22
David Pursell November 14, 2012 **IMPORTANT DISCLOSURES ON PAGE 20 OF THIS DOCUMENT** CFA Society Commodity Thoughts
David Pursell
November 14, 2012
**IMPORTANT DISCLOSURES ON PAGE 20 OF THIS DOCUMENT**
CFA Society
Commodity Thoughts
Summary
2
Oil prices
Near term
Middle East tension
Saudi production
China/global demand
Long term
Supply growth lags demand growth
Supply and demand must balance
Price is the equalizer
Marginal consumer sets the price
Natural gas
Too much supply
Rig count decline should fix this in 2013
Gas – coal - demand
NGL
Way oversupplied
Post election impacts?
Taxes
n
Ø
Ø
Ø
Ø
Ø
Ø
§
n
Ø
n
n
?
?
?
?
?
?
Futures, Are They Accurate?
3
-60%
-30%
0%
30%
60%
90%
120%
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11NYM
EX St
rip,
Pred
icte
d ÿÿ
ÿÿÿÿ
ÿÿÿÿ
ÿÿÿÿ
0}_-
àÿ-A
ctua
l, e
FØÌÂ
þþýÿ
ÿÿþÿ
ÿþÿ:
}_-à
ÿ%
Strip Too High
(Strip Too Low)
“You can’t lose what you don’t put in the middle” Mike McDermott, Rounders
Crude Prices
4
$50
$60
$70
$80
$90
$100
$110
$120
$130
$140
Brent
WTI
Saudi 9.8 mmbpd
Iraq ramping 3.0 mmbpd
U.S. supply +0.6 mmbpd y/y
Demand concerns Europe/China
n
n
n
n
OECD Inventories
"That's mathematics, son. You can argue with me, but you can't argue with figures“ Foghorn Leghorn
2,200
2,400
2,600
2,800
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5
Total OECD InventoriesM
illio
n t
MS
Bold
Barr
els
t M
S Bo
ld
2011
Max
Min
Norm
2012
Source: IEA, TPH
6Source: Bloomberg, TPH
Location, location, location
6
“This is U.S. history. I see the globe right there” Jeff Spicoli, Fast Times at Rigdemont High
Oily Basin Economics – price required for 10% ATROR
7
Current WTI = $85/bbl
May-12 Rig Count
Source: TPH Energy Research
8Source: EIA
(excludes Alaska)
Onshore Oil Production
8
2,500
3,000
3,500
4,000
4,500
5,000
Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012
thou
sand
ba
rrel
s
per d
ay
“If I had to do it all over again, I’d still hit that shot” Roy McAvoy, Tin Cup
U.S. Onshore Oil Production
Base Case Supply/Demand
9
Demand growing faster than non-OPEC supply
DEMAND 2010 2011 2012 2013 2011 2012 2013 2011 2012 2013
OECD
Total OECD 46,914 46,413 46,052 45,794 (501) (361) (258) -1% -1% -1%
NON-OECD
Total NON-OECD 41,208 42,355 43,489 44,802 1,148 1,133 1,313 3% 3% 3%
TOTAL DEMAND 88,122 88,769 89,541 90,596 647 772 1,055 1% 1% 1%
NON-OPEC SUPPLY 2010 2011 2012 2013 2011 2012 2013 2011 2012 2013
OECD
Total OECD 18,911 18,937 19,833 20,592 26 896 758 0% 5% 4%
NON-OECD
Total NON-OECD 29,861 29,737 29,513 29,722 (124) (224) 209 0% -1% 1%
TOTAL NON-OPEC SUPPLY 52,685 52,629 53,103 53,764 (55) 473 661 0% 1% 1%
OPEC 2010 2011 2012 2013 2011 2012 2013 2011 2012 2013
Call on OPEC CrudeOPEC Production
North America 24,116 23,918 23,662 23,549 (197) (257) (113) -1% -1% 0%Europe 14,702 14,365 14,045 13,870 (336) (321) (175) -2% -2% -1%Pacific 8,097 8,129 8,346 8,375 32 216 29 0% 3% 0%
