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1 20.09.2016
Oil price influence on the industry Offshore Energy Workshop - Surviving in a Changing Environment
Stewart Williams, SVP Research, Wood Mackenzie
AGENDA
2 20.09.2016
1. Corporate response to a lower-for-longer world
2. Spending cuts and project deferrals
3. The economics of new supply
4. Impact of low prices on the offshore drilling sector
1. Corporate response to a lower-for-longer world
3 20.09.2016
INDUSTRY CASH FLOW NEUTRALITY WILL REDUCE AS
A RESPONSE TO THE PRICE DROP
Brent price required to be cash-flow neutral in 2015
Source: Wood Mackenzie. Cash flow breakevens exclude cash flow from M&A, equity issuance and other one-off items. Base business
includes cash flow from hedging and downstream . Dividend estimates include cash savings from scrip issuance. Average shown weighted
by upstream NPV,10. Assumes equity financing for all projects. 2016 cash flow breakevens adjusted for capex and production guidance
announced to-date.
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 -
All top-50companies
FocusedInternational
Major FocusedCanadian
NOC Conglomerate Diversifiedindependent
Focused US Russian
Pri
ce r
eq
uir
ed
to
be c
ash
-flo
w n
eu
tral
(U
S$/b
bl
Bre
nt)
Buybacks
Dividends
Exploration
Base business (including hedging)
US$93
4 20.09.2016
OVERALL REVENUES INCREASED WHEN PRICES
WERE HIGH BUT MARGINS HAVE NOW BEEN
REDUCED TO THE POINT OF BEING NEGATIVE
Majors: cashflows per boe(2000-2015) Majors: free cash margin per boe (2000-2015)
Costs have to be ‘reset’ if prices are going to remain ‘lower for longer’
Source: Wood Mackenzie
-10
0
10
20
30
40
50
60
70
80
90
2000
2005
2010
2015
US
$/b
oe
Cash margin
Tax
Opex
Capex
Exploration
0
10
20
30
40
50
60
70
80
90
100
110
120
-5
0
5
10
15
20
2000
2005
2010
2015
Bre
nt
Oil
Pri
ce
(U
S$
/bb
l)
Ca
sh
Ma
rgin
(U
S$
/bo
e)
Cash margin
Brent
5
INDUSTRY RESPONSE HAS BEEN FAST, DEEP AND
RELENTLESS…
20.09.2016
Net debt
+$60 bn
+9%
(since
2014)
Capex
-25%
(2015 vs.
14)
Dividends
-$34 bn
-33%
(2015 vs.
14)
Cost
deflation
Source: Wood Mackenzie. Y-o-Y changes. Corporate Service coverage group only.
Buybacks
-$29 bn
-89%
(2015 vs.
14)
6 20.09.2016
INDUSTRY CASH FLOW NEUTRALITY CLOSING-IN ON
US$50/BBL BRENT
Brent price required to be cash-flow neutral in 2015
Source: Wood Mackenzie. Cash flow breakevens exclude cash flow from M&A, equity issuance and other one-off items. Base business
includes cash flow from hedging and downstream . Dividend estimates include cash savings from scrip issuance. Average shown weighted
by upstream NPV,10. Assumes equity financing for all projects. 2016 cash flow breakevens adjusted for capex and production guidance
announced to-date.
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 - 2015 -
All top-50companies
FocusedInternational
Major FocusedCanadian
NOC Conglomerate Diversifiedindependent
Focused US Russian
Pri
ce r
eq
uir
ed
to
be c
ash
-flo
w n
eu
tral
(U
S$/b
bl
Bre
nt)
Buybacks
Dividends
Exploration
Base business (including hedging)
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016
All top-50companies
FocusedInternational
Major FocusedCanadian
NOC Conglomerate Diversifiedindependent
Focused US Russian
Pri
ce r
eq
uir
ed
to
be c
ash
-flo
w n
eu
tral
(U
S$/b
bl
Bre
nt)
Buybacks
Dividends
Exploration
Base business (including hedging)-53%
-43%
-42% -34% -53% -50% -49%
-41%
-43%
7 20.09.2016
INDUSTRY CASH FLOW NEUTRALITY CLOSING-IN ON
US$50/BBL BRENT
Brent price required to be cash-flow neutral in 2015 vs. latest 2016 data
Source: Wood Mackenzie. Cash flow breakevens exclude cash flow from M&A, equity issuance and other one-off items. Base business
includes cash flow from hedging and downstream . Dividend estimates include cash savings from scrip issuance. Average shown weighted
by upstream NPV,10. Assumes equity financing for all projects. 2016 cash flow breakevens adjusted for capex and production guidance
announced to-date.
