Lower 48 Upstream Surviving the troughpecd.weebly.com/uploads/2/5/5/2/25529062/clarke_-_dallas_oct_2015.… · Lower 48 Upstream Surviving the trough PECD Luncheon October 30,

Lower 48 Upstream Surviving the trough

PECD Luncheon

October 30, 2015

Trusted commercial intelligence www.woodmac.com


2

Over the last 40 years, Wood Mackenzie has evolved

naturally along the energy value chain to capture all

the key components affecting global markets.

Our integrated approach allows us

to spot trends and forecast future

dynamics before anyone else

Upstream

Oil & Gas

Energy

Markets

Gas

Power

Refining &

Oil Products

LNG

NGL Chemicals

Macro

Economics

Metals & Mining

1973 2015


3

Our data We have built strong

relationships with

industry contacts to take

our primary research to

a new level.

Our analysis We rigorously evaluate

our data, ensuring

unrivalled knowledge of

the markets we serve.

Our people We encourage subscription

clients to talk directly to our

analysts to gain a more

comprehensive level of

understanding.


4

The 4Q 2015 reality of Lower 48 upstream

An onshore production slide

Rig count at cyclical lows and onshore production

heading to a spring 2017 trough of 6.6 million b/d

Prices to respond to fundamentals

Project deferrals and demand support both

work to rebalance the market in 2017

Tight oil cost of supply evolves

Breakeven prices fall, core locations grow, and

higher cost plays have ground to make up

Lower 48 under amplified scrutiny

Flexible, not necessarily marginal, barrels

become ever more important

2016 upstream activity outlook

Cost reductions are slowing, so additional cuts are

necessary to maintain cash flow and debt neutrality

Remarkable gas resiliency

New gas completions, using the latest “tight

oil” techniques, greatly improve play metrics


5

US onshore flexes: production declines underway and higher prices

are needed

-

1

2

3

4

5

6

7

8

Jan-1

1

Jun-1

1

No

v-1

1

Apr-

12

Sep-1

2

Feb

-13

Jul-1

3

De

c-1

3

Ma

y-1

4

Oct-

14

Ma

r-1

5

Aug-1

5

Jan-1

6

Jun-1

6

No

v-1

6

Apr-

17

Sep-1

7

Millio

n b

/d

Mid-Continent NiobraraBone Spring WolfcampBakken / Three Forks Eagle FordVertical / Other HZ

0

200

400

600

800

1000

1200

-

1

2

3

4

5

6

7

8

Jan-1

1

Jun-1

1

No

v-1

1

Apr-

12

Sep-1

2

Feb

-13

Jul-1

3

De

c-1

3

Ma

y-1

4

Oct-

14

Ma

r-1

5

Aug-1

5

Jan-1

6

Jun-1

6

No

v-1

6

Apr-

17

Sep-1

7

Rig

s

Millio

n b

/d

Oil/Cond Production Hz Oil Rigs

US onshore liquids production and rig count US tight oil outlook by play

Source: Wood Mackenzie


6

Brent price required for upstream portfolio to be cash flow neutral in 2016

Source: Wood Mackenzie Corporate Benchmarking Tool Q3 2015. Additional calculations undertaken for companies not covered in CBT. This chart includes cash flows from development,

financing and all other costs, but excludes cash flows from M&A, equity issuance and other one-off items. Antero, Southwestern, and Cabot are excluded due to significant gas-weighting.

Companies have disclosed little concrete guidance on 2016 spend and development plans, though

some have provided ranges which indicate flexibility and cash flow neutrality are key objectives.

Our models assume a mix of spending trajectories, based on how companies indicated they would

adjust activity if prices recover in 2016. Including the impact of hedges rolling-off, none of these

companies would generate free cash flow in 2016 at US$50/bbl Brent under our base assumptions.

Companies which may take a counter-cyclical approach and

outspend cash-flow in 2016 include Pioneer. Companies which we

expect to be cash-flow-positive at US$60/bbl Brent include EOG and

Cimarex, both of which have top-tier portfolios and have

demonstrated conservative approaches to spending thus far.

