[PPT] - W A RW ICK P A C O - p G R O U P u o r G OCAPL Night k PowerPoint Presentation

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P R E S E N T E R S :

M O N D A Y , A P R I L 1 7 , 2 0 1 7

March 2018

OCAPL Night

W A RW ICK

G R O U P

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The Most Important Things in the World You Need to Know (Macro Landscape).

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Too good to be true or global economic machine firing on all cylinders?

Record low unemployment
Economic growth here and abroad
Economic optimism so strong that Democrats feel better about the

economy than they did during the Obama years.

Companies bringing back jobs and money from overseas
Bank forecasters say a robust 4% GDP growth is possible

Axios, January 2018.

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Worries about a market top…

Main market fears are:
Surge in Inflation as economies overheat
Risk-off swing in market sentiment
Bankruptcy cycle given the amount of cheap, low quality

debt extended during the low interest rate cycle since 2008

Bankruptcy cycle in China would be particularly problematic

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Trump Tariffs These are stiff and they [mega] matter. 25% on imported steel 10% on aluminium

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Many Congressional Republicans, advisers and businesspeople bitterly oppose the tariffs Global markets fell last week, as investors worried about retaliation from trading partners This move was not in line with most

il & gas lobbying.

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Mohammed bin Salman (MBS): you need to know this person

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Ritz Carlton Riyadh

Source: http://www.ritzcarlton.com/en/hotels/saudi-arabia/riyadh

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Saudi Arabian authorities netted more than $106bn in financial settlements in a wide- reaching anti-corruption drive. The attorney- general said they seized properties, cash, securities and other assets; 56 of the 381 suspects questioned remain in custody (though none at the Ritz). Businessmen, ministers and royals have been caught up in Crown Prince Mohammed bin Salman’s campaign, which he launched in November.

The Economist, Espresso, January 31, 2018.

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Xi Jinping: in 2 weeks this person probably becomes Chinese President-for-Life, as Chinese collective rule is abolished for the first time since Deng Xiaoping

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China Pollution: Blue Sky Initiative

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E&P companies are in the penalty box with public market investors

Bloomberg.

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E&P companies are in the penalty box with public market investors

Bloomberg. E&P's include APC, APA, COG, CHK, XEC, CXO, COP, DVN, EOG, EQT, MRO, NBL, OXY, PXD, RRC.

10 Year Average 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 Global Data from NYU (Stern business school) Total Market 12.3% 13.6% 10.4% 10.8% 14.5% 15.7% 12.9% 11.4% 8.7% 9.9% 14.7% US Data (Source - 10Ks & Yardeni.com) US E&P's

0.9%
22.5%
53.6%

9.2% 7.7% 4.2% 12.6% 11.8%

3.3%

8.1% 17.1% S&P 500 14.3% 14.1% 13.6% 15.6% 15.4% 15.0% 16.1% 15.2% 11.7% 10.1% 15.9%

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E&P investment themes

~$7B in E&P Buybacks Authorized so far in 2018 (about 15% of E&P market capitalization overall)

$2.0B $1.4B $1.6B $100mm $100mm $400mm $200mm

Cash used for share

buybacks as opposed to drilling budgets

Will result in lower drilling

budgets

$750mm

Company press releases.

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The big question facing E&P’s is what to do with higher revenues coming from the oil price rally. Will more money go to shareholders in the form of dividend increases and buybacks, or will spending (drilling) pick up? Some analysts are worried E&P’s will waver from hard- fought financial discipline now that oil prices have improved. W a r w i c k G r

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5 Tech Giants are 15% of the entire stock market

Apple: $900 billion Alphabet: $762 billion Amazon: $738 billion Microsoft: $723 billion Facebook: $525 billion

The Economist, Espresso, Wednesday, January 31, 2018. Market Caps are as of 3/5/2018 from Google Finance

Exxon: $324 billion Shell: $285 billion Chevron: $216 billion Total SA: $143 billion The tech giants’ collective market share of ~$3.6 trillion is ~15% of the value of all firms in the S&P 500 Total: $3.6 trillion Total: $1.0 trillion

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Natural Gas Market Update

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North America is the Saudi Arabia of natural gas. Abundance of natural gas supply is scaring the market.

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19 Aegis Energy Risk, February 16, 2017.

But Natural Gas Prices are having a tough time…

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End of winter natural gas inventories are projected at 1.4 tcf which is below the 5 year average and below 2017. However the market is shrugging it off given current production robustness. Inventories below 5 year average….

Aegis Energy Risk, February 16, 2017.

