Natural Gas Tuesday, May 1, 2012; 4:00 PM 5:15 PM Moderator: Joel Kurtzman, Senior Fellow and Executive Director of the Center for Accelerating Energy Solutions, Milken Institute Speakers: Ralph Eads, Chairman, Energy Investment Banking, Jefferies & Co. Inc. Rick Grafton, CEO and Chief Investment Office, Grafton Asset Management Shaia Hosseinzadeh, Principal, WL Ross & Co. LLC Alex Szewczyk, Analyst, BP Capital
Global natural gas consumption on the rise Non-OECD nations will lead the way Trillion Cubic Feet 160 140 TOTAL 120 100 80 60 40 OECD Non-OECD 20 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: U.S Energy Information Administration. *Projection begins from 2010.
U.S. natural gas withdrawals Shale gas withdrawals increased by 95 percent between 09 10 Non-associated offshore 9% Coalbed methane 9% Alaska 2% Tight gas 26% Associated with oil 10% Non-associated onshore 21% Source: U.S Energy Information Administration. Shale gas 23%
Where does shale gas come from? Source: U.S Energy Information Administration.
Major shale basins around the world Source: U.S Energy Information Administration.
Discovery of wells and low-cost extraction methods increase shale gas production U.S. domestic shale gas production Trillion cubic feet 60 Proved Reserves 45 30 Production Shale gas makes up 23 percent of current U.S. production EIA estimates that production could double or triple over the next 25 years 15 0 2007 2008 2009 Source: U.S Energy Information Administration.
Electric power, residential and commercial heating consume the most natural gas U.S. natural gas consumption by end use, 2011 Pipeline and distribution Use 2.8% Lease and plant 5.7% Commercial 13.0% Vehicle fuel 0.1% Electric power 31.2% Residential 19.4% Source: U.S Energy Information Administration. Industrial 27.8%
Increase in supply, shale gas production, and a mild winter have contributed to current low prices U.S. natural gas wellhead prices US$ per thousand cubic feet 9 8 7 6 5 4 3 2 1 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: U.S Energy Information Administration. Projected
Operational natural gas rigs have surpassed crude oil rigs U.S. rotary rigs in operation Number of rigs 1,600 1,400 1,200 Natural Gas 1,000 800 600 400 Crude oil 200 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: U.S Energy Information Administration.
Natural gas production is supplied mostly by domestic reserves U.S. natural gas sources, 2011 89% Canada and Mexico 10% 1% Trinidad Qatar Yemen Egypt Nigeria Norway Peru Source: U.S Energy Information Administration. Domestic production Import (Pipeline) Import (LNG)
Discovery of domestic natural gas reserves is reducing import volume Import vs. domestic production Trillion cubic feet 30 29 28 27 26 25 24 23 22 21 20 Source: U.S Energy Information Administration. Imports (right) Domestic (left) Trillion cubic feet 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 4 3 2 1
Crude oil drilling costs remain higher than natural gas Cost of drilling per foot US$ 800 700 600 Crude oil 500 400 300 200 100 Natural gas 0 1970 1975 1980 1985 1990 1995 2000 2005 Source: U.S Energy Information Administration.
How is America powered? Primary energy sources in the U.S., 2010 Nuclear Electric Power 9.0% Renewable Energy 8.0% Petroleum 37.0% Coal 21.0% Natural Gas 25.0% Source: U.S Energy Information Administration.
Electric power and transportation consume the most natural gas Primary consumers of energy by sector, U.S., 2010 Electric Power 40.4% Transportation 28.3% Residential and Commercial 11.1% Industrial 20.2% Source: U.S Energy Information Administration.
Natural gas and crude oil reserves global make-up By geographic region, 2011 Central and South America 4% North America* 5% Africa 8% Asia and Oceania 8% Natural gas Europe 2% Middle East 40% Eurasia 7% Asia and Oceania Crude oil 3% Europe 1% Africa 8% North America* 14% Middle East 52% 6,655 Trillion cubic feet Eurasia 33% 1,469 Billion barrels Central and South America 16% Source: U.S Energy Information Administration. *Does not include Alaska
Natural gas is the least polluting fossil fuel Pollutant breakdown of the top fossil fuels 0 50 100 150 200 250 Thousand pounds per billion btu Coal Oil Natural Gas Particulates (down) Sulfur Dioxide (down) Nitrogen Oxides (down) Carbon Monoxide (down) Carbon Dioxide (top) 0 500 1000 1500 2000 2500 3000 Source: U.S Energy Information Administration. Pounds per billion btu
North American Natural Gas Play Economics Source: Peters & Co. Note: Limited estimates based on 10% discount rate and current strip prices.
