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Texas Energy Council Symposium “The Future for Oil & Gas Service Companies” March 6, 2012. Wilcox | Swartzwelder & Co. Overview. Leading boutique investment bank providing financial advisory solutions exclusively to mid-market companies in the Energy, Industrial and Infrastructure sector.

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Texas Energy Council Symposium

“The Future for Oil & Gas Service Companies”

March 6, 2012


Wilcox swartzwelder co overview
Wilcox | Swartzwelder & Co. Overview

Leading boutique investment bank providing financial advisory solutions exclusively to mid-market companies in the Energy, Industrial and Infrastructure sector.

  • Corporate Mergers and Acquisitions

  • Oil & Gas Property Acquisitions and Divestitures

  • Capital Raising & Private Placements

  • Merchant/Principal Investing

Services

  • Bring Wall Street expertise to Main Street

  • Senior level commitment; “boutique” level service

  • High quality advice and deal execution

  • Energy Industry focus

Approach

Track

Record

  • 40 years of experience, completing more than 100 transactions with value in excess of $3.6 billion

  • Navigated through multiple energy cycles, completing transactions in periods of positive momentum as well as difficult circumstances


Industry specialization 3ns across the energy chain
Industry Specialization – “3Ns” Across the Energy Chain

Specialization offers numerous advantages to clients – research, industry intelligence, capital markets knowledge, valuations, trends, investor and buyer relationships.

Energy

Industrial

Infrastructure

  • Energy Equipment and Services

  • Exploration & Production

  • Engineering and Infrastructure

  • Midstream Gathering and Distribution

  • Environmental

  • Construction

  • Electrical & Power

  • Industrial Distribution

  • Industrial Equipment and Services

  • Industrial Technology

  • Process/Flow Controls

  • Water/Wastewater


The future for oil gas service companies
The Future for Oil & Gas Chain Service Companies


Recent media descriptions of u s oil and gas industry
Recent Media Descriptions of U.S. Oil and Gas Industry Chain

“Renaissance”

“New Era”

“Revolutionary”

“Transformational”

“Game Changer”

“Early Stage”

“Death of Peak Oil”



Difficulty of predicting the future oilfield services index osx
Difficulty of Predicting the Future (Oilfield Chain Services Index – OSX)

Oil price reaches $141.47/Bbl

(June 27, 2008)

European debt crisis

Recession begins (April 2008)

Oil price drops to $33.20/Bbl

(January 16, 2009)

Recession ends (June 2009)


How good is your crystal ball
How Good is Your Crystal Ball? Chain

“How frustrating. The crystal ball is down again”

Source: New Yorker – August 12, 1991


Indications of what the future may hold
Indications of What the Future May Hold Chain

Windows are relatively short and the oil and gas service sector can change rapidly.

Primary Drivers of Activity

  • Follow the money ($$$)

  • Commodity prices and Oil & Gas producer expectations

  • Transition from natural gas to oil/liquids

  • Basin economics and rates of return

  • Technology  Efficiencies, Production Gains and Larger Recoveries

Implications

  • NAM Oil & Gas service industry performance is strong

  • Strained availability of services in certain highly active basins; shifting of operations to oil/liquids areas - more competition coming

  • What the stock market is indicating; margins may have peaked

  • Notable transactions

  • Case Study: Middle-market oilfield services transaction



Rig count gets oilier
Rig Count Gets “Oilier” Chain

Source: Baker Hughes Rig Count


Producer expectations 2012 outlook
Producer Expectations – 2012 Outlook Chain

Source: Barclays Capital annual oil & gas upstream spending survey (December 2011)

Source: The American Oil & Gas Reporter – Outlook 2012 (January 2012)


Sensitivity of drilling based on commodity prices
Sensitivity of Drilling Based on Commodity Prices Chain

Natural Gas Prices at Which Operators Alter 2012 Drilling

Oil Prices at Which Operators

Alter 2012 Drilling

Drilling Increases

Drilling Decreases

Source: The American Oil & Gas Reporter (January 2012)


Basin economics all basins not created equal
Basin Economics – All Basins Not Created Equal Chain

Capital flowing to basins offering highest rates of return.

