2015 State of the Industry

THE ENERGY INDUSTRY: WHAT’S NEXT

Introduction: Chairman’s Letter

As part of our commitment to knowing our energy clients’ business, we collect insights from some of the best minds in the industry.

This understanding contributes to how we deliver counsel that

exceeds our clients’ expectations and our ability to help them

make strategy decisions about their business.

The information in this ebook has been invaluable to us and

to our clients, and we hope that it will benefit you as well.

Read some of the trends and best practices gathered from

industry-leading clients and our own energy team. If you find

value in it and would like to hear more, join us for our next

BoyarMiller Breakfast Forum.

Best regards,

Chris Hanslik, Chairman

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TABLE OF CONTENTS

Practice Leaders

Expert Insights

Houston Downturn Means More Litigation

State of the Industry

REGULATORY & POLITICAL CLIMATE: ONGOING DEBATES

TRENDS IN ENERGY SERVICES: THIS DOWNTURN IS DIFFERENT

THE PRICE OF OIL: A LONG RECOVERY AHEAD

22

STATE OF THE

ENERGY INDUSTRY

Projecting the “shape” of the downturn helps energy industry leaders and investors better understand how steep the drop-off will be and when they can expect recovery.

1980s 2009 TODAY

33

EXCESS

CAPACITY

YEAR-OVER-

YEAR CHANGES

IN DEMAND

AVAILABILITY

OF CAPITAL

BANK ISSUES

& WORLD

ECONOMY

S&P 500

15.1 MMb/d

Demand declined

1.6 MMb/yr for previous 5 yrs

Very low

Distressed

700

4.3 MMb/d

Demand grew

1 MMb/yr for last 5 yrs

High

Healthy but cautious

2,100

today vs. 1985 today vs. 2009

COMPARING DOWNTURNS

DOWNTURN STATS

THE DOWNTURN SHAPES

ND WORST

IN 40 YEARS2 SHARPEST

DECLINE IN RIG COUNT

IT’S ALL ABOUT

SUPPLYThis is expected to be the 2nd worst down cycle in 40 years

The U.S. rig count has fallen more sharply than in any other U.S. down cycle

This is a supply-induced down cycle

1985 20092015 2015

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EXPERT INSIGHTS

Regulatory & Political Climate: Ongoing Debates

“We will see the idea of exporting U.S. oil gaining traction, but there is not enough understanding of the issue right now. Maybe the next admin-istration will get more serious about it, but it means a lot of education needs to take place.”

WHAT’S NEXT?David Pursell, Managing Director & Head of Securities, Tudor, Pickering, Holt & Co.

• ENVIRONMENTAL PROTECTION REGULATIONS CONTINUE. Enforcement of the Endan-

gered Species Act, which has cost

the Department of Justice more than

$15 million in attorney fees in the past four

years, will remain constant. Also expect

ongoing rail regulation, despite the fact

that the amount of crude shipped by rail

has declined for several years.

• BEWARE HEADLINE-GRABBING ACTIVITY. Investigation of the association of seismic activity

with water injection continues, largely because it is a topic that stirs the public. Although

water injection does not cause seismic activity, expect it to be explored further.

• HYDRAULIC FRACTURING OPPONENTS WILL NOT GO AWAY. Although some minor regula-

tions about produced water storage can be expected, nothing game-changing in

the fight against hydraulic fracturing is in the pipeline. Still, assume that opposition to

fracturing is here to stay.

D.C. WANTS ÛREGULATION: ENDANGERED SPECIES ACT RAIL REGULATION

Regulatory & Political Climate: Ongoing Debates, continued

55

EXPERT IN

SIGH

TS

• HOPE FOR POSITIVE REGULATORY CHANGES. Because pipelines are proven

to be the safest mode of crude transpor-

tation, the Keystone pipeline will – eventu-

ally – pass. We are hopeful that Mexican

energy reform will also happen, as it offers

much opportunity both for Mexico and for

the U.S. companies doing business there.

As Managing Director and Head of Securities, David Pursell is responsible for Tudor, Pickering, Holt & Co.’s analysis of global oil & gas markets, including inventory and price forecasts, supply/demand modeling and rig count/pro-duction relationships. He is a board member of private energy companies Oxane Materials and Unconventional Gas Resources. He holds a BS and MS in Petroleum Engineering from Texas A&M University.

