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

Slide 1 Labyrinth Consul4ng Services, Inc. artberman.com

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

Slide 2 Labyrinth Consul4ng Services, Inc. artberman.com

Pu>ng the Shale Revolu4on in Perspec4ve

• 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.

52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 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 Millions of Incremental Barrels of Crude Oil & Condensate Per Day

U.S. Incremental Ouput: The Major Cause For Low Oil Prices

Iraq Iran Russia Brazil Saudi Arabia U.S. Canada

Kuwait UAE Angola Venezuela Mexico Algeria

Nigeria Base

Libya

Indonesia-Ecuador-Qatar-Gabon Source: EIA & Labyrinth Consulting Services, Inc.

Canada, Iraq, Iran Saudi Arabia and Russia Also Important Contributors

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 $160

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

CPI Adjusted WTI Prices (January 2017 Dollars Per Barrel)

Oil Shocks

• ->

Massive E&P Investment (North Sea, Mexico, Siberia) Over-Supply, Demand Destruction & Price Deflation Debt-Fueled Economic Expansion & Rapid Growth in China & East Asia Massive E&P Investment (Shale, Deep Water, Heavy Oil) Over-Supply, Demand Destruction & Price Deflation

Current $50 Oil Price > 40% Higher Than Jan 1986 - Dec 2004 Average in July 2017 Dollars

Source: EIA, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.

Avg 1986-2004 $36/barrel Avg 2005-2014 $91/barrel

All Prices in Constant July 2017 Dollars

Avg 1974-1985 $71/barrel <$23/ barrel

$50/barrel

1st Bubble: 1974-1980 2nd Bubble: 1999-2014

$48/ barrel

Slide 3 Labyrinth Consul4ng Services, Inc. artberman.com

Oil Prices & The Long-Term Debt Cycle

$0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $0 $5 $10 $15 $20 $25 $30 $35 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

WTI Price in 2016 Dollars Per Barrel U.S. Govennment + Consumer + Non-Financial Corporate Debt (Trillions)

Oil Prices 2.4 times Higher After 2004 Than 1986-2004 In 2016 Dollars Debt GDP

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc.

Oil Price

Oil Shocks $69 Avg Price $86 Avg Price $34 Avg Price

Debt > GDP After 1974-1986 Oil Shocks

$23 Avg Price

$48

$45/barrel 1950-2016 Avg Price

Debt > GDP After 1986

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

• 0.8
• 0.4
• 1.3
• 1.9
• 1.5
• 0.4
• 0.2
• 0.6
• 1.0
• 2.25
• 2
• 1.75
• 1.5
• 1.25
• 1
• 0.75
• 0.5
• 0.25

0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3 3.25 3.5 3.75 4 4.25 4.5 $0 $20 $40 $60 $80 $100 $120 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 Annual Liquids Demand Growth (mmb/d) CPI-Adjusted Brent Price (December 2016 $/barrel)

No Demand Destruction During The 2012-2016 Oil-Price Collapse

Source: IEA, EIA, OPEC, BP, U.S. Bureau of Labor Statistics & Labyrinth Consulting Services, Inc.

Positive Demand Growth (RHS) Brent Price LHS (WTI before 1975) Negative Demand Growth (RHS) 1.2 mmb/d 30-Year Avg

• 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 2nd 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.

Slide 4 Labyrinth Consul4ng Services, Inc. artberman.com

Low Interest Rates Created A Capital Bubble For Tight Oil & The Permian Basin

• 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.

0% 1% 2% 3% 4% 5% 6% 7% $0 $20 $40 $60 $80 $100 $120 $140 $160 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 Federal Funds Effective Interest Rate (Percent) CPI-Adjusted WTI Price (2016 Dollars Per Barrel)

Lower Oil Prices Correspond With Higher Interest Rates & End of QE 3 in Late 2014 WTI Price (July 2017 Dollars) Interest Rates

Interest Rate Inc. From 0.09% to 0.12% End QE 3

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statistics, EIA & Labyrinth Consulting Services, Inc.