-

10

20

30

40

50

60

70

80

90

100

Pio

neer

Energ

en

Encana

Co

ntinen

tal

SM

Occid

en

tal

Ne

wfie

ld

Whitin

g

He

ss

Ra

nge

Co

nocoP

hill

ips

Co

ncho

Ma

rath

on

No

ble

De

vo

n

CR

C

Anad

ark

o

Apache

Mu

rphy

EP

EO

G

Ch

esape

ake

Cim

are

x

Buybacks Dividends Exploration Base business

US

$/b

bl B

rent Peer-group avg.

WM Low case

Balance sheet constraints hurt even as prices improve


7

Declines in the value of hedging matter

The impact of unrealised H2 2015 will dwarf 2016.

H2 2015: % of revenue from hedging 2016: % of revenue from hedging

Source: Wood Mackenzie, company reports, calculated using Wood Mackenzie’s Q3 price assumptions

-20% -10% 0% 10% 20% 30% 40% 50%

EOGHess

ApacheDevon

ConocoPhillipsSouthwestern

CabotChesapeake

OccidentalContinental

CimarexMurphy

CRCMarathonAnadarkoEnergenWhiting

NobleEncanaRange

NewfieldSM

PioneerConchoAntero

EP

WM High WM Base WM Low

% of revenue from hedging

-20% -10% 0% 10% 20% 30% 40% 50%

ApacheCimarex

ConocoPhillipsContinental

HessOccidental

MurphySouthwestern

AnadarkoEOG

MarathonWhiting

CRCCabot

ChesapeakeNewfield

NobleEncana

SMEP

DevonPioneerRange

ConchoEnergen

Antero

WM High WM Base WM Low

% of revenue from hedging


8

Is pivoting to gas an option as demand growth accelerates?

A second phase of LNG projects is expected, and low prices preserve power growth

-2

0

2

4

6

8

10

12

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

202

3

bcfd

Policy, oil prices

US GDP, coal fundamentals, policy

Global GDP, oil prices

Mexico energy policy and GDP

State policy, oil prices, US GDP

Global GDP, global gas US demand growth relative to 2013

LNG

Industry Power

Mexico

Heating

Transport



9

Well performance underpins lower cost supply

Breakevens fall, the supply curve flattens, and the ceiling becomes stronger

EURs in major Haynesville sub-plays EURs in major Northeast sub-plays

Carthage

Shelby Trough

Greenwood-

Waskom

Woodardville

0 5 10 15

Haynesville Combo

Spider

Caspiana Core

bcf

0 5 10 15

Lean Gas Core

Southern Wet Gas

bcf

0 5 10

WV Rich Gas

SW Rich Gas

Rich Gas Core

Pittsburgh Area

Greene Dry Gas…

bcf

0 10 20

SusquehannaCore

Bradford Area

bcf

2014

2015


10

0 100 200 300 400

Horn River

Rockies oil

Mid-Con oil

Fayetteville

Permian oil

Granite Wash

Woodford

Eagle Ford

Barnett

Duvernay

Deep Basin

Montney

Marcellus

Haynesville

Utica

Remaining cheap (<$4/mmbtu/<$60/bbl) gas (tcf)

Additional North American gas reserves continue to be

commercialized, and their market influence is concentrated

Remaining cheap gas (tcf)

~900

~475



11

Is there demand risk to the upside around LNG and industrial gas

projects?

