pacwest pressure pumping presentation, aug 2011

PacWest Consulting Partners 7941 Katy Freeway, Suite 309

Houston, TX 77024

Overview of Key Pressure Pumping Markets Market Update – August 31, 2011

Christopher Robart

Principal, PacWest Consulting Partners

[email protected]

CONFIDENTIAL FOR INTERNAL USE ONLY

TERMS & CONDITIONS Information furnished in all reports produced by PacWest may be used by Client for internal purposes, as Client deems beneficial, as long as due care is taken to hold the information confidential within Client’s organization and PacWest is not liable for the information provided. All rights to the information remain with PacWest. PacWest represents that it will not breach any obligation of confidentiality with respect to information contained in the study. PacWest will maintain in confidence and not disclose any information related to Client, without prior written consent of the Client. PacWest will not disclose to any person, including, without limitation, any of the Client’s competitors or suppliers, the fact that Client has engaged PacWest in this project scope, the scope of the assignment or any other information relating to Client.

Client Confidential

PRESSURE PUMPING MARKET UPDATE

© PacWest 2011 | All rights reserved | 2

Agenda

PacWest’s Market Intelligence Services

Pressure Pumping Market Overview

Frac Crew Deployment

Bakken Case Study

Questions

Client Confidential



PacWest Market Intelligence Services

PacWest has provided its strategic intelligence capabilities to oil and gas clients for years and has recently begun to make them more widely available.

Our suite of Market Intelligence services spans the following:

Client Confidential



Actionable Intelligence for Decision Makers

Actionable Intelligence

The PacWest team:

■ Transforms volumes of disparate market data, insider industry activity and expert input into strategic and actionable recommendations for decision-makers

■ Aggregates, organizes and distills a wide range of data and intelligence to provide information to our clients that is comprehensive, focused and strategic

■ Analyzes this information to assess its strategic implications and provide a clear path of action for each stakeholder

Decision Makers

Client Confidential



Comprehensive Methodology

Many of the insights are based on:

■ Surveys from operators and suppliers

■ In-depth interviews and conversations with operators and suppliers

■ Industry-leading experts and technical specialists

■ Budgetary estimates

■ PacWest proprietary databases

Primary Research

These sources are regularly consulted:

■ Market research and reports

■ Company annual reports, 10-Ks, 10-Qs

■ Speeches and presentations by company leadership and other industry experts

■ Analyst reports from leading banks

■ Government data

Secondary Research

PacWest uses a multi-pronged approach to develop its market intelligence offerings. The team:

1) Gathers and reviews all information available publicly and via proprietary databases

2) Engages its diverse network of industry contacts to gather real-time intelligence

3) Processes and synthesizes raw information into actionable intelligence

Client Confidential



Agenda




Bakken Case Study

Questions

Client Confidential



2011 Supply and Demand Balance – US Land Pressure Pumping

Source: CIBC World Markets; Macquarie; PacWest analysis

The US Land pressure pumping market is significantly under-supplied

100%

131%

9%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

Supply Demand

Pre

ssu

re P

um

pin

g C

apac

ity

Uti

lizat

ion

Backlog

New Completions

8,534,250 HP

735,890 HP

11,935,890 HP

11,200,000 HP

The under-supply is not expected to be relieved until late 2012 or early 2013

Client Confidential



The tight supply market is driving up prices for pressure pumping prices, with cost escalation most severe in hot liquids plays

Forecast of Pressure Pumping Price Increases (2011 – 2014)

Source: PacWest Shale Market Research Service, 2011 Q2 Release

19.4%

6.9% 5.3% 6.0%

29.3%

9.9%

7.4% 8.2%

26.1%

8.9% 6.7% 7.4%

12.5%

4.8% 3.9% 4.4%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014

An

nu

al C

ost

In

cre

ase

US Land

Bakken

Eagle Ford

Marcellus

Client Confidential



Manufacturers of pressure pumping equipment are operating at full capacity and are experiencing order backlogs up to 1-yr for critical parts

Frac Pump Backlogs

Backlog currently extends into 2012 Q1, with lead times close to 1 year

New Destiny pump line at capacity for 2011 as of late July

Growth driven largely by OE orders, which were 180% ahead of plan; now account for 55% of input vs. 36% 1 year ago

Early 2012 customer discussions positive; potential for frac pump business to be $500MM+ in H2

