Offshore ‘Beta’ Trade: Laggards Hold Greatest Upside in Recovery Darren Gacicia Managing Director Senior Oilfield Services Analyst KLR Group, LLC 713-352-0887 [email protected]For definitions and the distribution of analyst ratings, and other disclosures, please refer to pages 72 - 73 of this report
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2016-05-31_Offshore Beta Trade Laggards Hold Greatest Upside in Recovery - D. Gacicia
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Offshore ‘Beta’ Trade: Laggards Hold Greatest Upside in Recovery
For definitions and the distribution of analyst ratings, and other disclosures, please refer to pages 72 - 73 of this report
Set Up for Improving Fundamentals Align Offshore Stocks as the “Beta” Trade Within Oilfield Services Offshore Drillers & Equipment Stocks Highest “Beta” in Recovery. Fueled by prospects of a later cycle recovery and high leverage (Net Debt/EV), the offshore driller stocks represent the highest “beta” to a recovery in the oil services group. With better credit profiles, the offshore equipment group runs a close second in the “beta” rankings. In our view, a traditional lagged recovery of offshore activity leave shares with offshore exposure more leveraged to the level/trajectory of oil prices. Since we see tighter commodity markets ahead, we believe portfolios should have offshore exposure to capture “beta” as sentiment turns positive. Likewise, we are wary of the long onshore/short offshore trade, which is dangerous as the bearish paradigm for the group shifts. With an inflection in energy sector prospects and shift in risk/reward, we suspect offshore companies with higher leverage and fundamentals most challenged by the downturn may outperform. Multiple expansion, driven in part by a de-risking and re-rating of high leverage ratio stocks and better prospect for earnings recoveries (pgs. 11-13), may move offshore shares higher without an increase in near term earnings. We are not calling for a dramatic near term recovery in offshore rig or equipment demand in 2016 or 2017, but we see an increasing chance that improving fundamentals may surprise our conservative estimates.
Upgrade ATW & DO to Buy. We are upgrading ATW to Buy from Accumulate. Following ATW’s agreement to eliminate covenants on its revolver until July 2018, we see potential for these shares to de-risk and re-rate higher. We are willing to move further out on the risk frontier with ATW, as covenant issues move to the sidelines. We are raising our price target to $16, as a function of a lower WACC (160 bps reduction) and a marginal improvement in our long term rig utilization estimates. We are also upgrading DO to Buy from Accumulate. Given that we have retired numerous older rigs from the DO fleet, we are raising our longer term utilization assumptions (~91%) from more punitive levels. As a result, our price target increases to $33.
Estimate Changes & Price Target Increases. We are lowering our estimates for the offshore drillers as we cut near term dayrate assumptions closer to more recent fixture levels (pg. 22-23). Our normalized dayrate assumptions remain unchanged and tied to an assumption that rigs will work at dayrates that return on par with a 10% cost of capital. We sense that dayrates sit near trough levels, but should begin to recover more meaningfully in 2018 as rig attrition meets demand recovery. As we reviewed our offshore driller models and updated estimates, we are raising price targets for ATW, DO, ESV and adjusting our price target for PACD to reflect the reverse share split (pg. 3).
Rig Attrition, Cold Stacking, & Modest Demand Recovery Suggest More Bullish 2018 Offshore Driller Economics. We forecast that a demand recovery by 2018, met with floater and jackup cold stacking and retirements (pg. 46-59) should bring utilization of the marketed floater and jackup fleets above 85% (pgs 27, 41). Tighter offshore drilling markets should drive pricing power for offshore drillers in 2018. In our view, rig attrition should continue with rising oil prices, as offshore drillers may choose to retire assets versus commit capital to older assets for maintenance and surveys (pg. 54-55). Our estimates suggest ~70 floaters retire/stack in 2016-2017 and ~115 jackups retire/stack between 2016-2018. Given risk to floater and jackup newbuilds from speculative builders and unproven shipyards, our fleet tally assumes only 75% of floaters and jackups will be delivered on schedule. We have updated our floater and jackup demand forecasts. Our field-by-field development demand analysis for floaters continues to see flattish demand through 2020, but we see a steady uptick in exploration and appraisal activity from extremely low current levels (pg. 31). After development demand delays during the downturn, we see potential for demand to pull forward and probabilities for project approvals (FID) to rise in our model if commodity markets strengthen (pg. 32-33). A vast majority of near term development work remains tied to existing and FID approved projects, rather than new project starts (pgs. 36-38). Industry commentary around project redesign and standardization, lower break even costs, and potential for incremental development work for project with existing infrastructure may prove catalysts to pull forecasted demand forward. Reduced rig supply, a positive bias toward incremental development demand, and the need for exploration for reserve replacement may all suggest a better risk/reward for the group than currently discounted in a rising commodity price environment. We continue to prefer offshore driller exposure in RIG, NE, and ESV.