North America Natural Gas Pipelines 2011 Canadian Exports to the United States
Market Environment The emergence of unconventional plays is a game changer for the energy industry Very large resources Little technical risk Technological upside Unconventional activity likely to be concentrated in North America Huge opportunity as supply of assets exceed available capital $35 B / year of external capital needed Project returns exceed 20% Public equity valuations are cheap The key challenge today is the ability to develop these assets in a timely manner Unconventional plays represent an unprecedented resource boom
U.S. Natural Gas Reserves / Reserve Life 2,000 Tcf 250 Tcf 12 Year Life 100 Year Life Pre-Shale (EIA 2000) Post-Shale Natural gas can now be viewed as a long-term energy solution
Billions of Barrels U.S. Oil / Liquids Reserves 300 270 250 200 150 100 100 50-20 U.S. Existing U.S. Unconventional Potential Saudi Arabia Increase in U.S. liquids production will reduce imports
Commodity Price Backdrop Oil: OPEC (especially Saudis) holds a strong hand Global excess deliverability at all-time low Price movement driven by demand change and/or supply disruption North American Natural Gas: Huge resource discovered Excess drilling plus warm weather have created oversupply Rigs migrating to liquids plays; oversupply will abate Long-term price should trend to marginal cost, which is $5-$6 / Mcf Demand growing as natural gas displaces coal and industrial demand builds LNG exports are key future variable
Key M&A Themes Resource boom has created a wealth of opportunities Operating capability is a key constraint Continuing need for capital among smaller companies is driving activity JVs, asset sales, company sales Limited equity issuance given low valuations Property level returns for liquids plays are excellent Gas plays uneconomic at the current price Few natural gas assets are being sold except those related to planned LNG
Top Operators in the U.S. by Onshore Rig Count 144 Total U.S. Onshore Rig Count: 1,910 60 59 58 56 51 49 37 35 34 32 Source: Operator rig counts per The Land Rig Newsletter Biweekly Report. U.S. onshore rig count per Baker Hughes. (1) Encana currently employs 19 U.S. onshore rigs and 15 Canadian onshore rigs.
Total Transaction Value ($B) U.S. Onshore M&A Summary $90 $80 $73.5 $81.7 $70 $60 $66.1 $63.9 $62.0 $50 $40 $48.2 $45.9 $30 $27.8 $20 $17.1 $19.9 $10 $10.6 $- 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Onshore Asset Transactions Onshore Corporate Transactions Source: IHS Herold. U.S. onshore asset and corporate deals since 2002 with disclosed transaction values.
Well Level IRR Haynesville Shale Drilling Economics 140% 120% 6.8 Bcf EUR $9.5 MM Well Cost 108.3% 100% 82.0% 80% 59.1% 60% 40% 23.7% 39.7% 20% 11.4% 0.0% 2.6% 0% $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00 $10.00 Gas Price ($ / MMBtu) Source: Jefferies internal estimates.
Jefferies Role Since 2007, 41 deals for $112 billion in total value for approximately 60% sell-side market share Advised on 11 of the 15 largest U.S. onshore transactions since 2008 Pioneered the Joint Venture transaction model Have completed deals involving 15 of the 20 largest oil companies in the world Have brought several new entrants to the North American energy market, including Chinese National Oil Company, Korean National Oil Company, Sasol and Gas Authority of India
Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Company 8 Company 9 Company 10 Company 11 Company 12 Company 13 Company 14 Company 15 Company 16 Company 17 Company 18 Company 19 Company 20 Company 21 Company 22 Company 23 Company 24 Company 25 Company 26 Company 27 Company 28 Company 29 Company 30 Company 31 Company 32 Company 33 Company 34 Company 35 Company 36 Company 37 Company 38 Company 39 Company 40 Company 41 Company 42 Company 43 Company 44 Company 45 Company 46 Company 47 Company 48 Company 49 Company 50 Company 51 Company 52 Company 53 Producing and Finding Cost per Mcfe Industry Full Cycle Development Costs Low Prices Weigh Heavily on Production Economics Unit Producing and Finding Costs Global Industrialized Marketplace $15 $13 $11 $9 $7 Average: $5.91 / Mcfe $5 Cash Spot Price: $2.00 / Mcf $3 $1 Source: WL Ross analysis; public company SEC filings; Wall Street analyst research.
$1.35 $0.32 $1.74 $3.97/mcfe $2.22 Subsidy Effect from Legacy Hedges Now Rolling Off Gas Price Realizations are Dramatically Lower 100% $8 90% 80% 70% $7 $6 60% $5 50% $4 40% 30% 20% 10% $3 $2 $1 0% 2009 2010 2011 2012 2013 % Hedged % Spot Hedged Price Spot / Forward Price $0 Note: Average reflects US dry-gas producers including CHK, COG, CRK, DVN, GDP, NFX, RRC, SWN, UPL and XCO. Source: WL Ross analysis; public company SEC filings; Wall Street analyst research.
Comparison of Gas Price Expectations Financial Markets are Disjointed from the Physical Markets Financial Market Global Power and Physical Market Transport Market Average $16.67 - $20.00 $8.00 - $9.00 $5.91 $4.75 - $5.00 Average $4.50 $4.50 Upstream Dry Gas Equities Long-Term Forward Market Recent Private Market Deals Full Cycle Cost US LNG Breakeven Cost Gas-Oil BTU Parity Price Source: WL Ross analysis; Wall Street analyst research; Bloomberg LP.
The Majors are Shifting Towards Natural Gas Changing Landscape Makes Independents Increasingly Attractive Targets Production Growth (2005-2011) Top 10 Independents (% US Gas Production) Exxon -8% Oil Gas 125% 23% Conoco -5% 17% 12% Total SA -24% 30% 2001 2011 Source: WL Ross analysis; public company SEC filings; Bloomberg LP.