Slide 14

Labyrinth Consulting Services, Inc. Houston Geological Society $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110

• 25
• 20
• 15
• 10
• 5

5 10 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 WTI Price ($/barrel) Weekly Rig Count Change

Rig Count Weekly Change Suggests Permian Break-Even Price Is $55-$60/Barrel

$55 $60 Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc.

Weekly Rig Count Change WTI Price

Change In Permian Tight Oil Rig Count Lags Price By About 6 Weeks Weeks

Rig Count Rises & Falls Based on Expectation of $55-$60 Prices

Slide 5 Labyrinth Consul4ng Services, Inc. artberman.com

The False Premise that Tight Oil Plays Are the New Swing Producer: the “Call on Shale”

• Widespread belief that U.S. shale produc4on controls world produc4on surplus—results in over-emphasis on

U.S. rig count as a leading indicator.

• The “call on shale” thesis: just-in-4me nature of shale supply means that produc4on can start & stop quickly

based on price and inventory signals.

• Implies that U.S. shale is the new swing producer of the world effec4vely replacing OPEC.
• Being a swing producer means that there is sufficient spare capacity to turn on and off based on market

signals.

• The “call on shale” is a ridiculous idea: the volume of shale produc4on change cannot be correlated to oil price
• r inventories as promoters claim.
• Shale output reacts to price just like all plays—slowly & in long-period cycles.
• Shale plays have no spare capacity—they are just-in-4me.
• Shale producers cannot even control output because they are constrained by comple4on crews and capital.
• DUCs are not spare capacity because they are not ready to produce.

$0 $20 $40 $60 $80 $100 $120 $140 $160 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 WTI Price ($2017/barrel) Crude Oil + Condensate Production (mmb/d)

The "Call on Shale" Thesis is Not Supported By Price Data

Permian Bakken Niobrara Eagle Ford Granite Wash

• Miss. Lime

WTI (RHS)

Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak 700 750 800 850 900 950 1,000 1,050 1,100 1,150 1,200 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Crude Oil + Refined Products (mmb) Crude Oil + Condensate Production (mmb/d)

The "Call on Shale" Thesis is Not Supported By Inventory Data

Permian Bakken Niobrara Eagle Ford Granite Wash

• Miss. Lime

Inventories (RHS)

Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak

Slide 6 Labyrinth Consul4ng Services, Inc. artberman.com

How is the “Call on Shale” Consistent With Flat U.S. Output Since the OPEC Cut?

• U.S. oil output has been flat since the OPEC produc4on cuts and higher oil prices.
• 43% of U.S. supply is 4ght oil.
• Where is the surge in just-in-4me produc4on from the call on shale?

9.63 8.55 9.07 9.13 9.11 9.17 9.09 9.24 9.19 9.69 10.09

$0 $20 $40 $60 $80 $100 $120 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18

WTI Price ($/Barrel) Millions of Barrels of Crude Oil Per Day

U.S. Output Has Been Flat in 2017

April 2015 Source: EIA STEO Sept 2017 & Labyrinth Consulting Services, Inc.

• 1.08 mmb/d

Oil Production (LHS) WTI Price (RHS)

Aug 2017 Dec 2017 Sept 2016 Dec 2018

+0.89 mmb/d Aug 2017-Dec 2018

mmb/d Apr-15 Sep-16 Jun-17 Jul-17 Aug-17 Dec-17 Dec-18 Production 9.63 8.55 9.09 9.24 9.19 9.69 10.09 Since Apr-15 0.00

• 1.08
• 0.53
• 0.39
• 0.43

0.07 0.46 Since Sep-16 0.00 0.55 0.69 0.65 1.15 1.54 Since Jun-17 0.00 0.15 0.10 0.60 1.00 Since Jul-17 0.00

• 0.04

0.45 0.85 1 2 3 4 5 6 7 8 9 10 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Oil Production (mmb/d)

