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Fall 2015
S IX T H ANNUALP R I V A T E C O M P A N Y
E N E R G YC O N F E R E N C E R E C A P
SIMMONS & COMPANY INTERNATIONAL SIXTH ANNUAL PRIVATE COMPANY CONFERENCE PANEL PARTICIPANTS
LAND DRILLINGRon Tyson
Chief Executive Officer
Cactus Drilling
Brett Jensen
Chief Executive Officer
Hamilton Energy Group
Trent Latshaw
Chief Executive Officer
Latshaw Drilling
Phil Longorio
Chief Executive Officer & President
Scientific Drilling International
CAPITAL EQUIPMENTTrey Smith
President & Chief Executive Officer
Galtway Industries
Saeid Rahimian
President & Chief Executive Officer
Gardner Denver EG
Scott Mason
President & Chief Executive Officer
TYCROP Manufacturing
OIL SERVICESJosh Comstock
Chairman & Chief Executive Officer
C&J Energy Services
Randy McMullen
President & Chief Financial Officer
C&J Energy Services
COMPLETION SERVICESCody Wickersheim
President
Badger Mining Corporation
Ann Fox
Chief Executive Officer
Nine Energy Service
Dale Redman
Chief Executive Officer
Pro Petro Services
Regan Davis
President & Chief Executive Officer
STEP Energy Services
E&P SUPPLY CHAINMark Hood
Supply Chain Director
Apache Corporation
Brian Smith
Director, Global E&P Procurement
Repsol Energy
TAKEAWAYS FROM THE CONFERENCE
Held on December 2 and 3 in New York City, Simmons’ Sixth Annual Private Energy Conference included over 50 attending
energy companies. As expected, a cautious mood permeated the conference as near-term visibility remains opaque
while industry pricing pressures and weak utilization persist. Our conference featured five panels: (i) Land Drilling and
Well Service; (ii) Capital Equipment; (iii) Completion Services; (iv) a town hall gathering with CJES management and (v)
Perspectives from E&P Supply Chain Management. The nature of this conference (i.e. predominantly private industry
players) allows for a greater level of just-in-time ground-level operational feedback/outlook than with traditional public
company conferences, thus the central appeal to institutional clients. This year’s conference was replete with transparency
and candor as the challenges afflicting the industry received significant discussion while uncertainty surrounding near-
term activity levels was apparent. While a number of different subsector anecdotes were forthcoming, the following note
summarizes the prominent themes arising from our event. These include:
• Oil Service Industry’s Service Deliverability Being Impaired.
• Pricing Pressures Persist - At Unsustainable Levels and Still Declining.
• Near-Term Visibility Cloudy: Q4 Likely Better Relative to Early Expectations, But Q1 Moving Lower.
• New Market Entrants Emerging.
• E&P Supply Chain Management Still Seeking Well Cost Reductions: Efficiencies and Price.
In addition to these five themes, the event also included a 1x1 with the CEO and CFO of CJES. The panel essentially provided
a case study to our private company attendees regarding the growth and vision of the CJES founders. As a reminder, CJES was
formed in the late 1990’s as a one yard operation, but over the years through organic growth, acquisitions, two rounds of PE
investment and ultimately an IPO in 2011, the company became a billion dollar enterprise. Arguably, over the past ten years,
CJES is the industry’s most impressive operational growth story, a case study that appealed to a large number of our private
company attendees as most would love to replicate the CJES success.
Authored by: John Daniel Important Disclosures appear in Appendix on page 13-14Oil Service - December 8, 2015
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Impaired Industry Deliverability:
A theme which we have been hammering home now for some time was further validated by the majority of our panelists
last week and ultimately became one of the most important focal points of the conference. Specifically, the ability for the
industry to ramp quickly is being impaired due to massive headcount reduction, dramatic declines in oil service capital
spending budgets, reduced (and arguably insufficient) proactive spending on equipment maintenance, and reduced liquidity
associated with significant working capital reductions. Interestingly, impaired service deliverability is gaining more visibility
as Wall Street and major media outlets (Houston Chronicle article this weekend, for instance) are addressing this topic.
Industry deliverability will become an increasingly prominent theme during the Q4 earnings season next month as the oil
service industry will use this message as a key reason why oil service pricing should eventually move higher. In time, that
message will begin to resonate with the E&P industry as service quality and competitive choice will likely decline, but for
now, pressure to further reduce well costs remains a top priority for the E&P customer and service deliverability concerns
are a distant second. That said, the following observations were conveyed and are worth highlighting.
