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Oil and Gas Investment Opportunities in 2009; Investing in the Storm

Oil and Gas Investment Opportunities in 2009; Investing in the Storm. HAPL Technical Workshop Houston April, 2009 Ian Cross & Chris Moore. The “Perfect Storm” hits access to capital for growth. Precipitous decline in oil prices Dramatic reduction in free cash flow

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Oil and Gas Investment Opportunities in 2009; Investing in the Storm

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  1. Oil and Gas Investment Opportunities in 2009; Investing in the Storm HAPL Technical Workshop Houston April, 2009 Ian Cross & Chris Moore

  2. The “Perfect Storm” hits access to capital for growth • Precipitous decline in oil prices • Dramatic reduction in free cash flow • Precipitous decline in global stock markets • New equity difficult and dilutive • Credit crisis in global banking industry • Reduced availability of debt as lenders became strongly risk averse • Recent borrowers in difficulty with loan covenants

  3. Topics • Markets • Surface Risk • E&P Activities • Opportunities • Summary

  4. The futures market suggests that crude prices will rise steadily back to pre-spike levels, exceeding $60/STB. Current large Brent premium to WTI reflects glut at Cushing.

  5. The futures market suggests that US Henry Hub spot natural gas prices will rise steadily back to pre-spike levels, around $7.50/MMBtu (flat nominal, falling real) before seasonal adjustments.

  6. In the global market, the unique circumstances of each project mask any correlation between purchase price and crude price. The plotted trend line over time is not statistically significant

  7. There are significant intra-regional differences, as well as inter-regional ones, especially in South America and Europe. Relative proportions of proved reserves and undeveloped reserves and resources further affect comparisons

  8. Large data sets like deepwater GoM bids suggests that valuations are dominated by short term crude prices. With current spot prices over $20/STB below the end of the strip in real terms, bargains abound for those with a long term view (and cash)

  9. New World Order • Wave of resource-based nationalism • Expansion of NOCs role as E&P companies • Lower Risk Tolerance for exploration projects • Emergence of natural gas • Enforcement of anti-corruption standards • Terrorism • Climate change & pollution management • Communications have improved

  10. Surface Risk; Selection of Current Issues UK; Offshore unions unhappy with vacation ruling Canada; Environmental Russia; Appropriation of foreign companies Ukraine; Contract title risk Kazakhstan; Reinforced environmental audits USA; Obama threat of changes & environment Central Africa; DR Congo situation Colombia; Ecopetrol takes back oil field Ecuador; Tax changes & migration to new contract Nigeria; Land & security problems Indonesia;Hard-line contract discussions Peru; Government corruption effects new license holders Bolivia; Political crisis paralyses activity

  11. Surface Risk; Challenges Less control over country-specific risk

  12. Country & Company-specific Challenges Country Company Adapted from Berlin et al (2003)

  13. Perception of Risk Varies Example of a Risk Ranking • Pakistan • Nigeria • Iran • Venezuela • Indonesia • Ukraine • Philippines • Thailand • Saudi Arabia • India Source; Leading analysts global risk index (October 08) • Tolerance varies depending on nature & options to mitigate, reduce & absorb • Not uniform within a country • Georgia, Myanmar, Sudan? • Other Latin America? • Indonesia, Philippines, Thailand attract investment!

  14. Changes UK Fiscal System 1975; Three tiers; Royalty, PRT & CT introduced 1978; PRT increased to 60% 1979; PRT increased to 70% 1981; New duty (SPD) introduced 1983; SPD abolished, PRT increased to 75%, special conditions for NNS 1988; Special conditions extended to SNS & onshore 1993; PRT adjustment & other changes 2002; Royalty adjustment & new supplementary charge introduced 2004; PRT adjustment & incentive (EES) introduced 2008; Reforms aimed at older assets, PRT adjustment 2009; New incentives for small fields

  15. White Nile (Sudan) A – April 2005: WN announced it had entered into licensing agreement in August 2004 & assurances of title given B – April 2005: Overhyped Regal well effect AIM C – August 2005: VP of country & strong WN supporter killed D – Sept 2005: Total SA threatens legal action over claims to license E – Jan 2007: WN ordered to disclose documents F – May 2007: Indications license resolution possible – June 2007: Resolution made by the NPC to remove WN from disputed block. Country-specific Risk C D A B F E G G

