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November 23, 2010
Finding Petroleum ConferenceThe 'capability crunch' in the oil & gas industry
Picking Long-Term Exploration Stocks: The importance of people
See Disclosure Appendix of this report for important Disclosures and Analyst Certifications
Oswald Clint, Ph.D., ACA
Senior Analyst
Sanford C. Bernstein
+44-207-170-5089
Picking Long-Term Exploration Stocks: The importance of people
Hard for external observers to see impact of people
TOTAL
BP
ConocoPhill ips
ENI
Statoil
� What is clear though is that Western companies are more efficient than National, Russian, or Mexican oil companies
2
Source: Company reports
0 20 40 60 80 100 120 140 160 180
Surgut
Lukoil
Iraq
Rosneft
Pemex
Shell
2009 Entitlement Production (boed / employee)
Keeping this up will get tougher as employee numbers rise
15.2 16.0 16.6
7.78.0 9.0 10.9
10.9
60
70
80
Upstream Employees
� In the largest European Majors, Upstream employees rose 35% from 2005 to 2009. ENI saw the largest growth with 9% average annual growth as they acquired companies
3
21.0 22.0 22.0 22.0 23.0
18.921.4 21.8 21.4 21.5
14.814.9 15.2 16.0 16.6
0
10
20
30
40
50
2005 2006 2007 2008 2009
Th
ou
san
ds
Shell BP TOTAL ENI
Source: Company reports
New areas continue to emerge for industry talent
82
120
100
120
140
E&
P d
ivis
ion
he
ad
co
un
t ('0
00
)
3xincrease in headcount
Global Integrateds (E&P only)
Oilfield Services companies
� Using production-per-employee metrics then Iraq would need to treble their upstream employee numbers to reach the targeted 12Mbpd
4
1217
22
3437
42
52 54 54
82
0
20
40
60
80
COP TOT BP ROSN Iraq current LKOD WFT HAL Saudi Aramco
SLB Iraq target
E&
P d
ivis
ion
he
ad
co
un
t ('0
00
)
Source: Company reports and Bernstein estimates
The key way to add value from a stock market view is exploration
40%
50%
60%
Glo
bal E
xplo
ration &
Appra
isal S
uccess R
ate
s (
%)
� With the perceived 1-in-10 or 1-in-5 exploration success rates, few companies see real success and the majority never find anything significant. This is where ‘exploration know-how’ is crucial
5
0%
10%
20%
30%
1900
1904
1908
1912
1916
1920
1924
1928
1932
1936
1940
1944
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
Glo
bal E
xplo
ration &
Appra
isal S
uccess R
ate
s (
%)
Wildcat Wells Wildcat and Appraisal Wells
Source: IHS and Bernstein estimates
Even more so as the exploration targets continue to remain elusive
40
50
60
70
80
90
100
Estim
ate
d t
ota
l w
orl
d d
isco
verie
s (
Bn b
oe)
40
60
80
100
120
WT
I ($
/bbl),
Ga
s D
em
an
d (
Bcf)
, O
il
De
ma
nd
(M
bpd)
210
6
0
10
20
30
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Estim
ate
d t
ota
l w
orl
d d
isco
verie
s (
Bn b
oe)
0
20
40
WT
I ($
/bbl),
Ga
s D
em
an
d (
Bcf)
, O
il
De
ma
nd
(M
bpd)
Deepwater Onshore and Shallow-waterWTI ($/bbl) Oil Demand (Mbpd)Nat Gas Demand (Bcf)
Source: IHS, World Oil, AAPG, Company reports
For the Majors, adding value from exploration ‘people’ is getting tougher
7
Source: UCube, Company reports and Bernstein estimates
The Majors need to remain active in non-OECD regions and build solid ‘people’ relationships
Integrated Oil Company
NOC Country Shell BP TOTAL ENI BG Statoil Galp
Sonatrach Algeria X X
Sonangol Angola X X X
Petrobras Brazil X X
CNOOC China X X X X
PetroChina China X
ONGC India X X
Libya - Various Libya X X
Petronas Malaysia X X
NNPC Nigeria X X X
8
NNPC Nigeria X X X
Qatar Petroleum Qatar X X
Gazprom Russia X X X X X
TNK Russia X
Lukoil Russia
Rosneft Russia
Saudi Aramco Saudi Arabia X X
SABIC Saudi Arabia X
Pertamina Indonesia X
PDVSA Venezuela X X X X
Count 8 6 8 7 3 3 2
Source: Company reports and Bernstein estimates
Some of the Majors are doing this more than others…
30%
40%
50%
60%
70%
80%
400
600
800
1,000
1,200
Pe
ak
Pro
du
cti
on
(kb
oed
)
BG incl.