Weir SPM Backlog current extends

into 2012 Q1 and backlogs are currently at record highs

Have seen 100%+ YoY increase in both pump and fluid end orders

Current OE/AM mix stands around 75/25; expect to be 60/40 in 1-2 years

Management is concerned frac unit and component, particularly engines, constraints holding back pressure pumping market growth

Gardner Denver Backlog extends into 2012

with nearly 40% of 2012 capacity tentatively committed, though expect to see some of 2012 demand released in H2

Fluid Control backlog currently at a record $421MM

Currently looking at 9-12 month lead time for pumps and 2-4 weeks for flow iron

FMC

Source: PacWest analysis

Client Confidential



Manufacturers are responding with major capital investments to fuel capacity expansions, and other actions to satisfy demand

Frac Pump Capacity Expansion Initiatives

In midst of $40MM upgrade to Ft. Worth facility; increase pump capacity 30-35% by Apr 2012

Just announced incremental $75MM investment; increase pump capacity additional 20-25% by EOY 2012

Weir SPM Halfway through

$20MM upgrade of Fort Worth and Tulsa pump manufacturing facilities; doubling capacity by Apr 2012

Aggressively increasing aftermarket fluid end capacity; already doubled YoY and plan on another doubling in next year

Gardner Denver Unclear what portion

of a $200MM spend is going towards pump capacity expansion

Portion of pump capacity expansions coming online in H2, with full completion targeted for year-end

Flowline capacity expansions coming online in H2

FMC AXON: launching 2nd

generation frac pump and expanding capacity to support it

OFM: recently expanded mfg. facility 40-60%

J-Mac: recently launched frac pump line

Dixie/MSI: recently launched frac pump

Southwest/Global Energy: potentially launching frac pump

New Entrants

Oth

er

Init

iati

ves

Cap

ital

Inve

stm

ents

Implemented lean mfg. to increase throughput

Implemented lean mfg. and re-engineered processes

Extended H1 capacity 20-25% through outsourcing components, reliance on 3rd party machining

Expanding use of machine tools around the world to extend frac pump capacity

Source: PacWest analysis

Client Confidential



0

500

1,000

1,500

2,000

2,500

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Lan

d R

igs

US Land Rig Count (Aug 2009 – Aug 2011)

Source: Baker Hughes

On the demand side, US Land rig count has rebounded dramatically since 2009, driving demand of pressure pumping services

Client Confidential



The focus on oily plays is evident in the US Land rig count: oil drilling activity finally overtook gas drilling activity in early 2011

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Pe

rce

nta

ge o

f La

nd

Rig

s

Oil

Gas

US Land Rig Count – Oil vs. Gas (Aug 2009 – Aug 2011)


Client Confidential



The dominance of unconventionals is also evident in the US Land rig count: increases in directional drilling has driven the rig count

0

500

1,000

1,500

2,000

2,500

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Lan

d R

igs

Directional/Horizontal

Vertical

US Land Rig Count – Dir/Hor vs Vert (Aug 2009 – Aug 2011)


Client Confidential



1,709

1,950 2,020

2,089

0

500

1,000

1,500

2,000

2,500

2011 2012 2013 2014

Lan

d R

igs

US Land Average Rig Count Forecast (2011-2014)

Source: PacWest Analysis; Macquarie

Most analysts expect the rig count to increase through 2014

Current: 1,740 rigs (8/19/11)

Client Confidential



The Marcellus, Bakken, and Eagle Ford account for nearly 30% of US Land drilling activity

0

500

1,000

1,500

2,000

2,500

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Lan

d R

igs

Other US Land (69% of US Land)

California shales (2% of US Land)

Appalachian (8% of US Land)

Bakken (10% of US Land)

Eagle Ford (12% of US Land)

Rig Count: Key Plays (Aug 2009 – Aug 2011)


Client Confidential



Eagle Ford and Bakken are in a major growth phase, California is still an emerging play, and the Marcellus is a relatively mature play

-50%

0%

50%

100%

150%

200%

250%

300%

350%

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Lan

d R

igs

Eagle Ford (+309%)

Bakken (+276%)

Appalachian (+50%)

California shales (+258%)

US Land (+100%)

Rig Count Growth Rate: Key Plays (Aug 2009 – Aug 2011)


Client Confidential



Liquids-rich Eagle Ford is projected to be one of the most active plays in the country