43% of U.S. Production is Tight Oil

Conventional Oil Tight Oil

Source: Drilling Info, EIA, Labyrinth Consulting Services, Inc. & Crude Oil Peak

Slide 7 Labyrinth Consul4ng Services, Inc. artberman.com

Shale Cost Reduc4ons Mostly Industry Bust, Threshold For Growth > $50 WTI

• Lower costs of shale produc4on widely anributed to technology and efficiency.
• Cost cost defla4on was 90% because of a depression in the oil industry, 10% technology.
• That is over for now and prices have increased 8% in 2017.
• Rig count data indicates that expecta'on of $55-$60 is necessary for drilling growth.
• Drilling does not translate into produc4on because of OFS limita4ons.
• Shale growth has more to do with investor money than break-even prices.
• Investors need to believe that significantly higher prices are coming.
• WTI is not the price that producers get. Discount is $5 to $15/barrel.
• Current Bakken wellhead price is $35.83 but WTI is $50.00.

0.2 0.4 0.6 0.8 1 Dec-85 Sep-86 Jun-87 Mar-88 Dec-88 Sep-89 Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Dec-12 Sep-13 Jun-14 Mar-15 Dec-15 Sep-16 Jun-17 Normalized WTI & Producer Price Index

The Cost of Drilling Oil and Gas Wells Fell 45% After The Oil-Price Collapse; Costs Have Increased 8% Since January 2017

Source: U.S. Federal Reserve Bank, EIA & Labyrinth Consulting Services, Inc.

WTI Price OIl & Gas Well Drilling Producer Price Index

Source: U.S. Federal Reserve Bank, EIA & Labyrinth Consulting Services, Inc.

4-Fold Increase in O&G PPI Because of Unconventional Oil & Gas 2004-2014 45% Decrease

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115

• 70
• 60
• 50
• 40
• 30
• 20
• 10

10 20 30 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17

WTI Price ($/Barrel) Tight Oil HRZ Rig Count Change

Tight Oil Rig Counts Fall When Expectations of $55-$60 Oil Prices Fade Tight Oil Rig Count 4-week moving average (LHS) WTI Price 12-week moving average (RHS)

Source: Baker Hughes, EIA & Labyrinth Consulting Services, Inc. $60 $54

Change In Horizontal Tight Oil Rig Count Lags Price By About 8 Weeks

Slide 8 Labyrinth Consul4ng Services, Inc. artberman.com

Compara4ve Inventory Remains The Most Useful Indicator of Future Price Trens

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115

• 50 -40 -30 -20 -10

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

Most Likely December 2017 C.I. Range 40-75 mmb $50-$56/barrel C.I. Decreased -3.5 mmb This Week

Comparative Inventory (C.I.) Millions of Barrels WTI Price ($/barrel)

Source: EIA & Labyrinth Consulting Services, Inc.

$40 $55

Mar-June 2015 Optimism 2014-2017 Data Mid-cycle price Late 2015-Early 2016 Pessimisim (Cushing > 80% Capacity) OPEC Production Cut Optimism

Last Week

Most-Likely Dec. 2017 C.I. Range 40-75 mmb $50-$56/barrel

Mid-Feb Sept 15

$0 $20 $40 $60 $80 $100 $120 800 850 900 950 1,000 1,050 1,100 1,150 1,200 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 1/1/16 1/1/17 WTI Price ($/barrel) Ivnetories of Crude Oil + Products (mmb)

Inventories Have Fallen From Record Levels--Comparative Inventory, The Difference Between Inventories & The 5-Year Average, Remains Near Record Pre-2015 Levels

Source: EIA & Labyrinth Consulting Services, Inc.

5-Year Inventory Average (LHS) WTI Price (RHS) Inventories (LHS)

99 mmb Gap 97 mmb Gap

Record Inventory Level

• Compara4ve inventory (C.I.) is the key to understanding oil prices and poten4al future trends.
• The oil price collapse resulted in the largest increase in inventories and C.I. on record.
• C.I. has fallen 116 mmb since mid-February but the gap between inventories & the 5-year average is

s4ll very large.

• Flat yield curve of WTI vs C.I.—large decreases in C.I. do not create meaningful price increases.
• Most-likely range of C.I. indicates possible year-end WTI price range of $50 to $56/barrel.
• This assumes that C.I. will fall 3.75 mmb/week, the average for the last 30 weeks.
• Obviously, this must be monitored for changes that would poten4ally result in higher or lower year-

end prices.