Brazil
9
0%
10%
20%
30%
0
200
400
Shell TOTAL BP ENI STL BG XOM COP CVX
Pe
ak
Pro
du
cti
on
(kb
oed
)
Peak Production from non-OECD projects % of 2009 Production
Source: Company reports and Bernstein estimates
But value can still be created with exploration
0
5
10
15
20
25
30
Jan
10
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Jun
10
Jul
10
Au
g 1
0
Se
p 1
0
Oc
t 1
0
No
v 1
0
GB
p/
sha
re
Max Petroleum (£96M Market Cap)
Success at the Uytas Prospect in
onshore PreCaspian Basin, Kazakhstan
0
10
20
30
40
50
60
70
80
90
Jan
10
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Jun
10
Jul
10
Au
g 1
0
Se
p 1
0
Oc
t 1
0
No
v 1
0
GB
p/
sha
re
Cove Energy (£273M Market Cap)
Success at the Windjammer Prospect
offshore Rovuma Basin, Mozambique
10
Jan
10
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Jun
10
Jul
10
Au
g 1
0
Se
p 1
0
Oc
t 1
0
No
v 1
0
Jan
10
Fe
b 1
0
Ma
r 1
0
Ap
r 1
0
Ma
y 1
0
Jun
10
Jul
10
Au
g 1
0
Se
p 1
0
Oc
t 1
0
No
v 1
0
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
Jan
06
Ma
r 0
6
Ma
y 0
6
Jul
06
Se
p 0
6
No
v 0
6
Jan
07
Ma
r 0
7
Ma
y 0
7
Jul
07
Se
p 0
7
No
v 0
7
GB
p/
sha
re
BG Group (£41Bn Market Cap)
Success at the Tupi Prospect in
offshore Presalt Santos Basin, Brazil
0
200
400
600
800
1000
1200
1400
1600
Jan
07
Ap
r 0
7
Jul
07
Oc
t 0
7
Jan
08
Ap
r 0
8
Jul
08
Oc
t 0
8
Jan
09
Ap
r 0
9
Jul
09
Oc
t 0
9
Jan
10
Ap
r 1
0
GB
p/
sha
re
Tullow Oil (£11Bn Market Cap)
Success at the Jubilee Prospect
offshore Ghana
Source: Bloomberg
People know-how has to be strong in non-OECD basins
15%
20%
25%
30%
35%
2,000
3,000
4,000
5,000
6,000
% o
f W
ells D
rilled
in O
EC
D
Exp
lora
tio
n W
ells D
rilled
11
0%
5%
10%
0
1,000
2,000
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
% o
f W
ells D
rilled
in O
EC
D
Exp
lora
tio
n W
ells D
rilled
OECD - Europe OECD - North America OECD - Other Other Europe
Other Americas Russia & CIS Asia Africa
Middle East Other % OECD
Source: IHS and Bernstein estimates
Exploration acreage continues to be accumulated after internal assessments…
60
80
100
120
140
160
Net A
cre
age ('0
00 k
m2)
12
0
20
40
60
Tullo
w O
il C
ircle
Oil
Lundin
Cairn
Herita
ge
Pre
mie
r M
aure
l & P
rom
Melrose
Sala
mander
Tow
er R
esourc
es
DN
OD
ana
Max P
et.
PA
Resourc
es
Aure
lian O
il &
Gas
Addax
Serica
Ste
rlin
gB
ig S
kyPetr
ocelti
cS
tratic
Am
inex
Volg
a G
as
Regal
Petr
el R
esourc
es
Teth
ys
Medite
rranean O
il &
Gas
Nort
hern
Petr
ole
um
Isla
nd O
il &
Gas
Ventu
reU
rals
Rift O
ilH
ard
yG
old
Oil
Em
era
ld E
nerg
yA
fren
Det N
ors
keFaro
e P
etr
ole
um
Pan A
ndean
Rockh
opper
West S
iberian
JKX
Petr
oneft
SO
CO
Inte
rOil
Pro
vid
ence
CanA
rgo
Gas P
lus
Sound O
ilEncore
Ascent
Sib
irM
eridia
nElix
ir P
etr
ole
um
Genesis
Vic
toria O
il &
Gas
Ram
co
Roxi
Nors
eFox P
etr
ole
um
Am
erisur
Egdon
Xcite
Energ
yG
inger O
ilPetr
oLatin
aC
aspia
n H
old
ings
Net A
cre
age ('0
00 k
m2)
Average =
Source: Company reports
But the stock-market doesn't ascribe any value to acreage quantity
20 - 50
50 - 100
100 - 150
>150
Net acre
age ('0
00 k
m2)
13
0x 5x 10x 15x 20x 25x 30x
<2
2 - 5
5 - 10
10 - 20
10 year average stock market valuation multiple
Net acre
age ('0
00 k
m2)
Source: Company reports
Stock-markets don’t like over-promising and under-delivering
100
120
140
160
180
200
To
tal
We
lls
Dri
lle
d
14
0
20
40
60
80
100
2004 2005 2006 2007 2008 2009
To
tal
We
lls
Dri
lle
d
Exploration Appraisal Total Planned Wells
Source: Company reports
Drilling in the same old places is not going to excite the market either
1965-2005 Wildcat wells drilled in Europe 2005-2010 Wildcat wells drilled in Europe
15
Source: IHS and Bernstein estimates
New and/or undrilled exploration does excite the market
2005-2010 Wildcat wells drilled in East Africa
1965-2005 Wildcat wells drilled in East Africa
1965-2005 Wildcat wells drilled in East Africa
16
Source: IHS and Bernstein estimates
What makes good exploration stocks is…exploration success which can be related to ‘people’
40%
50%
60%
70%
Wil
dca
t ex
plo
rati
on
su
cces
s ra
te
17
0%
10%
20%
30%
40%
#1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 #14 #15 #16
Wil
dca
t ex
plo
rati
on
su
cces
s ra
te
Source: Company reports
Not all luck…Not all exploration heads are equal
0
1
2
3
4
Num
ber
of Explo
ratio
n &
Appra
isal W
ells
