How to Profit and Survive in Drilling Gary Howorth Founder 2009 Trends in the Offshore Drilling Rig Market IBC Global Conferences 29th September 10/1/2009 © 2009 Energy-Redefined. All Rights Reserved. . 1 Introduction – Points to be Covered Overview of the current drilling market Future views - What might the dynamics look like in the next 5 years? - What about carbon how will that affect the oil & gas industry and drilling in particular? - What will oil & gas prices do to the market? - What might technology and cost saving do to the business? Lessons from downturns from both within and outside of the industry - What can we learn from downturns and apply now? What potential business models does this suggest? - Should you merge, innovate, cost reduce or something else? So what does it mean? - the way forward for the drilling industry The Order of Play So how do your customers the oil companies view this? What about GDP and other prices e.g. Steel prices So what does that mean for oil prices & the Offshore Drilling Industry Carbon & Carbon Capture & Storage (CCS) Technology So what have others done in a downturn/recession – can we learn anything Options and Alternatives The Way Forward? Conclusions Industry Quotes Our analysis shows that given the recent cost climate present day commodity price levels simply do not allow the Majors to continue to grow the business and pay substantial shareholder returns, - Neil McMahon of Sanford C. Bernstein While the drilling rig count, are down sharply from last year and continue to fall, the key question remains when we will get an upturn in Gas/Oil demand from recovering automobile and housing industries.. Once prices recover, then drilling should resume, The challenge for the oil service industry is to gauge the number of drilling rigs that will be needed once we enter the industry recovery phase. May need considerably fewer rigs to restore a relative balance between supply and demand that is needed to support reasonable pricing. Is this right? Oil Company Financials Sources & Uses of Cash 60,000 $70/bbl and large budget cuts 40,000 30,000 20,000 10,000 Acquisitions Buybacks & other Development Capex Operating Cash Flow Financing - Outflow Disposal Proceeds 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 0 2006 $millions 50,000 Dividends Financing - Inflow Oil Company Free Cash-flow: The Customers Pain Free Cashflow 20000 15000 10000 $70/bbl 80$/bbl 5000 Minimum Level of Cashflow? 0 20 26 20 24 20 22 20 20 20 18 20 16 20 14 20 12 20 10 20 08 -5000 $12 Billion Dev CPX budget, $2 Billion Expro Many Oil companies in Pain at 70-80$/bbl – Will affect drilling Complex Interactions forming Prices and impacting Drilling Consumer Confidence etc Labor Steel concrete etc GDP Growth Oil Company Cashflows Costs Taxes Company Behavior Oil Demand Oil Price Supply Ex Rates Future Production from Expro Wells Drilled 10/1/2009 © 2009 Energy-Redefined. All Rights Reserved. 7 Govt Tax changes resulting in different regional focus So What About the USA China Can no longer behave like China because the US intends to behave like china FT Greater exports and a smaller current account deficit – less dependence on foreign investors to bail out the financial sector Larry Summers Probably means impact on Japans , Germany’s and China’s exports (and current surpluses ), & Dollar Depreciation Has an impact on the dollar oil price GDP Growth? Consensus View China R Historical Source FT from various forecasts as credited But where is it really going? Saving Grace -Steel Prices? GDP growth has a great impact on steel prices as well as other input costs How does China and US Assumptions Affect Oil Prices The order in which oil prices occur matters Cost levels and GDP assumptions are important Oil Price and Well Forecast under a Slower Growth Assumption 90 80 70 50 40 30 20 Utilization 10 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 6000 5000 Asia Middle East Caspian SS Africa N Africa Europe Lat am NA 4000 No of Wells $/bbl Real 60 3000 2000 1000 0 2007 2008 2009 2010 2011 2012 2013 2014 Complex Interactions forming prices and impacting Drilling – Now with Carbon Consumer Confidence etc Labor Steel concrete etc GDP Growth Oil Company Cashflows Costs Company Behavior Oil Demand Oil Price Supply Ex Rates Steel Industry etc Investments/ Technology Emissions Carbon prices Carbon legislation /rules regulations Weather 10/1/2009 Carbon market Structure Politicians Subsidies/Tax © 2009 Energy-Redefined. All Rights Reserved. Company Behavior 13 Taxes Carbon - $15/CO2e te Small impact – our models show an increase in oil price of 80 cents/bbl Typical oil company might gain $100 -400 million per year - not going to change drilling levels much Carbon prices likely to reduce GDP by ~ 0.15% - resulting in a oil price reduction of up to 7 $/bbl ie ~ 10% Higher oil prices of 100$/bbl could result in a reduction in demand through the use of alternative technologies and efficiency gains. This could further reduce oil prices by as much as $20/bbl Estimates by Energy-Redefined Carbon Storage Recent Study shows that Scotland has an extremely large CO2 storage resource. This is overwhelmingly in offshore saline aquifers (deeply buried porous sandstones filled with salt water) together with a few specific depleted hydrocarbon fields. The resource can easily accommodate the industrial CO2 emissions from Scotland (1/10 of the UK) for the next 200 years. There is very likely to be sufficient storage to allow import of CO2 from NE England, Total potential CO2 capacity in the range 4,600 to 46,000 million tonnes But what does that mean for Drilling? CCS Well Potential - UK Estimate by Energy-Redefined - Assuming 4600 million tonnes of capacity US CCS Potential US market is 60-80 times bigger But mostly onshore But even with 20% offshore - 500 wells per year potential – a very different market !!! US has more storage