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Global Oil Global Oil Over the River and Through the Woods
Vikas Dwivedi
(713) 275-66352
Macquarie Capital (USA)
One Allen Center, 500 Dallas, Suite 3100, H t TX 77002Houston, TX 77002
June 2015
Macquarie Capital (USA) In. is a registered broker – dealer and member of The Financial Industry Regulatory Authority (“FINRA”). Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc.
Please read Disclaimer on Pages 28-30
WTI/Brent likely to stay tighter on diverging fundamentals
Brent fundamentals:
Global supply is growing, with little signs of rolling over
Global demand; elasticity a positive, but dollar strength and regulated fuel industry mitigates effectsindustry mitigates effects
WTI fundamentals:
US l th t d t ll d t i ifi t d li i i t US supply growth expected to roll due to a significant decline in rig count
Demand growth remains strong
C / Conclusion – tighter WTI/Brent than in previous years
Page 2
Crude oil markets – steady demand growth, volatile supplyBrent WTI WTI-Brent LT Brent
Previous New Previous New Previous New Previous New2015 $74 $56 $68 $52 ($6) ($4)2016 $85 $68 $79 $62 ($6) ($6)2017 $90 $81 $84 $75 ($6) ($6)
+2017 ($6) ($5) $95 $84
Supply: US only source of timely rationalization US production growth slowing towards 0 from
1 2 million BPD but:
Demand: Regional and fuel diversification Global crude demand growth accelerating to 1.2
MM BPD from 0 9 demand growth now at1.2 million BPD, but: Production surprising to the upside from:
Russia Libya
MM BPD from 0.9 – demand growth now at average of past few years but not enough 2014 demand growth was only 700 K BPD Massive 1Q15 global demand growth rate
not sustainable Saudi Arabia North Sea Brazil
not sustainable Was high due to easy comps in the US
from last year’s polar vortex winter Better US employment data VMT data positive surprises
Source: Macquarie Capital (USA), Global Oil S&D, June 2015
Page 3
VMT data positive surprises
Crude oil markets – steady demand growth, volatile supplyMacquarie Price forecasts versus forwards and consensus
Our Targets & Views $90 Macquarie Brent Base CaseFwd curve / realized
2015 2016 2017
Versus Forwards: Bearish Neutral Bullish
Vers s $60
$70
$80 Consensus
Versus Consensus: Bearish Bearish Bullish
$40
$50
$
1Q15E 3Q15E 1Q16E 3Q16E 1Q17E 3Q17E1Q15E 3Q15E 1Q16E 3Q16E 1Q17E 3Q17E
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17Brent $55 $52 $57 $60 $64 $62 $70 $75 $80 $81 $80 $82 WTI $49 $48 $54 $57 $59 $55 $63 $71 $74 $75 $74 $76
WTI - Brent ($7) ($4) ($3) ($3) ($5) ($7) ($7) ($4) ($6) ($6) ($6) ($6)Consensus $55 $60 $63 $69 $72 $72 $77 $84 $73 $74 $79 $86
Forward Curve $55 $64 $65 $66 $67 $68 $69 $69 $70 $71 $71 $72 Brent vs. Cons $0 ($8) ($6) ($9) ($8) ($10) ($7) ($9) $7 $7 $1 ($4)
Page 4Source: Macquarie Capital (USA), Global Oil S&D, Bloomberg, June 2015
Brent vs. Fwds ($0) ($12) ($8) ($6) ($3) ($6) $1 $6 $10 $10 $9 $10
Supply still the dominating factor2Q looks well oversupplied into 2015…
2Q YOY Global Supply Change (million BPD)
500
…While key producing regions ramping rather than falling
Select country production growth
3.0 400
500
SEQ QTR 2Q15
YOY 2Q15
1.61.9
200
300
K B
PD
YOY 2Q15
0.6 0.6
0.3 0
100
2011 2012 2013 2014 2015 2016 -100FSU N. SEA Libya Saudi Arabia
Page 5Source: Macquarie Capital (USA), Global Oil S&D, June 2015
Although demand is looking more supportiveDemand growth picking up…
2Q YOY Global Demand Change (million BPD)
…but still the market is well over supplied
2nd Quarter – Global S/D (million BPD)
1.41.6
1 31.4
0 9
1.2
1.9
1.3 0.9 0.8
0.40.3
-0.8-0.7
-0.1
2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Page 6Source: Macquarie Capital (USA), Global Oil S&D, June 2015
Supply growth from key regions moving the wrong way
7
North Sea production should rise for the first time in a decade
North Sea crude oil production (million BPD) North Sea crude oil project pipeline
Estimated Start
5
6
7 Project Name Estimated Start Quarter Peak Production
