EY GCA Conference

May 20, 2015

Preparing for a new battleground in the global oil and gas market

Section 1

Low oil price

environment: the

changing tides of the

transaction battleground

Winners and losers of the oil price decline

2

► Advanced economies ► Oil driven economies

► Airline companies: research suggest that the current

decline in oil price could boost the airline industry by

$10bn (source: FXstreet)

► Commodity traders who will benefit from volatility

► Consumers benefit from increasing purchase power

Winners Losers

► Upstream companies operating at the margin

► Oil field services and equipment suppliers

► EPC providers to major capex projects as a result of

capex deferral – between $100bn and $129bn

(Rystad/Morgan Stanley) over the next two or so

years

Upstream M&A fell off a cliff at the beginning of 2015 before rebounding with Shell/BG deal

3

Q1 2015 deal value and deal count lowest since 2008.

Only 16 deals with $100+ million deal value in Q1 2015, compared to 54 in Q1 2014.

Source: 1Derrick, EY

Shell/BG

Deal

up to May

1,710 2,214 2,083 1,753 1,376 215

0

20

40

60

80

100

120

0

50

100

150

200

250

300

2010 2011 2012 2013 2014 Q1 2015 Q2 2015

US$/BBL Deal value (US$ billion) Total upstream deal value

Oil price (Brent US$/BBL)

Shell/BG

Deal

Upstream

deals (#) 84

(up to May)

How long will it take the sector to rebound from a down cycle this time?

4 Source: 1Derrick

Impetus for increased M&A activity:

Deal momentum from Shell/BG merger? Fallout of recent mega mergers? Distressed M&A?

- 20 40 60 80 100 120 140

0

5

10

15

20

25

30Ja

n

Fe

b

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r

Apr

Ma

y

Ju

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l

Aug

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Nov

Dec

Ja

n

Feb

Ma

r

Apr

Ma

y

Ju

n

Ju

l

Aug

Sep

Oct

Nov

Dec

US$/bbl US$bn

- 20 40 60 80 100 120 140

0

5

10

15

20

25

30

Ja

n

Fe

b

Ma

r

Apr

Ma

y

Ju

n

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Aug

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No

v

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c

Ja

n

Feb

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r

Apr

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y

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n

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l

Aug

Sep

Oct

No

v

De

c

US$/bbl US$bn

2008 2009

2014 2015

US$18bn Suncor –

Petro-Canada

merger US$41bn Exxon – XTO

US$13bn

Repsol -

Talisman US$82bn Shell offer for BG

Total

deal

value

Total

deal

value

Section 2

Low oil price

environment: who has

the best arsenal to

succeed?

To win the war, be prepared to fight these battles

6

Battle #1

► Different types of

players with

different costs of

capital create an

uneven playing

field

► Those with

relatively lower

cost of capital

have a clear

advantage and

will leverage that

to win

Battle #2 Battle #4 Battle #3

► Structuring to

unlock value of

tax pools

► Structuring to

manage

abandonment risk

► Structuring to

partner with

NOCs in emerging

economics

► Obtaining

government

approval

► Government

intervention

► Pre-emption rights

► Corporate taxation

► Sellers under

pressure to divest

flooding market

with assets on

sale

► Buyers under time

pressure to move

quickly to capture

opportunities in

the market

Leveraging

cost of

capital

Creative

transaction

structuring

Engaging

with the

State

Doing

deals

under

pressure

The competitive landscape isn’t what it used to be

7

► Strategy to remain competitive in a changing landscape,

including implementing innovative methods to lower cost of

capital

► Refresh capital structure to build resilience and flexibility

► Understand your relative position as compared with your

peers

Battle Plan

► Sources of capital flowing into groups with quality credit

ratings

► Preference by those with capital toward high quality

producing assets and well-understood, price resilient

developments

► IOCs able to raise cheap debt, some at negative margins

► Independents with large portfolios of marginal assets are

being crowded out of the market

► Marginal and questionable returns plays stalled due to

inability to attract capital

► Non-traditional players with different risk appetite entering

the market: PEs, distressed funds, private debt lenders,

utility companies

Dynamics of Market Participants IOCs

Upstream

Market

Independents

Vu

ltu

re

Fu

nd

s

Battle #1

Leveraging

cost of

capital

The oil price decline has magnified the difference in cost of capital between major and independent oil companies

8

Before oil price decline (January 2014) After oil price decline (January 2015)

Exxon Mobil Shell

ChevronTotalBPEni

Joint Stock

Tullow OilPremier Oil

Afren

EnQuest

0

500

1000

1500

2000

2500

3000

0 50000 100000 150000 200000 250000 300000

Spr

ead

(bps

)

EV (£m)

Exxon Mobil Shell

Chevron

Total

BP

EniJoint Stock

Tullow Oil

Premier Oil

Afren

EnQuest

0

500

1000

1500

2000

2500

3000

0 50000 100000 150000 200000 250000 300000

Spr

ead

(bps

)

EV (£m)

Sp

read

vs E

nte

rpri

se V

alu

e

Net

Deb

t / E

V

Majors oil companies

12%

Independent oil

companies

34%

Majors oil companies

13%

Independent oil

companies

55%

Independent companies

Major oil companies Independent companies

Major oil companies

Battle #1

Leveraging

cost of

capital

Afren Tullow Oil

EnQuest

Premier Oil

Join Stock

How is the current environment affecting transaction structures?

