Finance & Investment Club

Fall 2012Senior Analyst: Jeremy LimJunior Analysts: SeYoung Kim, Ricardo Garcia, Jacob Rettig, Kotaro Miyagawa, Kevin Foo, Mel Chandiramani, Xunchao Chen, Joanna Orlova

Oil Drilling in US

 

2

Industry Definition - Oil Drilling in the US

Breitburn Energy Partners L.P.(NASDAQ: BBEP)

Bill Barrett Corp.(NYSE: BBG)

W&T Offshore Inc.(NYSE: WTI)

Approach Resources Inc.(NASDAQ: AREX)

Vanguard Natural Resources, LLC(NYSE: VNR)

Northern Oil and Gas, Inc.(AMEX: NOG)

Firms in this industry operate and develop oil field properties in United States. They may also operate oil wells on their own account.

Activities include exploration and production of crude petroleum; the mining and extraction of oil from oil shale and oil sands, sulfur recovery from natural gas; and recovery of hydrocarbon liquids.

Quicksilver Resources Inc.(NYSE: KWK)

Sources: IBISWorld, Yahoo Finance

 

3

Industry Overview

41.6%

58.4%

Natural Gas Crude Oil

Product and Segmentation (2012)

Sources: IBISWorld

Industry Revenue ($MM)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Revenue ($MM) Growth %

ForecastedOverall Outlook Positive

Revenue $345.9 B

Profit $159.1 B

Annual Growth 3.1%

Expected Growth 3.5%

Exports $6.2 B

Key Economic Drivers

World Price of OilGDP growth of ChinaYield on 10-year Treasury Notes

Key TrendsIncrease in World Supply & Demand for OilGrowth in China’s EconomyRising Crude Oil PricesShift Toward Domestic Production

RisksPrice VolatilityHigh Economy DependenceClose Scrutiny of Permit Application

 

4

13.3%

14.1%

9.7%9.0%

17.5%

9.9%5.6%

Oil Drilling Industry Breakdown – Market Cap. ($BLN)

Oil Drilling$4266.6B(2.27%)

Major Integrated Oil & Gas $96,462.1B(51.29%)

Basic Materials $188,060.4B

(100%)

Breakdown By Market Cap1

1Total Market Cap. = $7,369,090,000; Sources: Yahoo Finance

AREX $843.13 MVNR $1.63 BNOG $922.51 MKWK $519.05 M

WTI $1.24 BBBEP $1.31 BBBG $904.4M

 

5

Oil Drilling Industry Breakdown – TTM Revenue ($BLN)

Sources: Companies 10-K report

Oil, Natural Gas & NGLs Total Natural Gas Equivalent (bcfe) Others

 

6

Oil Drilling Industry Breakdown - Geography

Sources: Companies 10-K report

 

7

General Business Model

Sources: Datamonitor

Recovery

Selling & Distribution

Transportation

Production Sector

Gathering system

Searching & Exploration

Consumers

MarketingRefinery

Upstream

Midstream

Downstream

 

8

Industry Revenue Generation

Sources: Datamonitor, IBISWorld

Gathering System

Pump & Compressor

Manufacturing

Oil & Gas Field Services

Metal Pipe & Tube

ManufacturingOil DrillingExploration

Supply Side

Seismic Survey

Tertiary Recovery

Secondary Recovery

Primary Recovery Recovery

 

9

Trend 1a – Increasing World Supply and Demand for Oil World supply and demand are increasing

together at CAGR of 0.9% and 1.4% respectively

World oil consumption grew by an estimated 1 million bbl/d2 in 2011

World consumption growth of about 700,000 bbl/d in 2012 and 900,000 bbl/d in 2013

Countries outside the OECD driving global consumption growth

China’s annual consumption growth projected to increase from 330,000 bbl/d in 2012 to 430,000 bbl/d in 2013

2 bbl/d = Barrels per day; Sources: US EIA

2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q178

80

82

84

86

88

90

92

World SupplyWorld Demandm

illio

n ba

rrel

s pe

r day

CAGR: 0.9%

CAGR: 1.4%

Forecasted

2008 2009 2010 2011 2012 2013

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

95

100

105

110

115

120

Others United States China

y-o-

y ch

ange

, mil

barr

els

per

day

World GDP (right axis) Forecasted

Oil consumption Vs. World GDP

World Supply and Demand of Oil

 