FSU 4,160 4,443 4,645 4,791 283 202 146 7% 5% 3%Europe 673 690 711 715 17 22 4 2% 3% 1%China 8,801 9,243 9,459 9,647 442 215 189 5% 2% 2%Other Asia 10,810 11,039 11,256 11,554 229 217 299 2% 2% 3%Latin America 6,002 6,213 6,370 6,626 211 157 256 4% 3% 4%Middle East 7,341 7,391 7,625 7,972 50 234 347 1% 3% 5%Africa 3,421 3,337 3,423 3,496 (84) 86 73 -2% 3% 2%
North America 14,107 14,601 15,653 16,389 495 1,051 737 4% 7% 5%Europe 4,144 3,765 3,632 3,685 (379) (133) 53 -9% -4% 1%Pacific 660 571 549 517 (90) (22) (32) -14% -4% -6%
FSU 13,527 13,577 13,665 13,764 50 88 99 0% 1% 1%Europe 180 177 172 171 (4) (5) (1) -2% -3% 0%China 4,078 4,101 4,146 4,236 23 45 90 1% 1% 2%Other Asia 3,696 3,585 3,608 3,582 (112) 23 (26) -3% 1% -1%Latin America 4,090 4,231 4,256 4,364 140 25 108 3% 1% 3%Middle East 1,735 1,648 1,404 1,400 (87) (243) (4) -5% -15% 0%Africa 2,554 2,420 2,263 2,205 (134) (156) (58) -5% -6% -3%
Processing Gains 2,081 2,100 1,995 1,896 20 (105) (100) 1% -5% -5%Global Biofuels 1,832 1,854 1,761 1,554 22 (94) (206) 1% -5% -12%
OPEC NGLs 5,264 5,653 5,999 6,264 389 346 265 7% 6% 4%30,173 30,486 30,439 30,568 314 (47) 129 1% 0% 0%29,235 29,877
Last Reported (Aug-'12): 31,550
10
Onshore Gas Production Growth
40
45
50
55
60
65
70
0
400
800
1,200
1,600
2,000 Ja
n-97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Ons
hore
Ò
Gro
ss G
as P
rodu
ctio
n, bc
f/da
y
Rig C
ount
Onshore Gas Rig Count
Onshore Gas Production
Gas Storage – Market Improving But Still Too Much Gas
11
0
1,000
2,000
3,000
4,000
1-Jan 2-Apr 2-Jul 1-Oct 31-Dec
Wor
king
Gas
, bcf
Normal
Max
2012
Min
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
Nio
brar
a
Frac
ture
Ve
rtic
al
Perm
ian
Nio
brar
a High
Resis
tivity
Mon
tere
y Ba
kken
Wol
fcam
p Mid
land
Utic
a Cond
ensa
teN
ew M
exic
o Vert
ical
Bo
ne Sp
ring
Eagl
e Ford
Oil
Calif
orni
aÿÿÿ
ÿÿÿÿ
ÿÿÿÿ
ÿÿÿ
¼ -à
ÿU
inta
Oil
Barn
ett aCo
mbo
MS L
ime
DJ Ba
sinEa
gle Fo
rd Co
nden
sate
ÿÿÿÿ
ÿÿÿÿ
ÿÿÿÿ
ÿÿ ¼
-àÿ
Mar
cellu
s ÿÿÿ
ÿÿÿÿ
ÿÿÿÿ
ÿÿÿ
¼ -à
ÿSW
PAGO
M de
ep ga
sCl
evel
and
ÿÿÿÿ
ÿÿÿÿ
ÿÿÿÿ
ÿÿ ¼
-àÿ
Tonk
awa
Aval
onW
olfc
amp De
law
are
Mar
cellu
s nNE P
AAn
adar
ko-Woo
dfor
d Wet
Hayn
esvi
lle
Core
Mar
cellu
s e
Cent
ral
Barn
ett s
Co
reGr
anite
Was
hAn
adar
ko-Woo
dfor
dPi
neda
leFa
yett
evill
elAr
kom
a-Woo
dfor
dJo
nah
Hayn
esvi
lle r
Non
-Cor
eAr
kom
aBa
rnet
t Non
-Cor
eSo
uth Te
xas
Pow
der Ri
ver
Anad
arko
Anad
arko-W
oodf
ord Dr
yPi
cean
ceEa
gle Fo
rd Ga
sEa
st Te
xas Co
nven
tiona
lN
iobr
ara
nal
Low
Resis
tivity
lAp
pala
chia
lGa
s
Current Gas Prices
TPH Long-term Gas Price
TPH Medium-term Gas Price
Brea
keve
n
Gas
Pric
e ($/m
cf)
Dry gasLow liquids gasHigh liquids gasOil
* Economics assume $100/bbl crude
Basin Economics – Gas Price Required for 10% ATROR
Gas produced from oil and liquids-rich plays is ~17% of the total the gas stack. These plays account for ~35% of the gas growth going forward.
12Source: TPH
What are stocks discounting?
