Finance & Investment Club Fall 2012 Senior Analyst: Jeremy Lim Junior Analysts: SeYoung Kim, Ricardo...
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Transcript of Finance & Investment Club Fall 2012 Senior Analyst: Jeremy Lim Junior Analysts: SeYoung Kim, Ricardo...
Finance & Investment Club
Fall 2012Senior Analyst: Jeremy LimJunior Analysts: SeYoung Kim, Ricardo Garcia, Jacob Rettig, Kotaro Miyagawa, Kevin Foo, Mel Chandiramani, Xunchao Chen, Joanna Orlova
Oil Drilling in US
2
Industry Definition - Oil Drilling in the US
Breitburn Energy Partners L.P.(NASDAQ: BBEP)
Bill Barrett Corp.(NYSE: BBG)
W&T Offshore Inc.(NYSE: WTI)
Approach Resources Inc.(NASDAQ: AREX)
Vanguard Natural Resources, LLC(NYSE: VNR)
Northern Oil and Gas, Inc.(AMEX: NOG)
Firms in this industry operate and develop oil field properties in United States. They may also operate oil wells on their own account.
Activities include exploration and production of crude petroleum; the mining and extraction of oil from oil shale and oil sands, sulfur recovery from natural gas; and recovery of hydrocarbon liquids.
Quicksilver Resources Inc.(NYSE: KWK)
Sources: IBISWorld, Yahoo Finance
3
Industry Overview
41.6%
58.4%
Natural Gas Crude Oil
Product and Segmentation (2012)
Sources: IBISWorld
Industry Revenue ($MM)
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
Revenue ($MM) Growth %
ForecastedOverall Outlook Positive
Revenue $345.9 B
Profit $159.1 B
Annual Growth 3.1%
Expected Growth 3.5%
Exports $6.2 B
Key Economic Drivers
World Price of OilGDP growth of ChinaYield on 10-year Treasury Notes
Key TrendsIncrease in World Supply & Demand for OilGrowth in China’s EconomyRising Crude Oil PricesShift Toward Domestic Production
RisksPrice VolatilityHigh Economy DependenceClose Scrutiny of Permit Application
4
13.3%
14.1%
9.7%9.0%
17.5%
9.9%5.6%
Oil Drilling Industry Breakdown – Market Cap. ($BLN)
Oil Drilling$4266.6B(2.27%)
Major Integrated Oil & Gas $96,462.1B(51.29%)
Basic Materials $188,060.4B
(100%)
Breakdown By Market Cap1
1Total Market Cap. = $7,369,090,000; Sources: Yahoo Finance
AREX $843.13 MVNR $1.63 BNOG $922.51 MKWK $519.05 M
WTI $1.24 BBBEP $1.31 BBBG $904.4M
5
Oil Drilling Industry Breakdown – TTM Revenue ($BLN)
Sources: Companies 10-K report
Oil, Natural Gas & NGLs Total Natural Gas Equivalent (bcfe) Others
7
General Business Model
Sources: Datamonitor
Recovery
Selling & Distribution
Transportation
Production Sector
Gathering system
Searching & Exploration
Consumers
MarketingRefinery
Upstream
Midstream
Downstream
8
Industry Revenue Generation
Sources: Datamonitor, IBISWorld
Gathering System
Pump & Compressor
Manufacturing
Oil & Gas Field Services
Metal Pipe & Tube
ManufacturingOil DrillingExploration
Supply Side
Seismic Survey
Tertiary Recovery
Secondary Recovery
Primary Recovery Recovery
9
Trend 1a – Increasing World Supply and Demand for Oil World supply and demand are increasing
together at CAGR of 0.9% and 1.4% respectively
World oil consumption grew by an estimated 1 million bbl/d2 in 2011
World consumption growth of about 700,000 bbl/d in 2012 and 900,000 bbl/d in 2013
Countries outside the OECD driving global consumption growth
China’s annual consumption growth projected to increase from 330,000 bbl/d in 2012 to 430,000 bbl/d in 2013
2 bbl/d = Barrels per day; Sources: US EIA
2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q178
80
82
84
86
88
90
92
World SupplyWorld Demandm
illio
n ba
rrel
s pe
r day
CAGR: 0.9%
CAGR: 1.4%
Forecasted
2008 2009 2010 2011 2012 2013
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
95
100
105
110
115
120
Others United States China
y-o-
y ch
ange
, mil
barr
els
per
day
World GDP (right axis) Forecasted
Oil consumption Vs. World GDP
World Supply and Demand of Oil
10
Trend 1b – Growth in China’s Emerging Economy Rapid industrialization in China bolstered
demand for oil and gas
China increases energy demand as they sustain economic growth
