2. Regulatory Overview or:
How I Learned to Stop
Worrying and Love the EPA?
David Pursell
March 21, 2013
**IMPORTANT DISCLOSURES ON PAGE 9 OF
THIS DOCUMENT**
3. Regulatory Overview or: How I Learned to Stop
Worrying and Love the EPA?
What do we care about today:
□ Keystone
□ Hydraulic fracturing
□ Rin – No really?
Party is not important. D’s and R’s equally inept.
Political cycles are much shorter than energy
cycles.
5. Unintended Consequences of Government
1Q`12 - US carbon emissions hit a 20-year low
Reduced CO2 emission over the past 5 years
Last 5 years – Power generation from coal down 25%, from natural gas +35%
Source: Forbes, EIA
6. Rin – Renewable Identification Numbers
$1.20
$1.00
2013 RIN Price
$0.80
2012 RIN Price
$0.60
$0.40
$0.20
$0.00
Government mandates an amount of ethanol sales
Companies do not want to blend more than 10% ethanol into gasoline
Companies either buy credits or export gasoline (without ethanol)
7. Shales Are Disruptive…but a Policy Win! For Gas
70
U.S. Natural Gas Production (bcf/d)
65
60
55
50
45
Jan-06
Source: EIA
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
8. … And Crude Oil!
5,000
U.S. Onshore Oil Production (kbpd)
4,500
4,000
3,500
3,000
2,500
2,000
Jan-05
Source: EIA
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
10. Analyst Certification:
I, Dave Pursell, do hereby certify that, to the best of my knowledge, the views
and opinions in this research report accurately reflect my personal views
about the company and its securities. I have not nor will not receive direct or
indirect compensation in return for expressing specific recommendations or
viewpoints in this report.
Important Disclosure:
The above mentioned analyst does not own any securities mentioned in this
report.
Ratings: B = buy, A = accumulate, H = hold, T = trim, S = sell, NR = not rated
For detailed rating information, distribution of ratings, price charts and other
important disclosures, please visit our website at www.tudorpickering.com.
To request a written copy of the disclosures please call 800-507-2400 or write
to Tudor, Pickering, Holt & Co. Securities, Inc. 1111 Bagby, Suite 5000,
Houston, TX 77002.
Institutional Communication Only. Under FINRA Rule 2210, this
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Copyright 2013, Tudor, Pickering, Holt & Co. This information is confidential
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12. RESEARCH
SALES
Oil Service / E&C
Jeff Tillery
713.333.2964
jtillery@tudorpickering.com
Midstream
Brad Olsen
713.333.7693
bolsen@tudorpickering.com
Houston
Clay Co neley
713-333-2979
cco neley@tudorpickering.com
Denver
Chuck Howell
303.300.1902
chowell@tudorpickering.com
Joe Hill
713.333.2963
jhill@tudorpickering.com
Joe Herman
713.333.3925
jherman@tudorpickering.com
Mike Bradley
713.333.2968
mbradley@tudorpickering.com
Jason Foxen
303.300.1960
jfoxen@tudorpickering.com
Byron Pope
713.333.7690
bpope@tudorpickering.com
Integrated Oils / Refiners
Robert Kessler
713.333.7696
rkessler@tudorpickering.com
Mike Davis
713.333.2971
mdavis@tudorpickering.com
New York
George O’Leary
713.333.2973
goleary@tudorpickering.com
Klayton Kovac
713-3333866
kkovac@tudorpickering.com
Macro
Dave Pursell
713.333.2962
dpursell@tudorpickering.com
Coal & Power
Brandon Blossman