Slide 9 Labyrinth Consul4ng Services, Inc. artberman.com

Strong Refined Product Demand & Lower Net Imports Drive Inventory Reduc4ons

• 100
• 50

50 100 150 200 250 300 18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5 22.0 22.5 1/3/14 3/3/14 5/3/14 7/3/14 9/3/14 11/3/14 1/3/15 3/3/15 5/3/15 7/3/15 9/3/15 11/3/15 1/3/16 3/3/16 5/3/16 7/3/16 9/3/16 11/3/16 1/3/17 3/3/17 5/3/17 7/3/17 9/3/17 Crude Oil + Refined Products Comparative Inventory (mmb) Csonumption (Product Supplied )(mmb/d)

2017 Average Consumption At Record Levels Fell After Gulf Hurricanes But Recovered Above YTD Avg This Week

Consumption (LHS) Comparative Inventory (RHS)

Source: EIA & Labyrinth Consulting Services, Inc.

4-Week Avg Annual Avg

50 100 150 200 250 300

• 4.5
• 4
• 3.5
• 3
• 2.5
• 2
• 1.5
• 1
• 0.5

1/16 15/16 29/16 12/16 26/16 11/16 25/16 8/16 22/16 6/16 20/16 3/16 17/16 1/16 15/16 29/16 12/16 26/16 9/16 23/16 7/16 21/16 4/16 18/16 2/16 16/16 30/16 13/17 27/17 10/17 24/17 10/17 24/17 7/17 21/17 5/17 19/17 2/17 16/17 30/17 14/17 28/17 11/17 25/17 8/17 Crude OIl + Products Comparative Inventories (mmb) Net Petroleum Product Imports (mmb/d)

~4.2 mmb/week (600 kb/d) Decrease in Net Petroleum Product Imports Account For Most Inventory Reductions in 2017 Comparative Inventory -113 mmb (RHS) Net Imports Annual Avg (LHS) Net Product Imports & Trendline (LHS)

• 2.0 mmb/d
• 2.5 mmb/d

Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventories Have Fallen 116 mmb Since Mid-February FEB 10 SEPT 8 Net imports increased 1.7 mmb/d because of Hurricane Harvey Net imports decreased to YTD avg 3rd week after Harvey

• Strong refined product demand and reduced net product imports are driving inventory reduc4on.
• 2017 YTD consump4on is at record levels.
• It fell aTer the hurricanes but has recovered to above the YTD average this week.
• Net refined product imports have fallen 600 kbpd (4.2 mmb/week) in 2017.
• Lower net crude imports, and falling gasoline and dis4llate stocks are the key components.

Slide 10 Labyrinth Consul4ng Services, Inc. artberman.com

How Effec4ve is OPEC-NOPEC Compliance With Produc4on Cuts?

• Libya and Nigeria are chief OPEC over-producers.
• Saudi Arabia has also increased produc4on since Q1 2017.
• Maximum OPEC-NOPEC produc4on cuts were in March and April 2017.
• August output was 1.3mmb/d less than in November 2016 vs. sanc4oned cuts of 1.8 mmb/d.

51 51.5 52 52.5 53 53.5 54 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Incremental Liquids Production (mmb/d)

Most Recent OPEC-NOPEC Increases From Nigeria, Libya & Saudi Arabia

Angola, Gabon, Algeria, Ecuador

Libya Nigeria UAE Saudi Arabia Kuwait Base Russia Mexico

Source: EIA Sept STEO, EIA International Data & Labyrinth Consulting Services, Inc.

Iraq Venezuela Qatar Iran

0.00

• 0.27
• 1.56
• 1.72
• 2.25
• 2.21
• 1.72
• 1.41
• 1.07
• 1.28

50 50.5 51 51.5 52 52.5 53 53.5 54 54.5

• 2.6
• 2.4
• 2.2
• 2
• 1.8
• 1.6
• 1.4
• 1.2
• 1
• 0.8
• 0.6
• 0.4
• 0.2

Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Liquids Production (mmb/d) Liquids Production Compared With November 2016 (mmb/d)

OPEC-NOPEC Only in Compliance With Production Cuts In March & April 2017

Source: EIA Sept STEO, EIA International Data & Labyrinth Consulting Services, Inc.