PREDICTION: KEYSTONE PIPELINE WILL PASS

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Trends in Energy Services: This Downturn is Different

“We had a record M&A backlog in 2014, so we think there is a lot of pent-up demand. We will begin to see deals that are more appropriate for the current market, so there is a lot of activity coming, but it will probably be slower before it gets better.”

WHAT’S NEXT?Matthew G. Pilon, Managing Director, Simmons & Company International

• RISE OF PRIVATE EQUITY FOCUSED ON ENERGY. One of the key trends of the last few

years is the rise of private equity focused on energy. The total private equity energy

funds raised since 2010 is about $88 billion – compared to just $8 billion of total public

offerings for the energy services and equipment sector. There is a ton of capital out

there targeting energy.

• GROWTH IN PRIVATE EQUITY INVESTMENT HAS CHANGED THE MARKET. As a result of this shift

toward private equity funding, companies have more exit options and less need for IPOs

– instead, they transition to the next tier of private equity firm. With all this capital, there

is high interest in operating partners and managers. We also see the industry becoming

more sensitive to capital markets.

• M&A ACTIVITY HAS DROPPED – AND WILL DROP FURTHER. Q1 2015 has already dropped

significantly, and can be expected to be slow in the next quarters as well, hitting bottom

in Q2 or Q3. Many deals from 2014 have been put on hold, and it will take time to fill the

pipeline with deals more appropriate to the current environment. Those deals are com-

ing, but the rate of deal announcements will get slower before it improves.

• THIS DOWNTURN IS DIFFERENT THAN THOSE BEFORE. The current downturn is absolutely not

like the 1980s, and though it looks similar to the drop in 2009, the industry is in a much

better situation in terms of rising demand, available capital, and the health of banks

and the economy than it has been in the past.

Matthew G. Pilon is a Managing Director with Simmons & Company International. He has focused exclusively on the energy services and equipment sector since joining the firm in 1994. A former Naval Officer, he holds a BS in Computer Science from the U.S. Naval Academy, an MA with distinction in International Relations from the University of Kent in England, and an MBA from Harvard Business School.

EXPERT IN

SIGH

TS

77

The Price of Oil: A Long Recovery Ahead

“We have to slow U.S. oil production growth close to zero – not production, but production growth.”

WHAT’S NEXT?James K. Wicklund, Managing Director – Energy Research, Credit Suisse LLC

• SECOND-WORST DOWN CYCLE IN 40 YEARS IS SUPPLY-INDUCED. Oil prices have been cut in

half, and no one is immune to this supply-induced down cycle. This downturn differs from

those before because demand can “bounce back,” as it did in 2009; however, changing

supply to raise oil prices will require convincing E&P companies to stop growing production.

• U.S HORIZONTAL RIG COUNT NEEDS TO DROP – AND STAY DOWN. Not only does the U.S.

horizontal rig count have to drop by 30-35%, but it also needs to stay there for four to six

quarters in order to get U.S. production growth to zero – the target number to get prices

back on track.

• EXPECT A “BATHTUB”-SHAPED RECOVERY. The world will not need U.S. production growth

and rig count at Q4 2014 levels for four more years. This means that once the industry

has bottomed, it will likely stay down for one to two years, creating not a V-shaped or

U-shaped recovery, but a “bathtub”-shaped recovery.

• LOW OIL PRICES ARE NEEDED TO GOVERN PRODUCTION GROWTH. In the past, oil prices

were raised to stimulate production so that supply could meet demand. Now, oil prices

need to stay low in order to limit production growth. It is very unlikely that 2015 will end

with a commodity price high enough to allow production growth at 2014 levels again.

Expect to be in a $60 oil world for the next two years.

James K. Wicklund spent several years in the oil and gas industry, working in geophysics and engineering in London, Singapore, Australia and the U.S. before joining the financial services industry as a research analyst covering the Oilfield Services sector. As the senior Oilfield Services analyst and Managing Director at Credit Suisse LLC, he has been recognized with various awards, including No. 1 rankings in Institutional Investor, Greenwich Surveys and the Wall Street Journal’s “Best on the Street.”

