how will oil price impact the supply chain? · analysis of us oilfield water management market,...

$: How Will Oil Price Impact the Supply Chain? · Analysis of US oilfield water management market, including regional supply, demand, pricing, trends for sourcing, logistics, drill/frac,$
PacWest Consulting Partners 920 Memorial City Way, Suite 160 Houston, TX 77024

How Will Oil Price Impact the Supply Chain? PESA Forum 2015 February 18, 2015

Alexander Robart Director [email protected] +1 434 294 1396 mobile +1 713 929 3261 office

Client Confidential © PacWest 2014 | All rights reserved | 2

How Will Oil Price Impact the Supply Chain?

Contents

1. About PacWest

2. Commodity Price Outlook

3. US Market Impact

4. US D&C Activity Forecast

5. Market and Financial Impact

6. Implications and Takeaways



PacWest Overview & Capabilities

Provide strategy consulting and advisory services primarily to energy clients

Strength in the oilfield supply market

- Often work with E&Ps or suppliers across range of industries that supply products/services to it

Generally work at C-Level or business lead level

Consulting & Advisory

Offer industry-leading, granular analysis of the oilfield

Deep knowledge and strength in the pressure pumping / frac market

Employ combination of primary intelligence + secondary research

Unique in market: apply strategy consulting capabilities to turn research into actionable intelligence

Market Intelligence

All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other

PacWest is a boutique strategy consultancy and market intelligence firm specializing in the oilfield



We deploy a combination of primary intelligence and secondary research and have access to all participants in the oil/gas value chain

Methodology

Primary Intelligence

Secondary Research

Proprietary Data

■ On-going conversations with PacWest source network of on-the-ground field experts

■ Conversations/ interviews with all participants in oil/gas value chain

■ Industry-leading experts and technical specialists

■ Market research data sets and reports

■ Company annual reports, SEC filings, press releases

■ Speeches and presentations by company leadership and other industry experts

■ Analyst reports from leading banks

■ State and Federal regulatory filings and data

■ Suite of market-leading market intelligence products

■ PacWest FracDB: proprietary database of ~100,000 NAM wells frac’ed

■ Completions Database: ~1 million+ regulatory filings

Multi-pronged approach with rich primary intelligence results in insightful and actionable results



Market Intelligence Offerings

Detailed analysis and forecast of global frac services market, including regional breakdown of supply, demand, utilization, pricing, as well as market, technical, and technology trends

Monitors and forecasts frac demand, supply, utilization, trends, drivers, and constraints across key Chinese frac markets

Stripped-down version of PumpingIQ: regional frac fleet/capacity counts, by pumper, and other key data points from PumpingIQ

Play-by-play forecasts of NAM rig counts, well completions, wells frac’ed, and frac stages, for 3 years in the future

Analysis of US oilfield water management market, including regional supply, demand, pricing, trends for sourcing, logistics, drill/frac, flowback, treatment, disposal service

Analysis/forecast of US proppant supply, demand, and pricing, by play and proppant type (sand, resin-coated sand, ceramics); regional pricing indices to be included in future releases In-depth analysis of stimulation chemicals market, including a market overview report and deep-dive reports on 10 key chemical categories (e.g. guar, crosslinker, friction reducer, etc.)

Frac database including location, operator, pumper, chemicals, suppliers, and more, for over 100,000 wells in North America

Product Description

Our suite of oilfield market intelligence products supports customer decision-making, including the market-leading fracturing offering



Contents

1. About PacWest


3. US Market Impact






Forecast

Crude Oil Price Outlook (2014-17)

Crude oil forecast to remain below $50 through 2015 with supply growth depressing prices

Sources: IHS; PacWest analysis

Comments

■ D&C activity forecasts downgraded due to a challenging oil price environment

■ D&C activity will fall significantly in 2015, with reductions similar to those seen in 2009

■ Current forecasts assume the following oil prices:

- 2015: $43/bbl.

