through the fog110. 2010. 2015. 2020. 2025. 2030. 2035. 90. 95. 100. 105. oil demand. today

Through the FogAAPG – January 2019

Three Rivers Through the Fog

Big Companies Leaving the

Permian

& 2009 Oil Price Collapse

$36/Share

Cline is New Play(Wolfcamp Shale Only Works in

Southern Midland Basin)

Three Rivers Through the Fog

PERMIAN

BAKKEN

EAGLEFORD

Big Companies No Longer Leaving the

Permian

Three Rivers Through the Fog

2014 OPEC Price War with US

Oil Px$26.14

Feb2016

Oil Floods Market

Today’s Fog

“Peak Oil Demand”

Today’s Fog

110

202020152010 2025 2030 203590

95

100

105

OIL DEMAND

TODAY

Today’s Fog

110

202020152010 2025 2030 203590

95

100

105

OIL DEMAND

Today’s Fog

110

202020152010 2025 2030 203590

95

100

105

OIL DEMAND

Today’s Fog

110

202020152010 2025 2030 203590

95

100

105

OIL DEMAND

Today’s Fog

110

202020152010 2025 2030 203590

95

100

105

CLIMATE CHANGE POLICIES

OIL DEMAND

History Lesson: “Peak Oil”

1956M. King Hubbert, a geologist for Shell Oil, says that

U.S. oil production will likely peak between 1965 and 1970 and decline steadily thereafter.

Others Have Made the Same Prediction Since.

1972 ∙ Esso 1976 ∙ UK Dept. of Energy 1979 ∙ Shell 1981 ∙ World Bank 1997 ∙ JD Edwards 2000 ∙ EIA 2003 ∙ Shell

Hubbert’s Original Curve

4,000

4,500

3,500

1900

500

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910

1,000

3,000

1,500

2,000

2,500

Original Prediction

1956

HISTORICAL PRODUCTION

Hubbert’s Original Curve

4,000

4,500

3,500

1900

500

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910

1,000

3,000

1,500

2,000

2,500

Original Prediction

1956

“Peak Oil”

EXPECTED DISCOVERIES

HISTORICAL PRODUCTION

Hubbert’s Original Curve

4,000

4,500

3,500

1900

500

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910

1,000

3,000

1,500

2,000

2,500

Original Prediction

1956

“Peak Oil”

EXPECTED DISCOVERIES

DECLINEHISTORICAL PRODUCTION

What Really Happened

1900

500

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910

1,000

1,500

2,000

4,000

4,500

3,500

3,000

2,500

“Peak Oil”Original

Prediction 1956

EXPECTED DISCOVERIES

DECLINEHISTORICAL PRODUCTION

What Really Happened

1900

500

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910

1,000

1,500

2,000

4,000

4,500

3,500

3,000

2,500

“Peak Oil”SHALE

Original Prediction

1956

EXPECTED DISCOVERIES

DECLINEHISTORICAL PRODUCTION

(1) This quote was originally attributed to Karl Kristian Steincke

Yogi Berra

“It’s tough to make predictions –especially about the future.”(1)

Baseball Philosopher

7.6Billion

On Earth in 2017

But Wait

7.6Billion

On Earth in 2017 BillionBy 2030

But Wait

7.6Billion

On Earth in 2017 BillionBy 2030

But Wait

But Wait

But WaitLet’s talk about a USA slide for perspective

88 percent of the next billion entrants into the middle class will be in Asia

88 percent of the next billion entrants into the middle class will be in Asia

88 percent of the next billion entrants into the middle class will be in Asia

88 percent of the next billion entrants into the middle class will be in Asia

They need energy any way they can get it – cheaply and easily

We Are Not Going Out of Business.

International Energy Administration

mb/

d110

100

90

80

70

602010 2015 2020 2025

CURRENTLY PRODUCING FIELDS

NON-SHALEGROWTH

SHALE

They Need Us

Only One Place to Get ItOnly One Place to Get It

Demand

Oil Outlook to 2025 without a Pick-Up in Conventional Oil Investment

Why Does Wall Street Hate Energy?

