e&p operator trends to vertical integration: service company threat?
DESCRIPTION
What do recent E&P operator trends towards vertical integration across pressure pumping, drilling rigs, logistics, frac sand, and coiled tubing mean for service companies? Is this a strategic threat or a short-term trend fad?PacWest is a leading consulting firm with deep expertise in the oilfield and unconventionals/shale. In addition to our strategic advisory and consulting services, we offer a collection of market intelligence products focused on the shale and unconventional supply market and industry trends.TRANSCRIPT
PacWest Consulting Partners 920 Memorial City Dr, Suite 160
Houston, TX 77024
E&P Operator Trends to Vertical Integration Strategic Threat to Service Companies?
Houston, Texas
November 14, 2011
TERMS & CONDITIONS Information furnished in all reports produced by PacWest may be used by Client for internal purposes, as Client deems beneficial, as long as due care is taken to hold the information confidential within Client’s organization and PacWest is not liable for the information provided. All rights to the information remain with PacWest. PacWest represents that it will not breach any obligation of confidentiality with respect to information contained in the study. PacWest will maintain in confidence and not disclose any information related to Client, without prior written consent of the Client. PacWest will not disclose to any person, including, without limitation, any of the Client’s competitors or suppliers, the fact that Client has engaged PacWest in this project scope, the scope of the assignment or any other information relating to Client.
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 2
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 3
Firm Overview & Capabilities
PacWest is a boutique strategy consultancy and market intelligence firm that specializes in unconventional oil & gas
Provide strategy consulting and advisory services to Oil & Gas
Strength in Oil & Gas supply market
- Often work with operator supply chain groups analyzing supply/demand, developing sourcing strategies, building capabilities, etc.
With oilfield suppliers, often work at C-Level or business lead
Consulting & Advisory
Offer industry-leading analysis of unconventional market
Deep knowledge and strength in the pressure pumping / frac market
Employ combination of primary intelligence + secondary research
Unique in market: apply strategy consulting capabilities to turn research into actionable intelligence
Market Intelligence Products
All key staff come from top-tier strategy firms; consulting and market intelligence capabilities reinforce/inform each other
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 4
Sample of Recent PacWest Consulting Projects
A sampling of some of PacWest’s recent projects demonstrate our depth of experience in North American and international shale
We have resources in nearly every major unconventional country/region to support international shale needs
PacWest Project Client Outcome
Analyzed Bakken & Eagle Ford supply/demand; conducted demand planning exercise to develop new pressure pumping sourcing/contract strategy
Operator avoided completion delays, avoided significant additional costs
Developed Poland unconventional market entry, product/service, and JV strategy for a potential shale service company for a private equity client
PE firm focused on high-growth segments only, with the right strategic partners
Developed an innovative economic and strategic analysis of operator all-in water management costs over 20-year timeframe, for Bakken & Eagle Ford assets
Operator understood cost implications, made optimal economic decisions
Conducted a study of frac pump market focused on supplier strategic plans, manufacturing capabilities, and supply chain capabilities
Equipment manufacturer developed optimal strategic investment plans
Conducted study of evolving service company landscape in Poland, including equipment, resources, and expansion plans
Operator made better informed contract award decision
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 5
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 6
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 7
As oil/liquids-driven activity has increased, vertical integration has become the hot new sourcing strategy amongst some operators
New Sourcing Strategy or Near-term Solution?
■ Some operators have been increasing pursuing vertical integration for key goods/services
- Is this a sourcing fad or new operator best practice?
- What is driving this trend?
- What type/size of operators are pursuing this strategy?
- What does this mean to service companies?
