Outlook for the Oil and Gas Industry

Outlook for the Oil and Gas Industry

1Spears & Associates

VMA Leadership Forum

End-User Industry PanelPhiladelphia, PA

Spears& Associates

Tulsa, OK

March 2017

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Global oil consumption is forecast to rise at a 1.4% CAGR over the 2016 to 2020 timeframe, reaching 102 million bpd by the end of the decade

• Gasoline use may see “peak demand” by 2025, but demand associated with aviation and truck transport and petrochemical feedstock use is expected to continue to grow.

• Outside of North America, relatively little new production is slated to come onstream over the 2018-2020 timeframe.

Outlook for the Oil and Gas Industry: Market Drivers

Spears & Associates

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World Oil Demand (million bpd)


OPEC’s idle crude oil production capacity is currently 3.5-4.0 million bpd

• “Unplanned outages” – conflict, accidents, etc. – represent 50% of the total• Long-term - will OPEC tolerate idle production at this level?

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OPEC Idle Crude Oil Production (mil bpd)

Unplanned Outages

Surplus Capacity



US oil production peaked in Q2 2015 and declined through Q4 2016 but has since begun to rise in response to increased drilling activity

• US oil production is forecast to increase 35% to 3.2 million bpd from 2016-2020.• US output increase to drive growth in liquid line pipeline construction.

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US Oil Production (million bpd)

Offshore

Alaska

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Oil prices have recovered in response to OPEC’s agreement to reduce production

• With the recovery in oil prices US operators are quickly returning to plans to grow oil output• Investors are increasingly worried that by Q4 2017 a further increase in oil prices beyond $60/bbl

may face a significant resistance due to rising US oil production.


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Spot WTI Price ($/bbl)


Warm winter weather has prevented overall US gas demand from growing for the past two years

• US gas use expected to grow 2.0-2.5% going forward due to industrial and power sectors

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US Gas Demand (bcfd)



US gas production has fallen for five straight quarters after having grown at a 3.5% CAGR from 2005-2015 due to new supply from gas shales

• Gas production from new oil wells (“associated gas”) is expected to lead overall US gas production higher going forward

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US Gas Production (bcfd)



The US is on track to become a net gas exporter in 2018

• US output increase expected to drive growth in pipeline construction supporting gas exports.

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US Gas Imports / Exports (bcfd)

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US spot gas prices are projected to recover due to growth in both gas demand (power, industrial sectors) and gas exports (LNG, pipeline)

• Long-term prices to average around $3.50/mmbtu as gas supplies in the US and abroad remain plentiful


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US Spot Gas Prices ($/mmbtu)

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North American drilling activity is poised to jump 56% in 2017 to a total of about 1,000 active rigs and 27,500 new wells

• Breakeven prices have been reduced to below $50/bbl in many basins due to reduced pricing and increased efficiency; however, some of the cost savings extracted from the oil services sector over the last two years will be reversed in 2017 as activity and the demand for people and equipment increases.

Outlook for the Oil and Gas Industry: Drilling Activity

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North American Rig Count

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Drilling activity outside North America is forecast to rise 3% in 2017 to about 950 active rigs and 9,500 new wells

• Slower rate of recovery outside of North America due to investor disfavor (long project lead times) and “above ground” issues (e.g., taxes, politics, infrastructure)

Outlook for the Oil and Gas Industry: Drilling Activity

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International Rig Count

Outlook for the Oil and Gas Industry: Commercial and Technical Trends

Demand for pressure control equipment in the oil and gas industry is tied to the type of wells being drilled

• ~80% of all US rigs are drilling horizontal wells and over 80% are drilling oil wells.• Total capital cost of a multi-horizontal well “pad” is now in the range of $25-$50 million,

incentivizing operators to use largest/”best” vendors.

US Rig Count by Wellpath

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US Rig Count by Type of Well

Oil Gas

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The global surface equipment market is projected to increase 20% to $4.2 billion in 2017

• Category includes wellheads, Christmas trees, and valves


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Global Surface Equipment Market (Mil)

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The global subsea equipment market is projected to remain around $14.0 billion in 2017

• Offshore exploration and development activity not expected to bottom until later this year


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Global Subsea Equipment Market (Mil)

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Summary

• Q1 2016 marked the bottom of the oil price cycle, with further price gains expected over the next 2-3 years as the market tightens due to continued oil demand growth and falling inventories.

• Drilling activity in the US and Canada is expected to recover sharply as oil prices move higher.

• The global oil market has entered one of the most transformative decades in its history as North America becomes the world’s swing producer, with implications for commodity price volatility.

• Cost management and capex discipline will be key challenges for oil and gas companies.

• Horizontal drilling/hydraulic fracturing will be the primary methods used by North American operators to manage cost and geological risk.

• Technical and operational innovation will be key factors driving the industry in this environment.

• Optimizing resource recovery from gas shale/tight oil formations is emerging as a key issue

Outlook for the Oil and Gas Industry: Highlights

Spears & Associates

Outlook for the Oil and Gas Industry

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