WHERE DO WE GO FROM HERE?

THE OUTLOOK FOR THE OIL AND GAS INDUSTRY

Jens Zimmermann, CFA
April 26, 2016

CFA Institute Webinar

26 April 2016
Jens Zimmermann, CFA

MSCI World Energy Sector Constituents

8.49%
6.71%

11.00%
15.73%

MSCI World Energy Index vs. WTI Crude Oil

400

160

350

140

300

120

250

100

200

80

150

60

100

40

50

20

58.07%

Integrated Oils
Exploration & Production

0
2000

Oil Services
Refining & Marketing

Transportation

USD/bbl

MSCI World Energy Index Subsector weights

0
2005
2010
2015
MSCI Energy Index
WTI Oil (RHS)

Source: Bloomberg

Source: Bloomberg

Oil Market Fundamentals

Supply/Demand Balance vs. Average Oil Price

102

Non-OECD countries drive global oil demand

CAGR2013-35

100

4500

90
97

80

3500

70

87

50
40

82

77
72

3000

Mtoe

60

USD/ bbl

92
mmbd

4000

2000

30

1500

20

1000

10

500

0
1997 2001 2005 2009 2013
Oil Demand
Oil Supply
WTI Oil Price (RHS)

-1.1%

0
1990 2000 2010 2020 2030
OECD
India
Other Non-OECD

Source: Bloomberg

1.6%

2500

China
Middle East

Source: International Energy Agency

Long-Term Oil Demand Forecasts

Oil demand by sector

Changing Fuel Mix

4000

CAGR2013-35

3500

-2.7%

CAGR2013-35

18000
15000

7.2%

CAGR+1.2%

3000
12000

1.6%

2000
1.6%

1500
1000

Mtoe

Mtoe

2500
9000

0.6%

6000

3000
0.5%

500
0
1990 2000 2010 2020 2030

Industry

RCA

Transportation

Power Generation
Source: International Energy Agency

0
1990 2000 2010 2020 2030
Hydro and Renewables
Nuclear
Gas
Coal
Oil
Source: International Energy Agency

Oil & Gas Subsectors

Oil & Gas Value Chain

Oil & Gas Field Services

Exploration & Production (E&P) companies

U.S. E&Ps: Total Oil & Gas Production
20%

U.S. E&P Subsector: Production Split

14

18%

12

14%

10

12%

10%

8%

6%

mln boe per day

Annual Production Growth

16%

4%
2

2%
0%

0
2001 2005 2009 2013
Oil & Gas Production (RHS)
Production growth
Source: Bloomberg

Source: Bloomberg

Exploration & Production (E&P) companies

U.S. E&P: Dry Gas Producers

U.S. E&P: Oil & NGL Producers

Denbury Res.
Diamondback
Oasis Petr.
Clayton Williams
Resolute Energy
Bill Barrett
Bonanza Creek
Occidental Petr.
Energen
Hess
Carrizo Oil & Gas
Laredo Petroleum
Marathon Oil

Rice Energy
Cabot Oil & Gas
Ultra Petrol.
Southwestern
EQT Corp

EXCO Resources
Antero Resources
Memorial Res.
Gulfport

Chesapeake
Range Resources
0%
Dry Gas

50%

100%

Oil & NGL

0%
Dry Gas

Source: Bloomberg

50%

100%

Oil & NGL

Source: Bloomberg

Exploration & Production (E&P) companies

share prices track the oil price

30%

120

3500

160

25%

100

3000

140

20%

80

2500

15%

60

120

100

2000

80
1500

10%

60

40

1000
5%

20

0%

0
2000

2005

Net Margin
WTI Oil (RHS)

2010

2015

USD/bbl

As oil prices drive E&P profits

40

500

20

0
2000

0
2005

2010

2015

ROE

E&P Index
Source: Bloomberg

WTI Oil (RHS)

Source: Factset, Bloomberg

Exploration & Production (E&P) companies

Gas-focussed E&Ps track gas prices
150

E&P Subsector suffers from debt burden

100%

15

50

120

12

90

60

30
0
2004

3
0
2008

2012

40

80%

USD/Mmbtu

USD

90%

2016

Ultra
EQT
Cabot
Southwestern
Natural Gas (RHS)

70%

30

60%

20

50%

40%

10

30%

20%
-10

10%
0%

-20
1996 2000 2004 2008 2012
Debt to Capital (LHS)
EBITDA to Int Expense (x)

Source: Bloomberg

Source: Bloomberg

10

Integrated Oil companies

RoyalDutchShell: Net Profit Split

Chevron: Net Profit Split

30000
25000

USD mln

20000
15000
10000
5000
0
-5000
2004

2007

Downstream

Source: Company Information

2010

2013

Upstream

Source: Company Information

11

Integrated Oil companies Big Oil

Big Oil: Too big to grow
20%

31

100%

30

90%

80%

29

30

50%

25

40%

20

30%

15

20%

10

24

10%

23

0%

26

25

0%
-5%

40

60%

27
5%

45
35

28

10%

50

(same
scale as
E&P chart)