Brynhild 4Q 2014 12Golden Eagle 4Q 2014 70
Kinnoull 4Q 2014 44Kvitebjorn ER 4Q 2014 52
3
4
j2014 Sub Total 177
Auk South 1Q 2015 11Boyla 1Q 2015 20
Eldfisk II 1Q 2015 60E hdh 1Q 2015 16
1
2Enochdhu 1Q 2015 16
Fram 1Q 2015 18Oseberg Delta 2 1Q 2015 7
Valemon 1Q 2015 16Knarr 2Q 2015 63
Alma Galia 3Q 2015 200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
E
Goliat 3Q 2015 94Solan 4Q 2014 24
Edvard Grieg 4Q 2015 95Laggan & Tormore 4Q 2015 10
2015 Sub Total 454
Page 7Source: Macquarie Capital (USA), IHS, June 2015
Supply growth from key regions moving the wrong waySaudi Arabia focusing on market share rather than balancing the market
Saudi Arabia crude oil production (million BPD) Comments from Oil Minister al-Naimi highlight the country’s desire to maintain market share11 desire to maintain market share
“… need cooperation of all producers to stabilize the market.”
“The challenge is to restore the supply demand balance10
The challenge is to restore the supply-demand balance and reach price stability. This requires the cooperation of the non-OPEC major producers, just as it did in the 1998-1999 crisis.”
9
“Some non-OPEC major producing countries said they were unable or unwilling to participate in production cuts…For this reason, OPEC decided…not to give up its market share in favor of others.”8
7Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
5-Yr Range 2014 2015 5 Yr Avg
Page 8Source: Macquarie Capital (USA), IEA, Bloomberg, June 2015
Core OPEC members adding rigsSaudi Arabia, Kuwait, and UAE ramping activity while the US reels in spending
Core OPEC oil rigs and US oil rigs since YE 2013 Core OPEC gas rigs also ramping up1401,800 80
100
120
1,400
1,600
,
US Core OPEC (RHS)
60
70UAE
Kuwait
Saudi Arabia
80
100
800
1,000
1,200
40
50
Rig Change Since October 2014
Core OPEC +10
40
60
400
600
800
20
30
US -819
0
20
0
200
J-12 N-12 M-13 J-13 N-13 M-14 J-14 N-14 M-150
10
J-12 N-12 M-13 J-13 N-13 M-14 J-14 N-14 M-15
Page 9Source: Macquarie Capital (USA), Baker Hughes, June 2015
Supply growth from key regions moving the wrong wayToo much light sweet supply weighing on differentials
Western African premium to Brent remains weak as refinery maintenance limits demand
Brent CFD ($/bbl)4 refinery maintenance limits demand
While slightly lower over the past month, Libyan crude oil production still remains near 400 K BPD
Mediterranean differentials feeling the impact of an over01234
Mediterranean differentials feeling the impact of an over supply of light sweet crude oil
Q Ib diff ti l t B t ($/bbl)A i BFOE ($/bbl)
-3-2-1
D-12 A-13 A-13 D-13 A-14 A-14 D-14 A-15
Qua Iboe differential to Brent ($/bbl)
2
3
Azeri versus BFOE ($/bbl)
2
3
4
2
3
4
0
1
-1
0
1
-1
0
1
Qua Iboe vs. Dated BrentBrent 1-3 Time Spreads
Page 10
-1D-12 A-13 A-13 D-13 A-14 A-14 D-14 A-15
Source: Macquarie Capital (USA), IEA, Bloomberg, Platts, June 2015
-2-2D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15
Brent 1 3 Time Spreads
Dollar strength mitigates elasticity effects
120
Stronger dollar during sell-off reduces the impact in local currencies
The DXY Index is up 19% year on year Weakening currencies mitigates effect of weaker crude oil
Crude oil performance in local currencies (based at 100, $/bbl)
708090
100110
NairaUSDRuble
Weakening currencies mitigates effect of weaker crude oil prices on the upstream sector
Priced in Russian Rubles, crude oil is only down 14% YoY This will result in production growth remaining higher than
dollar-based equilibrium would suggest
405060
M-14 M-14 J-14 S-14 N-14 J-15 M-15 M-15
RubleEuroRupee
dollar based equilibrium would suggest Will also result in a slower response from demand, as
elasticity effects will be less
DXY I d (b d t 100)DXY Index (based at 100)
115120125130
USD Ruble Euro Rupee Naira
95100105110115 Year on Year
Performance -44% -9% -32% -41% -32%
Page 11
90M-14 J-14 S-14 D-14 M-15
Source: Macquarie Capital (USA), Bloomberg, June 2015