Subsea Equipment Demand Stable, Higher 2017 Tree Orders Should Improve Optics. The subsea equipment and offshore infrastructure portion of our coverage maintains a fairly constructive set up under our offshore forecast. Again, we see potential for low expectations to become more optimistic with a recovery in commodity prices and a reversal of revision momentum to pull project times forward versus push them later. Our subsea tree/equipment forecast maintains a stable delivery profile that is congruent with a flat development drilling demand outlook (pg. 31). Subsea tree orders remain low in 2016 (135, pg. 65), but move higher in 2017 to support future field developments in our forecast. Akin to floater development demand, our probability-weighted estimates remain largely tied to existing and approved projects, where near term forecasted deliveries in 2016 and 2017 have largely been ordered (pgs. 63). Our data shows a trend of costs per tree coming down, which supports the view that breakeven project costs are falling (pg. 62). As deepwater expands as part of the demand mix (pg. 66), development cost reductions may play a key role to pull forward demand that has slipped into later years and accelerate field developments with existing infrastructure. Non-probability weighted demand suggests potential for significant upside for new tree orders and deliveries in the event that our adjusted numbers prove conservative. We like exposure to NOV, FTI, and OIS for offshore exposure, with a bias to get more constructive on OII and DRQ.
Note: Offshore index includes FI, OIS, FTI, OII, DRQ, SDRL, RIG, ESV, DO, NE, RDC, ATW, and PACD equally weighted performance from 1/1/14 to 5/27/16. Onshore index includes SLCA, CRR, HP, NBR, and PTEN equally weighted performance from 1/1/14 to 5/27/16
Source: Factset
Note: Offshore Drillers index includes RIG, ESV, DO, NE, RDC, and ATW equally weighted performance from 1/1/06 to 12/12/15. Offshore Equipment/Services index includes OIS, FTI, OII, and DRQ equally weighted performance from 1/1/06 to 12/12/15
May 31, 2016 4
Coverage Universe Risk/Reward Map
Source: Factset; KLR Group, LLC Forecasts
Buy
Accumulate
Hold
Reduce
Note: PACD falls outside the parameters of the graph
Negative Non-OPEC Supply Revisions: Bullish for Oil
Note: We maintain an extensive catalogue of the IEA’s monthly changes to its supply and demand forecasts. Annual estimates are typically initiated the summer before the year tracked and end the summer after the tracking year has ended.
Recent history sees negative revisions for non-OPEC oil supply as a leading indicator of oil price recovery.
Note: Indonesia rejoined OPEC, so it has been stripped from historical data for comparability
Fragmented market, numbers of newbuilds from higher risk sponsors, and the need for far large rig attrition/stacking, we see a sloppier jackup downturn
Dayrate Forecast: Jackup Downturn Prolonged Until 2018 Normalized dayrates assumed for 10% capital returns
Transition to normalized dayrates
Meaningful recovery in dayrates does not arrive until 2018
We forecast floater demand to fall ~20% 2016/2015, without recovery to 2015 levels until 2019.
We see more material pricing power emerge as the utilization of marketed supply crosses into the 80%+ range. In our view, operators will need to offer higher dayrates and term contracts for offshore drillers to re-staff and deploy capital to ready cold stacked/non marketed rigs.
Source: IHS Petrodata; Company Disclosuers; KLR Group, LLC Forecast
May 31, 2016 27
Floater Fleet Snapshot: 54 Rigs Uncontracted, Cold Stacked, and Not Marketed May Not Re-Enter Market
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata
OPERATOR CONTRACTED FLEET NOT CONTRACTED FLEET NEWBUILDS
Floaters Marketed by Generation Floaters Cold Stacked by Generation
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 30
69
80 82
107 113 114
122
137
122 117
90
58
79
102
121
132
50
60
70
80
90
100
110
120
130
140
150
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
58
73 69 74
78 83
87
106
136 145
135
123
112 121
115 111
50
60
70
80
90
100
110
120
130
140
150
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
Recovery of Exploration Demand For Floaters Key to Recovery & Reserve Replacement
Floater Development Demand Forecast Floater Exploration Demand Forecast
We do not see North American unconventional production stopping the trend of offshore field development. A move up the learning curve and cost efficiencies may continue to yield economic offshore projects.
Exploration may take a break, as capital may focus on efforts to create cash flow from development work.
Source: IHS Petrodata, Company Filings/Disclosures; KLR Group, LLC Forecast Source: IHS Petrodata, Company Filings/Disclosures; KLR Group, LLC Forecast
May 31, 2016 31
165
189
225
256
274
306
240
184
158
140
181 188
213 224
230
244
210
171
151
138
100
150
200
250
300
350
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
TOTAL RAW FLOATER DEMAND TOTAL FLOATER DEMAND (KLR Forecast)
KLR Forecast Narrows Project Opportunity Set by Probability Weighted Analysis
Consultant data may look very bullish when un-refined. Understanding which projects have reached FID, have equipment ordered, or may be lower probability potential projects provides a better calibration of demand.