• 1.8 mmb/d Threshold

Slide 11 Labyrinth Consul4ng Services, Inc. artberman.com

Oil Futures Have Moved Into Backwarda4on in September

• WTI has moved into full backwarda4on as of last week.
• Brent has also moved into backwarda4on.
• This signals a percep4on of supply 4ghtening that favors selling oil rather than storing it.

$44 $45 $46 $47 $48 $49 $50 $51 $52 $53 $54 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 WTI Futures Price ($/barrel)

WTI Futures Have Moved To Backwardation in September Signaling Increased Supply Tightening

Source: CME & Labyrinth Consulting Services, Inc.

Sept 15 Sept 20 Sept 5 Sept 26

$49 $50 $51 $52 $53 $54 $55 $56 $57 $58 $59 $60 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 Brent Futures Price ($/barrel)

Brent Futures Have Also Moved Into Backwardation Sept 15 Sept 20 Sept 5

Source: CME & Labyrinth Consulting Services, Inc.

Sept 26

Slide 12 Labyrinth Consul4ng Services, Inc. artberman.com

Reserve Es4mate Using 2016 10-K SEC Filings (Annual Reports)

• EIA 2015 proved reserves: 5 billion barrels Bakken, 4.3 bb Eagle Ford, 0.8 bb Permian.
• Permian seems low.
• Es4mated ~3.7 billion barrels of proved Permian 4ght oil reserves using 2016 10-K SEC filings
• f leading operators in the plays.
• All the companies in the table differen4ated Permian reserves from other company reserves.
• Those companies accounted for 47% of all 4ght oil produc4on in 2016. Used that as a scaling

factor to es4mate the contribu4on of companies like Anadarko, Apache, EOG and OXY that did not separate Permian from other company reserves in their 10-K filings.

• The es4mate is founded on a reliable base of 1.7 billion barrels from company filings. The

assump4on that undifferen4ated company reserves will follow 2016 produc4on ra4os is reasonable but uncertain.

Permian 2016 Proved Oil Reserves (kbo) 2016 Tight Oil Production (kbo) PCT OF Total 2016 Production CONCHO 321,026 37,315 9.3% PIONEER 283,647 45,538 11.3% ENERGEN 199,575 10,468 2.6% LAREDO 167,100 9,146 2.3% RSP PERMIAN 164,700 11,040 2.7% DIAMONDBACK 139,174 14,892 3.7% PARSLEY 136,536 11,763 2.9% EP 81,800 3,973 1.0% DEVON 81,000 16,211 4.0% CIMAREX 74,300 17,920 4.5% CALLON 71,145 8,509 2.1% SUBTOTAL 1,720,003 186,776 47% TOTAL 3,696,999 401,459 100%

million barrels 2014 2014 2015 2015 Production Reserves Production Reserves Williston Bakken ND, MT, SD 387 5,972 421 5,030 Western Gulf Eagle Ford TX 497 5,172 565 4,295 Permian Bone Spring, Wolfcamp NM, TX 53 722 66 782 Denver Niobrara* CO, KS, NE, WY 42 512 58 460 Appalachian Marcellus* PA, WV 13 232 16 143 Fort Worth Barnett TX 9 47 5 33 Sub-total 1,001 12,657 1,131 10,743 Other tight 56 708 83 859 U.S. tight oil 1,057 13,365 1,214 11,602 Basin Play State(s) Table 2. Crude oil production and proved reserves from selected U.S. tight plays, 2014-15

Slide 13 Labyrinth Consul4ng Services, Inc. artberman.com

Shale Plays & Sweet Spots ($40 Commercial Areas)

• All three plays have considerable commercial areas at $40 wellhead prices.
• Bone Spring commercial area is almost twice as large as Bakken or Eagle Ford.
• Bone Spring has 1/3 the well density of the Bakken or Eagle Ford.
• Bone Spring and Eagle Ford have lower break-even EUR than Bakken.
• Higher early rates and lower well costs largely account for advantages to Bone Spring and Eagle Ford.

