1 Oil & Gas Monitor 1
Trend 1 Tracker Used Pricing: Pricing was fairly consistent, with the exception of older mechanical rigs that are continuing to hit the auction block. Current industry estimates indicate that as much as 50% of the mechanical rig inventory is idle. As the number of these idled older rigs continues to increase, we are seeing signs of market saturation and, consequently, declines in recovery values for these items. However, other categories of oilfield equipment have remained stable over the last year. NOLVs: NOVLs for lubricants have remained relatively consistent year-over-year, with values ranging from a gain or loss of one to two percentage points based on gross margin changes. Sales Trends: Sales volumes for lubricants have decreased by up to 5% year-over-year due to recovering, though unstable market conditions. Used Trade Movement: We are still seeing excess equipment and/or older technology equipment hitting the market, but not enough of an increase over the last quarter to be noticeable, remaining fairly consistent. GA has observed primarily older equipment hitting the auction market as of late, especially in the drilling side of the business. OEM Pricing: For the most part, pricing is consistent, but some frac component OEM pricing is down in recent months. Gross Margin: Gross margins for lubricants were mixed yearover-year due to crude oil price fluctuations and changes in long-term contractual price agreements, sales mix, and the velocity of inventory. Inventory: Lubricants inventory levels have remained fairly consistent, increasing or decreasing slightly depending on regional activity and the markets served. Pricing: Market prices for crude oil, gasoline, diesel, and natural gas have increased since the prior month. Crude oil and natural gas prices have also increased year-over-year, though decreased over the same period for gasoline and diesel. Technology Advancement: Technological advancement has been consistent over the last 12 months, but has continued to make strides over the last few years. The greatest advancements in technology over the last few years have been in the drill string and bottom hole assembly. Auction Activity: Auction activity has increased, as excess equipment and older rigs have been coming to auction more frequently. Newer, state-of-the-art equipment is not prevalent in the secondary marketplace. 1
Overview 2 The oil and gas sector has continued to be stable through the first two months of 2014. Crude oil production continues to increase year-over-year and natural gas prices have increased to their highest point in nearly four years. While oil rig counts have remained relatively flat over the last three months, oil production has increased steadily. Production in 2013 ended at roughly 7.5 million barrels a day, with forecasts expecting 2014 to hit approximately 8.3 million barrels a day. The increased output continues to benefit from multi-pad drilling, walking rigs, and improved horizontal drilling techniques. Additionally, natural gas production has steadily increased through the beginning of 2014, as nearly 72 billion cubic feet was produced in January, which represented a 4% increase year-over-year. Forecasts by the U.S. Energy Information Administration ( EIA ) continue to show growth in the domestic output of crude oil and natural gas through 2014 and into 2015. Increased global demand for these products is expected to spur growth as the U.S looks to increase exports of excess supply. prices have peaked in recent months, prices are expected to edge back down throughout the course of the year. The secondary marketplace for related equipment has remained stable through the last 12 months as prices for crude oil and natural gas, while subject to some swings, have also remained stable. The exception would be with older mechanical rigs and related equipment, which have experienced an increase in secondary marketplace activity, albeit at decreased recovery values. This has been due to the functional obsolescence of these rigs, as technological advances have made them relatively less productive and thus less desirable. While prices for natural gas have increased in recent months as a result of a colder-thananticipated-winter and dwindling reserves, the EIA forecasts prices to even out through the remainder of the year. While crude oil 2
Recent 3 Appraisal Trends While domestic drilling rig counts had been in a slight decline through the tail end of 2013, the rig count has improved slightly in recent weeks. Overall, the domestic rig count has remained fairly flat over the last year, with minor swings up and down. However, this has not affected domestic oil production, which has continued to experience increases over the last three years and is expected to do so for the foreseeable future. and the push for domestic energy independence, crude oil production is expected to increase through the next few years. Accordingly, recovery values for oil and gas drilling equipment has remained fairly stable in recent months. Auction activity has remained consistent, with most transactions of equipment taking place in negotiated