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 8
Vertical integration is driven by two primary factors: pricing and challenges obtaining equipment/services when needed
Drivers of Vertical Integration
■ Pricing pressures continue
- Supply/Demand fundamentals have driven major pricing increases across nearly every product/service
- Significant price escalation is projected to continue through 2012
- Some operators boast significant well cost savings from vertical integration
■ Security of supply is challenged
- US onshore operators continue to announce record breaking drilling programs
- Large backlogs of uncompleted wells exists for nearly every major onshore player
- Infrastructure challenges in key operating regions cause additional supply chain constraints (e.g., Bakken)
- Service companies are forced to prioritize supply of key products/services to their key customers
In addition to securing supply, some operators boast significant average well cost savings from vertical integration
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 9
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 10
A significant number of small- to medium-sized operators are currently pursuing vertical integration strategies
Vertically Integrated Operators
■ The following peers have pursued vertical integration in one or more services:
: Project Scope
Note: List of firms does not include all firms that are vertically integrated Source: PacWest analysis, company presentations, company 10-Ks
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 11
The production base (i.e. cash flows) of operators pursuing vertical integration varies significantly
2010 Production (MMboe)
273
173
141
70
42
21 15 2
-
50
100
150
200
250
300
OXY CHK EOG SWN PXD SD Lewis OAS
Average = 92
Source: PacWest analysis, company presentations, company 10-Ks
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 12
The scale of activity that vertically integrated operators are undertaking also varies significantly
2010 Capital Spend and Wells Drilled
US Land Capex ($billion)
0.3
0.5
0.6
0.9
1.6
2.1
5.1
8.7
0.0 2.0 4.0 6.0 8.0 10.0
OAS
SD
Lewis
PXD
OXY
SWN
EOG
CHK
US Wells Drilled
Average = 2.5 29
47
424
473
536
704
895
1,149
- 500 1,000 1,500
OAS
Lewis
SD
PXD
OXY
SWN
EOG
CHK
Average = 532
Note: Data is estimated for some operators as not all peers provide sufficient granularity in capital spending guidance; SWN wells drilled figure includes 9 gross wells drilled in Arkoma Conventional asset; Lewis Energy wells estimated based on Oasis wells/spend ratio Source: PacWest analysis, company presentations, company 10-Ks, Oil and Gas Investor
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 13
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 14
Some operators have chosen to vertically integrate across just a handful of service categories
Vertical Integration by Operator & Category Operator
Pressure Pumping
Proppant Coiled Tubing Rigs Logistics
Source: PacWest analysis, company presentations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 15
Four operators own a total of 15 pressure pumping fleets (by mid-2012) with an estimated total of 530,000 HHP
Pressure Pumping Vertical Integration
■ Chesapeake owns pressure pumping subsidiary Performance Technologies
■ Performance operates 2 fleets/60,000 HHP in MidCon and adding another 2 fleets/80,000 HHP by EOY 2011
■ Also has 15% stake in Frac Tech Services (more of a financial/hedging strategy)
■ Lewis Energy owns 2 fleets/60,000 HHP of pressure pumping capacity that it operates in the Eagle Ford
■ Pioneer currently owns 8 fleets/225,000 HHP that it operates in Spraberry (5 fleets), Eagle Ford (2 fleets), and Barnett (1 fleet)
■ Expects delivery of 3 additional fleets by mid-2012; plans to deploy them to Spraberry
■ Also owns/operates 4 CT units in Eagle Ford and Raton Basin
■ Spending $24 million to launch Oasis Well Services subsidiary
■ Committed to buying 1 single frac fleet to operate in the Bakken; likely plans to add additional fleet once it has ramped up operations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 16
Proppant Vertical Integration
EOG and Southwestern have each brought a frac sand quarry online in the last few months
Source: PacWest analysis
Southwestern
Spent $30 million in 2008 to acquire reserves in Arkansas and set up a plant
Quarry currently yielding 0.65 million tpa
Quarry went live in 2009 Q2 and supplies an estimated 70% of company sand demand
Estimates savings of $150,000 per well
EOG
Spent $65 million to set up a frac sand quarry and plant in Chippewa, Wisconsin, with a capacity of 1.7 million tpa
Sand planned for use in Eagle Ford where C&J is doing the majority of pumping under a dedicated contract
