Kim Fustier (London) Thomas Adolff (London) Exploration & Production Tao Ly (London) Ritesh Gaggar (London) Arpit Harbhajanka (London) Oil Services Tao Ly (London) Arpit Harbhajanka (London) Utilities Vincent Gilles (London) Mark Freshney (London) Stephen Deeley (London) Michel Debs (London) Mulu Sun (London) Zoltan Fekete (London) Specialist Sales Jason Turner (London) Mark Whitfeld (London) +44 20 7883 0384 +44 20 7888 9114 +44 20 7888 1778 +44 20 7888 0277 +44 20 7888 0151 +44 20 7888 1778 +44 20 7888 0151 +44 20 7888 1926 +44 20 7888 0887 +44 20 7883 9534 +44 20 7883 9952 +44 20 7888 0269 +44 20 7888 0285 +44 20 7888 1395 +44 20 7888 8038 kim.fustier@credit-suisse.com thomas.adolff@credit-suisse.com tao.ly@credit-suisse.com ritesh.gaggar@credit-suisse.com arpit.harbhajanka@credit-suisse.com tao.ly@credit-suisse.com arpit.harbhajanka@credit-suisse.com vincent.gilles@credit-suisse.com mark.freshney@credit-suisse.com stephen.deeley@credit-suisse.com michel.debs@credit-suisse.com mulu.sun@credit-suisse.com zoltan.fekete@credit-suisse.com jason.turner@credit-suisse.com mark.whitfeld@credit-suisse.com

Canada Brian Dutton (Toronto) Andrew Kuske (Toronto) Courtney Morris (Toronto) Paul Tan Jason Frew (Calgary) Terence Chung (Calgary) David Phung (Calgary)

Latin America Oil & Gas Emerson Leite (Sao Paulo) +55 11 3841 6290 Utilities Vinicius Canheu (Sao Paulo) +55 11 3841 6310 Ethanol, Agribusiness and Transportation Luiz Campos (Sao Paulo) +55 11 3841 6312

emerson.leite@credit-suisse.com vinicius.canheu@credit-suisse.com luiz.campos@credit-suisse.com

+1 416 352 4596 +1 416 352 4561 +1 416 352 4595 +1 416 352 4593 +1 403 476 6022 +1 403 476 6024 +1 403 476 6023

brian.dutton@credit-suisse.com andrew.kuske@credit-suisse.com courtney.morris@credit-suisse.com paul.tan@credit-suisse.com jason.frew@credit-suisse.com terence.chung@credit-suisse.com david.phung@credit-suisse.com

Australia Sandra McCullagh (Melbourne) Nik Burns (Melbourne) Ben Combes (Melbourne)

+61 2 8205 4729 +61 3 9280 1641 +61 3 9280 1669

sandra.mccullagh@credit-suisse.com nik.burns@credit-suisse.com ben.combes@credit-suisse.com

Russia/Emerging Europe Oil & Gas Mark Henderson (London) Andrey Ovchinnikov (Moscow) Utilities Anton Fedotov (Moscow)

+44 20 7883 6901 mark.henderson.2@credit-suisse.com +7 495 967 8360 andrey.ovchinnikov@credit-suisse.com +7 495 967 8362 anton.fedotov@credit-suisse.com

Asia-Pacific David Hewitt (Singapore) Horace Tse (Hong Kong) Edwin Pang (Hong Kong) Yang Song (Hong Kong Trina Chen (Hong Kong) Sanjay Mookim (Mumbai) Yuji Nishiyama (Tokyo) Siriporn Sothikul (Bangkok) Poom Suvarnatemee (Bangkok) A-Hyung Cho (Seoul) Annuar Aziz Kuala Lumpur) Sidney Yeh (Taipei)

+65 6212 3064 +852 2101 7379 +852 2101 6406 +852 2101 6550 +852 2101 7031 +91 22 6777 3806 +81 3 4550 7374 +66 2 614 6217 66 2 614 6210 +82 2 3707 3735 +603 2723 2085 +8862 2715 6368

david.hewitt.2@credit-suisse.com horace.tse@credit-suisse.com edwin.pang@credit-suisse.com yang.y.song@credit-suisse.com trina.chen@credit-suisse.com sanjay.mookim@credit-suisse.com yuji.nishiyama@credit-suisse.com siriporn.sothikul@credit-suisse.com paworamon.suvarnatemee@credit-suisse. a-hyung.cho@credit-suisse.com annuar.aziz@credit-suisse.com sidney.yeh@credit-suisse.com

Source: Credit Suisse


Page 2

Credit Suisse Global Energy Team

Toronto

London

Moscow

Tokyo Seoul Hong Kong

New York
Source: Credit Suisse.

Bangkok Singapore Sao Paulo Kuala Lumpur Sydney Johannesburg

Call us anywhere: we can help you

Page 3

Table of contents
Industry Overview
Crude Oil
Crude Oil Overview Crude Oil Supply International Offshore Exploration Crude Oil Demand Global Oil Markets 6 12 19 27 32

Basics of Energy Investing


Investing in Big Oil 176

Outlook for Big Oil

185

Natural Gas
Natural Gas Overview North American Natural Gas Shale Gas in Focus Liquefied Natural Gas (LNG) 39 45 57 67

Investing in E&P

190

The Upstream
The Upstream Process Oil and Gas Reserves 83 99

Investing in OFS

195

The Midstream
Natural Gas Crude Oil/Refined Products 107 111

Investing in Refining

205

Oilfield Services, Equipment and Drilling


Products and Services Company Specific Details 116 136

Outlook for Refining

215

Investing in MLPs The Downstream


Refining Refinery Operations Oil Product Marketing 148 161 171

219

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CRUDE OIL

Crude Oil Overview

What Is Oil and Natural Gas?


Oil and natural gas (or hydrocarbons) are composed of chains of linked hydrogen
and carbon atoms. Plant and animal remains were covered by layers of sediment (particles of rock and mineral) and over millions of years of extreme pressure and temperatures these particles were reduced to liquid hydrocarbons (oil) or gaseous hydrocarbons (natural gas). Under geologic pressure, oil migrates from its source rock into rocks with larger spaces or pores reservoir rock. Limestone and sandstone have with large porosity and are two common types of reservoir rock. Oil is held in these reservoirs by impervious rock structures above called caps or traps.

Source: Earth science Australia

Page 7

Crude Oil Composition


Crude oil ranges from almost clear water-like fluids to black viscous semi-solids. Crude oil can be categorized into various API degrees of gravity. The higher the API gravity, the lighter the crude. Crude oils with higher API gravity yield greater proportions of lighter petroleum products like gasoline. Source: DOE
Sour
4.5% 4.0% 3.5% Maya 3.0% Arab Heavy 2.5% Fateh 2.0% Iranian Heavy 1.5% 1.0% 0.5% Bonny Medium ANS Brent Cabinda WTI Bonny Light 25 30 35 40 45 Tapis 50 Basrah Light Arab Light Arab Medium Cold Lake

Crude oils with higher than average sulfur content are known as sour. Those with low sulfur levels are called sweet. The majority of global reserves are light/medium and slightly sour.

Sulfur Content
Sweet

0.0% 0 5 10 15 20

Heavy

API Gravity

Light

Page 8

Global Oil Reserves

Source: BP Stats

The majority of the worlds current proved oil reserves are in OPEC countries. The BP Statistical Energy Review states that 956 billion barrels or 76% of the worlds proved reserves are held by OPEC. 754 billion of these are in the Middle East. The remaining 302 billion barrels or 24% of the worlds proved reserves are in nonOPEC regions. The former Soviet Union holds 42% of non-OPEC proved reserves. Additionally, the Canadian oil sands contain 150.7 billion barrels of proved reserves.
Page 9

What is OPEC?
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent,
intergovernmental organization, created in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The five Founding Members were joined by Qatar (1961); Indonesia (1962, left in 2008); Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973 suspended membership from 1992-2007); Angola (2007), and Gabon (1975, left in 1994). OPECs stated objective is to coordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry. OPECs members in effect attempt to raise the clearing price of crude oil above its natural level by withholding relatively cheap reserves from the market. OPEC sets production quotas which individual members adhere to with varying degrees of success (or compliance).

Page 10

World Oil Production

Source: BP Stats

The worlds oil production profile is different from its reserve distribution Declining production of aging fields is an important theme The Middle East, North America, and Europe/Eurasia rank as the top three producing regions.
Page 11

Crude Oil Supply

Global Oil Supply


The characteristics of producing basins vary substantially around the world, including differences in the costs of finding, development and production. The United States is the worlds most mature producing region with correspondingly low per well productivity and higher extraction costs. The Middle East is the most productive region with the largest remaining undeveloped resources.

Russia is the worlds largest oil producer and contains two highly mature provinces: Western Siberia and Volga/Urals. West Africa is a large source of production with future growth from the offshore. Brazil looks like a huge new resource opportunity with the development of the pre-salt play in the offshore Santos Basin. Frontier areas: Arctic, Greenland, Eastern Siberia, Antarctic, even deeper
Offshore

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Global Production Split: OPEC and Non-OPEC


OPEC Oil Production*

Crude Oil Production (MMBD)

global oil supply, a sharp increase from the trough of 1985, but still lower than its historical level of 55%+ pre-1973/74.

OPEC Supply [LHS] 35

Market Share [RHS] 50%

30 Global Market Share (%) 40% 25 20 15 20% 10 10% 5 0 2010E 2012E 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0% 30%

Non-OPEC (ex-Former Soviet Union or


FSU) production grew rapidly in the 1960s, 1970s/80s and the 1990s. However, non-OPEC supply growth has slowed in recent years. Non-OPECs restricted access to new reserves, combined with higher decline rates, are the reasons.

* Assumes no inventory change: 2009 - 2012

Page 14

Source: IEA, Credit Suisse estimates

OPEC accounts for roughly 40% of

40

60%

OPECs Spare Capacity: a Key Measure


8.0 6.0 4.0 Million Barrel Per Day 2.0 80 0.0 60 -2.0 -4.0 -6.0 Jan-01 40 20 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 WTI (RHS) Jan-10 Jan-11 160 140 120 100 WTI, $/bbl

Spare Capacity

Demand Less Supply Growth

Most of the time OPEC withholds existing supply from the market, creating spare capacity i.e., oil which could be produced, but is offline. Anticipated levels of future spare capacity have important effects on crude prices generating more or less fear about supply (see markets and pricing section).

Page 15

Source: IEA, Credit Suisse estimates adjusted for Libya

Watching OPEC Capacity Additions


OPEC Net Capacity Additions
1.80 1.30 0.80 0.30

-0.70 -1.20 -1.70 2007 2008 2009E 2010E 2011E 2012E 2013E

Algeria Libya

Angola Nigeria

Ecuador Qatar

Iran Saudi Arabia

Iraq UAE

Kuwait Venezuela

OPECs current policy appears to be to add new capacity only in line with expected increases in demand: investing behind the demand curve. OPEC capacity additions between 2011-2012 are expected to be modest.

Page 16

Source: IEA, Credit Suisse estimates

-0.20

Iraq: Significant potential, But Infrastructure a Challenge


Iraqi oil production over time rise and fall
12500 Iran/Iraq war 10000 7500 5000 2500 0 1987 2005 2013E 2009E 2011E 1979 1981 1983 1985 1989 1991 1993 1995 1997 1999 2001 2003 2007 Plateau 2015E Gulf war Gulf war II Implied potential

Iraq 9% of world reserves, 3% of world production


25% 20% 15% 10% 5% 0% Kazakhstan
2.85 1.125 2.325 6.30 1.800 1.800 0.535 0.230 0.170 0.120 0.110 4.765 11.07

% World reserves

% World production

Venezuela

Kuwait

Iran

Russia

Saudi Arabia

Iraq

Libya

Baseline

1st round projects

2nd round projects

Kurdistan

Source for top charts: IEA, industry data, Credit Suisse estimates

Iraqi Civilian Deaths Jan 2006 Aug 2009


1st round awards Rumaila Zubair West Qurna Phase-1 Sub-total 2nd round awards
Majnoon W est Qurna Phase-2 Halfaya Garraf Badra Qaiyarah Najmah

Oil projects awarded and growth


Reserves (BB) 17.77 4.08 8.58 30.43 12.58 12.88 4.10 0.86 0.11 0.81 0.86 32.19 62.62 Initial Rate (MMB/d) 1.05 0.195 0.26 1.51
0.046 0.000 0.003 0.000 0.000 0.000 0.000

Cost Recovery Floor (MMB/d) 1.155 0.2145 0.286 1.66 0.175 0.120 0.070 0.035 0.015 0.030 0.020 0.465

Targeted Plateau Rate (MMB/d)

Sub-total
Total

0.05 1.55

Source: Department of Defense

Source: Iraq Oil Forum

Could change perception of long-term supply.


Page 17

Nigeria

UAE

Onshore Growth Accelerating; We Need Offshore Too


US Onshore Supply Growth and Infrastructure
4,500 4,000 3,500 3,000 (KBD) 2,500 2,000 1,500 1,000 500 0 2010 2011 2012 2013 2014 2015 2016 2017 Refining Tanker + Barge Pip eline Supply Growth Rail

Deepwater Hockey Stick

14,000 Deepwater hockey stick 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 West Africa 2002 2004 2006 2008 2010E Brazil 2012E 2014E Ghana 2016E

US Gulf of Mexico

Other D

Non-OPEC supply expected to be lacklustre through 2014 even with onshore growth in the US A surge in deepwater projects helps lift Non-OPEC supply beyond 2014

Page 18

Source: IEA, Credit Suisse estimates

International Offshore Exploration Success Improving

Brazil is Still the Largest Hot Spot

Source: Petrobras

BM-S-22

Focus area has been Santos Basin (Tupi Cluster) Blocks BMS-8, 9, 21, 22 (Sugar Loaf) area, together with BMS-11 (Tupi) and BMS-24 (Jupiter)

Page 20

Ghana: Could Be Larger Than We Currently Think


(1) Teak could potentially be larger than the market expects. The third and fourth appraisal wells could create a standalone development (2) The left chart shows Tullow presentation of Teak in August. The Right shows KOS view. Appraisal will determine how large Teak truly is. (3) The are large fans underneath the giant Tweneboa Discovery that have yet to be tested (4) Cedrela will test the Cenomanian fairway in which HES has enjoyed success (5) Other targets in 2012 include Wawa, Wassa, Sapele in Deepwater Tano Block and new Albian prospects are being worked up.

Page 21

French Guiana/Suriname Zaedyus Game Changer

(1) Tullow believes Zaedyus discovery could be 700mmboe, with 5-6 more similar prospects in the near vicinity. (2) Tullow believe the fan structure is larger than the entire Tano basin in Ghana (3) Matamata is an additional large structure in the West of this block (4) Further drilling activity in Block 47, Georgetown offshore Suriname
Page 22

Source: APC, TLW

1st Successful Wildcat in Guyana Basin

Page 23

Source: APC, TLW

Africa : More Late Cretaceous


Large multi-hundred million barrel prospects being targets by APC, Tullow, CVX in Sierra Leone, Liberia and Cote DIvoire in 2H11/1H12 CVX spuds Liberia acreage in 4Q11 Montserrado Deep is important potentially opens up a new basin in Liberia
Testing Liberia, Sierra Leone, Cote DIvoire (APC)

Page 24

Source: APC, TLW

West Africa Exploration to the Forefront Pre Salt Angola


Angola Pre-Salt Cobalt Pre-Salt Drilling Cameia Currently

Page 25

Source: CIE

US Gulf of Mexico
US GoM Reserves, 78% Held by Supermajors
35 00 Deepwater Gulf of Mexico Reserves, MB 30 00 25 00 20 00 15 00 10 00

The US Gulf of Mexico contains significant resource but drawbacks are liability concerns and permitting delays
Source: Wood Mackenzie; CVX

5 00 0 HESS BP BHP Billiton Marathon Shell Statoil ExxonMobil Total Devon Energy Noble Energy Repsol YPF Petrobras Maersk ME Plains E&P Chevron Anadarko COP Nexen ATP Eni

14,000 12,000 10,000 Million BOE 8,000 6,000 4,000 2,000 0 Remaining Reserves in Production Reserves in Appraisal Recently Discovered Future Geological Potential

Page 26

Crude Oil Demand

Oil Demand
Oil demand grew by a CAGR of 1.5% from 1992 to 2008. We expect global oil demand to rise by about 1.9% in 2010. We expect oil demand to grow at 1.4% per annum from 2011 to 2017. Oil demand growth has been historically correlated with GDP growth, but not exclusively so. Price, taxation and fuel switching have all driven significant changes in consumption patterns. The future of oil demand growth is presumed to be outside the OECD: mainly in China, India and other developing economies. The principal uses for oil are transportation, power generation, and heating. The highest value use of oil today is as a transportation fuel. As countries become richer they tend to reduce or phase out their industrial uses of oil. Oil demand is price elastic: different consuming zones exhibit different price elasticity to crude prices. This is partly due to different end user taxation levels (the United States and China have low taxes, Europe has high taxes) and partly due to the relative availability of substitute fuels.

Page 28

Oil Demand Correlation with Real GDP Growth (1969 - 2008)


7.0% 6.0%

World Real GDP Growth

R2 = 0.5802
5.0%
Source: BP Stats, Credit Suisse estimates

4.0% 3.0% 2.0% 1.0% 0.0% -6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Worldwide Oil Consumption Growth

Global GDP trends are a clear underlying driver of oil demand. However, the relationship is uneven and consuming regions exhibit very different demand multipliers to GDP (~1 in emerging economies, ~0.5 in the OECD).

Page 29

Oil Demand Growth & Oil Prices


9% 8% 7% 6% 5% Global Oil Demand Growth 4% 3% 2% 1%
1.7% 1.3% 1.4% 5.5% 5.9% 4.2% 3.7% 2.9% 2.7% 2.3% 1.6% 0.6% 0.8% 0.5% 0.5% 3.0% 2.3% 2.1% 1.1% 0.9% 0.8% 2.8% 2.4% 2.2% 1.7% 1.4%1.4% 0.2% 1.9% 7.2% 8.2% 8.9% 8.4% 8.0% 7.3%

Demand growth

Real Brent Oil Price (USD/bbl), 2007

110

SPIKE Saudis change policy

SPIKE

100 90

70 60 50 40 30 20 10

1.2% 0.8%

Collapse
0% -1% -2% -3% -4% -5% -6%

0.3%

The Good Old Days


-1.5%

-0.5%

18 years of low and stable oil prices 1986-2004


-1.5%

Boom Recovery Recession

-2.3% -2.9%

Boom

Boom Recovery Recession

Boom Recovery Recession Recovery Recession

-4.1%

Recovery

Recession

Oil is a cyclical commodity (with managed characteristics).