70%

mln boe per day

Annual Production Growth

15%

and too big to fail

2001 2005 2009 2013

Oil & Gas Production (RHS)
Production growth

Source: Bloomberg

1996 2000 2004 2008 2012

Debt to Capital (LHS)
EBITDA to Int Expense
Source: Bloomberg

12

Big Oil as a defensive energy subsector

Big Oil also tracks oil, but less volatile
600

8%

200

500

150

400

7%

300

100

200

6%

50

100

5%

0
2000

4%

2005
IO Index

3%

USD/bbl

Big Oil: Attractive Dividend Yields

2010

2015

WTI Oil (RHS)

Big Oil relative to E&P vs. Oil price

0.40

200

0.35

1%

150

0.30
0.25

0%

2000

2005

Integrated Oils

2010

2015
E&P

100

0.20

50

0.15
0.10
2006 2008 2010 2012 2014

Source: Bloomberg

IO relative to E&P Index

USD/bbl

2%

WTI Oil (RHS)

Source: Factset, Bloomberg

13

Refining & Marketing (R&M)

Products derived from crude oil qualities

Source: Valero

Refineries convert crude oil into

refined products (such as
gasoline, diesel, heating oil)

A simple refinery separates crude

oil into different products through
distillation

A complex refinery improves the

product mix for a specific crude oil
with conversion processes

and uses different crude oil

qualities as feedstock

Refining Margins: Profit a refinery

can generate from turning a barrel
of oil into refined products

3:2:1 Complex Margin: from three

bbls of oil, produce 2 bbls of
gasoline and 1 bbl of heating oil
14

Refining & Marketing (R&M)

Complex 321Ref Margins US Gulf Coast
50

2000-15 Range

2014

2015

40
USD/bbl

Refining Margins drive Profitability

30%

30

25%

25

20%

20

15%

15

10%

10

5%

0%

30
20
10

01

02

03

05

06

07

09

10

12

Month

Complex 321Ref Margins NW Europe

50

2000-15 Range

2014

2015

40

USD/bbl

USD/bbl

30
20

2000

2005

2010

2015

10
0

01

02

03

05

06 07
Month

09

10

12

Source: Bloomberg

ROE of US refiners (LHS)

3:2:1 Gulf Coast Refining Margin
Source: Bloomberg

15

Refining & Marketing (R&M)

160

2500

140
2000

120

Demand
destruction

100

75

0.8

65

0.7

55

1000

60

500
'Golden Age'
of refining

2010

45

0.5
USD/bbl

80

2005

0.9

0.6

1500

0
2000

R&M relative to E&P vs. Refining Margin

35

0.4
25

0.3

40

0.2

15

20

0.1

0.0
2009

-5

2015

Global Refining Index

WTI Crude Oil (RHS)

Source: Factset, Bloomberg

USD/bbl

WTI Crude Oil vs. Global Refining Index

2011

2013

2015

R&M relative to E&P

3:2:1 GC Refining Margin (RHS)

Source: Factset, Bloomberg

16

Oil Services Providers

Services providers are the
clients of Integrated Oils and
E&Ps.

Capex from Big Oil and E&Ps

600

100
90

500

60
300

50
40

200

USD/bbl

70

400
USD bln

Revenues depend on capex

spending and drilling activity
from Big Oil and E&Ps.

80

30
20

100

10
0

0
2000

2005

CAPEX

2010

2015

WTI Oil (RHS)

Oil price affects revenues and

profits only indirectly, often
with a time lag.
Share prices are also highly
correlated with the oil price.
Services providers can be
distinguished in: Contract
Drilling, Oilfield Services and
Engineering & Construction

Source: Bloomberg

17

Oil Services Performance

500

160

450

140

Oil Services relative to defensive IO

2.0

160

1.8

140

1.6

400

120

300

100

250

80

200

60

150

USD/bbl

350

40

100

120

1.4
1.2

100

1.0

80

0.8

60

0.6

40

0.4

50
0
2000

2005

OS Index

2010

20

0.2

20

0.0
2006

2015

WTI Oil (RHS)

Source: Bloomberg

USD/bbl

Highly correlated to the oil price

2009

IO relative to OS

2012

2015

WTI Oil (RHS)

Source: Factset, Bloomberg

18

Oil Field Services (OFS)

Market shares of Oil Field Services

Baker Hughes U.S. Oil & Gas Rig Count

1800

Specialty chemicals

1600

Pressure pumping

1400

Completion serv.

1200
Number of rigs

Artificial lift

Drill bits
Drilling fluids
Directional dr.
Logging while dr.