Chinese crude demand growth slower, but stabilizingChinese crude demand higher, but slower economic growth bodes poorly for diesel demand
A transition from infrastructure-based investment spending to consumer driven growth will weigh on diesel demand
Crude consumption (million BPD)13 5Y Range to consumer driven growth will weigh on diesel demand
while supportive of gasoline demand Restocking of crude oil inventories also benefited crude oil
demand Spare storage capacity for expanding SPRs are likely
10
12
5Y Ave20142015
limited until the end of the year
Di l d d ( illi BPD) Chi d il d d th (th d BPD Y Y)
7
9
J F M A M J J A S O N D
Diesel demand (million BPD) Chinese crude oil demand growth (thousand BPD, YoY)
800
1,000
1,200
4.0
4.5 5Y Range5Y Ave20142015
200
400
600
800
3.0
3.5
2015
Page 12
02010 2011 2012 2013 2014 2015
Source: Macquarie Capital (USA), Bloomberg, June 2015
2.5J F M A M J J A S O N D
Limited near-term benefit from SPR fills
China SPR Site Operator Capacity (MM bbl) Completion
Phase 2
China SPR may be fully utilized as of March
China SPR
Dushanzi, Xinjiang PetroChina 18.9 2H-11Lanzhou, Gansu PetroChina 18.9 2H-11Tianjin Sinopec 20.1 2H-13Following facilities are facing delays, expected to be completed by end of 2015:Huangdao Shandong Sinopec 18 9 2015
Only Dushanzi, Lanzhou, and Tianjin are completed and at least partially filled
Chinese officials have stated that SPR is almost fully utilized as of the end of MarchN t it ill t b il bl til l t 2015Huangdao, Shandong Sinopec 18.9 2015
Zhoushan, Zhejiang Sinochem 18.9 2H-14Jinzhou, Liaoning PetroChina 18.9 2015Jintan, Jiangsu PetroChina 15.7 2015Huizhou, Guangdong CNOOC 25.2 2016Zhanjiang, Guangdong Sinopec 44.0 2016
New storage capacity will not be available until late 2015 Several facilities have faced construction delays
Zhanjiang, Guangdong Sinopec 44.0 2016Phase 2 Total 199.5
India SPR Site Capacity (MM BBLS) % Complete (Sept. 2014) Status India SPR
Visakhapatnam 9.8 99.2% Likely filled
Padur 18.3 97.6% Not Completed
Mangalore 11.0 94.5% Not Completed
Total 39 1
The Visakhapatnam site began filling in February Remaining two facilities will not be available until the
completion of a cross country pipeline, scheduled to be completed in July 2015
Page 13
Total 39.1 Monsoon risk could delay completion of pipeline
Source: Macquarie Capital (USA), Bloomberg, ISPRL, June 2015
New refinery capacity challenges the medium run outlook
11.512
All good things come to an end – European refinery runs will fall from very high rates
European refinery runs are up nearly 500 thousand BPD year to date YoY
European refinery runs and cracks (million BPD, $/bbl)
10.5
11.0
2468
10year to date, YoY
Seasonal maintenance pushing runs down recently The current level of margins implies that once
maintenance is concluded, refineries will pick up run rates Product inventory levels are at risk of building
9.5
10.0
-4-202
J-13 O-13 J-14 A-14 A-14 N-14 F-15 M-15 S-15
ARA Brent Cracking MarginEuropean Throughput (RHS)
Product inventory levels are at risk of building Gasoline stocks are already seasonally high
E fi ( illi BPD) E li t k ( illi f b l )European refinery runs (million BPD) Europe gasoline stocks (millions of barrels)
11
12
120
125
130
5 Year Range 2015Average 2014
105 Year Range Average2014 2015 105
110
115
Page 14Source: Macquarie Capital (USA), Bloomberg, Reuters, June 2015
9J F M A M J J A S O N D
100J F M A M J J A S O N D
Cushing storage levels remain highWhile Cushing appears to have averted full capacity, high storage levels will again be a problem in the fall
Cushing storage levels have drawn down slightly, but remain historically high
Cushing storage levels (million bbls)70 remain historically high
Cushing to Gulf Coast pipelines are running over 80% of capacity
While we expect production growth to slow, elevated production levels and fall refinery maintenance should 30
405060
result in storage levels increasing yet again in the fall
WTI lf t li ht t d il ($/bbl) S S T i & M k tli k i li fl ( illi BPD)
