through the fog110. 2010. 2015. 2020. 2025. 2030. 2035. 90. 95. 100. 105. oil demand. today
TRANSCRIPT
Through the FogAAPG – January 2019
Three Rivers Through the Fog
Big Companies Leaving the
Permian
& 2009 Oil Price Collapse
$36/Share
Cline is New Play(Wolfcamp Shale Only Works in
Southern Midland Basin)
Three Rivers Through the Fog
PERMIAN
BAKKEN
EAGLEFORD
Big Companies No Longer Leaving the
Permian
Three Rivers Through the Fog
2014 OPEC Price War with US
Oil Px$26.14
Feb2016
Oil Floods Market
Today’s Fog
“Peak Oil Demand”
Today’s Fog
110
202020152010 2025 2030 203590
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100
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OIL DEMAND
TODAY
Today’s Fog
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OIL DEMAND
Today’s Fog
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OIL DEMAND
Today’s Fog
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OIL DEMAND
Today’s Fog
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202020152010 2025 2030 203590
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CLIMATE CHANGE POLICIES
OIL DEMAND
History Lesson: “Peak Oil”
1956M. King Hubbert, a geologist for Shell Oil, says that
U.S. oil production will likely peak between 1965 and 1970 and decline steadily thereafter.
Others Have Made the Same Prediction Since.
1972 ∙ Esso 1976 ∙ UK Dept. of Energy 1979 ∙ Shell 1981 ∙ World Bank 1997 ∙ JD Edwards 2000 ∙ EIA 2003 ∙ Shell
Hubbert’s Original Curve
4,000
4,500
3,500
1900
500
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910
1,000
3,000
1,500
2,000
2,500
Original Prediction
1956
HISTORICAL PRODUCTION
Hubbert’s Original Curve
4,000
4,500
3,500
1900
500
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910
1,000
3,000
1,500
2,000
2,500
Original Prediction
1956
“Peak Oil”
EXPECTED DISCOVERIES
HISTORICAL PRODUCTION
Hubbert’s Original Curve
4,000
4,500
3,500
1900
500
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910
1,000
3,000
1,500
2,000
2,500
Original Prediction
1956
“Peak Oil”
EXPECTED DISCOVERIES
DECLINEHISTORICAL PRODUCTION
What Really Happened
1900
500
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910
1,000
1,500
2,000
4,000
4,500
3,500
3,000
2,500
“Peak Oil”Original
Prediction 1956
EXPECTED DISCOVERIES
DECLINEHISTORICAL PRODUCTION
What Really Happened
1900
500
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20201910
1,000
1,500
2,000
4,000
4,500
3,500
3,000
2,500
“Peak Oil”SHALE
Original Prediction
1956
EXPECTED DISCOVERIES
DECLINEHISTORICAL PRODUCTION
(1) This quote was originally attributed to Karl Kristian Steincke
Yogi Berra
“It’s tough to make predictions –especially about the future.”(1)
Baseball Philosopher
7.6Billion
On Earth in 2017
But Wait
7.6Billion
On Earth in 2017 BillionBy 2030
But Wait
7.6Billion
On Earth in 2017 BillionBy 2030
But Wait
But Wait
But WaitLet’s talk about a USA slide for perspective
88 percent of the next billion entrants into the middle class will be in Asia
88 percent of the next billion entrants into the middle class will be in Asia
88 percent of the next billion entrants into the middle class will be in Asia
88 percent of the next billion entrants into the middle class will be in Asia
They need energy any way they can get it – cheaply and easily
We Are Not Going Out of Business.
International Energy Administration
mb/
d110
100
90
80
70
602010 2015 2020 2025
CURRENTLY PRODUCING FIELDS
NON-SHALEGROWTH
SHALE
They Need Us
Only One Place to Get ItOnly One Place to Get It
Demand
Oil Outlook to 2025 without a Pick-Up in Conventional Oil Investment
Why Does Wall Street Hate Energy?
