September 2011 The Credit Suisse Energy Team

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ research disclosures or call +1 (877) 291-2683. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Credit Suisse Global Energy Team
United States Integrated Oils & Refiners Ed Westlake (New York)) Rakesh Advani (New York) Exploration & Production Arun Jayaram (New York) Mark Lear (New York) David Lee (New York) Oil Services Brad Handler (New York) Eduardo Royes (New York) Jonathan Sisto (New York) MLPs Yves Siegel (New York) Brett Reilly (New York) Utilities Dan Eggers (New York) Kevin Cole (New York) Matt Davis (New York) Katie Chapman (New York) Alternative Energy Satya Kumar (San Francisco) Ed Westlake (New York)) Patrick Jobin (New York) Specialist Sales Tom Marchetti (New York) Charlie Balancia (New York) +1 212-325 6751 +1 212 538 5084 +1 212 538 8428 +1 212 538 0239 +1 212 325 6693 +1 212 325 0772 +1 212 538 7446 +1 212-325-1292 +1 212 325 8462 +1 212 538 3749 +1 212 538 8430 +1 212 538 8422 +1 212 325 2573 +1 212 325 1261 +1 415 249 7928 +1 212-325 6751 +1 212 325 0843 +1 212 325 0667 +1 212-325 6314 edward.westlake@credit-suisse.com rakesh.advani@credit-suisse.com arun.jayaram@credit-suisse.com mark.lear@credit-suisse.com david.lee@credit-suisse.com brad.handler@credit-suisse.com eduardo.royes@credit-suisse.com jonathan.sisto@credit-suisse.com yves.siegel@credit-suisse.com brett.reilly@credit-suisse.com dan.eggers@credit-suisse.com kevin.cole@credit-suisse.com matthew.davis@credit-suisse.com katie.chapman@credit-suisse.com satya.kumar@credit-suisse.com edward.westlake@credit-suisse.com patrick.jobin@credit-suisse.com thomas.marchetti@credit-suisse.com charles.balancia@credit-suisse.com Europe Integrated Oils & Refiners Kim Fustier (London) Thomas Adolff (London) Exploration & Production Tao Ly (London) Ritesh Gaggar (London) Arpit Harbhajanka (London) Oil Services Tao Ly (London) Arpit Harbhajanka (London) Utilities Vincent Gilles (London) Mark Freshney (London) Stephen Deeley (London) Michel Debs (London) Mulu Sun (London) Zoltan Fekete (London) Specialist Sales Jason Turner (London) Mark Whitfeld (London) +44 20 7883 0384 +44 20 7888 9114 +44 20 7888 1778 +44 20 7888 0277 +44 20 7888 0151 +44 20 7888 1778 +44 20 7888 0151 +44 20 7888 1926 +44 20 7888 0887 +44 20 7883 9534 +44 20 7883 9952 +44 20 7888 0269 +44 20 7888 0285 +44 20 7888 1395 +44 20 7888 8038 kim.fustier@credit-suisse.com thomas.adolff@credit-suisse.com tao.ly@credit-suisse.com ritesh.gaggar@credit-suisse.com arpit.harbhajanka@credit-suisse.com tao.ly@credit-suisse.com arpit.harbhajanka@credit-suisse.com vincent.gilles@credit-suisse.com mark.freshney@credit-suisse.com stephen.deeley@credit-suisse.com michel.debs@credit-suisse.com mulu.sun@credit-suisse.com zoltan.fekete@credit-suisse.com jason.turner@credit-suisse.com mark.whitfeld@credit-suisse.com

Canada Brian Dutton (Toronto) Andrew Kuske (Toronto) Courtney Morris (Toronto) Paul Tan Jason Frew (Calgary) Terence Chung (Calgary) David Phung (Calgary)

Latin America Oil & Gas Emerson Leite (Sao Paulo) +55 11 3841 6290 Utilities Vinicius Canheu (Sao Paulo) +55 11 3841 6310 Ethanol, Agribusiness and Transportation Luiz Campos (Sao Paulo) +55 11 3841 6312

emerson.leite@credit-suisse.com vinicius.canheu@credit-suisse.com luiz.campos@credit-suisse.com

+1 416 352 4596 +1 416 352 4561 +1 416 352 4595 +1 416 352 4593 +1 403 476 6022 +1 403 476 6024 +1 403 476 6023

brian.dutton@credit-suisse.com andrew.kuske@credit-suisse.com courtney.morris@credit-suisse.com paul.tan@credit-suisse.com jason.frew@credit-suisse.com terence.chung@credit-suisse.com david.phung@credit-suisse.com

Australia Sandra McCullagh (Melbourne) Nik Burns (Melbourne) Ben Combes (Melbourne)

+61 2 8205 4729 +61 3 9280 1641 +61 3 9280 1669

sandra.mccullagh@credit-suisse.com nik.burns@credit-suisse.com ben.combes@credit-suisse.com

Russia/Emerging Europe Oil & Gas Mark Henderson (London) Andrey Ovchinnikov (Moscow) Utilities Anton Fedotov (Moscow)

+44 20 7883 6901 mark.henderson.2@credit-suisse.com +7 495 967 8360 andrey.ovchinnikov@credit-suisse.com +7 495 967 8362 anton.fedotov@credit-suisse.com

Asia-Pacific David Hewitt (Singapore) Horace Tse (Hong Kong) Edwin Pang (Hong Kong) Yang Song (Hong Kong Trina Chen (Hong Kong) Sanjay Mookim (Mumbai) Yuji Nishiyama (Tokyo) Siriporn Sothikul (Bangkok) Poom Suvarnatemee (Bangkok) A-Hyung Cho (Seoul) Annuar Aziz Kuala Lumpur) Sidney Yeh (Taipei)

+65 6212 3064 +852 2101 7379 +852 2101 6406 +852 2101 6550 +852 2101 7031 +91 22 6777 3806 +81 3 4550 7374 +66 2 614 6217 66 2 614 6210 +82 2 3707 3735 +603 2723 2085 +8862 2715 6368

david.hewitt.2@credit-suisse.com horace.tse@credit-suisse.com edwin.pang@credit-suisse.com yang.y.song@credit-suisse.com trina.chen@credit-suisse.com sanjay.mookim@credit-suisse.com yuji.nishiyama@credit-suisse.com siriporn.sothikul@credit-suisse.com paworamon.suvarnatemee@credit-suisse. a-hyung.cho@credit-suisse.com annuar.aziz@credit-suisse.com sidney.yeh@credit-suisse.com

Source: Credit Suisse
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Credit Suisse Global Energy Team




Tokyo Seoul Hong Kong

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Source: Credit Suisse.

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Call us anywhere: we can help you

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Table of contents
Industry Overview
Crude Oil
Crude Oil Overview Crude Oil Supply International Offshore Exploration Crude Oil Demand Global Oil Markets 6 12 19 27 32

Basics of Energy Investing
Investing in Big Oil 176

Outlook for Big Oil


Natural Gas
Natural Gas Overview North American Natural Gas Shale Gas in Focus Liquefied Natural Gas (LNG) 39 45 57 67

Investing in E&P


The Upstream
The Upstream Process Oil and Gas Reserves 83 99

Investing in OFS


The Midstream
Natural Gas Crude Oil/Refined Products 107 111

Investing in Refining


Oilfield Services, Equipment and Drilling
Products and Services Company Specific Details 116 136

Outlook for Refining


Investing in MLPs The Downstream
Refining Refinery Operations Oil Product Marketing 148 161 171


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Crude Oil Overview

What Is Oil and Natural Gas?
Oil and natural gas (or hydrocarbons) are composed of chains of linked hydrogen
and carbon atoms. Plant and animal remains were covered by layers of sediment (particles of rock and mineral) and over millions of years of extreme pressure and temperatures these particles were reduced to liquid hydrocarbons (oil) or gaseous hydrocarbons (natural gas). Under geologic pressure, oil migrates from its “source rock” into rocks with larger spaces or pores “reservoir rock.” Limestone and sandstone have with large porosity and are two common types of “reservoir rock.” Oil is held in these reservoirs by impervious rock structures above called caps or traps.

Source: Earth science Australia

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Crude Oil Composition
Crude oil ranges from almost clear water-like fluids to black viscous semi-solids. Crude oil can be categorized into various API degrees of gravity. The higher the API gravity, the lighter the crude. Crude oils with higher API gravity yield greater proportions of lighter petroleum products like gasoline. Source: DOE
4.5% 4.0% 3.5% Maya 3.0% Arab Heavy 2.5% Fateh 2.0% Iranian Heavy 1.5% 1.0% 0.5% Bonny Medium ANS Brent Cabinda WTI Bonny Light 25 30 35 40 45 Tapis 50 Basrah Light Arab Light Arab Medium Cold Lake

Crude oils with higher than average sulfur content are known as “sour.” Those with low sulfur levels are called “sweet.” The majority of global reserves are light/medium and slightly sour.

Sulfur Content

0.0% 0 5 10 15 20


API Gravity


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7 billion barrels of proved reserves. Additionally. Page 9 . The former Soviet Union holds 42% of non-OPEC proved reserves. 754 billion of these are in the Middle East. The remaining 302 billion barrels or 24% of the world’s proved reserves are in nonOPEC regions.Global Oil Reserves Source: BP Stats The majority of the world’s current proved oil reserves are in OPEC countries. The BP Statistical Energy Review states that 956 billion barrels or 76% of the world’s proved reserves are held by OPEC. the Canadian oil sands contain 150.

” OPEC’s members in effect attempt to raise the clearing price of crude oil above its “natural” level by withholding relatively cheap reserves from the market. United Arab Emirates (1967).What is OPEC? The Organization of the Petroleum Exporting Countries (OPEC) is a permanent. economic and regular supply of petroleum to consuming nations. Saudi Arabia. in order to secure fair and stable prices for petroleum producers. created in 1960 by Iran. Ecuador (1973 suspended membership from 1992-2007). an efficient. and Gabon (1975. Kuwait. Indonesia (1962. Algeria (1969). The five Founding Members were joined by Qatar (1961). OPEC sets production quotas which individual members adhere to with varying degrees of success (or “compliance”). Nigeria (1971). and Venezuela. Page 10 . OPEC’s stated objective is “to coordinate and unify petroleum policies among Member Countries. Libya (1962). Iraq. and a fair return on capital to those investing in the industry. intergovernmental organization. left in 1994). left in 2008). Angola (2007).

World Oil Production Source: BP Stats The world’s oil production profile is different from its reserve distribution Declining production of aging fields is an important theme The Middle East. and Europe/Eurasia rank as the top three producing regions. Page 11 . North America.

Crude Oil Supply .

The United States is the world’s most mature producing region with correspondingly low per well productivity and higher extraction costs. Eastern Siberia. Greenland. development and production. Frontier areas: Arctic.Global Oil Supply The characteristics of producing basins vary substantially around the world. Russia is the world’s largest oil producer and contains two highly mature provinces: Western Siberia and Volga/Urals. The Middle East is the most productive region with the largest remaining undeveloped resources. West Africa is a large source of production with future growth from the offshore. including differences in the costs of finding. Antarctic. even deeper Offshore Page 13 . Brazil looks like a huge new resource opportunity with the development of the pre-salt play in the offshore Santos Basin.

are the reasons. non-OPEC supply growth has slowed in recent years.Global Production Split: OPEC and Non-OPEC OPEC Oil Production* Crude Oil Production (MMBD) global oil supply. OPEC Supply [LHS] 35 Market Share [RHS] 50% 30 Global Market Share (%) 40% 25 20 15 20% 10 10% 5 0 2010E 2012E 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0% 30% Non-OPEC (ex-Former Soviet Union or FSU) production grew rapidly in the 1960s. Non-OPEC’s restricted access to new reserves. * Assumes no inventory change: 2009 . 1970s/80s and the 1990s. a sharp increase from the trough of 1985. combined with higher decline rates. but still lower than its historical level of 55%+ pre-1973/74. However. Credit Suisse estimates OPEC accounts for roughly 40% of 40 60% .2012 Page 14 Source: IEA.

0 Million Barrel Per Day 2.0 60 -2.0 80 0.0 6.e. $/bbl Spare Capacity Demand Less Supply Growth Most of the time OPEC withholds existing supply from the market. but is offline. Page 15 Source: IEA.0 -6. Anticipated levels of future spare capacity have important effects on crude prices generating more or less fear about supply (see markets and pricing section).0 -4.OPEC’s Spare Capacity: a Key Measure 8.0 4. oil which could be produced.. creating spare capacity’ i. Credit Suisse estimates – adjusted for Libya .0 Jan-01 40 20 0 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 WTI (RHS) Jan-10 Jan-11 160 140 120 100 WTI.

Credit Suisse estimates -0.70 2007 2008 2009E 2010E 2011E 2012E 2013E Algeria Libya Angola Nigeria Ecuador Qatar Iran Saudi Arabia Iraq UAE Kuwait Venezuela OPEC’s current policy appears to be to add new capacity only in line with expected increases in demand: “investing behind the demand curve.20 -1.” OPEC capacity additions between 2011-2012 are expected to be modest.Watching OPEC Capacity Additions OPEC Net Capacity Additions 1.80 0. Page 16 Source: IEA.20 .30 -0.80 1.70 -1.30 0.

Credit Suisse estimates Iraqi Civilian Deaths Jan 2006 – Aug 2009 1st round awards Rumaila Zubair West Qurna Phase-1 Sub-total 2nd round awards Majnoon W est Qurna Phase-2 Halfaya Garraf Badra Qaiyarah Najmah Oil projects awarded and growth Reserves (BB) 17.120 0.015 0.000 0.51 0. But Infrastructure a Challenge Iraqi oil production over time – rise and fall 12500 Iran/Iraq war 10000 7500 5000 2500 0 1987 2005 2013E 2009E 2011E 1979 1981 1983 1985 1989 1991 1993 1995 1997 1999 2001 2003 2007 Plateau 2015E Gulf war Gulf war II Implied potential Iraq – 9% of world reserves.86 32.800 1.19 62.66 0.58 30.003 0.030 0.86 0.81 0. 3% of world production 25% 20% 15% 10% 5% 0% Kazakhstan 2.110 4.170 0.07 % World reserves % World production Venezuela Kuwait Iran Russia Saudi Arabia Iraq Libya Baseline 1st round projects 2nd round projects Kurdistan Source for top charts: IEA. Page 17 Nigeria UAE .55 Source: Department of Defense Source: Iraq Oil Forum Could change perception of long-term supply.465 Targeted Plateau Rate (MMB/d) Sub-total Total 0.2145 0.046 0.08 8.765 11.230 0.020 0.05 1.Iraq: Significant potential.000 0.070 0.286 1.000 0. industry data.77 4.58 12.43 12.10 0.30 1.05 0.88 4.11 0.85 1.000 Cost Recovery Floor (MMB/d) 1.800 0.535 0.195 0.175 0.120 0.155 0.035 0.325 6.125 2.62 Initial Rate (MMB/d) 1.000 0.26 1.

Credit Suisse estimates .000 2. We Need Offshore Too US Onshore Supply Growth and Infrastructure 4.000 Deepwater hockey stick 12.000 8.000 3.000 4.500 3.000 0 2000 West Africa 2002 2004 2006 2008 2010E Brazil 2012E 2014E Ghana 2016E US Gulf of Mexico Other D Non-OPEC supply expected to be lacklustre through 2014 even with onshore growth in the US A surge in deepwater projects helps lift Non-OPEC supply beyond 2014 Page 18 Source: IEA.500 2.Onshore Growth Accelerating.000 500 0 2010 2011 2012 2013 2014 2015 2016 2017 Refining Tanker + Barge Pip eline Supply Growth Rail Deepwater Hockey Stick 14.000 (KBD) 2.500 1.000 1.500 4.000 6.000 10.

International Offshore Exploration Success Improving .

9.Brazil is Still the Largest Hot Spot Source: Petrobras BM-S-22 Focus area has been Santos Basin (Tupi Cluster) Blocks BMS-8. 22 (Sugar Loaf) area. 21. together with BMS-11 (Tupi) and BMS-24 (Jupiter) Page 20 .

Page 21 .Ghana: Could Be Larger Than We Currently Think (1) Teak could potentially be larger than the market expects. (3) The are large fans underneath the giant Tweneboa Discovery that have yet to be tested (4) Cedrela will test the Cenomanian fairway in which HES has enjoyed success (5) Other targets in 2012 include Wawa. Wassa. The third and fourth appraisal wells could create a standalone development (2) The left chart shows Tullow presentation of Teak in August. The Right shows KOS view. Appraisal will determine how large Teak truly is. Sapele in Deepwater Tano Block and new Albian prospects are being worked up.

with 5-6 more similar prospects in the near vicinity. Georgetown offshore Suriname Page 22 Source: APC. TLW .French Guiana/Suriname – Zaedyus Game Changer (1) Tullow believes Zaedyus discovery could be 700mmboe. (2) Tullow believe the fan structure is larger than the entire Tano basin in Ghana (3) Matamata is an additional large structure in the West of this block (4) Further drilling activity in Block 47.

TLW .1st Successful Wildcat in Guyana Basin Page 23 Source: APC.

Tullow. CVX in Sierra Leone. TLW .Africa : More Late Cretaceous Large multi-hundred million barrel prospects being targets by APC. Cote D’Ivoire (APC) Page 24 Source: APC. Sierra Leone. Liberia and Cote D’Ivoire in 2H11/1H12 CVX spuds Liberia acreage in 4Q11 Montserrado Deep is important – potentially opens up a new basin in Liberia Testing Liberia.

West Africa Exploration to the Forefront – Pre Salt Angola Angola Pre-Salt Cobalt Pre-Salt – Drilling Cameia Currently Page 25 Source: CIE .

MB 30 00 25 00 20 00 15 00 10 00 • The US Gulf of Mexico contains significant resource but drawbacks are liability concerns and permitting delays Source: Wood Mackenzie.000 10.000 2.000 0 Remaining Reserves in Production Reserves in Appraisal Recently Discovered Future Geological Potential Page 26 .000 6. 78% Held by Supermajors 35 00 Deepwater Gulf of Mexico Reserves.000 Million BOE 8.US Gulf of Mexico US GoM Reserves. CVX 5 00 0 HESS BP BHP Billiton Marathon Shell Statoil ExxonMobil Total Devon Energy Noble Energy Repsol YPF Petrobras Maersk ME Plains E&P Chevron Anadarko COP Nexen ATP Eni 14.000 12.000 4.

Crude Oil Demand .

Price. and heating.5% from 1992 to 2008. The principal uses for oil are transportation. taxation and fuel switching have all driven significant changes in consumption patterns. As countries become richer they tend to reduce or phase out their industrial uses of oil. power generation. Europe has high taxes) and partly due to the relative availability of substitute fuels. India and other developing economies. We expect oil demand to grow at 1. We expect global oil demand to rise by about 1. Oil demand is price elastic: different consuming zones exhibit different price elasticity to crude prices.Oil Demand Oil demand grew by a CAGR of 1.4% per annum from 2011 to 2017. Oil demand growth has been historically correlated with GDP growth.9% in 2010. This is partly due to different end user taxation levels (the United States and China have low taxes. Page 28 . but not exclusively so. The future of oil demand growth is presumed to be outside the OECD: mainly in China. The highest value use of oil today is as a transportation fuel.

