SHALE  OIL  RUSH    “3  KEYS  TO  SUCCESS”  

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1)  -­‐  Understand  HOW  Shale  Oil  is  DIFFERENT    •  Enabling  technologies,  horizontal  drilling  &  fracking:  novel,  evolving,  big  learnings  poten6al  •  Shale  oil  is  s6ll  a  very  young  &  fragmented  industry  with  many  new-­‐oilcos  and  lower  business  

entry  barriers  than  mining  or  conven6onal  oil  •  Extensive  services  infrastructure  is  essen6al,  transporta6on  infrastructure  less  cri6cal  •  DEVEX  depends  much  on  well-­‐construc6on  capacity  u6liza6on,  less  on  global  macro  factors  •  Explosive  growth  in  the  USA  from  0.5  to  3.0  MMbopd  over  last  5  years,  and  con6nuing  •  Above  ground  factors  so  far  impede  global  expansion,  but  Vaca  Muerta,  Bazhenov  promising  •  Shale  oil  is  scalable,  repeatable,  module-­‐able,  itera6on-­‐able  •  Much  shorter  project  lead  6mes  enabled  via  field  pilots  •  High  well  IRRs  &  margins  and  early  cash  returns  allow  faster  capital  recycling,  larger  

opportunity  capture  and  faster  growth  •  Mature  oilcos  key  strengths  -­‐  FEL/modeling,  work  flows,  finances  -­‐  no  compe66ve  advantage  •  Natural  hedge  against  oil  price  risk  during  development,  as  commodi6zed  US  onshore  drilling  

day  rates  and  frac  cost  inversely  correlated  to  well  margins  •  Reserves  booking  greatly  facilitated  via  well  type  curves,  analogues,  legacy  wells,  repeatability  •  Need  to  pay  close  aTen6on  to  capital  markets  (reserves,  PR)  and  capital  efficiency  (alloca6on,  

recycling,  OCC,  tax),  in  order  to  fast-­‐track  growth  

SHALE  OIL  RUSH  –  “3  KEYS  TO  SUCCESS”  

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2)  –  Capitalize  on  LATEST  technical  &  financial  PROGRESS    •  “More  efficient  wells”:  faster  wells,  longer  and  op6mally  placed  laterals,  more  frac  stages,  

ideal  perfs  placement,  larger  fracs  and  beTer  frac  efficiency,  higher  well  up6me  and  op6mized  A/L,  downhole  monitoring  and  drainage  control  

•  “Manufacturing  approach”:  pad  drilling,  rig  walkers,  zipper  fracs,  acreage  uni6za6on,  supply  logis6cs,  spud-­‐to-­‐POP  dura6on,  use  of  natural  gas,  TPS  baTeries  

•  Focus  is  broadening  to  “resource  maximiza6on”:  lateral  downspacing  to  ≈50  acres,  frac  stage  op6miza6on  to  ≈200  a,  add  deeper  and  shallower  horizons  

•  NPVs  discounted  with  higher  OCC,  not  WACC,  to  include  benefits  of  bigger  opport’y  capture  •  Well  emphasis  on  IP,  less  on  EUR,  as  result  of  using  the  higher  OCC  •  Early  reserves  booking  allows  debt  funding  and,  together  with  efficient  working  capital  

management,  is  impera6ve  for  high  NPAT  results  •  Where  cheap  and  possible,  overseas  acreage  gedng  secured  for  possible  future  development  •  Rapid  growth  via  acquisi6ons  and  virtuous-­‐cycle  resource  development  possible,  but  keen  

focus  on  capital  markets  and  capital  alloca6on  &  efficiency  necessary  

SHALE  OIL  RUSH  –  “3  KEYS  TO  SUCCESS”  

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3)  –  Foresee  FUTURE  TRENDS  &  play  it  SMART  

•  Large  scope  for  progress:  ver6cal  placement  of  laterals,  frac  stages  op6miza6on,  stress  field  examina6on,  resource  drainage  improvements,  frac  spread  simplifica6on,  drill  &  frac  fluids  recycling,  frac  propaga6on  control,  downhole  monitoring  -­‐  most  gains  will  spread  quickly  

•  Wave  of  consolida6on  will  eliminate  the  squaTers  and  the  slower  and  less  advanced  players  •  Producing  shale  oil:    -­‐  can  be  securi6zed,  offering  exposure  to  long-­‐term  infla6on  &  oil  prices  

         -­‐  may  be  set  up  as  MLPs,  linking  tax  benefits  with  liquidity  of  traded  secs  •  Securi6za6on  or  spin  off  into  MLPs  are  efficient  liquidity  measures  for  shale  oil    •  Mature  onshore  shale  oil  offers  great  scope  to  add  value  via  range  of  OPEX  ini6a6ves    •  In  the  long  run,  2  polarized  owners  of  shale  oil  resources  for  early  life  and  late  life  assets:  

1.  Shale  Oil  Developer  –  aggressive,  innova6ve,  savvy,  priv  equity,  capital  focus,  buy-­‐to-­‐sell  2.  O&M  Manager  –  diligent  finisher,  OPEX  &  margin  tweaker,  publicly  listed,  buy-­‐to-­‐hold  

•  Oil  price  risk  –  work  confidently  with  the  natural  hedge  during  development  phase  •  Alignments  –  private  equity  during  development,  services  companies  during  O&M  phase  •  People  –  entrepreneurs  during  development,  margin  tweakers  during  O&M  phase  •  Timing  –  entry  NOW  for  shale  oil  developers;  O&M  Managers  wait  for  consolida6on    •  Exit  -­‐  important  for  shale  oil  developers  not  to  miss  exit  and  move  to  the  next  dvmnt  •  Shale  gas  –  poses  significant  risk  to  DEVEX  if  it  takes  off,  since  it  uses  the  same  rigs  &  frac  fleet  

SHALE  OIL  RUSH  –  “3  KEYS  TO  SUCCESS”