December 2013 Bernstein Energy – Finding Petroleum Finding Opportunities in the Middle East & Levant A Forgotten Role In Global Energy Markets? Oswald Clint PhD, ACA Senior Research Analyst European & Russian Oil & Gas Rob West, CFA Senior Research Associate European & Russian Oil & Gas European & Russian Oil & Gas Oswald Clint PhD, ACA Senior Research Analyst [email protected]44 20 7959 5089 Iain Pyle, CFA, ACA Senior Research Associate [email protected]Rob West, CFA Senior Research Associate [email protected]European & Russian Oil & Gas BernsteinResearch.com See Disclosure Appendix of this publication for important disclosures and analyst certifications +44 20 7959 5089 +44 20 7170 0564 +44 20 7170 0589
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December 2013
Bernstein Energy – Finding Petroleumgy gFinding Opportunities in the Middle East & Levant
A Forgotten Role In Global Energy Markets?
Oswald Clint PhD, ACASenior Research Analyst
European & Russian Oil & Gas
Rob West, CFASenior Research Associate
European & Russian Oil & GasEuropean & Russian Oil & Gas
Decline Rate 10% /yearGas Oil Ratio 10% percentGas Price Assumption 4.0 $/mcfCentral Processing Facility Size 100 kbpdCentral Processing Facilities Required 2 #C t P C t l P i F ilit 290 $M
201
2012
2013
2014
2015
2016
2017
2018
2019
2020
202
2022
2023
2024
2025
2026
2027
2028
2029
2030
Net Cash Flow Capex Production Cost Royalty Cost Transportation Cost KRG Carry PSC Take Concession Tax
90%
100%
Cost Per Central Processing Facility 290 $MFacility Cost 2.9 $M/kbpdProduction Per Well 10 kbpdWell Cost 8.0 $M/wellLifting Costs 3.1 $/bblTrucking Costs 16 8 $/kboe/km
Mature regions have seen vast numbers of wildcats, near-constant drilling...
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Source: IHS, Petroleum Atlas, Company Reports, Bernstein Estimates
“Negligible” exploration occurred in 2005-2010 in core OPEC countries
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Source: IHS, Petroleum Atlas, Company Reports, Bernstein Estimates
5,000 wildcats in the Middle East have had an average success rate of 33%, which is well above the global average success rate of 27%
35%30000
Total Wells (1900-2010) Success Rates (%) 1400
d Pe
r
25%
30%
35%
25000
30000
dcat
s
1000
1200
Dis
cove
red
15%
20%
25%
15000
20000
ess
Rat
e (%
)
mbe
r of W
ild
600
800
Res
ourc
es D
Dis
cove
ry
5%
10%
15%
5000
10000 Succ
e
Num
200
400
n A
vera
ge R
0%
5%
0
5000
Eas
t
C.I.
S.
Afric
a
eric
a
East
alas
ia
rope
h a (e
x-)
0
200
East
.I.S.
frica
eric
a
East
asia
rope
Mea
n
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dle C A
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Aust
r a Eu
Nor
tAm
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Far E
Aust
ral
Eur
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World Energy Usage – c13Bn Toe, 29% coal, 31% oil, 21% gas
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Source: IEA, Company Reports, Bernstein Estimates
Middle East Energy Usage – 47% oil, 52% gas
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Source: IEA, Company Reports, Bernstein Estimates
Hence our oil price forecasts are calculated as a multiple of marginal cost, driven by OPEC effective spare capacity as per the historical relationship
1 1
1.2
1.3
7%
8%
9%
(Rat
io)
man
d (%
) R‐Squared = 70%
0.9
1.0
1.1
4%
5%
6%
argi
nal C
ost
As
a %
of D
em
0.6
0.7
0.8
1%
2%
3%
Oil
Pric
e / M
a
e C
apac
ity A
0.50%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
2018
E
2019
E
2020
E
WTI
O
Spar
e
Spare Capacity % of Demand WTI / Marginal Cost
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Source: IEA, Bernstein Analysis
“OPEC Spare Capacity” today is really “Saudi Arabian Spare Capacity”?
4 5 6 7 8 9 0 2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 9 0 2 E E E E E E E E
% o
Oil
Prod
uc
Iran13%
Iraq13%
1984
1985
1986
1987
1988
1989
1990
1991
199 2
1993
1994
1995
1996
1997
1998
1999
2000
2001
200 2
2003
2004
2005
2006
2007
2008
2009
2010
2011
201 2
2013
E20
14E
2015
E20
16E
2017
E20
18E
2019
E20
20E
Saudi Arabia Iran IraqKuwait UAE QatarKuwait UAE QatarNeutral Zone Oman SyriaYemen Other % of World Supply
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Source: IEA, BP Stat Review, Bernstein Estimates
Barriers to ramping back up?