0

50

100

150

200

250

Au

g-0

9

Oct

-09

Dec

-09

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1

Jun

-11


Vertical

Land Rigs

193

240 270

300

0

50

100

150

200

250

300

350

2011 2012 2013 2014

Current: 229 rigs (8/19/11)

Land Rigs

Source: PacWest Analysis; Macquarie; Baker Hughes

Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast

Eagle Ford Rig Count & Forecast

Client Confidential



18% 18%

17%

13% 12% 12%

8%

1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Mar

ket

Shar

e

Eagle Ford Pressure Pumping Market (Jan 2011 – Jun 2011)

Source: PacWest Frac DB (under development)

Frac Tech, BJ, and SLB are the dominant pumpers in 2011 H1 in the Eagle Ford, while Chesapeake is the dominant operator

35%

17% 16%

6% 5% 3% 3% 3% 3% 2% 2% 2% 1% 1% 1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Ch

esap

eake

Pet

roh

awk

An

adar

ko

El P

aso

Shel

l

Pen

n…

Pio

nee

r

Cab

ot

XTO

Ener

vest

Talis

man

Fore

st

Pla

ins

Ch

evro

n

Hes

s

Mar

ket

Shar

e

Supplier Market Share Operator Market Share

PRELIMINARY ANALYSIS

Client Confidential



Analysts expect higher gas prices through 2014, which will drive significant rig count growth in the Appalachian

0

20

40

60

80

100

120

140

160

180

Au

g-0

9

Oct

-09

Dec

-09

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1

Jun

-11


Vertical

Appalachian Rig Count & Forecast

Rig Count – Dir/Hor vs Vertical Average Rig Count Forecast Land Rigs Land Rigs

145

175 200

250

0

50

100

150

200

250

300

2011 2012 2013 2014



Client Confidential



27%

16% 14%

11% 11%

8%

5% 4% 3% 1%

0%

5%

10%

15%

20%

25%

30%

Mar

ket

Shar

e

Marcellus Pressure Pumping Market (Jan 2011 – Jun 2011)

Source: PacWest Frac DB (under development)

Halliburton is the dominant pumper in 2011 H1 in the Marcellus, while Chesapeake is again the dominant operator

27%

11% 11% 9%

7% 7% 5% 4% 4% 3% 3% 3% 3% 2% 2%

1% 0% 0%

5%

10%

15%

20%

25%

30%

Ch

esap

eake

Cab

ot

Talis

man

An

adar

ko

Shel

lEQ

T

Atl

as

Exco

Ran

ge

Will

iam

s

Ch

evro

n

Sen

eca

EOG

Sou

thw

es…

Ener

gy…

PD

C…

XTO

Mar

ket

Shar

e

PRELIMINARY ANALYSIS

Supplier Market Share Operator Market Share

Client Confidential



California shales are still a question mark in the mind of most analysts and they have not yet factored in its impact on the market

0

5

10

15

20

25

30

35

40

45

50

Au

g-…

Oct

-09

Dec

-…

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-…

Oct

-10

Dec

-…

Feb

-11

Ap

r-1

1

Jun

-11


Vertical

California Shale* Rig Count & Forecast

Note: California Shale rig count is focused on counties in shale plays. It includes Colusa, Fresno, Kern, Kings, Los Angeles, and Sutter counties, although the majority of drilling activity is in Kern county.

18

22

26

30

0

5

10

15

20

25

30

35

2011 2012 2013 2014




Client Confidential



Bakken continues to experience growth challenges, which will be discussed later in this presentation

0

20

40

60

80

100

120

140

160

180

200

Au

g-0

9

Oct

-09

Dec

-09

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

Dec

-10

Feb

-11

Ap

r-1

1

Jun

-11


Vertical

Bakken Rig Count & Forecast


180 200

210 220

0

50

100

150

200

250

2011 2012 2013 2014



Client Confidential



Agenda




Bakken Case Study

Questions

Client Confidential



Staffing experienced crews is a critical challenge faced by pressure pumping service providers

■ Completion increases = HHP increases = Frac crew increases = Need for trained staff!!