0% Source: BP Stats.00% -4.0% 6. However.00% 10. Credit Suisse estimates 4.00% 0.5 in the OECD).0% 0. ~0.00% -2. Page 29 . the relationship is uneven and consuming regions exhibit very different demand multipliers to GDP (~1 in emerging economies.00% 2.0% 3.5802 5.00% 6.0% World Real GDP Growth R2 = 0.00% 8.0% 1.Oil Demand Correlation with Real GDP Growth (1969 .00% 4.2008) 7.0% -6.0% 2.00% Worldwide Oil Consumption Growth Global GDP trends are a clear underlying driver of oil demand.

4% 0.3% Demand growth Real Brent Oil Price (USD/bbl).7% 1.2% 1.6% 0.Oil Demand Growth & Oil Prices 9% 8% 7% 6% 5% Global Oil Demand Growth 4% 3% 2% 1% 1.2% 8.4% 2.1% Recovery Recession Oil is a cyclical commodity (with managed characteristics).8% 0.4% 5.3% 1. 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E Source: Credit Suisse Page 30 Inflation adjusted Brent price US$ per bbl 80 .0% 7.5% 18 years of low and stable oil prices 1986-2004 -1.8% 2.8% Collapse 0% -1% -2% -3% -4% -5% -6% 0.5% 3.0% 2.3% The Good Old Days -1.9% 0.9% 7.2% 3.8% 2.9% 2.9% 8. Higher oil prices during booms create deeper demand recessions afterwards.7% 1.9% 4.5% 0. 2007 110 SPIKE Saudis change policy SPIKE 100 90 70 60 50 40 30 20 10 1.2% 0.3% -2.3% 2.5% -0.5% 5.2% 1.6% 0.2% 8.9% Boom Boom Recovery Recession Boom Recovery Recession Recovery Recession -4.5% 0 Boom Recovery Recession -2.1% 1.4% 8.7% 2.4%1.7% 2.3% 1.1% 0.

Asia-Pacific has roughly doubled its oil consumption. In the past 20 years. Page 31 . Europe has been flat. North America has also grown reasonably strongly.Oil Demand: Consumption Profile Source: BP Stats.

Global Oil Markets .

We estimate that the physical global crude trade is $1.Oil Markets: Global in Nature Oil is produced on nearly every continent. A complex transportation and refining system exists to move oil to end-user markets. as well as by power generation plants.S. Page 33 . dollar exchange rate also play a significant role for crude price given that oil is traded in U.680-billion-per year at $55/bbl oil and baseline global demand of 86 MBD. Futures are traded on major exchanges such as the NYMEX and the ICE. Geopolitics and speculation also influence the price of oil. dollars. Variations in the U. Crude oil is largely purchased by refiners to convert into refined products such as gasoline.S.

sweet crude oil futures contract is the world’s most liquid forum for crude oil trading and is also the world’s largest-volume futures contract trading on a physical commodity. Oklahoma.000 contracts are traded on average per day.Oil Markets: NYMEX The NYMEX light.000 barrels. The contract trades in units of 1. 650. The contract provides for delivery of several grades of domestic and internationally traded foreign crudes. and the delivery point is Cushing. Source: BBC Page 34 .

but can prove difficult to liquidate at times of market dislocation. often known as a swap. Page 35 . with the price of Kuwaiti crude oil tied to Saudi Arabian Medium (for western customers) and a monthly average of Dubai and Oman crudes (for Asian buyers). These contacts have become more popular than futures trading in recent years. Most Kuwaiti crude oil is sold on term contracts. Term contracts: private contracts to buy specified quantities of crude oil at prices based on regional benchmarks. from the seller. buyers and sellers of crude oil can enter into an over the counter transaction. a specific quantity of crude oil at a predetermined price on a future delivery date. Over-the-Counter Swaps etc: instead of trading via a futures exchange.Oil Markets: Trading Futures trading: standardized. exchange-traded contracts in which the contract buyer agrees to take delivery. These contracts are not traded in any form.

S. Source: IEA Source: IEA Page 36 . the IEA releases the “Oil Market Report. demand. stocks. imports.Oil Markets: Data Sources International Energy Agency (IEA): Every month. and refinery activity.” which contains information on supply. prices. inventories and refinery activity. Market participants utilize these types of data sources in order to form opinions on companies as well as the expected direction of the commodity. U. Department of Energy: The DOE provides weekly information on crude and principal petroleum products in regards to factors such as supply.

47 $76.11 $73.04 $73.60 Price per barrel $75 $72.47 $76.09 Price per barrel $75 Futures Curve: Backwardation Example $80 $77. Contango The shape of the 12-month futures curve is often an indication of current supply/demand balances.62 $74.60 $75. An upward sloping curve suggests higher expected prices and implicitly higher demand relative to supply in the future: Contango A downward sloping curve suggests current demand is outpacing current supply with the expectation that the imbalance will become less pronounced in the coming time period: Backwardation Futures Curve: Contango Example $80 $76.77$76.10 $74.04 $72.62 $75.10 $75.49 $73.11 $74.61 $73.77 $77.49 $72.04 $72.04 $70 $70 $65 Nov09 Jan10 Jun-10 Jul-10 Oct09 Feb10 Mar-10 Apr-10 May-10 Dec09 Aug-10 Sep-10 $65 Nov09 Jun-10 Jan10 Oct09 Jul-10 Aug-10 May-10 Sep-10 Feb10 Mar-10 Apr-10 Dec09 Source: Bloomberg Source: Bloomberg Page 37 .10 $75.Futures Curve: Backwardation vs.61 $74.10 $76.09 $76.


Natural Gas Overview .

colorless and odorless gas that is made up of a mixture of hydrocarbons. Because of the need for extensive pipeline systems and difficulty in shipping. propane and butane. which is quoted on a $ per Millions of British Thermal Units basis (MMBtu). Other components of the typical well-head natural gas stream (wet gas) include heavier “liquids” such as ethane. Page 40 . The benchmark spot price is Henry Hub.What is Natural Gas? Source: Chesapeake Energy Natural Gas is a combustible. Meanwhile. Methane (which is dry gas) is the most commercially marketable component of the natural gas stream. An Mcf is a volume unit. the ability to ship gas in liquid form (LNG) is gaining traction. natural gas is most used in regions with indigenous supply. Natural Gas is measured on a unit basis in thousands of cubic feet (Mcf). while MMBtu is an energy measurement.

600 trillion cubic feet at year-end 2010.227 Tcf North America 350 Tcf Middle East 2.Global Natural Gas: Proved Reserves (2010) Total Proved Reserves were over 6. Europe & Eurasia 2. Page 41 .675 Tcf Africa 522 Tcf South & Central America 264 Tcf Asia Pacific 575 Tcf Source: BP Statistical Review of World Energy 2011.

World Energy: Natural Gas Has Gained Share of the Energy Pie Source: BP Statistical Review of World Energy 2011 According to BP Statistical Energy Review. Page 42 . natural gas accounted for 24% of global primary energy consumption. the highest on record. in 2010.

Page 43 .Global Natural Gas: Daily Demand By Region (Bcf/d) Source: BP Statistical Review of World Energy 2011 Global gas demand growth is currently being driven by Asia and the Middle East (due to a switch away from oil).

A global movement towards clean energy has put natural gas more in favor versus coal and oil. solar and nuclear power). naphtha and alternative energy (such as wind.org. heating oil. Page 44 . due to inherently lower CO2 emissions. oil.co. There are numerous substitutes for natural gas including coal.greengop.Substitutes for Natural Gas Coal Oil Alternative Energy Source: www.britishcoalgasification.uk. Source: ecotechdaily.com Source: www.

North American Natural Gas .

N.0x 16. NYMEX gas prices have traded as low as $2-3 per MMBtu and as high as $14-15 per MMBtu.0x 0.0x 1/2/2011 Page 46 Source: Bloomberg LP Source: Bloomberg LP . prices tend to be linked to crude owing to less liquid trading markets.3x Current (9/14/11): 23.0x 12. Over the past 14 years.00 1/2/1997 1/2/1998 1/2/1999 1/2/2000 1/2/2001 1/2/2002 1/2/2003 1/2/2004 1/2/2005 1/2/2006 1/2/2007 1/2/2008 1/2/2009 ($ per MMBtu) 1/2/2010 WTI Crude Oil to Henry Hub Natural Gas (x) 32.. NYMEX Natural Gas Prices $16.0x 24.0x 4. In North America.00 $12. AM.00 $2.0x 20. Natural Gas Pricing North America is mostly a “closed” market with natural gas prices driven by demand trends (weather.0x 1/2/1997 1/2/2000 1/2/2002 1/2/2004 1/2/2007 1/2/2009 1/2/2010 1/2/2006 1/2/1998 1/2/1999 1/2/2001 1/2/2003 1/2/2005 1/2/2008 1/2/2011 10-Year Average: 11. oil and natural gas do not exhibit a strong pricing relationship as the two fuels don't compete much (oil is not used much for power while gas is not used much for transportation). Outside of the U.00 $8.00 $0. economic growth) and the cost of new supply.0x 28.0x 8.00 $4.00 $14.00 $6.00 $10.S.

Along the way. natural gas liquids (NGLs) and sulfur.North American Natural Gas: Industry Overview The process of bringing natural gas to market begins with exploration & production and ends with the retail distribution of gas to end markets. water. gas is gathered and processed for removal of oil. Source: Energy Information Administration Page 47 . It is then transported and stored while awaiting distribution.

Geological Survey. Source: StatoilHydro. Source: Department of Primary Industries.Upstream: Where is Natural Gas Located? Onshore: Shale Onshore: Tight Gas Offshore Source: U. Australia.S. onshore unconventional resources like shale and tight gas sands have become a growing source of production in recent years as traditional and lower cost sources have matured. Natural gas is located underground and below seabeds. Page 48 . In North America. Exploration & Production (also known as the upstream) of natural gas is a global venture and producers operate in both onshore and offshore environments. Producers often drill thousands of feet beneath the surface to reach natural gas reservoirs.

seismic evaluation. well logs. producers will develop the reservoir and commence production. exploratory wells. Produced natural gas is then sent to processing facilities via pipeline. Please see Upstream section for additional detail on the exploration and production process. Source: Japan Agency for Marine Earth Science and Technology Source: www. core samples and others.uk Page 49 . Once commercially viable quantities of natural gas have been discovered and confirmed.Upstream: Exploring and Producing Natural Gas Producers use various techniques to locate and test for the existence of natural gas including geophysical surveys.smi-online-co.

Page 50 .Midstream: Processing Natural Gas Processing natural gas (midstream) involves the removal of oil. butane and propane). free of impurities or other non-methane compounds. hydrogen sulfide. The end goal is to produce dry gas. water. carbon dioxide and NGLs (ethane.

Major pipelines include the Transcontinental.S. Northwest. The Ruby Pipeline. Page 51 Source: American Clean Skies Foundation .5 Bcf/d of capacity.The Midstream: Transporting Natural Gas Natural gas in the U. provides westbound transport from the Rockies region with 1. Pipeline companies charge regulated fees (tariffs) for moving gas.4 million miles. is delivered via a complex web of interstate and intrastate pipelines estimated by the American Gas Association to extend ~2. which was completed in July 2011. Rockies Express (REX) and Ruby pipelines.

S. Rockies gas trades at the widest discount (given little local demand and long pipeline distances) while Appalachia gas trades at a premium (given proximity to high demand areas on the east coast). The difference relative to NYMEX is called a basis differential. differentials across the U.60/MMBtu ~$4. Historically.org ~$4. have narrowed in recent quarters as a result of expanded pipeline capacity. Louisiana) is not necessarily what producers receive for their gas.30/MMBtu Source: www.nafsa. The actual price received (well-head price) is different throughout the country. However. Page 52 .20/MMBtu The NYMEX natural gas price (Henry Hub.Natural Gas Marketing: What are Basis Differentials? ~$3. Regional prices are a function of local supply and demand balances and the transport cost to the consuming markets in the Northeast.

Natural Gas Storage: The U.S. has a Deep Storage System

Before being transported for local distribution, natural gas is stored in underground facilities such as depleted reservoirs, salt caverns and aquifers. Total natural gas storage capacity in the U.S. is approximately 4.1-4.2 Tcf. Storage is located primarily in the Gulf Coast and the ‘consuming’ areas in the Midwest and Northeast.
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Source: Energy Information Administration

U.S. Weekly Storage Report
Change 9/2/2011 Producing Region Consuming East Consuming West Total U.S.
4,500 4,000

Change Bcf 2 58 4 64 Year Ago 971 1,707 477 3,156 % (1.2%) (4.2%) (9.9%) (4.2%) Bcf (12) (71) (47) (131) 5-Year Avg 925 1,732 427 3,085

Week Ago 957 1,578 426 2,961

% 0.2% 3.7% 0.9% 2.2%

Differential % Bcf 3.7% (5.5%) 0.7% (1.9%) 34 (96) 3 (60)

959 1,636 430 3,025

Total U.S. Working Gas In Storage
2011 5-Yr Avg 2008 2009 2010

Billion Cubic Feet

3,500 3,000 2,500 2,000 1,500 1,000 500 1 4 7 10















Calendar Week
Source: Energy Information Administration (EIA)

Natural gas in storage fluctuates from the withdrawal season (November to March) when cold weather typically results in storage withdrawals to the refill season (April to October) when lower demand leads to net storage injections. Every Thursday at 10:30am ET, the EIA reports the storage injection / draw for the prior week. The amount of injection or draw can have a material affect on gas prices as it indicates supply / demand trends relative to previous years.
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Major End Markets for Natural Gas
Residential Gas used in private dwellings for space and water heating, air conditioning, cooking and other household uses Industrial Gas used for heat, power or chemical feedstock for manufacturing. End products include petrochemicals, fertilizers, plastics, etc. Commercial Gas used by non-manufacturing establishments in the sale of goods or services

Electrical Power Gas used by power plants to generate electricity

Other smaller end-market uses of natural gas include 1) fuel (natural gas vehicles) and 2) oil & gas production.
Source: Energy Information Administration

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U.S. Natural Gas Demand by User (Bcf/d)

U.S. Natural Gas Demand By End Markets

Natural gas demand trends are highly seasonal. Because natural gas is used as a heating fuel, demand rises materially in the winter/cold weather months.




Electric Power


Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Page 56 Source: Energy Information Administration

Natural Gas Upstream Trends: Shale Gas in Focus .

Shale Gas in Focus Shale is a fine-grained sedimentary rock that may contain high concentrations of natural gas. Source: www.edu. production.S. It currently represents about 13-15 Bcf/d (~20-22%) of total U.uky.S. Shale is a growing source of current and future natural gas production in the U. Page 58 . Producers drill into shale beds and break open the rock using advanced drilling techniques and tremendous energy (pressure pumping).research.

Page 59 .S. Barnett. Marcellus and Woodford. Source: Energy Information Administration.Shale Basins in the U. Haynesville. Fayetteville. Major shale plays include: Bakken. Eagle Ford.

EOG.Bakken Shale The Bakken Shale is an unconventional resource play located in the Williston Basin in North Dakota. WLL. CLR. Major players include BEXP. Significant rise in completed well costs (+35% since 2009) is the biggest concern. Montana and Saskatchewan. Transporting produced volumes out of the Williston remains an issue for the industry. NFX. Page 60 Source: USGS . An oil-based shale play that offers one of the highest rate of returns in the industry. XTO/XOM and KOG. DNR. but recent capacity additions have provided some relief.

000 1. XTO/XOM.000 4.863 5. and Ellis Counties.000 2.964 3. Tarrant. much quicker than some other shale plays. Parker.041 1.1% Includes Denton.000 3.3% 46. Sommervell. Hood.4% 32. Wise.416 4. EOG and CHK as the major players.384 952 1.500 2.0% 54. Wells can be drilled in 15-20 days.0% 10.1% 37.0% 46.500 1. Johnson.9% 9.Barnett Shale Barnett Shale Natural Gas Production (MMcf/d) 5. Page 61 Source: Texas RRC .500 5.060 Barnett Growth –– 37.025 4.000 500 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 264 362 497 727 1.1% 4.500 3.9% 42. Production growth has slowed to less than 5% in 2010 after growing 36% per annum over the 2004 – 2009 timeframe showing that the play is maturing. ~3MM total acres with DVN. Hill.500 4.3% 30. Bosque. The Barnett Shale is an unconventional resource play located in North Central Texas.

IP rates are typically 10-15 MMcf/d and have been as high as 30 MMcf/d. Production has ramped up quickly and some industry sources indicate it could total 1. CHK. joint ventures or farm-outs The Haynesville Shale is an unconventional resource play located in East Texas / North Louisiana. Major players include ECA. RDS and HK. but first year decline rates are 80-90%.5MM acres We believe much of the “greenfield” leasing has been done Ways to enter now are through acquisitions.Haynesville Shale Industry believes play spans some 3. Page 62 Source: Company data r Cente of ity Activ .6 Bcf/d today. PXP.

CVX. UPL.org .planetthoughts. The Marcellus is currently producing ~3 Bcf/d and should continue to ramp into 2012. CNX. IP rates typically range 2-10 MMcf/d. APC. COG and CHK as the major players.Marcellus Shale High Pressure Area Low Pressure Area The Marcellus Shale is an unconventional resource play located in Appalachia. Page 63 Source: www. Play consists of ~60MM acres with EQT. Recent upward well EUR revisions in the SW PA region has pushed it to be one of the highest rate-of-return plays in the industry. Takeaway capacity concerns are being addressed with increased processing and pipeline buildouts. RRC.

It has gained significant attention with BHP Billiton’s recent acquisition of Petrohawk for $12. Page 64 Source: EIA . APC. SFY. NFX.Eagle Ford Shale The Eagle Ford Shale is an unconventional resource play located in South Texas. Concerns over takeaway capacity (lack of pipelines and trucks) remain a key issue. ROSE and BHP are major players. but are currently being addressed. IP rates typically range 8-12 MMcfe/d.1 billion (a 65% premium). CHK. SM. EOG.

wet gas/volatile oil and dry gas windows.planetthoughts. IP rates are speculated to be 20+ MMcf/d.Utica The Utica Shale is an unconventional resource play located in Eastern Ohio. PETD.org . Current focus has been on liquids-rich and volatile oil parts of the play. It is considered an analog to the Eagle Ford with oil. REXX. Page 65 Source: www. CNX and HES are major players. There has been significant exploratory activity and deal flow with recent JV’s and acquisitions (CNX/HES) that have valued the Utica at ~$9. GPOR.Emerging Plays . CHK.000/acre. DVN. APC. EVEP.

GDP. The Tuscaloosa is a new play in Southeastern Mississippi/Eastern Louisiana with DNR. SWN and DVN are first movers in the play. Page 66 Source: Berry Petroleum . BBG/BRY have announced an initial well and NFX has announced five wells to date with impressive early results. DVN and ECA have established acreage in the play. The Brown Dense is a new oil/gas play in Southern Arkansas and Northern Louisiana with no results announced to date.Emerging Plays – Uinta and Other Basins The Uinta Shale is an unconventional resource play located in Northern Utah.