Slide 14 Labyrinth Consul4ng Services, Inc. artberman.com

Tight Oil Produc4on Forecast

• Permian produc4on should con4nue to increase into the mid-2020s.
• Eagle Ford and Bakken will probably not reach 2015 peak produc4on levels.
• Bakken should decline more than Eagle Ford.

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2 2.1 2.2 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Crude Oil + Condensate Production (mmb/d)

Tight Oil Production Forecast Permian Eagle Ford

Source: EIA & Labyrinth Consulting Services, Inc.

Bakken

Slide 15 Labyrinth Consul4ng Services, Inc. artberman.com

Bakken EUR, Gas-Oil Ra4os & Water Cut Trends

100 200 300 400 500 600 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Oil Production (Barrels of Oil Per Day) Months of Production

Oil Production Decline Rates For Recent Years Are Greater Than For Previous Years For Top 8 Bakken Producers 2016 2015 2014 2013 2012 2016 Declining Faster Than All Previous Years Despite Higher Initial Rates 2015 Declining Faster Than Previous Years 2014 Declining Faster Than Previous Years

Source: Drilling Info & Labyrinth Consulting Services, Inc.

20% 25% 30% 35% 40% 45% 50% 55% 60% 1 2 3 4 5 6 7 8 9 10111213141516171819202122232425262728293031323334353637383940414243444546474849505152535455565758 Percent Water Months of Production

Water Cut Increased In The Last 3 Years For Top 8 Bakken Producers

2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

500 1,000 1,500 2,000 2,500 1 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930313233343536373839404142434445464748495051525354555657585960 Gas-Oil Ratio (Cubic Feet Per Barrel) Months of Production

Gas-Oil Ratio Increases Every Year For Top 8 Bakken Producers 2016 2015 2014 2013 2012

Source: Drilling Info & Labyrinth Consulting Services, Inc.

• EUR decreased & decline rates increased for wells with 1st produc4on aTer 2013.
• Gas-oil ra4os increased & then decreased.
• Water cuts increased for all wells with 1st produc4on aTer 2013.
• These trends suggest deple4on and that the play has been over-drilled—not conclusive without pressure data.
• Pioneer’s Permian basin GOR has increased 28% since November 2016.

500 1,000 1,500 2,000 2,500 1/1/12 3/1/12 5/1/12 7/1/12 9/1/12 11/1/12 1/1/13 3/1/13 5/1/13 7/1/13 9/1/13 11/1/13 1/1/14 3/1/14 5/1/14 7/1/14 9/1/14 11/1/14 1/1/15 3/1/15 5/1/15 7/1/15 9/1/15 11/1/15 1/1/16 3/1/16 5/1/16 7/1/16 9/1/16 11/1/16 1/1/17 3/1/17 5/1/17 7/1/17 Gas-Oil Ratio (cubic feet/barrel)

Pioneer's Permian Basin Gas-Oil Ratio Has Increased 28% Since November 2016

Source: Drilling Info & Labyrinth Consulting Services, Inc.

Slide 16 Labyrinth Consul4ng Services, Inc. artberman.com

Tight Oil Is A Marginal Business At Best

6.5 3.6 2.4 1.8 1.7 1.6 1.5 1.5 1.5 1.5 1.2 1.1 1.1 1.0 1.0 1.0 0.8 0.7 0.7 0.7 0.7 0.6 0.5

1 2 3 4 5 6 7 Parsley Sanchez Energen Whiting Hess Carrizo Laredo Callon Pioneer EPE Oasis Newfield Concho EOG Continental Apache Diamondback Oxy Chevron Murphy Marathon Conoco Statoil First Half 2017 Ratio of Capital Expenditures to Cash From Operations

Tight Oil Is a Marginal Business At Best

Most Companies Lose Money or Break Even Only Integrated Companies & Diamondback Made Money in 2017

Make Money Break Even Lose Money

Source: Google Finance & Labyrinth Consulting Services, Inc.

• Despite claims of ever-decreasing costs and break-even prices, company balance sheets and income

statements do not reflect profitability for most pure 4ght oil players.