We see a larger opportunity set as potential upside to our forecast. In our view, current iterations of raw data consultants also look far more conservative over the last 12 months.
Source: Inflied, KLR Group, LLC Forecast
May 31, 2016 32
Pro-Cyclical - Raw Demand Forecasts Push Development Drilling Out, But Recovery May Pull Activity Forward
-
20
40
60
80
100
120
140
160
180
200
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Raw
Flo
ater
Dem
and
Raw Development Demand - I Year Ago Raw Development Demand - Current
Source: Inflied, KLR Group, LLC Forecast
Demand is pushed to the right during the downturn.
May pull forward in estimates as oil prices recover. Every ~2.5 rig years of demand that pulls forward translates into ~1% of higher utilization, post a wave of rig retirements.
May 31, 2016 33
Floater Demand Forecast Methodology
•Raw Project Well Count Data Aggregate
•Determine Project Status
•Apply Historical/Projected Probability Weights Probability Weight
•Sort by Project Start Date
•Sort by Region Distribute
•Apply Historical/Projected Well to Rig Ratios Convert Wells to Rig Demand
Floating Rig & Subsea Equipment Model: Probability Weighting Methodology
Category Definitions:
• Field in Production : Field is on-stream producing oil, gas or condensate.
• Field Development in Progress: Platform or subsea completions are being constructed and pipelines laid.
• Firm Plan (FID) Early Stage Development: Development plan (PDO) submitted to relevant authority.
• Probable : Development planning stage at company level.
• Possible : Very early stage of field evaluation.
Probability Weights by Categories
Reached FID, so are approved projects, but delays remain variable
We assumed delayed or not executed projects remain in the inventory of future projects, as we probability weight demand, we assume a percentage of the “carried inventory” is completed in the following year. Carried demand does not have a meaningful impact on demand until 2018.
Further out in the forecast, where less FID projects are known, we assume a greater number of potential projects reach FID and move forward. Our forecast, follows historical trends in the data.
Source: Inflied, KLR Group, LLC Forecast
May 31, 2016 35
Percentage of Equipment Ordered Support Near Term Forecast, Illustrates Risk to Back End Forecast
Further out in the forecast, where less FID projects are known, we assume a greater number of potential projects reach FID and move forward.
Source: Infield, KLR Group, LLC Forecast
335
270
183
105
41 9 1 0 - -
93%
74%
44%
26%
10%
2% 0% 0% 0% 0% 0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-
50
100
150
200
250
300
350
400
450
500
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Total Development Wells (KLR Forecast) Total Development Wells Equipment Ordered
% KLR Forecast - Equipment Ordered
Source: Inflied, KLR Group, LLC Forecast
May 31, 2016 36
A Vast Majority of Our Near Term Forecast Hinges on Sanctioned (FID) Projects
Jackup Market Needs Attrition & Cold Stacking (~140 Jackups), Fragmented, It May be Sloppy
We forecast jackup activity to decline ~16% in 2016. Without the same granularity of data, we assume the jackup market tracks broader market trends. In our view, lower average project break-even levels and heavier weighting of development work may make the downturn less severe for jackups.
We forecast the market tightens into 2018, but it requires an exit of ~140 rigs from the marketed supply to make room for newbuild arrivals from 2016 forward. The amount of attrition needed to balance the market may decline if rigs under construction are not delivered.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata
May 31, 2016 41
Jackup Fleet Snapshot: 71 Rigs Uncontracted, Cold Stacked, and Not Marketed May Not Re-Enter Market
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata
OPERATOR CONTRACTED FLEET NOT CONTRACTED FLEET NEWBUILDS
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 43
Jackups Marketed & Cold Stacked
HE, 44, 10%
Premium, 116, 25%
High Spec. , 69, 15%
Standard, 154, 33%
Legacy/ (Non IC), 76, 17%
HE, 6, 9%Premium, 6,
9%
High Spec. , 2, 3%
Standard, 21, 31%
Legacy/ (Non IC), 32, 48%
Jackups Marketed by Class Floaters Cold Stacked by Class
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 44
Offshore Rig Supply & Attrition
May 31, 2016 45
Floater Supply Forecast
Jackup Supply Forecast
Forecasted Supply of Floaters & Jackups Remains Very Dependent on Attrition Via Retirement & Stacking
Our forecast calls for the bulk of floater attrition to come at the bottom of the market in 2016. We assume that only 19 of the 29 Brazil-sponsored floaters enter the market, as the rest may be delayed or cancelled due to the ongoing scandal.
