Art Berman Labyrinth Consulting Services, Inc. Midland, Texas - PowerPoint PPT Presentation

Putting the Permian Basin in Perspective: Tight Oil & the Long-Term Debt Cycle West Texas Geological Society 2017 Fall Symposium Art Berman Labyrinth Consulting Services, Inc. Midland, Texas September 27, 2017 Labyrinth Consul4ng Services, Inc. Slide 1 artberman.com

Pu>ng the Shale Revolu4on in Perspec4ve Current $50 Oil Price > 40% Higher Than Jan 1986 - Dec 2004 U.S. Incremental Ouput: The Major Cause For Low Oil Prices Average in July 2017 Dollars Canada, Iraq, Iran Saudi Arabia and Russia Also Important Contributors 66 $160 2nd Bubble: 1999-2014 65 All Prices in Constant July 2017 Dollars $150 Canada 64 Debt-Fueled Economic Massive E&P $140 Millions of Incremental Barrels of Crude Oil & Condensate Per Day Expansion & Rapid Investment CPI Adjusted WTI Prices (January 2017 Dollars Per Barrel) 1st Bubble: 1974-1980 63 $130 Growth in China & East (Shale, Deep Asia Water, Heavy 62 U.S. $120 Oil) $110 61 Oil Shocks $100 60 --> Iraq $90 Massive E&P 59 Over-Supply, Demand Destruction & Investment (North $80 Price Deflation Sea, Mexico, Iran 58 $70 Siberia) Russia $60 57 $50/barrel Brazil $50 56 $40 Over-Supply, Demand Indonesia-Ecuador-Qatar-Gabon Saudi Arabia 55 Destruction & Price Libya $30 Kuwait Deflation Angola 54 Venezuela $20 UAE Mexico Algeria Avg 2005-2014 $48/ <$23/ Avg 1974-1985 $71/barrel Avg 1986-2004 $36/barrel 53 $10 Nigeria $91/barrel barrel barrel Base Source: EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc. Source: EIA & Labyrinth Consulting Services, Inc. $0 52 Jan-70 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 The 1st Bubble 1974-1980: oil shocks and price increase from $23 to $117/barrel led to • massive E&P investments, over-produc4on, demand destruc4on & oil-price defla4on un4l 1998. Second Bubble: 1999-2014: flat global output & growing Asian demand led to increasing oil • prices from $17 to $148/barrel by 2008. ATer the 2008 Financial Collapse, OPEC cut produc4on then, declining OPEC spare capacity, • falling OECD inventories, & near-zero interest rates—led to the longest period of high oil prices in history from 2011-2014. Over-investment resulted in a massive over-supply, much of it from the United States. • The bubble burst in 2014 and prices collapsed. • Labyrinth Consul4ng Services, Inc. Slide 2 artberman.com

Oil Prices & The Long-Term Debt Cycle Oil Prices 2.4 times Higher After 2004 Than 1986-2004 In 2016 Dollars No Demand Destruction During The 2012-2016 Oil-Price Collapse Debt > GDP After 1974-1986 Oil Shocks $120 4.5 $35 $120 Brent Price LHS 4.25 (WTI before 1975) 4 Debt $110 U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions) 3.75 $30 3.5 $100 $100 3.25 Oil Price 3 $90 2.75 $86 Avg Price CPI-Adjusted Brent Price (December 2016 $/barrel) $25 2.5 Annual Liquids Demand Growth (mmb/d) WTI Price in 2016 Dollars Per Barrel $80 2.25 Positive Demand $80 2 Growth Oil Shocks 1.75 $70 (RHS) $20 $69 Avg Price GDP 1.5 1.2 mmb/d 1.25 $60 30-Year Avg $60 1 0.75 $15 $50 0.5 $48 $45/barrel 0.25 3.5 2.7 3.5 4.1 3.4 2.2 2.9 1.1 1.2 1.7 1.4 1.8 1.1 0.4 0.5 0.6 0.1 1.0 1.5 1.7 1.3 0.5 1.8 1.8 0.8 0.6 1.6 3.1 1.4 1.0 1.5 3.1 0.9 1.1 1.0 1.2 1.9 1.3 1.5 1.4 1950-2016 Avg Price $40 0 $40 -0.8 -0.4 -1.3 -1.9 -1.5 -0.4 -0.2 -0.6 -1.0 $34 Avg Price -0.25 $10 -0.5 $30 -0.75 $23 Avg Price -1 Negative $20 $20 -1.25 $5 Demand Growth -1.5 Debt > GDP (RHS) -1.75 $10 After 1986 -2 Source: IEA, EIA, OPEC, BP, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc. Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc. -2.25 $0 $0 $0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Petroleum Age aTer WWII produced unprecedented economic growth. • Oil shocks of 1974-1986 threatened to end that party. • Demand destruc4on & oil produc4on bubble resulted in 18 years of cheap energy. • Debt re-started economic growth & debt-based growth of China challenged oil supply aTer 2004. • Second oil shock made unconven4onal oil possible. Zero-interest rates led to 2 nd oil bubble. • Longest period of high oil prices in history. • That bubble burst in 2014 and oil prices collapsed but without demand destruc4on. • Now, we are near the end of long-term debt cycle but denying that the economic basics have • fundamentally changed since the post-war era. Labyrinth Consul4ng Services, Inc. Slide 3 artberman.com

Low Interest Rates Created A Capital Bubble For Tight Oil & The Permian Basin Rig Count Weekly Change Suggests Permian Break-Even Price Is $55-$60/Barrel Lower Oil Prices Correspond With Higher Interest Rates & End of QE 3 in Late 2014 Rig Count Rises & Falls Based on Expectation of $55-$60 Prices 7% $160 10 $110 $105 $100 Weekly Rig Count $140 6% $95 5 Change WTI Price $90 (July 2017 Dollars) $85 $120 CPI-Adjusted WTI Price (2016 Dollars Per Barrel) $80 5% Federal Funds Effective Interest Rate (Percent) 0 $75 $70 $100 Weekly Rig Count Change End $65 4% -5 WTI Price ($/barrel) $60 QE 3 $60 $55 $80 $55 $50 3% -10 $45 $60 $40 $35 2% -15 $30 $40 WTI Price Interest Rates $25 Interest Rate Inc. $20 Change In Permian Tight Oil Rig Count Lags Price By About 6 Weeks Weeks 1% -20 From 0.09% to 0.12% $20 $15 1/10/14 3/10/14 5/10/14 7/10/14 9/10/14 11/10/14 1/10/15 3/10/15 5/10/15 7/10/15 9/10/15 11/10/15 1/10/16 3/10/16 5/10/16 7/10/16 9/10/16 11/10/16 1/10/17 3/10/17 5/10/17 7/10/17 $10 $5 Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & Labyrinth Consulting Services, Inc. 0% $0 -25 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc. $0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Slide 14 Labyrinth Consulting Services, Inc. Houston Geological Society • The oil-price collapse coincided with the end of QE 3 and the beginning of U.S. interest rate increases. • Con4nued low interest rates caused margin hunters to focus first on 4ght oil and later, on the Permian basin. • $30 oil prices brought large capital flows to a select group of producers seen as winners. • Tight oil and Permian rig counts have more than doubled since August 2016. • Increased rig count and fear of ongoing over-supply is a major drag on oil prices. • Failure of OPEC produc4on cuts to quickly balance oil markets has 4ghtened capital flows since March. Labyrinth Consul4ng Services, Inc. Slide 4 artberman.com