Higher oil prices during booms create deeper demand recessions afterwards.

1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

Source: Credit Suisse

Page 30

Inflation adjusted Brent price US$ per bbl

80

Oil Demand: Consumption Profile

Source: BP Stats.

In the past 20 years, Asia-Pacific has roughly doubled its oil consumption. North America has also grown reasonably strongly. Europe has been flat.
Page 31

Global Oil Markets

Oil Markets: Global in Nature


Oil is produced on nearly every continent. A complex transportation and refining system exists to move oil to end-user markets. We estimate that the physical global crude trade is $1,680-billion-per year at $55/bbl oil and baseline global demand of 86 MBD. Variations in the U.S. dollar exchange rate also play a significant role for crude price given that oil is traded in U.S. dollars. Geopolitics and speculation also influence the price of oil. Crude oil is largely purchased by refiners to convert into refined products such as gasoline, as well as by power generation plants. Futures are traded on major exchanges such as the NYMEX and the ICE.

Page 33

Oil Markets: NYMEX

The NYMEX light, sweet crude oil futures contract is the worlds most liquid forum for crude oil trading and is also the worlds largest-volume futures contract trading on a physical commodity. The contract trades in units of 1,000 barrels, and the delivery point is Cushing, Oklahoma. The contract provides for delivery of several grades of domestic and internationally traded foreign crudes. 650,000 contracts are traded on average per day.
Source: BBC

Page 34

Oil Markets: Trading


Futures trading: standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil at a predetermined price on a future delivery date. Over-the-Counter Swaps etc: instead of trading via a futures exchange, buyers and sellers of crude oil can enter into an over the counter transaction, often known as a swap. These contacts have become more popular than futures trading in recent years, but can prove difficult to liquidate at times of market dislocation. Term contracts: private contracts to buy specified quantities of crude oil at prices based on regional benchmarks. These contracts are not traded in any form. Most Kuwaiti crude oil is sold on term contracts, with the price of Kuwaiti crude oil tied to Saudi Arabian Medium (for western customers) and a monthly average of Dubai and Oman crudes (for Asian buyers).
Page 35

Oil Markets: Data Sources


International Energy Agency (IEA): Every month, the IEA releases the Oil Market Report, which contains information on supply, demand, stocks, prices, and refinery activity. U.S. Department of Energy: The DOE provides weekly information on crude and principal petroleum products in regards to factors such as supply, imports, inventories and refinery activity. Market participants utilize these types of data sources in order to form opinions on companies as well as the expected direction of the commodity.
Source: IEA

Source: IEA

Page 36

Futures Curve: Backwardation vs. Contango


The shape of the 12-month futures curve is often an indication of current supply/demand balances. An upward sloping curve suggests higher expected prices and implicitly higher demand relative to supply in the future: Contango A downward sloping curve suggests current demand is outpacing current supply with the expectation that the imbalance will become less pronounced in the coming time period: Backwardation
Futures Curve: Contango Example
$80 $76.10 $76.47 $76.77 $77.09
Price per barrel $75

Futures Curve: Backwardation Example


$80 $77.09 $76.77$76.47 $76.10

$75.10 $75.60 Price per barrel $75 $72.04 $72.49 $73.04 $73.61 $74.11 $74.62

$75.60

$75.10 $74.62

$74.11 $73.61 $73.04

$72.49

$72.04

$70

$70

$65 Nov09 Jan10 Jun-10 Jul-10 Oct09 Feb10 Mar-10 Apr-10 May-10 Dec09 Aug-10 Sep-10

$65 Nov09 Jun-10 Jan10 Oct09 Jul-10 Aug-10 May-10 Sep-10 Feb10 Mar-10 Apr-10 Dec09

Source: Bloomberg

Source: Bloomberg

Page 37

NATURAL GAS

Natural Gas Overview

What is Natural Gas?

Source: Chesapeake Energy

Natural Gas is a combustible, colorless and odorless gas that is made up of a


mixture of hydrocarbons. Methane (which is dry gas) is the most commercially marketable component of the natural gas stream. Other components of the typical well-head natural gas stream (wet gas) include heavier liquids such as ethane, propane and butane. Natural Gas is measured on a unit basis in thousands of cubic feet (Mcf). The benchmark spot price is Henry Hub, which is quoted on a $ per Millions of British Thermal Units basis (MMBtu). An Mcf is a volume unit, while MMBtu is an energy measurement. Because of the need for extensive pipeline systems and difficulty in shipping, natural gas is most used in regions with indigenous supply. Meanwhile, the ability to ship gas in liquid form (LNG) is gaining traction.
Page 40

Global Natural Gas: Proved Reserves (2010)


Total Proved Reserves were over 6,600 trillion cubic feet at year-end 2010.

Europe & Eurasia 2,227 Tcf North America 350 Tcf Middle East 2,675 Tcf Africa 522 Tcf South & Central America 264 Tcf Asia Pacific 575 Tcf

Source: BP Statistical Review of World Energy 2011.

Page 41

World Energy: Natural Gas Has Gained Share of the Energy Pie

Source: BP Statistical Review of World Energy 2011

According to BP Statistical Energy Review, natural gas accounted for 24% of global primary energy consumption, the highest on record, in 2010.

Page 42

Global Natural Gas: Daily Demand By Region (Bcf/d)

Source: BP Statistical Review of World Energy 2011

Global gas demand growth is currently being driven by Asia and the Middle East (due to a switch away from oil).

Page 43

Substitutes for Natural Gas


Coal Oil Alternative Energy

Source: www.britishcoalgasification.co.uk.

Source: ecotechdaily.com

Source: www.greengop.org.

There are numerous substitutes for natural gas including coal, oil, heating oil, naphtha and alternative energy (such as wind, solar and nuclear

power).

A global movement towards clean energy has put natural gas more in favor versus coal and oil, due to inherently lower CO2 emissions.

Page 44

North American Natural Gas

N. AM. Natural Gas Pricing


North America is mostly a closed
market with natural gas prices driven by demand trends (weather, economic growth) and the cost of new supply. Over the past 14 years, NYMEX gas prices have traded as low as $2-3 per MMBtu and as high as $14-15 per MMBtu. In North America, oil and natural gas do not exhibit a strong pricing relationship as the two fuels don't compete much (oil is not used much for power while gas is not used much for transportation). Outside of the U.S., prices tend to be linked to crude owing to less liquid trading markets.

NYMEX Natural Gas Prices


$16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 1/2/1997 1/2/1998 1/2/1999 1/2/2000 1/2/2001 1/2/2002 1/2/2003 1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009

($ per MMBtu)

1/2/2010

WTI Crude Oil to Henry Hub Natural Gas (x)


32.0x 28.0x 24.0x 20.0x 16.0x 12.0x 8.0x 4.0x 0.0x 1/2/1997 1/2/2000 1/2/2002 1/2/2004 1/2/2007 1/2/2009 1/2/2010 1/2/2006 1/2/1998 1/2/1999 1/2/2001 1/2/2003 1/2/2005 1/2/2008 1/2/2011
10-Year Average: 11.3x Current (9/14/11): 23.0x

1/2/2011

Page 46

Source: Bloomberg LP

Source: Bloomberg LP

North American Natural Gas: Industry Overview

The process of bringing natural gas to market begins with exploration & production and ends with the retail distribution of gas to end markets. Along the way, gas is gathered and processed for removal of oil, water, natural gas liquids (NGLs) and sulfur. It is then transported and stored while awaiting distribution.

Source: Energy Information Administration

Page 47

Upstream: Where is Natural Gas Located?


Onshore: Shale Onshore: Tight Gas Offshore

Source: U.S. Geological Survey.

Source: StatoilHydro.

Source: Department of Primary Industries, Australia.

Exploration & Production (also known as the upstream) of natural gas is a global venture and producers operate in both onshore and offshore environments.
Natural gas is located underground and below seabeds. Producers often drill thousands of feet beneath the surface to reach natural gas reservoirs. In North America, onshore unconventional resources like shale and tight gas sands have become a growing source of production in recent years as traditional and lower cost sources have matured.
Page 48

Upstream: Exploring and Producing Natural Gas


Producers use various techniques to locate and test for the existence of natural gas including geophysical surveys, seismic evaluation, exploratory wells, well logs, core samples and others. Once commercially viable quantities of natural gas have been discovered and confirmed, producers will develop the reservoir and commence production. Produced natural gas is then sent to processing facilities via pipeline.
Please see Upstream section for additional detail on the exploration and production process.

Source: Japan Agency for Marine Earth Science and Technology

Source: www.smi-online-co.uk

Page 49

Midstream: Processing Natural Gas

Processing natural gas (midstream) involves the removal of oil, water, hydrogen sulfide, carbon dioxide and NGLs (ethane, butane and propane). The end goal is to produce dry gas, free of impurities or other non-methane compounds.
Page 50

The Midstream: Transporting Natural Gas

Natural gas in the U.S. is delivered via a complex web of interstate and intrastate pipelines estimated by the American Gas Association to extend ~2.4 million miles. Pipeline companies charge regulated fees (tariffs) for moving gas. Major pipelines include the Transcontinental, Northwest, Rockies Express (REX) and Ruby pipelines. The Ruby Pipeline, which was completed in July 2011, provides westbound transport from the Rockies region with 1.5 Bcf/d of capacity.
Page 51

Source: American Clean Skies Foundation

Natural Gas Marketing: What are Basis Differentials?

~$3.60/MMBtu

~$4.30/MMBtu
Source: www.nafsa.org

~$4.20/MMBtu

The NYMEX natural gas price (Henry Hub, Louisiana) is not necessarily what producers receive for their gas. The actual price received (well-head price) is different throughout the country. The difference relative to NYMEX is called a basis differential. Regional prices are a function of local supply and demand balances and the transport cost to the consuming markets in the Northeast. Historically, Rockies gas trades at the widest discount (given little local demand and long pipeline distances) while Appalachia gas trades at a premium (given proximity to high demand areas on the east coast). However, differentials across the U.S. have narrowed in recent quarters as a result of expanded pipeline capacity.
Page 52

Natural Gas Storage: The U.S. has a Deep Storage System

Before being transported for local distribution, natural gas is stored in underground facilities such as depleted reservoirs, salt caverns and aquifers. Total natural gas storage capacity in the U.S. is approximately 4.1-4.2 Tcf. Storage is located primarily in the Gulf Coast and the consuming areas in the Midwest and Northeast.
Page 53

Source: Energy Information Administration

U.S. Weekly Storage Report


WORKING GAS IN STORAGE
Change 9/2/2011 Producing Region Consuming East Consuming West Total U.S.
4,500 4,000

Change Bcf 2 58 4 64 Year Ago 971 1,707 477 3,156 % (1.2%) (4.2%) (9.9%) (4.2%) Bcf (12) (71) (47) (131) 5-Year Avg 925 1,732 427 3,085

Week Ago 957 1,578 426 2,961

% 0.2% 3.7% 0.9% 2.2%

Differential % Bcf 3.7% (5.5%) 0.7% (1.9%) 34 (96) 3 (60)

959 1,636 430 3,025

Total U.S. Working Gas In Storage


2011 5-Yr Avg 2008 2009 2010

Billion Cubic Feet

3,500 3,000 2,500 2,000 1,500 1,000 500 1 4 7 10

13

16

19

22

25

28

31

34

37

40

43

46

49

52

Calendar Week
Source: Energy Information Administration (EIA)

Natural gas in storage fluctuates from the withdrawal season (November to March) when cold weather typically results in storage withdrawals to the refill season (April to October) when lower demand leads to net storage injections. Every Thursday at 10:30am ET, the EIA reports the storage injection / draw for the prior week. The amount of injection or draw can have a material affect on gas prices as it indicates supply / demand trends relative to previous years.
Page 54

Major End Markets for Natural Gas


Residential Gas used in private dwellings for space and water heating, air conditioning, cooking and other household uses Industrial Gas used for heat, power or chemical feedstock for manufacturing. End products include petrochemicals, fertilizers, plastics, etc. Commercial Gas used by non-manufacturing establishments in the sale of goods or services

Electrical Power Gas used by power plants to generate electricity

Other smaller end-market uses of natural gas include 1) fuel (natural gas vehicles) and 2) oil & gas production.
Source: Energy Information Administration

Page 55

100.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

U.S. Natural Gas Demand by User (Bcf/d)

U.S. Natural Gas Demand By End Markets

Natural gas demand trends are highly seasonal. Because natural gas is used as a heating fuel, demand rises materially in the winter/cold weather months.

0.0

Commercial

Residential

Electric Power

Industrial

Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Page 56 Source: Energy Information Administration

Natural Gas Upstream Trends: Shale Gas in Focus

Shale Gas in Focus

Shale is a fine-grained sedimentary rock that may contain high concentrations of


natural gas. Producers drill into shale beds and break open the rock using advanced drilling techniques and tremendous energy (pressure pumping). Shale is a growing source of current and future natural gas production in the U.S. It currently represents about 13-15 Bcf/d (~20-22%) of total U.S. production.

Source: www.research.uky.edu.

Page 58

Shale Basins in the U.S.


Major shale plays include: Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus and Woodford.

Source: Energy Information Administration.


Page 59

Bakken Shale

The Bakken Shale is an unconventional resource play located in the Williston Basin in North Dakota, Montana and Saskatchewan. An oil-based shale play that offers one of the highest rate of returns in the industry. Major players include BEXP, CLR, DNR, EOG, NFX, WLL, XTO/XOM and KOG. Transporting produced volumes out of the Williston remains an issue for the industry, but recent capacity additions have provided some relief. Significant rise in completed well costs (+35% since 2009) is the biggest concern.
Page 60

Source: USGS

Barnett Shale
Barnett Shale Natural Gas Production (MMcf/d)
5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 264 362 497 727 1,384 952 1,041 1,964 3,025 4,416 4,863

5,060

Barnett Growth

37.1%

37.3%

46.3%

30.9%

9.4%

32.9%

42.0%

54.0%

46.0%

10.1%

4.1%

Includes Denton, Tarrant, Wise, Hood, Johnson, Parker, Hill, Bosque, Sommervell, and Ellis Counties.

The Barnett Shale is an unconventional resource play located in North Central Texas. Production growth has slowed to less than 5% in 2010 after growing 36% per annum over the 2004 2009 timeframe showing that the play is maturing. ~3MM total acres with DVN, XTO/XOM, EOG and CHK as the major players. Wells can be drilled in 15-20 days, much quicker than some other shale plays.
Page 61

Source: Texas RRC

Haynesville Shale
Industry believes play spans some 3.5MM acres We believe much of the greenfield leasing has been done Ways to enter now are through acquisitions, joint ventures or farm-outs

The Haynesville Shale is an unconventional resource play located in East Texas / North Louisiana. Production has ramped up quickly and some industry sources indicate it could total 1.6 Bcf/d today. Major players include ECA, CHK, PXP, RDS and HK. IP rates are typically 10-15 MMcf/d and have been as high as 30 MMcf/d, but first year decline rates are 80-90%.
Page 62

Source: Company data

r Cente of ity Activ

Marcellus Shale
High Pressure Area

Low Pressure Area

The Marcellus Shale is an unconventional resource play located in Appalachia. Recent upward well EUR revisions in the SW PA region has pushed it to be one of the highest rate-of-return plays in the industry. IP rates typically range 2-10 MMcf/d. Play consists of ~60MM acres with EQT, RRC, APC, CVX, UPL, CNX, COG and CHK as the major players. Takeaway capacity concerns are being addressed with increased processing and pipeline buildouts. The Marcellus is currently producing ~3 Bcf/d and should continue to ramp into 2012.
Page 63

Source: www.planetthoughts.org

Eagle Ford Shale

The Eagle Ford Shale is an unconventional resource play located in South Texas. It has gained significant attention with BHP Billitons recent acquisition of Petrohawk for $12.1 billion (a 65% premium). Concerns over takeaway capacity (lack of pipelines and trucks) remain a key issue, but are currently being addressed. EOG, APC, CHK, NFX, SM, SFY, ROSE and BHP are major players. IP rates typically range 8-12 MMcfe/d.
Page 64

Source: EIA

Emerging Plays - Utica

The Utica Shale is an unconventional resource play located in Eastern Ohio. It is considered an analog to the Eagle Ford with oil, wet gas/volatile oil and dry gas windows. Current focus has been on liquids-rich and volatile oil parts of the play. There has been significant exploratory activity and deal flow with recent JVs and acquisitions (CNX/HES) that have valued the Utica at ~$9,000/acre. CHK, EVEP, DVN, APC, GPOR, REXX, PETD, CNX and HES are major players. IP rates are speculated to be 20+ MMcf/d.
Page 65

Source: www.planetthoughts.org

Emerging Plays Uinta and Other Basins

The Uinta Shale is an unconventional resource play located in Northern Utah. BBG/BRY have announced an initial well and NFX has announced five wells to date with impressive early results. The Brown Dense is a new oil/gas play in Southern Arkansas and Northern Louisiana with no results announced to date. SWN and DVN are first movers in the play. The Tuscaloosa is a new play in Southeastern Mississippi/Eastern Louisiana with DNR, GDP, DVN and ECA have established acreage in the play.
Page 66

Source: Berry Petroleum

Liquified Natural Gas (LNG)

Liquefied Natural Gas (LNG)

Liquefied Natural Gas (LNG) is natural gas (methane) that is chilled to liquid form.
Natural Gas as a liquid occupies 1/600th of the space versus ambient gas, making it easier to store and transport on cargoes. LNG can be transported by ship or truck to destinations that cant be easily

reached by pipelines.

Source: LNG One World

Page 68

LNG: Industry Overview


Liquefaction
Source: StatoilHydro

Transport

LNG is exported from regions that have an abundant supply of natural gas, but without significant local markets. LNG facilities are highly capital intensive ($5-10B) and LNG vessels are $200-300MM each. While most LNG projects operate under long-term contracts (20-25 years), there is a growing spot market of ~5-6 Bcf/d. Spot shipments are delivered to regions with the highest netback prices (i.e., offer the highest bids for LNG cargoes). Contracted import prices are often based on a oil-indexed contract (such as Japanese Crude Cocktail [JCC]).

Regasification

Page 69

Source: www.oilonline.com

LNG: Liquefaction

Liquefaction is the process by which natural gas is converted to liquid form.


Methane gas is piped to a liquefaction facility where it is chilled to -260F, at which point the vapor condenses to liquid. The liquefied gas is then loaded on to a carrier and transported to import markets. Construction of a liquefaction facility can take five to seven years. Key LNG Supply Markets: Pacific Basin (Australia, Indonesia, Malaysia), Atlantic Basin (Algeria, Nigeria, Trinidad), and Middle East (Qatar, Egypt, Oman).

