Investment Banking Experts for the Energy, Industrial and Infrastructure Sector Texas Energy Council Symposium “The Future for Oil & Gas Service Companies”

Investment Banking Experts for the Energy, Industrial and Infrastructure Sector

Texas Energy Council Symposium“The Future for Oil & Gas Service Companies”

March 6, 2012


Wilcox | Swartzwelder & Co. Overview

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Corporate Mergers and Acquisitions

Oil & Gas Property Acquisitions and Divestitures

Capital Raising & Private Placements

Merchant/Principal Investing

Leading boutique investment bank providing financial advisory solutions exclusively to mid-market companies in the Energy, Industrial and Infrastructure sector.

Services

Approach

Track Record

Bring Wall Street expertise to Main Street Senior level commitment; “boutique” level service High quality advice and deal execution Energy Industry focus

40 years of experience, completing more than 100 transactions with value in excess of $3.6 billion

Navigated through multiple energy cycles, completing transactions in periods of positive momentum as well as difficult circumstances


Industry Specialization – “3Ns” Across the Energy Chain

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Specialization offers numerous advantages to clients – research, industry intelligence, capital markets knowledge, valuations, trends, investor and buyer relationships.

Energy Industrial Infrastructure

The Future for Oil & Gas Service Companies


Recent Media Descriptions of U.S. Oil and Gas Industry

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“Renaissa

nce”

“Revolutionary”“Early Stage”“Death of Peak Oil”

“New Era”“Transformational”


Difficulty of Predicting the Future

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Difficulty of Predicting the Future (Oilfield Services Index – OSX)

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Oil price reaches $141.47/Bbl

(June 27, 2008)

Oil price drops to $33.20/Bbl

(January 16, 2009)

Recession begins (April 2008)

Recession ends (June 2009)

European debt crisis


How Good is Your Crystal Ball?

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“How frustrating. The crystal ball is down again”Source: New Yorker – August 12, 1991


Indications of What the Future May Hold

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Windows are relatively short and the oil and gas service sector can change rapidly.

Follow the money ($$$)

Commodity prices and Oil & Gas producer expectations

Transition from natural gas to oil/liquids

Basin economics and rates of return

Technology Efficiencies, Production Gains and Larger Recoveries

NAM Oil & Gas service industry performance is strong

Strained availability of services in certain highly active basins; shifting of operations to oil/liquids areas - more competition coming

What the stock market is indicating; margins may have peaked

Notable transactions

Case Study: Middle-market oilfield services transaction

Primary Drivers of Activity

Implications


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Commodity Prices: Oil/Liquids…Not Natural Gas!

Bloomberg Consensus Forecasts 2012E 2013E

Oil $107.71 $102.35

Natural Gas $2.98 $3.94


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Rig Count Gets “Oilier”

Source: Baker Hughes Rig Count


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Producer Expectations – 2012 Outlook

Source: The American Oil & Gas Reporter – Outlook 2012 (January 2012) Source: Barclays Capital annual oil & gas upstream spending survey (December 2011)

U.S. Producer Spending 2012 ($MM)

Budget Size 2011 2012 % Increase

<$50 million $787 $984 25.0%

$50-$100 million 1,038 1,402 35.0%

$100-$1 billion 22,293 23,726 6.4%

>$1 billion 87,617 96,333 9.9%

Total Spending $111,735 $122,445 9.6%


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Sensitivity of Drilling Based on Commodity Prices

Source: The American Oil & Gas Reporter (January 2012)Drilling Decreases

Natural Gas Prices at Which Operators Alter 2012 Drilling

Oil Prices at Which Operators Alter 2012 Drilling

Drilling Increases


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Capital flowing to basins offering highest rates of return.

Basin Economics – All Basins Not Created Equal

Rate of

Return

Source: Credit Suisse (Jan. 3, 2012)


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Rig Count is Bearing Out the Trend (Year-Over-Year Change)

Permian Basin +112 rigs

471 total rigs31% change

Eagle Ford Basin +94 rigs


Bakken Shale +45 rigs


Marcellus Shale +11 rigs


Haynesville Shale -75 rigs

86 total rigs-47% change

Fayetteville Shale -2 rigs


Barnett Shale -24 rigs


Cana Woodford +10 rigs


Granite Wash+2 rigs


Mississippi Lime +28 rigs


Source: Baker Hughes Rig Count


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Horizontal Drilling Geo - steering Measurement-While-Drilling (MWD) Logging-While-Drilling (LWD) Pad development

Multi-Stage Hydraulic Fracturing/Enhanced Completion Techniques Longer laterals More stages Zipper frac

Results (Oil & Gas “Manufacturing”) Higher service intensity (oil 2-3x > gas) Improved predictability and repeatability

lowers risk and increases productivity

Technology Advances are Transformational

Rig Count (Horizontal vs. Vertical)

Improved efficiencies resulting in substantial production gains.

