north america oil & gas exploration & production · see disclosure appendix of this report...

See Disclosure Appendix of this report for important Disclosures and Analyst Certifications

North America Oil & Gas Exploration & Production

Energy (Oil & Gas) Market Dynamics:

Investments, Trading and Price Interactions

Bob Brackett, Ph.D. • Senior Analyst • +1-212-756-4656 • [email protected]

September 27, 2018

mailto:[email protected]

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 2

North American Oil & Gas Exploration & Production team

Bob Brackett, Ph.D. (Senior Analyst)

Bob Brackett is the Senior Research Analyst covering North American Oil & Gas Exploration & Production. He is currently recognized as All-American

#1 by Institutional Investor (for the 5th year in a row). Previously, Bob was Director of E&P Planning and also Director of Corporate Strategy for Hess

Corporation. Before Hess, Bob was an Engagement Manager with McKinsey & Company's Petroleum Practice, serving the majority of the world’s

largest oil companies across five continents and 30 countries throughout the petroleum value chain. Bob began his career with ExxonMobil,

spending eight years in positions in Exploration, Business Development, Development and Research. As a NASA Space Grant Fellow, Bob received

his PhD in Earth & Planetary Sciences from Washington University – St. Louis. He received his MBA from Rice University in Houston. He also holds a

BS in Geophysics and a BA in Astronomy from the University of Texas.


Key points

Why US oil supply response matters so muchGlobal supply (outside of 3 countries) isn’t growing

How do E&Ps think about fundingCash in ~ cash out (except when greedy or scared)

How E&Ps won the shale war

Our forecast of US supplyOil price, reinvestment rate, inflation, and well efficiencies drive result

Why the “predator prey” model is so importantLotka-Volterra equation

Midstream the current investment gating factor

Natural gas falls prey to oil market and lack of demand


Remember – oil supply isn’t growing if we strip out US, Saudi Arabia, and Iraq


Remember – oil supply isn’t growing if we strip out US, Saudi Arabia, and Iraq(and Saudi Arabia and Iraq follow different ‘feedback’ rules)


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$/

bo

e

Organic Capex$/boe (left axis) Acquisitions, $/boe (left axis) Cashflow From Operations,$/boe (left axis)

Shale Era Business Model: Cash In ~ Cash Out (except when greedy or scared…)

E&P Sector CFO compared to “organic” capex (capital spent drilling & completing existing acreage) i.e., productive capex

Source: Company Data, Bernstein estimates, Bloomberg

Eagle Ford breaks 0.1 mln bopd


Price cash flow capital plan updates rig count production

Source: HPDI, EIA; Baker Hughes, Bernstein analysis and estimates

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Rig

s

Pro

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cti

on

(k

bo

pd

)

EIA Weekly Production Estimates and Actual Monthly Data (with rig count and WTI)

BHI Hz US Rig Count [LHS] Weekly Estimates [RHS] Monthly Actuals [RHS] Oil Price (x10) [LHS]

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 8Source: Company Data, Bernstein estimates, Bloomberg

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500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

Shale Contribution by Quarter (bopd)

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017

Lion’s share of CFO goes to capex to create a quarterly wedge…


How E&Ps won the shale war…

...same way we won the revolutionary war…with help

Source: Corporate reports, Bloomberg, L.P., Bernstein analysis

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US

$, b

illio

n

Cumulative Cash flow statement, 1Q 2015 to 4Q 2016

Operating Cash Other Sources Cash burn Debt (Net) Asset Sales

Equity (Net) Organic Capex Plus Dividend Plus Acquisitons

“war onshale”OPEC

meeting

“oil cut”OPEC

meeting


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s P

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uct

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(kb

oep

d)

US Supply Forecast

Alaska GoM Other Offshore Other Onshore Shale (HZ) NGLs WTI (Right Axis)…

Our forecast of US liquids volumes


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US Total Oil & NGL Supply - Yearly Change

Alaska GoM Other Offshore Shale (HZ) Other Onshore NGLs US Liquids Inc. NGLs

Our forecast of US liquids growth…oil price, reinvestment rate, inflation, and well efficiencies drive result


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2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

S hale Production Sensitivity to Oil Price

Base $40 $50 $60 $70 $80

Impact of oil price


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2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E

S hale Production Sensitivity to Reinvestment of CFO

88% 50% 60% 70% 80% 90% 100%

Impact of reinvestment rate

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 14Source: DIDestop, FracFocus, Bernstein analysis and estimates

Productivity has increased in the Delaware largely due to rapid sand/ft increase (and lateral length)

Productivity increases in the Midland were more dominated by other effects (as lateral length and sand count already high years ago)

