private company energy

Fall 2015

S IX T H ANNUALP R I V A T E C O M P A N Y

E N E R G YC O N F E R E N C E R E C A P

SIMMONS & COMPANY INTERNATIONAL SIXTH ANNUAL PRIVATE COMPANY CONFERENCE PANEL PARTICIPANTS

LAND DRILLINGRon Tyson

Chief Executive Officer

Cactus Drilling

Brett Jensen


Hamilton Energy Group

Trent Latshaw


Latshaw Drilling

Phil Longorio

Chief Executive Officer & President

Scientific Drilling International

CAPITAL EQUIPMENTTrey Smith

President & Chief Executive Officer

Galtway Industries

Saeid Rahimian


Gardner Denver EG

Scott Mason


TYCROP Manufacturing

OIL SERVICESJosh Comstock

Chairman & Chief Executive Officer

C&J Energy Services

Randy McMullen

President & Chief Financial Officer

C&J Energy Services

COMPLETION SERVICESCody Wickersheim

President

Badger Mining Corporation

Ann Fox


Nine Energy Service

Dale Redman


Pro Petro Services

Regan Davis


STEP Energy Services

E&P SUPPLY CHAINMark Hood

Supply Chain Director

Apache Corporation

Brian Smith

Director, Global E&P Procurement

Repsol Energy

TAKEAWAYS FROM THE CONFERENCE

Held on December 2 and 3 in New York City, Simmons’ Sixth Annual Private Energy Conference included over 50 attending

energy companies. As expected, a cautious mood permeated the conference as near-term visibility remains opaque

while industry pricing pressures and weak utilization persist. Our conference featured five panels: (i) Land Drilling and

Well Service; (ii) Capital Equipment; (iii) Completion Services; (iv) a town hall gathering with CJES management and (v)

Perspectives from E&P Supply Chain Management. The nature of this conference (i.e. predominantly private industry

players) allows for a greater level of just-in-time ground-level operational feedback/outlook than with traditional public

company conferences, thus the central appeal to institutional clients. This year’s conference was replete with transparency

and candor as the challenges afflicting the industry received significant discussion while uncertainty surrounding near-

term activity levels was apparent. While a number of different subsector anecdotes were forthcoming, the following note

summarizes the prominent themes arising from our event. These include:

• Oil Service Industry’s Service Deliverability Being Impaired.

• Pricing Pressures Persist - At Unsustainable Levels and Still Declining.

• Near-Term Visibility Cloudy: Q4 Likely Better Relative to Early Expectations, But Q1 Moving Lower.

• New Market Entrants Emerging.

• E&P Supply Chain Management Still Seeking Well Cost Reductions: Efficiencies and Price.

In addition to these five themes, the event also included a 1x1 with the CEO and CFO of CJES. The panel essentially provided

a case study to our private company attendees regarding the growth and vision of the CJES founders. As a reminder, CJES was

formed in the late 1990’s as a one yard operation, but over the years through organic growth, acquisitions, two rounds of PE

investment and ultimately an IPO in 2011, the company became a billion dollar enterprise. Arguably, over the past ten years,

CJES is the industry’s most impressive operational growth story, a case study that appealed to a large number of our private

company attendees as most would love to replicate the CJES success.

Authored by: John Daniel Important Disclosures appear in Appendix on page 13-14Oil Service - December 8, 2015

S I M M O N S & C O M PA N Y I N T E R N AT I O N A L’SS I X T H A N N UA L P R I VAT E C O M PA N Y E N E R G Y C O N F E R E N C E R EC A P 1

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Impaired Industry Deliverability:

A theme which we have been hammering home now for some time was further validated by the majority of our panelists

last week and ultimately became one of the most important focal points of the conference. Specifically, the ability for the

industry to ramp quickly is being impaired due to massive headcount reduction, dramatic declines in oil service capital

spending budgets, reduced (and arguably insufficient) proactive spending on equipment maintenance, and reduced liquidity

associated with significant working capital reductions. Interestingly, impaired service deliverability is gaining more visibility

as Wall Street and major media outlets (Houston Chronicle article this weekend, for instance) are addressing this topic.

