Opportunities amidst the oil and gas wreckage

Primary colors

R 0

G 39

B 118

R 0

G 161

B 222

R 60

G 138

B 46

R 114

G 199

B 231

R 201

G 221

B 3

R 146

G 212

B 0

Sunrise Seminar

Brisbane, Queensland

Thursday 26th February 2015

Opportunity Amidst

The Oil and Gas Wreckage

Deloitte Touche Tohmatsu © 2015 - Oil and Gas: Opportunity Amidst The Wreckage

What is happening to global oil and gas markets?

• A significant supply and demand imbalance has triggered OPEC to act

• Capital markets are quick to react

• Oil and gas companies cut back on everything, everywhere

• Transactions will pick up pace (bankruptcies, M&A)

• LNG cannot completely sidestep the wreckage

• Oil will go into storage for now

• OPEC can’t hold on forever

• What will be the shape of the recovery? U? V? Other?

• How to survive and thrive in this setting?

1


OPEC’s own analysis highlights the problem.

Supply outpacing demand by 1-1.5 mmbbls/day

• World demand up 5 mmbbls/day since 2011

• Americas volumes (shale, oil sands) up 5 mmbbls/day since 2011

• OPEC supply up 0.5mmbbls/day since 2011

• Some analysts estimate supply overhang at 2 mmbbls/day

2

Source: OPEC


Saudi has handed the role of swing producer to

the US

• Cheap oil ($13) should not make

room for expensive oil ($70)

• Sustained high prices

encouraging new sources of

supply

• Demand (EU, China) not growing

to match

• Cutting production leads to

permanent share loss

• No other OPEC member able to

cut production

• Deep pockets

3

Immediate Rationale Longer Term Concerns

• Shale resources widely spread

• Drilling and hydraulic fraccing

technology spreads easily

• Alternatives taking share (LNG

ships, electric cars, renewable

power, batteries)

• China, US to cap GHG

• Climate change threatens all

fossil fuels, could strand sole

Saudi asset


Big price moves in oil are normal, but demand

and supply imbalances are rare. Last time? 1986

4 Source: macrotrends.net, reuters.com

WTI, Nominal USD

OPEC Meeting

ME countries commit to

let market find supply

balance

Russia confirms it has sent

troops into Crimea

2008 Financial Crisis Mubarak Resigns

BP Oil Disaster

G2OM Arab Spring

Civil War declared

in Syria US oil production

exceeds imports


Capital markets draw a distinction between

different players in the industry

• Asset plays benefit

from take-or-pay

contracts

• Integrated oil

companies capture

downstream margin

• E&P companies

rotate to highest

value plays

• Services companies

hit hardest

5

Source: economist.com


Companies respond by cutting capital spend

6

Company Initial Revised Date

Suncor $7.2b $6.2b Jan 2015

Freeport-McMoRan $7.2b $6.0b Jan 2015

CNRL $8.6b $6.2b Jan 2015

Crescent Point $2.0b $1.45b Jan 2015

ARC Resources $775m $634m Jan 2015

Pacific Rubiales $1.50b $1.10b Jan 2015

Ithaca Energy $400m $160m Jan 2015

Halcon Resources $800m $375m Jan 2015

Husky Energy $4.10b $2.90b Dec 2014

Continental $5.20b $2.70b Dec 2014

Genel Energy $670m $200m Jan 2015

ConocoPhillips $16.9b $11.5b Jan 2015

Occidental $8.7b $5.8b Jan 2015

Hess $2.20b $1.80b Jan 2015

CNOOC $17b $12b Feb 2015

Gazprom $38b $30b Feb 2015

Total $29b $25b Feb 2015

Source: reuters.com, miningweekly.com

• Cutbacks not

proportionate

• Smaller firms tend

towards larger %

• High debt shale

players may be

locked out capital

markets

• Balance exposure to

projects, operations


As the capital is scaled back, so are jobs. Note

the big hit in the services sector

7

Company Date RIF

Weatherford Feb 2015 5000

Suncor Canada Jan 2015 1000

Ensign Drilling Nov 2014 700

Schlumberger Jan 2015 9000

BP UK Jan 2015 300

Talisman UK Jan 2015 300

Baker Hughes Jan 2015 7000

Halliburton Feb 2015 5500

Precision Drilling Feb 2015 1000

Total Feb 2015 2000

Archer Feb 2015 1000

Source: reuters.com, offshoreenergytoday.com

• Tend to be indiscriminate

• Understated – buyouts might not be included

• Often an erosion of skills – senior talent exodus

• Typical price bounce-back means fundamental changes often deferred

• Innovation, R&D suffer

• Lots of talent available (Bloomberg est. 100k)


Assets are written down to reflect market value

which can also trigger debt covenants

• Reservoir assets

principally impacted

• Driver is market price

• Services assets can

also adjust

• Write downs impact

equity, restrict new

equity issue

• Debt markets drift out

of reach

8

Company Announcement Write

Down

Marubeni Jan 2015 $1.0b

Freeport-

McMoRan

Jan 2015 $3.1b

PA Resources Jan 2015 $200m

Sumitomo Sept 2014 $1.6b

BG Group Feb 2015 >$8.0b

Talisman Feb 2015 $1.3b

Total Feb 2015 $6.5b

Beach Energy Feb 2015 $224m

Source: reuters.com, bloomberg


Expect to see more MAD activity as companies

combine to cut costs

9

Parties Value Announce

Baker Hughes,

Halliburton (m)