Rail contract in place with Progressive Rail and Union Pacific and trucking handled by a local company, Chippewa Sand Transport
Estimates savings of $0.5 million/well
Also operates a 2nd frac sand quarry near Ft. Spunky in Texas that it bought in 2007 H1 for Barnett pumping
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 17
Five operators own/operate a total of nearly 200 drilling rigs across their US operations
Rigs Vertical Integration
■ Owns a total of ~115 drilling rigs across 2 drilling rig subsidiaries
■ Nomac owns ~95 rigs; launched in 2001 with $26 million investment
■ Acquired Bronco Drilling (22 rigs) in Apr 2011 for $315 million
■ Plans to add another ~30 newbuild by 2013; goal is to own 2/3rds of total rigs
■ Recently added 3 drilling rigs to bring total company-owned rig count to 13
■ All rigs are operating in South Texas
■ Currently owns/operates 15 rigs in the Spraberry, 40% of its total rig count
■ Also owns/operates 2 additional rigs in its Raton Basin asset
■ Set up a drilling subsidiary in 2005, DeSoto Drilling Inc. (DDI), which owns 11 rigs
■ DDI owns/operates 11 rigs, all but one of the horizontal rigs in play; remaining rig is on month-to-month contract
■ Owns 20 drilling rigs total: 14 in Permian, 5 in MidCon, and 1 in WTO
■ Owns a small fleet of workover rigs
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 18
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 19
Pioneer’s 2011 capital spend is forecast to be $2.1 billion, with 62% allocated to Permian and 13% to vertical integration
Pioneer 2011 Capital Spend ($billion)
0.3
0.9
1.6
1.7
1.7
2.1
2.3
2.8
2.9
5.2
6.4
0.0 2.0 4.0 6.0 8.0
MUR
NBL
MRO
APA
HES
PXD
DVN
OXY
APC
CHK
EOG
Note: Data is estimated for some peers are not all peers provide sufficient granularity in capital spending guidance
$0.10 $0.10
$0.12
$0.21
$0.30 $1.30
Alaska Other Eagle Ford
Barnett Combo Vertical Int./Facil. Spraberry
Average = 2.6
US Land Capex Pioneer Capex
Source: PacWest analysis, company presentations, company 10-Ks
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 20
Pioneer’s vertical integration strategy extends to rigs, pressure pumping equipment, and various other surface equipment
Pioneer’s Vertical Integration Approach
■ Pioneer has chosen to vertically integrate (i.e. own and operate) many of its critical services that are typically delivered by service companies and are generally the largest spend categories
■ It has vertically integrated in the following service areas:
- Drilling rigs: currently owns 15 rigs
- Frac fleets: by year-end 2011, it will own 8 frac fleets and it expects delivery of 3 fleets in mid-2012 for a total of roughly 300,000 HHP that is company-owned
- Coiled tubing units: by year-end, it will own 4 CT units
- Pulling units: currently owns 31 pulling units
- Various other equipment including water hauling trucks, BOPs, frac tanks, etc.
- Also includes yards, buildings, and storage facilities to support vertical integration
■ While the company does not own frac sand quarries itself (as does EOG), it does source its frac sand directly, through Carmeuse and potentially suppliers, rather than relying on 3rd parties
- It has sand supply in place through 2015
■ It has also contracted for cementing services through 2016
■ Pioneer received 12 rigs and 3 frac fleets near year-end 2010; given equipment order lead times, it likely began implementing its vertical integration strategy during the middle of 2010
Source: PacWest analysis, company presentations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 21
Pioneer has pursued vertical integration in all of its core unconventional assets that it is currently developing
Pioneer Assets
PXD Asset Details Vertical
Integration
Permian Largest operator in the Spraberry trend and is one of the most active developers in the Permian
Raton Basin
Largest operator in the Raton CBM basin where it is focused on shale resource development
Eagle Ford Owns 310,000 gross acres which it is aggressively developing
Barnett Combo
Owns significant assets in the wet gas zone of the play in the NW; currently developing
Alaska Entered the North Slope in 2002 and discovered the Oooguruk gas field in 2003, which it brought online in 2008
South Africa
45% interest owner with PetroSA in offshore asset that now produces small amount of gas
Hugoton Operates 600+ gas wells and has working interest in 1200+; owns majority of gathering/processing infrastructure; new development activity minimal until gas prices recover
Edwards Long history in the trend; development minimal until gas prices recover Source: PacWest analysis, company presentations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 22