TAKEAWAYS FROM THE CONFERENCE (CONTINUED)
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TAKEAWAYS FROM THE CONFERENCE (CONTINUED)
• A leading capital equipment provider implemented a 30% headcount reduction and will cut more in 2016 if conditions do not improve. The 1H’16 outlook for this panelist is bleak as backlog is low (orders booked in a quarter are typically shipped that same quarter). In addition, it will take up to 4-5 months to return to execution levels achieved during the last peak. This panelist believes that 60% of its frac customers are struggling and likely cannibalizing assets while 40% are highly disciplined and committed to strong maintenance programs.
• A leading fabricator echoed the previous points. It estimates that 30% of its frac customers are investing in the fleet, 20% are making due with some investment while 50% are cannibalizing. This company has also reduced ~25-30% of its headcount while operating cost reductions of ~20% have materialized. The company did note that it has commitments from customers to perform refurb work, but those projects keep getting delayed.
• A company tied to directional drilling noted that it reduced its headcount by ~1,000 employees (nearly 40-45%) while wages have been reduced. The company is now utilizing 2-man crews with remote monitoring vs. a prior use of 4-man crews. The company is preparing for a grim 1H’16 and doesn’t see a recovery until 2017. An interesting comment regarding visibility - the company will be assigned a rig, but the rigs can be dropped with very little notice which we presume make planning difficult.
• A leading sand provider noted that mines have been idled, but as it is debt free, it will look to use the current market as a platform for growth. Importantly, it reports growing turmoil amongst the higher-cost second tier mines as market pricing is below sustainable levels, a message the public mines are also advertising. The panelist believes industry consolidation will be forthcoming, noting obvious synergies would be derived from putting mines with different rail origins together.
• A completions-oriented company emphasized that market conditions are terrible and will deteriorate in 1H’16. 2016 earnings could be down as much as 50% y/y. A big concern for this panelist is the lack of liquidity for many of the private, less wellcapitalized players. Given that banks are increasingly tightening credit availability, combined with reduced working capital positions, many oil service companies will likely face liquidity constraints and will therefore be unable to quickly reactivate equipment. This panelist also noted a 50% headcount reduction.
S I M M O N S & C O M PA N Y I N T E R N AT I O N A L’SS I X T H A N N UA L P R I VAT E C O M PA N Y E N E R G Y C O N F E R E N C E R EC A P 3
Collectively, woeful industry returns and the prospects for deteriorating, or at best,
flat near-term activity will further weigh on the deliverability of the industry. Wage
count reductions, coupled with further attrition of the industry employee base, make
working in the oil service industry less attractive. This will impact the industry’s ability
to quickly rehire employees when the cycle eventually recovers. And on that point,
the longer the duration of this down-cycle, the greater the fleet attrition and the more
cumbersome a process it will be to reinvigorate a return of the former employee base.
All of this will ultimately be a central tenet to the oil service industry’s eventual push
for higher pricing.
Pricing Pressures Continue:
For competitive reasons, we did not ask our panelists for specific pricing data points,
rather we addressed the topic more tastefully, allowing panelists to provide general
observations. And, in keeping with the candor of all of our private company events, the
industry’s pricing duress continues to be unrelenting. One panelist tied to the directional
drilling business reported that a large customer, described as a super major, recently
requested an additional 50% price discount to leading edge pricing. Our panelist declined
this request. Our well service panelist described “Kamikaze” pricing whereby the large
public players have purportedly aggressively bid pricing lower to regain market share.
For what it’s worth, other private companies have been echoing this theme for some
time. Our land drilling contacts noted that current pricing is allowing for cash margins of
only $2,000-$3,000/day, in some cases. Interestingly, one panelist claimed that it would
not participate at those levels, particularly if the work is short-term well-to-well projects.
Specifically, this driller pointed to its self-insured insurance plans as it is responsible
for the first $250,000 for any work-related injury claim. That, along with the risk of a
mud pump failure (a potentially big ticket repair item) make ~$3,000/day cash margin
work unprofitable. On the self-insurance comment, this is important as the oilfield
remains a dangerous work environment as evidenced by nearly 17 oilfield work related
deaths YTD (take a look at the depressing statistics 2 December 8, 2015 Oil Service
on OSHA’s website to see nature of each fatality). Virtually all panelists report pricing
concessions, not a new concept. Importantly, very few panelists see any near-term
upward mobility to price. Bottom-line, while pricing is at unsustainably low levels, it will only stabilize when activity stabilizes and will only begin to recover when E&P capital spending increases.
