US Shale – Under Pressure TRISHA CURTIS – PETRONERDS - PRESIDENT AND CO-FOUNDER OXFORD INSTITUTE FOR ENERGY STUDIES – OIL DAY NOVEMBER 15, 2019 1 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Market Pressure for Public Companies Market Pressure Muted Oil Prices (Plenty of Supply, Demand Growth Investor Pressure – Returns, Spacing/Inventory, Concerns) ESG, Climate Change, Peak Demand S&P 500 Shrinkage – Loss of Generalist Investor Permian Focus – Rockies & Williston Basin Small and Mid-Large Cap Pressure producers struggling for attention Transition and Shake Out Limited capital access and an expectation that many small and mid-cap producers will be unable to Production has remained resilient survive a prolonged downturn 2 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Shale Market Dynamics Opportunity for Consolidation - PE and Small Generalist Investor has Left Players, but Significant the Oil Sector - Activists Consolidation has Not Yet Occurred Investor Pressure - BIG Shale Demand – Majors Shareholder Returns/Positive Pushing Permian and Short Free Cash Flow/Share Price Cycle Growth? How? Well Bifurcation between Majors Spacing/Inventory/Depletion and Large Caps and – Small/Mid Caps ROR vs. NPV 3 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Evolution of Investor Pressure Pre-2014: Need to diversify beyond the Bakken 2014 Oil Price Correction: Pump and produce, High IPs, Cash Flow 2015 to 2016: PERMANIA, Prices are sub-$60, buy anything and everything (dry powder, no production, at any cost), FOMO I. Strict drilling and leasing requirements follow 2017: Begin focusing on cash flow 2018: Investor pressure on returns and free cash flow continues to build, oil prices move up H1 2019 – Generalist investor is growing weary of shale companies. Free cash flow neutrality is not enough, serious returns are needed. I. Expecting mergers and acquisitions II. Favoring majors and short cycle III. Unclear what would drive share price growth at this point 4 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Investment Decisions are Being Pushed Toward Shorter Cycles …..the geopolitics of peak oil demand….even if its not happening today the psychology is influencing events today. …It is making it harder for companies to raise money. It is pushing investment into short cycle…rather than…long cycle…so its already having a big influence on what’s going on in markets and the energy sector even if it isn’t a reality, we don’t expect it be a reality for a long time. Megan O’Sullivan, Harvard Davos Panel, January 2019 5 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
US Shale Basin Liquid Production is Over 8 mbd 5,000,000 9,000,000 4,500,000 8,000,000 4,000,000 7,000,000 3,500,000 BARRELS PER DAY BARRELS PER DAY 6,000,000 3,000,000 5,000,000 2,500,000 4,000,000 2,000,000 3,000,000 1,500,000 2,000,000 1,000,000 1,000,000 500,000 - - 1/1/2010 9/1/2010 5/1/2011 1/1/2012 9/1/2012 5/1/2013 1/1/2014 9/1/2014 5/1/2015 1/1/2016 9/1/2016 5/1/2017 1/1/2018 9/1/2018 5/1/2019 1/1/2010 9/1/2010 5/1/2011 1/1/2012 9/1/2012 5/1/2013 1/1/2014 9/1/2014 5/1/2015 1/1/2016 9/1/2016 5/1/2017 1/1/2018 9/1/2018 5/1/2019 Williston Permian Anadarko Williston Permian Anadarko Denver Julesburg Powder River Eagle Ford Denver Julesburg Powder River Eagle Ford Source: PetroNerds, DrillingInfo 6 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Majors Continue Growth in the Permian Basin Short cycle, completive, strong breakevens, growth now - not later. Source: Chevron Q3 2019 Earnings, November 2019 Source: ExxonMobil Q3 Earnings, November 2019 7 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Are well spacing issues really going to kill the boom? 8 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Thinking about the amount of wells per targeted zone – both horizontally and vertically 9 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
The Permian Basin Learning Curve 600 $120 500 $100 400 $80 $ Per Barrel # of Rigs 300 $60 200 $40 100 $20 0 $- Horizontal Vertical Total Cushing OK WTI Spot Price FOB $/bbl Source: Pioneer Natural Resources Oct 2013 Investor Presentation 10 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Understanding the Hype: Long-Term Potential – “Stacked Pay” 11 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Spacing Tests Underperform and Further Spook Investors 2019 – “Dominator” project, 29 wells, downspace test 50 percent 2017 – 33 wells, only 330 ft apart vertically and horizontally 12 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Concho’s Spacing Revisions Source: Concho Resources Investor Presentation, Q3 2019 13 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