Industry deliverability will become an increasingly prominent theme during the Q4 earnings season next month as the oil

service industry will use this message as a key reason why oil service pricing should eventually move higher. In time, that

message will begin to resonate with the E&P industry as service quality and competitive choice will likely decline, but for

now, pressure to further reduce well costs remains a top priority for the E&P customer and service deliverability concerns

are a distant second. That said, the following observations were conveyed and are worth highlighting.

TAKEAWAYS FROM THE CONFERENCE (CONTINUED)

2 S I M M O N S & C O M PA N Y I N T E R N AT I O N A L’SS I X T H A N N UA L P R I VAT E C O M PA N Y E N E R G Y C O N F E R E N C E R EC A P


• A leading capital equipment provider implemented a 30% headcount reduction and will cut more in 2016 if conditions do not improve. The 1H’16 outlook for this panelist is bleak as backlog is low (orders booked in a quarter are typically shipped that same quarter). In addition, it will take up to 4-5 months to return to execution levels achieved during the last peak. This panelist believes that 60% of its frac customers are struggling and likely cannibalizing assets while 40% are highly disciplined and committed to strong maintenance programs.

• A leading fabricator echoed the previous points. It estimates that 30% of its frac customers are investing in the fleet, 20% are making due with some investment while 50% are cannibalizing. This company has also reduced ~25-30% of its headcount while operating cost reductions of ~20% have materialized. The company did note that it has commitments from customers to perform refurb work, but those projects keep getting delayed.

• A company tied to directional drilling noted that it reduced its headcount by ~1,000 employees (nearly 40-45%) while wages have been reduced. The company is now utilizing 2-man crews with remote monitoring vs. a prior use of 4-man crews. The company is preparing for a grim 1H’16 and doesn’t see a recovery until 2017. An interesting comment regarding visibility - the company will be assigned a rig, but the rigs can be dropped with very little notice which we presume make planning difficult.

• A leading sand provider noted that mines have been idled, but as it is debt free, it will look to use the current market as a platform for growth. Importantly, it reports growing turmoil amongst the higher-cost second tier mines as market pricing is below sustainable levels, a message the public mines are also advertising. The panelist believes industry consolidation will be forthcoming, noting obvious synergies would be derived from putting mines with different rail origins together.

• A completions-oriented company emphasized that market conditions are terrible and will deteriorate in 1H’16. 2016 earnings could be down as much as 50% y/y. A big concern for this panelist is the lack of liquidity for many of the private, less wellcapitalized players. Given that banks are increasingly tightening credit availability, combined with reduced working capital positions, many oil service companies will likely face liquidity constraints and will therefore be unable to quickly reactivate equipment. This panelist also noted a 50% headcount reduction.


Collectively, woeful industry returns and the prospects for deteriorating, or at best,

flat near-term activity will further weigh on the deliverability of the industry. Wage

count reductions, coupled with further attrition of the industry employee base, make

working in the oil service industry less attractive. This will impact the industry’s ability

to quickly rehire employees when the cycle eventually recovers. And on that point,

the longer the duration of this down-cycle, the greater the fleet attrition and the more

cumbersome a process it will be to reinvigorate a return of the former employee base.

All of this will ultimately be a central tenet to the oil service industry’s eventual push

for higher pricing.

Pricing Pressures Continue:

For competitive reasons, we did not ask our panelists for specific pricing data points,

rather we addressed the topic more tastefully, allowing panelists to provide general

observations. And, in keeping with the candor of all of our private company events, the

industry’s pricing duress continues to be unrelenting. One panelist tied to the directional

drilling business reported that a large customer, described as a super major, recently

requested an additional 50% price discount to leading edge pricing. Our panelist declined

this request. Our well service panelist described “Kamikaze” pricing whereby the large

public players have purportedly aggressively bid pricing lower to regain market share.

For what it’s worth, other private companies have been echoing this theme for some

time. Our land drilling contacts noted that current pricing is allowing for cash margins of

only $2,000-$3,000/day, in some cases. Interestingly, one panelist claimed that it would

not participate at those levels, particularly if the work is short-term well-to-well projects.