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Opaque Visibility:
General uncertainty surrounding 2016 activity levels and
importantly, the lack of concrete evidence regarding customer
spending plans reaffirms the prospect of a challenging 2016.
We asked all panelists to opine on the near-to-intermediate
outlook. Our sense is that Q4 results for the industry will
be a bit better relative to expectations earlier this quarter
(although still down q/q). Beyond Q4, however, most believe
that activity levels will move lower, although some believe
we are approaching a bottom now. One panelist believes that
Q3’15 marked the bottom for their company (we assume the
company is referring to margins, not activity) while a land
drilling panelist reported recent utilization improvements
along with indications that an additional ~2-3 idle rigs may
return to service in the coming weeks. These rigs, however,
would displace an incumbent, thus the additions are not
additive to overall industry activity levels. The lack of clarity
is noteworthy as these executives are on the front lines of
the business, many of whom are the primary liaison between
their respective company and the customer. This basket of
executives, in our opinion, is exactly the group to make the
best near-term call and the inability to do so is disconcerting
but not surprising. Moreover, if these private companies have
little-to-no near-term conviction, then it is simply wishful
thinking to believe that a recovery in oil service pricing is at
hand. Why? Because a service company needs to have an
improving near-term work schedule and be turning down
work before pricing moves higher. We heard no indications
from any panelists or other conference attendees that we
are at that point. Further, our conference took place the day
before the OPEC meeting and clearly, the sell-off in oil prices
since then further diminishes the prospect of any near-term
utilization/pricing recovery.
New Industry Players Emerging:
While it is increasingly evident that industry attrition is
unfolding, it isn’t clear that the fragmented nature of the
industry is being sufficiently redefined. We are seeing
signs of new money entering the sector as downturns
create opportunities. Specifically, we featured several
entrepreneurial management teams that are capitalizing
on the market while other panelists see opportunities to
capitalize on the market next year. In one case, STEP Energy
Services, a North American coiled tubing company, recently
acquired frac assets from Gas Frac. STEP injected some
capital to upgrade the assets and last month, it completed
its first frac job. In another case, Hamilton Energy Services
entered the well service space last year with two well service
rigs. Since that time, in a market of falling oil prices, it has
expanded its fleet to 33 rigs today and our impression is that
further growth is being considered. In addition, we are aware
TAKEAWAYS FROM THE CONFERENCE (CONTINUED)
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of companies such as Yellow Jacket Energy Services that purportedly acquired
cheap frac horsepower while last week Rubicon Oilfield International announced
a $300mm equity commitment from a leading private equity player. Moreover,
the combination of strong PE attendance at our event as well as discussions with
conference attendees lead us to believe that it’s only a matter of time before
additional funds flow into the space. This will take the form of recapitalizations
and funding new opportunities.
E&P Supply Chain - Still Seeking Well Cost Reductions:
The need to drive lower well costs will be a theme emphasized during the 2016 E&P budget process. This takes on even greater importance now that WTI is trading below $40/bbl. Yes, our E&P panelists understand that oil service pricing is low. One even observed that additional price concessions for traditional drilling and completion-oriented services may be limited, but the desire to achieve upwards of another 20% in well cost deflation is a de facto objective. Areas where price concessions will be targeted include compression and midstream-related services while further operational efficiencies may help meet the cost reduction goals. One comment that resonated was in reference to service quality.
In the case where the incumbent service provider is working on a contractual basis, no quality concerns have developed. However, the E&P company noted that call-out crews are delivering weaker relative service. That anecdote, we believe, is a sign of things to come as long as industry conditions remain depressed and lack of investment persists. With respect to efficiencies, one panelist cited drilling time reductions of nearly ~20 days in the Marcellus while both panelists see little difference in the various new rig designs. One contact noted that frac costs in Canada can be as much as 50% lower in the summer than in the winter, thus it will look at options to frac during those periods. With respect to bidding activity, one E&P still uses the same number of contractors during normal RFP processes while our other E&P panelist is increasing the number of bidders. As it relates to pending M&A, one panelist noted that it is looking at vendor alternatives in the offshore market due to the BHI/HAL deal. Finally, the E&P panelists pointed out that aggressive cost cuts are unfolding internally as headcount is being reduced, although our sense is that the magnitude of cuts (both headcount and salary) are much less dramatic than what is being witnessed in the oil service sector.