Gas-intensive industrial projects LNG exports by destination and flexibility

0

1

2

3

4

5

6

2015 2016 2017 2018 2019 2020 2021 2022 2023

bc

fd

Firm Possible Probable Speculative


0

2

4

6

8

10

12

14

16

18

20

bcfd

Asia (firm) Europe (firm) LatAm (firm)

Flexible Unsold Pre-FID


12

Gas prices do recover, but long-term supply growth hinges

on many moving parts

Price outlook

0

1

2

3

4

5

6

7

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

20

15

$/m

mb

tu

Dominion South Point MichCon Midwest expansion Transco Leidy Line

Transco Z5 Southeast expansion Perryville Henry Hub

Upside to prices based on the pace

of oil and gas drilling recovery



13

Case in point……an evolving US tight oil cost curve

In the range between 10 and 50 billion barrels, 1.8 billion barrels added for every US

$1.00 increase in price, versus 1.3 billion barrels in early 2015

0

20

40

60

80

100

120

- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000

WT

I B

rea

ke

ve

n a

t 1

0%

IR

R (

US

$/b

bl)

Cumulative undrilled commercial resource (mmbls)

1Q2015 Asset commercial resource(mmbls)

3Q2015 Asset commercial resource(mmbls)

New cumulative liquids resource by breakeven for US assets

Source: Wood Mackenzie, GEM


14

Service cost deflation – the silver lining so far

30% savings in onshore liquids plays lowers WTI breakevens by roughly US$15/bbl

-30% -20% -10% 0%

Facilities (Onshore)

Pipeline

Facilities (Shelf)

Subsea

Facilities (Deepwater)

G&A

Completion…

Shallow water drilling

Deepwater drilling

Ultra-deepwater drilling

Onshore drilling…

Deflation

Cost sensitivities on three Bakken areas Development cost deflation by Category

40

50

60

70

80

90

Base View 10% Savings 20% Savings 30% Savings

WT

I U

S$

/bb

l

Costs

North Williston

Williams Core

Nesson Anticline



15

40

60

80

100

2016 2017 2018 2019 2020

WT

I U

S$

/ba

rre

l Service costs will not stay low forever though

An activity rebound may be less than two years away

Deflation accounts for the bulk of cost reductions Will price concessions stick around?

25% - 35%

well cost

reductions

since 2014

Cyclical savings

(Deflation)

Optimized

development

(Structural)



16

Fluidity in the US sector is good, as it is up to non-OPEC to

balance the market

(45)

(40)

(35)

(30)

(25)

(20)

(15)

(10)

(5)

-

Mid/Small-Cap Large-Cap NOC MLP Major

Ch

an

ge

in

ye

ar-

on

-ye

ar

ca

pe

x g

uid

an

ce

(U

S$

billio

n)

22%

10%

21%

29%

7%

1% 8%

2%

Offshore

Oil Sands

Tight/Shale

Conventional

LNG

Midstream

Refining

Chemicals

Announced capital spending cuts by operator and development type

Source: Wood Mackenzie, company reports

Company capital expenditure cut over $220

billion with potentially more coming


17

It took time due to supply momentum in H1 2015 but low oil prices

are affecting the strength in non-OPEC supply

Year-on-year change and total non-OPEC supply

44

46

48

50

52

54

56

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

To

tal n

on

-OP

EC

pro

du

cti

on

(m

illi

on

b/d

)

Mil

lio

n b

/d

Other non-OPEC Mexico North SeaBrazil Russia Canada Oil SandsUnited States Total non-OPEC (right axis)



18

Closing thoughts…and what everyone is asking about

0

20

40

60

80

100

120

US

$/b

bl

Brent WTI

forecast

Quarterly nominal prices and forecast

Source: History - Argus; Forecast - Wood Mackenzie


19

https://www.youtube.com/watch?v=9GxoOSEfroQ


20

Appendix A: How has industry responded to past slow downs?

GoM did very well after the Macondo moratorium & tight oil is off to a great start

Lower 48 tight oil EUR trends – all regions GoM discovery trends – pre and post Macondo

0

2

4

6

8

10

12

14

16

18

20

0

20

40

60

80

100

120

140

160

180

200

2004 2007 2010 2013 2016

Dis

co

very

Co

un

t

Av

era

ge R

eco

vera

ble

Reserv

es (

mm

bo

e)

Average Recoverable Reserves Discovery Count


0

0.1

0.2

0.3

0.4

0.5

0.6

2011 2012 2013 2014 2015

mm

bo

e

Gas NGLs Oil/Condensate


21

Normalising for one area, the tight oil “pencil sharpening”

exercise becomes more apparent

Using data from our

North American Well

Analysis Tool, we

isolated one sub-play

in the Eagle Ford.