140 0%
Our Iraqi production forecast is just 6.1Mbpd by 2020
Iranian Carbonates Decline Rapidly Without EOR
10
12
)
-5.0%
0.0%
e Per
Wel
l
Median =
UpperQ =
Lower Qu
6
8
duct
ion
(Mbp
d
-15.0%
-10.0%
ual D
eclin
e Rat
e ‐25.4% declin
‐18.4%
uartile = ‐30.45 7 3.
1 3.6 4.
1 4.4 4.6 4.9 5.
2 5.6 6.
1
2
4Iraq
Prod
-20.0%
Aver
age A
nn
ne 4%2.
52.
1
1.3 2.
01.
8 2.0 2.1 2.4
2.4
2.5 2.7 3
0
2
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020 -30.0%
-25.0%
SCB Base CaseIEA Projections (2012)Rystad Energy (2012)Wood Mac (2011 Forecasts)Iraq Revised Target (2012)Iraq Original Target - Signed PSCs
-35.0%
SIAG
06
SIAH
03
SIAG
03
SIAH
02
SIAG
02
SIAH
01
SIAG
01
SIAG
04
SIAH
06
SIAH
04
SIAH
05
BernsteinResearch.com
Source: IEA, Rystad Energy, Wood Mackenzie, News Reports, Bernstein Analysis; Taheri & Sajjadian, 2006. Use of Reservoir Simulation for Optimizing Recovery Performance of One of Iran's Oil Fields
Iraq Original Target Signed PSCs
22
While prices falling into the low 90s $/bbl Brent increases the proportion of OPEC countries approaching budget deficits forcing widespread cuts
60%
% of World Supply From Oil Producing Countries (OPEC + Russia) In Deficit
201350%
60%
ply
(%) World Supply from OPEC + Russia
Cuts ?2013
30%
40%
rld O
il Su
p
Deficit Surplus
Cuts ?
201220%
30%
rtio
n of
Wo
0%
10%
Prop
or
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
102
104
106
108
110
112
114
116
118
120
122
124
126
128
130
132
134
136
138
140
Brent Oil Price ($/bbl)
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Source: IMF, IEA, Bernstein Estimates
Our oil price forecasts are well above the forward curve
Our target prices for the European Integrated Oils are calculated by applying our estimates for 2013 cashflow per share (CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and Return on Average Capital Employed (ROACE) within the Integrated Oils group Our calculation utilizes this relationshipAverage Capital Employed (ROACE) within the Integrated Oils group. Our calculation utilizes this relationship and an estimated long term, through the cycle ROACE to generate the target P/CF multiple. We use $110/bbl Brent and $4.25/mcf for US gas in 2013 and $111/bbl Brent and $4/mcf Henry Hub in 2014.
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Valuation Methodology – European E&P’s Our target prices for the European Integrated Oils are calculated by applying our estimates for 2013 cashflow per share (CFPS) to a forward
price-to-cashflow (P/CF) multiple. This P/CF multiple is generated through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and Return on Average Capital Employed (ROACE) within the Integrated Oils group. Our calculation utilizes this relationship and an estimated long term, through the cycle ROACE to generate the target P/CF multiple. We use $110/bbl Brent and $4.25/mcff US i 2013 d $111/bbl B t d $4/ f H H b i 2014
Our price targets for the European E&Ps are set using Net Asset Valuation models assuming a long term real oil price of $90/bbl.Exploration potential from the next 12 months worth of drilling activity is also captured by risking each company identified prospect based on basin location and historical trends for wildcat exploration.
for US gas in 2013 and $111/bbl Brent and $4/mcf Henry Hub in 2014.
Our price target for GALP is based on a Sum-of-the-Parts valuation. We value the Upstream production assets using DCFs and a long term real oil price of $90/bbl; we value exploration on a risked basis as for E&Ps; forward P/E multiple and DCFs are used to value Refining & Marketing; and DCFs are used for Gas & Power.
GALP Net Reserves ValuationSummary Country Total NPV NPV NPV/share
Oil prices forecasts are heavily dependent on GDP expectations. As such, should GDP be stronger than expected or weaker than expected it could materially change the outlook for oil demand and prices and for the cash flow generation of the peer group. In addition supply disruptions caused by weather or terrorism remain a material risk and would place further upward pressure on pricing. The greatest risk to our target prices is a significant decline in crude oil prices, as these stocks commonly trade in line with commodity prices. Additionally, downward revisions to production volume targets could adversely impact share y y p y, p g y pprices. For the European Majors, the greatest risk to our target prices is a significant decline in crude oil prices, as the Majors commonly trade in line withcommodity prices. Additionally, downward revisions to production volume targets could adversely impact share prices.
For BG specifically unsuccessful pilot test results or delays associated with the Brazilian Lula sub-salt wells, material delays to the ramp up of production from Brazilian fields and further cost increases for Australian CBM-LNG.
For GALP specifically further weakness in European refining margins represent a key risk. Unsuccessful pilot test results or delays associated with the Brazilian Lula development would also impact the shares.