sales or through mergers and acquisitions. Newer equipment is not readily available in the secondary marketplace and as such, when it becomes available, achieves a premium recovery value. Accordingly, demand for related equipment is anticipated to remain strong through the remainder of the year and into 2015. U.S. Land - Well Count Summary Basin 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2014 Permian 2,302 2,497 2,402 2,196 2,169 2,260 2,326 2,351 Eagle Ford 876 932 1,024 974 1,044 1,089 1,133 1,171 Williston 507 567 603 563 582 693 747 737 Marcellus 541 519 443 435 475 576 562 576 Mississippian 237 304 317 339 343 378 398 408 Barnett 551 542 487 452 443 403 380 374 DJ-Niobrara 483 397 353 311 266 268 278 258 Granite Wash 160 178 155 168 141 150 174 148 Fayetteville 222 179 146 161 157 194 159 129 Utica 76 90 94 118 131 118 112 112 Haynesville 184 109 84 92 109 98 97 94 Cana Woodford 90 99 62 58 82 74 69 77 Ardmore Woodford 32 35 40 48 49 47 65 66 Arkoma Woodford 35 32 28 19 13 12 13 25 Others 2,877 3,102 3,173 2,724 2,530 2,624 2,662 2,530 Total 9,173 9,582 9,411 8,658 8,534 8,984 9,175 9,056 Source: Baker Hughes As multi-well pads make more efficient use of rig time and substantially enhance the production per rig, rig counts will no longer dictate oil production. Well counts experienced a 4% increase in the third quarter of 2013 with a slight decline of nearly 1.3% in the fourth quarter. However, the fourth quarter well counts indicated a nearly 5% increase year-over-year. Oil production increased to approximately 7.5 millions barrels a day by the end of 2013, with forecasts expecting 2014 to settle at nearly 8.3 million barrels a day. Driven by global demand for crude oil Natural gas prices have experienced a sharp increase in recent weeks as demand has spiked which has drained domestic storage levels. Recent colder-thanexpected weather throughout most of the U.S. has driven this demand, which has seen prices increase to nearly $5.20 per million cubic feet, which represents a nearly 40% increase in price since October and the highest price point since February 2010. United States Canada International Date of Recent Rig Count February 7, 2014 February 7, 2014 January 2014 Count 1,771 621 1,325 Date of Prior Rig Count January 31, 2014 January 31, 2014 December 2013 Change From Prior Count (14) 13 (10) Date of Last Year's Rig Count February 7, 2013 February 7, 2013 January 2013 Change From Last Year's Count 12 (10) 46 3
Recent 4 Appraisal Trends However, EIA forecasts expect the price of natural gas to settle around $4.30 per million cubic feet throughout the course of 2014 as the inclement weather settles and stores are replenished. Similar to crude oil production domestically, natural gas production has experienced increases monthover-month throughout 2013 and in to 2014 in spite of decreasing rig counts. Natural gas production has been consistent at approximately 2.1 to 2.2 billion cubic feet a month in recent months, and is anticipated to reach up to 2.3 billion cubic feet per month and beyond in 2014. Increased global demand will continue to be a key driver for domestic natural gas production. Accordingly, companies have been spending large amounts of capital to construct liquefied natural gas pipelines and terminals in an effort to increase domestic export capacity. Well service rigs have been increasing in utilization over the last 12 months as drilling activity and well counts have increased. As is expected, the concentration of well service equipment is located in West Texas, the Rocky Mountain region, and along the West Coast and Alaska. Accordingly, demand for this equipment has remained steady over the last 12 months and is expected to remain this way in order to service ever-growing well counts. Late-model equipment continues to be the most highly sought after, generating the highest relative returns as compared to cost. If prices for crude oil and natural gas increase in the near future, leading to increased drilling activity, then the demand for well service equipment should follow suit. The demand for machinery and equipment in this sector has remained fairly stable in recent months as increased production and demand for the product has kept demand for related equipment steady. However, if prices were to continue to increase as they have in recent weeks, the demand for equipment utilized in exploration and drilling should increase drastically. Rental tools are directly related to the drilling of both onshore and offshore oil and gas production, and as a result, follow a similar path in demand as with the industry as a whole. Rental tools include such items as blowout preventers, drill collars, manifolds, drill pipe, tubing, pipe baskets, and handling tools utilized in oil and gas drilling, completion, and well control. These tools are a ubiquitous component of oil and gas exploration and, as a result, have remained stable with regard to market demand in recent months. In the secondary marketplace, good-condition, highquality equipment is highly sought after and typically in demand. Lower-quality equipment, while still useable, traditionally achieves lower recovery values in the secondary marketplace. Dealers in the secondary marketplace expect values of rental tools to increase throughout 2014, as drilling activity is forecasted to increase leading to an increase in rigs and production. Value trends for rental tools will be in line with the improvement of drilling equipment as a whole for the industry for the foreseeable future. 4