In 2013 and the first

half of 2014, EURs

averaged 0.444

mmboe from 1,237

wells.

In the same

geography, wells

since then showcase

better declines and

have an average EUR

of 0.568 mmboe.

Eagle Ford Karnes Trough wells today are 32% larger


22

Appendix B: Refracturing

Source: Wood Mackenzie.

Completion technology is evolving quickly and refracturing mature shale wells could add

reserves over time


23

Re-fractures may prove a low-cost path to increased production

Early refrac – likely higher pressure,

more proppant , more fluid

Advanced re-fracture

programme – new perforations



24

Re-fractures can be risky to nearby wells

1

10

100

1,000

10,000

100,0009

/1/2

00

2

1/1

4/2

004

5/2

8/2

005

10/1

0/2

00

6

2/2

2/2

008

7/6

/20

09

11/1

8/2

01

0

4/1

/20

12

8/1

4/2

013

12/2

7/2

01

4

5/1

0/2

016

Oil

(b

oe

) +

Ga

s (

bo

e)

John Robert 31X-22 (Refractured)

Lesueur 31X-22 (Offset well)

Frac hit in adjacent well due to

hydrualically enhanced natural

fracs system

Unsucessful clean out after refrac

due to rapid fluid loss 300-400

BW/hr

Source: Wood Mackenzie, XTO Energy


25

Robert Clarke

Robert G. Clarke has been with Wood Mackenzie since 2005, originally as a member of the company’s

US Lower 48 Upstream Research team. He has covered both the Rocky Mountains and Gulf Coast

regions specifically, and led much of Wood Mackenzie’s initial US shale research. He product managed

the Global Unconventional Play Service from 2009 to 2014. Now, Robert directs the company’s wider

global unconventional research effort and he also manages an internal upstream Knowledge Network.

Robert’s analytical specializations include geologic play description, decline curve analysis, production

forecasting, analogue play modelling, and economic benchmarking. He has widespread experience

analysing exploratory global unconventional gas assets and has worked on numerous upstream

consulting projects, ranging from asset opportunity screenings for E&Ps, to due diligence work for private

equity M&A. Robert also regularly contributes to written media and is a frequent speaker and panel

moderator at industry conferences.

Prior to joining Wood Mackenzie, he worked as a Field Geologist for HMI, a private engineering and

consulting firm in Houston, Texas. Robert graduated Cum Laude from Texas A&M University in 2001

with a BA in Geology, and received a MBA in 2005 from the Eller College of Management at the

University of Arizona.

Research Director – Global Unconventional Oil and Gas

E [email protected]

T +1 713 470 1634


26

Disclaimer

This report has been prepared by Wood Mackenzie Limited for delivery to Dallas clients

and prospects in October and November, 2015. The report is intended solely for the

benefit of the recipient and its contents and conclusions are confidential and may not

be disclosed to any other persons or companies without Wood Mackenzie’s prior

written permission.

The information upon which this report is based has either been supplied to us or

comes from our own experience, knowledge and databases. The opinions expressed in

this report are those of Wood Mackenzie. They have been arrived at following careful

consideration and enquiry but we do not guarantee their fairness, completeness or

accuracy. The opinions, as of this date, are subject to change. We do not accept any

liability for your reliance upon them.

Strictly Private & Confidential

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Americas +1 713 470 1600

Asia Pacific +65 6518 0800

Email [email protected]

Website www.woodmac.com

Wood Mackenzie* is a global leader in commercial intelligence for the energy, metals and mining industries.

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*WOOD MACKENZIE is a Registered Trade Mark of Wood Mackenzie Limited

Documents

Lower 48 Upstream Surviving the troughpecd.weebly.com/uploads/2/5/5/2/25529062/clarke_-_dallas_oct_2015.… · Lower 48 Upstream Surviving the trough PECD Luncheon October 30,