US$53
US$93
0
20
40
60
80
100
120
0
50
100
150
200
250
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
Oil
pri
ce
US
$ p
er
ba
rre
l
To
tal C
on
sid
era
tio
n (
US
$ b
illi
on
)
Corporate deal spend
Asset deal spend
Oil price
0
20
40
60
80
100
120
0
50
100
150
200
250
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
Oil
pri
ce
US
$ p
er
ba
rre
l
To
tal C
on
sid
era
tio
n (
US
$ b
illi
on
)
Corporate deal spend >US$10bn
Corporate deal spend <US$10bn
Asset deal spend
Oil price
8 20.09.2016
WHAT HAS THE OIL PRICE COLLAPSE DONE FOR
M&A?
Annual deal count Annual deal spend
Deal activity collapsed in 2015. A wide bid-ask spread suppressed activity
Source: Wood Mackenzie. 2016 figures are up to mid-August 2016
0
20
40
60
80
100
120
0
100
200
300
400
500
600
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
Oil
pri
ce
US
$ p
er
ba
rre
l
Dea
l C
ou
nt
Corporate deal count
Asset deal count
Oil price
AGENDA
9 20.09.2016
1. Corporate response to a lower-for-longer world
2. Spending cuts and project deferrals
3. The economics of new supply
4. Impact of low prices on the offshore drilling sector
10 20.09.2016
EVEN BEFORE EXPLORATION BUDGETS WERE
SLASHED, EXPLORATION WAS STRUGGLING TO
PROVIDE RETURNS
Exploration and appraisal expenditure Exploration costs and returns
Source: Wood Mackenzie.
0
20
40
60
80
100
2004 2008 2012 2016E 2020E
E&
A e
xp
en
dit
ure
(U
S$
bn
)
Onshore Shelf
Deepwater Firm
Contracted Discretionary
0%
5%
10%
15%
20%
0
1
2
3
4
2005 2007 2009 2011 2013 Fu
ll c
yc
le i
nte
rnal ra
te o
f re
turn
(%
)
Dis
co
ve
ry c
osts
(U
S$
/bo
e)
Discovery costs IRR
11 20.09.2016
UPSTREAM - INVESTMENT TO FALL BY 45% FROM
PEAK
Global upstream spend (US$ bn)
0
100
200
300
400
500
600
700
800
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Capex I
nvestm
ent (U
S$ B
illio
n)
Exploration spend yet-to-drill North America
Probable Development Under Development
Onstream Pre-oil price collapse projection
Capital
investment
down to US$440
bn compared to
US$755 bn in
2014
L48: uncons
flexibility:
recovers 2017
with firming oil
price
Conventional
FIDs: 6 in 2015,
similar in 2016
Exploration
spend - halves
to cUS$45 bn
2016-18 –
consequences?