2015 2016 2017 2018 2019 2020
Market Supply, BOP 496 487 457 459 467 479
Newbuilds 16 41 37 19 12 14
Attrition/Stacked (25) (70) (35) (10) - -
Market Supply, EOP 487 457 459 467 479 493
2015 2016 2017 2018 2019 2020
Market Supply, BOP 312 281 241 240 251 264
Newbuilds 15 15 14 12 13 7
Attrition/Stacked (46) (55) (15) - - -
Market Supply, EOP 281 241 240 251 264 271
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 46
Determination of the Marketed Supply of Offshore Rigs
In our view, the market balance for rigs is determined by the marketed supply of rigs that are actively available to work in relation to the demand for rigs in a given period. By our definition the marketed supply of rigs:
Includes: + Contracted Rigs + Idle + Warm Stacked + Hot Stacked + In Port + Moving to Location + Acceptance Testing + En Route + Standby + Waiting on Weather (WOW) + Shipyard
Does not include:
- Under Construction - On Order - Cold Stacked - Accident - Out of Service
All of these rig are active or bidding for work.
We do not add newbuilds to the marketed fleet until they are delivered.
We see low probability of legacy cold stacked assets returning to either the floater or jackup fleet.
May 31, 2016 47
0 0 0
6
14 14 10
1 1 4 4
0 1
9
21 22
31
19
13
24
15 15
(4)(2) (1) (1)
0 0 0 0 (3)
(7)(4)
0 (1)
0
0
(2) (1) (2)0
(15)
(30)
(15)
(40)
(30)
(20)
(10)
-
10
20
30
40
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
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20
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09
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11
20
12
20
13
20
14
20
15
20
16
Rig
s (R
etir
ed
) /
Ad
de
dNewbuilds Retirements
Historical Addition/Attrition Column Chart: Floaters – Retirements Look Set to Maintain Strong Pace
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 48
Stacking in the Floater Market Continues to Accelerate
-
5
10
15
20
25
30
35
40
45
50
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
1Q
10
3Q
10
1Q
11
3Q
11
1Q
12
3Q
12
1Q
13
3Q
13
1Q
14
3Q
14
1Q
15
3Q
15
1Q
16
Cold stacked Warm stacked Hot stacked
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 49
Historical Addition/Attrition Column Chart: Jackups – Anticipate Retirements to Accelerate
Floater Survey Due by Age Range (yrs) Cumulated Floater Survey Due by Generation
Industry commentary suggests that older floaters may require $10 million’s to over $100 million in CAPEX to pass surveys. Offshore Drillers are less likely to spend money on less competitive assets. Thus, surveys may trigger retirements.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 54
Jackup Survey Profile Looks Similar to Floaters, As Both Will Drive Rig Retirements
Floater Newbuilds: Most Risk From PBR Rigs, Established Drillers Remain Small Slice of Pie
Newbuilds by Delivery Quarter Newbuilds by Purchasing Group
With recent Seadrill (SDRL, $3.27, R, $3) & PACD announcements, both established and more risky offshore drillers have begun to cancel orders.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 56
Brazilian, Chinese, & Other Non Traditional (Korean) Shipyards Pose Risks to Floater Newbuilds
-
1
2
3
4
5
6
7
8
9
10
11
Dae
wo
o
Sam
sun
g H
eavy
Ind
ust
ries
Esta
leir
o A
tlan
tico
Su
l
Esta
leir
o J
uro
ng
Ara
cru
z
Yan
tai C
IMC
Raf
fles
Bra
sFEL
S
Esta
leir
o E
nse
ada
do
Par
agu
acu
Eco
vix-
Enge
vix
Hyu
nd
ai H
eavy
Ind
ust
ries
Juro
ng
Ship
yard
Pte
Ltd
Shan
ghai
Sh
ipya
rd
No
t K
no
wn
Bak
u S
hip
yard
LLC
CO
SCO
Qid
on
g
Dal
ian
Sh
ipb
uild
ing
Ind
ust
ry C
o.
Ho
ngh
ua
Kep
pel
FEL
S
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 57
Jackup Newbuilds: Risks For the ~86% of Fleet Ordered by Non-Established Offshore Drillers
Newbuilds by Delivery Quarter Newbuilds by Purchasing Group
We see potential for a number of cancellations from speculative orders and lack of interest in poorly managed rig constructions from established offshore drillers.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata -
5
10
15
20
25
2Q
16
3Q
16
4Q
16
1Q
17
2Q
17
3Q
17
4Q
17
1Q
18
2Q
18
3Q
18
4Q
18
1Q
19
2Q
19
3Q
19
4Q
19
1Q
20
2Q
20
3Q
20
4Q
20
Established Drillers NOCChinese State Mexican PlayersOffshore/OFS New Entrants Shipyard
Established Drillers, 17 , 14%
NOC, 4 , 3%
Chinese State, 23 , 19%
Mexican Players, 8 , 7%Offshore/OFS New
Entrants, 20 , 17%
Shipyard, 9 , 7%
Risky Drillers, 12 , 10%
Speculative/Other, 28 , 23%
May 31, 2016 58
Jackup Newbuilds From Speculative Builders & Shipyards Likely See Late Delivery or Cancellations
- 1 2 3 4 5 6 7 8 9
10 11 12 13 14 15 16 17 18 19
Kep
pe
l FEL
S
Ch
ina
Me
rch
ants
Hea
vy In
du
stry
Dal
ian
Sh
ipb
uild
ing
Ind
ust
ry C
o.
