jogmec international seminar...murphy 91 84 175 52% centennial 37 25 61 60% carrizo 39 21 60 65%...

JOGMEC International Seminar

“Recent Topics on Shale Oil and Gas Development in United States”Capital Markets / M&A PerspectivesFebruary 2019

Jefferies LLC

The information provided in this document, including valuation discussions, represents the views of Jefferies Investment Banking. There is no assurance that the views expressed herein will be consistent with the views expressed by Jefferies Research or its Analysts. Nothing in this document should be understood as a promise or offer of favorable research coverage.

Member SIPC

William A. Marko Managing DirectorHouston, TX USA

Jefferies LLC February 2019/

Current Status of U.S. Upstream And U.S. Shales

Total hydrocarbon production larger than any other country

─ Year end 2018 oil production 11.9 million barrels per day (MMBpd)

─ Year end 2018 gas production 87 billion cubic feet per day (Bcfd)

Approximately 1,030 onshore rigs drilling (860 oil / 170 gas)

─ Top area rig counts

Permian: 473

Eagle Ford: 82

Marcellus/Utica: 80

Rig count highly dependent on commodity price and perceived profitability (costs, type curves, etc.)

Very liquid deal flow environment

─ Normal M&A deal flow $50 - $70 billion per year

─ Many types of sale structures possible (acquisition, joint venture, DrillCo, private financing, public financing, working interest, royalty, etc.)

Method of entry should be carefully considered

─ Specific hydrocarbon and basin

─ Size and structure of deal(s)

─ Consider portfolio of deals

─ Bi-lateral (exclusive) vs public auction process

Large and growing export market ( oil, natural gas, natural gas liquids, petrochemicals, refined products)

SCOOP / STACK: 59

Bakken: 57

Haynesville: 56

1


U.S. Natural Gas Production History Since 2000 (Bcf / d)

-

500

1,000

1,500

2,000

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Natural G

as Rig C

ountN

atur

al G

as P

rodu

ctio

n (B

cf /

d)

Production RigsCount

U.S. Oil & Natural Gas Production – Unprecedented Growth Since Shale Boom

Source: EIA, February 2019.

U.S. Crude Oil Production History Since 2000 (MMBbl / d)U.S. Crude Oil Production History Since 2000 (MMBbl / d)

U.S. Natural Gas Production History Since 2000 (Bcf / d)

Focus On Oil Shales

Focus On Natural Gas Shales

-

360

720

1,080

1,440

1,800

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Oil R

ig Count

Cru

de O

il P

rodu

ctio

n (M

MB

bl/ d

)

Production RigsCount

2


$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$0

$20

$40

$60

$80

$100

$120

$140

$160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Nat

ural

Gas

NYM

EX

Pri

ce (

$ /

MM

Btu

)

Oil

NYM

EX

Price

($ /

Bbl

)

Oil NYMEX Price ($ / Bbl) Natural Gas NYMEX Price ($ / MMBtu)

U.S. Commodity Price Environment

Source: CapitalIQ on February 13, 2019.

NYMEX WTI Spot Prices Since Year 2000

Natural Gas Price“Disconnects”from Oil Price

OPEC vs.U.S. Shales

(Part 1)

OPEC vs.U.S. Shales

(Part 2)

3


Total Acreage: ~6 MM+ acresDaily Production: 1.8 MMBoe/d (77% oil)Active Horizontal Rigs: 57

Total Acreage: ~3 MM acresDaily Production: ~0.2 MMBoe/d (75% oil)Active Horizontal Rigs: 23 (3 Vertical Rigs)

Powder River Basin

Total Acreage: ~2 MM acresDaily Production: ~1.5 MMBoe/d (44% oil)Active Horizontal Rigs: 31

DJ Basin

Total Acreage: ~5 MM acresDaily Production: ~0.2 MMBoe/d (38% oil)Active Horizontal Rigs: 8

Uinta Basin

Total Acreage: ~13 MM acresDaily Oil Production: ~3.6 MMBo/dDaily Gas Production ~12.4 Bcf/dActive Horizontal Rigs: 473 (44 Vertical Rigs)

Permian Basin – Long Term Growth

Total Acreage: ~30 MM acresDaily Production: 30 Bcfe/d (97% gas)Active Horizontal Rigs: 80

Marcellus / Utica – Gas GrowthBakken – Intermediate Growth

Note: Statistics based on Baker Hughes Rig Count as of February 15, 2019, EIA and Jefferies estimates. (1) Represents Anadarko Basin statistics.