Lateral Length (ft.) Frac Stages

Bakken 2008 – 5,000 12

2011 – 10,000 32

Eagle Ford

2008 – 3,700 11

2011 – 6,000 18


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Domestic Natural Gas and Oil Production Has Turned the Corner


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Proof is in the Production – Sharply Accelerating Domestic Oil Supply

Source: Raymond James Equity Research (February 13, 2012)

Can the U.S. become energy independent?

MBP

D


We Are Really Good, But It Hurts: Barnett as Analog to Haynesville?

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Haynesville service activity is in decline…will it resemble what happened in the Barnett?

Roughly 400-500 drilled-but-uncompleted well inventory; won’t complete until gas prices improve

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Production Rig Count

Barnett Shale Production vs. Rig Count


Oil & Gas Service Companies Shifting to Oil/Liquids Areas

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Chesapeake announces decrease in active rigs in Haynesville (dry gas); where do these rigs go?

Increased competition and pricing pressure

Increased input costs (margin compression) Labor Raw materials Logistics and transport costs from dry gas to

oil/liquids basins

Pressure pumpers (hydraulic fracturing companies) – recent reports suggest pricing and margins coming down as “Big 3” (Schlumberger, Halliburton, Baker Hughes) defend market share

Southwestern Cutting Fayetteville Drilling for MarcellusFebruary 29, 2012


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People/Housing (Williston, North Dakota Wal-Mart)

Oilfield service equipment – logistics/transportation/relocations from dry gas regions

Commodities used for drilling and completing wells (e.g. Proppant)

Infrastructure (pipeline, rail, trucks, roads, water)

Strained Availability of Services

Source: Bakken Investor Conference 2011 – North Dakota Association of Oil & Gas Producing Counties

Bakken Needs Truck loads required per completed well 2,024

Quantity of frac sand per well 3 million pounds1,500 tons15 railcars

Barrels of fresh water per well 50,000

Barrels of oil handled daily by tank trucks 200,000 – 300,000

Quantity of tank trucks moving oil daily 1,000 – 1,500


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Oil & Gas Service Company Performance

Oilfield Service Revenue ($ in billions) Oilfield Service EBITDA and EBITDA Margin ($ in billions)


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What the Stock Market is Indicating

OSX Index S&P 500 Index


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Notable Oil and Gas Service Transactions

Transactions

URS acquires Flint Energy Services February 20, 2012

Superior Energy Services merges with Complete Production October 11, 2011

Archer Limited acquires Great White Energy Service August 23, 2011

Archer Limited acquires Allis Chalmers Energy February 24, 2011

Key Energy Services purchases Edge Oilfield Services/Summit Oilfield August 7, 2011

Key Energy Services sells pressure pump business to Patterson – UTI July 6, 2010

C & J Energy Services Initial Public Offering July 26, 2011

C & J Energy Services Purchases Total Equipment and Service April 28, 2011

Ensign Energy Services acquires land drilling division of Rowan July 20, 2011

Basic Energy Services purchase of Maverick Companies July 11, 2011

Select Energy Services, LLC acquires The Western Company of Texas July 5, 2011

Frac Tech Sale of Majority Interest to Temasek & RRJ Capital April 19, 2011

Baker Hughes Inc. purchases BJ Services Company April 29, 2010


Case Study: Middle Market Oilfield Service Transaction

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“Beauty is in eye of beholder”; if considering a transaction, it pays to broadly test the market

$40 million difference between initial high and low bids

Initial Indications of Interest ($mm)

Financial SponsorStrategic Buyer


Conclusion: The Future of Oil & Gas Service Companies

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Follow the $; capital flowing to areas offering highest returns given commodity prices

Transitioning from natural gas to oil/liquids

Technology will continue to advance leading to greater efficiencies, increased production, larger recoveries

Oil & Gas service company performance is strong, but momentum is slowing and margins will come down

Services will remain strained in highly active basins but competition will increase, thereby helping satisfy demand

Public equity markets indicate closer to top of cycle than bottom

M&A window remains open

Primary Drivers of Activity

Implications


Thank You!

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Jason N. Wilcox, Managing Director

Wilcox l Swartzwelder & Co.

433 E. Las Colinas Blvd, Suite 1200Irving, Texas 75039

972-831-1300

E-Mail: [email protected]

Website: ws-ibank.com

For more information contact:

Documents

Investment Banking Experts for the Energy, Industrial and Infrastructure Sector Texas Energy Council Symposium “The Future for Oil & Gas Service Companies”