Source: StatoilHydro Page 70

LNG: Regasification
LNG Carrier Storage Facility
Source: Federal Energy Regulatory Commission

Imported LNG is received as shipments at terminals with regasification (regas ) capabilities. Regasification involves bringing natural gas back to its gaseous form through thermal energy. The gas is then stored and distributed to local end-users through pipelines. Key Import Markets: Asia (Japan, Korea, Taiwan, India, China), Europe (U.K., Spain, Belgium) and U.S. (bidder of last resort). New markets are emerging in Southeast Asia, Latin America and the Middle East.
Page 71

LNG: U.S. Import Terminals

U.S. LNG import terminals (with regas facilities) include Cove Point, Elba Island, Everett, Freeport, Lake Charles, Cameron, Peuelas, Sabine and Golden Pass. COP and MRO closed the Kenai LNG plant in October 2011, the only LNG export terminal (with liquefaction facilities) in the U.S. The largest supplier of LNG to the U.S. is Trinidad.

Source: Federal Energy Regulatory Commission

Page 72

LNG: 2010 Imports / Exports by Region

LNG now accounts for 30.5% of the global gas trade

Source: BP Statistical Review of World Energy Page 73

LNG: Major Importing Countries Japan

Japan is currently the largest importer of LNG globally, importing 9.0 Bcf/d in 2010 as the country has few domestic means to satisfy natural gas demand. Imports primarily come from Australia, Indonesia and Malaysia. Total regasification capacity is currently approximately 25 Bcf/d with one terminal (Sodegaura) capable of importing 3.9 Bcf/d, one of the largest in the world.

Source: California Energy Commission

Page 74

LNG: Major Importing Countries South Korea

South Korea is currently the second largest importer of LNG globally, importing 4.3 Bcf/d in 2010. Current regasification capacity is roughly 10 Bcf/d with imports primarily from Qatar, Indonesia and Malaysia. Similarly to Japan, Korea has minimal domestic natural gas production and relies on LNG to fill the gap.

Source: www.hydrocarbons-technology.com

Page 75

LNG: Major Importing Countries Spain

Spain is currently the third largest importer of LNG globally, importing 2.7 Bcf/d in 2010. Current regasification capacity is roughly 5.9 Bcf/d and is set to rise to nearly 7 Bcf/d over the next five years or so. Spain relies on LNG imports (~3.0 Bcf/d) and pipeline gas (0.9 Bcf/d) to satisfy natural gas demand.

Source: www.faqs.org

Page 76

LNG: Major Exporting Countries Qatar


Source: www.hydrocarbons-technology.com

Qatar is currently the largest exporter of LNG globally, exporting 7.3 Bcf/d in 2010. Liquefaction capacity currently stands at ~10.2 Bcf/d and should continue to grow through 2012 as two recently completed projects have yet to reach plateau. Qatar exports gas to most markets including Japan, Korea, Spain, U.K. and the U.S. Exported gas is primarily sourced from the large North Field, which has estimated recoverable natural gas reserves of more than 900 Tcf.
Page 77

LNG: Major Exporting Countries Indonesia

Indonesia is currently the second largest exporter of LNG globally, exporting 3.0 Bcf/d in 2010. Liquefaction capacity currently stands at ~4.2 Bcf/d with the majority (3 Bcf/d) from the large Bontang LNG facility that includes eight processing trains. Indonesia plans to reduce future LNG exports from traditional LNG trains due to increasing domestic demand for gas, but recently granted project approval to Tangguh to build a third train, which should increase capacity by 0.6 Bcf/d. Like Australia, Indonesia primarily exports LNG to Asian markets.
Page 78

Source: www.aceproject.org

LNG: Major Exporting Countries Australia

Australia is currently the fourth largest exporter of LNG globally, exporting 2.5 Bcf/d in 2010. While liquefaction capacity only stands at ~3.2 Bcf/d currently, future projects are set to raise liquefaction capacity to 10-15 Bcf/d by 2020. Australia primarily exports its gas to Asian markets such as Japan, China and Korea. The $37B, 2.0 Bcf/d Gorgon LNG project is currently being developed with first production expected in 2014 or 2015. Gorgon will be Australias largest resources project.
Page 79

Source: www.lngpedia.com

THE UPSTREAM

Exploration & Production


Oil Supply Chain Natural Gas Supply Chain

Source: American Petroleum Institute.

Exploration & Production is the first link in the


oil & gas supply chain and involves:
1) Search and discovery of oil & gas reserves. 2) Extraction of oil & gas resources.
Source: American Petroleum Institute.

Page 81

Exploration & Production: Industry Players


The industry is made up of several categories of players who participate in exploration and production for oil and natural gas. 1) Integrated Oils: Are involved in all links of the supply chain, including the upstream. 2) Independent E&P: Primary business is to engage in exploration & production. 3) Pipeline Companies: Focus mainly on natural gas transmission but often have upstream segments as well.

Integrated Oils

Independent E&Ps

Pipeline Focused

Source: Google images

Page 82

The Upstream Process

The Upstream Process (E&P)


Exploration & Production involves the search for and development and production of oil and gas reservoirs. The process is broken down into five primary phases:

1) 2)

Acreage Acquisition: Producers begin by acquiring leases and drilling permits. Prospects include:
Locations contiguous to producing formations Unexplored areas Exploration & Appraisal: Producers will then begin to evaluate the acreage to see if there are commercially recoverable reserves. Involves sub-surface analysis, shooting seismic and drilling exploratory wells and appraisal wells. Wells drilled in previously unexplored areas are known as wildcats.

3) 4) 5)

Development: Once the commercial viability of a prospect is determined, rigs and equipment will be
contracted and wells are drilled and completed.

Production: Full scale production involves the ongoing collection of hydrocarbons. Oil and gas are
produced from within the well and transported to processing facilities via pipelines.

Plugging and Abandonment: When a well has produced out its economically recoverable reserves,
the well is decommissioned and equipment is removed from within the wellbore.

Source: www.directnews.co.uk, Gardner Denver ,Texas A&M University Page 84

The Upstream Process


START HERE

Plug & Abandon Bad

Good Acquire acreage Conduct seismic survey Interpret data Identify prospects Drill exploration wells Evaluate results

Final Investment Decision

Oil

For Sale
Go on to Development Sign gas sales contract Negotiate gas sales contract Formulate Development Plan Examine gas sales options Gas
with no spot market

Drill further wells appraisal

No market identified

Install platform/ rig or drilling ship

Begin drilling Install production wells facilities

Begin production

Sell oil / gas for cash

Source: Google images.

Page 85

Acreage Acquisition: Exploration and Right to Drill


Source: www.realestateofpinedale.com Page 86 Source: www.realestateofpinedale.com

The first step producers take is to negotiate or bid for leases with governments, states or spare private land owners. Producers then acquire drilling permits / necessary regulatory approvals (from federal/state/local governments) for the right to drill. Lease terms vary widely between countries but leases typically include:
1) A royalty payment to land owners that represent a percentage of gross production (typically 12.5-30.0% in the U.S.), OR 2) In some countries, leases are commonly awarded as Production Sharing Contracts or Agreements (PSCs, PSAs)

Lease terms can range from:


1) Short-term: 3-5 years 2) Long-term: approximately 10 years

3) Held by production: lease can be held based on a minimum


production threshold

Exploration & Appraisal: Finding Hydrocarbons


Among various techniques, producers use geological surveys and seismic evaluation to determine the likely existence of hydrocarbons before drilling a well. Geological surveys involve surface level analysis of the geology of an area to assess if sufficient oil and gas reserves are likely to be beneath the surface. Seismic evaluation allows producers to develop a subsurface image of a play. Geological Surveys Seismic Evaluation

Source: Oil Shale Exploration Company.

Source: Cobalt Exploration.

Page 87

Exploration & Appraisal: Seismic Evaluation


Seismic evaluation has greatly de-risked the
exploration process. Seismic is one of the most widely used exploration tools today and is used both onshore and offshore. Seismic evaluation involves the creation of a subsurface area image that can indicate hydrocarbon accumulations. The process:

Seismic waves (acoustic vibrations) are created. The waves migrate downward and reflect off of various layers of subsurface rock back to the surface where receivers "catch" the waves. The speed and nature of how the waves reflect are then interpreted to estimate subsurface geology.
Source: BP Energy

Please see Oilfield Services section for additional detail

Page 88

Source: BP Energy

Exploration & Appraisal: Drilling Test Wells


Once a target is chosen, producers will drill a prospect to confirm the existence of hydrocarbons. In areas where the existence of oil and gas reserves are unproven, producers will drill an exploratory well to confirm pre-drilling test data

(geological surveys and seismic). Successful exploration wells are capitalized as part of
the projects overall cost.

Source: Federal Institute of Geosciences and Natural

Unsuccessful exploration wells are known as dry


holes and their cost is generally immediately expensed.

For higher risk offshore production, producers will often drill appraisal wells to test flow rates and determine the commercial viability of the reservoir.
Resources (Germany): Kansas University Geological Survey

Page 89

Exploration & Appraisal: Downhole Tests


Downhole tests are run from within the well during drilling to test formation properties and determine the commercial viability of the reservoir. Common tests include:
1) Coring Core samples from the formation are collected from within the well. Fragments are tested to estimate flow potential for the well and effectiveness of fracture stimulation. 2) Logging Uses electrical, acoustic and other signals to measure depth and formation properties in the wellbore.
Source: San Joaquin Geological Society

Page 90

Development: Drilling the Well


The most common technique used to drill a well is rotary drilling. As the name implies, rotary drilling uses a sharp drill bit that drills through the Earths crust. Wells are drilled with rigs and equipment that is often contracted from an oilfield service company, to which producers pay day rates and fees for services rendered. Once a well is drilled, its commercial viability is determined. If a well contains sufficient oil and gas, it is completed and production commences. If a well does not contain sufficient hydrocarbons, it is designated a dry well and then plugged and abandoned.

Source: Schlumberger

Source: Encarta

Page 91

Development: Horizontal Drilling


An advanced drilling technique used by producers is directional drilling, which allows the well to be drilled at varied angles to access reservoirs that would otherwise be difficult to reach using traditional vertical drilling. Horizontal drilling is a widely used variation of directional drilling and has been a key to unlocking gas from shale formations. Horizontal drilling allows producers to access more difficult reservoirs, albeit it at higher costs.
Horizontal Well Vertical Well
Source: Energy Information Administration

Horizontal Drilling reaches deeper into blanket formations


Source: www.horizontaldrilling.org Page 92

Development: Well Completions


The process of completing a well involves installing casing to provide support for the wellbore (to prevent it from caving in). Well casing also serves to prevent leakage of oil and gas. Well casing is typically made of steel, which makes producers susceptible to movements in steel prices. Once the casing is installed, the well is perforated via explosive charges that are lowered into the well, which produce holes for hydrocarbons to flow into.
Source: Schlumberger

Source: Halliburton

Source: Schlumberger

Page 93

Development: Well Stimulation


If a reservoir contains hydrocarbons which are high in viscosity or have limited fissures to move through, producers may need to stimulate the reservoir with hydraulic fracturing (frac job). Frac jobs involve pumping fracturing fluid (a combination of water and sand) into the well at high pressures, creating fractures in the formation that allow oil and gas to flow through and into the wellbore. The goal of fracturing is to increase flow of oil and natural gas.

Additional fractures allow for better flow of oil and gas trapped within a formation

Page 94

Source: C.S. Garber & Sons

Production: Producing the Well


Production begins once a well has been completed and hydrocarbons
flow to the surface. During production, the natural pressure within a well may allow hydrocarbons to flow freely to the surface. When hydrocarbons are highly viscous or the formation below the surface has low permeability or low porosity, lifting equipment and / or compression may be necessary to best extract the oil and gas.

Sources: Well Services Energy, University of Texas

Page 95

Production: Decline Rates


Production will come on at an initial production rate (IP rate) and decline as natural pressure dissipates and the well produces out. Production decline rates will vary among different fields, with some gas shales exhibiting very steep declines within the first year (80-90%) and long life tails. Decline rates force producers to consider the time-value of a play.
Sample Decline Curve for a Pinedale Tight Gas Well

Source: Ultra Petroleum.

Page 96

Production: Enhanced Oil Recovery


As natural pressure fades during primary recovery, production falls leaving a significant amount of unrecovered oil remaining in the reservoir. Enhanced Oil Recovery (EOR) methods can be used to restore pressure within oil wells and regenerate flow (secondary and tertiary recovery). Secondary recovery involves pumping water into the well to restore pressure and stimulate oil flow. Secondary recovery can restore flow to a well for 10-15 years. Tertiary recovery involves pumping CO2 to increase recovery. CO2 restores pressure to the well, and also make oil less viscous and therefore easier to produce.

Source: Schlumberger

Page 97

Abandonment
At the end of its productive life, a well or field area is abandoned. In the onshore segment, the tubing may be removed from the well and sections of well bore filled with cement. The surface around the wellhead is then excavated, the wellhead and casing are cut off, and a cap is welded in place and then buried. In the offshore segment, the process is sometimes referred to as decommissioning. Platforms are de-activated and either removed or dropped to the seabed as prescribed.

Source: The Fairweather Group.

Page 98

Oil and Gas Reserves

Exploration & Production: Reserves


Producers can add reserves either 1) organically (drill-bit) or 2) through acquisitions Recognizing Reserves: 1) Proven Reserves (1P) Estimated quantities of oil and gas that are reasonably certain (80%-90% confidence) to be recoverable under todays technology and prices. 1P can be broken down into: - Proven Developed (PDP): Reserves expected to be recovered from existing wells, existing equipment and/or improved recovery techniques. - Proven Undeveloped (PUD): Reserves that will require further development and that are expected to be recovered from undrilled acreage or existing wells that require recompletion work. . 2) Probable (2P) Unproven reserves that are more than likely to be recoverable (50% confidence). Probables cannot be booked under current SEC guidelines. 3) Possible (3P) Unproven reserves that are less likely to be recovered than probables. Possibles cannot be booked under current SEC guidelines.

100% 80% 60% 40% 20% 0%


Source: Credit Suisse

PDP

Proved

PUD Probables Possibles

Page 100

Exploration & Production: Estimating Reserves


Oil in place or gas in place refers to the amount of oil or gas in a subsurface reservoir.
Only a fraction of this oil can be recovered from a reservoir and is known as the recovery factor. The portion that can be removed is considered in the calculation of reserves. There are three general categories for estimating oil reserves:
1. Volumetric Method: This method attempts to determine the amount of oil/gas-in-place by using the size of the reservoir as well as the physical properties of its rocks and fluids. Then a recovery factor is assumed, using assumptions from fields with similar characteristics. This method is most useful early in the life of the reservoir, before significant production has occurred. 2. Materials Balance Method: The materials balance method for an oil field uses an equation that relates the volume of oil, water and gas that has been produced from a reservoir, and the change in reservoir pressure, to calculate the remaining oil/gas. It requires some production to occur (typically 5% to 10% of ultimate recovery), unless reliable pressure history can be used from a field with similar rock and fluid characteristics. 3. Production Decline Curve Method: The decline curve method uses production data to fit a decline curve and estimate future oil production. It is assumed that the production will decline on a reasonably smooth curve, and so allowances must be made for wells shut in and production restrictions.

Page 101

Exploration & Production: Reserve Accounting


Producers are not required by the SEC to perform reserve audits but many choose to use outside engineers. Reserves may be revised depending on assessments of price and performance. Performance revisions include better than expected recovery (eg. In-fill drilling). At low commodity prices, it sometimes becomes uneconomic to produce certain reserves, so producers are forced to post negative price reserve revisions. Negative price revisions are different than impairments (which are taken against oil & gas properties, not reserves). The SEC recently revised the rules regarding reserve accounting that took effect for the 12/31/2009 reporting season. Some of the changes include: Use of a 12-month average price (calculated as the arithmetic average of the price on the first day of each month) rather than single-day, year-end pricing. Producers are able to report proved undeveloped reserve locations that are not directly offset by a producing well (one offset rule), which has led to higher industry PUD ratios.

Page 102

Exploration & Production: Reserve Life


This is the length of time that remaining reserves would last if production were to continue at current levels. Calculated as the reserves remaining at the end of any year divided by the production in that year.
80 200 70 60 50 Years 40 30 20 11 10 0 68 58 46 37 60

m er ic a

si a

A fr ic a

Eu ro pe /E ur as ia

er ic a

id

La tin

N or th

A m

dl e

W or ld

Ea st

Source: BP Stats

Page 103

THE MIDSTREAM

Midstream

Source: American Petroleum Institute.

Midstream refers to all activities between the production of natural gas


natural gas, natural gas liquids, crude oil and refined products

and oil and the end-use markets Midstream activities include transporting, processing, fractionating, and storing
Source: Enterprise Products Partners

Page 105

Midstream: Industry Players


The industry is made up of several categories of players but may generally be split by hydrocarbon 1) Natural Gas Midstream: Involved in transporting natural gas and natural gas liquids to end-use markets. 2) Crude Oil / Refined Products Midstream: Involved in transporting crude oil and refined products to end-use markets.

Natural Gas Midstream

Crude Oil / Refined Products Midstream

El Paso Spectra Williams ONEOK

Enterprise Energy Transfer Kinder Morgan Boardwalk

The Majors Colonial Pipeline Enbridge

Kinder Morgan Sunoco Logistics Magellan Buckeye

Plains All American NuStar

Page 106

Natural Gas

Midstream: Natural Gas Processing

Processing natural gas involves the removal of oil, water, hydrogen sulfide, carbon dioxide and natural gas liquids (NGLs). After the NGLs are separated from the natural gas stream they are transported via pipeline to fractionators where they are further separated into purity products

(ethane, propane, butane, isobutane, natural gasoline).