What drove productivity…the Permian example

73.4

29%

21.2

41%

38.96%

8.7

142.3

0

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40

60

80

100

120

140

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180

2014 Due to Lateral Length

From 4,433' to 5,715'

Due to Sand Per Foot

From 785 lb/ft to 2,331

Due to Other Effects 2017

1s

t 1

2 m

ont

hs

cum

ula

tive

oil

(kb

o)

D elaware

67.1

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25%

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34%

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2014 Due to Lateral Length

From 6,798' to 8,492'

Due to Sand Per Foot

From 1,124 lb/ft to

1,877

Due to Other Effects 2017

1s

t 1

2 m

on

ths

cum

ula

tive

oil

(kb

o)

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(519)

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(897)

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(1,511)

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(1,673)

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(1,973) 10

(2,691)

y = 45.938ln(x) - 184.58

R² = 0.6759

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San d (lb/ft)

D elaware Sand vs. Cumulative Production

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(2,526)

y = 21.444ln(x) - 38.577

R² = 0.2344

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Midland Sand vs Cumulative Production

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 15Source: Company Data, Bernstein estimates, Bloomberg

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Predator-Prey Model (Lotka-Volterra)

Rabbits (in thousands) Foxes (in thousands)

Lotka-Volterra (1st order nonlinear differential equations describing biologic systems)


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Predator-Prey Model (Lotka-Volterra)

Cash Flow Shale Production

Shale is not a thermostat – it induces waves (and needs culling!)

...”equilibrium price” is not a static equilibrium


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Historic and Futures prices for key oil prices ($/bbl)

Brent premium to Gulf Coast Gulf Coast premium to WTI WTI premium to Midland Midland

FutureHistorical

Midstream investment (not upstream) is gating factor for now

Source: EIA; Bloomberg

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Dry

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, bcfd

Permian Gas Outlook vs. Takeaway

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Permian Oil Production versus Takeaway Capacity (kbd)

Permian Unconstrained Permian Constrained P/L + Local Capacity + Rail + Truck

The Midland – WTI differential currently sits around -$15/bbl and is expected to remain wide until pipelines come online in 2019

Black line below shows takeaway…the Permian would 'like' to grow faster than takeaway next year (but can't). The red area shows 'the lost barrels' which peak at 0.5 mlnbopd…the green line is our forecast with constraints (note that constraints involve both volume and also pricing – higher differentials)

In our model, Permian gas doesn't fill pipes right away, but by 2021 needs more pipes


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Permian Basin Oil Production (kbopd)

Non-Hz Other Hz Delaware Midland

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Bcfd

Capped because of pipeline constraints

Permian gas production outlook, bcfd

Source: EIA; HPDI, Bernstein estimates

Permian wells keep getting better….this brings an astounding amount of gas byproduct


Future gas demand driven by U.S. energy chessboard

Source: Lawrence Livermore National Laboratory

(2 QBTU ~ 1 MBOEPD)

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 20Source: EIA, DI Desktop, Baker Hughes, Bernstein analysis and estimates

85.6

105.1-4.811.6

4.32.5 0.1

5.8

60

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120

Ga

s S

up

ply

(Bcf

d)

At present rig countdriven by PE spending Balancing for demand

versus supply growth

Supply Outlook to 2020 : This healthy growth means that in addition to “free” associated gas, Haynesville and Marcellus growth are needed at the margin

86.6

104.5

1.4

8.6

2.52.8

1.6 1.0

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2016

Demand

Rescom/

Industrial

LNG

Exports

Pipeline

Exports

(Net)

NGLs/

Ethane

Other Power 2020E

Demand

Da

ily G

as

De

man

d (B

cfd

)

4.8% CAGR

10 bcfd of capacity starting up

1.5 bcfd of cracker capacity starting up

Mexico growth

Natural gas supply / demand balance 2016-2020Natural Gas Demand Outlook to 2020: healthy growth, but led by LNG exports, Mexico exports, and ethane crackers

107.7

117.6

1.52.5

0.2 1.80.7

3.1

60

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2021EDemand

Rescom/Industrial

LNG Exports Net PipelineExports

NGLs/Ethane

Pipeline/Plant Use

Power 2025EDemand

Daily G

as

De

man

d (B

cfd

)

Gas Demand

of which 1.5 Bcfdis not price sensitive

1.9% CAGR

Natural Gas Demand Outlook 2021-25: demand profile slows as fewer LNG terminals are expected to be sanctioned & Mexico's gasification will be complete

107.7

118.0

-7.111.8

2.72.9

60

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120

2021E Total SupplyDeclines Permian Canada Marcellus2025E Total Supply

Ga

s S

up

ply

(Bcf

d)

This is the swing gas supply

Natural Gas Supply Outlook 2021-25: Associated gas can meet almost all of this supply, with minimal growth required from the Marcellus


