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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.
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
+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
Australia Sandra McCullagh (Melbourne) Nik Burns (Melbourne) Ben Combes (Melbourne)
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
Toronto
London
Moscow
New York
Source: Credit Suisse.
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
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
215
219
Page 4
CRUDE OIL
Page 7
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
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
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
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
Page 13
global oil supply, a sharp increase from the trough of 1985, but still lower than its historical level of 55%+ pre-1973/74.
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%
Page 14
40
60%
Spare Capacity
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
-0.70 -1.20 -1.70 2007 2008 2009E 2010E 2011E 2012E 2013E
Algeria Libya
Angola Nigeria
Ecuador Qatar
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
-0.20
% World reserves
% World production
Venezuela
Kuwait
Iran
Russia
Saudi Arabia
Iraq
Libya
Baseline
Kurdistan
Source for top charts: IEA, industry data, Credit Suisse estimates
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
Sub-total
Total
0.05 1.55
Nigeria
UAE
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: 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
Page 21
(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
Page 23
Page 24
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
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
R2 = 0.5802
5.0%
Source: BP Stats, Credit Suisse estimates
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
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
Demand growth
110
SPIKE
100 90
70 60 50 40 30 20 10
1.2% 0.8%
Collapse
0% -1% -2% -3% -4% -5% -6%
0.3%
-0.5%
-2.3% -2.9%
Boom
-4.1%
Recovery
Recession
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
Page 30
80
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
Page 33
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
Source: IEA
Page 36
$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
$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
$65 Nov09 Jun-10 Jan10 Oct09 Jul-10 Aug-10 May-10 Sep-10 Feb10 Mar-10 Apr-10 Dec09
Source: Bloomberg
Source: Bloomberg
Page 37
NATURAL GAS
Europe & Eurasia 2,227 Tcf North America 350 Tcf Middle East 2,675 Tcf Africa 522 Tcf South & Central America 264 Tcf Asia Pacific 575 Tcf
Page 41
World Energy: Natural Gas Has Gained Share of the Energy Pie
According to BP Statistical Energy Review, natural gas accounted for 24% of global primary energy consumption, the highest on record, in 2010.
Page 42
Global gas demand growth is currently being driven by Asia and the Middle East (due to a switch away from oil).
Page 43
Source: www.britishcoalgasification.co.uk.
Source: ecotechdaily.com
Source: www.greengop.org.
There are numerous substitutes for natural gas including coal, oil, heating oil, naphtha and alternative energy (such as wind, solar and nuclear
power).
A global movement towards clean energy has put natural gas more in favor versus coal and oil, due to inherently lower CO2 emissions.
Page 44
($ per MMBtu)
1/2/2010
1/2/2011
Page 46
Source: Bloomberg LP
Source: Bloomberg LP
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.
Page 47
Source: StatoilHydro.
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
Source: www.smi-online-co.uk
Page 49
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
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
~$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
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
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
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
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
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
Source: www.research.uky.edu.
Page 58
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
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
Marcellus Shale
High 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
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
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
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
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.
Page 68
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
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
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.
Page 72
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.
Page 74
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
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
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
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
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
Page 81
Integrated Oils
Independent E&Ps
Pipeline Focused
Page 82
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.
Good Acquire acreage Conduct seismic survey Interpret data Identify prospects Drill exploration wells Evaluate results
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
No market identified
Begin production
Page 85
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)
Page 87
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
Page 88
Source: BP Energy
(geological surveys and seismic). Successful exploration wells are capitalized as part of
the projects overall cost.
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
Page 90
Source: Schlumberger
Source: Encarta
Page 91
Source: Halliburton
Source: Schlumberger
Page 93
Additional fractures allow for better flow of oil and gas trapped within a formation
Page 94
Page 95
Page 96
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.
Page 98
PDP
Proved
Page 100
Page 101
Page 102
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
and oil and the end-use markets Midstream activities include transporting, processing, fractionating, and storing
Source: Enterprise Products Partners
Page 105
Page 106
Natural Gas
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
The resulting dry gas, free of impurities or other non-methane compounds, is deemed pipeline quality.
Page 108
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
$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
$0.88
($ / Gal)
($ / Gal)
$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
Page 109
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
Page 112
~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
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
Production Services 6%
Completion 15% Total Revenue: $259B Contract Drilling 22% Total Drilling 47%
Page 117
Seismic Output
Page 118
Page 119
Page 120
Drillship
Jackup
Page 121
US GOM 17%
US GOM 12%
Middle East/India 4%
Page 122
Page 123
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
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:
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
Completion System
Packers and plugs to isolate zones Screens to keep sands away from production Isolation valves to manage flows from multiple
completion zones
Page 126
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
Cementing unit
Page 127
Treating Iron
Frac Pump
Engine Transmission
Cooling System
Page 128
Manifold
Source: FMC Technologies, Oceaneering International, Umbilical Manufacturers Federation
Subsea Tree
Page 129
Page 130
ESP
PCP
Source: Spears & Associates, Weatherford, Independent Oil & Gas Service, Schlumberger
Page 131
Page 132
Page 133
Supply Boat
Page 134
ROV
Page 135
Page 137
37%
16%
40%
46%
20% 0%
WFT Offshore
BHI
Page 138
OFS: Equipment/Infrastructure
National Oilwell Varco (NOV)
Distribution Serv ices 12%
Cameron (CAM)
Rig Equipment 17% Subsea 26%
Surface 17%
Subsea 65%
Oceaneering (OII)
Adv anced Technology 12% Inspection & NDT 12% Remotely Operated Vehicles (ROVs) 34%
Dril-Quip (DRQ)
Serv ices 14%
Page 139
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%
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%
14%
NOV 19%
HAL 27%
BHI 32%
7% Borets 8%
SLB 16%
BHI 28%
Page 140
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%
MDR 9%
GE 7%
WG.LN 10%
FTI 18%
Aker 14%
Compression
Others 27% EXH 45% Valerus 5% Compr. Systems 6% CDM Resource 9%
CAM 17%
J-W 8%
FTI 59%
Page 141
Mud Pumps
Others 7%
CAM 43%
NOV 53%
NOV 53%
LEWCO 20%
Cementing Skids
BHI 23% Other 2%
Hydralift 7%
Top Drives
Others 14%
HAL 41%
Canyon 6%
SLB 34%
NOV 60%
Page 142
Supply Vessels
TDW 16% Bourbon 14%
SLB 4%
Saipem WFT 5% 4%
PTEN 6%
ESI 6%
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%
Page 143
31
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
10 SDRL.OL
Ultra Deepwater
4 ATW
2 7 14 3 1
70
40
16
Semisubmersible
36 30
22 2 14 7 11 DO 2 1 ATW 2 NADL
10
Page 144
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
219
40
ATW
Other Avg.