Why Does Wall Street Hate Energy?Not Care About

S&P 500 Energy

Of S&P500 Index5.3%

APACHE

ANADARKO

BAKER HUGHES

CABOT

CONOCOPHILLIPS

CHEVRON

CONCHO

DEVON

EOG

EQT

TECHNIPFMC

HALLIBURTON

HESS

HOLLYFRONTIER

HELMERICH & PAYNE

KINDER MORGAN

MARATHON PETROLEUM

MARATHON OIL

NOBLE

NEWFIELD

NATIONAL OILWELL VARCO

ONEOK

OCCIDENTAL

PHILLIPS 66

PIONEER

SCHLUMBERGER

VALERO

THE WILLIAMS COMPANIES

CIMAREX

EXXON MOBIL

S&P 500 Energy

Of S&P500 Index5.3% Upstream

Growth1.7% APACHE

ANADARKOBAKER HUGHES

CABOTCONOCOPHILLIPS

CHEVRON

CONCHODEVON

EOGEQT

TECHNIPFMC

HALLIBURTON

HESS

HOLLYFRONTIER

HELMERICH & PAYNE

KINDER MORGAN

MARATHON PETROLEUMMARATHON OIL

NOBLENEWFIELD

NATIONAL OILWELL VARCO

ONEOK

OCCIDENTALPHILLIPS 66

PIONEERSCHLUMBERGER

VALERO

THE WILLIAMS COMPANIES

CIMAREXEXXON MOBIL

S&P 500 Energy

Of S&P500 Index5.3% Upstream

Growth1.7% APACHE

ANADARKOBAKER HUGHES

CABOTCONOCOPHILLIPS

CHEVRON

CONCHODEVON

EOGEQT

TECHNIPFMC

HALLIBURTON

HESS

HOLLYFRONTIER

HELMERICH & PAYNE

KINDER MORGAN

MARATHON PETROLEUMMARATHON OIL

NOBLENEWFIELD

NATIONAL OILWELL VARCO

ONEOK

OCCIDENTALPHILLIPS 66

PIONEERSCHLUMBERGER

VALERO

THE WILLIAMS COMPANIES

CIMAREXEXXON MOBIL

We Are Immaterial.

We Have Lost MoneyS&P Energy Outcome

2012 16.0% 4.6% Worse

2013 32.4% 25.1% Worse

2014 13.7% <7.8%> Worse

2015 1.4% <21.1%> Worse

2016 12.0% 27.4% Better

2017 21.8% <1.0%> Worse

2018 <4.4%> <18.1%> Worse

6 Out of 7 Years

If You Are Wall Street

BIG20% of S&P 500

STRONGBeat Energy by 10xfor the Past 7 Years

SEXY

TECHNOLOGY

ENERGY

Small

Weak

Boring

If You Are Wall Street

Energy Investors Want

Growth Within Cash Flows

Return of Capital – Dividends or Share Buybacks

Consolidation to Achieve Economies of Scale

What Does This Mean ToYOU ?

It Depends Who You Are

CHARGER LUXEBRIGHAM

Public Companies

Public Companies

HAVES –

Drill Tier 1 Acreage Rationalize Tier 2 Acreage Selective Consolidation

Public Companies

BUBBLES –

Drill Tier 1 Acreage Bolt On Additional Tier 1

Acreage Consolidation

Public Companies

HAVE-NOTS –

No Premium Mergers

Public Companies

Tier 1 = 50% Well IRRs at $60 Oil Excluding Land Cost

What is Tier 1 Acreage?

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Expe

cted

Net

Cas

h Fl

ows

Tier 1 Acreage

3700 Wells Last Year

Last 12 Months of Permian Wells(Approximately 3700 Wells)

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Expe

cted

Net

Cas

h Fl

ows

Tier 1 Acreage

3700 Wells Last YearAssumptions:

Last 12 Months of Permian Wells(Approximately 3700 Wells)

Midland BasinD&C Costs:

$900/Lateral Ft

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Expe

cted

Net

Cas

h Fl

ows

Tier 1 Acreage

3700 Wells Last YearAssumptions:

Last 12 Months of Permian Wells(Approximately 3700 Wells)

Midland BasinD&C Costs:

$900/Lateral Ft

Delaware BasinD&C Cost:

$1,250/Lateral Ft.

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Expe

cted

Net

Cas

h Fl

ows

Tier 1 Acreage

3700 Wells Last YearAssumptions:

Last 12 Months of Permian Wells(Approximately 3700 Wells)

Delaware BasinD&C Cost:

$1,250/Lateral Ft.

Lifting Costs:$10/Barrel

Midland BasinD&C Costs:

$900/Lateral Ft

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Tier 1 AcreageLast 12 Months of Permian Wells

(Approximately 3700 Wells)

Tier 150%+IRR

Expe

cted

Net

Cas

h Fl

ows

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Tier 1 AcreageLast 12 Months of Permian Wells

(Approximately 3700 Wells)

Tier 150%+IRR

Tier 230%–49% IRR

Expe

cted

Net

Cas

h Fl

ows

10% 50% 60% 100%70% 80% 90%20% 30% 40%

Percentage of Wells

Tier 1 AcreageLast 12 Months of Permian Wells

(Approximately 3700 Wells)

Tier 150%+IRR

Tier 230%–49% IRR

Tier 310%–29% IRR

Uneconomic<0%–9% IRR

Expe

cted

Net

Cas

h Fl

ows

If You Are Private Equity Backed

PECOMPANIES

PE Assets That Can Be Sold As Tier 1 Assets

TIER 1You’re going to be fine – keep

up the good work.