Rate

of

Return

Source: Credit Suisse (Jan. 3, 2012)


Rig count is bearing out the trend year over year change
Rig Count is Bearing Out the Trend (Year-Over-Year Change) Chain

Bakken Shale

+45 rigs

202 total rigs

29% change

Mississippi Lime

+28 rigs

55 total rigs

104% change

Cana Woodford

+10 rigs

63 total rigs

19% change

Marcellus Shale

+11 rigs

134 total rigs

9% change

Granite Wash

+2 rigs

77 total rigs

3% change

Fayetteville Shale

-2 rigs

23 total rigs

-8% change

Permian Basin

+112 rigs

471 total rigs

31% change

Eagle Ford Basin

+94 rigs

241 total rigs

64% change

Barnett Shale

-24 rigs

56 total rigs

-30% change

Haynesville Shale

-75 rigs

86 total rigs

-47% change

Source: Baker Hughes Rig Count


Technology advances are transformational
Technology Advances are Transformational Chain

Improved efficiencies resulting in substantial production gains.

Rig Count (Horizontal vs. Vertical)

  • Horizontal Drilling

    • Geo - steering

    • Measurement-While-Drilling (MWD)

    • Logging-While-Drilling (LWD)

    • Pad development

  • Multi-Stage Hydraulic Fracturing/Enhanced Completion Techniques

    • Longer laterals

    • More stages

    • Zipper frac

  • Results (Oil & Gas “Manufacturing”)

    • Higher service intensity (oil 2-3x > gas)

    • Improved predictability and repeatability lowers risk and increases productivity



Proof is in the production sharply accelerating domestic oil supply

Can the U.S. become energy independent? Corner

Proof is in the Production – Sharply Accelerating Domestic Oil Supply

MBPD

Source: Raymond James Equity Research (February 13, 2012)


We are really good but it hurts barnett as analog to haynesville
We Are Really Good, But It Hurts: Barnett as Analog to Haynesville?

Haynesville service activity is in decline…will it resemble what happened in the Barnett?

Barnett Shale Production vs. Rig Count

  • Roughly 400-500 drilled-but-uncompleted well inventory; won’t complete until gas prices improve


Oil gas service companies shifting to oil liquids areas
Oil & Gas Service Companies Shifting to Oil/Liquids Areas Haynesville?

  • Chesapeake announces decrease in active rigs in Haynesville (dry gas); where do these rigs go?

  • Increased competition and pricing pressure

  • Increased input costs (margin compression)

    • Labor

    • Raw materials

    • Logistics and transport costs from dry gas to oil/liquids basins

  • Pressure pumpers (hydraulic fracturing companies) – recent reports suggest pricing and margins coming down as “Big 3” (Schlumberger, Halliburton, Baker Hughes) defend market share

Southwestern Cutting Fayetteville Drilling for MarcellusFebruary 29, 2012


Strained availability of services
Strained Availability of Services Haynesville?

  • People/Housing (Williston, North Dakota Wal-Mart)

  • Oilfield service equipment – logistics/transportation/relocations from dry gas regions

  • Commodities used for drilling and completing wells (e.g. Proppant)

  • Infrastructure (pipeline, rail, trucks, roads, water)

Source: Bakken Investor Conference 2011 – North Dakota Association of Oil & Gas Producing Counties


Oil gas service company performance
Oil & Gas Service Company Performance Haynesville?

Oilfield Service EBITDA and

EBITDA Margin ($ in billions)

Oilfield Service Revenue ($ in billions)


What the stock market is indicating
What the Stock Market is Indicating Haynesville?

S&P 500 Index

OSX Index



Case study middle market oilfield service transaction
Case Study: Middle Market Oilfield Service Transaction Haynesville?

  • “Beauty is in eye of beholder”; if considering a transaction, it pays to broadly test the market

  • $40 million difference between initial high and low bids

Initial Indications of Interest ($mm)

Financial Sponsor

Strategic Buyer


Conclusion the future of oil gas service companies
Conclusion: The Future of Oil & Gas Service Companies Haynesville?

Primary Drivers of Activity

  • Follow the $; capital flowing to areas offering highest returns given commodity prices

  • Transitioning from natural gas to oil/liquids

  • Technology will continue to advance leading to greater efficiencies, increased production, larger recoveries

  • Oil & Gas service company performance is strong, but momentum is slowing and margins will come down

  • Services will remain strained in highly active basins but competition will increase, thereby helping satisfy demand

  • Public equity markets indicate closer to top of cycle than bottom

  • M&A window remains open

Implications


Thank you
Thank You! Haynesville?

For more information contact:

Jason N. Wilcox, Managing Director

Wilcox l Swartzwelder & Co.

433 E. Las Colinas Blvd, Suite 1200

Irving, Texas 75039

972-831-1300

E-Mail: [email protected]

Website: ws-ibank.com


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