Oil Field Services Valuation

INVESTOR EDUCATION

OIL FIELD SERVICES VALUATION LAGOS 2ND OF JULY 2013

The emerging markets investment firm

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TABLE OF CONTENTS

I. Oilfield Services & Equipment

II. The Nigerian Oilfield Services Opportunity

III. Approach to Oilfield Services Valuation & Appraisal

IV.Key Value Driver Assumptions

V. Comparative Valuation Metrics – Examining Publicly Traded Comps

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OILFIELD SERVICES & EQUIPMENT

Helicopters

Marine Services & Vessels

Seismic Acquisition

Project Management

EPC contracting

Fabrication

Drillers

Onshore rigs

Swamp rigs

Jackups

Semisubmersibles

Drillships

Well testing & completion

Nigeria

Angola

Gabon

Togo

Benin

Ghana

Cote d’Ivoire

Liberia

Sierra

Leone

Guinea

Gambia

Cameroon

Equatorial Guinea

Senegal

Guinea Bissau

Republic Of

Congo Democratic

Republic of

Congo

Snapshot of Offshore Rigs Locations- July 2013 OffShore West Africa

A total of 90rigs in offshore fleet

- 30% within Nigerian waters

- 24% within Angola

64 offshore rigs contracted for West Africa, with 59 actively

drilling (July 2013)

Selected additional drilling announcements and field

developments for remainder of 2013 include:

- Tap oil have begun drilling Starfish-1 oil exploration

well in Ghana

- Afren discover 78 mmboe of gross P50 resources in

Ogo-1 well

- Subsea Egina field developments by Saipem, FMC

Nigeria

30 rigs stationed in Nigeria

Operators include

ExxonMobil, Total, Oando,

Chevron

Angola

22 rigs stationed in Angola

Primarily supporting Total’s

exploration program

8 rigs in Cameroon

10 rigs in Gabon

3 rigs in Eq.Guinea

9 rigs currently in Congo

Equatorial Region

Ghana

5 rigs stationed in Ghana

OffShore East Africa

Majority of E&P activity has been centred in West Africa,

however recent finds offshore Mozambique and Tanzania

are fuelling further activity

Mozambique is the highest producing country in the region

with 3 operating rigs including the one operated by Anadarko

Kenya and Tanzania also have an operating rig each

CURRENT OFFSHORE ACTIVITY DEMONSTRATES

CONTINUED FOCUS ON NIGERIA AND ANGOLA

Source: Rigzone 3

The “indigenous opportunity” comes against the backdrop of the current Nigerian O&G industry themes

Nigerian government desire to see job creation and capacity building amongst indigenous service companies

Desire to increase overall GDP contribution from oil services industry & see in country “value add”

The local content bill passed in Nov 2010 focuses on services sector

Nigerian govt seeking increased indigenous capacity building in the oil

field services segment of the O&G value chain

Certain % of all jobs must be carried out by indigenous operators with a

view to building local job creation – jobs over $100m must have

minimum % of Nigerian Labor

Indigenisation and Legislation Critical Success factors for Service Companies

Preferential Selection & Pricing on Contracts

Access to equipment & technology – business is

equipment heavy, access may be through own capacity,

partnerships and alliances

Service offering & track record – focused on delivering

end to end services within different areas of

specialization

Understanding of terrain – ability to do business in

Nigeria and deal with communities in job execution

including job creation

Standards and certifications – appropriate certifications

demanded by HSSE and IOC community for various

jobs, required permits from regulators

Access to capital – appropriately capitalized to enable

execution of backlog and growth. Indigenous companies

can access the NCDF

Management team – deeply entrenched within upstream

community for business development and backlog

creation

The Local Content Act stipulates preferential selection for indigenous

service companies in the procurement of certain services to the

upstream oil and gas industry

Allows for preferential pricing of up to 10% during selection between

local and foreign service companies for same job

Local Content Monitoring Board

Nigerian Content Development and Monitoring Board (“NCDMB”) set

up towards implementation of Nigerian Oil and Gas Content

Development Act and implementation of Nigerian Content

Development Fund (“NCDF”)

From April, 2010, NCDF requires upstream co’s to contribute 1% of

all contract award sums towards a Nigerian Content Development

Fund

NCDF fund is to be managed by local banks and accessed by

indigenous service co's in actualisation of their contract awards

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The services sector is very fragmented with very few

integrated local champions. Most service companies are

private, thereby limiting access to capital and the industry is

likely to face capacity shortage as there is increased

upstream activity

KEY THEMES IN NIGERIAN OIL & GAS – OIL FIELD

SERVICES

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OVERVIEW OF THE LOCAL CONTENT ACT

Overview

Key Highlights

Nigerian Oil & Gas Industry Content Development Act 2010

Commonly referred to the Nigerian Content Act or

Local Content Act, it mandates oil companies to

reflect considerable level of Nigerian content in

all their operations

First consideration to Nigerian goods and

services, and the engagement of Nigerians in

project work programmes

The provides the specific Nigerian content level

for each listed services, including man hours and

expenditure.