Specifically, this driller pointed to its self-insured insurance plans as it is responsible

for the first $250,000 for any work-related injury claim. That, along with the risk of a

mud pump failure (a potentially big ticket repair item) make ~$3,000/day cash margin

work unprofitable. On the self-insurance comment, this is important as the oilfield

remains a dangerous work environment as evidenced by nearly 17 oilfield work related

deaths YTD (take a look at the depressing statistics 2 December 8, 2015 Oil Service

on OSHA’s website to see nature of each fatality). Virtually all panelists report pricing

concessions, not a new concept. Importantly, very few panelists see any near-term

upward mobility to price. Bottom-line, while pricing is at unsustainably low levels, it will only stabilize when activity stabilizes and will only begin to recover when E&P capital spending increases.



Opaque Visibility:

General uncertainty surrounding 2016 activity levels and

importantly, the lack of concrete evidence regarding customer

spending plans reaffirms the prospect of a challenging 2016.

We asked all panelists to opine on the near-to-intermediate

outlook. Our sense is that Q4 results for the industry will

be a bit better relative to expectations earlier this quarter

(although still down q/q). Beyond Q4, however, most believe

that activity levels will move lower, although some believe

we are approaching a bottom now. One panelist believes that

Q3’15 marked the bottom for their company (we assume the

company is referring to margins, not activity) while a land

drilling panelist reported recent utilization improvements

along with indications that an additional ~2-3 idle rigs may

return to service in the coming weeks. These rigs, however,

would displace an incumbent, thus the additions are not

additive to overall industry activity levels. The lack of clarity

is noteworthy as these executives are on the front lines of

the business, many of whom are the primary liaison between

their respective company and the customer. This basket of

executives, in our opinion, is exactly the group to make the

best near-term call and the inability to do so is disconcerting

but not surprising. Moreover, if these private companies have

little-to-no near-term conviction, then it is simply wishful

thinking to believe that a recovery in oil service pricing is at

hand. Why? Because a service company needs to have an

improving near-term work schedule and be turning down

work before pricing moves higher. We heard no indications

from any panelists or other conference attendees that we

are at that point. Further, our conference took place the day

before the OPEC meeting and clearly, the sell-off in oil prices

since then further diminishes the prospect of any near-term

utilization/pricing recovery.

New Industry Players Emerging:

While it is increasingly evident that industry attrition is

unfolding, it isn’t clear that the fragmented nature of the

industry is being sufficiently redefined. We are seeing

signs of new money entering the sector as downturns

create opportunities. Specifically, we featured several

entrepreneurial management teams that are capitalizing

on the market while other panelists see opportunities to

capitalize on the market next year. In one case, STEP Energy

Services, a North American coiled tubing company, recently

acquired frac assets from Gas Frac. STEP injected some

capital to upgrade the assets and last month, it completed

its first frac job. In another case, Hamilton Energy Services

entered the well service space last year with two well service

rigs. Since that time, in a market of falling oil prices, it has

expanded its fleet to 33 rigs today and our impression is that

further growth is being considered. In addition, we are aware



of companies such as Yellow Jacket Energy Services that purportedly acquired

cheap frac horsepower while last week Rubicon Oilfield International announced

a $300mm equity commitment from a leading private equity player. Moreover,

the combination of strong PE attendance at our event as well as discussions with

conference attendees lead us to believe that it’s only a matter of time before

additional funds flow into the space. This will take the form of recapitalizations

and funding new opportunities.

E&P Supply Chain - Still Seeking Well Cost Reductions:

The need to drive lower well costs will be a theme emphasized during the 2016 E&P budget process. This takes on even greater importance now that WTI is trading below $40/bbl. Yes, our E&P panelists understand that oil service pricing is low. One even observed that additional price concessions for traditional drilling and completion-oriented services may be limited, but the desire to achieve upwards of another 20% in well cost deflation is a de facto objective. Areas where price concessions will be targeted include compression and midstream-related services while further operational efficiencies may help meet the cost reduction goals. One comment that resonated was in reference to service quality.