713.333.2994
bblossman@tudorpickering.com
Brandon Mei
713.333.7689
bmei@tudorpickering.com
Clay Rynd
713.333.3867
crynd@tudorpickering.com
E&P
Brian Lively
713.333.2970
blively@tudorpickering.com
Brad Pattarozzi
713-333-2993
bpattarozzi@tudorpickering.com
George O’Leary
713.333.2973
goleary@tudorpickering.com
Jo hn Hurd
713.333.2951
jhurd@tudorpickering.com
Jo sh Martin
713.333.2982
jmartin@tudorpickering.com
Paige Penchas
713.333.2969
ppenchas@tudorpickering.com
Ken Johnson
212-610-1650
kjohnson@tudorpickering.com
*London
Jon Mellberg
+44 20 3008 6430
jmellberg@tudorpickering.com
Scott McGarvey
smcgarvey@tudorpickering.com
Seth Williams
swilliams@tudorpickering.com
TRADING- New York
Todd Wood
twood@tudorpickering.com
*TRADING- London
‡ Chris Wellesley
cwellesley@tudorpickering.com
+44 20 3427 5833/4
‡ Harry Grist
hgrist@tudorpickering.com
+44 20 3427 5832
Win Oberlin
+44 20 3008 6431
woberlin@tudorpickering.com
‡ Jonathan Wright
+44 20 3008 6436
jwright@tudorpickering.com
Matt Portillo
713-333-2995
mportillo@tudorpickering.com
Utilities
Oliver Do o lin
713-333-2989
odoolin@tudorpickering.com
Chris Hart
212-610-1657
chart@tudorpickering.com
TRADING - Houston 800.507.2400
Hubert van der Heijden
713-333-3983
hvanderheijden@tudorpickering.com
Neel Mitra
713.333.3896
nmitra@tudorpickering.com
*London- E&P
Anish Kapadia
+44 20 3008 6433
akapadia@tudorpickering.com
Shola Labinjo
+ 44 20 3008 6437
slabinjo@tudorpickering.com
*Office o f Tudor, Pickering, Holt & Co. International, LLP.
Anish Kapadia and Shola Labinjo are employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and arenot registered/qualified as research analysts with FINRA. Mr. Kapadia and
Mr. Labinjo are not associated persons of Tudor, Pickering, Holt & Co. Securities, Inc. and as such are not subject to NASD Rule 2711 restrictions on communications with subject companies, public
appearances and trading securities held by a research analyst account.
‡ Employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and is not registered/qualifiedwith FINRA and is not an associated person of Tudor, Pickering, Holt & Co. Securities, Inc.
13. Perspectives on the Energy Industry
Capital Markets
Tom Hargrove
Managing Director
GulfStar Group
15. MIDDLE MARKET M&A ACTIVITY
Public companies’ stock prices at attractive levels with high cash balances
Large universe of private equity buyers with liquidity
Lenders relatively aggressive and return of cash flow based lending
Middle Market ($10-$250mm) EV/EBITDA and Deal Count
250
6.2x
Transaction Multiple
6.1x
6.0x
6.0x
200
6.0x
5.9x
150
100
5.5x
50
5.0x
0
2008
Source: PitchBook
2009
TEV/EBITDA
2010
2011
Number of Deals
2012
Number of Deals
6.5x
16. MIDDLE MARKET M&A ENVIRONMENT
Middle Market EV/EBITDA by Total Enterprise Value
TEV ($MM)
$10-25
$25-50
$50-100
$100-250
Source: GF Data
2008
5.4
6.0
6.7
6.7
2009
5.5
6.0
6.5
7.2
2010
5.3
6.2
6.6
6.2
2011
5.3
5.8
7.1
7.7
2012
5.6
6.1
6.8
7.5
21. OIL AND GAS SERVICE COMPANIES
Continued high activity in North American oil exploration
⁻ Eagle Ford
⁻ Bakken
⁻ Permian
⁻ Mississippi Lime
Horizontal drilling continues to drive more service revenue
⁻ More horizontal drilling in Permian and Mississippi Lime
⁻ Drilling increasing in efficiency
⁻ Fracing continuing to increase in scope