Shan
ghai
Wai
gao
qia
o S
hip
bu
ildin
g
PP
L Sh
ipya
rd
Lam
pre
ll
CO
SCO
Dal
ian
Yan
tai C
IMC
Raf
fle
s
AB
G S
hip
yard
CP
LEC
Shan
ghai
Zh
enh
ua
He
avy
Ind
ust
ries
Shan
hai
guan
Sh
ipb
uild
ing
Ind
ust
ry…
CSS
C H
uan
gpu
Wen
cho
ng
Ship
yard
Dry
do
cks
Wo
rld
Dry
do
cks
Wo
rld
–G
rah
a
Juro
ng
Ship
yard
Pte
Ltd
Sam
sun
g H
eav
y In
du
stri
es
Tai
Zh
on
g B
in H
ai
Bh
arat
i Sh
ipya
rd
CO
SCO
Qid
on
g
Dae
wo
o
Kep
pe
l Am
FELS
Kep
pe
l Kaz
akh
stan
Qin
gdao
Wu
chan
He
avy
Ind
ust
ry C
O.
Yan
gzij
ian
g Sh
ipb
uild
ing
PV
Sh
ipya
rd
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; IHS Petrodata, Industry Data
May 31, 2016 59
Subsea Equipment: Potential for Upside
May 31, 2016 60
61
3
4
70
1
45
1
18
1
32
1
53
1
79
2
08
26
9
19
6
28
2
26
8
25
2
18
7
29
4
30
3
40
2
36
0
31
6
24
4
25
4
26
0 3
16
4
02
3
59
3
57
3
61
3
82
3
59
3
01
3
23
3
44
3
19
2
93
1
81
-
100
200
300
400
500
600
700
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
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02
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Subsea Tree Deliveries - Unadjusted Subsea Tree Deliveries - Probability Weighted
Forecast Subsea Tree Deliveries Sees Flattish Activity Given Project Delays
The scale of the potential tree demand list may provide room for upward revisions to our estimates, if probabilities for more projects improve. In our view, the possible upside may drive multiple expansion for the subsea equipment names with a turn in commodity markets.
Forecasted Subsea Tree Deliveries vs. Potentially Bullish Inventory of Projects
Our forecast draws from the same data as our rig demand, which is probability weighted as outlined above for rig demand concerning the same projects.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 61
Cost per Tree Continues to Trend Lower – Breakeven Costs Coming Down
$5.0
$5.5
$6.0
$6.5
$7.0
$7.5
$8.0
$8.5
4Q
01
3Q
02
2Q
03
1Q
04
4Q
04
3Q
05
2Q
06
1Q
07
4Q
07
3Q
08
2Q
09
1Q
10
4Q
10
3Q
11
2Q
12
1Q
13
4Q
13
3Q
14
2Q
15
$EP
C C
ost
Per
Tre
e ($
MM
)
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 62
Our Forecast Requires New Orders to Fill the 2017/2018 Delivery Forecast for Subsea Equipment Companies
61
3
4 7
0
14
5
11
8
13
2
15
3 17
9 20
8
26
9
19
6
28
2
26
8
25
2
18
7
29
4
30
3
40
2
36
0
31
6
24
4
25
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26
0
31
6
40
2
35
9
35
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36
1
38
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35
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30
1
32
3
34
4
31
9
29
3
18
1
61
3
4 70
1
45
1
18
1
32
1
53
17
9 20
8
26
9
19
6
28
2
26
8
25
2
18
7
29
4
30
3
39
9
36
0
31
6
24
4
25
4
26
0
31
6
40
2
35
9
33
4
27
7
18
8
11
0
46
3
3
24
7
3
1
-
50
100
150
200
250
300
350
400
450
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
Subsea Tree Deliveries - Probability Weighted Subsea Tree Deliveries - Probability Weighted - Ordered
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 63
Our Forecast Leaves Very Low 2016 Order Expectations, Raw Order Expectation Paint More Bullish Picture
Very Modest Tree Orders Expected in 2016, But Still off to Slow Start
KLR Subsea Tree Order Forecast vs. Actual Tree Orders
The falloff in orders in 2014 impacts the trajectories of deliveries in 2016 and beyond, given 2-3 year lead times on larger projects.