Spraberry is Pioneer’s core asset accounting for nearly two-thirds of capex and it has pursued vertical integration most aggressively here
Pioneer Spraberry Development
Supply Discussion 2011 Wells Put on Production
■ Quarter-by-quarter supply chain activity:
- Q1: 4 frac fleets (3 company-owned, 1 dedicated 3rd party)
- Q2: in May increased to 6 frac fleets (4 company-owned, 2 dedicated 3rd party)
- Q4: Adding 5th company-owned frac fleet
■ The company owns 14 drilling rigs (40%)
■ As of Q4, the company will own 5 frac fleets, representing 71% of capacity, in addition 2 dedicated fleets with Baker Hughes
- Ordered an additional 3 fleets which it expects to receive in mid-2012
■ The company also owns 23 pulling units and various other equipment, including water hauling trucks, frac tanks, BOPs, construction equipment, and fishing tools
110
146
230 235
-
50
100
150
200
250
Q1 Q2 Q3E Q4E
Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates)
Rigs 30 35 45 by YE
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 23
Pioneer is running 12 rigs in the Eagle Ford and has deployed company-owned frac fleets and coiled tubing units in the play
Pioneer Eagle Ford Development
Supply Discussion 2011 Wells Put on Production
■ Quarter-by-quarter supply chain activity:
- Q2: deployed 1st company-owned frac fleet in addition to dedicated fleet
- Q3: brought 6th and 7th CGPs online
- Q4: Adding 2rd company-owned frac fleet; bringing 8th CGP online
■ As of Q4, the company will own 2 frac fleets, representing 67% of capacity, in addition to a dedicated frac fleet with Weatherford
- Second company-owned fleet is expected to be delivered during Q4
■ The company also owns a single coiled tubing unit and expects delivery of a second CT unit during Q4
■ Testing white frac sand (10 wells) in shallower areas; generating $700 million savings/well
4
18
35 35
-
10
20
30
40
Q1 Q2 Q3E Q4E
Rigs 8 10 12 12
Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates)
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 24
The company has also pursued vertical integration in the Barnett and Raton, its other two core unconventional resource plays
Pioneer Barnett & Raton Development
Raton Supply Discussion
■ The company currently owns 2 drilling rigs
■ The company currently owns 1 frac fleets
- Does not appear to be using any 3rd party pumpers for additional fracs
■ The company owns 2 coiled tubing units
■ The company owns 8 pulling units
■ The company also owns and operates a frac fluids laboratory in the Raton basin, which presumably serves all of Pioneer’s frac fleets across its assets
Source: PacWest analysis, company presentations
Barnett Supply Discussion
■ The company has 2 rigs currently under contract with 3rd parties
- Plans to increase to 4 rigs by year-end
■ Deployed 1 company-owned frac fleet in 2011 Q2
- Has also used Weatherford and Baker Hughes to frac wells
■ The company also owns a single coiled tubing unit and expects delivery of a 2nd CT unit during Q4
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 25
Pioneer claims that its vertical integration model will generate a 45% IRR on a third-party savings basis, excluding managerial burdens
Pioneer Vertical Integration Savings
■ Pioneer has spent $440 million on vertical integration over 2011:
- $300 million for equipment delivered in 2011
- $140 million for equipment to be delivered in the middle of 2012 (3 frac fleets and other)
- Likely spent additional capital in 2009 to reserve orders
■ Pioneer claims that the $440 million investment will generate a 45% IRR before taxes, though that is strictly on a cash savings basis and does not include incremental managerial burdens of these “businesses”; does not consider cost of capital
Service Area/Savings Spraberry Eagle Ford Barnett Total
Frac Fleets
YE Fleets 5 2 1 8
Fracs/Fleet/Year ~115 ~55 ~60 ~93
Savings/Frac $0.35MM $1.70MM $0.75MM $0.58MM
Annual Savings $200MM $185MM $45MM $430MM
Rigs & Other Services
Annual Savings $30MM - - $30MM
Annualized Cash Savings $230MM $185MM $45MM $460MM Source: PacWest analysis, company presentations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 26
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 27
Southwestern forecasts that it will spend $2 billion in capital over 2011, with nearly 2/3rd of that spend in the Fayetteville
2011 Capital Spend ($billion)
0.3
0.9
1.6
1.7
1.7
2.0
2.1
2.3
2.8
2.9
3.0
5.2
6.4
0.0 2.0 4.0 6.0 8.0
MUR
NBL
MRO
APA
HES
SWN
PXD
DVN
OXY
APC
MRO
CHK
EOG
Note: Data is estimated for some peers are not all peers provide sufficient granularity in capital spending guidance
61% 15%
9%
10%
3% 2%
Fayetteville Appalachia New Ventures