The resulting dry gas, free of impurities or other non-methane compounds, is deemed pipeline quality.
Page 108

NGL Fundamental Drivers


Natural gas production requires gathering and processing services
Especially rich gas from unconventional resource plays

The relationship between natural gas prices (the feedstock for NGLs) and crude oil prices affect natural gas processing economics
NGL price - Natural Gas price = Processing Margin

Drivers of natural gas liquids production


Absolute level of natural gas produced Mix of natural gas production between rich gas (contains relatively more NGLs) and dry gas (contains small amounts of NGLs)
Quarterly NGL Composite Price (Average of Weekly Prices)
1.80 1.60 1.40 1.20

Quarterly Gross Processing Spread (Average of Weekly Spreads)


1.20

$1.65 $1.65 $1.44 $1.36 $1.04 $0.71 $0.73 $0.84 $0.81 $1.15 $1.03 $1.16 $0.97 $1.25 $1.08 $1.40$1.40

$1.01 $1.03
1.00

$0.85 $0.67 $0.65 $0.58 $0.40 $0.67 $0.56 $0.47 $0.70 $0.65

$0.82 $0.69 $0.59

$0.88

($ / Gal)

1.00 0.80 0.60 0.40 0.20 0.00

($ / Gal)

0.80 0.60 0.40 0.20 0.00

$0.63

$0.15

$0.23

1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 3Q11TD

1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 Q11TD 3

Source: Bloomberg, Credit Suisse, as of 09/07/2011

Page 109

Natural Gas Pipelines & Storage


Natural Gas Pipelines Natural Gas Storage

Dry natural gas can move into interstate or intrastate pipelines or into storage Interstate pipelines are regulated by the Federal Energy Regulatory Commission (FERC) Intrastate pipelines are regulated at the state level (and FERC in certain instances) Storage facilities may be FERC-regulated or have market-based rates Two favorable characteristics of interstate pipelines:
1) The pipeline does not take title to the commodity and is thus not sensitive to commodity prices 2) Capacity reservation fees provide stable revenue regardless of volumes transported
Source: EIA

Page 110

Crude Oil / Refined Products

Crude Oil: Lease Gathering & Marketing


Midstream companies purchase crude from producers at or near the wellhead (lease) and sell that crude to refiners or third party marketers. Typically the crude is gathered by trucks or small diameter pipelines. Purchase and sales are typically entered into nearly simultaneously to mitigate commodity price exposure. Although lease gathering contracts are usually for short periods of 30 days, producers tend not to switch and remain loyal because the crude gatherer also provides field and administrative services to the producer.
Source: American Petroleum Institute

Page 112

Crude Oil / Refined Products Pipelines


Major Crude Oil Pipelines Major Refined Products Pipelines

~200,000 miles of pipelines in the U.S. transport about two-thirds of the petroleum consumed (water carriers (28%), trucks (4%), and rail (2%) represent the balance). Pipelines must be dedicated to either crude or refined products, but not both. Liquids pipelines do not take title to the commodities transported; their revenue streams depend on tariffs and the volume of product transported. Tariffs may be market based or regulated by the FERC.

Pipelines are allowed to adjust tariffs each July based on the producer price index for finished
goods for the prior calendar year plus 2.65%. This index methodology is reviewed every 5 years; current calculation is set through June 2012.
Source: Allegro Energy Group

Page 113

Refined Products Pipelines: Batching


R egular Gasoline R egular Gasoline Premium Gasoline Jet F uel Premium Gasoline

D iesel

Products that meet certain specifications can be mixed (batched) and transported together in sequence. A batch is a quantity of one product or grade that will be transported before the injection of a second product or grade. Transmix is created at the interface point where two batches meet. This new mixture must be moved to a separate storage facility and reprocessed.
Source: www.pipeline101.com

Page 114

OILFIELD SERVICES, DRILLING & EQUIPMENT

Products & Services

Oilfield Services: Industry Segments


Oil Service companies aid independent exploration and production companies
(E&Ps), international oil companies (IOCs) and national oil companies (NOCs) in the exploration and production of oil and natural gas.
The Industry is made up of several segments/life cycle categories. We list them by stage of a new oil & gas field:
2010 Western Service company total revenues: $259B
Total Production 33% Equipment/ Infrastructure 27% Exploration/ Seismic 5%

1) Exploration/Seismic 2) Drilling 3) Completion 4) Production

Production Services 6%

Drilling Services 25%

Completion 15% Total Revenue: $259B Contract Drilling 22% Total Drilling 47%

Source: Spears & Associates

Page 117

OFS - Exploration: Seismic


Seismic services and equipment include: Data Acquisition - collection of seismic data Data Processing - third party processing of
Receiver seismic data prior to interpretation vessel Library Sales - multiclient sales of nonexclusive seismic data Software - software products for seismic Streamer processing, interpretation, mapping, s reservoir modeling and characterization, petrophysical evaluation, and engineering analysis that can run on workstations or PCs Geophysical Equipment - data recorders, telemetry systems, geophones/hydrophones, energy sources (vibratory vehicles, air guns, etc.) used in data acquisition. Marine Seismic Survey

Seismic Output

Source: Spears & Associates, BP Energy, Baker Hughes

Page 118

OFS Exploration/Drilling: Wireline Logging/LWD


Wireline logging includes both open and
cased hole services. Open hole logging occurs during the drilling process and measures characteristics of the rock and the fluids contained therein. Cased hole logging refers to measurements taken in a well after a casing or liner has been set in the well. It is often applied in old wells to help operators determine what to do next (e.g. where to drill a side track well).
Types of Log Measurements: Electrical properties resistivity and conductivity Neutron density (porosity) Pressure testing Sonic properties Dimensional measurements Formation fluid sampling Spectroscopy (lithography)

Source: Spears & Associates, Schlumberger, American Association of Petroleum Geologists

Page 119

OFS Contract Drilling: Land Rigs


Land Rigs can be mechanical or electric and
vary in terms of drilling depth and horsepower. They are used for onshore oil and gas drilling. Key equipment includes: Derrick A structure used for lifting and positioning the drilling string and piping above the well bore and containing machinery for turning the drill bit. Top drive A device suspended in the derrick that rotates the drill pipe in order to drill the well. Draw works A steel spool device that is used to reel out and reel in the drilling line. Blow Out Preventer (BOP) A large valve used to seal off a well being drilled or worked over at the surface to prevent the escape of pressure.
Source: Schlumberger

Page 120

OFS Contract Drilling: Offshore Rigs


Drillship A floating mobile offshore drilling
vessel that operates in the midwater, deepwater and ultra-deepwater and is typically dynamically positioned. Semisubmersible A floating mobile offshore drilling platform that operates in the midwater, deepwater and ultra-deepwater and can be conventionally moored (anchored) or dynamically positioned. Jackup A mobile offshore drilling platform that operates in shallow water and rests on the oceanfloor when in operation. 2 types: Independent Leg -Anchored by legs that extend down to the seabed Mat - Anchored by a mat-like structure that rests on the sea bed.
Semisubmersible

Drillship

Jackup

Source: ODS-Petrodata, Noble, Rowan

Page 121

OFS Contract Drilling: Offshore Rigs by Geography


Middle East, SE Asia are the
largest jackup markets
Global jackup markets as % of total

South America, West Africa, North Sea are the largest


floater markets
Global floater markets as % of total
Other Australia/New Zealand 1% 3% Southeast Asia/Far East 15%

Southeast Asia/Far East 20%

US GOM 17%

US GOM 12%

Central/South America 10%

Middle East/India 4%

Central/South America 31%

North Sea 9% Middle East/India 31% Med./Africa 13%


Med./Africa 19%

North Sea 15%

Source: ODS-Petrodata, note figures exclude newbuilds

Page 122

OFS Drilling: Bits


Drill bits come in two main categories: Rollercone and fixed cutter (PDC). Technology advancement has led to steady share gains by PDC bits and is moving the market to buy on a $/ft drilled basis (i.e. a rental model).
Roller or Tri-Cone

Roller cone bits have teeth typically made of milled


steel or tungsten-carbon inserts mounted on three roller cone assemblies. They are best used in hard and medium strength formations.
Fixed Cutter or Polycrystalline Compact Diamond (PDC)

Fixed cutter bits usually use Polycrystalline Compact


Diamond (PDC) inserts mounted on the body of the bit. Fixed cutter bits are often custom engineered for specific formation characteristics. PDC bits have typically been used for soft formations, but advancing technology now puts them in hard, abrasive rock.

Source: Spears & Associates

Page 123

OFS Drilling: Fluid System


Fluid Circulation System

The drilling fluid, also known as drilling mud, is one of the major factors in the success or failure of the drilling operation. Drilling fluid serves three functions:

Lifts cuttings to the surface Cools the drill bit Supports the integrity of the wellbore and prevents hydrocarbon kicks by providing weight/pressure that is generally greater than that of the reservoir (known as an over-balanced condition).
Fluid Enters the well at the Bit

The fluids handling system re-circulates the drilling mud and includes:

Mud pump Mud mixer Shale shaker - to remove cuttings from the subsurface Mud pit to collect used mud for recirculation

Page 124

OFS Directional Drilling


Directional drilling entails drilling in a direction
other than vertical. There are two methods:

Directional and Horizontal Wells

Conventional uses a bend near the bit and a


steerable mud motor. Drilling fluid is pumped
through the mud motor, turning the bit and thereby allowing it to drill in the direction the bit points (unlike conventional [vertical] drilling, the drill string does not rotate).

Rotary Steerable Tools (RST) allow the driller to


point or push the bit without stopping drill pipe rotation, allowing for faster and smoother hole construction.

Rotary Steerable Technology

Drilling directionally entails use of steering systems (Measurement While Drilling or MWD) and Logging While Drilling or FEWD or LWD). LWD measurements are generally similar to those taken in wireline logging.
Source: www.horizontaldrilling.org, Halliburton

Page 125

OFS - Completions
Completing the well is the process of
accessing the reservoir including:

Perforating Casing/ Completion Reservoir Perforations

Installation of casing and liner. Casing is large diameter steel pipe that is cemented into the well bore to ensure stability of the formation. Perforating the casing to access the reservoir. A series of chargers are deployed to where the well accesses the reservoir.

Casing

Packers Screen Layers

Completion System

Stimulation (see next page)


Other key products include:

Packers and plugs to isolate zones Screens to keep sands away from production Isolation valves to manage flows from multiple
completion zones

Source: Schlumberger, Halliburton

Page 126

OFS Completion: Pressure Pumping


Pressure pumping consists primarily of
cementing and various forms of production stimulation.
Frac job Proppants

Cementing of Casing (approx 20% of P.P revenue) As described in the completions section, casing is cemented in place in the well bore. Cement is pumped thru the casing to the end of the section and forced back up the well in the annulus (between outer wall and well) where it sets and hardens.

Frac unit

Stimulation (80%) Services include hydraulic


fracturing (dominant), acidizing and nitrogen injection.
In fracturing, fluid is pumped at high pressures into the well bore to create/widen fractures in the formation so oil/gas can flow into the well. Proppants are used to keep fractures open and can be sand, resin-coated sand, and/or ceramic. In acidizing, acids can be used to etch away rock.
Source: BJ Services, Carbo Ceramics, Independent Oil & Gas Service, Gulftex, ProPublica

Cementing unit

Page 127

OFS Hydraulic Fracturing Equipment


Frac Truck

Treating Iron: temporary surface piping,


valves and manifolds required to bring fluid treatment down to wellbore from the pump

Treating Iron

Frac Pump

Engine Transmission

Cooling System

Frac Pump: a high pressure, high volume


Frac Pump pump used in hydraulic fracturing Manufacturers include independents such as Gardner Denver (GDI) and Weir SPM (WEIR.LN) and vertically integrated providers such as Halliburton (HAL) and FracTech Power End
Expected Lifespan: Up to 2 years

Fluid End Expected Lifespan: Ranges from 500 to 1,400 hours


Source: Jereh-PE, Weir SPM, Schlumberger

Page 128

OFS Production: Subsea


A Christmas tree is a set of valves that sit on top of the wellhead and control the flow of pressure of a producing well.
Surface Tree Subsea Tree

Surface trees are installed on land and on offshore


platforms.

Subsea trees are installed on the sea bed.

Manifolds house equipment and pipes that


control, direct and measure the flow of fluids to/from the subsea well.
Umbilical

Umbilicals are used for the control of subsea


production systems. Umbilicals are made of either steel or thermoplastic tubes that contain fluid conduits for hydraulic power and chemical injection.
Subsea Production System
Umbilicals Flowlines

Manifold
Source: FMC Technologies, Oceaneering International, Umbilical Manufacturers Federation

Subsea Tree

Page 129

OFS Production: Offshore Systems


Offshore production infrastructure includes:
Offshore Production Development Systems

Fixed Platforms consist of a jacket driven into the


seabed with a deck; water depths up to 1,500ft.

Compliant Towers can sustain significant lateral


deflections; water depths 1,000-2,000ft.

Tension Leg Platforms float but connected to the sea


floor by vertical tendons; water depths up to 4,000 ft.

SPAR Platforms have a large single vertical cylinder


supporting a deck; water depths beyond 4,000 ft.

Floating Production Systems are semi-submersibles


anchored by wire rope and chain, or dynamically positioned; water depths beyond 4,000 ft.

Floating Production, Storage & Offloading Systems


(FPSO) are large tanker vessels moored to the
seafloor; process and stow production from subsea wells and offload to a small tanker; suited for remote deepwater areas with no pipeline infrastructure; water depths beyond 4,000 ft.
Source: MMS, Credit Suisse

Page 130

OFS Production: Artificial Lift


Artificial Lift is a technology for mature oil and
gas wells that need to boost fluids out of the wellbore, particularly as they produce water. 90% of existing producing oil wells and gas wells requiring water removal utilize some type of artificial lift. Main types of artificial lift include:
Rod pump

Reciprocating rod pumps a plunger and valve


assembly driven by surface motor

ESP

PCP

Electric Submersible Pumps (ESPs) typically


several centrifugal pump stages to access different wellbore sections driven by a downhole electric motor

Progressive Cavity Pumps (PCPs) a surface


motor rotates the sucker rods using a stator and rotor to cause fluid to flow upward

Source: Spears & Associates, Weatherford, Independent Oil & Gas Service, Schlumberger

Page 131

OFS Production: Compression


Compression raises the pressure of natural
gas in the reservoir so that it will flow into pipelines and other facilities. There are three segments to the field compression market:
Compressor

wellhead gas gathering processing


Compressors have historically been owned and operated by oil companies, but the U.S. is now approximately 1/3 outsourced to contract compression providers.
Gas Gathering Compression

Source: Exterran Holdings, Ariel

Page 132

OFS Production: Well Servicing


Workover rig

Well Servicing refers to the maintenance


procedures that take place on a well after the well has been completed and production from the reservoir has begun. It is done to sustain and enhance the productivity of the well. Key products/services include:

Workover the process of performing major


maintenance or remedial treatment on a well.

Coiled tubing tubing used for the placement of


fluids or manipulation of tools during workover

Snubbing the process of putting drill pipe into the


wellbore when the BOPs are closed and pressure is contained in the well
Coiled tubing unit

Plug and Abandonment the process of preparing a


well to be permanently closed

Source: Schlumberger, MTG

Page 133

OFS Drilling/Production: Offshore Logistics


Helicopters are used for transporting personnel
between onshore bases and offshore platforms, drilling rigs, and installations.
Lift Boat

Lift Boats are self-propelled, self-elevating


vessels with a relatively large, open deck for carrying equipment in support of offshore exploration and production, and which can serve as a platform from which maintenance and construction work can be conducted.

Supply Boat

Supply Boats are ships specifically designed to


transport goods (i.e. drilling mud, cement, diesel fuel, chemicals, water, tools, etc) and personnel to and from offshore oil platforms and other offshore structures.

Source: Bristow Group, Superior Energy, Wartstila, MMS

Page 134

OFS Production: Offshore Construction


Pipelay vessels use either the S-lay method in water depths <2K ft where pipe is laid into the water horizontally and bends twice in an S-shape, or the J-lay method in deep water where pipe is laid vertically and only bends once as it hits the seabed. Derrick barges have cranes used to lift
heavy structures such as platforms/topsides. Diving support vessels (DSVs) support divers performing inspection, maintenance, repair (IMR) and welding. Surface diving can be performed in depths up to 200 ft; saturation diving can be performed in 2001,000 ft depths. Offshore Support Vessels (OSVs) are equipped with Remotely Operated Vehicles (ROVs) , tethered underwater robots used for IMR, construction and drill support in deep water.
Source: CalDive, Oceaneering

Combination Pipelay/Derrick Barge

ROV

Page 135

Company Specific Detail

OFS: Life Cycle Exposure and Selected Cos


Life Cycle Stage Exploration Prospect ID Seismic Acq./Processing Reservoir Imaging SLB, PGS.NO, CGV, DWSN HAL Evaluation Open Hole Wireline Logging Coring Production Testing Drilling Contract Drilling Land Shallow Water Deepwater NBR, PTEN, HP HERO, RDC RIG, DO, SDRL Drilling Services Bits Fluids OCTG Directional Drilling Completion Casing Handling "Tools" Pressure Pumping Production Ongoing (Enhancement) Chemicals Artificial Lift Nat Gas Compression Logistical Support Supply Boats Helicopter Equipment/Infrastructure Development Engineering/Design Fabrication Installation Production Subsea/Surface Equip. Umbilicals Risers/Flowlines TEC.FP, ACGY, SPM.IM GIFI, MDR HLX, GLBL FTI, CAM, Aker, TTS OII, TEC.FP GE (OG), DRQ Capital Equipment Rig Equipment Drill Pipe Seismic Equipment Production Unit/Equipment NOV, Aker, CAM NOV, Vallourec IO, CGV OIS BHI, Nalco WFT, SLB, BHI LUFK EXH, NGS TDW, CKH BRS Well Servicing Workover Rigs Coiled Tubing/Intervention Fishing Cased Hole Wireline Logging KEG, NBR, BAS BHI, CPX, SPN SLB, BHI SPN WFT, TESO HAL, BHI ,SLB, WFT HAL, SLB, BHI, CRR, CPX SLB, BHI, NOV SLB, HAL, BHI TS, X SLB, HAL, BHI, WFT SLB, BHI, HAL CLB SLB, Expro Oil Services Activities Examples of OFS Co's Life Cycle Stage Oil Service Activities Examples of OFS CO's

Page 137

OFS: Diversified Service Segmentation


Geographic Revenue Segmentation (2010)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 25% 42% 35% 23% 38%

Life Cycle Segmentation (2010)


100% 80% 60% 40% 64% 84% 67% 30% 12% SLB HAL Ex ploration 6% WFT Dev elopment Production 12% BHI 67% 6% 4% 26% 21%

20% 33% 45%

37%

16%

40%

46%

20% 0%

SLB NAM Land

HAL Intl Land

WFT Offshore

BHI

Diversified Service Revenue by Region (2010)


100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SLB HAL WFT BHI 21% 20% 48% 37% 49% LAM NAM 23% 18% 9% 8% 6% 11% 3% 20% 13% 6% 20% 7% 13% 16% 8% 9% 5% 18% 12% Russia/FSU Eur/Afr Other E Hemi Middle East

Diversified Service Revenue by Product (2010)


90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 15% 3% 16% 6% SLB 19% 3% 3% 21% 13% 12% 15% 3% 6% 5% HAL 40% 15% 17% 13% 6% 7% 12% 28% 10% 6% WFT 14% 8% 2% 16% 20% 7% 16% 7% 10% BHI Artificial Lift Interv ention Completion Pumping Other Drilling Fluids Dir Drilling Explor. Bits Wireline Geophy sical Compl. Drilling Prod'n 100% 4% Other