  16. Regal Petroleum (Ukraine) A – April 2005: Overhyped Greek well downgraded B – May 2005: Access to pipeline in Ukraine questioned C – June 2005: Chairman resigns; positive market reaction – Q3 & Q4, 2005: State firms question validity of Ukraine licenses & RP lose appeal E – Q1, 2006: Local Ukraine partner engaged F – Dec 2006: Kiev court dismisses claims against RP G – Nov 2007: New CEO; improved credibility: market confidence in management Company-specific Risk A F B C G E D D

  17. Surface Risk; Observations • Industry could do a better job of anticipation • Where there is a history expect it • Generally countries are open to negotiation • All political systems have been successfully worked with • Instability/conflict of government often a catalyst to problems • Correlation between risk acceptance & technical prospectivity

  18. NW Europe Dana acquires Bow Valley; main assets UK (Feb09) UK-listed Indago winds down & returns cash to shareholders (Apr09) Oilexco to sell UK assets to Premier for US$500 million (Mar09) BP profits for 1Q fall by 62% (Apr09) Storm Ventures acquires Silverstone; main assets UK-gas basin (Jan09) Northern Pet buys ATI Oil in deal valued at US$17 million; Italy assets (Apr09) Petrol Ofisi buys certain Toreador assets in Turkey (Mar09)

  19. Russia & Eastern Europe Cadogan to sell Ukraine asset(s) to augment funds (Apr09) • Russia; • BP & AAR agree deal to align BP – TNK interests in JV (Jan09) • Russian-player Urals Energy in financial difficulties (Dec08) • ONGC acquires Imperial Energy for US$2.2 billion; key assets Russia (Jan09) • Kazakhstan; • Canamens takes stake in Roxi’sKaz acreage (Jan09) • ONGC closes in on stake in Satpayev block in Kazakhstan (Jan09) • CNPC buys KMG assets in Kazakhstan for US$3.3 billion (Apr09) Russia and Ukraine gas payment & pipeline issues effect Europe; discussions on alternative pipeline(s) (Apr09)

  20. Africa Libya gains >US$5.4 billion in 2008 after contract changes (Jan09) ENI acquires First Calgary Petroleum for US$954 million; key assets; Algeria (Sept08) Somalia pirate problem escalates (Mar09) Ghana’s Jubilee oil field grows & new discovery (Apr09) Victoria Oil to acquire Bramlin; key asset Cameroon, London IPO US$10 million planned (Nov08) • Uganda: • oil potential confirmed • Tower Resources secures funding • (Jan09)

  21. Middle East & Indian Subcontinent Significant gas discoveries deepwater Israel by Noble (Apr09) Afghan bid round opens (Apr09) BP acquires an interest in Orient’s Pakistan licenses (Dec08) Slow progress in Iraq & terms toughened (Apr09) Indian bid round opened (Apr09) Heritage completes sale of Oman assets to RAK for US$28 million (Apr09) India offers Qatari’s a 10% stake in Petronet LNG (Jan09) Aramco & ConocoPhillips Saudi refinery delay (Jan09)

  22. Noble Energy’s Israel Deepwater Discovery; New Opportunities in Eastern Mediterranean Tamar-1 & Dalit-1 significant gas discovery, Tamar-2 spudded Cyprus 2nd bid round & farmouts Few deepwater wells; Egypt, Lebanon, Syria, Turkey & Greece upgraded; open acreage & farmouts; boundary issues Pelagic & other Israel farmouts & open acreage

  23. East Asia Horizon transfers Thai assets to Pearl (Feb09) BG buys Petroleum Resources stake in Thai-Cambodia overlapping zone (Apr09) Husky to spin Asian assets into new HK based company; main asset Liwan gas field, deepwater China (Apr09) Indonesia to offer 24 blocks for bid (Apr09) Indonesia oil production declines; formally leaves OPEC (Jan09)