Liquified Natural Gas (LNG) .

LNG can be transported by ship or truck to destinations that can’t be easily reached by pipelines. Natural Gas as a liquid occupies 1/600th of the space versus ambient gas. Source: LNG One World Page 68 .Liquefied Natural Gas (LNG) Liquefied Natural Gas (LNG) is natural gas (methane) that is chilled to liquid form. making it easier to store and transport on cargoes.

there is a growing spot market of ~5-6 Bcf/d.oilonline.. Regasification Page 69 Source: www. Spot shipments are delivered to regions with the highest netback prices (i. LNG facilities are highly capital intensive ($5-10B) and LNG vessels are $200-300MM each. offer the highest bids for LNG cargoes). but without significant local markets.com . Contracted import prices are often based on a oil-indexed contract (such as Japanese Crude Cocktail [JCC]).e.LNG: Industry Overview Liquefaction Source: StatoilHydro Transport LNG is exported from regions that have an abundant supply of natural gas. While most LNG projects operate under long-term contracts (20-25 years).

Nigeria. Construction of a liquefaction facility can take five to seven years. Atlantic Basin (Algeria.LNG: Liquefaction Liquefaction is the process by which natural gas is converted to liquid form. Oman). The liquefied gas is then loaded on to a carrier and transported to import markets. Methane gas is piped to a liquefaction facility where it is chilled to -260°F. Malaysia). Egypt. Trinidad). Indonesia. and Middle East (Qatar. Key LNG Supply Markets: Pacific Basin (Australia. Source: StatoilHydro Page 70 . at which point the vapor condenses to liquid.

S. Belgium) and U. Spain. Korea. Key Import Markets: Asia (Japan. Latin America and the Middle East. (bidder of last resort). Page 71 . Taiwan. The gas is then stored and distributed to local end-users through pipelines.LNG: Regasification LNG Carrier Storage Facility Source: Federal Energy Regulatory Commission Imported LNG is received as shipments at terminals with regasification (“regas” ) capabilities.. New markets are emerging in Southeast Asia.K. Regasification involves bringing natural gas back to its gaseous form through thermal energy. India. China). Europe (U.

Source: Federal Energy Regulatory Commission Page 72 . is Trinidad. Everett. the only LNG export terminal (with liquefaction facilities) in the U.S. COP and MRO closed the Kenai LNG plant in October 2011.LNG: U. Freeport. Peñuelas. Cameron. Elba Island.S. The largest supplier of LNG to the U.S. LNG import terminals (with regas facilities) include Cove Point. Sabine and Golden Pass. Import Terminals U. Lake Charles.S.

5% of the global gas trade Source: BP Statistical Review of World Energy Page 73 .LNG: 2010 Imports / Exports by Region LNG now accounts for 30.

importing 9.LNG: Major Importing Countries – Japan Japan is currently the largest importer of LNG globally. Indonesia and Malaysia. Source: California Energy Commission Page 74 . Imports primarily come from Australia. Total regasification capacity is currently approximately 25 Bcf/d with one terminal (Sodegaura) capable of importing 3. one of the largest in the world.9 Bcf/d.0 Bcf/d in 2010 as the country has few domestic means to satisfy natural gas demand.

Indonesia and Malaysia.3 Bcf/d in 2010.hydrocarbons-technology. importing 4. Korea has minimal domestic natural gas production and relies on LNG to fill the gap.com Page 75 . Current regasification capacity is roughly 10 Bcf/d with imports primarily from Qatar. Similarly to Japan.LNG: Major Importing Countries – South Korea South Korea is currently the second largest importer of LNG globally. Source: www.

Spain relies on LNG imports (~3.org Page 76 .faqs.9 Bcf/d) to satisfy natural gas demand.9 Bcf/d and is set to rise to nearly 7 Bcf/d over the next five years or so.LNG: Major Importing Countries – Spain Spain is currently the third largest importer of LNG globally.7 Bcf/d in 2010. importing 2. Source: www.0 Bcf/d) and pipeline gas (0. Current regasification capacity is roughly 5.

3 Bcf/d in 2010. Spain.hydrocarbons-technology. Qatar exports gas to most markets including Japan.K. Liquefaction capacity currently stands at ~10. and the U. Exported gas is primarily sourced from the large North Field.2 Bcf/d and should continue to grow through 2012 as two recently completed projects have yet to reach plateau. exporting 7.com Qatar is currently the largest exporter of LNG globally. Page 77 .S. Korea.LNG: Major Exporting Countries – Qatar Source: www. U. which has estimated recoverable natural gas reserves of more than 900 Tcf.

Page 78 Source: www. Indonesia plans to reduce future LNG exports from traditional LNG trains due to increasing domestic demand for gas. but recently granted project approval to Tangguh to build a third train. Like Australia. exporting 3.6 Bcf/d.LNG: Major Exporting Countries – Indonesia Indonesia is currently the second largest exporter of LNG globally. Indonesia primarily exports LNG to Asian markets. Liquefaction capacity currently stands at ~4.0 Bcf/d in 2010.2 Bcf/d with the majority (3 Bcf/d) from the large Bontang LNG facility that includes eight processing trains. which should increase capacity by 0.org .aceproject.

LNG: Major Exporting Countries – Australia Australia is currently the fourth largest exporter of LNG globally. exporting 2.com .0 Bcf/d Gorgon LNG project is currently being developed with first production expected in 2014 or 2015. Gorgon will be Australia’s largest resources project. China and Korea.5 Bcf/d in 2010.2 Bcf/d currently. Page 79 Source: www.lngpedia. Australia primarily exports its gas to Asian markets such as Japan. future projects are set to raise liquefaction capacity to 10-15 Bcf/d by 2020. The $37B. While liquefaction capacity only stands at ~3. 2.


2) Extraction of oil & gas resources.Exploration & Production Oil Supply Chain Natural Gas Supply Chain Source: American Petroleum Institute. Source: American Petroleum Institute. Exploration & Production is the first link in the oil & gas supply chain and involves: 1) Search and discovery of oil & gas reserves. Page 81 .

Exploration & Production: Industry Players The industry is made up of several categories of players who participate in exploration and production for oil and natural gas. 3) Pipeline Companies: Focus mainly on natural gas transmission but often have upstream segments as well. 2) Independent E&P: Primary business is to engage in exploration & production. 1) Integrated Oils: Are involved in all links of the supply chain. including the upstream. Integrated Oils Independent E&Ps Pipeline Focused Source: Google images Page 82 .

The Upstream Process .

the well is decommissioned and equipment is removed from within the wellbore.co. Prospects include: Locations contiguous to producing formations Unexplored areas Exploration & Appraisal: Producers will then begin to evaluate the acreage to see if there are commercially recoverable reserves. shooting seismic and drilling exploratory wells and appraisal wells. rigs and equipment will be contracted and wells are drilled and completed. 3) 4) 5) Development: Once the commercial viability of a prospect is determined. The process is broken down into five primary phases: 1) 2) Acreage Acquisition: Producers begin by acquiring leases and drilling permits. Production: Full scale production involves the ongoing collection of hydrocarbons. Wells drilled in previously unexplored areas are known as wildcats. Gardner Denver . Source: www.directnews.uk.The Upstream Process (E&P) Exploration & Production involves the search for and development and production of oil and gas reservoirs. Oil and gas are produced from within the well and transported to processing facilities via pipelines.Texas A&M University Page 84 . Plugging and Abandonment: When a well has produced out its economically recoverable reserves. Involves sub-surface analysis.

The Upstream Process START HERE Plug & Abandon Bad Good Acquire acreage Conduct seismic survey Interpret data Identify prospects Drill exploration wells Evaluate results Final Investment Decision Oil For Sale Go on to Development Sign gas sales contract Negotiate gas sales contract Formulate Development Plan Examine gas sales options Gas with no spot market Drill further wells appraisal No market identified Install platform/ rig or drilling ship Begin drilling Install production wells facilities Begin production Sell oil / gas for cash Source: Google images. Page 85 .

realestateofpinedale.com The first step producers take is to negotiate or bid for leases with governments. leases are commonly awarded as Production Sharing Contracts or Agreements (PSCs.). OR 2) In some countries. Lease terms vary widely between countries but leases typically include: 1) A royalty payment to land owners that represent a percentage of gross production (typically 12. states or spare private land owners. PSAs) Lease terms can range from: 1) Short-term: 3-5 years 2) Long-term: approximately 10 years 3) Held by production: lease can be held based on a minimum production threshold .Acreage Acquisition: Exploration and Right to Drill Source: www.5-30.0% in the U.S. Producers then acquire drilling permits / necessary regulatory approvals (from federal/state/local governments) for the right to drill.com Page 86 Source: www.realestateofpinedale.

producers use geological surveys and seismic evaluation to determine the likely existence of hydrocarbons before drilling a well. Page 87 . Geological surveys involve surface level analysis of the geology of an area to assess if sufficient oil and gas reserves are likely to be beneath the surface. Source: Cobalt Exploration. Seismic evaluation allows producers to develop a subsurface image of a play.Exploration & Appraisal: Finding Hydrocarbons Among various techniques. Geological Surveys Seismic Evaluation Source: Oil Shale Exploration Company.

Source: BP Energy Please see Oilfield Services section for additional detail Page 88 Source: BP Energy . The process: – – – Seismic waves (acoustic vibrations) are created. Seismic evaluation involves the creation of a subsurface area image that can indicate hydrocarbon accumulations. Seismic is one of the most widely used exploration tools today and is used both onshore and offshore.Exploration & Appraisal: Seismic Evaluation Seismic evaluation has greatly de-risked the exploration process. The waves migrate downward and reflect off of various layers of subsurface rock back to the surface where receivers "catch" the waves. The speed and nature of how the waves reflect are then interpreted to estimate subsurface geology.

– Successful exploration wells are capitalized as part of the project’s overall cost. producers will often drill appraisal wells to test flow rates and determine the commercial viability of the reservoir. Source: Federal Institute of Geosciences and Natural – Unsuccessful exploration wells are known as “dry holes” and their cost is generally immediately expensed. producers will drill an exploratory well to confirm pre-drilling test data (geological surveys and seismic). producers will drill a prospect to confirm the existence of hydrocarbons. In areas where the existence of oil and gas reserves are unproven. Resources (Germany): Kansas University Geological Survey Page 89 .Exploration & Appraisal: Drilling Test Wells Once a target is chosen. For higher risk offshore production.

2) Logging – Uses electrical. Fragments are tested to estimate flow potential for the well and effectiveness of fracture stimulation.Exploration & Appraisal: Downhole Tests Downhole tests are run from within the well during drilling to test formation properties and determine the commercial viability of the reservoir. acoustic and other signals to measure depth and formation properties in the wellbore. Common tests include: 1) Coring – Core samples from the formation are collected from within the well. Source: San Joaquin Geological Society Page 90 .

Development: Drilling the Well The most common technique used to drill a well is rotary drilling. As the name implies. If a well does not contain sufficient hydrocarbons. to which producers pay day rates and fees for services rendered. its commercial viability is determined. it is designated a dry well and then plugged and abandoned. it is completed and production commences. rotary drilling uses a sharp drill bit that drills through the Earth’s crust. Source: Schlumberger Source: Encarta Page 91 . Wells are drilled with rigs and equipment that is often contracted from an oilfield service company. Once a well is drilled. If a well contains sufficient oil and gas.

Development: Horizontal Drilling An advanced drilling technique used by producers is directional drilling.horizontaldrilling. which allows the well to be drilled at varied angles to access reservoirs that would otherwise be difficult to reach using traditional vertical drilling. albeit it at higher costs. Horizontal Well Vertical Well Source: Energy Information Administration Horizontal Drilling reaches deeper into blanket formations Source: www.org Page 92 . Horizontal drilling is a widely used variation of directional drilling and has been a key to unlocking gas from shale formations. Horizontal drilling allows producers to access more difficult reservoirs.

Once the casing is installed. Source: Schlumberger Source: Halliburton Source: Schlumberger Page 93 . Well casing is typically made of steel. which makes producers susceptible to movements in steel prices. the well is perforated via explosive charges that are lowered into the well.Development: Well Completions The process of completing a well involves installing casing to provide support for the wellbore (to prevent it from caving in). Well casing also serves to prevent leakage of oil and gas. which produce holes for hydrocarbons to flow into.

Frac jobs involve pumping fracturing fluid (a combination of water and sand) into the well at high pressures.S. Additional fractures allow for better flow of oil and gas trapped within a formation Page 94 Source: C. producers may need to stimulate the reservoir with hydraulic fracturing (“frac job”). Garber & Sons . The goal of fracturing is to increase flow of oil and natural gas. creating fractures in the formation that allow oil and gas to flow through and into the wellbore.Development: Well Stimulation If a reservoir contains hydrocarbons which are high in viscosity or have limited fissures to move through.

Production: Producing the Well Production begins once a well has been completed and hydrocarbons flow to the surface. Sources: Well Services Energy. When hydrocarbons are highly viscous or the formation below the surface has low permeability or low porosity. University of Texas Page 95 . the natural pressure within a well may allow hydrocarbons to flow freely to the surface. lifting equipment and / or compression may be necessary to best extract the oil and gas. During production.

Production: Decline Rates Production will come on at an initial production rate (IP rate) and decline as natural pressure dissipates and the well produces out. with some gas shales exhibiting very steep declines within the first year (80-90%) and long life tails. Production decline rates will vary among different fields. Sample Decline Curve for a Pinedale Tight Gas Well Source: Ultra Petroleum. Decline rates force producers to consider the time-value of a play. Page 96 .

Secondary recovery can restore flow to a well for 10-15 years.Production: Enhanced Oil Recovery As natural pressure fades during primary recovery. production falls leaving a significant amount of unrecovered oil remaining in the reservoir. Secondary recovery involves pumping water into the well to restore pressure and stimulate oil flow. CO2 restores pressure to the well. Enhanced Oil Recovery (EOR) methods can be used to restore pressure within oil wells and regenerate flow (secondary and tertiary recovery). Tertiary recovery involves pumping CO2 to increase recovery. Source: Schlumberger Page 97 . and also make oil less viscous and therefore easier to produce.

and a cap is welded in place and then buried. the tubing may be removed from the well and sections of well bore filled with cement. The surface around the wellhead is then excavated.Abandonment At the end of its productive life. a well or field area is abandoned. the process is sometimes referred to as “decommissioning. In the onshore segment. the wellhead and casing are cut off. Source: The Fairweather Group.” Platforms are de-activated and either removed or dropped to the seabed as prescribed. Page 98 . In the offshore segment.

Oil and Gas Reserves .

Possibles cannot be booked under current SEC guidelines. 3) Possible (3P) – Unproven reserves that are less likely to be recovered than probables.Exploration & Production: Reserves Producers can add reserves either 1) organically (drill-bit) or 2) through acquisitions Recognizing Reserves: 1) Proven Reserves (1P) – Estimated quantities of oil and gas that are reasonably certain (80%-90% confidence) to be recoverable under today’s technology and prices.Proven Developed (PDP): Reserves expected to be recovered from existing wells. existing equipment and/or improved recovery techniques. . . Probables cannot be booked under current SEC guidelines.Proven Undeveloped (PUD): Reserves that will require further development and that are expected to be recovered from undrilled acreage or existing wells that require recompletion work. 100% 80% 60% 40% 20% 0% Source: Credit Suisse PDP Proved PUD Probables Possibles Page 100 . 1P can be broken down into: . 2) Probable (2P) – Unproven reserves that are more than likely to be recoverable (50% confidence).

Only a fraction of this oil can be recovered from a reservoir and is known as the recovery factor. This method is most useful early in the life of the reservoir. It is assumed that the production will decline on a reasonably smooth curve. It requires some production to occur (typically 5% to 10% of ultimate recovery). Production Decline Curve Method: The decline curve method uses production data to fit a decline curve and estimate future oil production. and so allowances must be made for wells shut in and production restrictions. before significant production has occurred. Page 101 . using assumptions from fields with similar characteristics. Volumetric Method: This method attempts to determine the amount of oil/gas-in-place by using the size of the reservoir as well as the physical properties of its rocks and fluids. 2. There are three general categories for estimating oil reserves: 1. Then a recovery factor is assumed. 3.Exploration & Production: Estimating Reserves Oil in place or gas in place refers to the amount of oil or gas in a subsurface reservoir. Materials Balance Method: The materials balance method for an oil field uses an equation that relates the volume of oil. to calculate the remaining oil/gas. water and gas that has been produced from a reservoir. unless reliable pressure history can be used from a field with similar rock and fluid characteristics. and the change in reservoir pressure. The portion that can be removed is considered in the calculation of reserves.

Performance revisions include better than expected recovery (eg. In-fill drilling). Page 102 . Some of the changes include: Use of a 12-month average price (calculated as the arithmetic average of the price on the first day of each month) rather than single-day.Exploration & Production: Reserve Accounting Producers are not required by the SEC to perform reserve audits but many choose to use outside engineers. At low commodity prices. so producers are forced to post negative price reserve revisions. which has led to higher industry PUD ratios. Reserves may be revised depending on assessments of price and performance. year-end pricing. The SEC recently revised the rules regarding reserve accounting that took effect for the 12/31/2009 reporting season. it sometimes becomes uneconomic to produce certain reserves. Negative price revisions are different than impairments (which are taken against oil & gas properties. not reserves). Producers are able to report proved undeveloped reserve locations that are not directly offset by a producing well (one offset rule).

80 200 70 60 50 Years 40 30 20 11 10 0 68 58 46 37 60 m er ic a si a A fr ic a Eu ro pe /E ur as ia er ic a id La tin N or th M A m dl e A W or ld Ea st A Source: BP Stats Page 103 . Calculated as the reserves remaining at the end of any year divided by the production in that year.Exploration & Production: Reserve Life This is the length of time that remaining reserves would last if production were to continue at current levels.


processing. natural gas liquids. Midstream refers to all activities between the production of natural gas natural gas. crude oil and refined products and oil and the end-use markets Midstream activities include transporting. fractionating. and storing Source: Enterprise Products Partners Page 105 .Midstream Source: American Petroleum Institute.

2) Crude Oil / Refined Products Midstream: Involved in transporting crude oil and refined products to end-use markets. Natural Gas Midstream Crude Oil / Refined Products Midstream El Paso Spectra Williams ONEOK Enterprise Energy Transfer Kinder Morgan Boardwalk The Majors Colonial Pipeline Enbridge Kinder Morgan Sunoco Logistics Magellan Buckeye Plains All American NuStar Page 106 .Midstream: Industry Players The industry is made up of several categories of players but may generally be split by hydrocarbon 1) Natural Gas Midstream: Involved in transporting natural gas and natural gas liquids to end-use markets.

Natural Gas .

natural gasoline). The resulting dry gas. carbon dioxide and natural gas liquids (NGLs). butane. hydrogen sulfide. free of impurities or other non-methane compounds.Midstream: Natural Gas Processing Processing natural gas involves the removal of oil. isobutane. Page 108 . propane. After the NGLs are separated from the natural gas stream they are transported via pipeline to fractionators where they are further separated into purity products (ethane. is deemed “pipeline quality”. water.