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Crude Market Update

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Commodity price environment – crude oil update

$35 $40 $45 $50 $55 $60 $65 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21 Mar-22 Sep-22 Forward Curve @ Mar 2017 Forward Curve @ Mar 2018

Crude Oil Forward Curve as of March 2017 and 2018 ($/bbl)

Source: www.ino.com/exchanges. “NYMEX Crude Oil” (monthly pricing). 2017 and 2018 pricing as of March 6, 2017 and March 5, 2018, respectively.

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US oil production remains at 10.3 million barrels a day US still importing 7 million barrels a day of oil

Aegis Energy Risk, February 25, 2018.

U.S. Crude Oil Stocks

Millions of Barrels

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Oil price upside risks: decline rates, geopolitics & inflation Downside risks: shale efficiency, EV’s & OPEC discord

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25 IHS, December 2017.

The long-term good news?

Oil discoveries hit a 60 year low in 2015, then dropped again in 2016
174 discoveries last year, versus 400-500 per year up to 2013
E&P’s have cut exploration spending and large fields have become

rarer to find

Typical time from discovery to production is 5-7 years
World is likely to become increasingly reliant on unconventional

sources such as US shale

Shortfall of discoveries today may lead to tighter supplies over the

next decade

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IEA, Fatih Birol, February 26, 2018. The Economist, Morning Espresso, February 17, 2018.

US eclipsed Saudi Arabia and Russia 5 years ago as largest oil producer in the world Since 2013, US has produced more oil supply than any other country, calculated as crude, NGL’s, biofuel and refinery progress gain In 2017 we produced ~4 million barrels a day more than Russia and 3 million barrels a day more than Saudi Arabia

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27 Mike Rothman, Cornerstone Analytics, February 27, 2018.

Total Oil Production

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28 Mike Rothman, Cornerstone Analytics, February 27, 2018.

OPEC 12 Monthly Production

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29 IHS, December 2017.

The long-term good news?

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Assume you are MBS, does this seem fair?

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US oil and gas industry is made of many players acting in their own interests, not a centrally-planned behemoth like Aramco or OPEC or “NOPEC”

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This makes U.S. companies be "price-takers," without the same market-altering power.

"This difference between price-taking and price-making is why describing the United States as 'energy dominant' is misleading. To me, 'dominance' implies an ability to move markets, whereas the U.S. industry, while strong and increasingly important to global energy security, is not structured to achieve that end.”

Samantha Gross, Brookings

Samantha Gross, Brookings Institute, Axios, January 29, 2018

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We need to talk about Electric Vehicles (EV’s)

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Case in point: BP forecasts that EVs will be 15%

f the worldwide fleet in 2040, but account for

30% of passenger car miles traveled. Bloomberg New Energy Finance projects EVs will reach 58% of total US vehicle sales in 2040 The trend: EV’s, autonomous vehicles, ride- sharing.

Bloomberg New Energy Finance, “Autonomous Vehicles: Automakers Launch Strategies. “ January 18, 2018. Bloomberg New Energy Finance, “Comparison of long-term EV adoption forecasts.” Nicholas Albanese and Colin McKerracher. July 14, 2017.

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In China, The world's largest car market, EV's are part of a new industrial policy known as "Made in China 2025"

Beijing has allocated subsidies worth $15,000 per vehicle
China has also introduced a preferential vehicle licensing system for EV’s in

several cities

45% of EV's and hybrids sold in 2016 year were sold in China (507,000)
China has 171,000 charging stations nationwide. This compares with 45,000

charging outlets and 16,000 electric stations in the US Regulation Driving Adoption

The Economist, Espresso, February 8, 2018. Xinhua.

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Consumer Demand Driving Supply: In 24-36 months this may be a big deal

Ford to increase EV spend to $11 billion as it plans 40 EV models by 2022 GM’s new modular EV platform, launching in 2021, will be the basis for at least 20 new battery-powered vehicles by 2023 Toyota will add >10 EV’s to its global portfolio by the early 2020’s VW announces massive $84 billion investment in EV’s & batteries Volvo, Betting on Electric, Phasing Out Conventional Engines

Bloomberg New Energy Finance, “Autonomous Vehicles: Automakers Launch Strategies. “ January 18, 2018. Bloomberg New Energy Finance, “Comparison of long-term EV adoption forecasts.” Nicholas Albanese and Colin McKerracher. July 14, 2017.

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Culture (My Micro Lessons)

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Zero Sum Approach to Winning (ie: my win only exists if all others fail)

The New Yorker.