- 2016: $59/bbl.

- 2017: $65-75/bbl.

Oil Price Forecast ($/bbl.)

$0

$20

$40

$60

$80

$100

14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3

Forecast: $65-75



Forecast ■ After a steady decline in gas

prices since early 2014, we forecast moderate price recovery through 2017

■ LNG projects become less competitive with low crude prices

■ Current forecasts assume the following oil prices:

- 2015: $3.25 $/MMBtu.

- 2016: $3.50 $/MMBtu.

- 2017: $3.90 $/MMBtu.

Natural Gas Price Outlook (2014-17)

Natural gas prices expected to remain below $4 through 2017 driven by oversupply in US

Sources: IHS; PacWest analysis;

Comments Natural Gas Price Forecast ($/MMBtu)

$2

$3

$4

$5

$6

14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3



Contents

1. About PacWest


3. US Market Impact






■ Near-term oil price is expected to fall below break-even pricing for many oil/liquids plays in the US Land market

■ Of the set of plays at left, only the Woodford Cana SCOOP Wet Gas play breaks-even under $45

■ However, we expect ~20% in savings over the next 1-2 years, as D&C costs fall, due to reductions in pricing across most segments of oilfield services

US Basin/Play Economics

Market significantly challenged at current oil prices given play breakevens; however, lower OFS prices will improve economics

Comments Breakeven Prices for Oil/Liquids Plays ($/bbl.)

0 10 20 30 40 50 60 70 80 90

Woodford Cana SCOOP Wet Gas

Woodford Cana Scoop Oil

Eagle Ford East Wet Gas

Eagle Ford West Volatile Oil

Bakken

Eagle Ford East Volatile Oil

Bone Spring Delaware

Mississippian Core

Wolfcamp Midland Basin

Wolfcamp Delaware Basin

Eagle Ford West Wet Gas

Woodford Ardmore Cana

Eagle Ford West Black Oil

Eagle Ford East Black Oil

Granite Wash Core

Source: IHS

WTI: $53



■ Horizontal activity drove large increases in completions-related capex from 2005-14

■ Low oil prices make drilling uneconomical in many basins/plays so E&Ps shifting focus to production

■ Opex will decrease in 2015, primarily due to major price concessions across production services

E&P Spend

In response to lower oil prices, operators drastically cutting capital expenditures and increasing focus on production optimization

Sources: PacWest analysis; industry sources

Comments NAM E&P Spending: Capex vs. Opex

30% 29% 28% 28% 35% 35% 36%

70% 71% 72% 72% 65% 65% 64%

0%

20%

40%

60%

80%

100%

2011 2012 2013 2014 2015 2016 2017

Opex Capex

-40%

-20%

0%

20%

40%

2011 2012 2013 2014 2015 2016 2017

YoY ▲ (Opex) YoY ▲ (Capex)

NAM E&P Spending: YoY %▲ Capex vs. Opex



$0

$5

$10

$15

$20

$25

Tho

usa

nd

s 2014 2015■ Most operators

throughout the US are expected to reduce spending in 2015

■ Capex is expected to recover as activity recovers in 2016+

■ Expect capital spending to drop by 30% or more as E&Ps revisit budgets over the course of the year

E&P Capex (2014 vs. 2015)

Operators have already announced significant reduction in 2015 capex budgets; decline in aggregate spend as severe as 30%


Comments Select E&P Capex, by Operator ($ b)

-53%

-41%

-45% -21%

-20%

-20%

-20%

-8%

-3%



Contents

1. About PacWest


3. US Market Impact






Forecast

Comments

■ Rig count has fallen by 566 units since peak in October 2014

■ Skewing effect of “high grading” (slowing activity in less productive areas) make drop in rig count disproportionate to drop in production

■ Trajectory of decline in oil rig count similar to drop in gas rig count in mid-2008 - Current oil collapse is