Why Does Wall Street Hate Energy?Not Care About
S&P 500 Energy
Of S&P500 Index5.3%
APACHE
ANADARKO
BAKER HUGHES
CABOT
CONOCOPHILLIPS
CHEVRON
CONCHO
DEVON
EOG
EQT
TECHNIPFMC
HALLIBURTON
HESS
HOLLYFRONTIER
HELMERICH & PAYNE
KINDER MORGAN
MARATHON PETROLEUM
MARATHON OIL
NOBLE
NEWFIELD
NATIONAL OILWELL VARCO
ONEOK
OCCIDENTAL
PHILLIPS 66
PIONEER
SCHLUMBERGER
VALERO
THE WILLIAMS COMPANIES
CIMAREX
EXXON MOBIL
S&P 500 Energy
Of S&P500 Index5.3% Upstream
Growth1.7% APACHE
ANADARKOBAKER HUGHES
CABOTCONOCOPHILLIPS
CHEVRON
CONCHODEVON
EOGEQT
TECHNIPFMC
HALLIBURTON
HESS
HOLLYFRONTIER
HELMERICH & PAYNE
KINDER MORGAN
MARATHON PETROLEUMMARATHON OIL
NOBLENEWFIELD
NATIONAL OILWELL VARCO
ONEOK
OCCIDENTALPHILLIPS 66
PIONEERSCHLUMBERGER
VALERO
THE WILLIAMS COMPANIES
CIMAREXEXXON MOBIL
S&P 500 Energy
Of S&P500 Index5.3% Upstream
Growth1.7% APACHE
ANADARKOBAKER HUGHES
CABOTCONOCOPHILLIPS
CHEVRON
CONCHODEVON
EOGEQT
TECHNIPFMC
HALLIBURTON
HESS
HOLLYFRONTIER
HELMERICH & PAYNE
KINDER MORGAN
MARATHON PETROLEUMMARATHON OIL
NOBLENEWFIELD
NATIONAL OILWELL VARCO
ONEOK
OCCIDENTALPHILLIPS 66
PIONEERSCHLUMBERGER
VALERO
THE WILLIAMS COMPANIES
CIMAREXEXXON MOBIL
We Are Immaterial.
We Have Lost MoneyS&P Energy Outcome
2012 16.0% 4.6% Worse
2013 32.4% 25.1% Worse
2014 13.7% <7.8%> Worse
2015 1.4% <21.1%> Worse
2016 12.0% 27.4% Better
2017 21.8% <1.0%> Worse
2018 <4.4%> <18.1%> Worse
6 Out of 7 Years
If You Are Wall Street
BIG20% of S&P 500
STRONGBeat Energy by 10xfor the Past 7 Years
SEXY
TECHNOLOGY
ENERGY
Small
Weak
Boring
If You Are Wall Street
Energy Investors Want
Growth Within Cash Flows
Return of Capital – Dividends or Share Buybacks
Consolidation to Achieve Economies of Scale
What Does This Mean ToYOU ?
It Depends Who You Are
CHARGER LUXEBRIGHAM
Public Companies
Public Companies
HAVES –
Drill Tier 1 Acreage Rationalize Tier 2 Acreage Selective Consolidation
Public Companies
BUBBLES –
Drill Tier 1 Acreage Bolt On Additional Tier 1
Acreage Consolidation
Public Companies
HAVE-NOTS –
No Premium Mergers
Public Companies
Tier 1 = 50% Well IRRs at $60 Oil Excluding Land Cost
What is Tier 1 Acreage?
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Expe
cted
Net
Cas
h Fl
ows
Tier 1 Acreage
3700 Wells Last Year
Last 12 Months of Permian Wells(Approximately 3700 Wells)
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Expe
cted
Net
Cas
h Fl
ows
Tier 1 Acreage
3700 Wells Last YearAssumptions:
Last 12 Months of Permian Wells(Approximately 3700 Wells)
Midland BasinD&C Costs:
$900/Lateral Ft
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Expe
cted
Net
Cas
h Fl
ows
Tier 1 Acreage
3700 Wells Last YearAssumptions:
Last 12 Months of Permian Wells(Approximately 3700 Wells)
Midland BasinD&C Costs:
$900/Lateral Ft
Delaware BasinD&C Cost:
$1,250/Lateral Ft.
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Expe
cted
Net
Cas
h Fl
ows
Tier 1 Acreage
3700 Wells Last YearAssumptions:
Last 12 Months of Permian Wells(Approximately 3700 Wells)
Delaware BasinD&C Cost:
$1,250/Lateral Ft.
Lifting Costs:$10/Barrel
Midland BasinD&C Costs:
$900/Lateral Ft
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Tier 1 AcreageLast 12 Months of Permian Wells
(Approximately 3700 Wells)
Tier 150%+IRR
Expe
cted
Net
Cas
h Fl
ows
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Tier 1 AcreageLast 12 Months of Permian Wells
(Approximately 3700 Wells)
Tier 150%+IRR
Tier 230%–49% IRR
Expe
cted
Net
Cas
h Fl
ows
10% 50% 60% 100%70% 80% 90%20% 30% 40%
Percentage of Wells
Tier 1 AcreageLast 12 Months of Permian Wells
(Approximately 3700 Wells)
Tier 150%+IRR
Tier 230%–49% IRR
Tier 310%–29% IRR
Uneconomic<0%–9% IRR
Expe
cted
Net
Cas
h Fl
ows
If You Are Private Equity Backed
PECOMPANIES
PE Assets That Can Be Sold As Tier 1 Assets
TIER 1You’re going to be fine – keep
up the good work.