Midstream Corp Other Areas
Average = 2.6
US Land Capex Southwestern Capex
Source: PacWest analysis, company presentations, company 10-Ks
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 28
Since 2007 Q1, Southwestern’s new producing wells per quarter has increased 25% YoY, while its rig count has decreased 11% YoY
Fayetteville Development, wells put on production (2007 Q1 – 2011 Q2)
58
46
74 77 75 83
97
74
120 111
93
122
106
143 145
159
137
149
-
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
Source: PacWest analysis, company presentations
2007: 255
2008: 329
2009: 446
2010: 553 286
16 19 14 12 18 Rigs
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 29
Southwestern has succeeded in reducing drilling days per well by 17% YoY for an average 53% reduction since 2007
Fayetteville Development
Source: PacWest analysis, company presentations (in some cases, exact well counts are estimates)
Well Cost Days to Drill
17
14
12 11
8
-
10
20
2007 2008 2009 2010 2011 H1
$2.90 $3.00 $2.90 $2.80 $2.80
$-
$1.00
$2.00
$3.00
$4.00
2007 2008 2009 2010 2011 H1
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 30
Southwestern has chosen to pursue a vertical integration strategy only in its core Fayetteville asset
Southwestern Assets
SWN Asset Proved
Reserves (Bcf)
Details Vertical
Integration
Fayetteville 4,345
Focus of the company’s E&P operations; the company owns nearly 1 million net acres in the play; as of EOY 2010, company had spud 2,445 wells in play since commencement in 2004
Conventional Arkoma
226
Traditional area of operations located in western Arkansas; have recently expanded activity to the south and east of the traditional fairway area, but has significantly reduced capital spend
Appalachia 38 Owns nearly 175,000 net acres in play in NE Pennsylvania and have participated in a total of 25 wells since drilling commenced in 2009
East Texas 321 Active in region since 2000 in Cotton Valley and has expanded activities to target Haynesville/Bossier
Source: PacWest analysis, company presentations
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 31
Southwestern’s vertical integration strategy extends to drilling rigs, sand, water sourcing, water hauling, in-field logistics, and civil works
Fayetteville Vertical Integration Strategy Frac Sand
Spent $30 million in 2008 to acquire reserves in Arkansas and set up plant
Quarry went live in 2009 Q2 and supplies roughly 70% of company sand demand, saving estimated $150,000 per frac job
Water Hauling
Owns a network of water hauling trucks to handle the majority of its water hauling needs internally
Drilling Rigs
Set up a drilling subsidiary in 2005, DeSoto Drilling Inc. (DDI), which owns 11 rigs
DDI owns/operates 11 rigs, all but one of the horizontal rigs in play; remaining rig is on month-to-month contract
Water Sourcing
Sources all water internally, though this is quite common among operators
Experimenting with fracs to reduce water consumption 10% (~$60,000/job)
The company claims to save an estimated $0.3 million per well as a result its vertical integration efforts
Civil Works/Well Site Prep
Company handles site work that contractors might otherwise do, particularly pressure pumpers
In-field Logistics
Owns a network of trucks to handle the majority of in-field hauling needs internally
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 32
Southwestern employs Schlumberger, Calfrac, and Cudd for its pressure pumping services in the Fayetteville
Fayetteville Pressure Pumping Strategy
Source: PacWest analysis, PacWest FracDB, company presentations (in some cases, exact well counts are estimates)
Discussion 2011 Frac Jobs
20 21 29
25 29
14 15 17
14 13
16 16
18
15 13 11
10 9
11 11
10
9 7 4
0
10
20
30
40
50
60
Jan Feb Mar Apr May Jun Jul Aug
Southwestern employs three different pressure pumpers in the Fayetteville
- Schlumberger, Calfrac, and Cudd
Each pumper is on a 1-year contract that started in the February-March timeframe; each operates under a slightly different contract
- Contracts are bid year-to-year
The company’s pressure pumping demands are some of the most basic in the industry
- Frac depths range from 2,000 to 5,000 feet with ~5,000 feet laterals
- Currently running 100% slickwater fracs
Company has seen pressure pumping price increases in the 4-5% range over 2011, significantly less than most other operators in the area
Note: Data from Jun, Jul, and Aug does not yet include all fracs completed during those months
Legend: Schlumberger Calfrac Cudd
Pumper Share:
Schlumberger 48%
Calfrac 32%
Cudd 20%
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 33
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
Drivers