Recent 5 Appraisal Trends Year-over-year NOLVs ranged from a gain or loss of one to two percentage points. Values were largely dependent upon gross margin changes. The commodity nature of these goods allows lubricants to be sold through multiple distribution channels, which positively impacts recovery values. In addition, the majority of these goods are sold under well-recognized brands, which also has a positive impact on recovery values. GA recommends frequent monitoring of lubricants due to the potential volatility in the market. Gross margins were mixed year-over-year due to crude oil price fluctuations. Long-term contractual price agreements, sales mix, and the velocity of inventory also factor into the changes for gross margin, which in turn impact net recovery values. Inventory levels have also remained fairly steady, increasing or decreasing slightly depending on regional activity and the markets served. Sales volumes for lubricants have decreased up to 5% year-over-year due to recovering, though unstable market conditions. Lubricant and grease prices in have remained fairly steady over the fourth quarter of 2013. 5
Pricing 6 Trends West Texas Intermediate ( WTI ) crude oil prices were relatively consistent through the first half of 2013, with fluctuations remaining within a range of $5 per barrel from one month to another. According to data from the EIA, however, the second half of the year saw more volatility. Prices climbed to a high of $106.57 per barrel in August before falling back to $93.86 in November due to abundant supply. WTI prices increased to $97.90 in December, though decreased to a low of $91.36 on January 9. Prices have since increased and topped $100.12 per barrel on February 10 due to a lower-than-expected build in crude inventories. WTI prices advanced 2.5% the week ended February 7, which was the most since December, as cold weather boosted demand for distillate fuels. Stockpiles including heating oil and diesel shrank by 731,000 barrels to 113.1 million in the seven days ended February 7, according to the EIA. According to the EIA, supplies at Cushing, Oklahoma, the delivery point for crude oil futures, decreased by 2.7 million barrels to 37.6 million barrels, the lowest level since November 1; the decline was also the largest since July 5. Stockpiles declined as the southern leg of TransCanada Corp. s Keystone XL pipeline moved oil to the Gulf Coast. Source: New York Mercantile Exchange 6
Pricing 7 Trends According to the EIA, the U.S. average retail price of regular gasoline increased two cents to $3.31 per gallon as of February 10, 2014, 30 cents lower than last year at this time. Though prices decreased one cent on the East Coast to $3.35 per gallon, prices increased in all other regions of the nation. The Midwest price increased five cents to $3.28 per gallon. On the West Coast the price was $3.52 per gallon, up three cents from last week. The Rocky Mountain price gained a penny to $3.14 per gallon, and the Gulf Coast price was $3.09 per gallon, less than a penny more than last week. The national average diesel fuel price was up three cents to $3.98 per gallon, 13 cents lower than last year at this time. Prices increased in all regions of the nation, with the largest increase on the East Coast, where the price increased five cents to $4.12 per gallon. The Midwest price was $3.97 per gallon, three cents higher than last week, and the Rocky Mountain and Gulf Coast prices both increased one cent, to $3.87 per gallon and $3.79 per gallon, respectively. The West Coast price was up a fraction of a penny to $4.00 per gallon. Source: Energy Information Administration 7
Pricing 8 Trends Natural gas prices are especially affected during the winter, as many households use natural gas for home heating. Warmer weather translates into less natural gas demand and therefore lower prices. Conversely, colder weather translates into more natural gas demand and higher prices. Frigid temperatures across the U.S. this winter have escalated heating demand for natural gas and lifted prices to multi-year peaks. According to the EIA, natural gas spot prices at the Henry Hub increased $0.60 per one million British thermal units ( MMBtu ) from $3.64 in November to $4.24 in December. Prices continued to increase by $0.47 per MMBtu to $4.71 in January. Very cold temperatures in early January led to new record-high withdrawals of natural gas from storage in a season already characterized by larger-thannormal storage withdrawals. Working natural gas storage withdrawals exceeded 200 billion cubic feet ( Bcf ) for a three-week period in January. The EIA now projects inventories will end this heating season at 1,331 Bcf, the lowest end-of-season level since 2008. The EIA expects the price increases of the past few months will reverse at the end of winter. Projected Henry Hub natural gas prices average $4.17 per MMBtu in 2014 and $4.11 per MMBtu in 2015. Source: Energy Information Administration 8