Growing at a CAGR of 6.5% as a proportion of the world’s consumption and is currently responsible for 20.2% of global consumption
Natural Gas production more than tripled over the last decade
Increase consumption and increase in production drives prices up
Growing portion of OPEC’s output is going to China
Sources: US EIA, World Bank, IEA
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
500000
1000000
1500000
2000000
2500000
Energy Production (kt of oil equivalent)
CAGR: 8.6%
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%
5%
10%
15%
20%
25%
China's oil consumption/World consumption
CAGR: 6.5%
11
Trend 2 – Rising Crude Oil Prices
Drop of 42% in 2009 was due to the recession and the plummeted demand Rising prices have positive effect on industry revenue and profit Expected to grow over 2013 and beyond and remain at historic high
Sources: Platts
Spot Crude Prices vs. Growth rate
2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
20
40
60
80
100
120
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Spot Crude Prices Growth Rate %
USD
per
bar
rel
12
Trend 3 – Shift Toward Domestic Production Oil imports will drop from 10 million to 4 million barrels
a day – significant efforts to improve energy efficiency in the transport sector
Faster-than-expected development of hydrocarbon resources locked in shale and other tight rock formations have started to be unlocked by new combination of 2 technologies – hydraulic fracturing and horizontal drilling
US need for oil imports from Middle East will fall to almost 0 in the next decade
US energy independence could redefine military alliances, with Asian countries replacing US in securing shipping lanes from Persian Gulf
Kevin Book, managing director at Clearview Energy Partners LLC “Now, we have a different reality – the age of energy adequacy.”
Sources: IEA, WSJ
Oil production will peak at 11.1 million barrels a day in 2020, from 8.1 million in 2011
13
RisksRisk 1: Volatile in crude oil prices Roller-coaster industry revenue and profit Overall growth in industry revenue disguises high revenue volatility Ripple effects from tensions throughout Middle East, an influential variable of volatility, remain
threats – government transitions in Tunisia and Egypt
Risk 2: High economy dependency Movements in GDP affects revenue and prices of crude oil directly Follows a lagging indicator with a correlation coefficient close to 1 Eg. 2008 Financial Crisis
Risk 3: Close government scrutiny of permit application Hampers companies from exploration and production activities Environmental and safety issues – oil spills into the ocean and casualties from blow-out and
explosion Eg. Explosion of BP’s Deepwater Horizon oil platform in the Gulf of Mexico on April 20, 2010
Sources: WSJ, IEA, IBISWorld
14
Recommendation
Oil Drilling Industry
Increasing World Supply and
Demand for Oil
Rising Crude Oil Prices
Shift Toward Domestic
Production
TREND 2TREND 1a TREND 3
Key Industry Drivers/Trends
INDUSTRY RATING:
POSITIVE
Growth in China’s Emerging Economy
TREND 1b
15
Q & A
Industry Definition Industry Overview Market Cap. Breakdown Companies Revenue Breakdown Geographical Breakdown General Business Model Industry Revenue Generation
Trend 1a – Increasing World Supply and Demand for Oil
Trend 1b – Growth in China’s Emerging Economy
Trend 2 – Rising Crude Oil Prices Trend 3 – Shift Toward Higher Domes
tic Production Risks Recommendation
16
Conclusion
Profit has increased over the past 5 years due to combination of asset divestiture and increasing prices and will continue doing so.
Tensions in Middle East and strong growth in emerging countries will place upward pressure on crude oil prices, benefitting industry revenue
The Obama Administration believes that increased shale gas development will reduce greenhouse gas emissions.
Risks to Overcome:• Government’s moratorium on offshore-drilling is unlikely to be long term because of the strong
need for crude oil and tax revenue to address deficit issues.
• Must stay abreast of global influence on price volatility