Total Acreage: ~5 MM acresDaily Production: 1.4 Bcfe/d (92% gas)Active Horizontal Rigs: 3

San Juan Basin

Total Acreage: ~6 MM acresDaily Production: 1.8 MMBoe/d(1) (32% oil)Active Horizontal Rigs: 59

SCOOP / STACK

Total Acreage: ~5 MM acresDaily Production: 2.6 MMBoe/d (54% oil)Active Horizontal Rigs: 82

Eagle Ford / South Texas – Intermediate Growth

Total Acreage: ~4 MM acresDaily Production: 9.8 Bcfe/d (97% gas)Active Horizontal Rigs: 56

Haynesville – Gas Growth

U.S. Shale Landscape – Shales Are Abundant And Core Areas Are Fine Tuned

4


Why the Permian Is So Attractive – World Class Hydrocarbon Thickness / In Place Resources

3rd BS

U. WCB

Base 2nd BS

L. WCB

Cline

WCA

1st BS

2nd BS

Base 1st BS

Avalon

Delaware Basin

Horizontal Targets 10+

OOIP (MMBbl / section) ~940

Gross Thickness (ft) ~4,300’

Remaining Dev. Locations ~455,000+

Midland Basin

Horizontal Targets 10+



Remaining Dev. Locations ~247,000+

Eagle Ford + Bakken + Niobrara

Horizontal Targets ~10



Remaining Dev. Locations ~54,000

U. Spraberry

M. Spraberry

L. Spraberry

L Spr. Shale

Dean

Upper WCBLower WCB

WCD

Strawn

WCA

WCC

Austin Chalk

Upper EFLower EF

U. BakkenL.Bakken

Three Forks

Nio. Chalk BNio. Chalk C

Codell

Nio. Chalk A

LTM Permian Basin production growth is >800 MBbl/d, which is ~2x all other L48 basins combined

5


Investors are Insisting Companies Spend Within Cash Flow

Unfavorable for capital requirements to be greater than organic cash flow

High debt levels looked upon unfavorably since 2014-2016 downturn

Public equity markets are closed, valuations are down sharply

Companies Trying to Solve for How to Grow While Spending Within Available Capital

High shale decline rates require capital investment to maintain and grow

Public market investors increasingly intolerant of capital outspends

Most companies have more good inventory than available capital

This could provide opportunity for partnerships, particularly for investors with longer-dated capital

Companies are Still Under Pressure to Continuously Grow

Investors don’t want to see companies depleting assets or reserves

Small publics need to get bigger or merge with another entity

Consolidation is gaining strength as scale becomes more important and beneficial in shale

Operators also seek ways to drill more while still within cash flow availability

Current Environment for E&P Companies in the U.S.

“New” Investor Environment

Merging “New” with

“Old”

“Old” Investor Environment

6


- 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000

XOM

BP.

FP

ENI

Total Production (MBoe/d)

Axi

s Ti

tle

Top U.S. Producers – Best Potential Partners

Oil Production (MBoe)

Natural Gas Production (MBoe)

NameProduction (MBoe)

% OilOil Gas Total

Exxon 2,260 1,574 3,834 59%Shell 1,796 1,852 3,648 49%BP 2,181 1,372 3,553 61%Chevron 1,777 1,138 2,915 61%TOTAL 1,582 1,174 2,756 57%Equinor 1,051 903 1,954 54%Eni 898 957 1,855 48%Repsol 263 453 715 37%

NameProduction (MBoe)