Risks to our Statoil price target include: further weakness in oil prices given the high correlation with the E&P stocks and oil prices, and unsuccessful exploration results in the Barents Sea and the Ultra Deepwater Gulf of Mexico Failure to meet production guidance would also materially impact theexploration results in the Barents Sea and the Ultra Deepwater Gulf of Mexico. Failure to meet production guidance would also materially impact the company's shares due to the weaker than average historical performance.
For Repsol, specific risks to our rating include: delays to the company's major Upstream projects and resultant cost increases; potential downgrades of the credit rating; further weakness in the European refining & marketing environment; any political change affecting the company's Venezuelan projects.
Specific risks to our Tullow price target include unsuccessful exploration holes offshore in the Atlantic and in Uganda given the high implied market expectations for continued exploration success in the region. Additionally, downward revisions to production volume targets or delays to production increases in Ghana & Uganda would also adversely impact the share price.
Risks to our Premier price target include further weakness in oil prices given the high correlation with the E&P stocks and oil prices, and exploration success providing a material transformational discovery, which would make the company more attractive relative to peers.
Risks to our Cairn price target include further weakness in oil prices given the high correlation with the E&P stocks and oil prices. Furthermore, underlying negative performance in Cairn India, dry well catalysts and additional acquisitions all present risks
Russian equities fall into the emerging market (EM) category and are therefore sensitive to the risks associated with EM economies such as currency
BernsteinResearch.com 31
Russian equities fall into the emerging market (EM) category and are therefore sensitive to the risks associated with EM economies such as currency devaluation, debt default and political risk, all of which could materially alter the outlook for the companies.
Source: Bernstein estimates
Disclosure Appendix
Disclosure Appendix
SRO REQUIRED DISCLOSURES
References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L) it f Alli B t i (Si ) Ltd hi h i li d tit d th S iti d F t A t d i t d ith C R i t ti N 199703364C ll ti l53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively.
Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.
Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:
Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.
As of 06/11/2013, Bernstein's ratings were distributed as follows: Outperform - 38.4% (0.9% banking clients) ; Market-Perform - 49.0% (0.4% banking clients); Underperform - 12.6% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies BG/.LN / BG Group PLC, PMO.LN / Premier Oil PLC, TLW.LN / Tullow Oil PLC, BP/.LN / BP PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC.
The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such servicesThe following companies are or during the past twelve (12) months were clients of Bernstein, which provided non investment banking securities related services and received compensation for such services BP / BP PLC, BP/.LN / BP PLC.
An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies BP / BP PLC, BP/.LN / BP PLC.
This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) a unit of AllianceBernstein (Singapore) Ltd which is a licensed entity under the Securities and Futures Act and registered with Company Registration No 199703364Cregistration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, Director of Compliance, 30 Cecil Street, #28-08 Prudential Tower, Singapore 049712.
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Disclosure Appendix12-Month Rating History as of 06/19/2013
Ticker Rating Changes BG/.LN O (IC) 01/22/09 BP M (IC) 08/03/10 BP/.LN M (IC) 08/03/10 CNE.LN M (RC) 01/29/13 O (IC) 01/22/09 ( ) ( )E M (RC) 03/09/12 EAD.FP M (RC) 02/15/13 O (RC) 12/17/09 ENI.IM M (RC) 03/09/12 FP.FP O (IC) 08/03/10 GALP.PL O (RC) 05/26/10 LKOD.LI M (RC) 06/28/12 U (IC) 01/15/09 NVTK LI O (RC) 06/28/12 M (RC) 04/20/11NVTK.LI O (RC) 06/28/12 M (RC) 04/20/11 OGZD.LI O (RC) 07/16/09 PMO.LN O (RC) 06/28/12 M (RC) 08/23/11 RDS/A M (RC) 03/09/12 RDS/B M (RC) 03/09/12 RDSA.LN M (RC) 03/09/12 RDSA.NA M (RC) 03/09/12 RDSB LN M (RC) 03/09/12RDSB.LN M (RC) 03/09/12 RDSB.NA M (RC) 03/09/12 ROSN.LI M (RC) 01/29/13 O (RC) 06/28/12 U (IC) 01/15/09 SGGD.LI M (RC) 06/28/12 U (IC) 01/15/09 STL.NO M (RC) 06/28/12 U (RC) 04/20/11 TLW.LN O (IC) 01/22/09 TOT O (IC) 08/03/10 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC ‐ Initiated Coverage, DC ‐ Dropped Coverage, RC ‐ Rating Change
OTHER DISCLOSURES
A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.
This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of
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This publication has been published and distributed in accordance with Bernstein s policy for management of conflicts of interest in investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom, or Sanford C. Bernstein (Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong, or Sanford C. Bernstein (business registration number 53193989L) , a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C,
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CERTIFICATIONS
I/(we), Oswald Clint, Ph.D., ACA, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.
Copyright 2013, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. p , y y g j y y g g q jThis publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.