October Edition: A Spotlight on the Artificial Lift Market

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1 ($ in millions) (Well count in thousands) Bbl. Oil / Day October Edition: A Spotlight on the Artificial Lift Market Once again, the artificial lift market is on pace to achieve double digit growth (est. 15%) in 214. In the October edition, we spotlight this sector, detailing the historical methods for artificial lift, new innovation and technology, the industry outlook, and its implications for oilfield service providers. It s no secret that there has been exceptional growth in domestic drilling, with tens of thousands of new wells being drilled each year. With an increasing shift to horizontal drilling, the maturing of these unconventional wells presents a major challenge and opportunity: how to optimize well production. With horizontal wells exhibiting steep decline rates (see Bakken Hz. Well Decline Curve), the focus previously optimizing well completion is increasingly being allocated towards optimizing production. This shift bodes well for manufacturers and service providers of artificial lift systems. Quick Market Overview. Artificial lift is installed in wells when there is a need to supplement the natural reservoir drive to increase flow from the wellbore. Over 9% of global producing wells currently use some form of artificial lift. Further details: Prepared by: Duane Donner ddonner@foundersib.com Joe Brady jbrady@foundersib.com John Ortstadt jortstadt@foundersib.com Brandon Pilot bpilot@foundersib.com Ben New bnew@foundersib.com 94% of oil wells will need artificial lift or pumps at some point in their lifecycle, and 9% of existing oil and gas wells requiring water removal utilize some form of artificial lift system 7% of the world s oil and gas production is derived from mature fields, including a large percentage in the secondary or tertiary production phase The market has grown at an average annual growth rate of 19% since 29 (below) $16, $14, $12, $1, $8, $6, $4, $2, $ Artificial Lift - Market Size & Share vs. Total Well Count ,1 1,5 1, Bakken Hz. Well Decline Curve (3,694 Samples) Weatherford Schlumberger GE Oil & Gas Baker Hughes Others 214P Total Total Active Well Count Source: Spears & Associates Years from First Production Source: HPDI, Bernstein Research 1

2 Artificial Lift Types. Well bore characteristics including LPR (liquid production rate), water cut, gas-liquid ratio, viscosity, well depth, completion type, casing and tubing sizes and wellbore deviation all factor into determining the most suited lift system. That said, there are six major types of lifts that encompass the majority of lift systems (96%), with many customizations for specific wellbore conditions. A brief overview: Rod Lift - also known as the sucker-rod lift or the pump jack ; this is the most tenured lift and probably the most iconic visual in the oil and gas industry. These lifts provide an efficient and cost effective way to increase the rate of extracting hydrocarbons, and the simple design and easy maintenance of the rod-lift components make it easy to source service companies to work on the systems. With more than 5% of the global rod lift market based in the US, the lift is still the method of choice for vertical wells. ESPs (Electric Submersible Pumps) a dynamic lift that utilizes centrifugal force to lift hydrocarbons to the surface. ESPs are typically brought in to enhance oil production as soon as it begins to decline, and while there is still a moderate to high volume of fluid that can be lifted from the well. ESPs have an electric cable running downhole to power the lift motor, giving the ability to transmit signals, retrieve data and proactively monitor problems. ESPs limitations are primarily witnessed in unconventional wells with a high mixture of gas. Global Market Share by Lift Type 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 5% 4% 4% 4% 3% 2% 5% 2% 4% 2% 5% 6% 7% 7% 5% 25% 54% 31% 33% 46% 46% ESP Rod Lift PCP Gas Lift Plunger Hydraulic Other Source: Spears & Associates Gas Lift one of the most effective lifts for mature horizontal wells. It involves injecting high-pressure gas from the surface into the producing fluid column, reducing the density of fluids and the bottom hole pressure, and allowing the reservoir pressure to drive the hydrocarbons up to the surface. Hydraulic Pumping Systems a lift designed for deep wells with solids, sand, heavy oil, water, gas, corrosive fluids, etc. In both forms of HPS (reciprocating piston and jet hydraulic), a motor is placed downhole to help force pressure upward. According to Spears & Associates, HPS s are beginning to gain popularity in horizontal wells. Plunger Lift a lift that uses the well s own energy to open and close the well shutoff valve at the optimum times to bring up the plunger and the contaminants and maximize production. The lift s versatility gives it applications in both gassy and oily basins, making it easier to find mechanics to service it. This lift is increasing in popularity due to its efficiency and favorable environmental impacts. Sources: Hart Energy Research, Weatherford, Spears & Associates Rod Lift or Pump Jack An ESP Lift Diagram Source: Weatherford 2