Gulf of Mexico market has recovered from Macondo
⁻ Deep water activity
⁻ New build rigs entering market
Forecasted increase in NAM rig count in 2013
Oil and gas prices appear range-bound but generate good levels of profitability on oil projects
22. PIPELINE SERVICE COMPANIES
Aging pipeline infrastructure creating good maintenance market
⁻ Stable recurring revenues
⁻ Stricter DOT regulations and enforcement
⁻ Heightened concern over pipeline safety and maintenance with several high profile incidents
⁻ Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011
⁻ Hydrostatic testing and repairs on all pipelines constructed before 1970
Unconventional oil and gas plays require new pipeline infrastructure
⁻ New pipelines needed to get oil and gas from exploration areas to market
⁻ New pipeline infrastructure required at new or expanded petrochemical facilities
⁻ Shale development wells fall off rapidly after initial production, resulting in more wells drilled and
infrastructure needed
⁻ Pipeline construction needed to reduce bottlenecks; GOM crude priced at Brent versus WTI
(est. $110 vs. $95)
23. NEW PIPELINE CONSTRUCTION
Pipeline construction miles are projected to increase to approximately 41,000 in 2013, up from 36,000
in 2012
Total pipeline construction expenditures are projected to increase to over $41 billion in 2013, up from
$34 billion in 2012
These increases are driving the growth of all ancillary pipeline service, maintenance and construction
spending
24. PETROCHEMICAL AND REFINING SERVICES
Low natural gas prices and availability have resulted in robust petrochemical growth
Increased domestic oil availability is providing domestic refineries with price advantaged crude oil but
requires plant retrofits to process light crudes
Market for petrochemical / refining services being driven by several factors:
⁻ The resurgence and growth of domestic crude production and domestic natural gas production
⁻ Rising global demand for refined products
⁻ Attractive economics for U.S. petrochemical plants
⁻ Continued aging of current infrastructures
Capital spending (routine maintenance, turnarounds and general spending) anticipated to reach $17.6
billion in 2013 and grow to $19.9 billion by 2017
25. PETROCHEMICAL / REFINING CONSTRUCTION
Project
LyondellBasell Feedstock
Tesoro SLC Refinery
Exxon Port Allen
INEOS Chocolate Bayou
Exxon Baton Rouge
LyondellBasell Ethylene
Exxon Mobil Plastics
Valero McKee
Celanese Corp Methanol
Exxon Mobil
Chevron Phillips Baytown
Chevron Phillips Old Ocean
Dow Brazosport
Valero Three Rivers
Announced Plant Expansions through 2017
Value
Plant Location
Channelview, TX
$500 million
Salt Lake City, UT
$180 million
Port Allen, LA
N/A
Alvin, TX
N/A
Baton Rouge, LA
$215 million
La Porte, TX
$500 million
Mont Belvieu, TX
N/A
Sunray, TX
N/A
Clear Lake, TX
$1 billion
Baytown, TX
N/A
Baytown, TX
$5 billion
Sweeny, TX
$5 billion
Freeport, TX
$4 billion
Three Rivers, TX
N/A
Est. Completion Date
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
2017
2017
2017
N/A
26.
BoyarMiller Breakfast Forum
Private Equity - Perspectives on the
Energy Industry
James Wallis
March 21, 2013
CONFIDENTIAL AND PROPRIETARY
CONFIDENTIAL AND PROPRIETARY
27. Energy Private Equity
What is Energy Private Equity?