1000
800
600

Wireline logging

400

Seismic data

200
0%

50%

100%

Baker Hughes

Halliburton

Schlumberger

Weatherford
Source: Company Information

0
2000

2004
Oil Rigs

2008

2012

2016

Gas Rigs
Source: Baker Hughes

19

Valuation
Absolute Valuation:

MSCI Energy Index P/E

DCF: all subsectors

50%

30

NAV: E&P, IO, CD

40%

25

DDM: IO

30%

20

20%

15

10%

10

0%

Market-based Valuation Multiples

P/E: IO, OFS, E&C, CD
EV/EBITDA: all subsectors
EV/EBITDAX: E&P, IO
P/Book: all, but mostly R&M
Dividend Yield: IO
E&P (Exploration & Production), IO (Integrated Oils), R&M
(Refining & Marketing), OFS (Oil Field Services), CD
(Contract Dilling), E&C (Engineering & Construction)

-10%

-20%

Average:
-5%

-5

-30%
-10
2001 2003 2006 2009 2011 2014
MSCI Energy P/E rel. to World (LHS)
MSCI Energy 1 Yr Forw P/E
Source: Factset

20

Subsector P/E Valuation

IO: Secular P/E Valuation

E&C: Cyclical P/E Valuation

20

10%

15

0%

90%

15

70%
10

-10%
5
-20%
-30%

20

110%

Average:
-22%

10

50%
30% + 1 Stdev:
40%
10%

5
0

-10%
-5

-10
-40%
2000 2003 2005 2008 2011 2014

-30%

- 1 Stdev:
- 22%

-5

-10
-50%
2000 2003 2005 2008 2011 2014

IO P/E rel. to MSCI Energy (LHS)

EC P/E rel. to MSCI Energy (LHS)

IO 1 Yr Forw P/E

EC 1 Yr Forw P/E
Source: Factset

Source: Factset

21

Sub-sector EV/EBITDA Valuation

MSCI Energy: EV/EBITDA Range

Subsectors: EV/EBITDA Range 2000-15

20

8.0

18
16

7.0

EV/EBITDA (x)

EV/EBITDA (x)

+1 Stdev
6.0
5.0

-1 Stdev

14

12
10

8
6

4.0

4
2

3.0

2.0
2001 2004 2007 2009 2012 2015

Source: Factset

Median

Source: Factset

22

THANK YOU!
Archived recordings of webinars are available at www.cfainstitute.org/library

23

Appendix

24

Energy Demand Trends

Non-OECD countries drive oil demand

Source: Bloomberg

Gas demand by sector

Source: International Energy Agency

25

Contract Drilling (CD)

Fleet composition of Offshore Drillers

Gulf of Mexico Jack-Up Day Rates

Pacific Drilling

120

1
0.9

100

0.8

Day rate (USD k per day

Seadrill
Hercules Offshore
Diamond Offshore
Ensco
Noble
Transocean
0

50

100

150

0.7

80

0.6

60

0.5
0.4

40

0.3

0.2

20

0.1

Jack-up

Medium depth

0
2003

Deepwater

Ultra deepwater

Day rate (LHS)

Source: Company Information

Utilization (%)

Rowan

0
2008

2013
Utilisation (RHS)
Source: IHS Petrodata

26

Engineering & Construction (E&C)

Activities above and below the surface

ENGINEERING &
CONSTRUCTION

ABOVE

Development capex:

Key Players:

FPSO (Floating production

storage and offloading)
SURF (Subsea umbillicals,
risers, flowlines)
Subsea production and
flexible pipe systems
Pipelines and Refineries
Petrochemical plants
Gas-To-Liquids plants

Technip
Saipem
Wood Group
Petrofac
AMEC
SBM Offshore
Fugro
Subsea 7
Tecnicas Reunidas
Fluor

EARTH SURFACE or SEA FLOOR

BELOW
OIL FIELD
SERVICES
& EQUIPMENT

Exploration capex:

Key Players:

Seismic data
Wireline logging
Logging while drilling
Directional drilling
Drilling fluids
Drill bits
Completion services
Pressure pumping

Schlumberger
Halliburton
Weatherford
Baker Hughes
Cameron
Superior Energy
Service

E&C companies provide the

infrastructure above the surface
OFS companies provide drillingrelated service below the surface
Exploration capex for belowsurface OSF activities
Development capex for abovesurface E&C activities

US companies dominate OSF

market, European companies
stronger in E&C activities
E&C companies book an order
backlog due to long-term
contracts (3-5 yrs)

27

Financial Analysis
EBITDA Margins

Capital Intensity

0.6

0.50
0.45

0.5

0.40
0.35

0.4

0.30
0.3

0.25
0.20

0.2

0.15
0.10

0.1

0.05
0.00

0
2000 2003 2006 2009 2012
E&P

IO

OS

R&M

CD

Source: Factset

2000 2003 2006 2009 2012

E&P

IO

OS

R&M

CD

Source: Factset

28

Oil & Gas Producers

Individual well production profile

Field production profile

Field production (left sc)

3000
Initial decline rate =
10%

2000

Initial decline rate =

30%

1500
1000

350

2500

300

2000
k boe/d

2500

250
1500

200

1000

150
100

500

500

0
0

50 100 150 200 250 300

Months

Cumulative # of wells

boe/d

Wells drilled

50
0

50 100 150 200 250

Months

29