3 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Market Outlook and Implications. The artificial lift market is expected to increase in years ahead, with unconventional wells driving the demand for new technology. While over 9% of the world s wells use some form of artificial lift, it is the new horizontal and offshore well activity that is driving innovation (see Horizontal as Percentage of Total Rigs). An aforementioned demand driver is the high depletion rates in horizontal wells. The average flow from a shale gas well drops 5% to 75% in the first year, and up to 78% for oil wells. Consequently, operators are moving to artificial lift systems much sooner to maintain flow rates and progressing to different lift systems as the well conditions and flow rates change with the life of the well. An industry trend is the increasing amount of resources being allocated to technological development and innovation in lift systems. One example is GE Oil & Gas recent announcement of its next generation ESP Vector Plus variable speed drive (VSD), which allows the operator to gradually increase ESP motor speed and remotely adjust ESP speed from the surface with improved intelligent control capabilities. Additionally, there is an increasing focus on customizing lift systems to suit well conditions. Automation in the oilfield remains a hot topic, and one of the biggest opportunities for implementation and upside is in production operations. Reducing unplanned downtime and maximizing efficiencies without compromising health, safety or environmental impacts are big goals for operators. A little can go along way; according to a McKinsey & Company research report on automation and production, a 1% increase in production efficiency could yield over $26mm to the bottom-line on a particular brownfield asset. Consolidation. Over the years, key market players have been focusing on expansion of their product offering and venturing into submarkets, resulting in consolidation of the artificial lift market. From 29 to 213, the number of market participants reduced by approximately 5%, highlighting the market consolidation trend. Founders Director of Oil & Gas Services, Joe Brady recently stated, with expected double digit growth in the segment and increased demand for production-based services, the space has become very attractive. We expect to see new entrants coming in to the market, primarily driven by PEG-backed service providers that will offer niche technical expertise and cost saving maintenance. Summary Remarks. Production optimization has always been a priority of the operator, but as basins continue to mature, increasing attention and resources will be allocated to optimizing production from their existing wells. Further, the continued expansion into unconventional plays will call for new and improved technologies in artificial lift systems. As we push to extract resources from deeper, tighter, and more difficult formations, demand will rise for artificial lift systems engineered for specific well conditions. We expect emerging opportunities for companies that can pioneer new technology and provide customized solutions via higher expertise and ongoing innovation. In addition, we expect automation to play a growing role in the production space and the overall oilfield. In the coming months, we will explore the digitization and automation of the oilfield and its potential implications. 8% 7% 6% 5% 4% 3% Horizontal Rigs as Percentage of Total Rigs WE EXPECT TO SEE NEW ENTRANTS COMING IN TO THE MARKET, PRIMARILY DRIVEN BY PEG-BACKED SERVICE PROVIDERS THAT WILL OFFER NICHE TECHNICAL EXPERTISE AND COST SAVING MAINTENANCE - JOE BRADY, DIRECTOR OF FOUNDERS OIL & GAS SERVICES PRACTICE Source: Baker Hughes A diagram of oilfield automation Source: Baker Hughes, McKinsey & Company, Spears & Associates & HIS Inc. 3

4 Select M&A Transactions Announced Date Target/Issuer Buyers/Investors Total Transaction Value ($USDmm) 1/2/214 Geospace Technologies Corporation (NasdaqGS:GEOS) Lemelson Capital Management, LLC - 1/15/214 Sun Tubular Services LLC IronGate Energy Services, LLC - 1/9/214 TGC Industries Inc. (NasdaqGS:TGE) 1/8/214 Essential Energy Services Ltd, Rod Rig Assets Dawson Geophysical Company (NasdaqGS:DWSN) Rapid Rod Service Ltd /7/214 Schlehuber Oil Tools, LLC Team Oil Tools, Inc. - 1/4/214 LineQuest, LLC Milford Companies - 1/2/214 Accelerated Companies LLC Dover Artificial Lift 43. 1/2/214 Elite Treating Solutions, Ltd. WadeCo Specialties Inc. - 1/1/214 Houston Offshore Engineering LLC WS Atkins plc (LSE:ATK) 73. 9/3/214 Maxx Oilfield Services, LLC Pro Oilfield Services, LLC - 9/21/214 Dresser-Rand Group Inc. (NYSE:DRC) Siemens Energy, Inc. 7, /17/214 Pioneer Fishing & Rental Services, LLC Basic Energy Services, Inc. (NYSE:BAS) 9/15/214 9/15/214 9/12/214 CWC Energy Services Corp., Snubbing Assets and Business Technip SA, North American Diving Assets Oil and Gas Pipeline Inspection Services Business and Related Assets - Ranger Offshore, Inc. - Pure Technologies Ltd. (TSX:PUR) 9/12/214 Hyduke Machining Solutions Inc /12/214 JL Bryan Equipment Inc. and Tank Partners LLC Empeiria Capital Partners, LLC - Source: CapitalIQ 4