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Competitor-Driven Approach to Winning (ie: my win is not defined by my success but by your failure)

The New Yorker.

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Competitive motivation: survival vs bankruptcy / obsolescence (ie: my win is an existential necessity)

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Culture of Continual Growth

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This is how I define our culture

Radical transparency
Data-driven (which means by necessity technology-driven)
Psychological profile of people: purpose

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Radical Transparency

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Radical Transparency

This is only way an organization remains smart, innovative and engaged
Prevents the dreaded “coffee machine problem”
Protects against most senior, loudest, opinionated person in the room

swaying a decision

Goal is meritocracy (not aristocracy, democracy, autocracy)
Can be awkward
Can be personal
Must enjoy and invest in pushing colleagues to continually improve
Real-time feedback all the time

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Avoidance wins unless you DEMAND radical transparency. Period.

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Coffee Machine Problem

***Everyone gives feedback to people who are quiet

r can’t hurt them, all the time.**

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However, psychological safety is critical.

Skills don't matter in a state of threat, because in a state of threat you have no skills.

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Humility, curiosity, psychological safety, quest to improve are critical.

Ray Dalio. Principles. 2017.

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Meritocracy – best idea, supported by objective data, wins. Period.

I would rather have questions that can't be answered than answers that can't be questioned.

Richard Feynman

BIG problem. Great way to fail.

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Meritocracy – a lesson from the airline industry – the 1982 Potomac Crash

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Psychological profile of people: purpose

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Purpose

People who are excellent are not determined. They're compulsive about it. They cannot stop it. It is a compulsion. It is like an engine.

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Purpose

Delegated authority across the structure

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Delegated authority

Everyone is a “guardian of the gate”
(this means the onus is on the team to not just FIND / IDENTIFY problems

but also to work towards SOLUTIONS

We have to be careful about
Passive problem describers: “French intellectual café problem”
Problem identifiers who don’t fix / solve: “truffle-rooting pig problem”
Problem identifiers who solve without understanding impact on others

in / outside of their departments: “wrecking ball / isle of self thinking”

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Delegated authority: everyone is a guardian at the gate

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Delegated authority: “the French intellectual café problem”

The organization cannot tolerate the “French intellectual”, sitting in a café, smoking cigarettes and talking around, over and through problems without trying to solve them…

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Delegated authority: “the French intellectual café problem”

This is the look of a “French intellectual” in an organization.

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Delegated authority: “the truffle-rooting pig problem”

This is a cousin of the “French intellectual problem” and of the

“coffee machine problem”

Truffles = problems.
We cannot be a team of pigs that root up truffles (problems)

and leave them in a bowl without trying to understand the problem and build processes / data-driven solutions to solve the problems.

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Delegated authority: those who are not passive, can be “wrecking balls” with good intentions but not enough “systems empathy”

Culture must prevent the rise of “ad hoc solutions people” who have the get-up-and-go to drive solutions through (a positive!) but without understanding the full impact on cross-departmental investment and asset management system / processes (a real negative)

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Force-multiply. It's not just that hiring someone better than you makes you better. It encourages that person to do the same. Soon, you have a talent factory. Leaders/managers can be too insecure to hire those who might outshine them. Result is a mess of mediocrity with no easy fix.

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The tech wolf is at your door. Your job, your company and our industry face imminent threat from new technologies or robots. This threat will worsen.

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“Case studies” have been provided for discussion purposes

nly and are no guarantee of future results or that such

investment opportunities will become available to the product(s). Certain information contained herein may be “forward- looking” in nature. Due to various risks and uncertainties, actual events or results or the actual performance of the products may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Past performance is not indicative nor a guarantee of future returns. Target IRR and returns are presented gross and do not reflect the effect of management fees, incentive compensation, certain expenses or taxes. The target IRR returns presented are not a prediction, projection or guarantee of future

performance. The target IRR and returns were calculated

based on certain assumptions, which include recent performance data and current market conditions. Warwick gives no assurance that targeted returns will be achieved or that the methodology and assumptions used to estimate such returns are reasonable. Index performance and yield data are shown for illustrative purposes only and have limitations when used for comparison or for other purposes due to, among other matters, volatility, credit or other factors (such as number and types of securities). It may not be possible to directly invest in one or more of these indices and the holdings of any Warwick product may differ markedly from the holdings

f any such index in terms of levels of diversification, types of

securities or assets represented and other significant factors. Indices are unmanaged, do not charge any fees or expenses, assume reinvestment of income and do not employ special investment techniques such as leveraging or short selling. No such index is indicative of the future results of any Warwick product. Additional information may be available upon request.

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