Foreign companies are required to submit a

Nigerian Content Plan before carrying out any

project in Nigeria

Preferential consideration for projects with the

highest level of Nigerian content during bid

evaluation

Selected Local Content (LC) Level Requirements in OFS

Description LC%

FEED and Detailed Engineering 50%-80%

Fabrication and Construction 50%-100%

Materials and Procurement 45%-100%

Well and Drilling Services 45%-100%

Exploration, Subsurface, Petroleum Engineering 55%-100%

Marine Services 30%-100%

Project Management / Consulting Services 45%-90%

Local Content in Practice

Total Upstream Nigeria recently awarded a $3 billion

contract for the subsea development of the Egina oil field to

Siapem - Most of the fabrication work would the carried

out in Port Harcourt

The $3.1billion contract awarded to Samsung to build the

Egina FPSO also includes 12,000 – 15,000 tons of in-

country fabrication

$400 million East-West evacuation gas pipeline awarded to

two indigenous firms

NGN12 billion drilling contract awarded by Shell to Oando

Energy Services limited in 2012

$85 million fleet upgrade support provided by Shell to

Caverton Helicopters.

$5 billion Contractor Support Fund Scheme recently

launched by Shell in partnership with five Nigerian banks

$2.4 bn

$1.4 bn

Nigerian Companies Others

$3.8 bn

Breakdown of Contracts Awarded by Shell in 2012

Source: Shell

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KEY APPROACHES TO VALUATION

Net Asset

Value

Can be used as a tertiary metric, not a key driver for valuation of the sector

Difficult to estimate long-term utilization rates and pricing

Valuation Methodology Predominantly Based on Comparative Trading Metrics

Comparative

Metrics

Comparative metrics include P/E, EV/EBITDA, P/CF, ROIC

Predominant valuation metric for the sector

Comparing opportunities against publicly traded companies will confirm value

Key is predicting utilization rates and pricing in the short and medium term to

forecast future earnings – “Contract Backlog” vs. “Spot Market”

Day rates are published by many international drillers in “Fleet Reports”

Comparative

Metrics

Precedent transaction metrics will be used as potential upside to valuation

Distinction made between Asset vs. corporate transactions

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ASSUMPTIONS & FACTORS IMPACTING EARNINGS &

VALUATION

Commodity

Prices

The key driver of demand for Oilfield services

Equities trade with commodity prices although long-term contracts may be in place

Valuation Methodology Predominantly Based on Comparative Trading Metrics

Capacity

Utilization

Days in service

Quality and operational track record of off-taker e.g. IOC

Pricing power for Services

Utilization can vary for different types of assets & by location

Day Rates

Depend on type of equipment & utilization rates

Depends on demand / supply dynamics

Swamp rigs in Nigeria currently average US$100k/day

Onshore rigs in Nigeria currently average US$40k/day

Growth &

Return on

Capital

Margins & Costs of Operation

Ability to deploy additional equipment on field

Pipeline of additional assets to be deployed

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FACTORS IMPACTING EARNINGS & VALUATION

The key driver of demand for Oilfield services

Driven by asset acquisition and published capex

work programmes

Equities trade with commodity prices although long-

term contracts may be in place

Source: Broker Research

Illustrative View of Future Capex Spending

Illustrative Demand vs. Supply

Average Day Rates – Deepwater & Midwater

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EXAMPLE CONTRACT STATUS

The key driver of demand for oilfield services “Contract Backlog”

Source: Songa Offshore Corporate Documents

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THE EARNINGS FORECASTING MODEL

Based on corporate disclosure

Based on Analysts’ discussions with management & industry view

May also include a view on “spot market” rates (where applicable e.g. marine support vessels)

Source: Broker Research

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PUBLICLY TRADED COMPARABLES

Source: Bloomberg as at 20th March 2013; OES Financial Forecast

Mcap EV Share Price EBITDA Margin (%)