~24% in first 17 weeks, versus 21% for gas over a corresponding period

US Land Rig Activity (2013-16)

Rig count has declined significantly since peak and in similar trajectory to 2008 drop; we forecast a 42% decrease in HZ rig count through 2015


600

800

1,000

1,200

1,400

1,600

1,800

2,000

13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3

Rig Count HZ Rig Count

Land Rig Count

-42% peak-trough



Forecast

28.8 29.9 29.4

22.1 22.3

24.8

0

100

200

300

400

500

600

700

800

0

5

10

15

20

25

30

35

40

2012 2013 2014 2015 2016 2017Fr

ac S

tage

s (‘

00

0s)

We

lls (

‘00

0s)

HZ Wells Frac'ed VT/DR Wells Frac'edSpuds Frac Stages

US Land D&C Activity (2012-17)

We anticipate a significant pullback in activity; the number of wells frac’ed forecast to fall 25% in 2015

Sources: PacWest analysis; RigData

Comments Well Spuds, Wells Frac’ed, Frac Stages

■ The decline in oil prices will drive a collapse in D&C activity that started at the end of 2014 and will bottom out in 2015 before recovering in 2016 and 2017

■ Well spuds are expected to start recovering in late 2015, while wells frac'ed are expected to start recovering in early 2016

■ Frac stages are expected to fall 17% in 2015 and will recover to roughly 2014 totals in 2017

-26% peak-trough



Forecast

0

25

50

75

100

125

13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3

Total HZ VT/DR

Comments Frac Stages (‘000s)

US Land Frac Activity (2013-17)

Decline in frac stages will be mitigated by trends toward longer lateral lengths and greater stage density

Sources: PacWest analysis

■ Frac stages forecast to decline in 2015, but by a slower rate than the decrease in wells frac’ed due to:

- Shortening stage widths in developing and mature plays (e.g. Marcellus, Eagle Ford, Bakken)

- Increasing lateral length and stage width optimization

■ Expect total frac stages will be 2.5% lower in the last quarter of 2017 compared to the last quarter of 2014



The majority of plays will see major decreases in HZ frac activity in 2015 due to the decline in oil price

Sources: PacWest analysis

<-40% -30% to -40% -20% to -30% -10% to -20% -5% to -10% 0% to -5% 0% to +5% +5% to +10% +10% to +20% +20% to +30% +30% to +40% >+40%

BAKKEN

MARCELLUS

UTICA

PERMIAN

EAGLE FORD / WOODBINE

HAYNESVILLE / BROWN DENSE

DJ BASIN

MISSISSIPPIAN UINTA

PICEANCE

FAYETTEVILLE

BARNETT

ANADARKO WOODFORD / SCOOP

CALIFORNIA

US Land Heat Map: Growth in HZ Wells Frac’ed (2014 vs. 2015)

GREEN RIVER

MIDCON SANDS

POWDER RIVER

Notes: Haynesville and Eagle Ford are grouped with Brown Dense and Woodbine, respectively.



US Land Multi-Well Pad Drilling Penetration (HZ wells)

Multi-well pad penetration has increased efficiencies and contributed to lower break-evens across major US basins/plays

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% 12H2 13H1 13H2 14H1 14H2

Sources: PacWest analysis; Rig Data

Increasing multi-wellpad penetration tends to negatively impact newbuild equipment demand



Contents

1. About PacWest


3. US Market Impact






0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

3

6

9

12

15

18

21

14Q1 14Q3 15Q1 15Q3 16Q1 16Q3

Cap

acit

y U

tiliz

atio

n

Frac

Ho

rse

po

we

r (M

M H

HP

)

Frac Demand Available Capacity

Raw Utilization (available) Eff. Utilization (marketed)

Forecast

Rapidly falling frac demand and moderately increasing capacity will result in the lowest utilization since 2008/2009