5 Commodity Prices Crude Oil - WTI Price Crude Oil ($ per bbl) (9.3%) (14.8)% Natural Gas - Henry Hub Price Natural Gas ($ per MMBtu) (.7%) 1.7% Source: CapitalIQ 5

6 Rig Counts Onshore Rig Count 2,5 2, 1,5 1, 5 Rig Count U.S. Onshore 1,861 1,869 1,681 (.4%) 1.7% Offshore Rig Count Rig Count U.S. Offshore (8.1%) (1.7%) Source: Baker Hughes 6

7 Rig Counts (continued) 2,5 2, 1,5 1, 5 U.S. Rig Count by Basin Permian Eagle Ford Williston Marcellus Mississippian Granite Wash Haynesville DJ Niobrara Utica Cana Woodford Barnett Fayetteville Arkoma Woodford Ardmore Woodford Others U.S. Rig Count by Basin U.S. Rig Count by Basin YTD Change Permian Eagle Ford Permian Eagle Ford (19) 93 Williston 193 Williston 8 Marcellus 81 Marcellus (4) Mississippian 73 Mississippian (2) Granite Wash 62 Granite Wash 1 Haynesville 43 Haynesville DJ-Niobrara 63 DJ-Niobrara 13 Utica 47 Utica 9 Cana Woodford 38 Cana Woodford 2 Barnett 21 Barnett (13) Fayetteville 9 Fayetteville Arkoma Woodford 6 Arkoma Woodford 1 Ardmore Woodford 5 Ardmore Woodford (5) Others 57 Others 74 Source: Baker Hughes 7

8 Rig Counts (continued) U.S. Oil vs. Natural Gas Rig Count 1,8 1,6 1,4 1,2 1, Oil Rig Count Gas Rig Count Rig Count Oil 1,59 1,61 1,361 (.7%) 16.8% Natural Gas (.3%) (11.8%) Gulf of Mexico Oil vs. Natural Gas Rig Count Gas Rig Count Oil Rig Count Rig Count Oil % 15.8% Natural Gas (21.4%) (38.9%) Total Gulf of Mexico (5.2%) (1.8%) Source: Baker Hughes 8

9 (Mm bbl/day) Domestic Production Crude Oil Production Million Barrels per Day Sep Prior Month Prior Year Prior Month Prior Year Crude Oil % 11.8% Dry Natural Gas Production Billion Cubic Feet per Day Sep Prior Month Prior Year Prior Month Prior Year Dry Natural Gas (.2%) 5.8% Source: Baker Hughes 9

10 FOUNDERS INVESTMENT BANKING IS A MERGER AND ACQUISITION FIRM WITH AN OIL AND GAS SERVICES PRACTICE THAT BRINGS A WALL STREET-LEVEL OF SOPHISTICATION TO THE WELL SITE. ITS TEAM'S PROVEN EXPERTISE AND PROCESS-BASED SOLUTIONS HELP COMPANIES AND BUSINESS OWNERS ACCESS CAPITAL AND PREPARE FOR AND EXECUTE LIQUIDITY EVENTS TO ACHIEVE SPECIFIC FINANCIAL GOALS. O&G SERVICES LEAD ADVISORS: DUANE DONNER MANAGING DIRECTOR DDONNER@FOUNDERSIB.COM JOE BRADY DIRECTOR JBRADY@FOUNDERSIB.COM JOHN ORTSTADT BUSINESS DEVELOPMENT JORTSTADT@FOUNDERSIB.COM BRANDON PILOT ANALYST BPILOT@FOUNDERSIB.COM SAMPLE O&G TRANSACTIONS: 214 Founders Blast & Cast Fall Forum duck hunt at the lodge in Cameron Meadows. BEN NEW ANALYST BNEW@FOUNDERSIB.COM FOUNDERS INVESTMENT BANKING, LLC 224 LAKESHORE DRIVE BIRMINGHAM, AL Securities-related services, including M&A advisory for transactions involving stock or debt are offered through M&A Securities Group, Inc., Member FINRA & SiPC. Founders Investment Banking & M&A Securities Group are not affiliated entities. Principals of Founders are registered investment banking agents with M&A Securities Group & shall perform such services on behalf of M&A Securities Group.