10

Trend 1b – Growth in China’s Emerging Economy Rapid industrialization in China bolstered

demand for oil and gas

China increases energy demand as they sustain economic growth

Growing at a CAGR of 6.5% as a proportion of the world’s consumption and is currently responsible for 20.2% of global consumption

Natural Gas production more than tripled over the last decade

Increase consumption and increase in production drives prices up

Growing portion of OPEC’s output is going to China

Sources: US EIA, World Bank, IEA

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

500000

1000000

1500000

2000000

2500000

Energy Production (kt of oil equivalent)

CAGR: 8.6%

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%

5%

10%

15%

20%

25%

China's oil consumption/World consumption

CAGR: 6.5%

 

11

Trend 2 – Rising Crude Oil Prices

Drop of 42% in 2009 was due to the recession and the plummeted demand Rising prices have positive effect on industry revenue and profit Expected to grow over 2013 and beyond and remain at historic high

Sources: Platts

Spot Crude Prices vs. Growth rate

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

Spot Crude Prices Growth Rate %

USD

per

bar

rel

 

12

Trend 3 – Shift Toward Domestic Production Oil imports will drop from 10 million to 4 million barrels

a day – significant efforts to improve energy efficiency in the transport sector

Faster-than-expected development of hydrocarbon resources locked in shale and other tight rock formations have started to be unlocked by new combination of 2 technologies – hydraulic fracturing and horizontal drilling

US need for oil imports from Middle East will fall to almost 0 in the next decade

US energy independence could redefine military alliances, with Asian countries replacing US in securing shipping lanes from Persian Gulf

Kevin Book, managing director at Clearview Energy Partners LLC “Now, we have a different reality – the age of energy adequacy.”

Sources: IEA, WSJ

Oil production will peak at 11.1 million barrels a day in 2020, from 8.1 million in 2011

 

13

RisksRisk 1: Volatile in crude oil prices Roller-coaster industry revenue and profit Overall growth in industry revenue disguises high revenue volatility Ripple effects from tensions throughout Middle East, an influential variable of volatility, remain

threats – government transitions in Tunisia and Egypt

Risk 2: High economy dependency Movements in GDP affects revenue and prices of crude oil directly Follows a lagging indicator with a correlation coefficient close to 1 Eg. 2008 Financial Crisis

Risk 3: Close government scrutiny of permit application Hampers companies from exploration and production activities Environmental and safety issues – oil spills into the ocean and casualties from blow-out and

explosion Eg. Explosion of BP’s Deepwater Horizon oil platform in the Gulf of Mexico on April 20, 2010

Sources: WSJ, IEA, IBISWorld

 

14

Recommendation

Oil Drilling Industry

Increasing World Supply and

Demand for Oil

Rising Crude Oil Prices

Shift Toward Domestic

Production

TREND 2TREND 1a TREND 3

Key Industry Drivers/Trends

INDUSTRY RATING:

POSITIVE

Growth in China’s Emerging Economy

TREND 1b

 

15

Q & A

Industry Definition Industry Overview Market Cap. Breakdown Companies Revenue Breakdown Geographical Breakdown General Business Model Industry Revenue Generation

Trend 1a – Increasing World Supply and Demand for Oil

Trend 1b – Growth in China’s Emerging Economy

Trend 2 – Rising Crude Oil Prices Trend 3 – Shift Toward Higher Domes

tic Production Risks Recommendation

 

16

Conclusion

Profit has increased over the past 5 years due to combination of asset divestiture and increasing prices and will continue doing so.

Tensions in Middle East and strong growth in emerging countries will place upward pressure on crude oil prices, benefitting industry revenue

The Obama Administration believes that increased shale gas development will reduce greenhouse gas emissions.

Risks to Overcome:• Government’s moratorium on offshore-drilling is unlikely to be long term because of the strong

need for crude oil and tax revenue to address deficit issues.

• Must stay abreast of global influence on price volatility

 

17

Revenue Breakdown - Portfolio

19.1%

6.3%

15.5%2.6%

6.7%

5.7%

15.9%

W&T Offshore Inc Breitburn Energy Partners L.PBill Barrett Corp Approach Resources Inc.Vanguard Natural Resources, LLC Northern Oil and Gas, IncQuicksilver Resources inc