00 $0.47 $0.80 0.85 $0.03 1.80 1. as of 09/07/2011 Page 109 .73 $0.40 $0.63 $0.84 $0.00 0.01 $1.15 $1.25 $1.67 $0.97 $1.56 $0.20 0.65 $0.NGL Fundamental Drivers Natural gas production requires gathering and processing services Especially rich gas from unconventional resource plays The relationship between natural gas prices (the feedstock for NGLs) and crude oil prices affect natural gas processing economics NGL price .03 $1.20 0.20 $1.36 $1.40 0.60 0.65 $0.69 $0.60 0.59 $0.40$1.44 $1.88 ($ / Gal) 1.65 $1.60 1.70 $0.23 1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 3Q11TD 1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010 1Q11 2Q11 Q11TD 3 Source: Bloomberg.80 0.67 $0.71 $0.82 $0.20 Quarterly Gross Processing Spread (Average of Weekly Spreads) 1.40 0.08 $1.16 $0.04 $0.81 $1.00 ($ / Gal) 0.40 1.Natural Gas price = Processing Margin Drivers of natural gas liquids production Absolute level of natural gas produced Mix of natural gas production between rich gas (contains relatively more NGLs) and dry gas (contains small amounts of NGLs) Quarterly NGL Composite Price (Average of Weekly Prices) 1.00 $0.58 $0. Credit Suisse.65 $1.40 $1.15 $0.

Natural Gas Pipelines & Storage Natural Gas Pipelines Natural Gas Storage Dry natural gas can move into interstate or intrastate pipelines or into storage Interstate pipelines are regulated by the Federal Energy Regulatory Commission (FERC) Intrastate pipelines are regulated at the state level (and FERC in certain instances) Storage facilities may be FERC-regulated or have market-based rates Two favorable characteristics of interstate pipelines: 1) The pipeline does not take title to the commodity and is thus not sensitive to commodity prices 2) Capacity reservation fees provide stable revenue regardless of volumes transported Source: EIA Page 110 .

Crude Oil / Refined Products .

producers tend not to switch and remain loyal because the crude gatherer also provides field and administrative services to the producer. Typically the crude is gathered by trucks or small diameter pipelines. Purchase and sales are typically entered into nearly simultaneously to mitigate commodity price exposure.Crude Oil: Lease Gathering & Marketing Midstream companies purchase crude from producers at or near the wellhead (lease) and sell that crude to refiners or third party marketers. Source: American Petroleum Institute Page 112 . Although lease gathering contracts are usually for short periods of 30 days.

– Pipelines are allowed to adjust tariffs each July based on the producer price index for finished goods for the prior calendar year plus 2. Liquids pipelines do not take title to the commodities transported. trucks (4%).000 miles of pipelines in the U. but not both.Crude Oil / Refined Products Pipelines Major Crude Oil Pipelines Major Refined Products Pipelines ~200. – This index methodology is reviewed every 5 years. their revenue streams depend on tariffs and the volume of product transported. Pipelines must be dedicated to either crude or refined products. and rail (2%) represent the balance). Source: Allegro Energy Group Page 113 . Tariffs may be market based or regulated by the FERC.65%. transport about two-thirds of the petroleum consumed (water carriers (28%).S. current calculation is set through June 2012.

This new mixture must be moved to a separate storage facility and reprocessed. Transmix is created at the interface point where two batches meet. A batch is a quantity of one product or grade that will be transported before the injection of a second product or grade.pipeline101. Source: www.Refined Products Pipelines: Batching R egular Gasoline R egular Gasoline Premium Gasoline Jet F uel Premium Gasoline D iesel Products that meet certain specifications can be mixed (batched) and transported together in sequence.com Page 114 .


Products & Services .

Oilfield Services: Industry Segments Oil Service companies aid independent exploration and production companies (E&Ps). We list them by stage of a new oil & gas field: 2010 Western Service company total revenues: $259B Total Production 33% Equipment/ Infrastructure 27% Exploration/ Seismic 5% 1) Exploration/Seismic 2) Drilling 3) Completion 4) Production Production Services 6% Drilling Services 25% Completion 15% Total Revenue: $259B Contract Drilling 22% Total Drilling 47% Source: Spears & Associates Page 117 . The Industry is made up of several segments/life cycle categories. international oil companies (IOCs) and national oil companies (NOCs) in the exploration and production of oil and natural gas.

geophones/hydrophones.third party processing of Receiver seismic data prior to interpretation vessel Library Sales . telemetry systems.multiclient sales of nonexclusive seismic data Software . interpretation.collection of seismic data Data Processing .) used in data acquisition. etc.Exploration: Seismic Seismic services and equipment include: Data Acquisition .OFS . BP Energy. and engineering analysis that can run on workstations or PCs Geophysical Equipment . energy sources (vibratory vehicles. Baker Hughes Page 118 . air guns.software products for seismic Streamer processing.data recorders. s reservoir modeling and characterization. mapping. petrophysical evaluation. Marine Seismic Survey Seismic Output Source: Spears & Associates.

Schlumberger. where to drill a side track well). It is often applied in old wells to help operators determine what to do next (e. Types of Log Measurements: Electrical properties – resistivity and conductivity Neutron density (porosity) Pressure testing Sonic properties Dimensional measurements Formation fluid sampling Spectroscopy (lithography) Source: Spears & Associates. American Association of Petroleum Geologists Page 119 . Open hole logging occurs during the drilling process and measures characteristics of the rock and the fluids contained therein. Cased hole logging refers to measurements taken in a well after a casing or liner has been set in the well.OFS – Exploration/Drilling: Wireline Logging/LWD Wireline logging includes both open and cased hole services.g.

Top drive – A device suspended in the derrick that rotates the drill pipe in order to drill the well. Blow Out Preventer (BOP) – A large valve used to seal off a well being drilled or worked over at the surface to prevent the escape of pressure. Key equipment includes: Derrick – A structure used for lifting and positioning the drilling string and piping above the well bore and containing machinery for turning the drill bit. They are used for onshore oil and gas drilling. Draw works – A steel spool device that is used to reel out and reel in the drilling line. Source: Schlumberger Page 120 .OFS – Contract Drilling: Land Rigs Land Rigs can be mechanical or electric and vary in terms of drilling depth and horsepower.

Rowan Page 121 . Noble.Anchored by a mat-like structure that rests on the sea bed. 2 types: – Independent Leg -Anchored by “legs” that extend down to the seabed – Mat .OFS – Contract Drilling: Offshore Rigs Drillship A floating mobile offshore drilling vessel that operates in the midwater. deepwater and ultra-deepwater and can be conventionally moored (anchored) or dynamically positioned. deepwater and ultra-deepwater and is typically dynamically positioned. Jackup A mobile offshore drilling platform that operates in shallow water and rests on the oceanfloor when in operation. Semisubmersible Drillship Jackup Source: ODS-Petrodata. Semisubmersible A floating mobile offshore drilling platform that operates in the midwater.

note figures exclude newbuilds Page 122 ./Africa 19% North Sea 15% Source: ODS-Petrodata.OFS – Contract Drilling: Offshore Rigs by Geography Middle East. SE Asia are the largest jackup markets Global jackup markets as % of total South America. West Africa./Africa 13% Med. North Sea are the largest floater markets Global floater markets as % of total Other Australia/New Zealand 1% 3% Southeast Asia/Far East 15% Southeast Asia/Far East 20% US GOM 17% US GOM 12% Central/South America 10% Middle East/India 4% Central/South America 31% North Sea 9% Middle East/India 31% Med.

Roller or Tri-Cone –Roller cone bits have teeth typically made of milled steel or tungsten-carbon inserts mounted on three roller cone assemblies. but advancing technology now puts them in hard. They are best used in hard and medium strength formations. Fixed cutter bits are often custom engineered for specific formation characteristics.e. a “rental” model).OFS – Drilling: Bits Drill bits come in two main categories: Rollercone and fixed cutter (PDC). abrasive rock. Fixed Cutter or Polycrystalline Compact Diamond (PDC) –Fixed cutter bits usually use Polycrystalline Compact Diamond (PDC) inserts mounted on the body of the bit. Source: Spears & Associates Page 123 . Technology advancement has led to steady share gains by PDC bits and is moving the market to buy on a $/ft drilled basis (i. PDC bits have typically been used for soft formations.

OFS – Drilling: Fluid System Fluid Circulation System The drilling fluid.to remove cuttings from the subsurface Mud pit – to collect used mud for recirculation Page 124 . is one of the major factors in the success or failure of the drilling operation. Fluid Enters the well at the Bit The fluids handling system re-circulates the drilling mud and includes: – – – – Mud pump Mud mixer Shale shaker . Drilling fluid serves three functions: – – – Lifts cuttings to the surface Cools the drill bit Supports the integrity of the wellbore and prevents hydrocarbon “kicks” by providing weight/pressure that is generally greater than that of the reservoir (known as an “over-balanced” condition). also known as drilling mud.

Source: www. turning the bit and thereby allowing it to drill in the direction the bit points (unlike conventional [vertical] drilling. Drilling fluid is pumped through the mud motor. Halliburton Page 125 . – Rotary Steerable Tools (RST) allow the driller to “point” or “push” the bit without stopping drill pipe rotation. the drill string does not rotate). Rotary Steerable Technology Drilling directionally entails use of steering systems (Measurement While Drilling or MWD) and Logging While Drilling or FEWD or LWD). allowing for faster and smoother hole construction. LWD measurements are generally similar to those taken in wireline logging.OFS – Directional Drilling Directional drilling entails drilling in a direction other than vertical. There are two methods: Directional and Horizontal Wells – Conventional uses a bend near the bit and a steerable mud motor.horizontaldrilling.org.

Completions Completing the well is the process of accessing the reservoir including: Perforating Casing/ Completion Reservoir Perforations – – Installation of casing and liner. Perforating the casing to access the reservoir.OFS . A series of “chargers” are deployed to where the well accesses the reservoir. Halliburton Page 126 . Casing is large diameter steel pipe that is cemented into the well bore to ensure stability of the formation. Casing Packers Screen Layers Completion System – Stimulation (see next page) Other key products include: – Packers and plugs to isolate zones – Screens to keep sands away from production – Isolation valves to manage flows from multiple completion zones Source: Schlumberger.

Independent Oil & Gas Service. In acidizing. Frac job Proppants –Cementing of Casing (approx 20% of P. Gulftex. Proppants are used to keep fractures open and can be sand. Cement is pumped thru the casing to the end of the section and forced back up the well in the annulus (between outer wall and well) where it sets and hardens. Carbo Ceramics. ProPublica Cementing unit Page 127 .OFS – Completion: Pressure Pumping Pressure pumping consists primarily of cementing and various forms of production stimulation. In fracturing. casing is cemented in place in the well bore. resin-coated sand. acids can be used to etch away rock. Source: BJ Services. Frac unit –Stimulation (80%) – Services include hydraulic fracturing (dominant). acidizing and nitrogen injection.P revenue) As described in the completions section. fluid is pumped at high pressures into the well bore to create/widen fractures in the formation so oil/gas can flow into the well. and/or ceramic.

valves and manifolds required to bring fluid treatment down to wellbore from the pump Treating Iron Frac Pump Engine Transmission Cooling System Frac Pump: a high pressure. Weir SPM.OFS – Hydraulic Fracturing Equipment Frac Truck Treating Iron: temporary surface piping.400 hours Source: Jereh-PE.LN) and vertically integrated providers such as Halliburton (HAL) and FracTech Power End Expected Lifespan: Up to 2 years Fluid End Expected Lifespan: Ranges from 500 to 1. high volume Frac Pump pump used in hydraulic fracturing • Manufacturers include independents such as Gardner Denver (GDI) and Weir SPM (WEIR. Schlumberger Page 128 .

Manifolds house equipment and pipes that control. Surface Tree Subsea Tree – Surface trees are installed on land and on offshore platforms. Oceaneering International. direct and measure the flow of fluids to/from the subsea well. – Subsea trees are installed on the sea bed. Umbilicals are made of either steel or thermoplastic tubes that contain fluid conduits for hydraulic power and chemical injection. Umbilical Umbilicals are used for the control of subsea production systems.OFS – Production: Subsea A Christmas tree is a set of valves that sit on top of the wellhead and control the flow of pressure of a producing well. Umbilical Manufacturers’ Federation Subsea Tree Page 129 . Subsea Production System Umbilicals Flowlines Manifold Source: FMC Technologies.

water depths up to 1. water depths up to 4.000-2.000 ft.000ft. – SPAR Platforms have a large single vertical cylinder supporting a deck. – Floating Production Systems are semi-submersibles anchored by wire rope and chain. suited for remote deepwater areas with no pipeline infrastructure. – Tension Leg Platforms float but connected to the sea floor by vertical tendons. water depths beyond 4. water depths 1.000 ft.OFS – Production: Offshore Systems Offshore production infrastructure includes: Offshore Production Development Systems – Fixed Platforms consist of a jacket driven into the seabed with a deck. Credit Suisse Page 130 . or dynamically positioned. – Floating Production.000 ft. Storage & Offloading Systems (FPSO) are large tanker vessels moored to the seafloor. – Compliant Towers can sustain significant lateral deflections. water depths beyond 4. Source: MMS.500ft.000 ft. process and stow production from subsea wells and offload to a small tanker. water depths beyond 4.

Schlumberger Page 131 . 90% of existing producing oil wells and gas wells requiring water removal utilize some type of artificial lift.OFS – Production: Artificial Lift Artificial Lift is a technology for mature oil and gas wells that need to boost fluids out of the wellbore. Independent Oil & Gas Service. particularly as they produce water. Main types of artificial lift include: Rod pump – Reciprocating rod pumps – a plunger and valve assembly driven by surface motor ESP PCP – Electric Submersible Pumps (ESPs) – typically several centrifugal pump stages to access different wellbore sections driven by a downhole electric motor – Progressive Cavity Pumps (PCPs) – a surface motor rotates the sucker rods using a stator and rotor to cause fluid to flow upward Source: Spears & Associates. Weatherford.

There are three segments to the field compression market: Compressor –wellhead –gas gathering –processing Compressors have historically been owned and operated by oil companies.S.OFS – Production: Compression Compression raises the pressure of natural gas in the reservoir so that it will flow into pipelines and other facilities. Gas Gathering Compression Source: Exterran Holdings. but the U. is now approximately 1/3 outsourced to contract compression providers. Ariel Page 132 .

Key products/services include: –Workover – the process of performing major maintenance or remedial treatment on a well.OFS – Production: Well Servicing Workover rig Well Servicing refers to the maintenance procedures that take place on a well after the well has been completed and production from the reservoir has begun. It is done to sustain and enhance the productivity of the well. –Coiled tubing – tubing used for the placement of fluids or manipulation of tools during workover –Snubbing – the process of putting drill pipe into the wellbore when the BOPs are closed and pressure is contained in the well Coiled tubing unit –Plug and Abandonment – the process of preparing a well to be permanently closed Source: Schlumberger. MTG Page 133 .

OFS – Drilling/Production: Offshore Logistics Helicopters are used for transporting personnel between onshore bases and offshore platforms. Wartstila. drilling mud. water. drilling rigs. open deck for carrying equipment in support of offshore exploration and production. Superior Energy. Lift Boat Lift Boats are self-propelled. Supply Boat Supply Boats are ships specifically designed to transport goods (i. self-elevating vessels with a relatively large. chemicals. and which can serve as a platform from which maintenance and construction work can be conducted. and installations. cement. etc) and personnel to and from offshore oil platforms and other offshore structures. Source: Bristow Group.e. tools. MMS Page 134 . diesel fuel.

Source: CalDive. repair (IMR) and welding. Offshore Support Vessels (OSVs) are equipped with Remotely Operated Vehicles (ROVs) .000 ft depths. maintenance. Surface diving can be performed in depths up to 200 ft. Derrick barges have cranes used to lift heavy structures such as platforms/topsides. saturation diving can be performed in 2001. construction and drill support in deep water. Diving support vessels (DSVs) support divers performing inspection. tethered underwater robots used for IMR. or the J-lay method in deep water where pipe is laid vertically and only bends once as it hits the seabed. Oceaneering Combination Pipelay/Derrick Barge ROV Page 135 .OFS –Production: Offshore Construction Pipelay vessels use either the S-lay method in water depths <2K ft where pipe is laid into the water horizontally and bends twice in an S-shape.

Company Specific Detail .

Aker. SPM. TTS OII. CRR. NGS TDW. BHI TS.SLB. SLB. CGV OIS BHI. WFT HAL. TESO HAL. HP HERO.OFS: Life Cycle Exposure and Selected Co’s Life Cycle Stage Exploration Prospect ID Seismic Acq. BHI. Nalco WFT. Vallourec IO. BHI LUFK EXH. PGS. BHI. NBR. RDC RIG. NOV SLB. CAM./Processing Reservoir Imaging SLB. TEC.FP. CKH BRS Well Servicing Workover Rigs Coiled Tubing/Intervention Fishing Cased Hole Wireline Logging KEG. BHI. SLB. Umbilicals Risers/Flowlines TEC. HAL.NO. GLBL FTI. SPN SLB. BHI. CPX SLB. HAL. CGV. HAL CLB SLB. X SLB. DO. BHI SPN WFT. DWSN HAL Evaluation Open Hole Wireline Logging Coring Production Testing Drilling Contract Drilling Land Shallow Water Deepwater NBR. Expro Oil Services Activities Examples of OFS Co's Life Cycle Stage Oil Service Activities Examples of OFS CO's Page 137 .FP GE (OG). WFT SLB. SDRL Drilling Services Bits Fluids OCTG Directional Drilling Completion Casing Handling "Tools" Pressure Pumping Production Ongoing (Enhancement) Chemicals Artificial Lift Nat Gas Compression Logistical Support Supply Boats Helicopter Equipment/Infrastructure Development Engineering/Design Fabrication Installation Production Subsea/Surface Equip. MDR HLX. CPX. BAS BHI. Aker. DRQ Capital Equipment Rig Equipment Drill Pipe Seismic Equipment Production Unit/Equipment NOV. ACGY.IM GIFI. BHI . PTEN. CAM NOV.

OFS: Diversified Service Segmentation Geographic Revenue Segmentation (2010) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 25% 42% 35% 23% 38% Life Cycle Segmentation (2010) 100% 80% 60% 40% 64% 84% 67% 30% 12% SLB HAL Ex ploration 6% WFT Dev elopment Production 12% BHI 67% 6% 4% 26% 21% 20% 33% 45% 37% 16% 40% 46% 20% 0% SLB NAM Land HAL Intl Land WFT Offshore BHI Diversified Service Revenue by Region (2010) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SLB HAL WFT BHI 21% 20% 48% 37% 49% LAM NAM 23% 18% 9% 8% 6% 11% 3% 20% 13% 6% 20% 7% 13% 16% 8% 9% 5% 18% 12% Russia/FSU Eur/Afr Other E Hemi Middle East Diversified Service Revenue by Product (2010) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 15% 3% 16% 6% SLB 19% 3% 3% 21% 13% 12% 15% 3% 6% 5% HAL 40% 15% 17% 13% 6% 7% 12% 28% 10% 6% WFT 14% 8% 2% 16% 20% 7% 16% 7% 10% BHI Artificial Lift Interv ention Completion Pumping Other Drilling Fluids Dir Drilling Explor. Company data. Bits Wireline Geophy sical Compl. Drilling Prod'n 100% 4% Other Source: Spears & Associates. Credit Suisse estimates Page 138 .