01020
J F M A M J J A S O N D
5 Year Range 2015 Average 2014
WTI versus gulf coast light sweet crude oil ($/bbl) Seaway, Seaway Twin, & Marketlink pipeline flows (million BPD)
10
15 MarketLink Tariff (Light)LLS/WTISeaway Tariff (Light)Houston Light Sweet vs. WTI 1.0
1.3
1.5 2015 2015 2014
0
5
0.3
0.5
0.8
Page 15
-5D-13 M-14 J-14 S-14 D-14 M-15
0.0J F M A M J J A S O N D
Source: Macquarie Capital (USA), Bloomberg, EIA, Platts, Genscape, June 2015
Refinery runs will help storage levelsRefinery runs may hit as high as 17 million BPD this summer, which will help slow the pace of builds
US refinery runs could rise to as much as 17 million BPD during the summer
US refinery runs (million BPD)17 during the summer
Ultra high utilization rates pushing calendar day processing rates to stream day limitations
High refinery runs will mitigate very high crude oil storage levels
15
16
Maintenance levels are expected to be historically low for the balance of 2015
US d il t l l l di SPR ( illi f bbl ) US l d t d ti it ( illi BPD)
13
14
J F M A M J J A S O N D
5 Year Range 2015Average 2014
US crude oil storage levels, excluding SPR (millions of bbls) US planned turnaround activity (million BPD)
450
500
5505 Year Range2015Average2014 1 5
2.0
2.5 5 Year Range Average
2014 2015
350
400
450
0.5
1.0
1.5
Page 16
300J F M A M J J A S O N D
0.0J F M A M J J A S O N D
Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
Crude oil differentials are very tight, howeverTight differentials suggest waterborne imports should pick up in the near term
Bakken crude oil prices, relative to Brent, have strengthened significantly since the end of the first quarter
Brent vs. Bakken crude oil differential ($/bbl)25
R il C t t USEC Current levels are below the required spread to cover the cost of rail transportation
While a significant portion of crude by rail is on a term basis, we would expect spot barrels railed to the US East Coast to decline10
15
20Rail Costs to USEC
Coast to decline With lower Bakken to East Coast rail deliveries,
waterborne imports should pick up High storage levels could mitigate this effect, however
PADD I d il I t ( illi BPD)
0
5
D-13 M-14 J-14 S-14 D-14 M-15
PADD I d il t l l ( illi b l )
16
18
20 5 Year Range2015Average2014
1.5
2.0
PADD I crude oil Imports (million BPD) PADD I crude oil storage levels (million barrels)
10
12
142014
0.5
1.0
5 Year Range Average
Page 17
8J F M A M J J A S O N D
0.0J F M A M J J A S O N D
5 Year Range Average2014 2015
Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
Weak western African differentials supports imports
4
Oversupply of light sweet in Atlantic Basin weighing on high quality light crude oil
Bonny Light’s differential to Brent has narrowed considerably due to an inability of Nigeria clear its
Bonny Light differential to Dated Brent ($/bbl)
2
3loadings schedules
In spite of weak WAF differentials and tight Bakken differentials, imports of Western African crude oil remain historically low
Imports are expected to remain low in the near term only
0
1
D-12 M-13 J-13 S-13 D-13 M-14 J-14 S-14 D-14 M-15
Imports are expected to remain low in the near term – only three vessels have been fixed to sail to the US East Coast refining center, totaling only 50 thousand barrels
U S weekly imports of West African crude oil (million BPD) PADD II to PADD I crude movements by rail (thousand BPD)U.S weekly imports of West African crude oil (million BPD)
1.5
2.05 Year Range 2015Average 2014
PADD II to PADD I crude movements by rail (thousand BPD)
300
400
500 5 Year Range 20155 Year Average 2014
0.5
1.0
100
200
300
Page 18Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
0.0J F M A M J J A S O N D
0J F M A M J J A S O N D
Cushing model suggests storage concerns not over
70
Fall maintenance season and ad valorem taxes should push storage balances higher in the fourth quarter
US refinery runs are expected to hit all time highs this summer during the driving season