If You Are Private Equity Backed
PECOMPANIES
PE Assets That Can Be Sold As Tier 1 Assets
TIER 1You’re going to be fine – keep
up the good work.
TIER 2Implement a newbusiness model
$0
$100
$200
$300
$400
$500
$600
$700
0 1 2 3 4 5 6 7 8
Years
Equi
ty D
eplo
yed
($M
iilon
)
Prospecting
InitialPurchase
1 4 6
Tier 2 Assets – New Model
Old ModelBuy, Build, Flip
$0
$100
$200
$300
$400
$500
$600
$700
0 1 2 3 4 5 6 7 8
Equi
ty D
eplo
yed
($M
iilon
)
Prospecting
Proof of Concept
InitialPurchase
Years
1 4 6
Tier 2 Assets – New Model
Old ModelBuy, Build, Flip
Traditional PE Sales Point
$0
$100
$200
$300
$400
$500
$600
$700
0 1 2 3 4 5 6 7 8
Equi
ty D
eplo
yed
($M
iilon
)
YearsProspecting
New PE Sales PointCash Flow Neutral
Proof of Concept
InitialPurchase
1 4 6
Full Development
Initial Development18 – 24 Months
Tier 2 Assets – New Model
Traditional PE Sales Point
Old ModelBuy, Build, Flip
New ModelBuy, Drill to Cashflow
Neutral, Flip
Newco
Tier 2 Conclusion
Expect Longer Hold Periods
Expect Lower ROIs
Bigger Teams – Must Be Ableto Drill Wells Efficiently
Smash Co. May BecomeMore Common
Newco
Tier 2 Conclusion
Expect Longer Hold Periods
Expect Lower ROIs
Bigger Teams – Must Be Ableto Drill Wells Efficiently
Smash Co. May BecomeMore Common
Newco
Tier 2 Conclusion
Expect Longer Hold Periods
Expect Lower ROIs
Bigger Teams – Must Be Ableto Drill Wells Efficiently
Smash Co. May BecomeMore Common
Newco
Tier 2 Conclusion
Expect Longer Hold Periods
Expect Lower ROIs
Bigger Teams – Must Be Ableto Drill Wells Efficiently
Smash Co. May BecomeMore Common
PDP / YIELD INVESTORS
HAYNESVILLE
BUYS
ONTARIO TEACHERS
UTICA
BUYS
CANADIAN PENSION PLAN
PDP / YIELD INVESTORS
HAYNESVILLE
BUYS
ONTARIO TEACHERS
FAYETTEVILLE
BUYS
INCOME FUND
UTICA
BUYS
CANADIAN PENSION PLAN
EAGLE FORD
BUYS
INCOME FUND
PDP / YIELD INVESTORS
FAYETTEVILLE
BUYS
INCOME FUND
BAKKEN
BUYS
SPAC
HAYNESVILLE
BUYS
ONTARIO TEACHERS
UTICA
BUYS
CANADIAN PENSION PLAN
BUYS
SPAC
EAGLE FORD
BUYS
INCOME FUND
PDP / YIELD INVESTORS
FAYETTEVILLE
BUYS
INCOME FUND
BAKKEN
BUYS
SPAC
HAYNESVILLE
BUYS
ONTARIO TEACHERS
UTICA
BUYS
CANADIAN PENSION PLAN
SAN JUAN
BUYS
PRIVATE
EAGLE FORD
BUYS
BUYS
SPAC
INCOME FUND
Conclusion
Best Deals Come Out of the Fog
Change is Inevitable
Is the Party Over?
Conclusion
Best Deals Come Out of the Fog
Change is Inevitable
Is the Party Over?
Conclusion
Best Deals Come Out of the Fog
Change is Inevitable
Is the Party Over?
Conclusion
Best Deals Come Out of the Fog
Change is Inevitable
Is the Party Over?
ABSOLUTELY NOT
Conclusion
One More Thing
Trouble brewing
Private Equity
Wall Street Investor
HEDGE FUNDENDOWMENT
Private Equity Investor
Private Equity
Must Beat the S&P 500
Wall Street Investor
HEDGE FUNDENDOWMENT
Private Equity Investor Must beat the S&P 500
Private Equity
Must Beat the S&P 500
Only Cares about Making Money
Wall Street Investor
HEDGE FUNDENDOWMENT
Private Equity Investor Must beat the S&P 500
Wants to be a Social Investor –Hydrocarbons are out of Favor
Private Equity
Must Beat the S&P 500
Only Cares about Making Money
Can Have Short-Term Thesis
Wall Street Investor
HEDGE FUNDENDOWMENT
Private Equity Investor Must beat the S&P 500
Wants to be a Social Investor –Hydrocarbons are out of Favor
Has Longer Hold Periods