Integrated Operators
Integrated Services
Pioneer Case Study
Southwestern Case Study
Strategic Implications
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 34
If timed properly, vertical integration can yield significant near-term benefits to operators, but the model also entails significant risks
Vertical Integration Strategic Considerations
Risks
■ Bear risk of idle equipment/staff if price environment necessitates activity reduction
■ Added enterprise complexity can potentially serve as distraction for management/staff
■ Potentially increases per well costs if service business is not operated efficiently
Benefits
■ Ensures equipment availability and avoids delays during a tight supply market
■ Potentially lowers per well costs if service business is operated efficiently
Implications
■ Model can yield significant benefits during times of tight supply but those benefits become marginal as supply market loosens and turn negative as the market collapses
■ Operators need to be strategic about the “exit opportunity” – requires market foresight to know when the market is going to loosen and when to you should get out of the business
■ North American supply market is just beginning to loosen from its peak in mid-2011 and things appear to be likely to equalize by late-2012 or early-2013
– Market opportunity for vertical integration may be over for operators
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 35
Greater operator vertical integration represents a potential strategic threat to service companies
Strategic Threat?
■ Larger independents increasing looking at peer’s well cost advantages with a keen eye
- Baker Hughes leadership should be aware of these cost advantages for pricing decisions
■ However, several factors reduce the vertical integration opportunity:
- Backlogs for frac fleets and other key equipment currently exceed 9-12 months in many cases
- Market tightness in key equipment and services appears to be loosening and moving towards a more stable balance – the ideal time to seize the opportunity was likely 12-18 months ago, when a handful of prescient operators placed orders
■ Given this, PacWest does not believe vertical integration is a new, long-term operator sourcing trend
- It is an interesting short- to medium-term trend to note and monitor, but it does not represent a meaningful strategic threat to service companies
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 36
Contents
1. PacWest Snapshot
2. Operator Vertical Integration
3. PacWest Market Intelligence Offerings
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 37
Market Intelligence Offerings
PacWest currently offers multiple unconventional market intelligence product offerings to support subscriber decision-making
Breakdown of pressure pumping fleets/capacity by basin and supplier with strategic analysis of latest regional supply market trends
Interactive database of 100+ critical unconventional suppliers
Cost escalation forecast for major D&C categories
Detailed breakdown of frac activity by basin, operator, pumper
Database of fracs including basin, operator, pumper, chemicals, chemical suppliers
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 38
PumpingIQ provides the only granular breakdown of regional fleets/capacity by pressure pumper and analysis of market trends
Focus Markets Fleet/Capacity Breakdown & Trends
Bakken
Eagle Ford
Permian
DJ Basin
Anadarko
Marcellus
Uinta/Piceance/Green River
Haynesville
Fayetteville
Barnett
On-going monitoring of pressure pumping fleets and capacity in major US onshore frac markets
Granular regional breakdowns of fleets/capacity by pumper
Key customers by pumper
Detailed discussion of major trends and strategic insights for each region and US market in aggregate
PumpingIQ is the only granular fleet breakdown available in the market
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 39
SupplierIQ is an interactive database of 100+ suppliers that are critical players in shale supply markets
Profile Contents Supplier Analysis
PacWest Supplier Classification
Company Overview & Analysis
Service Offerings
Geographic Footprint
Financials
Customers
Organizational Footprint
Detailed discussion of Service Offerings: 15 product/services that are critical for shale production
Interactive database of 100+ companies that supply critical D&C products/services for shale production
Database is updated quarterly with new suppliers; updates made to existing suppliers bi-annually
Subscribers can request supplier additions
Offer two forms of subscription to database: full SupplierIQ access or a subset of suppliers, customized to subscriber needs
SupplierIQ provides insightful snapshots of your key suppliers and competitors
