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Oil Price Recovery: What does that mean for steel? Nicole J. Leonard, Senior Consultant Commodities Consulting, Bentek Energy
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Why I’m bearish short-term oil prices, bullish long-term prices
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Crude and liquids drive drilling and production activity, not much gas-by-rail activity
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$/M
MB
tu E
quiv
alen
t
Historical Commodity Price Spreads
Brent WTI Mont Belvieu HH CAPP
3 Source: S&P Global Platts Analytics
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Bentek maintains bearish stance through 2017, remains bullish compared to the market
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Bentek’s Brent Price Forecast
History Feb-15 Current
Source: S&P Global Platts Analytics, Bentek
Volatility driven by
supply uncertainty
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OPEC cuts seem to be on target, risks and duration create uncertainty and volatility
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(0.60)
(0.50)
(0.40)
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MM
b/d
Change in OPEC Production by Country (Oct – Jan)
Change in Production Proposed Cut
Proposed cut: 1.2 MMb/d Platts estimate: 0.9 MMb/d
Source: S&P Global Platts Estimates
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Non-OPEC countries still planning supply growth
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Moho, Congo 140 Mb/d in
2017
Edvard Greig, Norway
100 Mb/d in 2017
Cidade de Itaguai FPSO, Brazil
150 Mb/d in 2017
Filanvovsky and Pyakyakhinskoye 110 Mb/d in 2017
GLOBAL SUPPLY PROJECTS RAMPING UP IN 2017
Canadian Oil Sands ~300 Mb/d in 2017
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* Non-OPEC countries participating in production cut. Source: S&P Global Platts Analytics Bentek
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“But don’t worry, America still has more oil than we can use in 500 years.”
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Historical Brent Prices and Forward Curve
Hisory Forward Curve (Mar 3)
Source: S&P Global Platts Analytics, Bentek
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Bakken 40/+9 (30%)
Anadarko 113/+41 (57%)
Niobrara 26/+8 (44%)
Eagle Ford 74/+28 (61%)
Permian 318/+166 (112%)
Active rig count: Mar 3, 2017 / Change in rig count from Mar 4, 2016
Rigs return to oil plays on higher prices, rigs also return to gas plays on bullish market
TOTAL US 874/+353
(68%)
US Rig Count (Oct ’14)
2,143 -60% from
peak
Source: S&P Global Platts Analytics RigData 8
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Do breakevens even matter?
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Henry Hub (Jan 19):
$3.26/MMbtu
Source: S&P Global Platts Analytics Bentek 9
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Prices remain above breakeven floor, yet production does not recover
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cf/d
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US Natural Gas Production v Prices
ProductionHenry Hub Natural Gas PriceAvg Gas Breakeven Price
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US Crude Oil Production v Prices
ProductionWTI Crude Oil PriceAvg Oil Breakeven Price
Source: S&P Global Platts Analytics
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What happened to efficiencies or has debt finally crippled US producers?
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Debt/Stock Issued v Repaid
Issuance of Common Stock Repurchase of Common Stock
Total Debt Repaid Total Debt Issued
Balance
Source: S&P Global Platts Analytics Bentek, S&P Capital IQ
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US/Canada E&P Net Debt/EBITDA
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Public producers selling, not acquiring, selling mostly private money and independents
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-$15-$10
-$5$0$5
$10$15$20
bn$
US/Canada Acquisitions v Divestitures
Divestitures Sale of Property Cash Acquisitions
0.00.51.01.52.02.53.03.54.04.5
bn$
Publically Announced Private M&A by Value
Source: S&P Global Platts Analytics Bentek, S&P Capital IQ
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Private money more suited toward quick “flip” of assets rather than long-term investments
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Prod
uctio
n (M
b/d)
Oil Production from $300MM Investment
Shale (2-year, 5-rig program) Offshore Platform Cum. Income (Shale) Cum. Income (Offshore)
Source: S&P Global Platts Analytics Bentek
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Who’s investing in the long-term, low-decline assets?