% OilOil Gas Total

Conoco 759 509 1,269 60%Exxon 514 489 1,003 51%Chevron 654 177 831 79%EOG 399 321 720 55%EQT 2 671 673 0%Anadarko 386 280 667 58%Occidental 417 241 658 63%Encana(2) 249 309 558 45%Devon 244 286 530 46%Chesapeake 89 430 519 17%Apache 243 219 462 53%Shell 300 131 431 70%Marathon 206 211 417 49%Noble 130 220 350 37%Cabot 2 334 336 1%Continental 167 130 296 56%Repsol 113 175 287 39%Hess 133 134 267 50%Concho 168 95 263 64%Cimarex 66 153 220 30%Diamondback(3) 146 71 217 67%Murphy 91 84 175 52%Centennial 37 25 61 60%Carrizo 39 21 60 65%Magnolia 32 21 53 60%Matador 30 22 52 58%Jagged Peak 27 7 34 78%

Production By Commodity – For Select Producers

Majors

U.S. Independents & Majors’ U.S.

Production Figures(1)

Source: CapitalIQ as of February 15, 2019.(1) Majors’ U.S. production numbers are a subset of the total Majors’ production numbers at top. Forward Estimates not available

by region; using disclosed numbers for order of magnitude. Not all companies listed at top disclose U.S. production figures.

(2) Pro forma for Newfield production.(3) Pro forma for Energen production.

0 200 400 600 800 1,000 1,200

7


12.9x

9.6x

8.4x8.9x

6.3x5.6x

6.8x

5.3x 5.4x

Large Permian Pure Play Other Permian All Remaining Independents

E&P Equity Valuations Have Decreased Meaningfully – Adds Pressure to Public Companies

Note: Large Permian Pure Play include EOG, CDEV, CXO, FANG, PE, and PXD. Other Permian companies include APC, APA, AREX, CPE, XEC, ECA, EPE, HK, JAG, LPI, LLEX, MTDR, NBL, OXY, REN, REI, ROSE, SM and WPX.Source: Company filings and Capital IQ as of February 13, 2019. Capital IQ for historical data.

TEV / Forward EBITDAas of February-2018



6 Companies: EOG, CDEV, CXO, FANG, PE, and PXD

(34% of Total)

Large Permian Pure Play

22 Companies(33% of Total)

Other Permian

70+ Companies(32% of Total)

All Remaining Independents

2017 2018 2019 2017 2018 2019 2017 2018 2019

TEV / NTM EBITDA

8


U.S. Public E&P Equity Performance Relative to Benchmarks – Last Two Years

Source: CapitalIQ as of February 15, 2019.

U.S. E&P Equity Performance

SPX: 24.0%

XOP: (25.2)%

APA: (47.5)%

COG: 8.0%

COP: 40.0%

ECA: (42.0)%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

Apache Continental ConchoEncana Noble ConocoPhillipsAnadarko Diamondback HessCabot Devon EOGMarathon S&P 500 XOP

9


Private Capital Readily Available and Creating Buy-Side Competition

Institutional Funds Focused on highest quality opportunities

Increasingly focused on private investments

Pension Plans /Endowments

Large pools of capital; ability to provide low cost capital at scale

Focused on investments with long duration / high ROI opportunities

Sovereign Wealth Funds Large pools of capital

Focused on highest quality, brand-name partners

Family Offices Seeking direct investments in blue chip platforms

Actively seek to invest in family run businesses

Mezzanine Funds Increasingly willing to lower return thresholds for scaled, high-quality

opportunities

Sophisticated investors, who have ability to provide low cost capital

Private Equity Funds Have large pools of capital that they are eager to put to work

Focused on direct investments in the energy space

10


Transactions 421 313 433 505 435 20

AvgerageWTI Price: $92.67 $49.09 $43.82 $50.97 $64.78 $52.21

U.S. M&A Overview – 2018 Deal Activity Reached 4-Year High Driven by Corporate Consolidations

(1) Source: PLS as of February 13, 2019. Includes deals with disclosed value greater than $5 MM.