Frac Supply, Demand, Utilization

■ Frac demand growth in 2014 and tight market conditions led many pumpers to aggressively ramp up equipment newbuild programs

■ Pumpers have scrambled to adjust capital spending and equipment newbuild programs - Forecasts for 2015 net

capacity additions lowered to ~750K HHP, excluding retirements

■ Utilization is expected to bottom at 58% in 15Q4, the lowest point since 2008/2009

US Land Frac Market (2014-16)

Comments



Collapsing demand will result in lower, but still meaningful, frac capacity additions in 2015

NAM Frac Capacity

Gross & Net Frac Capacity Additions (’000 HHP) Comments

■ Robust demand growth in 2014 and tight market conditions led many pumpers to aggressively ramp up equipment newbuild programs

■ However, pumpers have scrambled to adjust capital spending and equipment newbuild programs

■ We expect HAL, C&J to retire older equipment acquired in the BHI, NBR transactions in mid- and late-2015, after the transactions close

Sources: PacWest analysis; company reports; industry sources

1,270

872

147 300

250

300

725

300

300

1,520

1,172

447

600

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2014 2015 2015Retirements

2015 2016

Net Additions Replacements*

Ex- Retirements

Incl. Retirements

HAL/C&J retirements of older BHI/NBR

equipment

Notes: HAL/FTS replacements are excluded from the figures above, as HAL/FTS manufacture equipment in-house



50

55

60

65

70

75

80

85

90

55%

65%

75%

85%

95%

105%

13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3

Pri

ce In

dex

Cap

acit

y U

tiliz

atio

n

Raw Utilization (available) Eff. Utilization (marketed)Price Index

Forecast

We expect frac pricing to fall by 15% in 15Q1 and by 24% by year-end

US Land Frac Capacity Utilization and Price Index

Capacity Utilization and Price Index Comments

■ First round of pricing conversations have resulted in ~15% average pricing concession

■ Expect further to total 24% reduction in pricing by year-end 2015

■ Pumpers are working closely with vendors to reduce cost structure, leading to price cuts for all key frac inputs

■ Many pumpers will likely experience financial distress in the next 3-6 months

Price Index: 11Q3 = 100

Notes: Aggregate US pricing is calculated using a capacity weighted average of regional pricing indices Sources: PacWest analysis; company reports; industry sources

90% effective utilization



Forecast

-10%

-5%

0%

5%

10%

15%

20%

25%

14Q1 14Q2 14Q3 14Q4 15Q1 15Q2

Schlumberger Basic Superior

Pioneer C&J Patterson-UTI

■ Margins expected to contract significantly for oilfield service providers

■ All large players have announced significant layoffs and base closures; however, not enough to offset large falls in activity and pricing concessions

■ OFS actively working to reduce cost structure; all vendors including equipment will be impacted

Select OFS Company Financials (2014 vs. 2015)

Oilfield service companies expected to be impacted first as E&Ps seek price concessions

Sources: CapitalIQ; PacWest analysis; industry sources

Notes: Forecast margins based on consensus analyst estimates

Comments Revenue ($ ’000s)

$0

$20

$40

$60

SLB SPN PTEN CJES BAS PES

2014 2015E

Operating Margin (%)

-13%

-11% -40% -5% -15% -21%



Forecast

A collapsing frac price will cause financial distress for many small pumpers, leading to market consolidation

Financial Distress and Market Consolidation

At-Risk Assessment Comments

■ Many Tier-2/3 pumpers at risk of financial distress, as pricing and utilization deteriorate

■ We have identified 12 pumpers with high risk of financial distress; represents 1.3 MM HHP or 6% of capacity

■ PE firms and other financial sponsors raised significant funds to invest in OFS and E&P opportunities

■ Expect consolidation to decrease number of active companies to the low-40s by late 2016