Credit Suisse estimates 2010 Revenues = $0.9B Page 139 .9B Source: Company data.6B 2010 Revenues = $1.7B 2010 Revenues = $6.1B Oceaneering (OII) Adv anced Technology 12% Inspection & NDT 12% Remotely Operated Vehicles (ROVs) 34% Dril-Quip (DRQ) Serv ices 14% Dresser Rand Corp (DRC) Other Midstream 10% 5% Offshore Rig Equipment 16% Env ironmental 15% Upstream 50% Subsea Projects 13% Subsea Products 29% Surface Equipment 5% Subsea Equipment 65% Dow nstream 20% 2010 Revenues = $1.OFS: Equipment/Infrastructure National Oilwell Varco (NOV) Distribution Serv ices 12% Cameron (CAM) Rig Equipment 17% Subsea 26% FMC Technologies (FTI) Surface 16% Petroleum Serv ices & Supply 33% Rig Technology 55% Surface 17% Energy Processing Sy stems 19% Subsea 65% Process & Compression Systems 19% Valves & Measurement 21% 2010 Revenues = $12.1B 2010 Revenues = $4.

5B Page 140 .5B 2010 Revenues = $3.8B 2010 Revenues = $9.4B 2010 Revenues = $9.6B 2010 Revenues = $6.3B Source: Spears & Associates 2010 Revenues = $6.5B Fluids China OFS 2% TTI 4% NR 7% BHI 11% SLB 37% SLB 17% Completions Ex pro WFT 12% 3% Others 2% HAL 34% Artificial Lift Others 19% WFT 20% HAL Varel 6% Bits Others 4% SLB 29% WFT NOV Others 2% 2% 8% Dov er 6% LUFK 7% WG.LN BHI 17% 14% NOV 19% HAL 27% BHI 32% 7% Borets 8% SLB 16% BHI 28% 2010 Revenues = $8.0B 2010 Revenues = $11.OFS: Market Shares for Key Services/Products Pressure Pumping Others Calfrac 4% WFT 4% Frac Tech 5% Trican 5% BHI 11% SLB 24% GOK 5% Fugro 7% HAL 8% PGS 9% SLB 17% Seismic Others 22% GGS 2% TGS 5% CGV 25% Ex pro 2% SPN 3% WFT 6% HAL 11% Wireline J-W China Wireline OFS 2% 2% Directional Drilling Others 15% Scientific Drilling 4% WFT SLB 54% NBR 1% 17% Others 6% HAL 29% SLB 36% 7% BHI BHI 14% 18% HAL 20% 2010 Revenues = $25.

6B 2010 Revenues = $10.9B 2010 Revenues = $3.LN 10% FTI 18% Aker 14% 2010 Revenues = $29.4B Source: Spears & Associates. Quest Offshore Resources 2010 Tree Orders = $6.9B Compression Others 27% EXH 45% Valerus 5% Compr.7B Page 141 .LN 4% OII 5% Others 9% FTI 25% KBR 13% TTES 4% Aker 6% GE 7% Technip 17% CAM 15% MDR 9% GE 7% WG.OFS: Market Shares for Equipment/Infrastructure Offshore Construction GLBL 2% OII 2% Technip 3% Fugro 4% Aker 6% SBMO 7% Subsea 7 7% ACGY 7% DVR Others 18% 2% Saipem 20% Surface Equipment Others 21% Weir SPM 3% CAM 31% Subsea Equipment DRQ 4% WSM. Systems 6% CDM Resource 9% Subsea Tree Orders GE 8% AKER 16% CAM 17% J-W 8% FTI 59% 2010 Revenues = $2.

ODS Petrodata. Oceaneering Total since ‘05 = 167 Top Drives Total = 747 Vehicles Page 142 .2B Total since ‘05 = 183 BOPs Total since ‘05 = 169 Mud Pumps Cementing Skids BHI 23% Other 2% Hydralift 7% Top Drives Others 14% Drill Support ROVs Other 24% OII 35% HAL 41% Canyon 6% SLB 34% Maritime Hydraulics 19% NOV 60% Fugro 7% Sonsub 8% Subsea 7 20% Total since ‘05 = 219 Skids Source: Spears & Associates.OFS: Market Shares for Rig Equipment Rig Equipment Others 24% Bentec 2% OIS 3% GE 5% Aker 5% CAM 8% Hydril 27% Shaffer 22% Blowout Preventers (BOP) NOV CIW 7% 1% Wirth 20% Mud Pumps Others 7% CAM 43% NOV 53% NOV 53% LEWCO 20% 2010 Revenues = $13.

9B Source: Spears & Associates 2010 Revenues = $3.3B Page 143 .OFS: Market Shares for Contract Drilling/Other Offshore Contract Drilling Other 32% RIG 24% Others 34% Supply Vessels TDW 16% Bourbon 14% Land Contract Drilling NBR 15% Other 44% HP 10% PDC 6% Maersk 3% KCA Deutag 3% PDE 4% China OFS ESV 5% 4% SDRL 9% DO 9% NE 7% Gulfmark 5% TRMA 7% CKH 12% Maersk 12% SLB 4% Saipem WFT 5% 4% PTEN 6% ESI 6% 2010 Revenues = $37.5B 2010 Revenues = $19.2B 2010 Revenues = $6.3B Petroleum Aviation Heli-Union 2% Rotorcraft 4% CKH 6% Petroleum 9% BRS 31% Others 9% CHC Helicopter 39% Well Servicing Others 43% NBR 17% KEG 15% CPX 8% PDS 5% Integra 6% BAS 6% 2010 Revenues = $3.

OFS – Contract Drilling: Fleet Profiles Fleet Profile by Company (Floaters) 80 70 60 31 Fleet Profile by Company (all rigs) 140 23 120 50 40 30 20 10 13 13 6 7 9 16 11 DO Shallow Water 9 8 2 4 ESV Mid Water 8 7 2 3 NE Deepwater 100 50 80 5 60 17 40 64 20 46 45 49 32 16 4 6 13 0 RIG Jackup ESV NE HERO Drillship DO SDRL RDC 14 28 2 5 3 ATW 30 45 48 60 18 50 1 0 RIG 10 SDRL.OL Ultra Deepwater 4 ATW 1 2 7 14 3 1 70 Fleet Profile by Company (Jackups) 40 16 7 Semisubmersible Other (excl. note figures exclude newbuilds Page 144 . platforms and barges) 20 36 30 22 2 14 7 11 DO 2 1 ATW 2 NADL 10 0 HERO RDC RIG SDRL ESV NE Standard (< 300') Premium (> 300') Source: ODS-Petrodata.

0 16. RDC NE ESV 0 2008 2009 2010 2011E 2012E 2013E 2014E 35 Fav orable global macro 30 25 env ironment and drilling fundamentals open the door for new entrants Risk of obsolescence in light of commodity price stability + fav orable y ard economics encourages established drillers to order again. new er 11 8 10 5 0 11 4 1 1Q04 1 2Q04 1 3Q04 2 4Q04 1Q05 3 5 2Q05 6 3 3 3 3Q05 2 2 4 4Q05 8 1 6 4 1Q06 1 5 4 2Q06 1 6 4 3Q06 3 1 2 4Q06 3 1 6 1 1Q07 7 1 3 4 2Q07 6 6 1 3Q07 1 4 4 3 4Q07 5 1 5 1 1Q08 9 10 3 3 2Q08 4 3Q08 2 4Q08 2 1Q09 2Q09 3Q09 2 1 3 4Q09 4 6 1 1Q10 1 2Q10 2 3Q10 1 4Q10 1Q11 6 8 market entrants capitalize on this too 11 10 2 2Q11 13 9 14 8 Order Trends: Established U.6 21. Credit Suisse estimates Page 145 .S.8 27.S.7 19. Drillers vs. Others’ Fleet Age 35 30 Average Rig Age (Years) 31.S.500 ft.7 30.9 Established U.1 Deepwater Expansion: Fleet more than doubling within 5 year span (2008 to 2013E) Deepwater (4. Company data.OFS – Contract Drilling: Fleet Age & Growth Trends Established U. Others in Recent Order Cycles # of Rigs Ordered 20 15 Established Drillers: Floating Rigs Established Drillers: Jackups Other Drilling Co's: Floating Rigs Other Drilling Co's: Jackups Source: ODS-Petrodata. Drillers vs.+) Rig Supply at year-end 240 6-year CAGR: 14% 25 20 15 10 5 0 HERO RIG DO 200 160 120 214 80 99 120 174 140 187 219 40 ATW Other Avg.4 24. Drillers = 48% Total Global Fleet 21.


In the wholesale market. Source: Company data. In the retail market. Refining and marketing are the two key downstream components. diesel and jet.The Downstream The downstream segment refers to all activities after crude is produced to when it is sold to the end-user. Refining is the processing of raw crude into usable fuels called refined products: gasoline. These products are sold into wholesale and retail markets. petroleum products are sold to the end-user. products are traded between large customers in global markets or on exchanges. Page 147 . Credit Suisse estimates. The primary example of this gasoline or diesel sold at service stations. Petrochemicals are also included in downstream activities but are usually considered a separate segment. These products are then sold into the retail market.

Refining .

tx. TX refinery Source: www.Refining Basics Refining is the process of turning crude oil into usable petroleum products.com Source: www. or unplanned reasons.houstonist.us Page 149 . refineries do take downtime for planned reasons. refineries run continuously. However.sunoco. such as upgrading a refining unit. TX refinery Sunoco’s Philadelphia. Exxon Mobil’s Baytown. When in operation. A refinery is the factory where this process takes place. such as fires or other accidents.com Source: www.state. PA refinery BP’s Texas City.

the vaporized crude naturally separates into different fractions or cuts.eia. The heavier cuts fall to the bottom of the CDU. This process is repeated several times until the cuts fully separate. Here. An example of the mix that comes from one barrel of crude oil is shown to the right.doe. Source: www.doe. a furnace first heats and vaporizes the crude. The vaporized crude is then piped into a crude distillation unit or CDU (referred to on the left as the Distillation Tower).Breaking Down a Barrel of Crude The refining process splits crude oil into a variety of refined products.gov Page 150 .eia. Source: www.gov To create these different products.

At 250 degrees F only 35% gasoline is yielded while the remaining 65% is naphtha. The heaviness of a product refers to the length of its hydrocarbon chain. Heavier products tend to be less valuable than lighter products. At 220 degrees F an equal amount of gasoline and naphtha are produced. The temperature at which crude oil changes its product yields is called a cut point. The first cuts from the CDU do not produce usable refined products. Controlling the cut point is a way to alter the product slate. which refers to the total product mix from a barrel of crude oil.A Closer Look at Separation and Cuts The heavier cuts generally create heavier refined products. The chart to the right illustrates various different cut points. Further treatment stages are needed. for example to turn naphtha into gasoline. Source: Marathon Oil Page 151 .

Page 152 . the more flexible it generally is in terms of final product slate.zeonglobalenergy. which we discuss later.com The product slate can then be further altered. the various fractions are recondensed into liquid form. Conversion units also comprise a refinery’s complexity. Not every refinery has each of these units. The more conversion units a refinery has. Examples of upgrading units are shown to the left. generally breaking heavier fractions into lighter.From Fractions to Final Products Once separation is complete. Advanced upgrading units such as crackers and cokers treat products from the refinery’s first cut. A typical barrel of light crude before any further treatment would look similar to the barrel shown on the right. shorter hydrocarbon chains. Credit Suisse estimates Source: www. Source: Bloomberg.

a key component of high octane gasoline. Octane measures how resistant a fuel is to self-igniting. A desulfurizer or hydrotreater uses hydrogen to strip out naturally occurring sulfur from final refined products (gasoline.Basic Upgrading Units: Reformer & Desulfurizer Reformer Desulfurization unit Source: Marathon Oil A reformer has two functions. Knocking occurs when the engine backfires. Higher octane gasolines are more resistant to self-igniting. The second function is to provide the hydrogen needed by a distillate desulfurizer. Page 153 . heating oil) in order to comply with modern environmental requirements. The first is to upgrade low octane naphtha into high octane reformate. diesel. which causes knocking. wasting fuel and causing potential engine damage.

a processing gain occurs: the cracking process yields more than the original amount of crude. During cracking.0 gallon of crude fractions yield 1. Other light cat-cracked fractions are added to gasoline. FCCs mainly add to the gasoline final product stream of a refinery. goes to a gas processing facility to form propane and butane.Advanced Upgrading Unit: Fluid Catalytic Cracker (FCC) Source: Marathon Oil A fluid catalytic cracker (also called an FCC or cat-cracker) is used to convert heavy crude elements into smaller. The lightest cracked fraction. lighter elements through a process called cracking. which is discussed on the next slide. Page 154 . The remaining cracked fractions are sent to an alkylation unit. Middle-cracked fractions are blended with distillate. 1. isobutene. The use of a deasphalter can also convert even more heavy fuel oil into additional fractions that can be run through an FCC.38 gallons of crude fractions after cracking. Cracking occurs at temperatures of over 900 degrees F.

blended. or alkylates.Advanced Upgrading Unit: Alkylation Unit Source: Valero Cat cracked elements not sent to the gas-processing facility. These are combined with other olefins to form iso-paraffins. as alkylation decreases yields. are created in the gas-processing facility. Page 155 . This is known as shrinkage. such as isobutane. Alkylates are used as fuel additives to both boost the octane rating and make fuels cleaner-burning. or cracked again are sent to an alkylation unit (shown below). – Alkylation is the reverse of fractionation: the process makes larger refined product components from smaller molecules. Paraffins. – – A reverse processing gain occurs.

Source: Marathon Oil Page 156 . The sample yields from a delayed coker are shown in the image below.Advanced Upgrading Unit: Delayed Coker A delayed coker is used to convert low value fuel oil into higher value gasoline. gas oils and petroleum coke (used in the steel industry and elsewhere).

Source: www. Winter blends. the products gasoline and diesel are not quite ready for market. Before entering the market.com Page 157 .Making Finished Gasoline Even after crude is processed by the upgrading units. gasoline vapor pressure and octane ratings must be fine tuned. methanol and ethanol can be used as additives to increase the octane rating.answers. A gasoline with high vapor pressure is one that does not become ignitable until very high temperatures and pressures are reached. which come into use from September 15th. In addition to alkylates. Refiners make different gasoline blends for different seasons. Higher octane gasoline corresponds with lower engine knocking. can have lower vapor pressure while summer blends are required to have a higher vapor pressure so that the gasoline does not inadvertently ignite in the warm weather. lead.

Hydrotreating removes sulfur and other contaminants from distillate so that the final product meets environmental specifications. Catalytic reforming increases low octane diesel to a higher octane level. Source: www.i.Making Finished Diesel Diesel goes through two final processes before entering the market: hydrotreating and catalytic reforming.treehugger.com Page 158 .

gov Page 159 . then it is stored in fields similar to the one to the left. Pipelines must be dedicated to either crude or refined product.doe.doe. Crude is also initially transported by these three means. They can be transported by pipelines (shown to the right).eia.eia. products are transported to end-use sites such as retail stations.gov If crude or product is not being used immediately. trucks and ship. not both. Source: www. Source: www. Pipelines are the cheapest form of transportation.Where Does the Product Go Once It Is Refined? Once refined.

Cuts that are heavier than middle distillates are usually called “bottom of the barrel” products.Examples of the Uses for the Products Created from Crude Liquid petroleum gas (LPG) is the lightest product. These are used as petrochemical feedstocks and automotive fuels. Asphalt is also a “bottom of the barrel” product. butane. kerosene. Page 160 . Source: Google images Light distillates are the next cut up from LPGs and include gasoline and naphthas. These gases can include ethane. These are used for jets. These can be residual fuels such as fuel oil and are used to power ships and for power generation. jet fuel. trucks and residential heating. and heating oil. Middle distillates can include diesel fuel. and propane and are used both as chemical feedstocks and for outdoor cooking.

Refinery Operations .

7 MMBD 27% Integrated 9.3 MMBD 19% Public independent 4. Independent refiners can be publicly traded like Valero or Tesoro or be privately owned such as Sinclair or Wyoming Refining. although this doesn’t happen that much. The distribution of ownership is shown to the right. the lack of upstream operations exposes independent refiners to crude price spikes and potential supply problems. by Ownership Private independent 3. The disadvantage is less flexibility in procuring crude from different producers. These companies can more easily buy crude from different producers and shop for the best possible price. sometimes referred to as Big Oil. However.Ownership of Refining Assets Refineries can be owned by both integrated oil and gas companies (with upstream operations) as well as by independent refiners.4 MMBD 54% Source: OGJ Page 162 . The primary advantage of Big Oil owning refineries is that these companies can supply refinery operations using their own crude supply. US Refining Capacity. Chevron and Exxon Mobil are two examples of integrated oil companies.

eia..S.doe. complexity and ownership details within each PADD. Each region has different benchmark margins and legal specifications. The slide after that shows additional yield.S.gov Page 163 . The map below illustrates the PADDs.Geographical Division In the U. refinery locations are divided into five separate Petroleum Administration for Defense Districts (PADDs). Source: www. The next slide shows the percent of total U. refining capacity in each PADD and the distribution of ownership within each PADD.

Topic (1) WTI – Brent. Too Much Crude in the Mid-Con Page 164 Source: MPC .

Barging increasing from Patoka. HES 130kbd Rangeland 100kbd EDOG 100kbd Musket 70kbd Infrastructure bottlenecks could include access to trains and offloading capacity Total Tariff from Bakken to St James Louisiana of $10-12/bbl. PADD 2 Crude Growth Through Jun-2011 M id w es t (P AD D 2) F ield Pro du c tion o f C rud e O il (T h ou s an d 80 0 75 0 70 0 65 0 60 0 55 0 50 0 45 0 Nov-09 Nov-10 Sep-09 Mar-09 May-10 May-09 Sep-10 Mar-11 Mar-10 Jan-09 Jan-10 Jul-10 Jul-09 Jan-11 May-11 (KBD) Significant drilled but not completed well inventory in the Bakken. DOE . Bloomberg. PADD 2 production growing at 200kbd pa annualized from recent up-tick. Page 165 Source for all charts: Credit Suisse estimates. There should be sufficient rail capacity to transport this by 2Q12.Intermediate Solutions Reliant on Rail Rail Loading Capacity Announcements 700 600 500 400 300 200 100 0 3Q12 2013 1Q12 2Q12 4Q12 2014 2010 2011 2012 2015 2016 2017 Significant rail loading capacity is being added in 2012 in the Bakken.