than it needs from its own industrial output Not all Economic right now!!!!! So this market could be 20% of the world offshore drilling market and maybe provide bigger margins? Impact of Technologies Impact of Technology over Business As Usual % Reduction 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Conventional Technologies P10 Conventional Technologies P50 Estimates by Energy Redefined 20 20 19 20 18 20 17 20 16 20 15 20 14 20 13 20 20 12 Other Technologies Downturns are times when Smart People make Fortunes 1999:British Petroleum's completed acquisition of Amoco Corp. for $56.5 billion, generated some $18 billion in value over the longer term as oil prices have moved up Service Companies: $26 billion of mergers and acquisitions in 1998/99 - representing some ~25% of the sector net worth. Cost savings probably generated some $3 billion of value. In 1999 the Drilling Companies Sedco and Transocean merged creating a $3.2 billion entitity. Driven by cost Savings but created ~$5 billion of value because of higher rig prices Mergers & Mergers & risk risk taking taking Frontline – John Fredriksen made his fortune during the Iran Iraq wars in the 1980s when his tankers picked up oil at great risk and huge profits. He landed squarely in the sweet spot of the tanker cycle, with the largest fleet of ships. Was counter cyclical creating $1 billion Recessions Recessions also also create create great great companies companies Bill Hewlett and Dave Packard founded a great company in 1939 from their Garage with innovative products – Created ~$60 billion Chester Carlson patented Dry copying process to create Xerox in the 1930’s- ~$4 billion Revlon – quality product with customer focused marketing – created ~$150 million Texas Instruments: Karcher and Mcdermott resigned from Amerada petroleum company in 1930 to set up Geophysical Service Inc. (later TI). Created $28 billion of value starting with a new seismic technique Growth Opportunities Increase during Economic Downturns It is counter-intuitive but research confirms that economic downturns are generally the best times to • • • • • implement growth initiatives create shareholder value. that the most effective business strategy during boom times is to divest assets or implement similar retrenchment activities. The Great Depression created more millionaires that any other period of time in US history! Unfortunately, and perhaps not surprising, most companies do the exact opposite! But But How? How? Key themes emerge: • • • • • • Efficiencies Deals – buy low sell high Innovation Customer (government) focus Risk taking and opportunity seeking – counter cyclical “War Chests” So What does it Mean? Rigs under-utilized for many years in slow growth scenarios How do we find alternative uses for them • CCS? Solutions Understand your customers’ business. • You must understand your business almost as well as they do • The more you help them, the more you help yourself Be creative and Innovative • There are plenty of opportunities for us to challenge the way we drill wells • Look for profitable alternatives. 10/1/2009 © 2009 Energy-Redefined. All Rights Reserved. 21 Opportunities / Alternatives/ Trends CO2 Storage Production optimization – integration of drilling Rig optimization - logistics Convert the rigs to provide some other function • • • • GTL Transportation Accommodation Production systems Cost cutting Seismic while drilling ……. Some Some suggestions suggestions Short Term Survival Options Withdrawal Withdrawal Liquidation Liquidation Divest Divest Management Management buyout buyout Subcontract Subcontract outsource outsource Consolidation Consolidation Decline Decline or or grow grow with with market market Buyout Buyout & & shutdown shutdown JV/Partnering JV/Partnering Cost Cost cutting cutting Costs/Layoffs/Stacking Costs/Layoffs/Stacking ?? Increased Increased focus focus on on key key sector sector Increase Increase quality quality productivity productivity Buy Buy Expert Expert Co Co Technology/Innovation Technology/Innovation New New Sector, Sector, New New Technology, R Technology, R & &D D Buy Buy key key technologies technologies or licence or licence Partnering? Partnering? xxxxx xxxxx xxxx xxxx Short Term Survival Options Customer Customer focus focus Liquidation Liquidation Divest Divest Management Management buyout buyout Innovation Innovation Decline Decline or or grow grow with with market market Buyout Buyout & & shutdown shutdown Alterantive Alterantive Uses Uses Costs/Layoffs/Stacking Costs/Layoffs/Stacking ?? Prod Prod opti opti Increase Increase quality quality productivity productivity Buy Buy Expert Expert Co Co CO2 CO2 New New Sector, Sector, New New Technology, R Technology, R & &D D Buy Buy key key technologies technologies or license or license Subcontract Subcontract outsource outsource xxxx xxxx Partnering? Partnering? xxxx xxxx So what’s the way Forward Key - look for alternatives that intersect trends Doesn’t lie in the conventional approaches of acquiring or cost cutting New Sector approaches have probably have most promise but need funding Failing this • Profit management not cost cutting • Build a war chest for the next downturn Conclusions • Oil companies in Cash-flow pain – 80$/bbl + needed • Oil prices greatly affected by assumptions on US and Chinese health • Oil prices could remain low for many years under a slow growth scenario • Carbon will not affect oil prices that much per say but will affect demand. At high oil prices this effect could be large. • Utilization of rigs could remain low !!! • Alternative options and uses required to improve profitability • CCS Drilling could add some 15-20%to the drilling stock • Key seems to be to have a war chest for future downturns and to “build alternative business lines” Thank You [email protected] www.Energy-Redefined.com 10/1/2009 © 2009 Energy-Redefined. All Rights Reserved. . 27