■ North American pressure pumping industry is expanding rapidly (~20% YoY increase 2010-2011) and needs to add new hires to meet expansion targets

■ Major increases in completions require major increases in frac crews, for example:

- Typical 25K HHP frac fleet in the Bakken requires 2-3 crews of 30 staff = 60 – 90 experienced employees

- PacWest forecasts an increase in frac fleets in the Bakken from 38 fleets (May 2011) to 52 fleets (year-end 2011) = 840-1,260 experienced employees

■ Fact: Critical driver of oilfield safety = experienced staff

■ Problem: There are no more experienced field workers left; pumpers are forced to manage deployment of large numbers of inexperienced employees

The Quality vs. Quantity Dilemma

Client Confidential



Pressure pumpers are deploying equipment and staff from other regions when possible, but there are limitations to this approach

Frac Fleet Redeployment

Pumpers are deploying staff and equipment from nearby plays

However, the prevalence of dedicated contracts and ‘take-or-pay’ relationships is constraining the number of available staff and equipment for redeployment

Majority of US Fleets dedicated

Pressure Pumper % Dedicated BJ Services 50% Cudd 60% Frac Tech 70% Schlumberger 60%-70% Pumpco 74% Superior 80%-90%

Few Existing Deployment Options

Roughly 60-65% of fleets

dedicated

■ For example: Calfrac has redeployed frac fleets from its Colorado base to the Bakken but it still does not have a sufficient facilities for major maintenance so it drives frac trucks back to Colorado every 1-2 months to service equipment

Client Confidential



Most pressure pumpers depend heavily on non-local employees to meet staffing needs

■ Flex crews = non-local employees working at a local base on a temporary basis

■ Flex crews typically spend 2-3 weeks working 17 hours or more per day and then have 1-2 weeks off before returning to the local base

■ All service companies have reported using flex crews to some degree

- Larger companies (e.g. Halliburton) often meet half of their staffing needs with flex crews in some areas

- Smaller new entrants are sometimes forced to depend entirely on flex crews

■ Companies trying to hire locally, but there are few suitable potential hires in many hot areas (e.g. Eagle Ford, Bakken)

■ Pumpers have admitted that they will never be able to eliminate flex crews entirely in more remote areas

Pressure Pumping “flex crews”

Client Confidential



There are significant differences in the commitment of pressure pumping companies to safety

…

Employee Training & Management

Staff Deployment Training

All pressure pumpers have training programs to orient ‘greenhats’ to the oilfield and provide them with the basic knowledge and skills to safely and effectively operate frac equipment

Programs vary widely in structure, duration, and effectiveness

However, no training programs can substitute for solid field experience

More important is how companies balance the deployment of inexperienced employees vs. experienced employees in a crew

Good = Majority experienced employees + minority inexperienced, which provides mentors upon which greenhats can depend

Bad = Minority experienced + majority inexperienced… a recipe for disaster

■ For example: A former Sanjel employee in the Bakken reports often being deployed in crews where the majority of staff had less than two months of oilfield experience

- Outcome: Multiple cases of splitting iron and debilitating injuries

Client Confidential



Agenda




Bakken Case Study

Questions

Client Confidential



Overwhelming demand in the Bakken is expected to lead to a significant under-supply of pressure pumping capacity for 2011

100% 133%

166%

199% 21%

28%

35%

42%

0%

50%

100%

150%

200%

250%

15 20 25 30

Pre

ssu

re P

um

pin

g C

apac

ity

Uti

lizat

ion

Average Stages per Well

2011 completions + backlog

2011 completions

121%

161%

201%

241%

Sensitivity Analysis of 2011 Bakken Pressure Pumping Capacity Utilization

Sources: CIBC World Markets; Macquarie; PacWest analysis

100%

utilization of

2011

capacity

The Bakken will be 61% under-supplied in 2011, conservatively assuming 20 stages/well

Client Confidential



114% 109% 104% 100%

45% 43%

42% 40%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

30% 40% 50% 60%

Pre

ssu

re P

um

pin

g C

apac

ity

Uti

lizat

ion

Capacity Growth (2011 – 2012)

2012 completions + backlog

2012 completions

159% 152% 146%

140%

Sensitivity Analysis of 2012 Bakken Pressure Pumping Capacity Utilization

100% utilization

of 2012

capacity

Source: CIBC World Markets; Macquarie; PacWest analysis

Demand will continue to outpace supply for pressure pumping capacity into 2012 in the Bakken

Note: Sensitivity analysis assumes an average of 20 frac stages / well in 2012, a conservative estimate

Client Confidential



Drilling & completion activity in the Bakken is up considerably and continued increases are forecast