$3

$86

$68

$73

$34

$94

201920182017201620152014

U.S. E&P Deal Volume ($Bn) (1)

Asset Corporate

CXO / RSPP: $9.5 BnFANG / EGN: $9.2 BnBP / BHP: $10.5 BnECA / NFX: $7.7 Bn

Elliott / QEP : $2.5 B

RICE / EQT: $8.2 Bn

REPYY / TLM: $12.9 BnECA / AETHON: $7.0 BnWLL/KOG: $6.0 Bn

CHK / SWN: $5.4 Bn

11


$3

$23

$32

$9

$22

$11

$12

$20

$25

Q1 2019Q4 2018Q3 2018Q2 2018Q1 2018Q4 2017Q3 2017Q2 2017Q1 2017

Transactions 71 58 59 53 70 57 58 36 7

FANG / EGN: $9.2 BnBP / BHP: $10.5 Bn

CXO / RSPP: $9.5 Bn

Last 2 Years, A Closer Look – Deal Activity Troughed In Q2 2018 But Quickly Rebounded

(1) Source: PLS as of February 13, 2019. Includes deals with disclosed value greater than $5 MM.

ECA / NFX: $7.7 BnCHK / WRD: $4.0 BnDNR / PVAC: $1.7 BnXEC / REN : $1.6 Bn

Elliott / QEP : $2.5 B

U.S. E&P Deal Volume ($Bn) (1)

Asset Corporate

12


Recent M&A Market Activity Jefferies Transaction

Date Buyer Seller Amount ($MM) Location

01/07/19 $2,547 Permian

12/17/18 $176 Multi Region

11/19/18 $1,616 Permian

11/19/18 $735 Ark-La-Tex

11/7/18 $1,650 Bakken

11/6/18 $313 Permian

11/1/18 $7,700 Midcontinent

10/31/18 $260 SCOOP

10/30/18 $3,977 Eagle Ford

10/28/18 $1,716 Eagle Ford

10/17/18 $976 Permian

10/15/18 $300 Appalachia


10/08/18 $900 Gulf of Mexico

10/01/18 $480 Rockies

09/06/18 Multiple Buyers $972 Permian

09/05/18 Multiple Small Sellers $100 Gulf Coast

09/04/18 $1,865 Ark-La-Tex



08/21/18 $191 Multi Region

08/14/18 $9,200 Permian

08/14/18 $215 Permian

08/08/18 $1,245 Permian

08/06/18 $1,225 Gulf of Mexico

08/06/18 Mission Creek $117 Ark-La-Tex

08/02/18 $230 Midcontinent

07/31/18 $293 Rockies

07/26/18 $10,500 Multi Region

07/26/18 $1,900 Eastern

07/18/18 $152 Bakken

07/10/18 $155 Bakken

13


Comparison of Global Oil Resource PlaysXOM Tight Oil Production (1)

Supply Cost Perspectives – Owning Assets Offers Ability To Lower Supply CostsIndustry Example – ExxonMobil Growth Plan

(1) XOM analyst day presentation in March 2018.(2) Midland and Delaware Basin only.

Ramping Permian Production to 600 MBoe/d

by 2025 (2)

XOM upstream acquisitions in the

Permian since 2017:$7 Bn

Infrastructure investment to bring oil

and feedstocks to market:

$2 Bn

Commitment to build chemical, refining, lubricant and LNG facilities along the U.S. Gulf coast:

$20 Bn

14


Industry Example – ExxonMobil Growth Plan (Cont’d)

Upstream

Downstream

Highlights

Amassed 1.6 MM acres in the Permian; 7,000+ locations

Approximately 9.5 billion BOE net recoverable resource

~$5B cumulative free cash flow from 2018 through 2025 (1)

Generate returns >10% IRR at $35 / Bbl (WTI)

Costs down 70% since 2014

Highlights

$20 B U.S. Gulf Coast expansion program over next ten years

Overall North American and Asian capacity growing by 40%

Beaumont Expansion (online 2022)

─ 250 Mbpd crude expansion to 617 Mbpd (+65%)

─ Includes new 1.5 Mmtpa ethane cracker

Midstream

Highlights

Announced Wink to Webster JV with Plains All American and Lotus Midstream

1 MMbpd 36-inch crude pipeline from Permian to Gulf Coast

GasCrude

ExistingNGL

Under Construction

Source: ExxonMobil investor presentations.(1) Assumes $60 WTI oil.(2) As of February 15, 2019.