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 40
CostIQ provides a forecast of cost increases for key drilling and completion cost drivers
Cost Segments Forecast Analysis
Drilling
- Land rigs
- OCTG
- Drilling fluids
- Cementing services
Completion
- Pressure pumping services
- Proppant
- Frac chemicals
- Completion hardware
- Completion rigs
3-year forecast of D&C cost escalation, segmented into major categories
Includes strategic discussion of trends driving increases and/or decreases
Updated bi-annually (every 6 months)
PacWest utilizes three quantitative methods to forecast prices changes for each market segment:
- Multi-variable regression
- Demand/supply models
- Macroeconomic models
CostIQ provides 3-year cost forecasts for each key US region
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 41
FracIQ is the source of frac activity data by operator and pressure pumper, with data broken down US-wide and regionally
Contents Product Overview
Aggregate US fracs:
- By operator
- By pressure pumper
Regional breakdown of fracs:
- By operator
- By pressure pumper
- By frac type
Operator and pumper relationships
Frac practices, including chemicals usage
The definitive subscription publication on frac activity across the US
Summary of fracs by region, operator, pressure pumper
Market share by pumper and operator across multiple metrics
Strategic analysis of frac trends and market dynamics, including implications for operators, pressure pumpers, and other stakeholders
Updated quarterly
Your “Land Rig Newsletter” for the frac market – available late 2011
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 42
FracDB is the definitive database of fracs and frac chemicals that can be used to conduct sophisticated market analyses
Data Elements Product Overview
Frac date
Well number, API number
Operator
TVD
Water volume
Pressure Pumper
Play
Chemical type
Chemical ingredient
Chemical supplier
Contact us for more detail
Database of US fracs and frac chemicals, built into a rich structured data set
- The data set already contains nearly 7,000 fracs conducted in 2011
A sophisticated tool that can be used to run a variety of analyses:
- Pressure pumping/frac market share
- Completion chemicals market share
- Regional frac design practices
- And dozens of other analyses…
Updated quarterly
FracDB is a powerful tool for the sophisticated market analyst – available late 2011
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 43
The ShaleIQ bundled product provides access to 3 useful products at a reduced price point
Breakdown of pressure pumping fleets/capacity
by basin and supplier with strategic analysis of latest
regional supply market trends
Interactive database of 100+ critical
unconventional suppliers
Cost escalation forecast for major D&C categories
The ShaleIQ bundle is a valuable resource to add to your decision-making toolkit
Bundle Includes
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 44
Actionable Intelligence
Transforms volumes of disparate market data, insider industry activity and expert input into strategic and actionable recommendations for decision-makers
Aggregates, organizes and distills a wide range of data and intelligence to provide information to our clients that is comprehensive, focused and strategic
Analyzes this information to assess its strategic implications and provide a clear path of action for each stakeholder
PacWest delivers actionable intelligence that is designed to provide strategic recommendations to key decision-makers
Decision-Makers
Client Confidential
E&P VERTICAL INTEGRATION
© PacWest 2011 | All rights reserved | 45
Methodology
PacWest uses a multi-pronged approach to develop its market intelligence offerings; the team:
1) Gathers and reviews all information available publicly and via proprietary databases
2) Engages its diverse network of industry contacts to gather real-time intelligence
3) Processes and synthesizes raw information into actionable intelligence
PacWest employs a comprehensive methodology that relies on primary intelligence and rigorous research and analysis
Insights are based on:
Constant conversations with our source network of field experts on-the-ground
Surveys from operators and suppliers
In-depth interviews and conversations with operators and suppliers
Industry-leading experts and technical specialists
PacWest internal databases
Primary Intelligence Gathering
These sources are regularly consulted:
Market research and reports
Company annual reports, 10-Ks, 10-Qs
Speeches and presentations by company leadership and other industry experts
Analyst reports from leading banks
Government data
Secondary Research