drilling sept 09 final2

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7/25/2011 2009 Energy-Redefined. All Rights Reserved.. 1

Gary Howorth

Founder

2009 Trends in the Offshore Drilling Rig Market IBC Global Conferences

29th September

How to Profit and Survive in

Drilling


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Introduction Points to be Covered

Overview of the current drilling marketFuture views- What might the dynamics look like in the next 5 years?- What about carbon how will that affect the oil & gas industryand drilling in particular?

- What will oil & gas prices do to the market?- What might technology and cost saving do to the business?Lessons from downturns from both within and outside of theindustry- What can we learn from downturns and apply now?

What potential business models does this suggest?- Should you merge, innovate, cost reduce or something else?So what does it mean? - the way forward for the drilling industry


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The Order of Play

So how do your customers the oil companies view this?What about GDP and other prices e.g. Steel pricesSo what does that mean for oil prices & the Offshore DrillingIndustryCarbon & Carbon Capture & Storage (CCS)

TechnologySo what have others done in a downturn/recession can welearn anythingOptions and Alternatives

The Way Forward?Conclusions


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Industry Quotes

Our analysis shows that given the recent cost climate present day commodity price levels simply do not allow the Majors to continue to grow the business and pay substantial shareholder returns, - Neil McMahon of SanfordC. BernsteinWhile the drilling rig count, are down sharply from last year

and continue to fall, the key question remains when we willget an upturn in Gas/Oil demand from recoveringautomobile and housing industries.. Once prices recover,then drilling should resume,The challenge for the oil service industry is to gauge the numberof drilling rigs that will be needed once we enter the industryrecovery phase. May need considerably fewer rigs to restore a relative balancebetween supply and demand that is needed to supportreasonable pricing.

Is this right?


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Oil Company Financials

Sources & Uses of Cash

0

10,000

20,000

30,000

40,000

50,000

60,000

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

2 0 1 7

2 0 1 8

2 0 1 9

2 0 2 0

2 0 2 1

2 0 2 2

$ m i l l i o n s

Acquisitions Development Capex Financing - Outflow DividendsBuybacks & other Operating Cash Flow Disposal Proceeds Financing - Inflow

$70/bbl andlarge budget cuts


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Oil Company Free Cash-flow: The Customers Pain

Free Cashflow

-5000

0

5000

10000

15000

20000

2 0 0 8

2 0 1 0

2 0 1 2

2 0 1 4

2 0 1 6

2 0 1 8

2 0 2 0

2 0 2 2

2 0 2 4

2 0 2 6

$70/bbl80$/bbl

Minimum Level of Cashflow?

Many Oil companies in Pain at 70-80$/bbl Will affect drilling

$12 Billion Dev CPX budget, $2 BillionExpro


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Complex Interactions forming Prices and impactingDrilling

7/25/2011 2009 Energy-Redefined. All Rights

Reserved. 7

GDPGrowth

Ex RatesSupply

Oil CompanyCashflows

Oil Demand

CompanyBehavior

Taxes

Wells Drilled

Oil Price

LaborSteel

concreteetc

Costs

Consumer Confidence etc

Govt Taxchangesresulting

indifferentregional

focus

FutureProductionfrom Expro


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So What About the USA

Greater exports and asmaller current accountdeficit less dependence onforeign investors to bail outthe financial sector - Larry

Summers

China Can no

longer behave likeChina because the

US intends tobehave like china -

FT

Probably means impact on Japans , Germanys and Chinas exports (and current surpluses ),

& Dollar Depreciation

Has an impact on the dollar oil price


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GDP Growth?

R

Consensus View

But where is it really going?

China

Historical

Source FT fromvarious forecasts ascredited


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Saving Grace -Steel Prices?

GDP growth has a great impact on steel prices as well as other

input costs


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How does China and US Assumptions Affect Oil Prices

The order in which oil prices occur mattersCost levels and GDP assumptions are important


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0

10

20

30

40

50

60

70

80

90

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

$ / b b l R e a

l

Oil Price and Well Forecast under a Slower GrowthAssumption

Utilization

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012 2013 2014

N o o

f W e l

l s

AsiaMiddle EastCaspianSS AfricaN AfricaEuropeLat amNA


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Complex Interactions forming prices and impactingDrilling Now with Carbon

7/25/2011 2009 Energy-Redefined. All RightsReserved. 13

GDPGrowth

Ex Rates Supply

Oil CompanyCashflows

Oil Demand

CompanyBehavior

Taxes

Oil Price

LaborSteel

concreteetc

Costs

Consumer Confidence etc

Emissions

Carbonlegislation /rules

regulations

Subsidies/Tax

Investments/ Technology

Steel Industry etc

Carbon marketStructure

CompanyBehavior

Politicians

Carbon prices

Weather


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Carbon - $15/CO2e te

Small impact our models show an increase in oil price of 80cents/bblTypical oil company might gain $100 -400 million per year - notgoing to change drilling levels muchCarbon prices likely to reduce GDP by ~ 0.15% - resulting in a

oil price reduction of up to 7 $/bbl ie ~ 10%

Higher oil prices of 100$/bbl could result in a reduction indemand through the use of alternative technologies andefficiency gains. This could further reduce oil prices by as muchas $20/bbl

Estimates by Energy-Redefined


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Carbon Storage

Recent Study shows that Scotland has an extremely large CO2storage resource. This is overwhelmingly in offshore salineaquifers (deeply buried porous sandstones filled with salt water)together with a few specific depleted hydrocarbon fields.The resource can easily accommodate the industrial CO2emissions from Scotland (1/10 of the UK) for the next 200years.There is very likely to be sufficient storage to allow import ofCO2 from NE England,Total potential CO2 capacity in the range 4,600 to 46,000 million

tonnes

But what does that mean for Drilling?