RDC
NE
ESV
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
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.
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
Page 149
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
Page 151
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
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
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
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
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
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
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
Refinery Operations
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
Page 164
Source: MPC
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.
(KBD)
Page 165
$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
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
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%
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
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
Page 168
PADD I
PADD II
Private independent 0.7 MMBD 20% Public independent 0.8 MMBD 21%
PADD III
Private independent 1.9 MMBD 22%
PADD IV
PADD V
Private independent 0.4 MMBD 14%
Source: OGJ.
Page 169
Page 170
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
(cents/gal)
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
Page 173
Dec-11
Jan-11
Jan-11
Jun-11
Apr-11
Oct-11
Jul-11
20
Page 174
Page 175
Super Majors
Other
NOCs
Emerging Majors
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.
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
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$/bbl 100 120 140 y = 0.2253x + 1.4425 R2 = 0.9457 XOM Correlation
Sensitivity
60
WTI, US$/bbl
80
100
120
140
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
Page 180
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
Segmental capex
23.3%
Upstream Downstream Chemicals
Downstream
23.0%
Chemicals
20%
15.7%
90 80
15%
70
13.2%
Capex ($bn)
60 50 40 30 20 10
10%
7.4% 4.9% 3.7% 5.0%
9.4%
5%
0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 10-yr avg 5-yr avg 3-yr avg
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
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
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.
Page 183
Characteristics
Low Beta
1.5 1.4 MRO PCA HES 1.2 COP 1.1 ENI
80%
140%
1.3
120%
SU
100%
1 BP
CVX
RDS TOT
STO
60%
0.6
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
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% XOM CVX
TOT
EOG
RDS
ENI
HES
COP
XOM
OXY
XOM, RDS and COP should deliver best in class growth+dividend yield
MRO
CVX
BP
HES
COP
RDS
MRO
TOT
ENI
BP
Page 186
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
$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
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
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 $60/bbl
Page 189
140
INVESTING IN E&P
Reserve per Share Growth: Basic measure of a producers ability to add reserves. Industry
average growth over the past five years has been about 8-10% annually.
Reserve Life: Indication of inventory depth by comparing how many years of reserves a
producer has at current production. Median industry reserve lives are currently ~12.0 years.
Recycle Ratio: Compares cash flow ($ 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
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
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.
Page 193
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
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
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.
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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
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.
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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%.
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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 Jackup Dayrates
WW Jackup Utilization
Source: ODS-Petrodata
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WW Jackup Utilization
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
Source: ODS-Petrodata
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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
Minimum = 41%
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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
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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.
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INVESTING IN REFINING
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.
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Gasoline Distillate Product price WTI crude Gulf Coast 3:2:1 refining margin
x 2/3 x 1/3 x1
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.
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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.
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$35
Gasoline
Distillate
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.
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Source: www.ogj.com
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$0.90 Gasoline-Resid Spread (US$/gal) $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 -$0.10 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10
Gasoline-Resid
WTI-Maya
Complex refineries can run different types of crude, quickly change product slates and produce more higher value products, so why not make every refinery complex? The upfront capital costs to add complexity are high and maintenance can be expansive. For some locations, more simple refineries may make sense. Above, we show historic crude and product differentials. A greater differential in the light-heavy spread favors complex refineries who run heavier crude but produce a similar light product yield to a simpler refinery processing light crude. Higher differentials between gasoline and residual fuel oil favor complex refiners, many of whom do not produce any fuel oil as a final product.
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Singapore simple US$/bbl Refined products Gasoline Naphtha Jet/Kerosene Gas oil Fuel oil
= = = = =
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
= = = = =
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.
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.
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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
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
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
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
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.
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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.
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2000
1500
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
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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
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INVESTING IN MLPS
What is an MLP?
Typical MLP Structure
Real Assets
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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
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Page 222
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
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+ Distribution growth
2011E growth of 4.9%
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/
164% 153%
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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
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
Price / Distributable cash flow (DCF) multiple Adjusted Enterprise Value / EBITDA multiple
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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
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.
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
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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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Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditincluding an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other suisse.com/researchdisclosures or call +1 (877) 291-2683. circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analysts coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analysts coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisses distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 49% (61% banking clients) Neutral/Hold* 40% (56% banking clients) Underperform/Sell* 9% (52% banking clients) Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An in vestor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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