  24. Australasia • PNG; • Merlin Energy buys US$800 million stake in LNG project (Dec08) • Abu Dhabi group invests US$1 billion in Oil Search (Dec08) • First sale LNG announced by ExxonMobil (Apr09) • InterOil announce world record gas test results (Apr09) • Australia (CSG); • Arrow Energy pays A$551 million for Pure Energy’s acreage (Dec08) • Shell completes A$742 million acquisition of interests in Arrow Energy (Dec08) • - AGL makes A$171 million offer for Sydney Gas (Jan09) • Arrow Energy signs MOU with ONGC for JV (Jan09) • British Gas offers A$4.9 billion for QGC; after failing with Origin Energy (Jan09) • Arrow Energy pays A$400 million to Beach for sale of assets (Apr09) PTTEP pays A$170 million for Coogee Resources (Dec08)

  25. InterOil - Antelope-1 – PPL 238 • 382 MMcfg/d & 5,000 BCPD • 545 MMcfg/d (max calculated absolute flow) • Possible global best; • Vertical well gas flow • Vertical column in an onshore reef • Low cost LNG facility being discussed • Highlights potential of Miocene carbonates Elk/Antelope

  26. Global LNG Liquefaction Capacity ~2020

  27. North America Suncor acquires PetroCanada for US$15 billion (Jan09) Nexen increases stake in Alberta Long Lake project for US$582 million (Dec08) Indian Oil Company puts on hold Canadian oil sands investments (Jan09) Berry sells certain Colorado assets for US$154 million (Mar09) StatoilHydro acquires stake in 50 GoM blocks from BHPB (Apr09) Total partners with IDT in Colorado oil shale projects (Jan09) Mexico oil production plummeting (Jan09)

  28. South America PetroFalcon cancels farmin deal with Chevron in Venezuela (Jan09) Hocol buys M&P Colombian assets for US$748 million (Mar09) Murphy sells Ecuador assets to Repsol for US$87 million (Mar09) Brasil is global hot-spot for oil discoveries (Apr09) Ecuador suspends ENI & Perenco oil production (Jan09) • Peru; • BPZ & Shell deal discontinued (Jan09) • Ecopetrol & KNOC acquire Petro-Tech for US$900 million (Feb09)

  29. Selection of Buyers 2009 (Market Cap US$)

  30. Selection of Sellers 2009 (Market Cap US$)

  31. USA Onshore Transactions, Price Comparisons • Recent analysis shows that same or similar assets would receive a transaction price in 2008/2009 1/3 to 2/3 the price received 2 years ago • Without adjusting reserve categories for risk, the standard 10% discount rate applied by the buyer has increased to 25-40% • Monthly cash flow transaction multiples are 60-120X

  32. Looking Forward • Eventual low commodity prices will trigger M&A activity • Distressed companies forced to sell or liquidate • Global upstream CAPEX down ~25% • Service costs reduced to reflect demand • Exploration projects stalled or acquired: • Unfunded deepwater & high risk exploration projects shelved, or assets acquired • Government bid rounds will be delayed, low bid, or fail • Renegotiations of work programmes is likely to be acceptable • Government re-bidding of contracts & improved terms for qualified companies • Acquisitions of distressed companies cheaper than initiating projects • Private Equity: • Private Equity groups well funded & in a good position to be “patient” • Cash available for “right” projects

  33. Summary • Transaction activity to take-off • Capital is limited as Risk Tolerance falls, available for the right projects but the cost is higher • Acquisition opportunities for larger producers • Non-producers in strained capital situation very vulnerable • Governments to reconsider fiscal terms & work programmes • Less competitive country-bid rounds offer opportunities

  34. Current Mandates, April 2009 New Guinea Energy Evaluation and farmout of six onshore Papua New Guinea PPLs Sun Resources Farmout of onshore Thailand license L20/50 Sherritt International Corporation Farmout of seven offshore Turkey licenses, Black Sea Blue Energy Farmout of four offshore PPLs in the Eastern Gulf of Papua Seha Corporation Sale of interest in Sarkramabas and West Bozoba Concessions, Pre Caspian Basin, Kazakhstan MND Exploration and Production Farmout of Barkhan block, onshore Pakistan

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