• Among key 4ght oil-weighted companies, most lose money.
• A few break even.
• Only integrated companies with diversified porwolios outside of 4ght oil plays (e.g., Chevron, Conoco Philips,

Statoil, Oxy) make money.

• Diamondback is the only pure 4ght oil player that made money in 2017.
• The disparity between break-even and IRR claims, and corporate financial data:

Ø Selec4ve data in claims vs. average well EUR and costs. Ø Exclusion of many costs in claims that are part of the cost of doing business. Ø Misleading emphasis on produc4on costs vs full costs.

Slide 17 Labyrinth Consul4ng Services, Inc. artberman.com

30 35 40 45 50 55 60 100 105 110 115 120 125 130 135 140 145 150 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Concho

Close WTI 30 35 40 45 50 55 60 120 130 140 150 160 170 180 190 200 210 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Pioneer

Close WTI

Estimated net flows into and out of U.S. energy stock funds

THE WALL STREET JOURNAL Source: Morningstar Note: All data are full-year except 2017, which is through July. .billion 2012 ’13 ’14 ’15 ’16 ’17

• 4
• 2

2 4 6 8 $10

30 35 40 45 50 55 60 80 85 90 95 100 105 110 12-Sep-16 12-Oct-16 12-Nov-16 12-Dec-16 12-Jan-17 12-Feb-17 12-Mar-17 12-Apr-17 12-May-17 12-Jun-17 12-Jul-17 12-Aug-17

Vanguard

Close WTI

Energy Stocks Have Suffered in 2017, Permian Stocks More Recently

• Capital flows to 4ght oil have slowed in 2017.
• Share prices have declined as markets 4re of mediocre financial returns.
• Con4nued capital flow is the chief factor in 4ght oil growth, not reserves or economics.

Slide 18 Labyrinth Consul4ng Services, Inc. artberman.com

Tight Oil and The Long-Term Debt Cycle

48 35 50 100 150 200 250 300 350 Venezuela Saudi Arabia Canada Iran Iraq Russia Kuwait UAE Libya US Nigeria Kazakhstan China Qatar Brazil Algeria Angola Ecuador Mexico Norway Azerbaijan Oman India Vietnam Australia Malaysia South Sudan Egypt Permian Billions of Barrels of Liquids

The U.S. Must Double Reserves To Become an Oil-Dominant Producer Even Doubling or Tripling Permian Reserves Not Nearly Enough

BP EIA

United States

Source: BP, EIA & Labyrinth Consulting Services, Inc.

Permian Basin

0% 20% 40% 60% 80% 100% 120% $0 $20 $40 $60 $80 $100 $120 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

U.S. Public Debt-To-GDP Percent Oil Price in October 2016 Dollars

High Oil Prices 2005-2014 Plus Massive Debt & Low Interest Rates After 2008

WTI Price $2016 (LHS) Debt/GDP (RHS)

Source: U.S. Federal Reserve Bank, U.S. Bureau of Labor Statiistics, World Bank, EIA & Labyrinth Consulting Services, Inc. Low Oil Prices High Oil Prices High Oil Prices Increasing Debt-To-GDP Falling Oil Prices

Credit Bubble

Led To Major Credit Bubble & The Shale Revolution

• Shale revolu4on must be put in perspec4ve.
• High oil prices 2005-2104 plus massive debt & low interest rates aTer 2008 created a capital bubble that drove

4ght oil development and growth—much of it uneconomic!

• Con4nued availability of external capital is the most cri4cal factor for produc4on growth & maintenance.
• The true break-even price for 4ght oil is not < $50 but is closer to $60 wellhead price.
• Tight oil plays are not the new swing producer of the world (i.e., the “call on shale”).
• Compara4ve inventory remains the best indicator of future oil prices.
• C.I. has 4ghtened in spite of OPEC’s modest compliance but will this con4nue?
• Year-end 2017 WTI prices could be $55 but forward curves are in backwarda4on.
• Permian plays are good but will probably con4nue to deliver low returns and lower produc4on growth than

many analysts predict.

• Enthusiasm for 4ght oil innova4on must be balanced by the desirability of years of depressed oil prices.