Source: Spears & Associates, Company data, Credit Suisse estimates

Page 138

OFS: Equipment/Infrastructure
National Oilwell Varco (NOV)
Distribution Serv ices 12%

Cameron (CAM)
Rig Equipment 17% Subsea 26%

FMC Technologies (FTI)


Surface 16%

Petroleum Serv ices & Supply 33% Rig Technology 55%

Surface 17%

Energy Processing Sy stems 19%

Subsea 65%

Process & Compression Systems 19%

Valves & Measurement 21%

2010 Revenues = $12.7B

2010 Revenues = $6.1B

2010 Revenues = $4.1B

Oceaneering (OII)
Adv anced Technology 12% Inspection & NDT 12% Remotely Operated Vehicles (ROVs) 34%

Dril-Quip (DRQ)
Serv ices 14%

Dresser Rand Corp (DRC)


Other Midstream 10% 5%

Offshore Rig Equipment 16%

Env ironmental 15% Upstream 50%

Subsea Projects 13% Subsea Products 29%


Surface Equipment 5% Subsea Equipment 65%
Dow nstream 20%

2010 Revenues = $1.9B


Source: Company data, Credit Suisse estimates

2010 Revenues = $0.6B

2010 Revenues = $1.9B

Page 139

OFS: Market Shares for Key Services/Products


Pressure Pumping
Others Calfrac 4% WFT 4% Frac Tech 5% Trican 5% BHI 11% SLB 24%
GOK 5% Fugro 7% HAL 8% PGS 9% SLB 17%

Seismic
Others 22% GGS 2% TGS 5% CGV 25%
Ex pro 2% SPN 3% WFT 6% HAL 11%

Wireline
J-W China Wireline OFS 2% 2%

Directional Drilling
Others 15% Scientific Drilling 4% WFT
SLB 54%

NBR 1%

17%

Others 6%

HAL 29%

SLB 36%

7%

BHI
BHI 14%

18% HAL 20%

2010 Revenues = $25.0B

2010 Revenues = $11.8B

2010 Revenues = $9.4B

2010 Revenues = $9.5B

Fluids
China OFS 2% TTI 4% NR 7% BHI 11% SLB 37%
SLB 17%

Completions
Ex pro WFT 12% 3% Others 2% HAL 34%

Artificial Lift
Others 19% WFT 20%
HAL Varel 6%

Bits
Others 4% SLB 29%

WFT NOV Others 2% 2% 8%

Dov er 6% LUFK 7% WG.LN BHI 17%

14%

NOV 19%

HAL 27%

BHI 32%

7% Borets 8%

SLB 16%

BHI 28%

2010 Revenues = $8.3B


Source: Spears & Associates

2010 Revenues = $6.6B

2010 Revenues = $6.5B

2010 Revenues = $3.5B

Page 140

OFS: Market Shares for Equipment/Infrastructure


Offshore Construction
GLBL 2% OII 2% Technip 3% Fugro 4% Aker 6% SBMO 7% Subsea 7 7% ACGY 7% DVR Others 18% 2% Saipem 20%

Surface Equipment
Others 21% Weir SPM 3% CAM 31%

Subsea Equipment
DRQ 4% WSM.LN 4% OII 5% Others 9% FTI 25%

KBR 13%

TTES 4% Aker 6%

GE 7% Technip 17% CAM 15%

MDR 9%

GE 7%

WG.LN 10%

FTI 18%

Aker 14%

2010 Revenues = $29.9B

2010 Revenues = $3.6B

2010 Revenues = $10.9B

Compression
Others 27% EXH 45% Valerus 5% Compr. Systems 6% CDM Resource 9%

Subsea Tree Orders


GE 8% AKER 16%

CAM 17%
J-W 8%

FTI 59%

2010 Revenues = $2.4B


Source: Spears & Associates, Quest Offshore Resources

2010 Tree Orders = $6.7B

Page 141

OFS: Market Shares for Rig Equipment


Rig Equipment
Others 24% Bentec 2% OIS 3% GE 5% Aker 5% CAM 8%
Hydril 27% Shaffer 22%

Blowout Preventers (BOP)


NOV CIW 7% 1% Wirth 20%

Mud Pumps
Others 7%

CAM 43%

NOV 53%

NOV 53%

LEWCO 20%

2010 Revenues = $13.2B

Total since 05 = 183 BOPs

Total since 05 = 169 Mud Pumps

Cementing Skids
BHI 23% Other 2%
Hydralift 7%

Top Drives
Others 14%

Drill Support ROVs


Other 24% OII 35%

HAL 41%

Canyon 6%

SLB 34%

Maritime Hydraulics 19%

NOV 60%

Fugro 7% Sonsub 8% Subsea 7 20%

Total since 05 = 219 Skids


Source: Spears & Associates, ODS Petrodata, Oceaneering

Total since 05 = 167 Top Drives

Total = 747 Vehicles

Page 142

OFS: Market Shares for Contract Drilling/Other


Offshore Contract Drilling
Other 32% RIG 24% Others 34%

Supply Vessels
TDW 16% Bourbon 14%

Land Contract Drilling


NBR 15% Other 44% HP 10% PDC 6%

Maersk 3% KCA Deutag 3% PDE 4% China OFS ESV 5% 4%

SDRL 9% DO 9% NE 7% Gulfmark 5% TRMA 7% CKH 12% Maersk 12%

SLB 4%

Saipem WFT 5% 4%

PTEN 6%

ESI 6%

2010 Revenues = $37.2B

2010 Revenues = $6.5B

2010 Revenues = $19.3B

Petroleum Aviation
Heli-Union 2% Rotorcraft 4% CKH 6% Petroleum 9% BRS 31% Others 9% CHC Helicopter 39%

Well Servicing
Others 43% NBR 17%

KEG 15%

CPX 8% PDS 5% Integra 6% BAS 6%

2010 Revenues = $3.9B


Source: Spears & Associates

2010 Revenues = $3.3B

Page 143

OFS Contract Drilling: Fleet Profiles


Fleet Profile by Company (Floaters)
80 70 60

31

Fleet Profile by Company (all rigs)


140 23 120

50 40 30 20 10 13

13 6 7 9 16 11 DO
Shallow Water

9 8 2 4 ESV
Mid Water

8 7 2 3 NE
Deepwater

100 50 80 5 60 17 40 64 20 46 45 49 32 16 4 6 13 0 RIG Jackup ESV NE HERO Drillship DO SDRL RDC 14 28 2 5 3 ATW


30 45 48 60 18 50 1 0 RIG

10 SDRL.OL
Ultra Deepwater

4 ATW

2 7 14 3 1
70

Fleet Profile by Company (Jackups)

40

16

Semisubmersible

Other (excl. platforms and barges)


20

36 30

22 2 14 7 11 DO 2 1 ATW 2 NADL

10

0 HERO RDC RIG SDRL ESV NE

Standard (< 300')

Premium (> 300')

Source: ODS-Petrodata, note figures exclude newbuilds

Page 144

OFS Contract Drilling: Fleet Age & Growth Trends


Established U.S. Drillers vs. Others Fleet Age
35 30
Average Rig Age (Years) 31.7 30.8 27.4 24.6 21.9 Established U.S. Drillers = 48% Total Global Fleet 21.7 19.0 16.1

Deepwater Expansion: Fleet more than doubling within 5 year span (2008 to 2013E)
Deepwater (4,500 ft.+) Rig Supply at year-end 240 6-year CAGR: 14%

25 20 15 10 5 0
HERO RIG DO

200

160

120 214 80 99 120 174 140 187

219

40

ATW

Other Avg.

RDC

NE

ESV

0 2008 2009 2010 2011E 2012E 2013E 2014E

35 Fav orable global macro 30 25 env ironment and drilling fundamentals open the door for new entrants Risk of obsolescence in light of commodity price stability + fav orable y ard economics encourages established drillers to order again; new er 11 8 10 5 0 11 4 1 1Q04 1 2Q04 1 3Q04 2 4Q04 1Q05 3 5 2Q05 6 3 3 3 3Q05 2 2 4 4Q05 8 1 6 4 1Q06 1 5 4 2Q06 1 6 4 3Q06 3 1 2 4Q06 3 1 6 1 1Q07 7 1 3 4 2Q07 6 6 1 3Q07 1 4 4 3 4Q07 5 1 5 1 1Q08 9 10 3 3 2Q08 4 3Q08 2 4Q08 2 1Q09 2Q09 3Q09 2 1 3 4Q09 4 6 1 1Q10 1 2Q10 2 3Q10 1 4Q10 1Q11 6 8 market entrants capitalize on this too 11 10 2 2Q11 13 9 14 8

Order Trends: Established U.S. Drillers vs. Others in Recent Order Cycles

# of Rigs Ordered

20 15

Established Drillers: Floating Rigs Established Drillers: Jackups

Other Drilling Co's: Floating Rigs Other Drilling Co's: Jackups

Source: ODS-Petrodata, Company data, Credit Suisse estimates

Page 145

THE DOWNSTREAM

The Downstream
The downstream segment refers to all activities after crude is produced to when it is sold to the end-user. Refining and marketing are the two key downstream components. Petrochemicals are also included in downstream activities but are usually considered a separate segment. Refining is the processing of raw crude into usable fuels called refined products: gasoline, diesel and jet. These products are sold into wholesale and retail markets. In the wholesale market, products are traded between large customers in global markets or on exchanges. These products are then sold into the retail market. In the retail market, petroleum products are sold to the end-user. The primary example of this gasoline or diesel sold at service stations.

Source: Company data, Credit Suisse estimates.


Page 147

Refining

Refining Basics
Refining is the process of turning crude oil into usable petroleum products. A
refinery is the factory where this process takes place. When in operation, refineries run continuously. However, refineries do take downtime for planned reasons, such as upgrading a refining unit, or unplanned reasons, such as fires or other accidents.
Exxon Mobils Baytown, TX refinery Sunocos Philadelphia, PA refinery BPs Texas City, TX refinery

Source: www.houstonist.com Source: www.sunoco.com Source: www.state.tx.us

Page 149

Breaking Down a Barrel of Crude


The refining process splits crude oil into a variety of refined products. An example of the mix that comes from one barrel of crude oil is shown to the right.

Source: www.eia.doe.gov

To create these different products, a furnace first heats and vaporizes the crude. The vaporized crude is then piped into a crude distillation unit or CDU (referred to on the left as the Distillation Tower). Here, the vaporized crude naturally separates into different fractions or cuts. The heavier cuts fall to the bottom of the CDU. This process is repeated several times until the cuts fully separate.
Source: www.eia.doe.gov

Page 150

A Closer Look at Separation and Cuts


The heavier cuts generally create heavier refined products. The heaviness of a product refers to the length of its hydrocarbon chain. Heavier products tend to be less valuable than lighter products. The first cuts from the CDU do not produce usable refined products. Further treatment stages are needed, for example to turn naphtha into gasoline. The temperature at which crude oil changes its product yields is called a cut point. At 220 degrees F an equal amount of gasoline and naphtha are produced. At 250 degrees F only 35% gasoline is yielded while the remaining 65% is naphtha. Controlling the cut point is a way to alter the product slate, which refers to the total product mix from a barrel of crude oil. The chart to the right illustrates various different cut points.
Source: Marathon Oil

Page 151

From Fractions to Final Products


Once separation is complete, the various fractions are recondensed into liquid form. A typical barrel of light crude before any further treatment would look similar to the barrel shown on the right.
Source: Bloomberg, Credit Suisse estimates

Source: www.zeonglobalenergy.com

The product slate can then be further altered. Advanced upgrading units such as crackers and cokers treat products from the refinerys first cut, generally breaking heavier fractions into lighter, shorter hydrocarbon chains. Examples of upgrading units are shown to the left. Not every refinery has each of these units. The more conversion units a refinery has, the more flexible it generally is in terms of final product slate. Conversion units also comprise a refinerys complexity, which we discuss later.
Page 152

Basic Upgrading Units: Reformer & Desulfurizer


Reformer Desulfurization unit
Source: Marathon Oil

A reformer has two functions. The first is to upgrade low octane naphtha into high octane reformate, a key component of high octane gasoline. The second function is to provide the hydrogen needed by a distillate desulfurizer. Octane measures how resistant a fuel is to self-igniting, which causes knocking. Knocking occurs when the engine backfires, wasting fuel and causing potential engine damage. Higher octane gasolines are more resistant to self-igniting. A desulfurizer or hydrotreater uses hydrogen to strip out naturally occurring sulfur from final refined products (gasoline, diesel, heating oil) in order to comply with modern environmental requirements.

Page 153

Advanced Upgrading Unit: Fluid Catalytic Cracker (FCC)


Source: Marathon Oil

A fluid catalytic cracker (also called an FCC or cat-cracker) is used to convert heavy crude elements into smaller, lighter elements through a process called cracking. FCCs mainly add to the gasoline final product stream of a refinery. Cracking occurs at temperatures of over 900 degrees F.
During cracking, a processing gain occurs: the cracking process yields more than the original amount of crude. 1.0 gallon of crude fractions yield 1.38 gallons of crude fractions after cracking. The lightest cracked fraction, isobutene, goes to a gas processing facility to form propane and butane. Other light cat-cracked fractions are added to gasoline. Middle-cracked fractions are blended with distillate. The remaining cracked fractions are sent to an alkylation unit, which is discussed on the next slide. The use of a deasphalter can also convert even more heavy fuel oil into additional fractions that can be run through an FCC.

Page 154

Advanced Upgrading Unit: Alkylation Unit

Source: Valero

Cat cracked elements not sent to the gas-processing facility, blended, or cracked again are sent to an alkylation unit (shown below).

Alkylation is the reverse of fractionation: the process makes larger refined product components
from smaller molecules.

A reverse processing gain occurs, as alkylation decreases yields. This is known as shrinkage. Paraffins, such as isobutane, are created in the gas-processing facility. These are combined with other olefins to form iso-paraffins, or alkylates. Alkylates are used as fuel additives to both boost the octane rating and make fuels cleaner-burning.

Page 155

Advanced Upgrading Unit: Delayed Coker


A delayed coker is used to convert low value fuel oil into higher value gasoline, gas oils and petroleum coke (used in the steel industry and elsewhere). The sample yields from a delayed coker are shown in the image below.

Source: Marathon Oil


Page 156

Making Finished Gasoline


Even after crude is processed by the upgrading units, the products gasoline and diesel are not quite ready for market. Before entering the market, gasoline vapor pressure and octane ratings must be fine tuned.

A gasoline with high vapor pressure is one that does not become ignitable until very high temperatures and pressures are reached. Refiners make different gasoline blends for different seasons. Winter blends, which come into use from September 15th, can have lower vapor pressure while summer blends are required to have a higher vapor pressure so that the gasoline does not inadvertently ignite in the warm weather. Higher octane gasoline corresponds with lower engine knocking. In addition to alkylates, lead, methanol and ethanol can be used as additives to increase the octane rating.

Source: www.answers.com

Page 157

Making Finished Diesel


Diesel goes through two final processes before entering the market: hydrotreating and catalytic reforming.

Hydrotreating removes sulfur and other contaminants from distillate so that the final product meets environmental specifications. Catalytic reforming increases low octane diesel to a higher octane level.

Source: www.i.treehugger.com

Page 158

Where Does the Product Go Once It Is Refined?


Once refined, products are transported to end-use sites such as retail stations. They can be transported by pipelines (shown to the right), trucks and ship. Pipelines are the cheapest form of transportation. Crude is also initially transported by these three means. Pipelines must be dedicated to either crude or refined product, not both.
Source: www.eia.doe.gov

If crude or product is not being used immediately, then it is stored in fields similar to the one to the left.

Source: www.eia.doe.gov

Page 159

Examples of the Uses for the Products Created from Crude


Liquid petroleum gas (LPG) is the lightest product.
These gases can include ethane, butane, and propane and are used both as chemical feedstocks and for outdoor cooking.
Source: Google images

Light distillates are the next cut up from LPGs and


include gasoline and naphthas. These are used as petrochemical feedstocks and automotive fuels.

Middle distillates can include diesel fuel, jet fuel,


kerosene, and heating oil. These are used for jets, trucks and residential heating. Cuts that are heavier than middle distillates are usually called bottom of the barrel products. These can be residual fuels such as fuel oil and are used to power ships and for power generation. Asphalt is also a bottom of the barrel product.
Page 160

Refinery Operations

Ownership of Refining Assets


Refineries can be owned by both integrated oil and gas companies (with upstream operations) as well as by independent refiners. The distribution of ownership is shown to the right. Chevron and Exxon Mobil are two examples of integrated oil companies, sometimes referred to as Big Oil. The primary advantage of Big Oil owning refineries is that these companies can supply refinery operations using their own crude supply, although this doesnt happen that much. The disadvantage is less flexibility in procuring crude from different producers. Independent refiners can be publicly traded like Valero or Tesoro or be privately owned such as Sinclair or Wyoming Refining. These companies can more easily buy crude from different producers and shop for the best possible price. However, the lack of upstream operations exposes independent refiners to crude price spikes and potential supply problems.

US Refining Capacity, by Ownership

Private independent 3.3 MMBD 19% Public independent 4.7 MMBD 27% Integrated 9.4 MMBD 54%

Source: OGJ

Page 162

Geographical Division
In the U.S., refinery locations are divided into five separate Petroleum Administration for Defense Districts (PADDs). Each region has different benchmark margins and legal specifications. The map below illustrates the PADDs. The next slide shows the percent of total U.S. refining capacity in each PADD and the distribution of ownership within each PADD. The slide after that shows additional yield, complexity and ownership details within each PADD.

Source: www.eia.doe.gov

Page 163

Topic (1) WTI Brent, Too Much Crude in the Mid-Con

Page 164

Source: MPC

Intermediate Solutions Reliant on Rail


Rail Loading Capacity Announcements
700 600 500 400 300 200 100 0 3Q12 2013 1Q12 2Q12 4Q12 2014 2010 2011 2012 2015 2016 2017

Significant rail loading capacity is being added in 2012 in the Bakken. Barging increasing from Patoka. HES 130kbd Rangeland 100kbd EDOG 100kbd Musket 70kbd Infrastructure bottlenecks could include access to trains and offloading capacity Total Tariff from Bakken to St James Louisiana of $10-12/bbl. PADD 2 production growing at 200kbd pa annualized from recent up-tick. There should be sufficient rail capacity to transport this by 2Q12.

PADD 2 Crude Growth Through Jun-2011


M id w es t (P AD D 2) F ield Pro du c tion o f C rud e O il (T h ou s an d
80 0 75 0 70 0 65 0 60 0 55 0 50 0 45 0 Nov-09 Nov-10 Sep-09 Mar-09 May-10 May-09 Sep-10 Mar-11 Mar-10 Jan-09 Jan-10 Jul-10 Jul-09 Jan-11 May-11

(KBD)

Significant drilled but not completed well inventory in the Bakken.