TAKEAWAYS FROM THE CONFERENCE (CONTINUED)
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CJES Panel:
Our relationship with CJES dates back to 2005. We first met
management when C&J Specialty Rentals elected to pursue
its first sale. At that time, the company operated in one yard
in Robstown, Texas. The company ultimately sold to a private
equity player and then almost 18 months later, C&J sold again
to another PE player. In the following years, C&J expanded into
the pressure pumping universe and ultimately, the company
pursued its IPO in 2011. For this year’s conference, we deviated
slightly from our traditional format in that we wanted to
highlight to our private company audience an example of a
company that grew rapidly 3 December 8, 2015 Oil Service
from a one-basin operator to ultimately become a global
provider of oilfield services. In our opinion, there is no other
oil service company who has so dramatically transformed itself
during the past ten years. The key driver in this transformation
is the visionary leadership of the CEO and a capable and driven
CFO. The panel focused primarily on the lessons learned during
the CJES growth years although a modicum of time was spent
discussing current business trends. While no financial guidance
was provided, our sense is that activity levels are tracking in
line, to slightly ahead of the company’s outlook imparted on
the Q3 earnings call. This was a theme we sensed from most
of our panelists and private company attendees, thus as we
head into Q4 update season, our instinct is that we could see
slight upward revisions to our Q4 assumptions. That probably
doesn’t matter, however, in a sub-$40 oil market.
TAKEAWAYS FROM THE CONFERENCE (CONTINUED)
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RECENT SELECT ACTIVITIES
Exploration & Production
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RECENT SELECT ACTIVITIES (CONTINUED)
Energy Services & Equipment
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RECENT SELECT ACTIVITIES (CONTINUED)
Energy Services & Equipment (Aberdeen)
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RECENT SELECT ACTIVITIES (CONTINUED)
Midstream & DownstreamMidstream & Downstream
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SIMMONS & COMPANY EXECUTIVES
Colin I. Welsh Chief Executive Officer cwelsh@simmonsco-intl.co.uk
Mike Beveridge Managing Director mbeveridge@simmonsco-intl.co.uk
Nick Dalgarno Managing Director ndalgarno@simmonsco-intl.co.uk
Eddie Leigh Managing Director eleigh@simmonsco-intl.co.uk
Craig Lyon Managing Director clyon@simmonsco-intl.co.uk
Ross Atkinson Director ratkinson@simmonsco-intl.co.uk
Ritchie Clark Director rclark@simmonsco-intl.co.uk
Nabeel Siddiqui Director nsiddiqui@simmonsco-intl.co.uk
Michael Willett Director mwilett@simmonsco-intl.co.uk
SIMMONS & COMPANY INTERNATIONAL LIMITED - ABERDEEN, LONDON AND DUBAI
Robert C. Muse Director, Head of European Institutional Sales rmuse@simmonsco-intl.com
SIMMONS & COMPANY INTERNATIONAL CAPITAL MARKETS LIMITED - LONDON
James P. Baker Managing Director, Midstream & Downstream jbaker@simmonsco-intl.com
Jay B. Boudreaux Managing Director, Exploration & Production jboudreaux@simmonsco-intl.com
Damon Box Managing Director, Exploration & Production dbox@simmonsco-intl.com
Frederick W. Charlton Managing Director, Energy Services & Equipment fcharlton@simmonsco-intl.com
Ira H. Green, Jr. Managing Director, Capital Markets, E&P and Alt. Energy igreen@simmonsco-intl.com
Todd A. Parsapour Managing Director, Energy Services & Equipment tparsapour@simmonsco-intl.com
Matthew G. Pilon Managing Director, Energy Services & Equipment mpilon@simmonsco-intl.com
Spencer W. Rippstein Managing Director, Midstream & Downstream srippstein@simmonsco-intl.com
Andrew C. Schroeder Managing Director, Energy Services & Equipment aschroeder@simmonsco-intl.com
Paul R. Steier Managing Director, Energy Services & Equipment psteier@simmonsco-intl.com
Michael S. Sulton Managing Director, Midstream & Downstream msulton@simmonsco-intl.com
Jason R. Greenwald Director of Engineering Exploration & Production jgreenwald@simmonsco-intl.com
Barry R. Kessler Director, Energy Services & Equipment bkessler@simmonsco-intl.com
Sanjiv Shah Director, Energy Services & Equipment sshah@simmonsco-intl.com
J. Kris Terrill Director, Energy Services & Equipment kterrill@simmonsco-intl.com
David A. Watson Director, Energy Services & Equipment dwatson@simmonsco-intl.com
CORPORATE FINANCE HOUSTON
William F. Britt Managing Director, Co-head of Securities wbritt@simmonsco-intl.com
A. Denney Cancelmo Managing Director, Head of Trading dcancelmo@simmonsco-intl.com