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 65
-
50
100
150
200
250
300
350
400
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Midwater Deepwater Ultra-Deepwater
Greater Field Complexity Met with Standardization & Process Improvement To Lower Costs
According to our forecast deepwater and ultra-deepwater projects may continue to gain share in the proportion of equipment orders. Inexperience made a smaller number of initial projects expensive, and likely over-engineered. We anticipate that incremental projects may gain efficiencies and see lower cost gained from prior experience and standardization of equipment/practices.
We see the potential for a higher content of equipment in addition to trees to add to the dollar value of equipment package orders. In particular, manifolds, control systems, boosting, separation, and more automation may continue to lift revenue/per tree and support capacity utilization.
Subsea Tree/Well Demand By Water Depth
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 66
Subsea Equipment Manufacturing Utilization Stable, May Regain Pricing With Small Demand Upside
Subsea Tree Manufacturing Capacity & Utilization
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
54
%
30
%
58
%
87
%
63
% 67
%
69
%
78
% 81
% 87
%
61
%
82
%
76
%
68
%
49
%
73
%
71
%
82
%
72
%
61
%
46
%
47
%
48
%
58
%
68
%
60
%
59
%
59
% 62
%
59
%
49
%
0%
20%
40%
60%
80%
100%
0
100
200
300
400
500
600
700
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Total Capacity Subsea Tree Deliveries - Probability Weighted Tree Capacity Utilization
May 31, 2016 67
Subsea Equipment Manufacturing Capacity Dominated by Four Largest Players
Subsea Tree Manufacturing Annual Capacity Industry Breakdown
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
34
34
34
65
65
65
65
68
84
90
90
90
90
90
90
10
1
10
9
10
9
11
3
11
3
12
2
12
2
12
2
12
6
16
1
16
1
16
1
16
1
16
1
16
1
16
1
22
22
26
26
41
49
67
67
68
92
10
5
11
5
11
5
12
3
12
3
12
3
12
5
18
1
18
1
18
1
18
1
19
1
19
1
19
1 20
1
20
1
20
1
20
1
20
1
20
1
20
1
32
32
33
47
47
47
47
47
53
63
63
66
66
66
77
86
86
93
93
93
93
93
93
93
98
98
10
6
11
0
11
0
11
0
11
0
25
27
27
29
29
29
36
39
39
51
51
52
61
61
61
61
80
81
86
10
4
10
4
10
4
10
4
10
4 1
04
10
4
10
4
10
4
10
4
10
4
10
4
- - -
1 5
9 9
9 1
4
14
14
20
20
29
29
29
29
29
29
29
29
29
29
31
31
31
31
37
37
37
37
0
100
200
300
400
500
600
700
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
SLB/CAM FMC GEOG Aker Solutions Dril-Quip
May 31, 2016 68
Increases Manifold Demand May Increase Capacity Utilization Above Levels Stated For Trees Only
-
10
20
30
40
50
60
70
80
90
100
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Manifold Demand May Augment Utilization
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
$22.0
$24.0
$26.0
$28.0
4Q
01
4Q
02
4Q
03
4Q
04
4Q
05
4Q
06
4Q
07
4Q
08
4Q
09
4Q
10
4Q
11
4Q
12
4Q
13
4Q
14
4Q
15
$EP
C C
ost
Per
Man
ifo
ld (
$M
M)
Manifold Cost Remains Fairly Constant
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 69
Concentration of Deliveries/Demand with Large Customers
Subsea Tree Deliveries – Probability Weighted Subsea Tree Orders – Probability Weighted Wells by company 2015 2016 2017 2018 2019 2020 TOTAL % Total
1 Petrobras 72 53 50 50 51 38 314 15%
2 Total 24 20 57 48 23 22 194 10%
3 Eni 7 41 39 42 20 12 161 8%
4 Shell 29 31 15 23 20 31 149 7%
5 Chevron 16 32 23 34 15 10 131 6%
6 BP 15 7 19 18 30 34 122 6%
7 ExxonMobil 30 25 4 14 22 5 100 5%
8 Statoil 26 8 10 17 16 20 97 5%
9 Woodside 3 6 7 6 21 10 53 3%
10 Tullow - 20 7 8 8 5 48 2%
11 EnQuest 13 2 13 5 7 7 47 2%
12 Premier 2 2 16 14 3 6 43 2%
13 Noble 5 7 5 9 3 9 38 2%
14 Anadarko 7 5 1 3 3 13 32 2%
15 Hess 4 1 1 7 9 6 29 1%
16 Husky 3 7 12 5 - - 27 1%