Asset Managers
Our investors are pensions, endowments, and charities
Source of Capital
Experienced
Patient
Disciplined
Strategic Partners
Relationship-focused
Energy Finance Expertise
Well-connected to capital, M&A, and talent markets
Prior lessons and relationships applied across the portfolio
CONFIDENTIAL AND PROPRIETARY
27
28. Competitors
Energy Private Equity – It’s Competitive
OCCASIONAL DIRECT COMPETITORS
UPSTREAM OIL
AND GAS:
SERVICE, E&P
ALL ENERGY
SECTORS
First Reserve (8.9)
PRIMARILY US
E&P AND
MIDSTREAM
PRIMARILY SERVICE OR
SERVICE TECHNOLOGY
ACQUIRE AND
DIRECTLY
OPERATE
SCF (0.5)
Altira (0.2)
EnCap (5.0)
epiV (0.1)
Kayne Anderson (1.6)
White Deer (1.3)
Energy
Ventures (0.4)
NGP Tech. (0.3)
NGP (3.6)
EnerVest (1.5)
Denham (3.0)
HitecVision (1.4)
Intervale (0.3)
Pelican (0.1)
Quantum (2.5)
KKR/Premier
Cadent (0.5)
4D (0.2)
Basin
Scotia Waterous
Merit Energy (0.9)
Quintana (0.7)
Kerogen (E&P) (1.5)
Kenda/Shell
Global Energy
Capital (0.2)
SFC Partners (0.7)
Quantum Res. (1.2)
EIG Partners (4.1)
OFS Energy
CSL (0.3)
Yorktown (1.3)
Scout Energy
Barclays Nat. Res (0.9)
Statoil
CTV
Sheridan (1.8)
Harvest Partners
Chesapeake NG
Ventures
CoP/ETV
Urban (0.1)
Turnbridge
White Rock
Riverstone (6.0)
ArcLight (3.5)
Arcapita
Energy Capital
Mgmt./SAEV
Clearlake Capital
ESS
OTHER ENERGY PRIVATE EQUITY INVESTORS
MIDSTREAM
Energy Spectrum (0.6)
POWER
GENERALISTS
Energy Capital
Partners (4.3)
Apollo (14.7)
Warburg (15.0)
Advent (1.7)
EnCap Flatrock (0.8)
Goldman (20.3)
Avista (2.0)
Haddington (0.2)
Tenaska (2.4)
KKR (17.6)
Pine Brook Road
(1.4)
Energy & Minerals
Group (1.4)
Energy Investors
Fund (EIF) (1.4)
3i
TPG (17.8)
Gen. Atlantic
Wexford (0.5)
Rockland Power
Partners (0.3)
Blackstone
Kelso (5.1)
LS Power
Parenthetical numbers represent total capital commitments of most recently raised relevant fund in billions of dollars, if available.
CONFIDENTIAL AND PROPRIETARY
28
29. Lime Rock
Who is Lime Rock?
Energy-focused asset managers with two distinct private equity fund strategies
$5 billion of total private capital under management
Founded in 1998
Founded in 2005
Invests in companies
Acquires oil and natural gas properties
Global strategy: E&P and energy
service
U.S. strategy: E&P only
E&P portfolio companies operate
properties
E&P investments target higher-risk,
unconventional resource or
exploration- oriented projects
Directly operates properties
Targeting lower-risk, mature, currently
producing, high PDP reserves
Headquartered in Houston with field
offices in Texas, Oklahoma, and New
Mexico
Global team in five locations:
Westport, Houston, Aberdeen,
London, and Dubai
CONFIDENTIAL AND PROPRIETARY
29
30. Today’s Investment Environment
Macro Uncertainty Abounds
World economies are fragile
Global deleveraging cycle will be a drag on growth everywhere
Europe is a mess with no resolution in sight
China is a black box – possibly headed for a “hard landing”
U.S. recovery is nascent, slow, and hooked on fiscal stimulus
Politicians not inspiring confidence
Despite this, U.S. stock market is hitting new highs and debt yields are very low
Timing the markets is incredibly difficult
Diversification within energy is prudent – timing, geography, and commodity
Not a time for bold, market-calling theme bets
“Teams over themes”
U.S. Oil & Gas Renaissance is providing a big tailwind
CONFIDENTIAL AND PROPRIETARY
30
31. Investing in the U.S. Oil and Gas Renaissance
Everyone Has Heard the News…
U.S. ANNUAL CRUDE OIL PRODUCTION, 19802012
U.S. ANNUAL DRY GAS PRODUCTION, 19902012
(million barrels per day, excludes NGLs)
(billion cubic feet per day)
10
70
8
60
6
50
4
40
1980
1984
1988
1992
1996
2000
2004
2008
2012
1990
1993
1996
1999
2002
2005
2008
2011
Source: EIA
CONFIDENTIAL AND PROPRIETARY
31
32. Investing in the U.S. Oil and Gas Renaissance
Basic Technologies Are Well Known and Understood
Source: CERA
CONFIDENTIAL AND PROPRIETARY
32
33. Investing in the U.S. Oil and Gas Renaissance
But the Technologies Are Not New
HORIZONTAL DRILLING RIGS AS A PERCENTAGE OF U.S. TOTAL RIG
COUNT, 1991-2012
75%
50%
25%
0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Source: Baker Hughes
CONFIDENTIAL AND PROPRIETARY
33
34. Investing in the U.S. Oil and Gas Renaissance
Pop Quiz: Who was the NFL champion the
year of the first hydraulic fracturing
operation?