Jeff A. Dietert Managing Director, Head of Research jdietert@simmonsco-intl.com
Pearce W. Hammond Managing Director, Co-head of E&P Research phammond@simmonsco-intl.com
William A. Herbert Managing Director, Co-head of Securities bherbert@simmonsco-intl.com
David W. Kistler Managing Director, Co-head of E&P Research dkistler@simmonsco-intl.com
Sean W. Mitchell Managing Director, Head of Institutional Sales smitchell@simmonsco-intl.com
David P. Orr Managing Director, Institutional Sales dorr@simmonsco-intl.com
Guy A. Baber, IV Director, Head of Integrated Company Research gbaber@simmonsco-intl.com
John M. Daniel Director, Co-head of Oil Service Research jdaniel@simmonsco-intl.com
Brian Gamble Director, Research bgamble@simmonsco-intl.com
Ian Macpherson Director, Co-head of Oil Service Research imacpherson@simmonsco-intl.com
Mark L. Reichman Director, Research mreichman@simmonsco-intl.com
SECURITIES HOUSTON
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Analyst Certification:
I, John Daniel, hereby certify that the views expressed in this research report to the best of my knowledge, accurately reflect my personal views about the subject compan(ies) and its (their) securities; and that, I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) or views in this research report.
Important Disclosures:
For detailed rating information, go to https://simmons.bluematrix.com/sellside/Disclosures.action. Additional information is available upon request. Simmons & Company International may seek compensation for investment banking services from and other companies for which research coverage is provided. The firm would expect to receive compensation for any such services. Research analysts compensation is based upon (among other things) the firm’s general investment banking revenues.
Ratings Definition and Distribution:
Our recommendation system is based on a stock’s expected total return relative to the performance of the S&P 500 Index and its discrete energy sub-sector over a 12 month period. We divide stocks under coverage into three categories, each defined by a prospective rate of return:
Overweight – the stock is expected to outperform the average total return of its discrete energy sub-sector over the next 12 months.
APPENDIX
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Neutral – the stock is expected to perform in line with the average total return of its discrete energy sub-sector over the next 12 months.
Underweight – the stock is expected to underperform the average total return of the its discrete energy sub-sector over the next 12 months.
Suspended – the company rating, target price and earnings estimates have been temporarily suspended. The above presentation represents this ratings system as conformed for FINRA requirements.
Foreign Affiliate Disclosure:
This report may be made available in the United Kingdom through distribution by Simmons & Company International Capital Markets Limited, a firm authorized and regulated by the Financial Conduct Authority to undertake designated investment business in the United Kingdom. Simmons & Company International Capital Markets Limited’s policy on managing investment research conflicts is available by request. The research report is directed only at persons who have professional experience in matters relating to investments who fall within the definition of investment professionals in Article 19(5) Financial Services and Markets Act (Financial Promotion) Order 2001 (as amended) (“FPO”); persons who fall within Article 49(2)(a) to (d) FPO (high net worth companies, unincorporated associations etc.) or persons who are otherwise market counterparties or intermediate customers in accordance with the FCA Handbook of Rules and Guidance (“relevant persons”). The research report must not be acted on or relied upon by any persons who receive it within the EEA who are not relevant persons. Simmons & Company International Capital Markets Limited is located at 6 Arlington Street, London, United Kingdom.
APPENDIX (CONTINUED)
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Simmons & Company International is a member of FINRA/SIPC. Simmons & Company International Limited (”SCIL”) (Reg. No. SC190220) is authorised and regulated by the Financial Services Authority in the United Kingdom and by the Dubai Financial Services Authority as a Representative Office in Dubai. Simmons & Company International Capital Markets Limited (“SCICML”) (Reg. No. 05925082) is authorised and regulated by the Financial Services Authority in the United Kingdom.
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