Page 165

Source for all charts: Credit Suisse estimates, Bloomberg, DOE

WTI-Brent to Peak This Winter, Structurally Wider For Longer


WTI-Brent Spread Futures Curve
$25

$20

Widening WTI-Brent has been a key theme in 2011. We have a mid-cycle supply-demand file which suggests a need for 2-3 pipelines to the Gulf The likely peak of WTI-Brent should be this winter as mid-con refineries shut for winter maintenance and demand falls As we move into 2012, increased rail capacity becomes available - $10-12/bbl from Bakken to the Gulf providing an alternative for E&P producers.

$15

$10

$5

$0 3Q 1 1 1Q 1 2 3 Q 12 1 Q1 3 3Q 1 3 1 Q 14 3 Q1 4 1Q 1 5 3 Q 15

Mid-Con Supply Demand Chart


4 ,50 0 4 ,00 0 3 ,50 0 3 ,00 0 (KBD) 2 ,50 0 2 ,00 0 1 ,50 0 1 ,00 0 50 0 0 20 10 20 11 20 12 2 01 3 2 01 4 2 01 5 20 16 20 17 R e fin ing Ta nke r + Ba rge P ip eline S up ply Grow th Ra il

In 2013, Keystone XL adds pipeline capacity subject to 2H11 permit approvals and a successful construction program. We need another pipeline in addition to XL Enbridge, Energy Partners, Seaway Reversal in the frame. Margin for error on supply not huge given potential from new plays e.g. Utica Longer term Canada Still Grows Exports to the West ? .equally important where does WTI-Brent settle after the pipelines are built ?...

Page 166

Source: Credit Suisse estimates, Bloomberg, DOE

G ra ni

10%
26% 24% 36% 37% 37% 12% 27% 27% 19% 27% 26% 26% 24% 24% 22% 22% 12% 21% 19% 14% 18% 18% 18% 18% 15% 13% 15% 15% 14% 11% 12% 9% 10% 10% 8% 8% 50% 35%

20%

30%

40%

50%

60%

Most Projects Still Work at $60 Oil, Bakken Most Sensitive

0%
8% 6% 6% 4% 4% 4%

54% 53%

Rates of Return at the Current Futures Strip and $60 per Bbl Oil
Current Futures Strip $60/Oil and Nat Gas at Futures Strip

At the current futures strip the Granite Wash, Eagle Ford, Marcellus and Bakken remain the highest returning plays in domestic onshore E&P.
te W Ea as h gl e M Fo Liq ar ui ce r ds l lu d S R ha s ic Sh le h -L al H or e B iq ak -S iz ui . ke ds W M n Li R ar Sh ic ce q u h al id l lu e s /T s R S ic hr h ee hal e Fo B -S ar rk W ne s Sa tt C an Sh ni sh a al W e oo -C M d ar or ce for e d llu B Sh ar s ne al Sh H e tt or al Sh e n -N al R iv e E er -S B ou as th in er Pi n ne Li da Ea qu le H id ay gle s Fo ne H ur Ric rd sv h ill Sh on e Sh al Sh e al - D ale e ry -C G or as e LA B a /T W Fa rne X oo tt ye df Sh tte or al vi d e Sh lle Pi Sh al ce H al an e ay e A ce ne rk B sv Gra om as ni ill a in e/ te B Va W os as lle si h y er -H C Sh ot or al to iz e C . n ot Va - N to E lle n TX y Va Ve lle rt ic Po y H al or w de iz r R on ta iv l er C B M

At $60 oil, Marcellus moves to the front of the pack, but Granite Wash and Eagle Ford still exceed the 15% rate-of-return hurdle rate. Bakken and Barnett (liquids-rich) projects are more at risk.

Page 167

Source: Company Data and Credit Suisse Estimates

Even After Pipelines are Built to Gulf, Challenges Remain


Structural Oversupply Versus Refining Capacity
10,000 9,000 8,000 7,000 6,000 KBD 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 GoM Texas (ex-Eagleford) Padd 2 (Core) Eagleford Mississippian Light Crude Capacity Padd 3 (Core) Bakken Padd 4 (Core) Niobara Uinta

Even after all required pipelines are built to the Gulf Coast, refinery bottlenecks need to be considered The line on the chart shows the available light processing refining capacity in the Mid-Con and the Gulf after heavy processing capacity is stripped out By 2014, onshore crude supply could exceed this light processing capacity. Were this to occur, there would need to be crude exports from the Gulf to the North East In this scenario WTI would trade $3-4/bbl below LLS but LLS would trade $2-3/bbl below Brenti.e. a $5-7/bbl WTI-Brent spread into the longer term POSITIVE LONGER TERM MARGINS AND FREE CASH FLOW FOR MID CON REFINERS AND IN THE GULF SKITTISH EQUITY MARKET LIKELY WELCOME HEDGES

Theoretical Cost to Move EagleFord to PADD I

Page 168

Source: Credit Suisse estimates, MPC

Division by Ownership Type and PADD


US Refining Capacity, by PADD
PADD V, 3.1, 18% PADD I 1.6 MMBD 9% PADD II 3.6 MMBD 21% Public independent 1.1 MMBD 67% Private independent 0.1 MMBD 6%

PADD I

PADD II
Private independent 0.7 MMBD 20% Public independent 0.8 MMBD 21%

PADD IV 0.6 MMBD 4%

Integrated 0.4 MMBD 27%

Integrated 2.1 MMBD 59%

PADD III 8.4 MMBD 48%

PADD III
Private independent 1.9 MMBD 22%

PADD IV

PADD V
Private independent 0.4 MMBD 14%

Private independent 0.2 MMBD 32% Integrated 4.9 MMBD 58%

Public independent 1.7 MMBD 20%

Integrated 0.3 MMBD 47%

Public independent 0.1 MMBD 21%

Public independent 1.1 MMBD 34%

Integrated 1.6 MMBD 52%

Source: OGJ.

Page 169

Refinery Summary, by PADD and Company

Source: Credit Suisse estimates.

Page 170

Oil Product Marketing

Introduction to Marketing
Composite Retail Margins Historical 4-week moving average 1995-Present
70 60 50

40 30 20 10 Jan-95 Mar-95 Jun-95 Sep-95 Dec-95 Feb-96 May-96 Aug-96 Nov-96 Jan-97 Apr-97 Jul-97 Oct-97 Dec-97 Mar-98 Jun-98 Sep-98 Nov-98 Feb-99 May-99 Aug-99 Nov-99 Jan-00 Apr-00 Jul-00 Oct-00 Dec-00 Mar-01 Jun-01 Sep-01 Nov-01 Feb-02 May-02 Aug-02 Oct-02 Jan-03 Apr-03 Jul-03 Sep-03 Dec-03 Mar-04 Jun-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Oct-05 Jan-06 Apr-06 Jul-06 Sep-06 Dec-06 Mar-07 Jun-07 Aug-07 Nov-07 Feb-08 May-08 Jul-08 Oct-08 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Mar-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Jul-11 Oct-11

Marketing is divided into wholesale and retail segments. Profits from the marketing division tend to be more stable than those from the refining division. The wholesale market component involves the trade between large customers in global markets or on exchanges. These products are then sold into the retail market. The retail market encompasses the sale of petroleum products to end-use

markets and serve end users on a spot, transactional basis. The most common form of retail distribution is through the service station Benchmark margins for the U.S. retail segment since 1995 are shown above.
Page 172

Source: DOE, Credit Suisse estimates

(cents/gal)

Retail Margins Key to Profitability of the Marketing Business


The retail division tends to have a much greater percentage of the profit than the wholesale division owing to higher margins, so we focus on this part. Below, there are two charts of historical retail benchmark margins (excluding taxes). The left chart is for U.S. retail margins while the right chart is for retail margins in NorthWest Europe. The retail business is highly competitive and operators compete on both price and product quality.
U.S. Retail Margins
60
80

NorthWest Europe Retail Margins

50

70

40

60 (cents/gal)

(cents/gal)

30

50

20

40

10

30

Mar-11

Aug-11

Sep-11

Feb-11

Nov-11

Aug-11

May-11

May-11

Sep-11

Dec-11

Apr-11

Jul-11

Oct-11

Nov-11

Feb-11

Mar-11

Jan-11

Jun-11

5Y R A v g

May-11

20 11

20 10

5 YR A vg

20 1 1

20 10

Source: www.eia.doe.gov, Credit Suisse estimates

Page 173

Dec-11

Jan-11

Jan-11

Jun-11

Apr-11

Oct-11

Jul-11

20

More on the Retail Segment


Previously a gas station used to be just thata gas station. To attempt to generate additional profits many gas stations now have convenience stores selling merchandise and food. Retail operators purchase fuel under long-term or short-term supply agreements either with oil companies (called branded) or from independently owned distributors. Big Oil and Independent Refiners have marketing and distribution costs associated with gasoline normally making it more expensive. Using unbranded gasoline can allow a retail station a wider profit margin. However, the quality and public perception of branded gasoline versus unbranded gasoline is different. As of July 2011, the federal fuel tax in the U.S. was 18.40 cents per gallon for gasoline and 24.40 cents per gallon for diesel. The average state tax for fuel was around 30.50 cents per gallon for motor gasoline and 29.60 cents per gallon for diesel.

Page 174

Retail Prices Tend to be Sticky


One final note about retail gasoline and diesel prices is that they tend to lag changes in wholesale prices, which makes the business somewhat seasonal. During the summer driving season, the run up in gasoline and diesel prices tend to support retail margins. Sharp moves up or down in crude can also narrow or expand retail margins, respectively.

Total marketing margin = wholesale margin + retail margin

Source: Google Images

Page 175

INVESTING IN BIG OIL

What is an Integrated Oil Company?


Integrated oil companies (IOCs) are present throughout the oil and gas chain, from upstream production to refining and distribution. Typical divisions include E&P (exploration and production), R&M (refining and marketing), and sometimes chemicals, gas & power. The Super Majors are global in scope, while Emerging Majors tend to be more local. National Oil Companies (NOCs) in resource-rich regions are becoming more global.

Super Majors

Other

NOCs

Emerging Majors

Source: Google images

Page 177

Background
Super Majors

These large global integrated oil companies (IOCs) were formed from a wave of mergers that
took place between 1998 and 2003. Typically show little volume growth and questions remain over reinvestment strategy. Generous dividends and share buybacks characterized the upcycle.

Other

Smaller than the Super Majors and usually with a higher concentration of assets in select
regions (i.e. U.S., North Sea). Usually more leveraged to commodity prices.

National Oil Companies (NOCs)

Fully or majority owned by national governments. Some have recently started to reach beyond home areas. Partially state-owned oil companies with public equity. Have also begun to expand their operations beyond domestic borders.

Emerging Majors

Page 178

Super Majors (XOM, ENI, CVX, COP, TOT, BP, RDS)


Total Oil & Gas reserves Super Majors (mmboe)
Source: Credit Suisse estimates
95,000 90,795 89,892 88,985 87,825 85,527 85,000 82,873 88,724 91,643 91,654 91,684

90,106 90,000

80,000

78,214

75,000

70,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

In spite of significant reserve bases, the Super Majors have found it hard to grow production recently versus their peers. They exhibit high return on capital, while Emerging Majors and NOCs dominate the production growth rankings. The Super Majors are mainly focused on large projects that can substantially increase their reserve base and compensate for significant base production declines.

Page 179

Integrateds: Sensitivities
Typical Integrated Sensitivity vs Oil Price
30 25 Net Income, US$/bbl 20 15 10 5 0 0 20 40 60 80 WTI, US$/bbl 100 120 140 y = 0.2253x + 1.4425 R2 = 0.9457 XOM Correlation

Typical Integrated Sensitivity vs Oil Price


5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0 20 40
XOM Correlation y = 0.4674x -0.9256 R2 = 0.7824

Sensitivity

60
WTI, US$/bbl

80

100

120

140

12mth rolling Avg Oil


1.2% % Net Incom e change for +1$/bbl change in OIL 1.2%

12mth rolling Avg Gas


% Ne t Incom e change for +1$/boe change in GAS

1.0% 0.8%

1.0%

0.8%

0.6%

0.6%

0.4% 0.2%

0.4%

0.2%

0.0% HES STL CVX BP MRO OMV XOM COP TOT BG RDS

0.0% BG CV X MRO STL COP BP HES XOM RDS TOT OMV

Source: Credit Suisse estimates

Page 180

Profitability Upstream Driven


ROGIC (%) Segment*
ROGIC - upstream ROGIC - downstream ROGIC - chemicals

Source: Credit Suisse estimates

25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total returns for the Integrated Oils are driven by the upstream segment, although chemicals has been on an upswing. Even in their best years, the downstream and chemicals segment performances have generally not been comparable to the upstream.
*US Integrated Oils only

Page 181

Segment breakdown Upstream Driven*


ROCE - Segments
Upstream 25%
19.9% 20.2%

Segmental capex
23.3%
Upstream Downstream Chemicals

Downstream
23.0%

Chemicals

20%
15.7%

90 80

15%

14.0% 11.8% 10.1% 10.6%

70

13.2%
Capex ($bn)

60 50 40 30 20 10

10%
7.4% 4.9% 3.7% 5.0%

9.4%

5%

0% 2009 2010 3-yr avg 5-yr avg 10-yr avg

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 10-yr avg 5-yr avg 3-yr avg

Source: Company, Credit Suisse estimates.

The upstream has been a consistent outperformer The relative outperformance of the upstream has led integrated oil companies to increase reinvestment spending in the business

*US Integrated Oils only

Page 182

Performance
Integrated Oils vs. S&P500
30.0% 25.0% 20.0% 15.0% 10.0% 5% 5.0% 0.0% 0% -5.0% -5% -10.0% -15.0% -20.0% -21% -25.0% -30.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -9% -11% -4% 3% 9% 18% 17% 12% 18% 15% 24%

Recession Recession
-27% 2008 2009 2010

Source: Credit Suisse estimates.

The Integrated Oils are a classic defensive investment class. They generally outperform during broad market downturns as these periods often coincide with rising energy price environments.

*Estimated end of recession as per St. Louis Federal Reserve Bank

Page 183

Characteristics
Low Beta
1.5 1.4 MRO PCA HES 1.2 COP 1.1 ENI
80%

Average Integrateds Relative P/E vs. S&P500


160%

140%

1.3

120%

SU
100%

1 BP

CVX

RDS TOT

STO
60%

BG 0.9 REP IMO


40%

0.8 XOM 0.7


0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20%

0.6

Source: Company, Credit Suisse estimates.

The Integrated Oils are the most conservative oil and gas investment compared to the more volatile Independent E&Ps and hyper-volatile Oilfield Service shares. They tend to perform better than the other oil and gas industries as the cycle shifts from peak to trough, but will likely underperform the highly leveraged E&Ps and Service companies when oil and gas fundamentals improve.
Page 184

OUTLOOK FOR BIG OIL

Under-appreciated Cash Flow Growth


Potential Longer Term Cash flow Growth and Divs CFPS Drives 2015 Multiples Lower

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% XOM CVX

10 - 17 CAGR - Adjusted Total CFPS

2011 Div Yield

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Historical Multiple, 5 yr Average (IOCs)

TOT

EOG

RDS

ENI

HES

COP

XOM

OXY

Source: IEA, JODI, Credit Suisse Estimates

XOM, RDS and COP should deliver best in class growth+dividend yield

MRO

CVX

BP

HES

COP

RDS

MRO

TOT

ENI

BP

Page 186

Big Oils Portfolio Shift and Performance Prize


Portfolio Shifting to Long Duration Projects
50% 45% 40% Share of Long Duration 35% 30% 25% 20% 15% 10% 5% 0% COP CVX XOM BP RDS TOT ENI Long Duration, 2009 Long Duration, 2017

10% improvement in cost equals 1% FCF yield

Higher share of longer lived projects helps Big Oil manage the reinvestment treadmill. Longer lives should be correlated with higher multiples On $120bn of upstream capex, a 10% performance improvement translates into 1% additional FCF yield

Page 187

Source for all charts: XOM, Credit Suisse estimates

Higher Cash Margins on New Upstream Projects


Operating Cash Flow per Barrel on Selected New Projects (2011-15 Start-ups)
$7 0

$6 0

$5 0

$4 0

$3 0

$2 0

$1 0

$CLOV Mars B AOSP - Base + Ph 1 Pearl GTL Wheatstone Qatargas 4 OML 138/139 (Usan/UKOT) MLE & CAFC (405b) Queensland Gas Guara (BM-S-9) Block 31 PSVM Tupi (BM-S-11) APLNG Goliat Skarv Yemen LNG Kashagan Rumaila Gorgon Junin 5 Pazflor Block 17 Jack/St Malo Groundbirch Akpo/Egina ACG

Source: Credit Suisse Estimates

Cash margins on projects starting up in 2011-15 are up to 30-40% higher than existing
production Margins are highest on Canadian oil sands (mined), GTL, US GoM deepwater and offshore West African projects (partly due to the timing of cost recovery)

Page 188

Stocks are discounting a double dip


Pessimism in future returns by company
10 CFROI, FY1 CFROI, Embedded

Embedded returns lower than 2010


12.0 10.0 120 100 80 60 4.0 2.0 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E Embedded CRFOI ($/bbl)

8
(%)

8.0 6.0

0.0

0 OXY CVX XOM TOTF HES BP COP RDSb OMVV STL ENI REP MRO

Big Oil should generate CFROI of 6-8% at $80/bbl Stocks are discounting only 2-5%CFROI Big Oil would generate this CFROI on less than $60/bbl

Page 189

Source for all charts: Company data, Credit Suisse estimates

Average CFROI (LHS) Consensus Brent (RHS)

140

INVESTING IN E&P

Evaluating E&Ps: Key Metrics


Producers seek to create value by adding, producing and selling oil and natural gas reserves at a return greater than their cost of capital. There are several key metrics that help quantify producer performance:

Reserve per Share Growth: Basic measure of a producers ability to add reserves. Industry
average growth over the past five years has been about 8-10% annually.

Reserve Replacement Ratio: A measure of reserve adds compared to production. Reserve


replacement of >100% indicates incremental reserves were added net of production.

Reserve Life: Indication of inventory depth by comparing how many years of reserves a
producer has at current production. Median industry reserve lives are currently ~12.0 years.

Recycle Ratio: Compares cash flow ($ per Boe) with finding and development costs ($ per
Boe). A recycle ratio of 1 is a breakeven point, indicating that a producer is replacing what
was produced. Industry three-year median is 1.9x.