Battle #2

Creative

transaction

structuring

► Potential for accelerated

decommissioning a more ‘real’

possibility and attracting increased

scrutiny

► Assignment of risk between transacting

parties increasingly at the forefront of

negotiations

► Greater risk being factored into value

and commercial negotiations; leading to

stalled or, worse, failed deals

Manage abandonment risk Access value of tax pool Invest in Emerging Markets NOCs

► Deep understanding and realistic

forecast of decommissioning liability –

both extent and timeline

► Engagement with core stakeholders

► Optimal funding of liability

Battle Plan

► Significant value locked up in

existing tax pools

► Can tax paying companies be

paired with companies with tax

losses?

► Opportunity for innovative

financing leveraging tax

attributes

► Deep understanding of tax laws

and incentives available

► Proper structuring to capture

value

Battle Plan

► Cash constrained NOCs in Emerging

Markets looking for funding options to

participate in their resource development

► Potential for equity investment structure to

replace traditional debt capital raise

► Possible structures explored include: i)

acquiring a stake in NOC, ii) strategic JV

with NOC across all assets, iii) farm into

interest in select NOC assets

► Solid relationship with the decision makers

at NOCs to spot opportunities

► Negotiation/structuring to protect interest

► Fair risk-return allocation

Battle Plan

North Sea Emerging Markets

Evolving trends as the result of the current oil price environment

Already a shake up and a new lesson

to learn (or reminder?) for governments

Even stronger competition among

countries for investments

Increasing pressure coming from the industry

to revise fiscal frameworks

Possibly more leverage for investors in

negotiations with governments

New licensing rounds could be

strongly affected (timing may

become uncertain, both fiscal and

non-fiscal terms may need to be

relaxed)

New incentives or adjustments to tax

regimes may be required to ensure important affected

projects remain economically

viable

Will the current situation change

countries’ attitude to their fiscal

regimes to make them sustainable

and flexible as any robust fiscal

regime for oil and gas should be?

In case of further decrease in oil

prices governments could face renegotiation

claims from investors

Battle #3

Engaging

with the

State

Countries’ responses so far Major recent changes triggered by the new oil price environment

Russia Exploring optimal approaches to change the existing oil and gas regime

UK Significant changes including reduced headline corporate tax rate from 62% to 50% and new ‘investment allowance’ aimed at supporting the industry

Kazakhstan Decrease in export duty (royalty-like) from US$11/bbl to US$8/bbl, discussions on further modifications to the tax regime aimed at increasing its sustainability

Argentina In response to the significant drop in oil prices the export tax (royalty-like) has been modified (twice) to significantly decrease the duty rate

Colombia Incentives to support interest in offshore opportunities (special 15% corporate income tax (general is 25%) and special customs terms

China Increase in price threshold for the windfall tax (from US$55/bbl. to US$65/bbl.)

Mexico Revision of IRR thresholds for the Round One PSCs

(increase by 5%)

No particular tightening of upstream tax terms observed (e.g. as a response to revenue pressures due to oil price decline). Countries are still evaluating their regimes, with pressure from the industry increasing.

Battle #3

Engaging

with the

State

Both buyers and sellers are facing pressure to transact

12

► of oil and gas companies say that shareholder

activism influenced their most recent decision

to divest

► of oil and gas companies reinvested the funds

raised from most recent divestment in their

core business

► Recent mega mergers triggering forced

divestments

► of oil and gas companies divesting to meet

financial obligations

Sellers under pressure

► Portfolio review and optimisation to develop effective

divestment strategy

► Optimal transaction process to achieve divestment objectives

► Balancing between competing priorities: value maximization,

required timeframe, commercial terms

► Wide network to facilitate conversations with the right

counterparty is crucial

► Disciplined execution by the right people to ensure transaction

success

Battle Plan

► Market flooded with assets, both the good and the bad

► Buyers under time pressure to act or risk “missing the boat”

Buyers under pressure

► Robust asset assessment framework to identify and pursue the

“right asset” to enhance current portfolio

► Deep technical know-how combined with market insight to

quickly evaluate opportunities and craft pursuit strategy

► Be prepared with a war chest of deal structuring, tax structuring

and financing options

Battle Plan

43%

38%

2

?

Battle #4

Source: 2015 EY Global Corporate Divestment Study

Doing

deals

under

pressure

In summary, a new landscape requires a fresh new strategy

13

Whether you’re attacking or defending, a clear effective strategy is crucial to ensure you emerge as the victor.

Don’t under-estimate the importance of preparation.

Arm yourselves with the right people and resources to ensure success.

Leveraging

cost of

capital

Creative

transaction

structuring

Engaging

with the

State

Doing

deals

under

pressure

EY | Assurance | Tax | Transactions | Advisory

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