Experience 9 GA has been involved in the asset disposition of many industrial contractors, rental construction equipment companies, oil and gas service companies, and freight haulers. Recent transactions include: Biofuel Box BP, Plc Marine Pipeline Red River WDC Wells and Exploration GA also has extensive experience in the oil and gas industry including the related equipment, parts, supplies, and services, as follows: Manufacturers and distributors of oilfield products such as valves, clutches, brake blocks, compression equipment, frac pumps, engines, and transmissions, including equipment rentals. Manufacturers and distributors of oil country tubular goods. A leading manufacturer and supplier of various proprietary and patented oilfield products, equipment, and services such as the proprietary blending of fracking fluids including guar, sand, and beads. Operators of multiple refineries, producers of specialty lubricants, and local distributors of fuel and lubricants. Manufacturers and distributors of steel raw materials as well as companies with scrap metal inventory derived from used parts and equipment. Manufacturers and distributors of systems and solutions for gas and fluid transportation and storage including frac tanks, water tanks, as well as vacuum, transport, and winch trucks. The companies appraised by GA service those throughout the oil and gas industry including the exploration, development, extraction, production, and distribution sectors. Given our experience in both the valuation and disposition of oil and gas assets and inventory, GA is uniquely qualified to not only render value opinions, but to also assist with your needs through the sales of surplus and/or idle oil and gas equipment. 9
Monitor 10 Information The Oil & Gas Monitor relates information covering a variety of oil and gas equipment assets, such as drilling equipment, well service and stimulation equipment, and rental tools. Great American Group Advisory & Valuation Services, L.L.C. ( GA ) provides our customer base with a concise document highlighting the oil and gas industry, including industry trends, market pricing, and their relation to the valuation process. Due to the nature of certain oil and gas assets, timely reporting is necessary to understand an ever-changing marketplace. GA strives to contextualize important indicators in order to provide a more in-depth perspective of the market as a whole. GA welcomes the opportunity to make our expertise available to you in every possible way. Should you need any further information or wish to discuss recovery ranges for a particular segment, please feel free to contact your GA Business Development Officer. GA s Oil & Gas Monitor provides market value and industry trend information for a variety of oil and gas products. The information contained herein is based on a composite of GA s industry expertise, contact with industry personnel, industry publications, liquidation and appraisal experience, and data compiled from a variety of well-respected sources believed to be reliable. We do not guarantee the completeness of such information or make any representation as to its accuracy. 10
Appraisal 11 & Valuation Team Mike Marchlik National Sales & Marketing Director mmarchlik@greatamerican.com (818) 746-9306 Ryan Mulcunry Executive Vice President - Northeast Region, Canada & Europe rmulcunry@greatamerican.com (617) 692-8310 David Seiden Executive Vice President, Southeast Region dseiden@greatamerican.com Bill Soncini Senior Vice President, Midwest Region bsoncini@greatamerican.com (312) 777-7945 Drew Jakubek Managing Director, Southwest Region djakubek@greatamerican.com (972) 265-7981 Mark Weitz President mweitz@greatamerican.com 818-884-3737 Michael Petruski Executive Vice President, General Manager mpetruski@greatamerican.com 704-227-7161 Marc Musitano Chief Operating Officer mmusitano@greatamerican.com 818-884-3737 Robert Callaway Head of Oil and Gas rcallaway@greatamerican.com 972-589-3308 Thomas Mitchell Project Manager tmitchell@greatamerican.com 818-884-3737 Jennie Kim Vice President, Western Region jkim@greatamerican.com (818) 746-9370 Gordon Titley Director of Valuations, GA Europe Valuations gtitley@gaeurope.co.uk +44 2073180574 About Great American Group Great American Group is a leading provider of asset disposition solutions and valuation and appraisal services to a wide range of retail, wholesale, and industrial clients, as well as lenders, capital providers, private equity investors, and professional services firms. In addition to the Oil & Gas Monitor, GA also provides clients with industry expertise in the form of monitors for the chemicals and plastics, metals, food, and building products sectors, among many others. GA offers European Monitors via its subsidiary, GA Europe Valuations Limited. Headquarters 21860 Burbank Blvd. Suite 300 South Woodland Hills, CA 91367 800-45-GREAT www.greatamerican.com 11