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CCS Well Potential - UK

Estimate by Energy-Redefined - Assuming 4600 million tonnes ofcapacity


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US CCS Potential

US market is 60-80 times biggerBut mostly onshoreBut even with 20% offshore - 500 wells per year potential avery different market !!!US has more storage than it needs from its own industrial

outputNot all Economic right now!!!!!

So this market could be 20% of the world offshore drilling marketand maybe provide bigger margins?


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Impact of Technology over Business As Usual

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%

40.0%45.0%

2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0

% Reduction

Conventional TechnologiesP10

Conventional TechnologiesP50Other Technologies

Impact of Technologies

Estimates by Energy Redefined


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Downturns are times when Smart People makeFortunes

1999:British Petroleum's completed acquisition of Amoco Corp. for $56.5 billion, generated some $18

billion in value over the longer term as oil prices have moved upService Companies: $26 billion of mergers and acquisitions in 1998/99 - representing some ~25% ofthe sector net worth. Cost savings probably generated some $3 billion of value.In 1999 the Drilling Companies Sedco and Transocean merged creating a $3.2 billion entitity. Drivenby cost Savings but created ~$5 billion of value because of higher rig prices

Frontline John Fredriksen made his fortune during the Iran Iraq wars in the 1980s when his tankerspicked up oil at great risk and huge profits. He landed squarely in the sweet spot of the tanker cycle,with the largest fleet of ships. Was counter cyclical creating $1 billion

Bill Hewlett and Dave Packard founded a great company in 1939 from their Garage with innovativeproducts Created ~$60 billion

Chester Carlson patented Dry copying process to create Xerox in the 1930s - ~$4 billion

Revlon quality product with customer focused marketing created ~$150 millionTexas Instruments: Karcher and Mcdermott resigned from Amerada petroleum company in 1930 toset up Geophysical Service Inc. (later TI). Created $28 billion of value starting with a new seismictechnique

Recessions also create great companies

Mergers &risk taking


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Growth Opportunities Increase during EconomicDownturns

It is counter-intuitive but research confirms that economic downturns aregenerally the best times to implement growth initiatives create shareholder value . that the most effective business strategy during boom times is to divest assets or implement similar retrenchment activities.

The Great Depression created more millionaires that any other period of time in UShistory!

Unfortunately, and perhaps not surprising, most companies do the exactopposite!

But How?

Key themes emerge: Efficiencies Deals buy low sell high Innovation Customer (government) focus

Risk taking and opportunity seeking counter cyclical War Chests


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So What does it Mean?

Rigs under-utilized for many years in slow growthscenariosHow do we find alternative uses for them CCS?

Solutions

Understand your customers business. You must understand your business almost as well as they do The more you help them, the more you help yourself

Be creative and Innovative There are plenty of opportunities for us to challenge the way we drill

wells Look for profitable alternatives.

7/25/2011 2009 Energy-Redefined. All RightsReserved. 21


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Opportunities / Alternatives/ Trends

CO2 StorageProduction optimization integration of drillingRig optimization - logisticsConvert the rigs to provide some other function GTL

Transportation Accommodation Production systems

Cost cutting

Seismic while drilling.

Some suggestions


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Short Term Survival Options

Options Internal Acquisition Alliance

Withdrawal

Consolidation

Increased focus on

key sector

Liquidation

Decline or grow withmarket

Divest Managementbuyout

Buyout & shutdown

Subcontractoutsource

JV/Partnering

xxxxx

Technology/Innovation

Buy Expert Co

Cost cutting

New Sector, NewTechnology, R & D

Increase qualityproductivity

Costs/Layoffs/Stacking

Buy key technologiesor licence

? Partnering?

xxxx


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Short Term Survival Options

Trends Internal Acquisition Alliance

Customer focus

Innovation

Prod opti

Liquidation

Decline or grow withmarket

Divest Managementbuyout

Buyout & shutdown

Subcontractoutsource

xxxx

CO2

Buy Expert Co

Alterantive Uses

New Sector, NewTechnology, R & D

Increase qualityproductivity

Costs/Layoffs/Stacking

Buy key technologiesor license

Partnering?

xxxx

JV Partnering

?


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So whats the way Forward

Key - look for alternatives that intersect trendsDoesnt lie in the conventional approaches of acquiring or costcuttingNew Sector approaches have probably have most promise butneed funding

Failing this Profit management not cost cutting Build a war chest for the next downturn


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Conclusions

Oil companies in Cash-flow pain 80$/bbl + needed

Oil prices greatly affected by assumptions on US and Chinesehealth

Oil prices could remain low for many years under a slow growthscenario

Carbon will not affect oil prices that much per say but will affectdemand. At high oil prices this effect could be large.

Utilization of rigs could remain low !!!

Alternative options and uses required to improve profitability

CCS Drilling could add some 15-20%to the drilling stock Key seems to be to have a war chest for future downturns and to

build alternative business lines

drilling sept 09 final2

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