EXPERT IN

SIGH

TS

U.S. OIL PRODUCTION GROWTH NEEDS TO BE

NEAR ZERO

PROTECT YOURSELF: HOUSTON DOWNTURN MEANS MORE LITIGATION

88

Chris Hanslik & Andrew Pearce, BoyarMiller

In the face of a downturn in the city’s economy driven by crude oil trading below $60, Houston has had cautious optimism because of the quick recovery seen in 2009 – but this down cycle may be different.Crude oil has already dropped farther than it did in 2009, and it may hover in the $60

range for two more years. Houston is already feeling the collateral damage, with 74,000

jobs already lost and more predicted. Beyond jobs, the real estate market in Houston will

also be impacted, given that about 58 percent of office space in Houston is directly or

indirectly related to the energy sector.

The effect of the downturn in oil and its impact on the oilfield services industry, employ-

ment, and real estate, will likely be an increase in litigation.

When the economy is strong, the desire to incur litigation costs and dedicate time to col-

lection efforts can take a backseat to a company’s focus on the growth of its business

through new customers, projects and opportunities. But as those opportunities begin to

diminish, the focus turns back to outstanding account receivables.

We have already seen a number of lawsuits that arose out of demand letters sent months

earlier – cases in which the parties did not reach a resolution, but left the matter for

another day. Now, that day has come.

Similarly, we also see the domino effect of customers who purchase product on a spec

market with the goal of flipping the product for a profit. Yet markets in the energy sector

can disappear quickly – and when they do, customers may refuse to take delivery of what

they previously ordered. The seller is now faced with mitigating its damages by selling

product into a depressed market, if it can sell the product at all. This issue is compounded

when the seller, in turn, is unable to pay its own suppliers given the default of the buyer.

The terms of the parties’ agreements – whether by contract, purchase order, or some other

arrangement – then become critically important.

99

We are already seeing the front-end impact of reductions-in-force, defaults on contractual

agreements, and other disputes arising out of this downturn. Law360 reported in April 2015

that the “steep drop in oil prices over the past year will spur an increase in wage-and-hour

suits against companies in the energy sector, as laid-off workers turn to attorneys who

are on the lookout for soft spots – like questionable classifications of workers as overtime-

exempt or independent contractors – that could be the basis of lucrative collective

action claims.”

As we move deeper into this downturn, one important note to consider is whether compa-

nies may avoid litigation as part of their effort to reduce their operating costs. The recent

reduction in forces are clear signs that companies are already seeking to reduce costs,

and the uncertain nature and expense of litigation may dissuade companies from filing

suits in smaller matters.

The factors contributing to this down cycle are estimated to take six quarters to fix, and a

more favorable level of economic activity could take two to three years. In the meantime,

it will be a tough environment, with the industry under a lot of pressure.

Until turnaround takes place and Houston begins to recover, properly reducing workforces,

knowing your contractual termination rights, and fully exploring work-out options become

increasingly important.

Houston Downturn Means More Litigation, continued

Chris HanslikFirm Chairman

Represents companies in all aspects of the energy sector,

both domestically and internationally, in disputes ranging

from breach of contract and fraud to misappropriation

of trade secrets and employment-related disputes.

Has secured favorable results in both state and federal

courts, as well as international arbitration proceedings

for energy clients.

Steve KestenChair, Business Group

Represents multiple international energy and energy

services clients with outbound expansion (i.e., U.S. compa-

nies expanding internationally) and inbound expansion

(international companies expanding to the U.S.), including

start-up expansion or expansion by acquisition, as well as

in connection with financing and merger and divestiture

transactions.

Gary MillerFounding Shareholder, Business Group

Represents numerous domestic and offshore-based com-

panies in connection with acquisitions and divestitures,

financings, joint ventures and general corporate matters

in the United States.

ENERGY

PRACTICE LEADERS

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Bill BoyarFounding Shareholder, Business Group

Represents the various parties involved in the acquisition,

disposition, capitalization and financing of national

and international businesses. Served as lead counsel

for numerous complex, multi-party acquisitions and

project financings with significant experience in corporate

finance, mergers and acquisitions, private equity and

structure finance.

Gus BourgeoisShareholder, Business Group

Represents clients doing business domestically and interna-

tionally in connection with mergers and acquisitions, finance

and multi-jurisdictional transactions, including negotiation

of contracts for sales of goods and services (including mas-

ter service agreements), technology licensing, joint venture

agreements, and employment agreements, with significant

experience in assisting foreign businesses in establishing

and growing their U.S. operations.

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Practice Leaders, continued

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