COVID-19 and OPEC Price Wars

COVID-19 and OPEC Price War–Implications for

Oil and Gas Markets, Prices and Companies

Jim Rebello

Managing Director, Head of Energy M&A Advisory

Jed DiPaolo

Senior Energy Advisor

Martin Rubio

Managing Director, Energy M&A Advisory

April 23, 2020

11:00 am EST

2

Introductions

Oil is a Geopolitically Driven Commodity

Capital Markets

Agenda

Conclusion and Recommendations

Q&A

Copyright © 2020 Duff & Phelps LLC. All rights reserved.

Introductions

Jed DiPaolo

Jed DiPaolo has served as a Senior Energy Advisor for Duff & Phelps, LLC since 2011. He brings more than 42 years

of experience in the energy industry.

Jed was a Partner at Growth Capital Partners, L.P. for eight years. Prior to that, Jed worked for over 27 years at

Halliburton Company where he held several managerial and technical positions. Jed retired as a Group Senior Vice

President of Global Business Development with Halliburton Company in 2003. Prior roles at Halliburton included

serving as North American Regional Vice President and Far East Regional Vice President. In these roles, he was

responsible for overall operations of Halliburton Energy Services’ North America and Far East operations.

Jed currently serves as the Lead Director of Evolution Petroleum (AMEX:EPM), and a Member of the Board of

privately-held Deep Well Services, portfolio company of White Deer Energy, Air Drilling Solutions, a portfolio company

of Black Bay Energy Capital, Altitude Energy Partners, also backed by Black Bay, and Danos Energy Services.

He successfully restructured Seventy Seven Energy through Chapter 11 Bankruptcy and facilitated its sale to

Patterson-UTI (NASDAQ:PTEN). Additionally, he served as Interim Chairman of the Board of Directors of Boots and

Coots Group. He also served on Superior Well Service Board prior to being sold to Nabors Industries and the Edgen

Group Board before being acquired by Sumitomo Corporation. In addition, he served on the Board of Innicor

Subsurface Technologies prior to it being sold to BJ Services.

Jed received his undergraduate degree in Agricultural Engineering from West Virginia in 1976 and an Honorary

Doctorate of Science in 2013. He also serves on the Advisory Board for the West Virginia University College of

Engineering and is a member of the Society of Petroleum Engineers.

4


Houston

+1 713 986 9327

[email protected]


Jim Rebello

Jim Rebello is a managing director and head of the Energy M&A Advisory practice, based in the Houston office. He

leverages more than 25 years of principal investing and M&A origination, execution and management experience,

assisting companies in the Southwest with all aspects of transaction execution.

Prior to joining Duff & Phelps, Jim was a managing director and member of the Executive Management Committee of

Growth Capital Partners, L.P. (GCP), a merchant and investment banking firm in Houston. In addition, he was a

Principal of both SMI I and SMI II, GCP’s mezzanine investments funds. Before that, he held the title of corporate

financial analyst with Energy Ventures, Inc., where he was responsible for treasury management functions. He also

analyzed the financial performance of Energy Ventures and its corporate subsidiaries as well as potential acquisition

candidates. Earlier in his career, Jim was a Credit Analyst for Prudential Capital’s Southwestern Energy Group.

Jim has extensive experience managing merger & acquisition, divestiture, recapitalization, restructuring and private

placement transactions for a variety of clients across a range of industries, including exploration and production, oilfield

services, distribution, industrial services, business services, metals and manufacturing. He currently serves on the

board of Unifocus Corporation and a member of the Independent Petroleum Association of America, the Houston

Association for Corporate Growth. He previously served on the boards of Paradigm Valve, White Petrov and Growth

Capital Partners.

Jim received a B.S. in business administration with concentrations in marketing and management from Northeastern

University, graduating summa cum laude. Jim is a FINRA Series 7, 79 and 63 registered representative. He also

serves on several local non-profit community-based organizations.

5

Managing Director and Head of Energy M&A Advisory

Houston

+1 713 986 9318

[email protected]


Martin Rubio

Martin Rubio is a managing director in the Corporate Finance practice, based in the Houston office. Martin leverages

more than 20 years of experience in the energy industry advising equipment suppliers, distributors and other providers

of technical and specialty services on mergers and acquisitions and recapitalization assignments. He also has

experience in both middle-market corporate finance and in operating positions for the energy industry.

Prior to joining Duff & Phelps, Martin served in finance and business development roles at Turbine Air Systems, Ltd., a

packager of modular energy systems. Before that he held commercial operations and project management positions at

GE Energy and Stewart & Stevenson Services, Inc., a leading designer, manufacturer and distributor of specialized

equipment and aftermarket parts and service for the energy industry based in Houston.