.00 0 (KBD) 2 . We have a mid-cycle supply-demand file which suggests a need for 2-3 pipelines to the Gulf The likely peak of WTI-Brent should be this winter as mid-con refineries shut for winter maintenance and demand falls As we move into 2012. Energy Partners. Structurally Wider For Longer WTI-Brent Spread Futures Curve $25 $20 Widening WTI-Brent has been a key theme in 2011. $15 $10 $5 $0 3Q 1 1 1Q 1 2 3 Q 12 1 Q1 3 3Q 1 3 1 Q 14 3 Q1 4 1Q 1 5 3 Q 15 Mid-Con Supply Demand Chart 4 .50 0 1 . Bloomberg.00 0 1 .g. Margin for error on supply not huge given potential from new plays e.$10-12/bbl from Bakken to the Gulf providing an alternative for E&P producers. Utica Longer term Canada Still Grows – Exports to the West ? ….50 0 2 . Keystone XL adds pipeline capacity subject to 2H11 permit approvals and a successful construction program. Page 166 Source: Credit Suisse estimates. increased rail capacity becomes available ..WTI-Brent to Peak This Winter.equally important where does WTI-Brent settle after the pipelines are built ?. DOE .00 0 3 . Seaway Reversal in the frame.50 0 4 . We need another pipeline in addition to XL – Enbridge.00 0 50 0 0 20 10 20 11 20 12 2 01 3 2 01 4 2 01 5 20 16 20 17 R e fin ing Ta nke r + Ba rge P ip eline S up ply Grow th Ra il In 2013.50 0 3 .

Page 167 Source: Company Data and Credit Suisse Estimates .D ale e ry -C G or as e LA B a /T W Fa rne X oo tt ye df Sh tte or al vi d e Sh lle Pi Sh al ce H al an e ay e A ce ne rk B sv Gra om as ni ill a in e/ te B Va W os as lle si h y er -H C Sh ot or al to iz e C . te W Ea as h gl e M Fo Liq ar ui ce r ds l lu d S R ha s ic Sh le h -L al H or e B iq ak -S iz ui . n ot Va . but Granite Wash and Eagle Ford still exceed the 15% rate-of-return hurdle rate.N to E lle n TX y Va Ve lle rt ic Po y H al or w de iz r R on ta iv l er C B M At $60 oil. ke ds W M n Li R ar Sh ic ce q u h al id l lu e s /T s R S ic hr h ee hal e Fo B -S ar rk W ne s Sa tt C an Sh ni sh a al W e oo -C M d ar or ce for e d llu B Sh ar s ne al Sh H e tt or al Sh e n -N al R iv e E er -S B ou as th in er Pi n ne Li da Ea qu le H id ay gle s Fo ne H ur Ric rd sv h ill Sh on e Sh al Sh e al . Marcellus moves to the front of the pack.G ra ni 10% 26% 24% 36% 37% 37% 12% 27% 27% 19% 27% 26% 26% 24% 24% 22% 22% 12% 21% 19% 14% 18% 18% 18% 18% 15% 13% 15% 15% 14% 11% 12% 9% 10% 10% 8% 8% 50% 35% 20% 30% 40% 50% 60% Most Projects Still Work at $60 Oil. Bakken and Barnett (liquids-rich) projects are more at risk. Bakken Most Sensitive 0% 8% 6% 6% 4% 4% 4% 54% 53% Rates of Return at the Current Futures Strip and $60 per Bbl Oil Current Futures Strip $60/Oil and Nat Gas at Futures Strip At the current futures strip the Granite Wash. Eagle Ford. Marcellus and Bakken remain the highest returning plays in domestic onshore E&P.

000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 GoM Texas (ex-Eagleford) Padd 2 (Core) Eagleford Mississippian Light Crude Capacity Padd 3 (Core) Bakken Padd 4 (Core) Niobara Uinta Even after all required pipelines are built to the Gulf Coast. a $5-7/bbl WTI-Brent spread into the longer term POSITIVE LONGER TERM MARGINS AND FREE CASH FLOW FOR MID CON REFINERS AND IN THE GULF SKITTISH EQUITY MARKET LIKELY WELCOME HEDGES Theoretical Cost to Move EagleFord to PADD I Page 168 Source: Credit Suisse estimates.000 3.000 1.000 9.000 2. Were this to occur.000 KBD 5.e. onshore crude supply could exceed this light processing capacity.000 7. MPC .000 4.000 6. refinery bottlenecks need to be considered The line on the chart shows the available light processing refining capacity in the Mid-Con and the Gulf after heavy processing capacity is stripped out By 2014.Even After Pipelines are Built to Gulf.000 8. Challenges Remain Structural Oversupply Versus Refining Capacity 10. there would need to be crude exports from the Gulf to the North East In this scenario WTI would trade $3-4/bbl below LLS but LLS would trade $2-3/bbl below Brent…i.

Division by Ownership Type and PADD US Refining Capacity.4 MMBD 48% PADD III Private independent 1.1 MMBD 21% Public independent 1.3 MMBD 47% Public independent 0.6 MMBD 9% PADD II 3.9 MMBD 22% PADD IV PADD V Private independent 0.1.1 MMBD 67% Private independent 0.4 MMBD 14% Private independent 0.4 MMBD 27% Integrated 2. Page 169 .7 MMBD 20% Public independent 0.1 MMBD 6% PADD I PADD II Private independent 0.6 MMBD 4% Integrated 0. by PADD PADD V.9 MMBD 58% Public independent 1. 3.8 MMBD 21% PADD IV 0. 18% PADD I 1.7 MMBD 20% Integrated 0.6 MMBD 52% Source: OGJ.1 MMBD 59% PADD III 8.6 MMBD 21% Public independent 1.2 MMBD 32% Integrated 4.1 MMBD 34% Integrated 1.

Page 170 . by PADD and Company Source: Credit Suisse estimates.Refinery Summary.

Oil Product Marketing .

The wholesale market component involves the trade between large customers in global markets or on exchanges. transactional basis. The retail market encompasses the sale of petroleum products to end-use markets and serve end users on a spot.S. The most common form of retail distribution is through the service station Benchmark margins for the U. Profits from the marketing division tend to be more stable than those from the refining division. These products are then sold into the retail market. Credit Suisse estimates (cents/gal) . Page 172 Source: DOE.Introduction to Marketing Composite Retail Margins Historical 4-week moving average 1995-Present 70 60 50 40 30 20 10 Jan-95 Mar-95 Jun-95 Sep-95 Dec-95 Feb-96 May-96 Aug-96 Nov-96 Jan-97 Apr-97 Jul-97 Oct-97 Dec-97 Mar-98 Jun-98 Sep-98 Nov-98 Feb-99 May-99 Aug-99 Nov-99 Jan-00 Apr-00 Jul-00 Oct-00 Dec-00 Mar-01 Jun-01 Sep-01 Nov-01 Feb-02 May-02 Aug-02 Oct-02 Jan-03 Apr-03 Jul-03 Sep-03 Dec-03 Mar-04 Jun-04 Aug-04 Nov-04 Feb-05 May-05 Aug-05 Oct-05 Jan-06 Apr-06 Jul-06 Sep-06 Dec-06 Mar-07 Jun-07 Aug-07 Nov-07 Feb-08 May-08 Jul-08 Oct-08 Jan-09 Apr-09 Jun-09 Sep-09 Dec-09 Mar-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Jul-11 Oct-11 Marketing is divided into wholesale and retail segments. retail segment since 1995 are shown above.

S. The left chart is for U. The retail business is highly competitive and operators compete on both price and product quality. U.Retail Margins Key to Profitability of the Marketing Business The retail division tends to have a much greater percentage of the profit than the wholesale division owing to higher margins.S.doe. there are two charts of historical retail benchmark margins (excluding taxes). Credit Suisse estimates Page 173 Dec-11 Jan-11 Jan-11 Jun-11 Apr-11 Oct-11 Jul-11 - 20 . retail margins while the right chart is for retail margins in NorthWest Europe. Retail Margins 60 80 NorthWest Europe Retail Margins 50 70 40 60 (cents/gal) (cents/gal) 30 50 20 40 10 30 Mar-11 Aug-11 Sep-11 Feb-11 Nov-11 Aug-11 May-11 May-11 Sep-11 Dec-11 Apr-11 Jul-11 Oct-11 Nov-11 Feb-11 Mar-11 Jan-11 Jun-11 5Y R A v g May-11 20 11 20 10 5 YR A vg 20 1 1 20 10 Source: www.eia. Below. so we focus on this part.gov.

Big Oil and Independent Refiners have marketing and distribution costs associated with gasoline normally making it more expensive. Using unbranded gasoline can allow a retail station a wider profit margin.40 cents per gallon for diesel. Page 174 . the quality and public perception of branded gasoline versus unbranded gasoline is different. was 18.60 cents per gallon for diesel.S. To attempt to generate additional profits many gas stations now have convenience stores selling merchandise and food. the federal fuel tax in the U. Retail operators purchase fuel under long-term or short-term supply agreements either with oil companies (called branded) or from independently owned distributors.More on the Retail Segment Previously a gas station used to be just that…a gas station. As of July 2011.50 cents per gallon for motor gasoline and 29.40 cents per gallon for gasoline and 24. The average state tax for fuel was around 30. However.

respectively. During the summer driving season. Total marketing margin = wholesale margin + retail margin Source: Google Images Page 175 . Sharp moves up or down in crude can also narrow or expand retail margins. the run up in gasoline and diesel prices tend to support retail margins. which makes the business somewhat seasonal.Retail Prices Tend to be Sticky One final note about retail gasoline and diesel prices is that they tend to lag changes in wholesale prices.


R&M (refining and marketing). and sometimes chemicals. while Emerging Majors tend to be more local.What is an Integrated Oil Company? Integrated oil companies (IOCs) are present throughout the oil and gas chain. Typical divisions include E&P (exploration and production). Super Majors Other NOCs Emerging Majors Source: Google images Page 177 . from upstream production to refining and distribution. gas & power. National Oil Companies (NOCs) in resource-rich regions are becoming more global. The Super Majors are global in scope.

Other – Smaller than the Super Majors and usually with a higher concentration of assets in select regions (i. Emerging Majors Page 178 . National Oil Companies (NOCs) – Fully or majority owned by national governments.Background Super Majors – These large global integrated oil companies (IOCs) were formed from a wave of mergers that took place between 1998 and 2003.e. North Sea).. – Some have recently started to reach beyond home areas. – Generous dividends and share buybacks characterized the upcycle. – Have also begun to expand their operations beyond domestic borders. U. – Typically show little volume growth and questions remain over reinvestment strategy.S. – Partially state-owned oil companies with public equity. – Usually more leveraged to commodity prices.

214 75.106 90.795 89. while Emerging Majors and NOCs dominate the production growth rankings.000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 In spite of significant reserve bases. COP.654 91.724 91.000 78. ENI. CVX.985 87. BP. They exhibit high return on capital.873 88.Super Majors (XOM.643 91. TOT.527 85.000 80. RDS) Total Oil & Gas reserves – Super Majors (mmboe) Source: Credit Suisse estimates 95.825 85.684 90. Page 179 .892 88.000 82. the Super Majors have found it hard to grow production recently versus their peers. The Super Majors are mainly focused on large projects that can substantially increase their reserve base and compensate for significant base production declines.000 90.000 70.

4% 0.5% 0.7824 Sensitivity 60 WTI.9256 R2 = 0.2253x + 1.0% 0 20 40 XOM Correlation y = 0.0% 3.2% 0.5% 3.0% 4.8% 0.5% 1.2% 12mth rolling Avg Gas % Ne t Incom e change for +1$/boe change in GAS 1.5% 2.4674x -0. US$/bbl 80 100 120 140 12mth rolling Avg Oil 1.Integrateds: Sensitivities Typical Integrated Sensitivity vs Oil Price 30 25 Net Income. US$/bbl 20 15 10 5 0 0 20 40 60 80 WTI.0% BG CV X MRO STL COP BP HES XOM RDS TOT OMV Source: Credit Suisse estimates Page 180 .2% % Net Incom e change for +1$/bbl change in OIL 1.4% 0.0% HES STL CVX BP MRO OMV XOM COP TOT BG RDS 0.9457 XOM Correlation Typical Integrated Sensitivity vs Oil Price 5.8% 1.0% 0.4425 R2 = 0.0% 0.0% 2.5% 4.0% 1.2% 0.0% 0.6% 0. US$/bbl 100 120 140 y = 0.6% 0.

upstream ROGIC .0% 10.Profitability – Upstream Driven ROGIC (%) – Segment* ROGIC .chemicals Source: Credit Suisse estimates 25.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total returns for the Integrated Oils are driven by the upstream segment.0% 5.0% 15. although chemicals has been on an upswing. *US Integrated Oils only Page 181 .0% 20.0% 0. Even in their best years. the downstream and chemicals segment performances have generally not been comparable to the upstream.downstream ROGIC .

7% 5. The upstream has been a consistent outperformer The relative outperformance of the upstream has led integrated oil companies to increase reinvestment spending in the business *US Integrated Oils only Page 182 .2% Capex ($bn) 60 50 40 30 20 10 10% 7.8% 10.9% 3.0% 9.4% 4.4% 5% 0% 2009 2010 3-yr avg 5-yr avg 10-yr avg 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 10-yr avg 5-yr avg 3-yr avg Source: Company.2% Segmental capex 23.9% 20.Segments Upstream 25% 19.1% 10. Credit Suisse estimates.7% 90 80 15% 14.0% Chemicals 20% 15.0% 11.3% Upstream Downstream Chemicals Downstream 23.6% 70 13.Segment breakdown – Upstream Driven* ROCE .

0% -21% -25. The Integrated Oils are a classic defensive investment class.0% 15.0% 20. S&P500 30.0% 5% 5.0% -20.0% 10.0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -9% -11% -4% 3% 9% 18% 17% 12% 18% 15% 24% Recession Recession -27% 2008 2009 2010 Source: Credit Suisse estimates.0% 0.0% -15.0% 25.0% 0% -5.0% -5% -10.0% -30. Louis Federal Reserve Bank Page 183 .Performance Integrated Oils vs. *Estimated end of recession as per St. They generally outperform during broad market downturns as these periods often coincide with rising energy price environments.

The Integrated Oils are the most conservative oil and gas investment compared to the more volatile Independent E&Ps and hyper-volatile Oilfield Service shares.8 XOM 0.Characteristics Low Beta 1.6 Source: Company.2 COP 1.1 ENI 80% Average Integrateds Relative P/E vs. Credit Suisse estimates.4 MRO PCA HES 1. but will likely underperform the highly leveraged E&Ps and Service companies when oil and gas fundamentals improve. They tend to perform better than the other oil and gas industries as the cycle shifts from peak to trough.5 1.9 REP IMO 40% 0.3 120% SU 100% 1 BP CVX RDS TOT STO 60% BG 0. Page 184 . S&P500 160% 140% 1.7 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 20% 0.


0 4.0% 4.0% 6.0% 8.Adjusted Total CFPS 2011 Div Yield 7.0% 0.0 6.0% XOM CVX 10 . JODI.17 CAGR .0% 12.0 5. 5 yr Average (IOCs) TOT EOG RDS ENI HES COP XOM OXY Source: IEA.0% 10.0 0. Credit Suisse Estimates – XOM.0 Historical Multiple.0% 2.0 2.0 3. RDS and COP should deliver best in class growth+dividend yield MRO CVX BP HES COP RDS MRO TOT ENI BP Page 186 .Under-appreciated Cash Flow Growth Potential Longer Term Cash flow Growth and Divs CFPS Drives 2015 Multiples Lower 14.0 1.

2009 Long Duration. Longer lives should be correlated with higher multiples On $120bn of upstream capex. 2017 10% improvement in cost equals 1% FCF yield Higher share of longer lived projects helps Big Oil manage the reinvestment treadmill.Big Oil’s – Portfolio Shift and Performance Prize Portfolio Shifting to Long Duration Projects 50% 45% 40% Share of Long Duration 35% 30% 25% 20% 15% 10% 5% 0% COP CVX XOM BP RDS TOT ENI Long Duration. Credit Suisse estimates . a 10% performance improvement translates into 1% additional FCF yield Page 187 Source for all charts: XOM.

GTL. US GoM deepwater and offshore West African projects (partly due to the timing of cost recovery) Page 188 .Higher Cash Margins on New Upstream Projects Operating Cash Flow per Barrel on Selected New Projects (2011-15 Start-ups) $7 0 $6 0 $5 0 $4 0 $3 0 $2 0 $1 0 $CLOV Mars B AOSP .Base + Ph 1 Pearl GTL Wheatstone Qatargas 4 OML 138/139 (Usan/UKOT) MLE & CAFC (405b) Queensland Gas Guara (BM-S-9) Block 31 PSVM Tupi (BM-S-11) APLNG Goliat Skarv Yemen LNG Kashagan Rumaila Gorgon Junin 5 Pazflor Block 17 Jack/St Malo Groundbirch Akpo/Egina ACG Source: Credit Suisse Estimates – Cash margins on projects starting up in 2011-15 are up to 30-40% higher than existing production – Margins are highest on Canadian oil sands (mined).

0 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E Embedded CRFOI ($/bbl) 8 (%) 8.0 6 4 0.0 120 100 80 60 4. Embedded Embedded returns lower than 2010 12.0 2 0 OXY CVX XOM TOTF HES BP COP RDSb OMVV STL ENI REP MRO Big Oil should generate CFROI of 6-8% at $80/bbl Stocks are discounting only 2-5%CFROI Big Oil would generate this CFROI on less than $60/bbl Page 189 Source for all charts: Company data.0 6.0 2. Credit Suisse estimates Average CFROI (LHS) Consensus Brent (RHS) 140 . FY1 CFROI.Stocks are discounting a double dip Pessimism in future returns by company 10 CFROI.0 10.


Evaluating E&Ps: Key Metrics Producers seek to create value by adding. Industry three-year median is 1. – Reserve Life: Indication of inventory depth by comparing how many years of reserves a producer has at current production.0 years.9x. – Recycle Ratio: Compares cash flow ($ per Boe) with finding and development costs ($ per Boe). There are several key metrics that help quantify producer performance: – Reserve per Share Growth: Basic measure of a producer’s ability to add reserves. Reserve replacement of >100% indicates incremental reserves were added net of production.” indicating that a producer is replacing what was produced. Higher relative PUD percentage will likely mean higher future capital needs to develop existing reserves. – Reinvestment Rate: Reinvestment rates of > 100% indicate a producer will be free cash flow negative. Page 191 . – PUD Percentage: Measures proved undeveloped (PUD) against total reserves. – Reserve Replacement Ratio: A measure of reserve adds compared to production. A recycle ratio of 1 is a “breakeven point. Industry average growth over the past five years has been about 8-10% annually. Median industry reserve lives are currently ~12. producing and selling oil and natural gas reserves at a return greater than their cost of capital.

LOE tends to mirror movements in commodity prices due to energy related inputs (eg. Measured by finding & development (F&D) costs – unit cost to replace 1 unit of reserves. power/electricity. The average industry total cost structure was about $5. G&A. and interest expense. Therefore a key differentiating factor among producers is the ability to control both capital and operating costs. production taxes. geological costs (seismic) and midstream (developing gathering lines). acreage costs.60 per Mcfe. – Operating Costs – Producer cost structures include field level costs (LOE) related to the operation of a well.Evaluating E&Ps: Cost Considerations All producers are essentially price-takers. Page 192 . but can sometimes be lagged and/or downward sticky. Production taxes are calculated as a percent of revenues and are directly related to changes in prices. DD&A. The historical 3-year industry median F&D cost is ~$2.63 per Mcfe as of 4Q10. These include drilling and development costs (contracting a rig and crew). – Capital Costs – The costs associated with exploring for and developing oil & natural gas reserves. natural gas).

