Oil: What’s a Reasonable Price? Impact on M&A Keith King Managing Director, Moyes & Co.
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Moyes & Co.
Moyes & Co. Scope of Work • • • • • • • • •
Transactions (farm–in, farm-out, buying, selling) Valuation of Assets and Companies Oil and Gas - Exploration through Production Established in 1983, 32 years IOC, NOC, Service Sector and Private Companies, 2,500 Previous Clients Competent Persons Reports Upstream Economics, Business Planning Litigation & Arbitration Expert witness, Commercial Contractual Issues Database • Companies: 41,800 records • Properties: 122,100 • Transaction analysis: 5,000 deals • Active contacts (people): 77,000
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Main Points • • • • • •
World oil not “significantly” oversupplied Price drop due to price war (OPEC Market Share) Drilling and production lags behind price stimulus Natural production decline in the world’s oil fields needs to be replaced by new developments Global conventional discoveries waning, except SS Africa Most likely scenario is production will flatten and prices will increase back to the Marginal Cost of Supply (MCoS) or above
“Those (US Shale Oil Producers) who created this oversupply, they need to learn the lesson..” Source: CNN quote from UAE Energy Minister Suhail Mohammed Faraj Al Mazrouei
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Supply / Demand Not Significantly Imbalanced
World currently over supplied by 1 to 2 %
Many see this as a “glut”
Perception is more important than reality (in the short run) MMB/d 100 95 90 85 80 75 70 65 60
Oil Supply - Demand Not Significantly Imbalanced The Great “Glut”
1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 12 12 12 12 13 13 13 13 14 14 14 14 15
IEA Data, Moyes Analysis www.moyesco.com
Demand 4
Supply
Supply Demand Imbalances Are Short Lived
Imbalances self correcting
Imbalances don’t always move price
MMB/d
100 90 80
Relation Between Supply, Demand, and Price (Annual Data)
The Great “Glut” 140
Oversupply Undersupply Oversupply Undersupply Oversupply Undersupply
70
120 100 80 60 40
60
20 0
50 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 IEA Data, Moyes Analysis Supply Demand Price $ Data EIA, Moyes Analysis www.moyesco.com
$/b
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OPEC Spare Capacity Now At Multi-Year Low
Saudi increased production to 10.3 mmb/d to gain market share
Low OPEC Spare Capacity associated with rising price
Data IEA, Moyes Analysis www.moyesco.com
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US Petroleum Stocks Increasing • Storage capacity is uncertain • “Days of Production in Storage” gives different perspective • Increased storage occurred after price drop
Cushing Storage mmbbls
Data EIA, Moyes Analysis www.moyesco.com
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What Caused OPEC to Panic • 4 to 5 million bbls a day additional supply – 5% of global production • World would have been 3 to 4 mm/d undersupplied without it
US Crude Oil Production
Data Source: EIA www.moyesco.com
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Conventional Discoveries: Gas Dominates • Areas with greater than 1 GBOE discovered in last 10 years • Sub-salt and deep water • Conventional 90% of global production
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Conventional: Gas Replacing Production, Oil is Not • Discoveries decreasing since 1960’s • Gas discoveries more robust
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SS Africa Still a Bright Spot
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NAm Production Responded to Increased Spend, International Production Declined Despite Increased Spend
Source: IHS, EIA SLB Source: IEA, SLB www.moyesco.com
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OPEC’s Eroding Market Share • Increasing US production, flat to lower OPEC production • OPEC aspires to increase market share • Started the price war
IEA Data
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The Price War Begins Sep. 29, 2014, Bloomberg "ConocoPhillips is shipping a cargo of Alaska North Slope crude to Asia,"
Oct. 2, 2014, CNBC "Saudi Aramco surprised markets when it announced it would cut official prices for Asian customers"
120
WTI Spot $
100 80
Nov 28, 2014, CNN – “Oil prices came crashing down to trade below $70 per barrel after OPEC announced it was leaving oil production levels unchanged.”
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60 40 20 0 Apr 2014 Jul 2014 Oct 2014 Jan 2015 Apr 2015
Global Oil Production Declines with Depletion • • • • •
Conventional fields decline by 4% to 6% “Shale” Production declines by 50%+ first year Demand grows by about 1% a year Compensated by new developments, improved recovery If these new projects are delayed or cancelled, a “supply /demand gap” starts to open
Bio RG Shale Deep Water
New
Shallow Water
Land
Source: IHS, EIA, SLB www.moyesco.com
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Future Projects Not Economic at Today’s Prices • • • •
“Marginal Cost of supply” impacts future production “Cash cost” impacts current production Existing Production not significantly affected at current prices Future production is crushed at current prices! Cash Cost (ex Finding and Development)
Marginal Cost of Supply (inc. Finding and Devel)
Source: Citi, Rystad, Woodmac, Morgan Stanley www.moyesco.com
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Lower Prices Will Lead to Reduced Volumes Bakken Before Price Collapse
Bakken After Price Collapse
Areas Economic at $110 WTI
Areas Economic at $50 WTI
Moyes Analysis www.moyesco.com
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Price, Activity, Production Lag - Four Months to Decades • • •
Conventional discovery to first production -10 Years Conventional improved recovery – 6 to 18 months “Shale” (fracking) – 4 to 6 months Should see production response in 2nd half 2015
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EIA Projects US Production Will Flatten or Decline • Delayed response after drilling slow down • Production likely to be lower than projected • International lag will be longer
Monthly oil production & rig count in the L48 2016
2015
2014
2000
Rig Count (actual)
MM/d
2500
1500
Drilling slowed even more than expected
Rig Count (projected)