CONFIDENTIAL AND PROPRIETARY
34
35. Investing in the U.S. Oil and Gas Renaissance
Since the first hydraulic fracturing operation in 1947, conducted by Halliburton,
there have been 1.1 million separate fracturing jobs, most in the United States.
CONFIDENTIAL AND PROPRIETARY
35
36. Investing in the U.S. Oil and Gas Renaissance
So What’s New?
Simultaneous hydraulic fracturing
and “zipper fracs”
Real-time microseismic
Nano-scale reservoir analysis
Advanced fracturing fluids
Automated AC drilling rigs
Pad drilling
Extended laterals
Geosteering
Source: CERA
CONFIDENTIAL AND PROPRIETARY
36
37. Investing in the U.S. Oil and Gas Renaissance
Four reasons that this supply renaissance
has changed the game.
CONFIDENTIAL AND PROPRIETARY
37
38. Investing in the U.S. Oil and Gas Renaissance
1. For U.S. Natural Gas, Upending the Cost Curve:
“Bad” Reservoirs Are Cheaper than “Good” Reservoirs
THAT WAS THEN (FEB. 2007):
Could conventional basins compete with ~$4-6/MCF
LNG breakeven import price?
LNG VERSUS U.S. NATURAL GAS BASIN ECONOMICS
(breakeven gas price, $/mcf)
THIS IS NOW:
When will we need more supply than can be
supplied by ~$3.00-$3.50/MCF Marcellus Shale
breakeven price?
NYMEX BREAKEVEN PRICE FOR 10% AFTER-TAX RATE OF
RETURN
Source: Pickering Energy Partners
Source: Tudor Pickering Holt & Co.
CONFIDENTIAL AND PROPRIETARY
38
39. Investing in the U.S. Oil and Gas Renaissance
“Big Three” Gas Giants – Historical Production vs. Rig Count
350
6.0
300
5.0
250
4.0
200
3.0
150
2.0
100
1.0
50
0.0
0
Barnett
Haynesville
Marcellus
Barnett Rigs
Haynesville Rigs
Horizontal Rigs
400
7.0
Bcfe/d
8.0
Marcellus Rigs
Source: ITG Investment Research, raw data provided by didesktop, Ventyx.
CONFIDENTIAL AND PROPRIETARY
39
40. Investing in the U.S. Oil and Gas Renaissance
Remaining Low-Cost Gas Inventory is Mind-Boggling
Marcellus
Barnett
•
19 million acres
•
5 million acres
•
~3,000 wells produce 7 Bcf/d
•
~12,000 wells produce 5 Bcf/d
Source: ITG Investment Research, raw data provided by didesktop and state agencies.
CONFIDENTIAL AND PROPRIETARY
40
41. Investing in the U.S. Oil and Gas Renaissance
2. Goodbye, Peak Oil…
DEMAND
SUPPLY
Source: BP Energy Outlook 2030
CONFIDENTIAL AND PROPRIETARY
41
42. Investing in the U.S. Oil and Gas Renaissance
U.S. Share of Worldwide Oil Production Growth
CONFIDENTIAL AND PROPRIETARY
42
43. Investing in the U.S. Oil and Gas Renaissance
3. United States Is Moving to Either Energy
Independence or Energy Less-Dependence
OIL DEMAND, FIELD PRODUCTION, AND NET
IMPORTS
(million barrels per day)
NATURAL GAS IMPORTS
(billion cubic feet per day)
PIPELINE
LNG
IMPORTS
AS % OF
DEMAND
2007
8.0
1.4
14.9%
2007
20.7
6.9
12.0
2012
(Jan-Oct)
4.0
0.4
6.4%
2012
(JanOct)