(3) floors. As hedges roll off.00 $2. and (4) natural gas basis swaps Basis swaps protect regional gas prices by locking in differentials to NYMEX. Hedging only protects near term cash flows. Common instruments: (1) swaps. Timing of when to put on hedges is an important management consideration. A N D Page 193 .00 $4. Sample Natural Gas Collar ($ per MMBtu) $14.00 $0. (2) collars. Credit Suisse.Evaluating E&Ps: Hedging Producers use derivative instruments to protect against volatility in commodity prices.00 $8.00 $6. producers are forced to re-hedge at prevailing commodity prices.00 $10.00 ug -0 8 ov -0 8 Se p08 ec -0 8 Ju n08 Fe b09 Ju l-0 8 Ja n09 ct -0 8 O Collar Floor protects against downside volatility Source: Bloomberg.00 $12.

proved reserves only. Recently. production rates. In deriving an NAV. and life of reserves. Page 194 .Evaluating E&Ps: Valuation The primary tools we use for valuing producers are Net Asset Value and Multiples. – Multiples: The most commonly followed valuation multiple within the E&P sector is EV to EBITDA. NAVs per share is compared to a producer’s stock price.0x EBITDA. operating costs. NAVs can be run on a producers 3P reserves (All-in NAV). finding & development costs. develop and produce out the reserves that will be discounted. lack of visibility on future commodity prices have shifted valuation focus away from NAVs and placed EV to EBITDA multiples more in favor Historically the group has traded at 6. or proved-developed reserves. Price to NAV > 100% suggests that a stock is over-valued (based on valuation assumptions). assumptions are made on future commodities prices. – Net Asset Value (NAV): An NAV is a discounted cash flow analysis of a producer’s reserves. The choice of which NAV to use depends on the outlook for the producer to find.


With shorter time horizons. deepwater markets accelerate and cycle approaches peak earnings Change in m acro environm ent precipitates decline in com modity prices North Am erica leads the upturn. international markets lag Cycle begins with upturn in comm odity prices North American independents curtail upstream spending North America generally leads in a resumption in upstream spending because more of the activity is conducted by smaller (and therefore more nimble) operators (E&P companies). the North American operators are also the first to curtail spending in a downturn Page 196 .OFS: The Traditional Upstream Spending Cycle Int'l m arkets. generally.

beneficiaries include rig count driven com panies selling drilling materials (e. Beneficiaries: pressure pum pers.margins im prove quickly as m anufacturing absorption issues dissipate. but traditionally have the lowest Beta. Initial activity includes W ell Servicing and Production Enhancement. As Drilling and Completions activity picks up. Stocks respond to backlog growth in m iddle stages of the cycle. fluids) . Companies that (1) Install Infrastructure for new developm ents (Production) and (2) provide new drilling rig equipm ent tend to see fastest earnings growth later in the cycle. Seismic companies are key beneficiary. deepwater drillers Oil com panies increasingly focus on new Prospect Identification as existing prospects have been developed. With more confidence in sustained higher commodity prices. Key beneficiaries: Large caps.e. workover drilling contractors Drilling Services com panies experience price leverage as rig count rises and service utilization increases. drilling and completion related activity responds. i. Page 197 . bits. Exploration is generally the last to strengthen and the first to fall in a downturn in oil prices.OFS: Oil Services Activities Through the Cycle Com panies with solid positions in International m arkets as well as deepwater/rem ote areas benefit from pick up in international activity.g. Secular challenges related to hydrocarbon production have sustained higher-than-expected growth in the latest upcycle. the fastest way to take advantage of higher com m odity prices is not through the drill bit. Production related services are the most resilient and the earliest to “revive”.

0 4. Page 198 .5 5.5 2.0 0.5 3.5 Worldwide QualRig OFS Relative Stock Performance Note the strong directional correlation between spending patterns and the stocks as expectations for future upstream spending have historically been a significant driver of relative OFS stock performance. & Compl.0 3. Spending) 5.0 2.0 1.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 OFS Relative Stock Index 18 16 14 12 10 8 6 4 2 0 4.OFS: Stocks Directionally Correlated with Upstream Spending 20 QualRig ($bil) (Monthly Drill.5 0. OFS stocks tend to be highly anticipatory and move ahead of changes in spending patterns.5 1.

spending trends tend to follow 18-month average of gross revenue at a reinvestment rate of approximately 11-12%. Page 199 .OFS: Gross Revenues Drive Upstream Spending 240 220 Monthly WW Producer Gross Revenue (18Mo. Avg) 200 180 160 140 120 100 80 60 40 20 2011E 2012E 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 24 QualRig ($bil) Monthly Drilling & Completion Spending ($bil) 22 20 18 16 14 12 10 8 6 4 2 Worldw ide QualRig Average Yearly QualRig Spending trends tend to follow producer gross revenues (production times commodity prices) Historically.

000 $120.000 $400.000 60% $240. Semisubmersible Utilization WW Jackup Dayrates WW Jackup Utilization WW Avg.000 $80.000 $120.3% 100% 90% 80% 70% 70% WW Semi Utilization WW Jackup Dayrates $80.000 $360.000 Average Utilization = 83.000 $320.000 40% $160.000 30% 20% 10% $0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-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 0% 10% 0% WW Semisubmersible Dayrates WW Semisubmersible Utilization WW Avg.000 40% $40. Jackup Utilization Source: ODS-Petrodata Page 200 WW Jackup Utilization .000 $0 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-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 30% 20% $20.000 WW Semi Dayrates $280.OFS – Contract Drilling: Offshore Drillers Dayrates and utilization are key drivers of driller earnings power Worldwide Semi Dayrate/Utilization $440.000 Average = 83.9% Worldwide Jackup Dayrate/Utilization 100% 90% 80% $100.000 60% 50% $60.000 50% $200.000 $40.

00 $0 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 0.79 Absolute R-squared = $200.000 CSFB OFS Index: Absolute Performance CSFB OFS Index: Relative Performance WW Offshore Dayrates (unweighted) Source: ODS-Petrodata Page 201 .81 0.000 Relative R-squared = 12.00 $100.000 16.00 10.00 14.000 2.000 6.00 0.00 Offshore Dayrates $150.OFS – Contract Drilling: Offshore Drillers Stocks are generally correlated with dayrate trends $250.00 $50.00 8.00 4.

0% 100.0% 20. which can extend out as far as three years. and different depreciation methods used by the companies. replacement value metrics are also used Maximum = 166% Current = 81% Minimum = 41% Page 202 .OFS: Traditional Valuation Methodologies Services – as an earnings momentum group.0% 80. During trough periods.0% 120. P/E or EV/EBITDA is applied to normalized or “midcycle” earnings estimates 30 25 20 P/E 15 10 5 0 Diversified Service Forward P/E Trend Prior Cy cle ('96-mid '98) High = 25. = Nov '04 .8x Av e. = 17.Aug '08: High = 24. However. In the recent upcycle.0% Current Q197 Q397 Q198 Q398 Q199 Q399 Q100 Q300 Q101 Q301 Q102 Q302 Q103 Q303 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Drillers – with high asset intensity associated with owning the rigs.0% 140.0% 0. backlog visibility lends itself to DCF.0x Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Current = 11. the industry tends to use forward year P/CF (EV/EBITDA).0% 160.3x Av e. we believe shares have generally been valued on forward year P/E and to a lesser extent forward EV/EBITDA. In troughs. lends itself to DCF.6x Equipment – the backlog visibility.0% 40.0% 60. forward earnings metrics are also used Offshore Asset Replacement Cost Trend 180.

Sustained higher commodity prices – Drilling and Completion – Oil company spending budgets (generally set early in the calendar year. M-I) or bi-weekly (The Land Rig Newsletter). – Rig count. Contract drilling shares are generally highly correlated with the trajectory of day rates. As a traditionally earnings momentum-driven group. – Pricing (day rates for drillers). Permitting activity Coincident Indicators – Oil and natural gas prices – Earnings. Non-North American rig counts are updated monthly Page 203 . although they are revised intra-year).OFS: Indicators Leading Indicators – Seismic – Licensing rounds. North American rig counts are updated weekly (sources include Baker Hughes. quarterly earnings matter. Oil company exploration budgets.

Related to the above. The recent upcycle/strength in commodity prices facilitated/was coincident with several countries becoming less accommodating to outside oil companies. natural gas tends to be more lucrative than oil as it is often deeper (=higher pressure and temperature) and presents corrosion challenges. international oil companies are being pushed to explore/exploit more challenging and higher cost environments to access hydrocarbons in their quest to grow reserves/production. NAM unconventional gas.OFS: Secular Trends Resource Nationalism. this manifested itself in both contractual changes to lower oil company ownership stakes and higher taxes. New Frontiers. including more offshore (and deeper waters). This is driving organizational changes to meet this demand within service companies. Page 204 . The combination of human resource constraints at oil companies. Bundling. Gas Monetization. The recent upcycle has seen the “unlocking” of NAM gas shales. Although the OFS activities are essentially the same. including the use of horizontal drilling and aggressive multi-zonal completion techniques (including very large fracturing jobs). more challenging reservoirs and demonstrated efficiencies are leading to more tendering for products and services on a bundled basis. The upcycle has seen more natural gas development (20% of the non-North America (non-NAM) rig count versus 15-18% in the 1998 cycle). The shales plays are thought to be 2-5x more service intensive than traditional wells.


The first is crude cost. for example. The fourth determinant is regional supply/demand.Refining Margins Drive Refinery Value Refining earnings are driven by refining margins (also called cracks or crack spreads). There are four major determinants of margins. before operating costs. More complex refiners run less attractive (cheaper) crudes and produce a higher yield of light products. Page 206 . The higher this is. mainly concerned with local market conditions and regulations. The third is refinery complexity or yield. which is effectively the cost of goods sold. Cracks are normally quoted gross. as the difference between the prices of refined products and the price of the crude feedstock. the wider the crack spreads. Barrel of crude Refinery – processing center Finished product Source: Google images The second is finished or end product price.

32 Benchmark refining margins attempt to give a rough overview of the current profitability of the refining industry.91 68. which assumes that six barrels of Brent crude oil are turned into three barrels of gasoline. To calculate a benchmark margin. Page 207 Source: Bloomberg. two barrels of distillate. For instance. we assume that one barrel of crude from a region is then transformed into a standard suite of refined products.95 1. the Gulf Coast benchmark 3:2:1 margin (for PADD III) assumes that three barrels of WTI crude oil are turned into two barrels of gasoline and one barrel of middle distillates.59 x 2/3 x 1/3 x1 54.74 US$/bbl (x 42) 81.59 10. the New York Harbor (PADD I) uses a 6:3:2:1 margin.90 72.Gasoline Distillate Product price WTI crude Gulf Coast 3:2:1 refining margin US$/gal 1.31 78.60 24. For instance. Benchmark margins vary for each region. Credit Suisse estimates How to Calculate Benchmark Refining Margins .93 68. and one barrel of “bottom of the barrel” products or residual fuels. Above we show an example of this calculation.

such as what would one barrel of gasoline trade for above one barrel of WTI crude oil. Credit Suisse estimates $35 Gasoline Distillate . We illustrate recent gasoline and distillate crack spreads in the chart above.64 premium to one barrel of WTI crude. A NYMEX gasoline crack of $3. Page 208 Source: Bloomberg.Why We Use Theoretical Benchmark Margins $30 $25 $20 $/bbl $15 $10 $5 $$(5) 1Q1999 4Q1999 3Q2000 2Q2001 1Q2002 4Q2002 3Q2003 2Q2004 1Q2005 4Q2005 3Q2006 2Q2007 1Q2008 4Q2008 3Q2009 2Q2010 1Q2011 We can also look at individual crack spreads. One barrel of crude cannot actually transform into one barrel of gasoline (or any other product). however this is the convention in discussing gasoline cracks or distillate (heat) cracks.64/bbl means that one barrel of gasoline is currently trading at a $3.

Utilization rates are seasonal and usually increase in the summer when US demand for gasoline is greater. The crude run divided by the crude capacity is known as the utilization rate. Crude runs can be less than nameplate capacity due to planned or unplanned downtime or due to an economic decision to reduce operating rates in the face of weak margins. If a refinery can process 100 KBD of crude but crude runs are only 90 KBD. Page 209 Source: DOE.Additional Variables: Utilization Rates US refining capacity distillation utilization % 1 00 95 90 85 80 75 70 Sep-91 Sep-01 Sep-07 Sep-93 Sep-03 Sep-89 Sep-95 Sep-99 Sep-05 Sep-09 Sep-97 The actual throughput for a refinery is known as its crude run. then the utilization rate is 90%. Credit Suisse estimates .

calculated as [134.0.Additional Variables: Complexity Refineries are often divided into two categories: simple and complex. The factor assigned is normally based on the piece’s cost relative to the crude distillation unit (CDU).000 / 242. Source: www. The Nelson index dates from 1960 and assigns a separate complexity factor to each piece of equipment in a refinery (see LH picture below).com Page 210 .11.000] x 2).ogj. One commonly used measure of complexity is the Nelson Complexity Index. which is assigned a complexity factor of 1. The index for vacuum distillation. Below the complexity of Kuwait’s Mina Abdulla refinery is calculated. is 1. for example. In reality complexity is measured on a continuum.

quickly change product slates and produce more higher value products.70 $0. so why not make every refinery complex? The upfront capital costs to add complexity are high and maintenance can be expansive.30 $0.$0. Higher differentials between gasoline and residual fuel oil favor complex refiners.00 -$0.10 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 $25 $20 $15 $10 $5 $0 WTI-Maya Spread (US$/bbl) Gasoline-Resid WTI-Maya Complex refineries can run different types of crude. Above.50 $0.60 $0. we show historic crude and product differentials. Credit Suisse estimates Why Not Make Every Refinery Complex? . many of whom do not produce any fuel oil as a final product.40 $0. For some locations.80 $0. more simple refineries may make sense. Page 211 Source: Bloomberg.90 Gasoline-Resid Spread (US$/gal) $0.20 $0. A greater differential in the light-heavy spread favors complex refineries who run heavier crude but produce a similar light product yield to a simpler refinery processing light crude.10 $0.

9% Product prices 36.25 54.33 7. .9% x 5.69 - 3.9% x 24.27 43.00 = 1.5% Product prices 36. complex refiners adapt their yield patterns to suit the market conditions prevailing at the time. While the difference in margins is appreciable.19 As illustrated above using two hypothetical Singapore refineries.61 = = = = = Output value 4.75 29.3% x 98.15 57.85 32.4% x 4.15 57.39 Singapore complex US$/bbl Refined products Gasoline Naphtha Jet/Kerosene Gas oil Fuel oil Dubai yield % 26.36 14.4% x 46.39 - 2. Complex Refinery Source: Credit Suisse estimates Page 212 Singapore simple US$/bbl Refined products Gasoline Naphtha Jet/Kerosene Gas oil Fuel oil Dubai yield % 11.61 = = = = = Output value 9. as some refinery fuel and energy is lost in the process.85 32.78 2.1% x 9. 2008 year-end product pricing. In practice.37 1.12 15.17 22.2% x 97.02 = 6.Example of the Economics for a Simple vs.71 - Crude cost Gross margin Operating cost Cash margin 37. Note that the percentages do not add up to 100%. a complex refinery generates a substantially higher cash margin than a simple refinery.02 = 3.16 2.41 - Crude cost Gross margin Operating cost Cash margin 37. and Dubai crude.0% x 38.49 5.50 = 3. so is the cost of building a complex plant.07 40.6% x 22.75 29.6% x 7.25 54.

A Few Final Notes about Refiner Profitability Just because a refiner is complex does not mean that it can process heavier crudes. For instance. Operating costs are key to cash margins. a plant may have extensive facilities to upgrade fuel oil or a lubricants plant but may not be able to process heavy or sour crudes. Competition is key for refiners. These are driven by several factors including natural gas. Page 213 Source: Google Images . One must look into what is driving the higher complexity level. If a plant is in a relatively isolated market it will enjoy much higher margins than a plant in a merchant refining center.

0 4. The charts above show how share price movements occurs after adjustments to EPS forecasts.5 2.0 4.5 3.5 0.0 45 30 55 65 40 75 50 85 60 95 Tesoro 70 TSO EPS forecast TSO share price When it comes to independent refining stocks.5 4.0 3.0 5.0 Valero VLO EPS forecast VLO share price 9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011 9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011 US refiners are earnings momentum stocks 9/22/2006 12/15/2006 3/09/2007 6/01/2007 8/24/2007 11/16/2007 2/08/2008 5/02/2008 7/25/2008 10/17/2008 1/09/2009 4/03/2009 6/26/2009 9/18/2009 12/11/2009 3/05/2010 5/28/2010 8/20/2010 11/12/2010 2/04/2011 4/29/2011 7/22/2011 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 VLO share price SUN NTM EPS 9.5 5.0 3.VLO NTM EPS 9.5 6.5 1.5 8.0 8.5 7.0 6.5 2.0 1.0 Sunoco SUN EPS forecast SUN share price 15 0 25 10 35 20 SUN share price TSO NTM EPS 6.5 4.0 3. momentum often drives stock price movement.5 5.5 8.5 0.0 0.0 4.5 7.5 4.0 2.0 2.0 2.5 5. Page 214 TSO share price .0 6.0 1.5 6.5 3.5 0.0 7.0 0.5 1.0 0.5 1.0 5.5 3.0 1.0 7.0 8.5 2.0 5.


US gasoline demand has likely peaked…..FOREVER
US Gasoline demand Long Term
Economic bounce back slows decline in 2010

Source: Credit Suisse estimates

US gasoline consumption KBD





5,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Gasoline demand after CAFE Refiner Gasoline demand after CAFE and RFS

US future oil demand growth is now seen at negative 0.1%, from a positive rate of over 1% between 1998 and 2007 We expect a 0.6% annual decline in gasoline consumption between 2010 – 2020 from new CAFE standards. Adopting the full RFS would give a 1.4% annual decline.
Page 216

Over Capacity in the Industry
3000 2500



Source: Credit Suisse






-1000 2006 North America 2007 OECD Europe 2008 South America 2009 FSU/Other Europe 2010 Africa 2011E Middle East 2012E OECD Pacific 2013E Other Asia 2014E Biofuels 2015E Demand growth

Significant new capacity and a collapse in demand have ushered in The Dark Ages Some proposed new capacity has started to slip Expect more movement in that direction, including fewer Middle East refineries
Page 217

US Crude Over Supply Throws a Lifeline to Mid-Con Refiners
Structural Oversupply Versus Refining Capacity
10,000 9,000 8,000 7,000 6,000 KBD 5,000 4,000 3,000 2,000 1,000 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 GoM Texas (ex-Eagleford) Padd 2 (Core) Eagleford Mississippian Light Crude Capacity Padd 3 (Core) Bakken Padd 4 (Core) Niobara Uinta

Even after all required pipelines are built to the Gulf Coast, refinery bottlenecks need to be considered The line on the chart shows the available light processing refining capacity in the Mid-Con and the Gulf after heavy processing capacity is stripped out By 2014, onshore crude supply could exceed this light processing capacity. Were this to occur, there would need to be crude exports from the Gulf to the North East In this scenario WTI would trade $3-4/bbl below LLS but LLS would trade $2-3/bbl below Brent…i.e. a $5-7/bbl WTI-Brent spread into the longer term Each $1/bbl margin adds 8% to EBITDA for a refinery Refining stocks are deeply undervalued

Embedded Returns in US Refiners (HOLT)

Page 218

Source: Credit Suisse estimates, HOLT


What is an MLP? Typical MLP Structure Real Assets Real Cash Flow Real Company Housed in a master limited partnership structure MLP Source: Credit Suisse analysis Page 220 .