49

184

0

20

40

60

80

100

120

140

160

180

200

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

Jan

-10

Feb

-10

Mar

-10

Ap

r-1

0

May

-10

Jun

-10

Jul-

10

Au

g-1

0

Sep

-10

Oct

-10

No

v-1

0

Dec

-10

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Rig

Co

un

t

Forecast Bakken D&C Activity Metric 2011 2012 2013 2014 Average rig count 180 200 210 220 Drilling days / well 32 31 30 30 New completions 2,053 2,355 2,555 2,677

Sources: Baker Hughes, Macquarie, CIBC World Markets, PacWest analysis

Bakken Rig Count (Aug 2009 – Aug 2011)

Client Confidential



Pressure pumping companies are significantly expanding their capacity in the Bakken in response to increased demand…

1

2

2

2

3

5

3

7

1

1

1

1

4

5

2

1

1

2

3

1

2

2

0 2 4 6 8 10 12 14

Cudd

Pumpco

Calfrac

Superior

BJ Services

Frac Tech

Schlumberger

Sanjel

Halliburton

Current dedicated fleets* Current spot fleets* Future 2011 fleet additions

Sources: company documents, interviews

Bakken Pressure Pumping Equipment

Fleets

Current dedicated 25 Current spot 14 Total current 38 Future additions 14 Total year-end 52

HHP Current 773 Year-end 1,074

Bakken Pressure Pumping Supply (May 2011)

Note: “Spot” fleets are not necessarily available; only implies not in long-term dedicated contract; little to no scheduling availability remains for most spot fleets in the 2011

Client Confidential



… but supply chain constraints are holding back the deployment of new equipment and the ability to consistently supply pumping services

Logistics ■ Railway (primarily BNSF) import capacity into the Bakken is limited for all products,

particularly proppant due to the large volumes required (1 railcar has capacity of 200K lbs of proppant; average 3 million lbs frac job requires 15 railcars)

Proppant ■ Global proppant consumption has reached unprecedented levels and most domestic

producers are essentially sold out of product

■ Greatest constraint is in 20/40 raw sand

Guar ■ Demand has reached record highs and the guar supply chain is not highly responsive

due to its length (90% of raw guar seed grown in rural India)

Equipment ■ Manufacturers of pumping equipment reporting order backlogs of up to 1 year

Labor ■ Local labor force in the Bakken is limited and unemployment is extremely low

Bakken Supply Chain Constraints

Client Confidential



Bakken pressure pumping supply has been unable to keep pace with demand so well completion backlogs are growing

90 67

85 76 50

87 72

96

57 81

67 82

80 81

103 99 95 98 103

107 93

118

172

0

60

120

180

Day

s b

etw

ee

n W

ell

Spu

d a

nd

Co

mp

leti

on

Uncompleted Drilling Permitted

Bakken 429 162 413

Montana 57 6 67

North Dakota 372 156 346

0

100

200

300

400

500

Nu

mb

er

of

We

lls

Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis

Days Required for D&C in North Dakota

Bakken Well Count (May 2011)

Client Confidential



Operator D&C performance varies, in some cases depending on contracting practices

Sources: Montana Board of Oil & Gas; North Dakota Industrial Commission; PacWest analysis

4.5

3.6

3.4

3.0

2.8

2.7

2.6

2.4

2.0

1.9

1.8

1.0

0 1 2 3 4 5

Oasis Petroleum

Marathon

EOG Resources

Newfield

Slawson

Hess

ConocoPhillips

Brigham Oil & Gas

Zenergy

Whiting Oil & Gas

Continental Resources

Anschutz/OXY

Bakken Ratio of Uncompleted Wells to Active Rigs (May 2011)

7

45

29

12

17

13

48

17

15

34

25

27

Well

Backlog

7

25

15

6

7

5

18

6

5

10

7

6

Rigs

Note: Well backlog is best estimate based on data from Montana and North Dakota oil/gas regulators; rig count is from April 2011

Client Confidential



The Bakken supply/demand imbalance is not expected to improve drastically anytime soon so operators must contract accordingly

■ It is important to be proactive to develop long-term solutions rather than short-term fixes, while considering other infrastructure challenges

■ Operators should include terms in contract to incentivize for safety improvements, performance improvement

■ Avoid safety incidents by forcing service companies to provide their best crews, when possible

■ Consider using greenhat clauses or crew continuity incentives, similar to drilling contracts

Implications for Contracting Strategy in the Bakken

Client Confidential



Agenda




Bakken Case Study

Questions

pacwest pressure pumping presentation, aug 2011

Documents