18.7
8.8
7.7
DEMAND
Per Credit Suisse, by 2020, the U.S. will have
5.7 BCF per day of LNG export capacity
FIELD
PRODUCTION
NET
IMPORTS
Forecast range from ~4.5 to ~6.5 million
barrels/day of incremental production through
2020, including crude oil, NGLs, and biofuels
Source: EIA for import data
CONFIDENTIAL AND PROPRIETARY
43
44. Investing in the U.S. Oil and Gas Renaissance
U.S. Energy Less-Dependence
Historical
CONFIDENTIAL AND PROPRIETARY
Projected
44
45. Investing in the U.S. Oil and Gas Renaissance
4. There Are Potential Major Implications for the U.S.
Economy and Competiveness
INDIRECT
DIRECT
JOBS
CAPITAL INVESTMENT
~467,000 in oil and gas
extraction including
support roles
Citibank forecasts
doubling of direct jobs but
others are more skeptical
Tremendous amount will
be spent on well
construction, pipelines,
processing plants,
supporting services and
equipment, rail, road
infrastructure, etc
ENERGY/FEEDSTOCK
U.S. more competitive in
chemicals and fertilizer
where oil and gas are
direct fedstocks
Lower energy and basic
material costs lead to
more competitive
manufacturing
BALANCE OF
PAYMENTS
Lower current account
deficit—strengthen U.S.
dollar
Foreign policy
implications
Citibank estimates
potential for up to 2
million indirect jobs
Estimate of U.S. Unconventional Oil and Gas Capital
Expenditures and Job Creation
(Through 2020)
Category
Exploration and Production
Pipelines
NG Processing Plants
LNG
Manufacturing
Rail and Other Infrastructure
Total
Investment
(billions)
$60 – $70
$50 – $65
$35 – $45
$20 – $30
$70 – $80
$10 – $20
$245 – $305
CUMULATIVE IMPACT ON U.S. REAL GDP, 2012E-2020E
Jobs Created
(thousands)
440 – 480
800 – 920
450 – 550
260 – 370
920 – 985
125 – 200
3,000 – 3,505
Source: Citi Investment Research and
Analysis
Source: Forbes.
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46. Investing in the U.S. Oil and Gas Renaissance
The Big Questions: Will Prices Be High Enough to
Continue to Make This Volume Growth Possible?
GAS: A QUESTION OF DEMAND
U.S. GAS CONSUMPTION, 1970-2012E
(billion cubic feet per day)
80
70
60
50
40
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: EIA
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47. Investing in the U.S. Oil and Gas Renaissance
The Big Questions: Will Prices Be High Enough to
Continue to Make This Volume Growth Possible?
OIL: QUESTIONS OF DEMAND…
AND SUPPLY
U.S. OIL PRODUCTION AND TWO-YEAR GROWTH
UNDER DIFFERENT PRICE SCENARIOS
ANNUAL CHANGE IN OIL DEMAND
(million barrels per day)
(million barrels per day)
1.5
Two Year Production Growth Under
Various Scenarios
2012 Production
0.8
$70/ B Oil $85/ B Oil $100/ B Oil
Williston
762
96
236
325
Eagle Ford
468
230
318
435
1,216
303
446
582
Permian
0.0
DJ
China
Rest of World
-1.5
2008
2009
2010
2011
2012
11
23
53
104
126
579
-20
-20
-20
Gulf of Mexico
1,359
3
3
3
Other
1,838
-30
-16
0
Total
U.S.
1
127
Alaska
-0.8
85
Anadarko
6,434
636
1,082
1,474
2013E
Source: IEA
Source: Simmons & Co.
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48. Investing in the U.S. Oil and Gas Renaissance
Specific Energy Investment Themes
People – Always #1
E&P
Capital discipline and profitability are priorities
Focus on the lowest cost molecules, period
Everyone is land rich – be prepared to stay in longer
Oilfield Service
North American equipment overbuilt and underutilized – for now
North American margins are stabilizing; International margins increasing
Infrastructure
Bottlenecks everywhere; $300+ billion needed through 2035 just for pipelines
Completion technology
Export the resource revolution abroad
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