. transportation (e.MLP Assets An MLP must generate at least 90% of its income from qualifying sources (primarily natural resources activities) as defined in section 7704 of the internal revenue code – Energy related assets include: Exploration and production. storage and terminals. American Petroleum Institute Page 221 . propane. – pipelines). and coal MLPs predominantly own midstream energy assets Source: Spectra Energy website.g. gathering and processing. refining. marine transportation.

has no role in managing the partnership General Partner (GP): manages partnership. 2% equity ownership.MLP Key Terms Defined Master limited partnerships (MLPs) are limited partnerships that are publicly traded on US stock exchanges. However. these are pass-through entities that pay no corporate taxes. receives distributions. They trade just like common stock. Limited Partner (LP): provides capital. owns incentive distribution rights (IDRs) Distribution: Similar to dividends. distributions are paid quarterly and a large portion (typically 70% to 100%) is tax deferred Incentive Distribution Rights (IDRs): Entitle the GP to an increasing portion of distributions (up to 50%) as target distribution levels are attained Distributable Cash Flow (DCF)*: maximum amount of cash flow available to pay limited partners after taking into account maintenance capital requirements and the general partner entitlement Schedule K-1: Investors receive Schedule K-1s instead of Form 1099s UBTI: MLPs generate unrelated business taxable income (UBTI) *Credit Suisse definition Page 222 . unlike corporations. A high proportion of distributions are tax-deferred.

transparency and focus on cash flow Maintenance Capex – Too little can mean lower cash flow over time – More predictable cash flow streams = less need for excess distribution coverage – Less predictable cash flow streams = greater need for excess distribution coverage Risk to business model: Reliance on capital markets for growth MLP Debt / Equity Issuance 25.0 11.7 4.0 15.2 7.0 2004 2005 2006 2007 Debt 2008 Equity 2009 2010 YTD 5.8 16.5 6.1 20.2 Cash Flow Coverage of Distribution Source: Factset.0 20.3 9.9 5.3 5.0 ($bn) 10.1 11.2 15.8 7.6 19.3 8.0 5.MLP Business Model: Distribution Sustainability is Key MLPs pay out majority of available cash flow Access debt/equity markets needed to finance growth Cash Flow Characteristics – Gas pipelines and storage most stable and secure cash flow given reservation fees – E&P/Refining least stable given commodity price risk and depleting asset base Benefit of business model: Mandates financial discipline.1 8. Credit Suisse analysis Page 223 .0 0.

4% 5.6% 3.4% 5/9 8/2 6 2 / /9 6 28 9 / /97 26 4/ /97 2 1 1 4 /9 /2 8 0 6/ /9 8 18 1/1 / 99 4 8/1 / 00 1/0 3/ 0 9/0 10 1 /5 /0 5 1 11 /3/0 /29 2 6 / /02 27 1 / /03 23 8 / /04 20 3/ /04 1 1 0 8 /0 /1 5 4 5/1 /0 5 2/ 12 06 /8/ 0 7/ 6 6/ 0 2/ 7 1 8 / /0 8 29 3 / /08 2 10 7 /09 /23 05 /09 /2 12 1/ 10 /1 0 7 7/ 1 /1 0 5/1 1 1/ Energy MLPs Annual Distribution Growth vs CPI 14.4% 8. Prices as of 09/02/11 Total Return CAGRs: MLPs: 15.0% 9. S&P 500: 6.0% 2.3% 4.0% 8.0% 10.AMZ ML P Ind ex Y ield MLP Value Proposition High tax-advantaged yield Current yield of 6.0% 4.1% 9.0% 0.9% 4.0% 6. R2000: 6.5% 4.8% 6.0% 12.9% 1200% 1000% 800% = Attractive total return Expect 10 to 13% total returns 600% 400% 200% 0% -200% 12 /29 / 9/1 95 3/9 5/3 6 0/ 2/1 97 3 10 /98 /30 / 7/1 98 6/9 3/3 9 1 12 /00 /15 / 8/3 00 1/0 5/1 1 7/ 1/3 02 1 10 /03 /17 /0 7/2 3 / 3/1 04 8/0 12 5 /2/ 8/1 05 8/0 5/4 6 / 1/1 07 8/0 10 8 /3/ 6/1 08 9/0 3/5 9 11 /10 /19 /1 8/5 0 /11 AMZ MLP Index TR S&P500 TR Russell 2000 TR Source: Factset.2% 8.0% 3.0% Total Return (Since 1996) 886% 164% 153% Page 224 .9% 5.0% -2. Bureau of Labor Statistics.8% 2.8% 4.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E MLP Distribution Growth (Median) Y/Y Change in CPI 7.8% 4.1%.6% 3.6% 16% 14% 12% 10% 8% 6% 4% Annual Dist Growth + Distribution growth 2011E growth of 4.7%.

Valuation Framework: DDM is Preferred Methodology Follow the Cash. which discounts five years of distribution forecast. Since 1999. MLPs have traded at 322 basis points spread to the ten-year US treasury and 595 basis point spread to a high yield bond index Relative Valuation Metrics – Price / Distributable cash flow (DCF) multiple – Adjusted Enterprise Value / EBITDA multiple Page 225 . No One Really Cares About Earnings MLPs are primarily valued on their distributions. – – assumes a second stage of moderating distribution growth and a terminal value To arrive at a discount rate we use a blended approach combining the discount rate implied by the capital asset pricing model with the discount rate implied by investor’s required rate of return (yield plus expected distribution growth) Subjective factors are considered: asset mix. stability of cash flows and management track record Target Yield Methodology – Price target derived by projecting a targeted yield on an expected distribution rate 12 months out – Yield spread comparisons are usually analyzed. expectations for distribution growth and perceived risk profile Valuation Methodologies Distribution Discount Model (DDM) Methodology – Credit Suisse preferred methodology – Price target is based on a three-stage DDM model.

0x 12/31/99 6/23/00 11/30/01 11/15/02 10/31/03 3/24/06 8/15/08 01/07/11 10/15/04 07/16/10 07/01/11 1/15/99 7/9/99 5/24/02 5/9/03 4/23/04 4/8/05 9/30/05 9/15/06 8/31/07 2/22/08 2/6/09 7/31/09 C S L U C I B B B 7-1 0 Y r S p re a d to 1 0 -Y r T re a su ry (1 9 9 9 -2 0 1 1) 80 0 70 0 60 0 50 0 40 0 30 0 20 0 10 0 0 4/8/05 5/9/03 3/9/07 7/9/99 11/30/01 5/24/02 2/6/09 01/22/10 07/01/11 9/15/06 2/22/08 12/15/00 10/31/03 10/15/04 7/31/09 07/16/10 1/15/99 12/31/99 6/23/00 6/8/01 11/15/02 3/24/06 8/31/07 8/15/08 01/07/11 4/23/04 9/30/05 C u r ren t Sp r ea d = 21 5 A v era g e Sp r ea d = 20 6 700 600 500 400 300 200 100 0 -100 -200 MLPs yield 6. 00 0 80 0 60 0 40 0 20 0 0 12/15/00 C u rr e n t S p re a d = 4 5 9 A v e ra g e S p re a d = 3 2 2 A M Z Y ie ld v s . Prices as of 09/08/11 1/15/99 7/9/99 12/31/99 6/23/00 12/15/00 6/8/01 11/30/01 5/24/02 11/15/02 5/9/03 10/31/03 4/23/04 10/15/04 4/8/05 9/30/05 3/24/06 9/15/06 3/9/07 8/31/07 2/22/08 8/15/08 2/6/09 7/31/09 01/22/10 07/16/10 01/07/11 07/01/11 1/5/96 6/28/96 12/20/96 6/13/97 12/5/97 5/29/98 11/20/98 5/14/99 11/5/99 4/28/00 10/20/00 4/12/01 10/5/01 3/28/02 9/20/02 3/14/03 9/5/03 2/27/04 8/20/04 2/11/05 8/5/05 1/27/06 7/21/06 1/12/07 7/6/07 12/28/07 6/20/08 12/12/08 6/5/09 11/27/09 05/21/10 11/12/10 05/06/11 6/8/01 3/9/07 AMZ Y ield vs. CS LUCI BBB 7-10 Y r (1999-2011) C urrent = 2 44 ps A ve rag e = 1 18b ps M LPs are attractive vs. 1 0 y r T r e as u ry (1 9 9 9 -2 0 1 1 ) 1 8x 1 6x 1 4x 1 2x 1 0x 8x 6x 4x 01/22/10 A M Z P r ic e/D C F (1 9 9 6-2 0 11 ) C u r re n t = 13 .one standard deviation range of 10x to 14x.2x A v er ag e = 12 . 20 0 1.Yield Spread Analysis 1. Alerian website. ML Ps Page 226 . which is close to one standard deviation above the historical average. MLPs remain within their historical +/. 459 bps more than treasuries. 40 0 1. MLP yields remain compelling relative to investment grade bonds.6%. On a price-to-distributable cash flow basis. Credit Suisse analysis. Source: Factset. IG cre dits IG cred tis are attra ctive vs.

Disclosures .

00) Marathon Oil Corp (MRO.13. $71. (GGS.00) Denbury Resources (DNR. $56. TP $93. $42.33. $72. OUTPERFORM.00) Cobalt International Energy (CIE. TP $73.15. $44. TP $38.00) Oil States International (OIS.41.00) Cabot Oil & Gas Corp (COG. TP $46.99) Statoil (STL. $21. $76. TP $67. Some U. TP $30.00) Kinder Morgan Management. (HSE. OUTPERFORM [V]. LP (EPE.61) Anadarko Petroleum Corp. TP $53.03) Nabors Industries. $46. $76.20) Magellan Midstream Partners.04.49. Australia. $14. OUTPERFORM.00) Smith International. (NFX. $60. $24. $33. OUTPERFORM.00. TP $68. is or will be directly or indirectly related to the specific recommendations or views expressed in this report.00) LUKOIL (LKOH. $12. (DRQ.00) St. TP 1804. $37.00) Petrobras (PBR.HE. $28.31) Exterran Holdings (EXH.00) Plains Exploration & Production Co. (ROSE. TP NKr159. $15. $22. $43. NEUTRAL. $7. OUTPERFORM. NEUTRAL. OUTPERFORM.95. Eu12. OUTPERFORM. (TSO. TP $35.32. $29.00) Weir Group (WEIR.00) Murphy Oil Corp. $8. NEUTRAL.63.25. $71. $72. $19.00) Hercules Offshore (HERO.71. TP $50.S. TP $24.00) Helmerich & Payne. $25.32. Inc. TP $13. $43. TP $42.21) Boardwalk Pipeline Partners. The 15% and 7. (UPL. Mary Land (SM. $41.50 p. NEUTRAL. $33.00) Rowan Companies (RDC. TP Eu28.23. TP $21.84) Southwestern Energy Co.L. 1888. TP 610. $8.00) Whiting Petroleum Corp. Inc. NEUTRAL. OUTPERFORM. $48. (CNX.00) Patterson-UTI Energy. ratings are based on a stock’s total return relative to the analyst's coverage universe**. NEUTRAL. TP $34. TP $95. OUTPERFORM. (KMP. (PTEN. (KWK. 1768.04.00) Transocean Inc.00) Berry Petroleum Co.00 p) Ultra Petroleum Corp. NEUTRAL. NEUTRAL.64. $43.Companies Mentioned (Price as of 21 Sep 11) Alon USA Energy Inc. TP $12.60. RESTRICTED) ENI (ENI.00) Global Geophysical Services. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. TP $67.19. TP $36.90.41) Kosmos Energy Ltd (KOS.00) Energy Transfer Equity. NKr127.13. (BHI. TP C$32. and non-Japan Asia stocks. OUTPERFORM.L. OUTPERFORM.62.00) Noble Corporation (NE. NEUTRAL. $14. NEUTRAL. TP $17. L.P. that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was.00) Disclosure Appendix Important Global Disclosures Arun Jayaram. $43.97. $77. TP $36. RESTRICTED) CONSOL Energy Inc. (CVX. TP $117. For Australian and New Zealand stocks. Page 228 . (REXX.72) Atwood Oceanics.65. $3. Inc. $19. $41.30. $63. TP $95.00) OMV (OMVV. TP C$50. (WLL.20. OUTPERFORM. OUTPERFORM. TP $52.50) Rex Energy Corp. TP $66.63. OUTPERFORM. and Canadian ratings may fall outside the absolute total return ranges defined above. TP $36.N. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**.35. LP (BWP.09.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition.PA. $38.34) Plains All American Pipeline. TP $52. OUTPERFORM.00) Range Resources (RRC.00) Dresser Rand Group Inc (DRC) Dril-Quip.00) Baker Hughes Inc.00) Seadrill (SDRL. TP $25. $35. OUTPERFORM.00) Husky Energy Inc. NEUTRAL [V].00) Ensco Plc.27. TP $128.00) Occidental Petroleum (OXY.04.00) Complete Production Services (CPX. OUTPERFORM. C$17.47. $42.00) Goodrich Petroleum Corp.47.MI. Eu19.71. NEUTRAL. $48. (DK.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions. TP $90. CFA.71. *Relevant benchmark by region: As of 29th May 2009. $21. L. $70. $88. NEUTRAL. OUTPERFORM.73.93.48) Enterprise Products Partners.26.54.00) Tullow Oil (TLW. OUTPERFORM. $63.30) Nexen Inc. OUTPERFORM. $32.52.61) Diamond Offshore (DO. $61. $53. OUTPERFORM.91) Gulfport Energy Corporation (GPOR. TP $91.00) Neste (NES1V. NEUTRAL. NEUTRAL. OUTPERFORM.TO. $56. (ALJ. NEUTRAL [V].50) Hess Corporation (HES. Inc.00) Tidewater (TDW.P. (MUR. $32. Japanese.28. depending on perceived risk) over the next 12 months.50) Newfield Exploration Co. OUTPERFORM. OUTPERFORM. $8. L. TP $49. $65. TP $41. NEUTRAL. a portion of which are generated by Credit Suisse's investment banking activities. C$28. (GDP. Eu7. NEUTRAL.00) EOG Resources (EOG. $58. NEUTRAL. TP $105. OUTPERFORM. L.P. NEUTRAL.63. C$22.43) EV Energy Partners LP (EVEP. Eu32. TP $6.MC. (BRS.05 p. (SWN. LP (ETE. (ATW.L. OUTPERFORM. TP C$27.99. OUTPERFORM [V].27.00) Oceaneering Intl.L.RTS. TP $17. $37. for European stocks.00) FMC Technologies.79. NEUTRAL. $54.04.00) National Oilwell Varco (NOV. For Latin American.54) Valero Energy Corporation (VLO. (PXP. TP $36.04. NEUTRAL. Inc. OUTPERFORM [V].22. TP 3160.TO. TP $115. $41.00) Tesoro Corp. $12. OUTPERFORM [V]. OUTPERFORM. Inc. Ltd. $83.64.00 p. TP $110. TP $48. TP $35. OUTPERFORM [V].OL.15. TP $71. Inc.28. TP $62. with respect to the companies or securities that he or she analyzes.22.15. RESTRICTED) Energy Transfer Partners. $9. $35.43. TP $69. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months.00) BHP Billiton (BLT. $38. (CAM. TP Eu29.00) Total (TOTF.96.00) Sunoco Logistics Partners. LLC (KMR. 404. (PAA.77.63. $74. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more.00) Forest Oil (FST.00) Pioneer Natural Resources (PXD. NEUTRAL [V]. $39. NEUTRAL. (SXL. (NBR. TP $70.00) Schlumberger (SLB. $56. NEUTRAL. (RIG. (CHK. 1333.09) NuStar Energy LP (NS. TP Eu11. TP Eu19.78. OUTPERFORM.00) Noble Energy (NBL.00) BP (BP. NKr184. (SFY.00) Chesapeake Energy Corp. $60.00) Frontier Oil Corporation (FTO.00 p) Western Refining Inc. OUTPERFORM. TP Eu46. (SII.20. (GDI. NEUTRAL. OUTPERFORM [V]. Brad Handler & Edward Westlake each certify.00) Repsol YPF SA (REP.00) Swift Energy Co.00) Royal Dutch Shell PLC (ADR) (RDSa. TP $93. OUTPERFORM [V]. Inc. $47.01. TP $17.00) ConocoPhillips (COP. (APC. See the Companies Mentioned section for full company names.00) Enterprise GP Holdings. TP $45. $37.00) NuStar GP Holdings LLC (NSH. (WNR.TO. $64. TP 2000. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. $60.00) Devon Energy Corp (DVN. Eu25. TP $46. $29. $14. U.35) Halliburton (HAL.00) Delek US Holdings.00) Kinder Morgan Energy Partners.42) Chevron Corp. LP (SEP. (BRY. Inc.00) Holly Corp.00) ExxonMobil Corporation (XOM. (ETP. OUTPERFORM. with Outperforms representing the most attractive. Inc. TP $77. Inc. respectively. $26. New Zealand. (NXY. TP $65.31) Gardner Denver.70. (HP. TP $74. TP $73. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues.07. $70. OUTPERFORM [V]. NEUTRAL. OUTPERFORM [V].00) Rosetta Resources Inc. $61.76) HollyFrontier Corp (HFC. TP NKr178. LP (MMP.74.92. OUTPERFORM.89. (OII.00 p.58. Neutrals the less attractive. TP $63. and Underperforms the least attractive investment opportunities.00 p) Bristow Group Inc.64. NEUTRAL [V]. $94. NEUTRAL. TP $51. $56. NEUTRAL. 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7. $12.S.75) Quicksilver Resources. $41.70) Spectra Energy Partners.52.00 p) Bill Barrett Corp (BBG.88. TP $77.P. (HOC.00) Suncor Energy (SU. TP $29. depending on market conditions and industry factors. (ESV. (ECA. $26. LP (EPD. $58. $23. TP $130. respectively. ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. OUTPERFORM.16.VI. TP $71. UNDERPERFORM. $71.22) EnCana Corp. $17. OUTPERFORM. NEUTRAL. TP $71. UNDERPERFORM.10. $67. LP (DEP.03) Cameron International Corp.26.89. (FTI. $29.29.72) Duncan Energy Partners.

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