17 Apache 5 6 8 1 4 2 26 1%
18 Inpex - - 12 6 4 2 24 1%
19 CNOOC 8 1 2 1 7 5 24 1%
20 Murphy 5 3 1 5 8 1 22 1%
21 Cobalt - - - 7 9 5 20 1%
22 Freeport-McMoRan 4 8 2 4 - - 18 1%
23 ONGC 1 1 4 2 6 5 18 1%
24 KNOC 1 - 5 6 3 2 17 1%
25 LLOG 7 3 2 3 - - 15 1%
26 PEMEX - - 8 2 1 3 14 1%
27 ConocoPhill ips 6 - 1 2 3 2 14 1%
28 Sinopec - - - 13 - - 13 1%
29 Maersk 5 4 1 - 2 0 12 1%
30 BG Group 6 - 1 1 4 - 12 1%
Wells by company 2015 2016 2017 2018 2019 2020 TOTAL % Total
1 BP 33 11 11 26 31 27 138 10%
2 Shell 15 15 38 17 30 18 132 9%
3 Petrobras - 1 19 20 41 40 121 8%
4 Chevron 4 8 25 20 15 31 103 7%
5 Eni 34 16 26 11 10 5 102 7%
6 Statoil 16 2 5 25 12 22 83 6%
7 Total 7 16 10 8 18 14 74 5%
8 Anadarko 3 1 2 10 22 14 52 4%
9 ExxonMobil - 3 8 22 10 6 49 3%
10 Woodside 9 2 2 20 3 12 48 3%
11 Noble 2 9 6 7 8 6 38 3%
12 Hess 1 3 15 6 2 2 29 2%
13 Tullow - 5 9 7 5 2 28 2%
14 Cobalt - - 12 8 2 4 26 2%
15 ONGC 5 1 2 8 5 4 24 2%
16 Apache 10 7 1 5 - - 23 2%
17 Eni CNPC - - 5 7 9 1 23 2%
18 Premier - - 10 9 3 - 22 2%
19 CNOOC - 2 1 7 5 4 20 1%
20 Murphy 4 2 2 6 1 3 18 1%
21 Eni EGPC - 5 2 4 3 4 16 1%
22 Reliance - - - 5 6 2 14 1%
23 Husky - 4 8 - - - 12 1%
24 BG Group - 0 1 5 - 6 12 1%
25 PEMEX - 1 2 1 2 5 12 1%
26 EnQuest - 1 1 2 3 4 12 1%
27 ConocoPhillips - - 1 4 3 2 11 1%
28 Daewoo - 2 4 1 1 2 9 1%
29 Freeport-McMoRan 9 - - - - - 9 1%
30 Petroleum Equity - 0 - 5 3 0 9 1%
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 70
Top 30 Subsea Tree Orders Customers: SLB/CAM & FMC Dominate Market Share
Market Share by Subsea Tree Orders Since 2005
Subsea Tree Order Market Share 2010-2015
Operators listed in order of the number of tree orders since 2005.
Source: Infield, Company Filings/Disclosures
SLB/CAM, 23%
FMC, 42%
GEOG, 14%
Aker Solutions, 17%
Dril-Quip, 2%
Others, 2%
SLB/CAM FMC Dril-Quip
1 Petrobras 40% 35% 1% 24% --
2 Total 20% 53% 0% 27% --
3 Shell 1% 84% 14% -- --
4 Statoil -- 58% 7% 35% --
5 BP 65% 25% 9% -- --
6 Chevron 34% 32% 34% -- --
7 Eni 17% 21% 44% 19% --
8 ExxonMobil 14% 27% 59% -- --
9 EnQuest -- 49% 10% 41% --
10 BHP Billiton 92% -- 8% -- --
11 Woodside -- 98% 2% -- --
12 Tullow -- 78% 22% -- --
13 CNOOC -- 96% 2% -- 2%
14 Murphy 100% -- -- -- --
15 Anadarko 19% 19% 51% 11% --
16 Husky 9% 21% -- 66% 4%
17 Premier -- 11% 17% -- 71%
18 Noble 91% 6% -- 3% --
19 BG Group EGPC Petronas 100% -- -- -- --
20 Maersk -- -- 100% -- --
21 LLOG -- 100% -- -- --
22 ConocoPhillips -- 97% -- -- 3%
23 Hess -- -- -- 100% --
24 Reliance 32% 68% -- -- --
25 PEMEX 50% 50% -- -- --
26 Freeport-McMoRan 30% 9% 61% -- --
27 Apache -- 56% 38% -- 6%
28 Sinopec 23% -- 77% -- --
29 Inpex -- -- 100% -- --
30 Centrica -- 20% 75% -- 5%
GEOG VetcoGray Aker Solutions
Sources: KLR Group, LLC Forecast; Company Filings/Disclosures; Infield, Industry Data
May 31, 2016 71
IMPORTANT DISCLOSURES
Rating SystemKLR Group, LLC employs a five tier rating system for evaluating the potential return associated with owning common equity shares of rated firms. The expectedreturn of any given equity is measured on a quantitative basis in relation to our target price. Since stock prices are volatile on a daily basis KLR will utilize atleast a +/- 5% variance tolerance in determining our ratings. Descriptions of the ratings are as follows:Buy - The common stock of the company is estimated to have over 30% upside to our target price.Accumulate - The common stock of the company is estimated to have 10%-30% upside to our target price.Hold - The common stock of the company is estimated to be within +/-10% of our target price.Reduce - The common stock of the company is estimated to have 10%-30% downside to our target price.Sell - The common stock of the company is estimated to have over 30% downside to our target price.