Exploration
spend – picks
up towards
2020
2014 spending
proves
unsustainable
12 20.09.2016
NEAR-TERM UPSTREAM INVESTMENT SLASHED BY
US$370 BILLION SINCE OIL PRICE FALL
Wood Mackenzie’s view: reduction in 2016-17 global capital investment from Q4 2014 to Q2 2016
Source: Wood Mackenzie
AGENDA
13 20.09.2016
1. Corporate response to a lower-for-longer world
2. Spending cuts and project deferrals
3. The economics of new supply
4. Impact of low prices on the offshore drilling sector
14 20.09.2016
PRE-FID PROJECTS ARE CRUCIAL TO FILL 2025
SUPPLY GAP
Growing supply gap to 2025 Cost of pre-FID projects and new drilling
Over 20 million b/d needs to be developed by 2025 to offset declines and
meet demand projections
Source: Wood Mackenzie Oil Supply Tool and Macro Oils Long Term Outlook H1 2016
60
65
70
75
80
85
90
95
100
105
Mil
lio
n b
/d
0
5
10
15
20
25
Supplygap
<$40 $40<$60
$60<$80
>$80 Non-OPEC
reservesgrowth,
other Disc,YTF
Call onother
OPEC
Mil
lio
n b
/d
Pre-FID projects + new US
L48 drilling
15 20.09.2016
80% OF US LOWER 48 FUTURE DRILLING IS NOW
COMMERCIAL AT $60/BBL. ONLY 55% OF
CONVENTIONAL PROJECTS ARE COMMERCIAL AT $60
US Lower 48 breakeven bands Conventional pre-FID breakeven bands
70% of new global production in 2025 breaks even under $60/bbl
Source: Wood Mackenzie Oil Supply Tool
0
1
2
3
4
5
6
7
8
2017 2019 2021 2023 2025 2027
Pro
du
cti
on
(m
illio
n b
/d)
>$90
$80-$90
$70-$80
$60-$70
$50-$60
$40-$50
<$40
0
1
2
3
4
5
6
7
8
2017 2019 2021 2023 2025 2027
Pro
du
cti
on
(m
illio
n b
/d)
>$90
$80-$90
$70-$80
$60-$70
$50-$60
$40-$50
<$40
16
LONG TERM COST CURVE: SCALE AND
SUSTAINABILITY ALSO IMPORTANT
20.09.2016
Pre-FID and US L48 future drilling cumulative production by breakeven in 2025
Source: Wood Mackenzie, Oil Sands and US onshore breakevens at 10% discount rate, ROW at 15%
discount rate, breakevens in US$ Brent equivalent
Cumulative liquids production 2025 '000 b/d
Bre
ak
eve
n U
S$
/bb
l B
ren
t e
qu
iva
len
t
Onshore OPEC
Eagle Ford
Shallow water
Nigeria
Onshore Non - OPEC
Mid-Continent SCOOP
L48 Other
Canada Oil Sands
Wolfcamp
Niobrara
Bone Spring
Ultra Deepwater
Nigeria
UDW Brazil
L48 Vertical
Deepwater US
Deepwater Non - OPEC
Bakken
Mid - Continent STACK
Shallow Water Europe
Deepwater
Nigeria
Three Forks
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Offshore
non-OPEC
Deepwater Angola
UDW US
UDW
Angola
AGENDA
18 20.09.2016
1. Corporate response to a lower-for-longer world
2. Spending cuts and project deferrals
3. The economics of new supply
4. Impact of low prices on the offshore drilling sector
19
STACKING ACTIVITY HAS STARTED TO GAIN PACE
THOUGH 2015 AND 2016 THOUGH FAR MORE NEEDS
TO BE DONE TO REBALANCE THE MARKET
20.09.2016
Global marketed rig utilisation dropped towards 67% in June 2016
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
100
200
300
400
500
600
700
800
2010-01 2011-01 2012-01 2013-01 2014-01 2015-01 2016-01
Demand (LHS) Supply (LHS) Utilisation Rate (RHS)
June ‘16 Average Demand Count: 483
June ‘15 Average Demand Count: 623
Y-o-Y % Change: -22.5%
Source: Wood Mackenzie Infield Systems [email protected]
20
THE NUMBER OF READY AND COLD STACKED ASSETS
HAS INCREASED RAPIDLY AS OPERATORS HAVE
STOPPED SIGNING AND RENEWING CONTRACTS.
20.09.2016
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016
Ready Stacked Cold Stacked
The number of cold and
ready stacked assets now
well beyond the number in
the previous down-turn
0% 20% 40% 60% 80% 100%
Ready Stacked
Cold Stacked
0-9 10-19 20-29 30-39 40-49 >50
Large number of cold-stacked rigs that
are greater than 15 years of age. Under
current market conditions rig managers
will struggle to justify the investment
required to maintain them
Source: Wood Mackenzie Infield Systems
21
STACKED RIGS – FIRTH OF FORTH, EAST OF
EDINBURGH
20.09.2016
Cromarty Firth ‘parking-lots’ are full, rigs now stacked further south
Stewart Williams
VP Research
Wood Mackenzie
Stewart Williams
VP Research
Wood Mackenzie