How many wells can you drill? Source: Diamondback Energy Investor Presentations, Q3 2019 and Q2 2019 14 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Differentiated Views on Well Spacing Not a one size fits all - EOG vs. PXD on Well Spacing Source: EOG Q2 2019 Earnings, Pioneer Natural Resources September 2019 Investor Presentation 15 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Energy’s Weighting in the S&P 500 is less than 5% Materials 3% Real Estate Information Energy 3% Technology 5% 20% Utilities Consumer 3% Staples 7% Industrials Health Care 9% 16% Communicati ons Services 10% Financials Consumer 14% Discretionary 10% Source: Bloomberg, September 21, 2018 https://www.barchart.com/stocks/indices/sp-sector/energies Source: The Balance, November 2018 16 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Top Permian Basin Oil Producers Permian Basin Operator Latest Oil Production - Barrels Per Day Latest Gas Production - mcf/day Oxy – 48% 1 OCCIDENTAL PETROLEUM 498,925 1,544,337 Pioneer – 38 % 2 PIONEER NATURAL RESOURCES 295,728 723,330 Concho – 59% 3 CONCHO RESOURCES 293,581 1,012,001 EOG – 46 % 4 EOG RESOURCES 250,104 851,808 Diamondback – 37 % 5 DIAMONDBACK ENERGY 234,795 574,155 Exxon – 19% 6 EXXON MOBIL 196,534 586,199 Chevron – 9% 7 CHEVRON 133,370 586,050 Apache – 54 % 8 APACHE 119,368 820,717 9 PARSLEY ENERGY 117,763 304,094 10 ENDEAVOR ENERGY RESOURCES 105,837 219,238 11 CIMAREX ENERGY 100,384 804,243 12 ENCANA 100,165 238,700 Devon – 44 % 13 DEVON ENERGY 91,061 339,470 14 SM ENERGY 77,845 138,164 15 MEWBOURNE OIL COMPANY 74,403 253,196 16 SURGE OPERATING 69,306 87,436 Source: PetroNerds, DrillingInfo 17 WPX ENERGY 61,839 335,473 18 SHELL 61,272 149,224 19 CENTENNIAL RESOURCE DEVELOPMENT 61,095 224,538 Noble – 34% 20 NOBLE ENERGY 56,318 153,029 17 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
2016 vs. 2020 Capital Sourcing Shift 18 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Activity Levels and Oil Price 2,500 $120 $100 2,000 $80 1,500 $ Per Barrel # of Rigs $60 1,000 $40 500 $20 0 $- 2/4/2011 2/4/2012 2/4/2013 2/4/2014 2/4/2015 2/4/2016 2/4/2017 2/4/2018 2/4/2019 Oil Gas Total Permian Basin Oil Rig Count Cushing OK WTI Spot Price FOB $/bbl Source: PetroNerds, EIA, DrillingInfo, Baker Hughes 19 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Pipeline additions have created a material impact in pricing Midland Argus prices are at a slight premium to WTI Source: Enterprise Products Partners Analyst Meeting Presentation, April 2019 20 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
U.S. Crude Oil Exports are Critical to Permian Development 3,500 3,000 June 2019 – 3.7 mbd 2,500 2,000 Mostly Barrels Per Day 1,500 light sweet 1,000 500 - Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Canada China Korea Taiwan India Italy Netherlands United Arab Emirates Thailand United Kingdom U.S. Exports of Crude Oil Source: PetroNerds, EIA, Enterprise Products Partners 21 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Production, Activity, and Productivity 22 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
Permian Basin Oil, Gas, and Water Production Horizontal vs. Vertical Well Production Water and Gas Production 5,000,000 25,000,000 BARRELS PER DAY AND MCF/DAU 4.3 mbd 4,500,000 20,000,000 4,000,000 BARRELS PER DAY 3,500,000 15,000,000 3,000,000 2,500,000 10,000,000 2,000,000 1,500,000 5,000,000 1,000,000 - 500,000 1/1/2010 9/1/2010 5/1/2011 1/1/2012 9/1/2012 5/1/2013 1/1/2014 9/1/2014 5/1/2015 1/1/2016 9/1/2016 5/1/2017 1/1/2018 9/1/2018 5/1/2019 - 1/1/2010 9/1/2010 5/1/2011 1/1/2012 9/1/2012 5/1/2013 1/1/2014 9/1/2014 5/1/2015 1/1/2016 9/1/2016 5/1/2017 1/1/2018 9/1/2018 5/1/2019 Total Gas Total Water Liquid Horizontal Vertical Horizontal Gas Horizontal Water Source: PetroNerds, DrillingInfo 23 PETRONERDS LLC | WWW.PETRONERDS.COM | 970-329-1645
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