Achieving
Innovation through Dynamic Change
Industry Perspective presented by J. Robinson West
7 April 2016 PESA Annual Meeting
1
"Generals always fight the last war"
Boom and bust cycle continues as operators aggressively
cut capex in response to price
-18.4
3.37.8
14.510.8
20.918.2
21.7
5.2
29.0
-60
-45
-30
-15
0
15
30
45
60
75
(%)
2014 20152013201220112010
12.2
2009
-7.1
2008
21.0
200720062005
28.1
20042003
18.9
2002
1.8
20012000
E&P Expenditure (YoY Delta) Brent Crude Oil (YoY Delta)
Annual Change in Global E&P Capex vs Oil Price
Source: Rystad UCube (Feb 2016); EIA, BCG
2
50
100
150
200
250
2009 2010 2011 2012 2013 2014
50
100
150
200
250
1999 2000 2001 2002 2003 2004
Value of $100 invested in Dec 1999 ($)
Average annual TSR
Big Oil1 : 6.7%
S&P 500: (2.3)%
Average annual TSR
Big Oil1 : 2.9%
S&P 500: 13.6%
50
100
150
200
250
2004 2005 2006 2007 2008 2009
Average annual TSR
Big Oil1 : 7.3%
S&P 500: 0.4%
Big Oil
S&P 500
Big Oil
S&P 500
Big Oil
S&P 500
1999 – 2004 Dec 1999 – Dec 2004 Dec 2004 – Dec 2009 Dec 2009 – Oct 2015
Value of $100 invested in Dec 2004 ($) Value of $100 invested in Dec 2009 ($)
1. 'Big Oil' is: Chevron, ExxonMobil, Shell, Total, BP, ConocoPhilips, Statoil, Eni, Repsol; 2. Dec 2009-July 2014 TSRs for Big Oil: 10.3% and S&P 500: 15.1%. 3. Brent
Note: 'Big Oil' index uses equal-weighted median returns, rebalanced monthly and will not equal the average return of all peers shown previously. Statoil is not included in Dec 1999 – Dec
2004 index because its initial public offering did not take place until 2001. Source: S&P Capital IQ, BCG ValueScience Center, Thomson Reuters, BCG analysis
18 29 24 25 29 38
Avg. oil
price
($/bbl)3 :
38 55 65 72 98 61 10080 111 112 10961 55
YTD
The model of the Oil & Gas industry is broken Big oil value creation has disappointed investors prior to the oil price decline
Value creation
challenges
already emerged
with high oil price2
3
A fundamental misunderstanding of the industry has
underpinned this failure
It is a rich industry
• Net profit margin >8%prior to 2009
Margins are tight
• Net profit margin <5% since 2009
It is a vehicle to deliver dividends
• Historic dividend coverage of >200%
Capex consumes most cash flow
• $0.97 of every new $1 of cash flow
dedicated to capex
You need scale to be successful
• Consolidation of the 1990s-2000s
created value
Smaller players are more nimble
• One-size-fits-all model not well suited to
new challenges, e.g. shale
Industry is internally focused and
doesn't learn from the outside
• New, lean operating models are needed
Operators are run by smart engineers
• A cultural shift is required to focus on
cost and continuous improvement
Myths of the industry Reality of the industry
Industry is adaptable and flexible
• Successful growth into new basins and
development of new technologies
Operators run efficient businesses
• Established operating models worked
Source: BCG
4
Peak oil price$115.19
Brent - 19th July 2014
Majors
Integrated
operators
Independent
operators
Jun
'14
Jan
'15
Q4
'15
-38% -24% -8%
-41% -23% -8%
-74% -62% -39%
Oil price2015 Q4 '15
100
75
Jan-16
50
25
Jul-15Jan-15Jul-14
Index 100
Service companies and operators are in this together, and
must solve it together as well
Updated: January 2016Note: Companies included: Majors: Total, Shell, ExxonMobil, Eni, ConocoPhilips, Chevron, BP, Integrated: Suncor Energy, Santos, Pluspetrol, Oxy, Novatek, Murphy Oil, Mitsui, Lukoil, Inpex, Imperial Oil, Hess, Gazprom, CNRL, BG, AGL Energy, Independant: Southwestern Energy, Marathon Oil, EOG Resources, Encana, Devon Energy, Chesapeake, Apache, Anadarko. Source: Bloomberg, BCG Analysis
OFS companies -65% -46% -23%
5
However, you behave as suppliers to customers
You are not advisors to anticipate change
You adjust prices responsively based on market conditions
You are not actively seen as helping to bring cost structures down
Your "solutions" are often just baskets of your services
Unless we change this dynamic, the whole industry will be
in even deeper trouble
6
So what to do?