$mn $mn Local CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E

JACUKUP RIGS

Hercules Offshore 1,122 1,819 7.07 8.6x 5.4x 3.8x 4.3x 30% 35% 42% 41% n/m 25.1x 8.7x 9.8x

ENSCO International Inc. 13,569 17,845 58.31 8.5x 7.1x 6.1x 5.4x 49% 49% 51% 52% 11.1x 8.9x 7.5x 6.5x

Transocean Ltd 17,455 24,975 48.44 9.0x 6.9x 5.6x 5.3x 30% 38% 41% 42% n/m 11.0x 7.9x 7.4x

Seadrill Limited 18,983 30,614 244.60 12.7x 11.3x 9.0x 7.7x 54% 55% 58% 58% 15.8x 14.3x 10.8x 8.8x

Songa Offshore 175 1,106 5.21 5.6x 5.1x 5.0x 3.0x 34% 39% 38% 41% 7.6x 3.2x 5.3x 2.9x

Average 8.9 x 7.2 x 5.9 x 5.1 x 39% 43% 46% 47% 11.5 x 12.5 x 8.0 x 7.1 x

Median 8.6 x 6.9 x 5.6 x 5.3 x 34% 39% 42% 42% 11.1 x 11.0 x 7.9 x 7.4 x

LAND DRILLING RIGS

Nabors 4,608 8,308 15.64 4.2x 4.8x 4.3x 3.8x 28% 27% 28% 30% 9.1x 16.0x 11.2x 8.7x

Pioneer Energy Services 410 959 6.61 3.9x 4.2x 4.0x 3.7x 27% 24% 25% 25% 16.8x n/m n/a 16.5x

Patterson UTI 2,856 3,409 19.44 3.4x 3.8x 3.6x 3.4x 36% 33% 33% 34% 10.9x 14.0x 11.8x 11.1x

Average 3.8 x 4.3 x 3.9 x 3.6 x 31% 28% 29% 30% 12.3 x 15.0 x 11.5 x 12.1 x

Median 3.9 x 4.2 x 4.0 x 3.7 x 28% 27% 28% 30% 10.9 x 15.0 x 11.5 x 11.1 x

27-Jun-13

EV/EBITDA P/E

Mcap EV Share Price EBITDA Margin (%)

$mn $mn Local CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E CY12A CY13E CY14E CY15E

DIVING COMPANIES

Subsea 7 6,167 6,394 106.00 6.1x 6.0x 4.3x 3.7x 17% 16% 21% 22% 11.3x 15.4x 9.1x 7.6x

Sevan Marine 197 138 22.60 5.2x 14.0x 8.4x 12.8x 25% 13% 21% 14% 6.9x 16.1x 13.9x 25.4x

Helix Energy Solutions 2,459 2,557 23.21 48.5x 8.9x 6.9x 6.1x 6% 32% 34% 37% 12.5x 22.4x 13.5x 11.6x

McDermott International 1,986 2,049 8.40 4.6x 7.3x 4.7x 4.0x 12% 9% 12% 13% 9.3x 20.3x 9.7x 7.5x

Average 16.1 x 9.1 x 6.1 x 6.7 x 15% 17% 22% 21% 10.0 x 18.6 x 11.6 x 13.0 x

Median 5.6 x 8.1 x 5.8 x 5.1 x 14% 15% 21% 18% 10.3 x 18.2 x 11.6 x 9.6 x

MARINE SERVICES COS

Gulfmark Offshore 1,206 1,588 45.30 14.4x 10.4x 7.4x 7.2x 28% 34% 40% 41% 35.5x 19.4x 11.1x 10.2x

Hornbeck Offshore Services 1,919 2,519 53.62 12.1x 9.0x 6.0x 4.9x 41% 45% 50% 51% 50.5x 22.0x 12.3x 9.6x

Tidew ater 2,826 3,786 57.10 10.9x 10.1x 7.8x 6.7x 28% 29% 33% 34% 21.2x 18.4x 12.3x 9.7x

Average 12.5 x 9.8 x 7.1 x 6.3 x 32% 36% 41% 42% 35.8 x 20.0 x 11.9 x 9.8 x

Median 12.1 x 10.1 x 7.4 x 6.7 x 28% 34% 40% 41% 35.5 x 19.4 x 12.3 x 9.7 x

27-Jun-13

EV/EBITDA P/E

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PUBLICLY TRADED COMPARABLES (cont’d)

Source: Bloomberg as at 20th March 2013; OES Financial Forecast

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