If You Are Private Equity Backed

PECOMPANIES

PE Assets That Can Be Sold As Tier 1 Assets

TIER 1You’re going to be fine – keep

up the good work.

TIER 2Implement a newbusiness model

$0

$100

$200

$300

$400

$500

$600

$700

0 1 2 3 4 5 6 7 8

Years

Equi

ty D

eplo

yed

($M

iilon

)

Prospecting

InitialPurchase

1 4 6

Tier 2 Assets – New Model

Old ModelBuy, Build, Flip

$0

$100

$200

$300

$400

$500

$600

$700

0 1 2 3 4 5 6 7 8

Equi

ty D

eplo

yed

($M

iilon

)

Prospecting

Proof of Concept

InitialPurchase

Years

1 4 6

Tier 2 Assets – New Model

Old ModelBuy, Build, Flip

Traditional PE Sales Point

$0

$100

$200

$300

$400

$500

$600

$700

0 1 2 3 4 5 6 7 8

Equi

ty D

eplo

yed

($M

iilon

)

YearsProspecting

New PE Sales PointCash Flow Neutral

Proof of Concept

InitialPurchase

1 4 6

Full Development

Initial Development18 – 24 Months

Tier 2 Assets – New Model

Traditional PE Sales Point

Old ModelBuy, Build, Flip

New ModelBuy, Drill to Cashflow

Neutral, Flip

Newco

Tier 2 Conclusion

Expect Longer Hold Periods

Expect Lower ROIs

Bigger Teams – Must Be Ableto Drill Wells Efficiently

Smash Co. May BecomeMore Common

Newco

Tier 2 Conclusion

Expect Longer Hold Periods

Expect Lower ROIs

Bigger Teams – Must Be Ableto Drill Wells Efficiently

Smash Co. May BecomeMore Common

Newco

Tier 2 Conclusion

Expect Longer Hold Periods

Expect Lower ROIs

Bigger Teams – Must Be Ableto Drill Wells Efficiently

Smash Co. May BecomeMore Common

Newco

Tier 2 Conclusion

Expect Longer Hold Periods

Expect Lower ROIs

Bigger Teams – Must Be Ableto Drill Wells Efficiently

Smash Co. May BecomeMore Common

PDP / YIELD INVESTORS

HAYNESVILLE

BUYS

ONTARIO TEACHERS

UTICA

BUYS

CANADIAN PENSION PLAN

PDP / YIELD INVESTORS

HAYNESVILLE

BUYS

ONTARIO TEACHERS

FAYETTEVILLE

BUYS

INCOME FUND

UTICA

BUYS

CANADIAN PENSION PLAN

EAGLE FORD

BUYS

INCOME FUND

PDP / YIELD INVESTORS

FAYETTEVILLE

BUYS

INCOME FUND

BAKKEN

BUYS

SPAC

HAYNESVILLE

BUYS

ONTARIO TEACHERS

UTICA

BUYS

CANADIAN PENSION PLAN

BUYS

SPAC

EAGLE FORD

BUYS

INCOME FUND

PDP / YIELD INVESTORS

FAYETTEVILLE

BUYS

INCOME FUND

BAKKEN

BUYS

SPAC

HAYNESVILLE

BUYS

ONTARIO TEACHERS

UTICA

BUYS

CANADIAN PENSION PLAN

SAN JUAN

BUYS

PRIVATE

EAGLE FORD

BUYS

BUYS

SPAC

INCOME FUND

Conclusion

Best Deals Come Out of the Fog

Change is Inevitable

Is the Party Over?

Conclusion

Best Deals Come Out of the Fog

Change is Inevitable

Is the Party Over?

Conclusion

Best Deals Come Out of the Fog

Change is Inevitable

Is the Party Over?

Conclusion

Best Deals Come Out of the Fog

Change is Inevitable

Is the Party Over?

ABSOLUTELY NOT

Conclusion

One More Thing

Trouble brewing

Private Equity

Wall Street Investor

HEDGE FUNDENDOWMENT

Private Equity Investor

Private Equity

Must Beat the S&P 500

Wall Street Investor

HEDGE FUNDENDOWMENT

Private Equity Investor Must beat the S&P 500

Private Equity

Must Beat the S&P 500

Only Cares about Making Money

Wall Street Investor

HEDGE FUNDENDOWMENT

Private Equity Investor Must beat the S&P 500

Wants to be a Social Investor –Hydrocarbons are out of Favor

Private Equity

Must Beat the S&P 500

Only Cares about Making Money

Can Have Short-Term Thesis

Wall Street Investor

HEDGE FUNDENDOWMENT

Private Equity Investor Must beat the S&P 500

Wants to be a Social Investor –Hydrocarbons are out of Favor

Has Longer Hold Periods