COG
REXX LP
IU
PLCH
KCL
REO
GKW
KO
ASBR
YCV
E CN
PXP
GD
PSM
MEG
CNTL
M CN
WPX
XCO
PXD
APA
FST
WLL
CRZO
CXO
NBL
SWN
XEC
MPO CIE
ROSE
SGY
LPR
NFX SD QEP
DVN RRC
OXY APC
GST
Oily
Neutral
Gassy
13
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
$/m
cf
Long Term Implied Gas Price on 3P Reserves - NAM
Average = $4.30
Large-Cap Average = $4.15
(87:5 oil to gas ratio)
Average PriceGassy Stocks $4.45/mcf
Oily Stocks $77/bbl
*A s of 11/8/12
8
1 3
1 8
2 3
2 8
3 3
3 8
2 0 1 1
2 0 1 2
F o r e c a s t
1 ,7 00
1 ,9 00
2 ,1 00
2 ,3 00
2 ,5 00
2 ,7 00
2 ,9 00
3 ,1 00
3 ,3 00
2 0 1 1
2 0 1 2
F o r e c a s t
Electric Power Generation Coal/Gas Demand
Cheap gas and sticky coal prices plus mild winter weather pushed power gen coal demand to all time lows…off 21% Jan – April 2012 on a y/y basis. Summer heat and rising gas prices helped bring the y/y deficition down below a -10% drop y/y/
Despite the mild weather (overall power load ~down 2% 2012YTD) gas demand +28% y/y…and that’s after a record breaking 2011.
Bcf pe
r day
Thou
sand
to
ns pe
r day
Coal Consumed for Electric Generation
Natural Gas Consumed for Electric Generation
T ra i l i n g 7 -y rm i n / m ax
T ra i l in g 7 -y rm i n / m ax
Source: EIA, TPH research
1) Coal demand at unprecedented lows:
2) Gas continues to amaze:
14
1
2
15 15Source: EIA
NGL Production
1,000
1,400
1,800
2,200
2,600
Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012
thou
sand
barr
els
per d
ay
“The only thing better than one crawfish dinner is five crawfish dinners” Coach Red Beaulieu, The Waterboy
U.S. Production of Natural Gas Liquids
-800
-600
-400
-200
0
200
400
600
800
1,000
1,200
Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018
Ethane from Fractionation Ethane Pipe into MBEthane Supply from Y-Grade Pipes* Newbuild Crackers (CPC DOW Sasol RDS)DOW Expansions Formosa ExpansionOther Brownfield Expansions Ethane Exports to CanadaProjected C2 Supply/(Deficit) Forecasted Ethane Production
16
Given lengthy lead times for cracker construction (5-7 years), we expect an ethane glut in 2H 2013-2018. We assume all potential ethylene projects are constructed.
Demand
Supply
Ethane Supply Gets to Gulf Coast before DemandN
et E
st. S
uppl
y of M
B Et
hane
, MBP
D
US Ethane Supply/Demand Forecast
n
Source: SEC filings, company press releasesNote: Dark blue bar indicates pipe capacity for which corresponding fractionation has not yet been announced.
US Slides Down the Global NGL Cost Curve
17
-50
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011
Propane Butane Isobutane N. Gasoline Net Imports/(Exports)
Net US NGL Imports/(Exports), 2005-2011
Impo
rts/
(Exp
orts
) ÿÿ
ÿÿÿÿ
¾g
-àÿ
MBP
D
Source: EIA, TPH estimates
US LNG Exports? – 2015+
“According to this map we’ve only gone about four inches” Harry, Dumb & Dumber
18
YES!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
19
Analyst Certification:
Important Disclosure:
OTHER DISCLOSURES
U.S. U.K.
I, Dave Pursell, do hereby certify that, to the best of my knowledge, the views and opinions in this research report accurately reflect my personal views about the company and its securities. I have not nor will I receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report.
The analysts above (or members of their household) do not own any securities mentioned in this report.
Ratings: B = buy, A = accumulate, H = hold, T = trim, S = sell, NR = not rated
For detailed rating information, distribution of ratings, price charts and other important disclosures, please visit our website at www.tudorpickering.com. To request a written copy of the disclosures please call 800-507-2400 or write to Tudor, Pickering, Holt & Co. Securities, Inc. 1111 Bagby, Suite 5000, Houston, TX 77002.
Trade Name
Tudor, Pickering, Holt & Co. is the global brand name for Tudor, Pickering, Holt & Co. Securities, Inc. (TPHCSI) and its non-US affiliates worldwide.
Legal Entities Disclosures
: TPHCSI is a member of FINRA and SIPC. : Tudor, Pickering, Holt & Co. International, LLP is authorised and regulated by the Financial Services Authority. Registered in England & Wales No. OC349535. Registered Office is 5th Floor, 6 St. Andrew Street, London EC4A 3AE.
CanadaThe information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offense.