Reinvestment Rate: Reinvestment rates of > 100% indicate a producer will be free cash flow
negative.

PUD Percentage: Measures proved undeveloped (PUD) against total reserves. Higher
relative PUD percentage will likely mean higher future capital needs to develop existing reserves.

Page 191

Evaluating E&Ps: Cost Considerations


All producers are essentially price-takers. Therefore a key differentiating factor among producers is the ability to control both capital and operating costs.

Capital Costs The costs associated with exploring for and developing oil & natural gas
reserves. These include drilling and development costs (contracting a rig and crew), acreage costs, geological costs (seismic) and midstream (developing gathering lines). Measured by finding & development (F&D) costs unit cost to replace 1 unit of reserves. The historical 3-year industry median F&D cost is ~$2.60 per Mcfe.

Operating Costs Producer cost structures include field level costs (LOE) related to the
operation of a well, production taxes, DD&A, G&A, and interest expense. LOE tends to mirror movements in commodity prices due to energy related inputs (eg. power/electricity, natural gas), but can sometimes be lagged and/or downward sticky. Production taxes are calculated as a percent of revenues and are directly related to changes in prices. The average industry total cost structure was about $5.63 per Mcfe as of 4Q10.

Page 192

Evaluating E&Ps: Hedging


Producers use derivative instruments to protect against volatility in commodity prices. Common instruments: (1) swaps, (2) collars, (3) floors, and (4) natural gas basis swaps

Basis swaps protect regional gas prices by locking in differentials to NYMEX. Hedging only protects near term cash flows. As hedges roll off, producers are forced
to re-hedge at prevailing commodity prices.

Timing of when to put on hedges is an important management consideration.


Sample Natural Gas Collar ($ per MMBtu)
$14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00
ug -0 8 ov -0 8 Se p08 ec -0 8 Ju n08 Fe b09 Ju l-0 8 Ja n09 ct -0 8 O

Collar Floor protects against downside volatility

Source: Bloomberg, Credit Suisse.

Page 193

Evaluating E&Ps: Valuation


The primary tools we use for valuing producers are Net Asset Value and Multiples.

Net Asset Value (NAV): An NAV is a discounted cash flow analysis of a producers
reserves. In deriving an NAV, assumptions are made on future commodities prices, production rates, operating costs, finding & development costs, and life of reserves. NAVs can be run on a producers 3P reserves (All-in NAV), proved reserves only, or proved-developed reserves. The choice of which NAV to use depends on the outlook for the producer to find, develop and produce out the reserves that will be discounted. NAVs per share is compared to a producers stock price. Price to NAV > 100% suggests that a stock is over-valued (based on valuation assumptions).

Multiples: The most commonly followed valuation multiple within the E&P sector is EV to
EBITDA. Recently, lack of visibility on future commodity prices have shifted valuation focus away from NAVs and placed EV to EBITDA multiples more in favor Historically the group has traded at 6.0x EBITDA.

Page 194

INVESTING IN OILFIELD SERVICES & DRILLING

OFS: The Traditional Upstream Spending Cycle


Int'l m arkets, deepwater markets accelerate and cycle approaches peak earnings Change in m acro environm ent precipitates decline in com modity prices

North Am erica leads the upturn, international markets lag

Cycle begins with upturn in comm odity prices

North American independents curtail upstream spending

North America generally leads in a resumption in upstream spending because more of the activity is conducted by smaller (and therefore more nimble) operators (E&P companies). With shorter time horizons, generally, the North American operators are also the first to curtail spending in a downturn

Page 196

OFS: Oil Services Activities Through the Cycle


Com panies with solid positions in International m arkets as well as deepwater/rem ote areas benefit from pick up in international activity. Key beneficiaries: Large caps, deepwater drillers Oil com panies increasingly focus on new Prospect Identification as existing prospects have been developed. Seismic companies are key beneficiary. Companies that (1) Install Infrastructure for new developm ents (Production) and (2) provide new drilling rig equipm ent tend to see fastest earnings growth later in the cycle. Stocks respond to backlog growth in m iddle stages of the cycle.

As Drilling and Completions activity picks up, beneficiaries include rig count driven com panies selling drilling materials (e.g. bits, fluids) - margins im prove quickly as m anufacturing absorption issues dissipate.

Initial activity includes W ell Servicing and Production Enhancement, i.e. the fastest way to take advantage of higher com m odity prices is not through the drill bit. Beneficiaries: pressure pum pers, workover drilling contractors

Drilling Services com panies experience price leverage as rig count rises and service utilization increases.

Production related services are the most resilient and the earliest to revive, but traditionally have the lowest Beta. Secular challenges related to hydrocarbon production have sustained higher-than-expected growth in the latest upcycle. With more confidence in sustained higher commodity prices, drilling and completion related activity responds. Exploration is generally the last to strengthen and the first to fall in a downturn in oil prices.

Page 197

OFS: Stocks Directionally Correlated with Upstream Spending


20
QualRig ($bil) (Monthly Drill. & Compl. Spending)

5.5 5.0 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 OFS Relative Stock Index

18 16 14 12 10 8 6 4 2 0

4.5

Worldwide QualRig

OFS Relative Stock Performance

Note the strong directional correlation between spending patterns and the stocks as expectations for future upstream spending have historically been a significant driver of relative OFS stock performance. OFS stocks tend to be highly anticipatory and move ahead of changes in spending patterns.

Page 198

OFS: Gross Revenues Drive Upstream Spending


240 220 Monthly WW Producer Gross Revenue (18Mo. Avg) 200 180 160 140 120 100 80 60 40 20 2011E 2012E 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 24 QualRig ($bil) Monthly Drilling & Completion Spending ($bil) 22 20 18 16 14 12 10 8 6 4 2

Worldw ide QualRig

Average Yearly QualRig

Spending trends tend to follow producer gross revenues (production times commodity prices) Historically, spending trends tend to follow 18-month average of gross revenue at a reinvestment rate of approximately 11-12%.

Page 199

OFS Contract Drilling: Offshore Drillers


Dayrates and utilization are key drivers of driller earnings power
Worldwide Semi Dayrate/Utilization
$440,000 $400,000 $360,000 $320,000 WW Semi Dayrates $280,000 60% $240,000 50% $200,000 40% $160,000 $120,000 $80,000 $40,000 $0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 30% 20%
$20,000
Average = 83.9%

Worldwide Jackup Dayrate/Utilization


100% 90% 80%
$100,000 $120,000 Average Utilization = 83.3% 100% 90% 80% 70%

70% WW Semi Utilization


WW Jackup Dayrates $80,000

60% 50%

$60,000 40% $40,000 30% 20% 10% $0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0%

10% 0%

WW Semisubmersible Dayrates

WW Semisubmersible Utilization

WW Avg. Semisubmersible Utilization

WW Jackup Dayrates

WW Jackup Utilization

WW Avg. Jackup Utilization

Source: ODS-Petrodata

Page 200

WW Jackup Utilization

OFS Contract Drilling: Offshore Drillers


Stocks are generally correlated with dayrate trends
$250,000 16.00 14.00
0.81 0.79

Absolute R-squared =

$200,000

Relative R-squared =

12.00 10.00 8.00 $100,000 6.00 4.00 $50,000 2.00 $0 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 0.00

Offshore Dayrates

$150,000

CSFB OFS Index: Absolute Performance

CSFB OFS Index: Relative Performance

WW Offshore Dayrates (unweighted)

Source: ODS-Petrodata

Page 201

OFS: Traditional Valuation Methodologies


Services as an earnings momentum group, we
believe shares have generally been valued on forward year P/E and to a lesser extent forward EV/EBITDA. During trough periods, P/E or EV/EBITDA is applied to normalized or midcycle earnings estimates
30 25 20 P/E 15 10 5 0

Diversified Service Forward P/E Trend

Prior Cy cle ('96-mid '98) High = 25.8x Av e. = Nov '04 - Aug '08: High = 24.3x Av e. = 17.0x Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Current = 11.6x

Equipment the backlog visibility, which can


extend out as far as three years, lends itself to DCF. However, forward earnings metrics are also used

Offshore Asset Replacement Cost Trend


180.0% 160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Current Q197 Q397 Q198 Q398 Q199 Q399 Q100 Q300 Q101 Q301 Q102 Q302 Q103 Q303 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111

Drillers with high asset intensity associated with


owning the rigs, and different depreciation methods used by the companies, the industry tends to use forward year P/CF (EV/EBITDA). In the recent upcycle, backlog visibility lends itself to DCF. In troughs, replacement value metrics are also used

Maximum = 166% Current = 81%

Minimum = 41%

Page 202

OFS: Indicators
Leading Indicators

Seismic Licensing rounds, Oil company exploration budgets, Sustained higher commodity
prices

Drilling and Completion Oil company spending budgets (generally set early in the calendar
year, although they are revised intra-year), Permitting activity

Coincident Indicators

Oil and natural gas prices Earnings. As a traditionally earnings momentum-driven group, quarterly earnings matter. Pricing (day rates for drillers). Contract drilling shares are generally highly correlated with the
trajectory of day rates.

Rig count. North American rig counts are updated weekly (sources include Baker Hughes,
M-I) or bi-weekly (The Land Rig Newsletter). Non-North American rig counts are updated monthly

Page 203

OFS: Secular Trends


Resource Nationalism. The recent upcycle/strength in commodity prices facilitated/was coincident with
several countries becoming less accommodating to outside oil companies; this manifested itself in both contractual changes to lower oil company ownership stakes and higher taxes.

New Frontiers. Related to the above, international oil companies are being pushed to explore/exploit
more challenging and higher cost environments to access hydrocarbons in their quest to grow reserves/production, including more offshore (and deeper waters).

Gas Monetization. The upcycle has seen more natural gas development (20% of the non-North
America (non-NAM) rig count versus 15-18% in the 1998 cycle). Although the OFS activities are essentially the same, natural gas tends to be more lucrative than oil as it is often deeper (=higher pressure and temperature) and presents corrosion challenges.

NAM unconventional gas. The recent upcycle has seen the unlocking of NAM gas shales, including
the use of horizontal drilling and aggressive multi-zonal completion techniques (including very large fracturing jobs). The shales plays are thought to be 2-5x more service intensive than traditional wells.

Bundling. The combination of human resource constraints at oil companies, more challenging
reservoirs and demonstrated efficiencies are leading to more tendering for products and services on a bundled basis. This is driving organizational changes to meet this demand within service companies.

Page 204

INVESTING IN REFINING

Refining Margins Drive Refinery Value


Refining earnings are driven by refining margins (also called cracks or crack spreads). Cracks are normally quoted gross, for example, as the difference between the prices of refined products and the price of the crude feedstock, before operating costs.
Barrel of crude Refinery processing center Finished product
Source: Google images

The second is finished or end product price. The higher this is, the wider the crack spreads. The third is refinery complexity or yield. More complex refiners run less attractive (cheaper) crudes and produce a higher yield of light products. The fourth determinant is regional supply/demand, mainly concerned with local market conditions and regulations.

There are four major determinants of margins. The first is crude cost, which is effectively the cost of goods sold.

Page 206

Gasoline Distillate Product price WTI crude Gulf Coast 3:2:1 refining margin

US$/gal 1.95 1.74

US$/bbl (x 42) 81.90 72.93 68.59

x 2/3 x 1/3 x1

54.60 24.31 78.91 68.59 10.32

Benchmark refining margins attempt to give a rough overview of the current profitability of the refining industry.

To calculate a benchmark margin, we assume that one barrel of crude from a region is then transformed into a standard suite of refined products. For instance, the Gulf Coast benchmark 3:2:1 margin (for PADD III) assumes that three barrels of WTI crude oil are turned into two barrels of gasoline and one barrel of middle distillates. Above we show an example of this calculation. Benchmark margins vary for each region. For instance, the New York Harbor (PADD I) uses a 6:3:2:1 margin, which assumes that six barrels of Brent crude oil are turned into three barrels of gasoline, two barrels of distillate, and one barrel of bottom of the barrel products or residual fuels.
Page 207

Source: Bloomberg, Credit Suisse estimates

How to Calculate Benchmark Refining Margins

Why We Use Theoretical Benchmark Margins


$30 $25 $20 $/bbl $15 $10 $5 $$(5) 1Q1999 4Q1999 3Q2000 2Q2001 1Q2002 4Q2002 3Q2003 2Q2004 1Q2005 4Q2005 3Q2006 2Q2007 1Q2008 4Q2008 3Q2009 2Q2010 1Q2011

We can also look at individual crack spreads, such as what would one barrel of gasoline trade for above one barrel of WTI crude oil. One barrel of crude cannot actually transform into one barrel of gasoline (or any other product), however this is the convention in discussing gasoline cracks or distillate (heat) cracks. A NYMEX gasoline crack of $3.64/bbl means that one barrel of gasoline is currently trading at a $3.64 premium to one barrel of WTI crude. We illustrate recent gasoline and distillate crack spreads in the chart above.
Page 208

Source: Bloomberg, Credit Suisse estimates

$35

Gasoline

Distillate

Additional Variables: Utilization Rates


US refining capacity distillation utilization % 1 00 95 90 85 80 75 70 Sep-91 Sep-01 Sep-07 Sep-93 Sep-03 Sep-89 Sep-95 Sep-99 Sep-05 Sep-09 Sep-97

The actual throughput for a refinery is known as its crude run. Crude runs can be less than nameplate capacity due to planned or unplanned downtime or due to an economic decision to reduce operating rates in the face of weak margins. The crude run divided by the crude capacity is known as the utilization rate. If a refinery can process 100 KBD of crude but crude runs are only 90 KBD, then the utilization rate is 90%. Utilization rates are seasonal and usually increase in the summer when US demand for gasoline is greater.
Page 209

Source: DOE, Credit Suisse estimates

Additional Variables: Complexity


Refineries are often divided into two categories: simple and complex. In reality complexity is measured on a continuum. One commonly used measure of complexity is the Nelson Complexity Index. The Nelson index dates from 1960 and assigns a separate complexity factor to each piece of equipment in a refinery (see LH picture below). The factor assigned is normally based on the pieces cost relative to the crude distillation unit (CDU), which is assigned a complexity factor of 1.0. Below the complexity of Kuwaits Mina Abdulla refinery is calculated. The index for vacuum distillation, for example, is 1.11, calculated as [134,000 / 242,000] x 2).

Source: www.ogj.com

Page 210

$0.90 Gasoline-Resid Spread (US$/gal) $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 -$0.10 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10

$25 $20 $15 $10 $5 $0 WTI-Maya Spread (US$/bbl)

Gasoline-Resid

WTI-Maya

Complex refineries can run different types of crude, quickly change product slates and produce more higher value products, so why not make every refinery complex? The upfront capital costs to add complexity are high and maintenance can be expansive. For some locations, more simple refineries may make sense. Above, we show historic crude and product differentials. A greater differential in the light-heavy spread favors complex refineries who run heavier crude but produce a similar light product yield to a simpler refinery processing light crude. Higher differentials between gasoline and residual fuel oil favor complex refiners, many of whom do not produce any fuel oil as a final product.
Page 211

Source: Bloomberg, Credit Suisse estimates

Why Not Make Every Refinery Complex?

Example of the Economics for a Simple vs. Complex Refinery


Source: Credit Suisse estimates
Page 212

Singapore simple US$/bbl Refined products Gasoline Naphtha Jet/Kerosene Gas oil Fuel oil

Dubai yield % 11.9% x 5.1% x 9.9% x 24.4% x 46.2% x 97.5%

Product prices 36.75 29.25 54.15 57.85 32.61

= = = = =

Output value 4.37 1.49 5.36 14.12 15.07 40.41 -

Crude cost

Gross margin

Operating cost

Cash margin

37.02 =

3.39 -

2.00 =

1.39

Singapore complex US$/bbl Refined products Gasoline Naphtha Jet/Kerosene Gas oil Fuel oil

Dubai yield % 26.6% x 7.4% x 4.0% x 38.6% x 22.3% x 98.9%

Product prices 36.75 29.25 54.15 57.85 32.61

= = = = =

Output value 9.78 2.16 2.17 22.33 7.27 43.71 -

Crude cost

Gross margin

Operating cost

Cash margin

37.02 =

6.69 -

3.50 =

3.19

As illustrated above using two hypothetical Singapore refineries, 2008 year-end product pricing, and Dubai crude, a complex refinery generates a substantially higher cash margin than a simple refinery. Note that the percentages do not add up to 100%, as some refinery fuel and energy is lost in the process. While the difference in margins is appreciable, so is the cost of building a complex plant. In practice, complex refiners adapt their yield patterns to suit the market conditions prevailing at the time.

A Few Final Notes about Refiner Profitability

Just because a refiner is complex does not mean that it can process heavier crudes. One must look into what is driving the higher complexity level. For instance, a plant may have extensive facilities to upgrade fuel oil or a lubricants plant but may not be able to process heavy or sour crudes. Competition is key for refiners. If a plant is in a relatively isolated market it will enjoy much higher margins than a plant in a merchant refining center. Operating costs are key to cash margins. These are driven by several factors including natural gas.
Page 213

Source: Google Images

VLO NTM EPS 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Valero

VLO EPS forecast VLO share price

9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011

9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011

US refiners are earnings momentum stocks

9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011

75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 VLO share price SUN NTM EPS 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Sunoco

SUN EPS forecast SUN share price

15 0

25 10

35 20

SUN share price TSO NTM EPS 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

45 30

55

65 40

75 50

85 60

95

Tesoro
70

TSO EPS forecast TSO share price

When it comes to independent refining stocks, momentum often drives stock price movement. The charts above show how share price movements occurs after adjustments to EPS forecasts.