Most operators are attacking cost in similar areas
Choosing
appropriate
standards and
limiting choices
Rethinking
schedules and
policies
Optimizing head
count and
upgrading talent
Adjusting contracts
and optimizing
asset utilization
Reducing
administrative
costs and
bureaucracy
Cooperating with
peers to reduce
infrastructure and
asset costs
Leveraging
partnership
opportunities and
overhauling
agreements
Exercising greater
discipline in—and
thinking more
strategically about-
cost management
Technical
standardization
and
de-averaging
Maintenance
optimization
Organizational
right-sizing
Optimization of
aviation,
trucking, and
marine logistics
Improved
workforce
efficiency
Greater
cooperation
with other
industry players
Supply chain
partnering and
renegotiation
Streamlining
overhead, real
estate and
support service
costs
1
2
3
4
5
6
7
8
7
Most of you know this "what" – Why is it so hard in
practice?
You don't understand one another's
businesses
You don't have mechanisms to solve
problems together
You may not trust each other or have had
adversarial relationships in the past
It is new/different and can be perceived
as risky
Typical barriers to genuine supplier-
operator collaboration
8
An example of what is possible: Supplier collaboration in
the automotive industry
0
200
400
600
800
1965 1970 1975 1980 1985 1990 1995 2000 2005
Value added per employee
(Index 1968=100)
US OEMs
Japanese Suppliers
Japanese OEMs
US Suppliers
Japanese OEMs & Suppliers
• Close collaboration through R&D and
design processes
• Results in a high degree of outsourcing
(>75% for Toyota)
Source(s): US Census Bureau Annual Survey of Manufacturers, Toyota Data Book 2003, Japanese Census of Manufacturers, Dyer and Nobeoka, "Creating and Managing a High
Performance Network: The Toyota Case, SMJ, 2000; BCG analysis
Japanese automotive suppliers achieved 4x value over US
suppliers in the same period
VS.
US OEMs & Suppliers
• More transactional and reactionary
sourcing relationships
• Results in lower degree of outsourcing
(~50% for GM)
9
Environment and Climate
• Challenging License to Operate
• “Fossil” fuel industry
• Targeting infrastructure
• Fracking success/fiasco
• Service sector on point
10
Responding to climate change is an emerging area for
collaboration with your customers
Context: Operators launched the Oil &
Gas Climate Initiative (OGCI) Commitments
• Improve efficiency and reduce GHG
emissions from own operations
• Invest in long-term solutions, including
R&D and scaling up of new technologies
• Increase natural gas substitution for other,
higher carbon intensity fuels
• Develop common methods for reporting
efforts and measuring impacts
• Share best practices and engage across
industries to find solutions
OGCI member declaration: "We are
committed to playing our part. Over the
coming years we will collectively strengthen
our actions and investments to contribute to
reducing the GHG intensity of the global
energy mix"
Members include: BP, CNPC, Eni,
PEMEX, Reliance Industries, Repsol, Saudi
Aramco, Shell, Statoil and TOTAL
Source: OGCI, BCG
11
Use the current environment as an opportunity for change
"Never let a good crisis
go to waste"
– Winston Churchill
12
Yes, but how?
Change relationships between operators and service companies
Transform from customer/transactional to partners/collaboration
Shift from cost to value creation
Redefine brand
Think pennies before dollars – for yourself and your customers
Environment/climate
Recognize this is a serious threat
Be and be seen to be part of the solution, not the problem
Must address critics not just admirers
Answer the questions behind the questions