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Bentek’s Brent Price Forecast
History Feb-15 Current
Source: S&P Global Platts Analytics, Bentek
Prices incent production growth to meet demand growth
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IOC capex needed to drive global supply growth, but they have to make money first
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BP Exxon Mobil
USD
bn
Quarterly Capital Expenditures
2012 2013 2014 2015 2016
Source: S&P Global Platts Analytics, Bentek, CapIQ
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BP Exxon Mobil
USD
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Net Undeveloped Acreage
2012 2013 2014 2015 2016
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Exports drive natural gas demand growth of over 15 Bcf/d in just five years
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US Natural Gas Demand Growth from 2016
Mexico ExportsLNG ExportIndustrialRes/CommPower Burn
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Higher gas prices on higher exports could drive drilling activity in dry gas plays
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Mbt
u
Henry Hub Price Forecast v NYMEX Forward Curve
Bentek NYMEX Forward Curve
Source: S&P Global Platts Analytics, Bentek
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Three-year rig forecast suggests a return to 80% of previous rig count in high case
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0200400600800
1,0001,2001,4001,600
# of
act
ive
rigs
RigData’s Historical and Forecast Rig Count
Actual Low Case Base Case High Case
Source: S&P Global Platts Analytics, Bentek
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1,000
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Anadarko Delaware DJ Basin Eagle Ford Marcellus Midland
Late
ral L
engt
h (fe
et)
Producer-Reported Average Lateral Lengths by Play
2013 2014 2015 2016
Lateral lengths increase 20% YOY, differs on geology of play, expected to increase
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All drilling is getting deeper, resulting in 45% increase in steel demand per well since 2010
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Wel
l Dep
th
Historical Oil/Gas Well Depths by Producing Area
Northeast Wet Gas Permian Delaware Denver-Julesburg Permian MidlandEagle Ford Bakken Average US
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Drilling activity not expected to reach shale-revolution levels, incremental 22,000 wells/year expected
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d
Historical and Forecasted Wells Drilled in North America
Drilled Forecast
Source: S&P Global Platts Analytics, Bentek, RigData 22
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Steel demand in West Texas expected to grow to 2014 levels, prime steel demand area for E&P
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0.00.51.01.52.02.53.03.54.0
Mill
ion
Tons
Historical and Forecasted Steel Tube and Casing Demand in the Permian
Delaware NM Midland Delaware TX Permian Other
Assumptions: 2016 average well depth/lateral length held constant
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Line pipe demand could grow, pipeline projects at risk on less production
Source: Bentek
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% o
f mile
s at
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Mile
s of
Lin
e Pi
pe
Miles of New Pipeline and Risk to Completion
Miles of Line Pipe % of miles at risk
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Energy demand consolidating in the US Gulf Coast, fewer long-haul pipelines needed
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690 Mb/d of new pipeline capacity announced in the Permian this year
Eagle Ford rig count doubles since
October
Crude exports to grow to +1.0 MMb/d
by 2023
USGC accounts for 54% of total US crude demand
Refined products exports growing 15% every year
Natural gas liquids export and petchem
demand growth
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Key Takeaways
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- Short-term oil market could be oversupplied once OPEC resumes production and if US private equity buoys US production.
- Long-term oil supply is being overlooked due to market optimism around US shale production, but investment is needed now for long-term supply growth to meet demand.
- Increasing natural gas demand in the US for exports as LNG and to Mexico could spur dry gas drilling and the need for new pipelines over the next ten years.
- Oil and gas wells are getting deeper and utilizing more steel than historically, though the number of wells drilled are unlikely to reach pre-price collapse levels.
- Less line pipe needed as US energy market centralizes in the US Gulf Coast, but a resurgence in drilling elsewhere would require more pipe.
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Questions?
Nicole Leonard, Project Manager, Oil & Gas Consulting
[email protected] Direct: (720) 264-6680