Martin received a B.A. in political science from Loyola University New Orleans and an MBA from The University of

Texas at Austin with a concentration in finance. He is a FINRA Series 7 and 63 registered representative.

6

Managing Director, Energy M&A Advisory

Houston

+1 713 986 9311

[email protected]


Oil is a Geopolitically

Driven Commodity

Jed DiPaolo


OPEC and OPEC + Members

8

Have Nots

Venezuela

Algeria

Nigeria

Libya

Ecuador

Angola

Congo

Equatorial Guinea

Bahrain

Brunei

Malaysia

Sudan

Haves

Saudi Arabia

UAE

Kuwait

Qatar

Russia

Want to Be

Iran

Iraq

Azerbaijan

Oman

Kazakhstan

Mexico

OPEC

OPEC +


OPEC + January 2020 Production (thousands of barrels a day)

9

OPEC Nations OPEC + Nations

24,708 16,355

Source: Bloomberg


Spare capacity < 2.5 million barrels per day

$0

$20

$40

$60

$80

$100

$120

$140

0

1

2

3

4

5

6

7

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

OPEC Spare Capacity WTI Crude Oil Price

OPEC Spare Production Capacity & WTI Prices

10

Spare capacity (millions barrels per day) $/b (real 2010 dollars)

forecast

Source: EIA, Refinitiv


Oil Prices and Production (Pre-Pandemic)

11

Note: OPEC output includes all members; Brent prices as of Feb. 24 2020

Sources: Bloomberg, ICE Futures Europe, U.S. Energy Information Administration


Capital Markets

Jim Rebello

Managing Director,

Head of Energy M&A

Advisory

COVID-19 / Capital Markets

13

$187.4

$159.8

$78.8

$25.8

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

Jul-1

9

Oct-

19

Jan-2

0

Apr-

20

PHLX Oil Service Sector Index (^OSX) - Index Value

~67%

decrease since

Jan’20

$52.4

$77.4

$63.0

$8.9

$0

$10

$20

$30

$40

$50

$60

$70

$80

Jan-1

7

Apr-

17

Jul-1

7

Oct-

17

Jan-1

8

Apr-

18

Jul-1

8

Oct-

18

Jan-1

9

Apr-

19

Jul-1

9

Oct-

19

Jan-2

0

Apr-

20

WTI Spot Price

~85% decrease

since Jan’20^OSX

WTI Spot Price

Source: CapitalIQ, EIA


282,000

3,307,000

6,867,000 6,615,000

5,245,000

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

1/4

/20

1/1

1/2

0

1/1

8/2

0

1/2

5/2

0

2/1

/20

2/8

/20

2/1

5/2

0

2/2

2/2

0

2/2

9/2

0

3/7

/20

3/1

4/2

0

3/2

1/2

0

3/2

8/2

0

4/4

/20

4/1

1/2

0

-25.0%

-30.0%

-33.0%

-34.0%

-8.4%

-10.0%

JPM

MS

DB

GS

Q4 2008

Q1 1958

Volatility Expected to Continue

14

Economic Contraction

YTD 2020 Weekly Unemployment Claims

Worst quarterly US GDP contractions since Great Depression (% q/q, annualized)

Q2’20 U.S. GDP forecasts (% q/q, annualized)

Source: Deutsche Bank, US Department of Labor

▪ Q2’20 economic contraction

expected to be 3x larger than worst

quarter by contraction ever

▪ More than 22 million unemployment

claims in the last 4 weeks


World Crude Oil Demand/Effects of Covid-19

15

97 99 99 99 100 100 101 101 100 100

101 101

99

60

65

70

75

80

85

90

95

100

105

20

17 Q

1

20

17 Q

2

20

17 Q

3

20

17 Q

4

20

18 Q

1

20

18 Q

2

20

18 Q

3

20

18 Q

4

20

19 Q

1

20

19 Q

2

20

19 Q

3

20

19 Q

4

20

20 Q

1

20

20 Q

2

Actual Demand Reduced Demand Forecast

World Oil Demand (millions barrels per day)

Source: Spears & Associates

Lock-down

among

global

economies

expected

to result in

a 30 to 35%

reduction

in demand

during

Q2’20


U.S. Crude Oil Storage Capacity

16

US Crude Oil Stocks (thousands barrels per day)