Page 214

TSO share price

OUTLOOK FOR REFINING

US gasoline demand has likely peaked..FOREVER


US Gasoline demand Long Term
10,000
Economic bounce back slows decline in 2010

Source: Credit Suisse estimates

US gasoline consumption KBD

9,000

8,000

7,000

6,000

5,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Gasoline demand after CAFE Refiner Gasoline demand after CAFE and RFS

US future oil demand growth is now seen at negative 0.1%, from a positive rate of over 1% between 1998 and 2007 We expect a 0.6% annual decline in gasoline consumption between 2010 2020 from new CAFE standards. Adopting the full RFS would give a 1.4% annual decline.
Page 216

Over Capacity in the Industry


3000 2500

2000

1500

Source: Credit Suisse

KBD

1000

500

-500

-1000 2006 North America 2007 OECD Europe 2008 South America 2009 FSU/Other Europe 2010 Africa 2011E Middle East 2012E OECD Pacific 2013E Other Asia 2014E Biofuels 2015E Demand growth

Significant new capacity and a collapse in demand have ushered in The Dark Ages Some proposed new capacity has started to slip Expect more movement in that direction, including fewer Middle East refineries
Page 217

US Crude Over Supply Throws a Lifeline to Mid-Con Refiners


Structural Oversupply Versus Refining Capacity
10,000 9,000 8,000 7,000 6,000 KBD 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 GoM Texas (ex-Eagleford) Padd 2 (Core) Eagleford Mississippian Light Crude Capacity Padd 3 (Core) Bakken Padd 4 (Core) Niobara Uinta

Even after all required pipelines are built to the Gulf Coast, refinery bottlenecks need to be considered The line on the chart shows the available light processing refining capacity in the Mid-Con and the Gulf after heavy processing capacity is stripped out By 2014, onshore crude supply could exceed this light processing capacity. Were this to occur, there would need to be crude exports from the Gulf to the North East In this scenario WTI would trade $3-4/bbl below LLS but LLS would trade $2-3/bbl below Brenti.e. a $5-7/bbl WTI-Brent spread into the longer term Each $1/bbl margin adds 8% to EBITDA for a refinery Refining stocks are deeply undervalued

Embedded Returns in US Refiners (HOLT)

Page 218

Source: Credit Suisse estimates, HOLT

INVESTING IN MLPS

What is an MLP?
Typical MLP Structure

Real Assets

Real Cash Flow

Real Company Housed in a master limited partnership structure


MLP

Source: Credit Suisse analysis

Page 220

MLP Assets
An MLP must generate at least 90% of its income from qualifying sources (primarily natural resources activities) as defined in section 7704 of the internal revenue code Energy related assets include: Exploration and production, gathering and processing, transportation (e.g.,
pipelines), storage and terminals, refining, marine transportation, propane, and coal MLPs predominantly own midstream energy assets

Source: Spectra Energy website, American Petroleum Institute

Page 221

MLP Key Terms Defined


Master limited partnerships (MLPs) are limited partnerships that are publicly traded on US stock exchanges. They trade just like common stock. However, unlike corporations, these are pass-through entities that pay no corporate taxes. A high proportion of distributions are tax-deferred.
Limited Partner (LP): provides capital, receives distributions, has no role in managing the partnership General Partner (GP): manages partnership, 2% equity ownership, owns incentive distribution rights (IDRs) Distribution: Similar to dividends, distributions are paid quarterly and a large portion (typically 70% to 100%) is tax deferred Incentive Distribution Rights (IDRs): Entitle the GP to an increasing portion of distributions (up to 50%) as target distribution levels are attained Distributable Cash Flow (DCF)*: maximum amount of cash flow available to pay limited partners after taking into account maintenance capital requirements and the general partner entitlement Schedule K-1: Investors receive Schedule K-1s instead of Form 1099s UBTI: MLPs generate unrelated business taxable income (UBTI)

*Credit Suisse definition

Page 222

MLP Business Model: Distribution Sustainability is Key


MLPs pay out majority of available cash flow Access debt/equity markets needed to finance growth Cash Flow Characteristics

Gas pipelines and storage most stable and


secure cash flow given reservation fees E&P/Refining least stable given commodity price risk and depleting asset base

Benefit of business model:


Mandates financial discipline, transparency and focus on cash flow

Maintenance Capex

Too little can mean lower cash flow over time More predictable cash flow streams = less
need for excess distribution coverage Less predictable cash flow streams = greater need for excess distribution coverage

Risk to business model:


Reliance on capital markets for growth
MLP Debt / Equity Issuance
25.0 20.0 15.0 ($bn) 10.0 5.0 0.0 2004 2005 2006 2007 Debt 2008 Equity 2009 2010 YTD 5.7 4.9 5.3 8.3 9.2 7.0 11.1 8.3 5.6 19.1 20.2 15.1 11.5 6.8 7.8 16.2

Cash Flow Coverage of Distribution

Source: Factset, Credit Suisse analysis

Page 223

AMZ ML P Ind ex Y ield

MLP Value Proposition


High tax-advantaged yield
Current yield of 6.6%

16% 14% 12% 10% 8% 6% 4%

Annual Dist Growth

+ Distribution growth
2011E growth of 4.9%

1200% 1000% 800%

= Attractive total return


Expect 10 to 13% total returns

600% 400% 200% 0% -200%


12 /29 / 9/1 95 3/9 5/3 6 0/ 2/1 97 3 10 /98 /30 / 7/1 98 6/9 3/3 9 1 12 /00 /15 / 8/3 00 1/0 5/1 1 7/ 1/3 02 1 10 /03 /17 /0 7/2 3 / 3/1 04 8/0 12 5 /2/ 8/1 05 8/0 5/4 6 / 1/1 07 8/0 10 8 /3/ 6/1 08 9/0 3/5 9 11 /10 /19 /1 8/5 0 /11
AMZ MLP Index TR S&P500 TR Russell 2000 TR

Source: Factset, Bureau of Labor Statistics; Prices as of 09/02/11

Total Return CAGRs: MLPs: 15.7%, S&P 500: 6.1%, R2000: 6.4%

5/9 8/2 6 2 / /9 6 28 9 / /97 26 4/ /97 2 1 1 4 /9 /2 8 0 6/ /9 8 18 1/1 / 99 4 8/1 / 00 1/0 3/ 0 9/0 10 1 /5 /0 5 1 11 /3/0 /29 2 6 / /02 27 1 / /03 23 8 / /04 20 3/ /04 1 1 0 8 /0 /1 5 4 5/1 /0 5 2/ 12 06 /8/ 0 7/ 6 6/ 0 2/ 7 1 8 / /0 8 29 3 / /08 2 10 7 /09 /23 05 /09 /2 12 1/ 10 /1 0 7 7/ 1 /1 0 5/1 1

1/

Energy MLPs Annual Distribution Growth vs CPI


14.0% 12.0% 10.0% 8.0% 6.0% 4.9% 4.5% 4.3% 4.0% 2.0% 0.0% -2.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E MLP Distribution Growth (Median) Y/Y Change in CPI 7.0% 3.6% 3.8% 4.8% 2.6% 3.0% 9.1% 9.4% 8.2% 8.8% 6.8% 4.9% 5.4% 5.0%

Total Return (Since 1996)


886%

164% 153%

Page 224

Valuation Framework: DDM is Preferred Methodology


Follow the Cash, No One Really Cares About Earnings
MLPs are primarily valued on their distributions, expectations for distribution growth and perceived risk profile

Valuation Methodologies
Distribution Discount Model (DDM) Methodology
Credit Suisse preferred methodology Price target is based on a three-stage DDM model, which discounts five years of distribution forecast,
assumes a second stage of moderating distribution growth and a terminal value To arrive at a discount rate we use a blended approach combining the discount rate implied by the capital asset pricing model with the discount rate implied by investors required rate of return (yield plus expected distribution growth) Subjective factors are considered: asset mix, stability of cash flows and management track record

Target Yield Methodology

Price target derived by projecting a targeted yield on an expected distribution rate 12 months out Yield spread comparisons are usually analyzed. Since 1999, MLPs have traded at 322 basis points
spread to the ten-year US treasury and 595 basis point spread to a high yield bond index

Relative Valuation Metrics

Price / Distributable cash flow (DCF) multiple Adjusted Enterprise Value / EBITDA multiple

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Yield Spread Analysis


1, 40 0 1, 20 0 1, 00 0 80 0 60 0 40 0 20 0 0 12/15/00 C u rr e n t S p re a d = 4 5 9 A v e ra g e S p re a d = 3 2 2

A M Z Y ie ld v s . 1 0 y r T r e as u ry (1 9 9 9 -2 0 1 1 )
1 8x 1 6x 1 4x 1 2x 1 0x 8x 6x 4x
01/22/10

A M Z P r ic e/D C F (1 9 9 6-2 0 11 )
C u r re n t = 13 .2x A v er ag e = 12 .0x

12/31/99

6/23/00

11/30/01

11/15/02

10/31/03

3/24/06

8/15/08

01/07/11

10/15/04

07/16/10

07/01/11

1/15/99

7/9/99

5/24/02

5/9/03

4/23/04

4/8/05

9/30/05

9/15/06

8/31/07

2/22/08

2/6/09

7/31/09

C S L U C I B B B 7-1 0 Y r S p re a d to 1 0 -Y r T re a su ry (1 9 9 9 -2 0 1 1)
80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0 4/8/05 5/9/03 3/9/07 7/9/99 11/30/01 5/24/02 2/6/09 01/22/10 07/01/11 9/15/06 2/22/08 12/15/00 10/31/03 10/15/04 7/31/09 07/16/10 1/15/99 12/31/99 6/23/00 6/8/01 11/15/02 3/24/06 8/31/07 8/15/08 01/07/11 4/23/04 9/30/05 C u r ren t Sp r ea d = 21 5 A v era g e Sp r ea d = 20 6

700 600 500 400 300 200 100 0 -100 -200

MLPs yield 6.6%, 459 bps more than treasuries, which is close to one standard deviation above the historical average. MLP yields remain compelling relative to investment grade bonds. On a price-to-distributable cash flow basis, MLPs remain within their historical +/- one standard deviation range of 10x to 14x.

Source: Factset, Alerian website, Credit Suisse analysis; Prices as of 09/08/11

1/15/99 7/9/99 12/31/99 6/23/00 12/15/00 6/8/01 11/30/01 5/24/02 11/15/02 5/9/03 10/31/03 4/23/04 10/15/04 4/8/05 9/30/05 3/24/06 9/15/06 3/9/07 8/31/07 2/22/08 8/15/08 2/6/09 7/31/09 01/22/10 07/16/10 01/07/11 07/01/11

1/5/96 6/28/96 12/20/96 6/13/97 12/5/97 5/29/98 11/20/98 5/14/99 11/5/99 4/28/00 10/20/00 4/12/01 10/5/01 3/28/02 9/20/02 3/14/03 9/5/03 2/27/04 8/20/04 2/11/05 8/5/05 1/27/06 7/21/06 1/12/07 7/6/07 12/28/07 6/20/08 12/12/08 6/5/09 11/27/09 05/21/10 11/12/10 05/06/11

6/8/01

3/9/07

AMZ Y ield vs. CS LUCI BBB 7-10 Y r (1999-2011)


C urrent = 2 44 ps A ve rag e = 1 18b ps M LPs are attractive vs. IG cre dits

IG cred tis are attra ctive vs. ML Ps

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Disclosures

Companies Mentioned (Price as of 21 Sep 11) Alon USA Energy Inc. (ALJ, $7.61) Anadarko Petroleum Corp. (APC, $72.72) Atwood Oceanics, Inc. (ATW, $37.47, NEUTRAL [V], TP $45.00) Baker Hughes Inc. (BHI, $54.33, OUTPERFORM, TP $93.00) Berry Petroleum Co. (BRY, $43.71, OUTPERFORM, TP $70.00) BHP Billiton (BLT.L, 1888.50 p, NEUTRAL, TP 3160.00 p) Bill Barrett Corp (BBG, $41.21) Boardwalk Pipeline Partners, LP (BWP, $26.07, OUTPERFORM, TP $35.00) BP (BP.L, 404.05 p, OUTPERFORM, TP 610.00 p) Bristow Group Inc. (BRS, $42.65, OUTPERFORM, TP $53.00) Cabot Oil & Gas Corp (COG, $70.03) Cameron International Corp. (CAM, $47.58, OUTPERFORM, TP $74.00) Chesapeake Energy Corp. (CHK, $29.42) Chevron Corp. (CVX, $94.27, OUTPERFORM, TP $130.00) Cobalt International Energy (CIE, $8.78, OUTPERFORM [V], TP $17.00) Complete Production Services (CPX, $22.74, NEUTRAL [V], TP $52.00) ConocoPhillips (COP, $64.95, RESTRICTED) CONSOL Energy Inc. (CNX, $37.92, OUTPERFORM, TP $65.00) Delek US Holdings, Inc. (DK, $12.52, NEUTRAL, TP $17.00) Denbury Resources (DNR, $12.99, NEUTRAL, TP $30.00) Devon Energy Corp (DVN, $61.61) Diamond Offshore (DO, $60.22, UNDERPERFORM, TP $67.00) Dresser Rand Group Inc (DRC) Dril-Quip, Inc. (DRQ, $63.72) Duncan Energy Partners, LP (DEP, $41.22) EnCana Corp. (ECA, $21.64, OUTPERFORM, TP $36.00) Energy Transfer Equity, LP (ETE, $37.43, RESTRICTED) Energy Transfer Partners, L.P. (ETP, $43.89, RESTRICTED) ENI (ENI.MI, Eu12.88, NEUTRAL, TP Eu19.00) Ensco Plc. (ESV, $46.19, OUTPERFORM, TP $71.00) Enterprise GP Holdings, LP (EPE, $43.48) Enterprise Products Partners, LP (EPD, $42.26, OUTPERFORM, TP $46.00) EOG Resources (EOG, $83.43) EV Energy Partners LP (EVEP, $72.31) Exterran Holdings (EXH, $9.71, NEUTRAL, TP $17.00) ExxonMobil Corporation (XOM, $71.97, NEUTRAL, TP $95.00) FMC Technologies, Inc. (FTI, $41.13, NEUTRAL, TP $49.00) Forest Oil (FST, $17.62, OUTPERFORM [V], TP $29.00) Frontier Oil Corporation (FTO, $32.31) Gardner Denver, Inc. (GDI, $71.63, NEUTRAL, TP $91.00) Global Geophysical Services, Inc. (GGS, $8.20, OUTPERFORM [V], TP $21.00) Goodrich Petroleum Corp. (GDP, $14.91) Gulfport Energy Corporation (GPOR, $26.35) Halliburton (HAL, $35.09, OUTPERFORM, TP $66.00) Helmerich & Payne, Inc. (HP, $48.27, NEUTRAL, TP $69.00) Hercules Offshore (HERO, $3.63, OUTPERFORM [V], TP $6.50) Hess Corporation (HES, $56.49, OUTPERFORM, TP $115.00) Holly Corp. (HOC, $71.76) HollyFrontier Corp (HFC, $29.64, OUTPERFORM [V], TP $50.00) Husky Energy Inc. (HSE.TO, C$22.93, NEUTRAL, TP C$32.00) Kinder Morgan Energy Partners, L.P. (KMP, $70.70, NEUTRAL, TP $77.00) Kinder Morgan Management, LLC (KMR, $60.04, OUTPERFORM, TP $73.41) Kosmos Energy Ltd (KOS, $12.79, OUTPERFORM [V], TP $25.00) LUKOIL (LKOH.RTS, $56.90, OUTPERFORM, TP $105.20) Magellan Midstream Partners, LP (MMP, $61.29, NEUTRAL, TP $62.00) Marathon Oil Corp (MRO, $23.73, NEUTRAL, TP $36.00) Murphy Oil Corp. (MUR, $48.03) Nabors Industries, Ltd. (NBR, $15.63, OUTPERFORM, TP $35.00) National Oilwell Varco (NOV, $58.04, OUTPERFORM, TP $95.00) Neste (NES1V.HE, Eu7.16, NEUTRAL, TP Eu11.50) Newfield Exploration Co. (NFX, $44.30) Nexen Inc. (NXY.TO, C$17.28, NEUTRAL, TP C$27.00) Noble Corporation (NE, $33.41, OUTPERFORM, TP $51.00) Noble Energy (NBL, $77.09)

NuStar Energy LP (NS, $56.00, NEUTRAL, TP $68.00) NuStar GP Holdings LLC (NSH, $33.25, NEUTRAL, TP $36.00) Occidental Petroleum (OXY, $76.32, NEUTRAL, TP $128.00) Oceaneering Intl, Inc. (OII, $39.15, NEUTRAL, TP $48.00) Oil States International (OIS, $58.32, OUTPERFORM [V], TP $110.00) OMV (OMVV.VI, Eu25.04, UNDERPERFORM, TP Eu28.00) Patterson-UTI Energy, Inc. (PTEN, $19.54, OUTPERFORM, TP $42.00) Petrobras (PBR, $24.64, NEUTRAL, TP $38.00) Pioneer Natural Resources (PXD, $74.34) Plains All American Pipeline, L.P. (PAA, $60.04, OUTPERFORM, TP $67.00) Plains Exploration & Production Co. (PXP, $25.75) Quicksilver Resources, Inc. (KWK, $8.63, NEUTRAL, TP $12.00) Range Resources (RRC, $67.96, OUTPERFORM, TP $77.00) Repsol YPF SA (REP.MC, Eu19.52, OUTPERFORM, TP Eu29.50) Rex Energy Corp. (REXX, $14.28, NEUTRAL [V], TP $13.00) Rosetta Resources Inc. (ROSE, $43.01, OUTPERFORM [V], TP $71.00) Rowan Companies (RDC, $35.23, NEUTRAL, TP $46.00) Royal Dutch Shell PLC (ADR) (RDSa.N, $63.15, OUTPERFORM, TP $90.00) Schlumberger (SLB, $65.15, OUTPERFORM, TP $117.00) Seadrill (SDRL, NKr184.10, NEUTRAL, TP NKr178.00) Smith International, Inc. (SII, $38.84) Southwestern Energy Co. (SWN, $38.70) Spectra Energy Partners, LP (SEP, $28.77, NEUTRAL, TP $34.00) St. Mary Land (SM, $76.99) Statoil (STL.OL, NKr127.60, NEUTRAL, TP NKr159.00) Suncor Energy (SU.TO, C$28.13, OUTPERFORM, TP C$50.00) Sunoco Logistics Partners, L.P. (SXL, $88.22, OUTPERFORM, TP $93.00) Swift Energy Co. (SFY, $29.26, OUTPERFORM, TP $52.00) Tesoro Corp. (TSO, $21.47, OUTPERFORM [V], TP $36.00) Tidewater (TDW, $53.71, OUTPERFORM, TP $63.00) Total (TOTF.PA, Eu32.20, NEUTRAL, TP Eu46.00) Transocean Inc. (RIG, $56.30, NEUTRAL, TP $71.00) Tullow Oil (TLW.L, 1333.00 p, OUTPERFORM, TP 1804.00 p) Ultra Petroleum Corp. (UPL, $32.54) Valero Energy Corporation (VLO, $19.89, OUTPERFORM, TP $41.00) Weir Group (WEIR.L, 1768.00 p, OUTPERFORM, TP 2000.00 p) Western Refining Inc. (WNR, $14.35, NEUTRAL [V], TP $24.00) Whiting Petroleum Corp. (WLL, $41.04, OUTPERFORM, TP $73.00)

Disclosure Appendix
Important Global Disclosures Arun Jayaram, CFA, Brad Handler & Edward Westlake each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stocks total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stocks total return is expected to be in line with the relevant benchmark* (range of 10-15%) over the next 12 months. Underperform (U): The stocks total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stocks total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector.

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