$34.6b Nov 2014

Repsol, Talisman

(m)

$8.3b Dec 2014

QGC, APA (a) $5b Dec 2014

Source: reuters.com

• Last big imbalance yielded:

• Exxon Mobil

• BP Amoco

• Chevron Texaco

• Asset write-downs depress values

• Asset sales pick up

• Inorganic growth potential very high

* - rumoured pipeline sale

(m) – merger, (a) – asset sale


Australia’s LNG projects are caught up in the

maelstrom but are in generally a good position

• Oil-linked pricing

• Spot prices down, contract pricing

soft

• Limited buyer interest

• Asset write downs

• Capital cutbacks

• Project cancellations

• Workforce reductions

• Ratings downgrades

• Investment banking alerts

• Take over speculation

10

Headwinds Offsetting

• Long term contracts

• Floor pricing

• Gas volume requirements

• Cost out potential

• Ample assets to sell but complex

ownership

• Plenty of liquidity chasing assets

• Elimination of international

competition

• Future expansion potential

• Deep pocketed investors


$'s

/ w

ell

co

un

t

Time

Capital expenditure Pipeline Capital expenditure Operating costs per GJ

Queensland’s LNG industry needs to transition

into production and steady state operations

QGC, PNG LNG

GLNG, APLNG

Arrow

11


Like most oil and gas firms, the LNG projects are

executing a variety of tactics to promote success

12

• Revenue modelling; fraud detection; hedging; gas management

Revenue

• RIFs; price reductions (15-40%); vendor pruning

• Procurement strengthening (Achilles, auctions)

• Collaboration, bulk buying

Cost

• Asset sales (pipes, other); defer capital; valuations

• Collaboration; JVs; sell-downs; capital reconfigure Asset

• Debt reviews; supplier reviews; risk review

• Disclosures Expectations


Analysis suggests costs take 12-18 months to

melt out of the system. 15-30% possible.

13

Source: Stephen Brown, The Steam Oil Production Company


What might the recovery look like?

14

Quick

Bounce

Permanent

new floor

Slow recovery

back to peak

Slow recovery

to new ceiling

$110

$110

~$40

~$70


What do you believe? Hedge to the downside

15

Quick Bounce Permanent new floor

Slow recovery back to peak Slow recovery to new ceiling

• Inventories to be released

• Lots of cost-out yet to happen

• Cautious re-entry of capital

• Turns shale into swing product

• Depth of Saudi treasury

• Not in OPEC’s interest

• Kills shale (for now)

• Impedes alternatives

• Capital cuts drive future shortages

• OPEC’s interest

• Supply and demand do not support

• Production still coming to market

• Does not quell shale play

• Does not quell alternatives

• Inventories building

• Lots of cost-out yet to happen

• OPEC needs high price

• Lower pricing stimulates demand

• Capital cuts lead to future shortages


There will be winners and losers

• Wealth shift towards consuming nations

• Uptick in auto sector, travel, consumer goods

• Shipping, haulage, mining, petrochem

• Positive impact on importer capital reserves, trade balances

• Currency adjustments lower domestic costs

• Opportunity to relieve subsidies

• Deeply discounted assets available

16

Winners Losers

• E&P, services companies scale back

• Asset owners, debt market investors in US

• Communities with oil production

• Government royalty flows, wealth transfers

• OPEC, Russia, Venezuela

• Banking sector exposure

• Alternative energy plays

• Climate impacted by higher consumption


Final thoughts

• Prepare for a long haul at low prices

• Reset your business model for $50/bbl

• Be the low cost player, as soon as possible

• Squeeze out surplus assets

• Invest in the midstream

• Fix up your balance sheet

• Watch for growth in 2017

17

In most price eventualities CSG remains marginal –

and hence the need for a step change in modus operandi.

CEO, CSG Company


Follow up for more insight

• National Director, Oil and Gas, Deloitte

Brisbane

• 24 years with Deloitte

• Canada, Korea, Japan, China, Hong Kong,

Australia, USA, Caribbean

• Strategy, transformation, cost reduction

• Blog: www.geoffreycann.com

• Twitter: @geoffreycann

• Email: [email protected]

• Phone: +61 7-3308-7125

18

mailto:[email protected]

General information only

This presentation contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this

presentation, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No

entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this presentation.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.

Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries,

Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte has in the region of 200,000 professionals,

all committed to becoming the standard of excellence.

About Deloitte Australia

In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms. Deloitte Touche Tohmatsu and its affiliates provide audit, tax,

consulting, and financial advisory services through approximately 6,000 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human

resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit our web site at www.deloitte.com.au.

Liability limited by a scheme approved under Professional Standards Legislation.

Member of Deloitte Touche Tohmatsu Limited

© 2015 Deloitte Touche Tohmatsu

Opportunities amidst the oil and gas wreckage

Business

Transcript of Opportunities amidst the oil and gas wreckage