653,448

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1/1

7/2

0

1/2

4/2

0

1/3

1/2

0

2/7

/20

2/1

4/2

0

2/2

1/2

0

2/2

8/2

0

3/6

/20

3/1

3/2

0

3/2

0/2

0

3/2

7/2

0

4/3

/20

4/1

0/2

0

Crude Stock Pipeline Fill & Stock in Transit Working Storage Capacity

Source: EIA


953

973

984

1,089

1,235

1,277

1,279

1,471

1,548

1,582

1,598

2,043

2,257

2,377

2,525

3,018

4,287

4,961

14,035

20,291

0 5,000 10,000 15,000 20,000 25,000

Turkey

Taiwan

Netherlands

Australia

Italy

Spain

Thailand

Indonesia

Mexico

France

United Kingdom

Saudi Arabia

Brazil

Germany

Canada

Korea

Japan

India

China

United States

17

Crude Oil Demand for Q2 Reduction Forecasted 2019 Top 20 Crude Oil Consumption Country (thousands bpd)

Source: JODI Oil Dataset, Monthly Update, Spears & Associates

101

0

20

40

60

80

100

2019 Q4 2020 Q2

Mill

ions B

arr

els

per

Day

Demand Forecast Reduced Demand Forecast

~10

mbpd

cuts

(1) Assumes 35% demand reduction

Global

Economic

Rebound

Plus


OPEC Response/Demand Rebound

2%

10%11%15%16%

22%22%23%23%27%

30%32%32%36%

40%41%46%

63%

81%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ba

nkin

g

Utilit

y

Consum

er

Goods

Me

dia

Tech

Ba

sic

In

du

str

y

Insura

nce

He

alth

care

Tele

com

Cap

ita

l G

ood

s

Se

rvic

es

HY

In

de

x

Fin

Se

rvic

es

Leis

ure

Re

al E

sta

te

Au

tom

otive

Re

tail

Tra

nsp

ort

ation

En

erg

y

Distressed Debt Rising Rapidly

18

% of High Yield Index Trading at Distressed Level (% of Face Value)

Source: Deutsche Bank, CreditSights (data as of April 7, 2020)

▪ More than

$140 billion

of high yield

energy debt

is trading at

distressed

levels

(spread

>1,000 bps)

▪ Highest ever

energy

sector

distress ratio


Conclusion and Recommendations

Martin Rubio

Energy M&A Advisory

513

876

1,032

943

780

417

318 332407

515

675

0

200

400

600

800

1,000

1,200

Land Offshore

U.S. Rig Count, Drilling and Completion (D&C) Spending

20

Source: Baker Hughes, Spears & Associates

$73

$104

$138$130

$23$13 $10 $11

$50$66

$94

$0

$40

$80

$120

$160

Drilling and Completion Spending

Rig Count $ in billions

Estimated 2020 D&C

Spend of $57B


What should Companies do in the Current Environment?

21

▪ Discontinue unprofitable divisions/product lines

▪ Evaluate liquidation of non-core/underutilized assets

▪ Scrutinize/defer working capital and capex investments

▪ Evaluate credit policies

Lack of Visibility Drives Increased Need to Reduce

Costs and Manage Cash

▪ Three year strategic and operating plan

▪ Extended cash flow and liquidity forecasts

▪ Discuss your plan with all stakeholders

▪ Evaluate capital structures that will provide liquidity to

achieve your three year plan

Develop a Survival Plan

You are not alone in this.

Have vision, stay positive, think long term.

We will get back to normal…eventually


Q&A

Light At the End of the Tunnel?

23

Testing

Therapies

Vaccine


Appendix

Duff & Phelps Overview

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MORE THAN

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PERFORMED IN 2019

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Assessment of strategic

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Analysis

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Structuring

Financial projections and

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Business and asset

valuation

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Valuation and structuring

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An End-to-End Integrated Platform


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Creative, Global

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D&P Energy Practice Leadership Team

Our Results

James Rebello

Head of Energy M&A Advisory

(713) 986-9318

[email protected]

Martin Rubio

Managing Director

(713) 986-9311

[email protected]

550+Restructuring

transaction

completed

$850+Billion in

aggregate

liabilities

restructured

#4Ranked

middle-market

M&A practice

Restructuring RestructuringRestructuring Restructuring

Financial Advisor to the

Company


Company


Company

has expanded its existing

facilities through the

completion of a priority

term loan

Restructuring RestructuringRestructuringRestructuring


Official Committee of

Unsecured Creditors


1st Lien Lenders


Official Committee of

Unsecured Creditors


Committee of Equity

Holders

Restructuring RestructuringRestructuring Restructuring


Secured Creditor


Pass Through Trust

Certificate Holders

Financial Advisor to Ad

Hoc Note Holders


Ad Hoc Committee of

Note Holders

Restructuring RestructuringDistressed M&A Restructuring


Company


California Public Utilities

Commission


Ad-hoc Committee of

Unsecured Noteholders


Senior Secured

Convertible Noteholders

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COVID-19 and OPEC Price Wars