Risk FactorsMacro:
Sustained weakness in commodity prices. Persistent weakness in commodity prices may negatively impact oilfield service company returns. This risk is magnifiedfor companies with weaker balance sheets and higher near term liabilities.
Access to capital markets: The ability of many oilfield service companies to withstand the downturn hinges on their access to capital. If capital markets beginto close off to the industry it would be difficult for many companies to maintain their existing operating plans.
Foreign exchange volatility. The sector’s international component leaves earnings exposed to foreign exchange volatility.
Climate change regulation. The increased attention on climate change and greenhouse gas (GHG) emissions could lead to new regulations aimed at limitingfuture GHG emissions. If enacted these regulations could impose additional costs for both operators and service providers.
Company Centric:
Contracting risk: The new and rolling contracts across the oil services business may perpetuate lower dayrates and falling contract pricing, even if renegotiationsoccur during the initial phases of a recovery.
Continued oversupply in rig market: Day rates could remain depressed if the rig market remains oversaturated resulting from fewer rig retirements thanforecasted.
Rig productivity gains: If onshore rigs continue to achieve new productivity gains, the demand for onshore rigs could continue to deteriorate, particularly inthe lower end of the onshore rig market. Greater levels of efficiency and productivity gains may
Lumpy Cash Flows: The lumpy nature of the equipment & manufacturing industry could cause a significant lag between the recovery in the oil and gas industryand the improvement in the equipment & manufacturing industry’s cash flow position.
Cost Escalation: Fixed price long term contracts common in the oilfield equipment & manufacturing leave industry participants particularly vulnerable to costincreases. This risk could be magnified for contracts entered into during a low price environment.
Adoption of new technologies: Many proppant providers are relying on new technologies to improve margins. However, there is a risk that the industry maycontinue to prefer lower cost options. Alternatively, the industry could select a single new technology winner with the losers going the way of the Beta Max video.
Additional DisclosuresKLR Group, LLC is a member of FINRA and SIPC and a registered U.S. Broker-Dealer.
Investment Banking services include, but are not limited to, acting as a manager/co-manager in the underwriting or placement of securities, acting as financialadvisor, and/or providing corporate finance or capital markets-related services to a company or one of its affiliates or subsidiaries within the past 12 months.
Analyst CertificationI, Darren Gacicia, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its(their) securities and that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressedby me in this research report.The Firm and/or its affiliates intend(s) to seek compensation from Atwood Oceanics, Inc., C&J Energy Services, Ltd., Core Laboratories N.V., CARBO CeramicsInc., Diamond Offshore Drilling Inc, Dril-Quip, Inc., ENSCO PLC, Forum Energy Technologies Inc, Franks International NV, Fairmount Santrol Holdings Inc,FMC Technologies, Inc., Flotek Industries Inc, Halliburton Company, Helmerich & Payne, Inc., Nabors Industries Ltd., Noble Corp plc, National-Oilwell Varco,Inc., Newpark Resources Inc, Oceaneering International, Oil States International, Inc., Pacific Drilling SA, Patterson-UTI Energy, Inc., Rowan Companies PLC,Transocean LTD, Seadrill Ltd, Schlumberger Limited., U.S. Silica Holdings Inc, Superior Energy Services, Inc. and Weatherford International Plc for investmentbanking services within three months, following publication of the research report.
Any opinions expressed herein are statements of our judgment as of the date of publication and are subject to change without notice.
Reproduction without written permission is prohibited.
The closing prices of securities mentioned in this report are as of May 30 2016. Additional information is available to clients upon written request.For completeresearch report on Atwood Oceanics, Inc., C&J Energy Services, Ltd., Core Laboratories N.V., CARBO Ceramics Inc., Diamond Offshore Drilling Inc, Dril-Quip,Inc., ENSCO PLC, Forum Energy Technologies Inc, Franks International NV, Fairmount Santrol Holdings Inc, FMC Technologies, Inc., Flotek Industries Inc,Halliburton Company, Helmerich & Payne, Inc., Nabors Industries Ltd., Noble Corp plc, National-Oilwell Varco, Inc., Newpark Resources Inc, OceaneeringInternational, Oil States International, Inc., Pacific Drilling SA, Patterson-UTI Energy, Inc., Rowan Companies PLC, Transocean LTD, Seadrill Ltd, SchlumbergerLimited., U.S. Silica Holdings Inc, Superior Energy Services, Inc. and Weatherford International Plc, please call (713) 654-8080.
Readers are advised that this report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy.The information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport tobe a complete statement or summary of the available data. Past performance is no guarantee of future results.