1 Exploration Head Current Exploration Head2 Exploration Heads
18
-3
-2
-1
0
Aug-0
2
De
c-0
2
Apr-
03
Aug-0
3
De
c-0
3
Apr-
04
Aug-0
4
De
c-0
4
Apr-
05
Aug-0
5
De
c-0
5
Apr-
06
Aug-0
6
De
c-0
6
Apr-
07
Aug-0
7
De
c-0
7
Apr-
08
Aug-0
8
De
c-0
8
Apr-
09
Aug-0
9
De
c-0
9
Apr-
10
Num
ber
of Explo
ratio
n &
Appra
isal W
ells
Successful Unsuccessful
Source: Company reports
Such success is helped further by low finding costs per barrel
4.0
3.9
3.1
2.2
1.7
1.6
0.5
#7
#6
#5
#4
#3
#2
#1
19
7.3
7.1
7.1
6.2
6.0
5.4
5.0
4.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
#14
#13
#12
#11
#10
#9
#8
#7
Finding costs ($/boe) (adjusted for inflation)
Source: Company reports
What they do like is exploration success
2000%
2500%
3000%
3500%
Sh
are
Pri
ce P
erf
orm
an
ce (
20
03
-20
09
)
20
0%
500%
1000%
1500%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Sh
are
Pri
ce P
erf
orm
an
ce (
20
03
Exploration Success Rates
Source: Company reports
Disclosure Appendix
21
Disclosure Appendix
SRO REQUIRED DISCLOSURES
• References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, 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 11/18/2010, Bernstein's ratings were distributed as follows: Outperform: 44.8% (1.6% banking clients) ; Market-Perform: 46.3% (1.0% banking clients); Underperform: 8.9% (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.
22
• 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, BP / BP PLC, BP/.LN / BP PLC, PMO.LN / Premier Oil PLC, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell 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, TLW.LN / Tullow Oil PLC, TOT / Total SA.
• 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 services BG/.LN / BG Group PLC, BP / BP PLC, BP/.LN / BP PLC, FP.FP / TotalFinaElf SA, TOT / Total SA.
• In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from BG/.LN / BG Group PLC, BP / BP PLC, BP/.LN / BP PLC, CNE.LN / Cairn Energy PLC, E / ENI SpA, ENI.IM / ENI SpA, FP.FP / TotalFinaElf SA, GALP.PL / Galp Energia SGPS SA, LKOD.LI / LUKOIL, NVTK.LI / NovaTek OAO, OGZD.LI / Gazprom OAO, PMO.LN / Premier Oil PLC, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell 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, ROSN.LI / Rosneft Oil Co, SGGD.LI / Surgutneftegaz, STO / Statoil ASA, TLW.LN / Tullow Oil PLC, TOT / Total SA.
12-Month Rating History as of 11/22/2010========================================BG/.LN - O (IC) 1/22/2009BP - M (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 5/10/2010, M (RC) 3/3/2009BP/.LN - M (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 5/10/2010, M (RC) 3/3/2009CNE.LN - O (IC) 1/22/2009E - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 11/21/2008ENI.IM - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 11/21/2008FP.FP - O (IC) 8/3/2010, M (DC) 8/2/2010, M (RC) 2/16/2010, O (IC) 5/30/2003GALP.PL - O (RC) 5/26/2010, M (IC) 1/22/2009LKOD.LI - U (IC) 1/15/2009NVTK.LI - O (IC) 1/15/2009OGZD.LI - O (RC) 7/16/2009PMO.LN - O (RC) 2/19/2010, M (IC) 1/22/2009RDS/A - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009RDS/B - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009RDSA.LN - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009RDSA.NA - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009RDSB.LN - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009RDSB.NA - O (IC) 8/3/2010, O (DC) 8/2/2010, O (RC) 2/16/2010, M (RC) 3/16/2009ROSN.LI - U (IC) 1/15/2009
23
ROSN.LI - U (IC) 1/15/2009SGGD.LI - U (IC) 1/15/2009STL.NO - M (IC) 1/22/2009STO - M (IC) 1/22/2009TLW.LN - O (IC) 1/22/2009TOT - O (IC) 8/3/2010, M (DC) 8/2/2010, M (RC) 2/16/2010, O (IC) 5/30/2003
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 section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority.
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24
conflict of interest that could affect the objectivity of this publication. Investors should consider this publication as only a single factor in making their investment decisions.
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, Devonshire House, One Mayfair Place, LondonW1J 8SB, United Kingdom, Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.
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.
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