Sources: PacWest analysis; company reports; industry sources

Metric Tier 1 Tier 2 Tier 3 Total

“At Risk” Companies 0 2 10 12

“At Risk” HHP 0 608,000 665,000 1,273,000

“At Risk HHP (% of NAM) 0% 3% 3% 6%

30

40

50

60

11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3

Number of Active NAM Frac Services Providers



Forecast

■ Revenue widely expected to decline

■ Wall Street expects margins roughly flat 2015 H1, but we view this as optimistic

■ Pricing concessions filtering down the D&C value chain and do not expect equipment to immune

■ Equipment manufacturers actively rationalizing cost structure, but may not be enough to offset

Select Equipment Company Financials (2014 vs. 2015)

Wall Street expects equipment manufacturer margins to remain relatively flat through first half of 2015

Sources: CapitalIQ; PacWest analysis

Comments

0%

5%

10%

15%

20%

25%

30%

14Q1 14Q2 14Q3 14Q4 15Q1 15Q2

NOV Cameron FMC Weir Allison Forum

Revenue ($ ’000s)

$0

$5

$10

$15

$20

$25

NOV CAM FMC WEIR ALSN FET

2014 2015E

Operating Margin (%)

-19%

-14%

+9% -2% -2% -20%



Contents

1. About PacWest


3. US Market Impact






Newbuild orders will be hit hard by market downturn; aftermarket becomes increasingly critical as OFS resumes “new normal”


Newbuild vs. Aftermarket Opportunities

■ Drilling equipment orders have been hit particularly hard; companies have reporting order cancellations up to 50%

■ Frac equipment has seen some order cancellations, but for the most part orders have been pushed back to late 2015 and early 2016

■ 2016/17 frac equipment order outlook not positive

■ Overcapacity across virtually every OFS equipment category

Newbuild Aftermarket

■ Activity declining sharply, but will continue at ~75% of recent levels; market is in process of correcting to a “new normal” level of activity

■ Aftermarket orders down sharply as market tries to gauge severity; as OFS gets comfortable with “new normal” will resume purchases a steady aftermarket demand will emerge



■ Oil prices falling significantly due to an oversupplied market

■ Activity falling as a result; majority of plays seeing significant decreases in D&C activity

■ Falling OFS demand and pricing will lead to financial distress over next 6-12 months; likely to see many OFS bankruptcies over next two years

Implications and Takeaways

Equipment manufacturers must adapt to new market environment through downturn

OFS Commentary Equipment Takeaways

■ Do not expect service market balance until 2017… expect weak newbuild orders until then

■ Given limited newbuild demand, aftermarket is now the key equipment market driver

■ Aftermarket/service footprint needs to adjust to new geographic distribution of demand

■ Know your customers financial position; structure payment terms accordingly and be flexible with core customers

■ Expect to see equipment bankruptcies as well; presents opportunities to add manufacturing capacity and/or aftermarket footprint cheaply



PacWest Consulting Partners is a boutique strategy consultancy and market intelligence firm that specializes in the energy, industrial, and resources sectors. Much of its work is focused around the oilfield and the many industries that supply critical products and services to it. With the explosion of unconventional resources in North America and increasingly internationally, the energy landscape is changing quickly. PacWest is at the forefront of the changes in the US and in global energy markets resulting from the development of unconventional oil/gas resources. We work with companies to better understand the market and develop and implement new strategies to position themselves for growth.

PacWest Consulting Partners 920 Memorial City Way, Suite 160 Houston, Texas 77024 USA

Visit us at: www.pacwestconsulting.com

50

Contact:

Nilesh Dayal Vice President Office: +1 713 929 3260 Mobile: +1 503 804 8173 Email: [email protected] Alexander Robart Director Office: +1 713 929 3261 Mobile: +1 434 294 1396 Email: [email protected] Christopher Robart Director Office: +1 713 929 3272 Mobile: +1 202 352 7805 Email: [email protected]

how will oil price impact the supply chain? · analysis of us oilfield water management market,...

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