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MTP

A

Ax

is T

itle

US LNG Capacity Approved Henry Hub Linked Oil Linked

Oil linked cheaper

HH linked

cheaper

Futurecurve signals

parity

US LNG approvedwhen price arbitrage

window open

0

1

2

3

4

5

6

7

2012 2013 2014 2015 2016 2017 2018*

FID

s

CC3

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

(60)

(40)

(20)

-

20

40

60

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

% o

f G

lob

al D

em

an

d

Sp

are

Bas

e C

ap

acit

y (m

mt)

Spare Base Capacity % of Demand

54mtpa of new projects need to be sanctioned by 2020 to meet long-term

market demand in 2025

A wave of LNG FIDs in the US (and Australia) occurred from 2012-15, but they dried up after. It takes 4 years from FID to startup.

Source: EIA; HPDI, Bernstein estimates. *CC-3 not yet officially FID-ed but Cheniere says will happen this year

Exports need LNG and Mexico…LNG waiting and Mexico full

This is due to the oversupply that we see in the LNG market from 2019-22…but by 2023 we will need more

Parity at the forward curve…but our deck suggests HH linked cheaper…

6% 10% 11% 11%

33%

51%

70%62%

34%

30%2%

1%

20%

4%

4%9%

8% 5%14% 17%

0%

20%

40%

60%

80%

100%

120%

U.S. 2015 Mexico 2015 Mexico 2021E Mexico 2030E

% o

f Ele

ctr

ic G

en

era

tio

n

Hydro Gas Coal & Oil Nuclear Other Renewable

~310GWh ~366GWh ~444GWh~4,078GWh

Mexican forecast suggests rising imports to 2020…then falling

By 2021 gas will be as fully saturated into power demand as can be expected


Source: EIA; SENER, Bernstein analysis

Company City Startup Date

Capacity

MTA

Capacity

kbd

ethane

Oxy/Mexichem JV Ingleside 3/1/2017 550 32

Dow Freeport 3/1/2018 1,500 87

Indorama Ventures PCL Lake Charles 7/1/2018 420 24

ExxonMobil Baytown 7/1/2018 1,500 87

Chevron Phillips Cedar Bayou 7/1/2018 1,500 87

FPC USA Point Comfort 4/1/2019 1,250 73

Shin-Etsu Plaquemine 7/1/2019 500 29

SASOL Lake Charles 7/1/2019 1,550 90

LACC LLC Lake Charles 7/1/2020 1,000 58

Exports Enterprise/ETP 7/1/2018 200

BY 2020 total 9,770 767

Dow Freeport 1/1/2021 500 29

Shell Chemical Monaca 1/1/2022 1,500 87

Total Port Arthur 1/1/2023 1,000 58

Exxon/SABIC San Patricio 6/1/2023 1,800 104

Post 2020 total 4,800 174

Next ethane cracker wave likely smaller than the one going on now

NORTH AMERICAN OIL & GAS EXPLORATION/PRODUCTION | 23Source: Rystad, Bloomberg, Factset, Bernstein estimates.

Comparing historical and projected gas prices

0.00

0.50

1.00

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3.00

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4.00

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20

Gas Prices ($/MMBtu)

AECO Waha Premium to AECO Leidy Premium to Waha HH Premium to Leidy HH

HistoricalFuture

A ECO

H H

L e idy

Wah a


WoodMac Price Assumptions

Brent

Year Low Base High

2018 31.60 52.00 72.40

2019 32.19 53.00 73.81

2020 31.78 53.00 74.22

2021 48.71 70.36 92.01

Henry Hub

Year Low Base High

2018 2.55 3.08 3.61

2019 2.39 2.93 3.46

2020 2.32 2.86 3.41

2021 3.07 3.62 4.18

Source: Rystad, Bloomberg, Factset, Bernstein estimates.

Comparing historical and projected gas prices

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c-2

2

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c-2

3

De

c-2

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De

c-2

5

Ga

sPric

e ($

/mc

f)

Gas Marginal Cost Curve

Cash Cost

Rystad (Base)

Henry Hub

Marginal Cost

Forward Curve

Bernstein Forecast


Key points

Why US oil supply response matters so muchGlobal supply (outside of 3 countries) isn’t growing

How do E&Ps think about fundingCash in ~ cash out (except when greedy or scared)

How E&Ps won the shale war

Our forecast of US supplyOil price, reinvestment rate, inflation, and well efficiencies drive result

Why the “predator prey” model is so importantLotka-Volterra equation

Midstream the current investment gating factor

Natural gas falls prey to oil market and lack of demand

north america oil & gas exploration & production · see disclosure appendix of this report...

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