Exxon Acreage

39 3524 20 18 18 14 12 11 11

Permian Rig Count (2)

15


Finding and Development (1) $0.60

Plus: Transportation / Basis $0.14

Plus: Gathering, Treating and Fuel (2) $0.29

Plus: LOE & Field Taxes (2) $0.25

Henry Hub Delivered Costs $1.33

Plus: G&A $0.05

(1) F&D calculated as gross 2018 well cost / EUR pre-royalty burden for the 10,000’ Haynesville Red Type Curve.(2) GWI LOE per Company LOS for LTM period ending September 2018. (3) Company Research.

Natural Gas Supply Cost ExampleVine Illustrative Case Study: Highly Competitive Delivered Gas Costs

Key Points

Low delivered costs support class-leading EBITDA margins

$1.33/Mcf all-in costs to deliver gas to Henry Hub

Low cost feedstock gas for LNG liquefaction or petrochemical delivery centers

$1.33 / Mcf Delivered Costs Support Vine’s High EBITDA Margins

North American LNG Capacity (MMcf/d) (3)

Proximity to Gulf Coast Natural Gas Market Drives Competitive Economics

Louisiana

Texas

Carthage Perryville

Henry Hub

Enable

Arcadian

Gulf South

MEP

Regency

Tiger

Tennessee Gas

Vine / Brix Units

SoNat

Enable GGS

Vine / Brix Position

Only 125 Miles to Gulf Coast

16


Averages $50 -70 Billion per Year for Upstream

Has been as large as $100 billion per year

Large universe of upstream companies and assets available for sale

Many private-equity-backed companies seeking exits / monetizations

Ability to design “right sized” transactions

Buyers and Sellers Have Increased Flexibility and Creativity to Complete Deals

Cash up front always preferred by sellers

Alternatives can include delayed payments, carry of costs, performance incentives, etc.

Structures other than straight working interest sale also available

─ Joint venture

─ DrillCo

Deal Flow Decreases as Commodity Price Volatility Increases

Buyers don’t like price uncertainty and risks of volatility

Sellers don’t like to sell in down markets

Challenge is to complete deals during these cycles

U.S. Provides Abundant Availability of Transactions M&A Activity – Most Active in the World

Opportunity Size

Deal Structures

Price Environment

─ Asset vs. corporate sale

─ Cash plus stock for mergers

17


Three Key Components

1) Invest in great rocks (strong technical story)

2) Strategic alignment / cultural fit with partners

3) Appropriate entry cost

Shale Boom is a Decade Old, Still Very Early in Its Ultimate Life Cycle

Amazing cost and type curve (reserves per well) improvements since 2014

Price downturn caused companies to focus on returns on limited capital, not simply growth

Sweet spots in all the plays continue to be changing as more wells drilled, more data acquired

Past Investments in U.S. Were Made Early in Shale Life Cycle

Surprises included oversupply of natural gas and severe erosion of natural gas price

Buying assets without much data led to technical disappointments

Ultimate misalignment with operators as strategies changed

Reflections on Past Investments in U.S. by U.S. and Internationals

Key Components

Life Cycle & Evolution

Historical Shale Deals

18


Closing Comments – Key Aspects of Successful Transactions

Owning upstream assets provides advantaged supply cost

─ Instead of buying at prevailing WTI or NYMEX price, the “cost of supply” is finding and development + operating + acquisition costs

─ This could be appreciably less than spot price of the day

It may be desirable to build a portfolio of opportunities

─ Reduces concentration risk

─ Portfolio can be multiple assets in a basin or commodity diversification or investments in multiple basins

Bi-lateral discussions, where possible, are preferable to “public auctions”

─ Difficult for international companies to compete with U.S. companies on timeline

─ Ability to custom design an approach and deal structure

Having resources “on the ground” can be a plus

─ Understand technical and commercial aspects of U.S.

─ Build relationships with U.S. operators

─ Have highest possible exposure to U.S. deal flow, understand the market

Every company has more high quality ideas than money. They need partners and additional capital to grow asset value within capital limitations

─ Companies cannot outspend cash flow

─ Public markets are closed

─ Private markets are conservative

19

jogmec international seminar...murphy 91 84 175 52% centennial 37 25 61 60% carrizo 39 21 60 65%...

Documents