Copyright 2012, Tudor, Pickering, Holt & Co. This information is confidential and is intended only for the individual named. This information may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Tudor, Pickering, Holt & Co. This communication is based on information which Tudor, Pickering, Holt & Co. believes is reliable. However, Tudor, Pickering, Holt & Co. does not represent or warrant its accuracy. The viewpoints and opinions expressed in this communication represent the views of TPH as of the date of this report. These viewpoints and opinions may be subject to change without notice and TPH will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication. The viewpoints and opinions herein do not take into consideration individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Past performance is not indicative of future results. This message should not be considered as an offer or solicitation to buy or sell any securities.
20
United Kingdom
Tudor, Pickering, Holt & Co International LLP does not provide accounting, tax or legal advice. In addition, we mutually agree that, subject to applicable law, you (and your employees, representatives and other agents) may disclose any aspects of any potential transaction or structure described herein that are necessary to support any UK income tax benefits, and all materials of any kind (including tax opinions and other tax analyses) related to those benefits, with no limitations imposed by Tudor, Pickering, Holt & Co International LLP or its affiliates.
The information contained herein is confidential (except for information relating to tax issues) and may not be reproduced in whole or in part. Tudor, Pickering, Holt & Co International LLP assumes no responsibility for independent verification of third-party information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including estimates of potential cost savings and synergies) prepared by, reviewed or discussed with the managements of your company and/ or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). These materials were designed for use by specific persons familiar with the business and the affairs of your company and Tudor, Pickering, Holt & Co International LLP materials.
This information is intended only for the use of professional clients and eligible counterparties or persons who would fall into these categories if they were clients of Tudor, Pickering, Holt & Co International, LLP, or any of its affiliates. Retail clients must not rely on this document and should note that the services of Tudor, Pickering, Holt & Co International, LLP, are not available to them.
Under no circumstances is this presentation to be used or considered as an offer to sell or a solicitation of any offer to buy, any security. Prior to making any trade, you should discuss with your professional tax, accounting, or regulatory advisers how such particular trade(s) affect you. This brief statement does not disclose all of the risks and other significant aspects of entering into any particular transaction.
Tudor, Pickering, Holt & Co. International, LLP is a limited liability partnership registered in England and Wales (registered number OC349535). Its registered office is 5th Floor, 6 St. Andrew Street, London EC4A 3AE. Tudor, Pickering, Holt & Co. International, LLP (TPH International) is authorised and regulated by the Financial Services Authority, and is a separate but affiliated entity of Tudor, Pickering, Holt & Co. Securities, Inc. (TPH Securities). TPH Securities is a member of FINRA and SIPC. Unless governing law permits otherwise, you must contact the Tudor, Pickering, Holt & Co. entity in your home jurisdiction if you want to use our services in effecting a transaction.
See http://www.tudorpickering.com/Disclosure/ for further information on regulatory disclosures including disclosures relating to potential conflicts of interest.
21
RESEARCH
Jeff [email protected]
George O’[email protected]
Rhett [email protected]
Klayton [email protected]
Dave [email protected]
Brandon [email protected]
George O’[email protected]
Neel [email protected]
TRADING - Houston 800.507.2400SALES
Clay [email protected]
Mike [email protected]
Mike [email protected]
Oliver [email protected]
John [email protected]
Josh [email protected]
Paige [email protected]
Scott [email protected]
Seth [email protected]
Todd [email protected]
‡ Chris [email protected]+44 20 3427 5833/4
‡ Harry [email protected]+44 20 3427 5832
Chuck [email protected]
Jason [email protected]
Chris [email protected]
Jon Mellberg+44 20 3008 [email protected]
Win Oberlin+44 20 3008 [email protected]
‡ Jonathan Wright+44 20 3008 [email protected]
Brad [email protected]
Robert [email protected]
Brandon [email protected]
Brian [email protected]
Brad [email protected]
Matt [email protected]
Hubert van der [email protected]
Anish Kapadia+44 20 3008 [email protected]
Shola Labinjo+ 44 20 3008 [email protected]
*Office of Tudor, Pickering, Holt & Co. International, LLP. Anish Kapadia and Shola Labinjo are employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and are not registered/qualified as research analysts with FINRA. Mr. Kapadia and Mr. Labinjo are not associated persons of Tudor, Pickering, Holt & Co. Securities, Inc. and as such are not subject to NASD Rule 2711 restrictions on communications with subject companies, public appearances and trading securities held by a research analyst account.‡ Employed by Tudor, Pickering, Holt & Co. International, LLP in the United Kingdom and is not registered/qualified with FINRA and is not an associated person of Tudor, Pickering, Holt & Co. Securities, Inc.
TRADING- New York
*TRADING- London
Oil Service / E&C
Macro
Coal & Power
Utilities
Houston Denver
New York
*London
Midstream
Integrated Oils
E&P
*London- E&P