In the case where the incumbent service provider is working on a contractual basis, no quality concerns have developed. However, the E&P company noted that call-out crews are delivering weaker relative service. That anecdote, we believe, is a sign of things to come as long as industry conditions remain depressed and lack of investment persists. With respect to efficiencies, one panelist cited drilling time reductions of nearly ~20 days in the Marcellus while both panelists see little difference in the various new rig designs. One contact noted that frac costs in Canada can be as much as 50% lower in the summer than in the winter, thus it will look at options to frac during those periods. With respect to bidding activity, one E&P still uses the same number of contractors during normal RFP processes while our other E&P panelist is increasing the number of bidders. As it relates to pending M&A, one panelist noted that it is looking at vendor alternatives in the offshore market due to the BHI/HAL deal. Finally, the E&P panelists pointed out that aggressive cost cuts are unfolding internally as headcount is being reduced, although our sense is that the magnitude of cuts (both headcount and salary) are much less dramatic than what is being witnessed in the oil service sector.



CJES Panel:

Our relationship with CJES dates back to 2005. We first met

management when C&J Specialty Rentals elected to pursue

its first sale. At that time, the company operated in one yard

in Robstown, Texas. The company ultimately sold to a private

equity player and then almost 18 months later, C&J sold again

to another PE player. In the following years, C&J expanded into

the pressure pumping universe and ultimately, the company

pursued its IPO in 2011. For this year’s conference, we deviated

slightly from our traditional format in that we wanted to

highlight to our private company audience an example of a

company that grew rapidly 3 December 8, 2015 Oil Service

from a one-basin operator to ultimately become a global

provider of oilfield services. In our opinion, there is no other

oil service company who has so dramatically transformed itself

during the past ten years. The key driver in this transformation

is the visionary leadership of the CEO and a capable and driven

CFO. The panel focused primarily on the lessons learned during

the CJES growth years although a modicum of time was spent

discussing current business trends. While no financial guidance

was provided, our sense is that activity levels are tracking in

line, to slightly ahead of the company’s outlook imparted on

the Q3 earnings call. This was a theme we sensed from most

of our panelists and private company attendees, thus as we

head into Q4 update season, our instinct is that we could see

slight upward revisions to our Q4 assumptions. That probably

doesn’t matter, however, in a sub-$40 oil market.



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CORPORATE FINANCE HOUSTON

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Pearce W. Hammond Managing Director, Co-head of E&P Research [email protected]

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Guy A. Baber, IV Director, Head of Integrated Company Research [email protected]

John M. Daniel Director, Co-head of Oil Service Research [email protected]

Brian Gamble Director, Research [email protected]

Ian Macpherson Director, Co-head of Oil Service Research [email protected]

Mark L. Reichman Director, Research [email protected]

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Analyst Certification:

I, John Daniel, hereby certify that the views expressed in this research report to the best of my knowledge, accurately reflect my personal views about the subject compan(ies) and its (their) securities; and that, I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) or views in this research report.

Important Disclosures:

For detailed rating information, go to https://simmons.bluematrix.com/sellside/Disclosures.action. Additional information is available upon request. Simmons & Company International may seek compensation for investment banking services from and other companies for which research coverage is provided. The firm would expect to receive compensation for any such services. Research analysts compensation is based upon (among other things) the firm’s general investment banking revenues.

Ratings Definition and Distribution:

Our recommendation system is based on a stock’s expected total return relative to the performance of the S&P 500 Index and its discrete energy sub-sector over a 12 month period. We divide stocks under coverage into three categories, each defined by a prospective rate of return:

Overweight – the stock is expected to outperform the average total return of its discrete energy sub-sector over the next 12 months.

APPENDIX


Neutral – the stock is expected to perform in line with the average total return of its discrete energy sub-sector over the next 12 months.

Underweight – the stock is expected to underperform the average total return of the its discrete energy sub-sector over the next 12 months.

Suspended – the company rating, target price and earnings estimates have been temporarily suspended. The above presentation represents this ratings system as conformed for FINRA requirements.

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