Cushing Storage Model (million barrels)
30
40
50
60 High refinery run rates will result in lower storage levels at Cushing, as utilization rates on Cushing to Gulf Coast pipelines increases
The fall maintenance season however, should result in lower flows on these pipelines and therefore result in
0
10
20
J F M A M J J A S O N D
5 Year Range2014Actual
lower flows on these pipelines, and therefore result in more crude oil being left at Cushing
PADD II maintenance is expected to be quite heavy this year, which could weigh on PADD II, and Cushing, balances
Seasonal flows, partly due to ad valorem taxes, should see more crude left in PADD II, rather than in the Gulf Coast
Storage levels could become another concern in the 0.6
0.8
5 Year RangeAverage
PADD II CDU Turnarounds (million BPD)
fourth quarter. While we don’t expect storage levels to breach full capacity, higher storage levels should result in a wider WTI/Brent spread
0.2
0.4
g20142015
Page 19Source: Macquarie Capital (USA), Bloomberg, IIR, EIA, June 2015
0.0J F M A M J J A S O N D
US unconventional oil growth showing signs of slowingHorizontal oil rig count fallen below necessary level to keep production flat
US horizontal oil rigs have fallen below the threshold to keep production flat
US horizontal land oil rigs by play1,200
O We expect production to roll as soon as May; while production has stalled in the weekly reports, we need to see confirmation from the EIA’s Petroleum Supply Monthly Report
We estimate about 600 700 horizontal oil rigs are
1,000
,All Others
Eagle Ford
Bakken
Permian We estimate about 600 – 700 horizontal oil rigs are
necessary to keep production flat Limited evidence of high grading although the Eagle Ford
has seen a smaller reduction in rigs
US l 48 d il d ti kl ti t (MM BPD)600
800
US lower 48 crude oil production, weekly estimates (MM BPD)
8
9
10
200
400
4
5
6
7
5 Year Range 2015 Average 2014
0
200
02/04/11 02/04/12 02/04/13 02/04/14 02/04/15
Page 20
3J F M A M J J A S O N D
5 Year Range 2015 Average 2014
Source: Macquarie Capital (USA), Bloomberg, EIA, Baker Hughes, June 2015
Production expected to slow and soon US crude oil production may be showing signs of slowing, and is expected to roll over
US major play crude oil production (million BPD)
5
Tight oil plays QoQ forecast production growth
20%
4
5
Denver
Permian
15%
20%
Bakken
P i
3
Permian
Eagle Ford
Bakken
5%
10%
Permian
Eagle Ford
2
0%
5%
0
1
10%
-5%
Page 21Source: Macquarie Capital (USA), IHS, EIA, Baker Hughes, June 2015
0J-10 J-10 J-11 J-11 J-12 J-12 J-13 J-13 J-14 J-14 J-15
-10%M-15 J-15 N-15 M-16 J-16 N-16 M-17 J-17 N-17
Strong labor markets supportive of gasolineUS economic data a headwind, but stumbled recently
US ISM Manufacturing remains above 50, but has fallen from highs earlier in the year
ISM Manufacturing70 from highs earlier in the year
GDP growth also stalled in the first quarter, up 0.2% QoQ In spite of this, the labor market remains very strong, with
the unemployment rate below 6% This means more people are on the road driving,
50
60
This means more people are on the road driving, increasing demand for gasoline
The next step to a sustainable increase in growth is to realize an increase in the labor force participation rate
US U l t R t (%)
30
40
D-05 N-06 O-07 S-08 A-09 J-10 J-11 M-12 A-13 M-14 F-15
US Unemployment Rate (%)
67
68
68
8
10
12
66
66
67
67
2
4
6
8
Unemployment RateFOMC LR
Page 22Source: Macquarie Capital (USA), Bloomberg, BLS, ISM, June 2015
650D-05 N-06 O-07 S-08 A-09 J-10 J-11 M-12 A-13 M-14 F-15
Labor Force Participation Rate
Vehicle miles travels confirms strong labor market
9.6
US demand responding to price
Gasoline demand in March rose 370 thousand BPD, YoY Persistently cold weather last year however
Gasoline consumption (million BPD)
8.4
8.8
9.2
Persistently cold weather last year however VMT corroborates strong gasoline demand Compared with the five year average, gasoline
demand was still up by 355 thousand BPD Diesel demand fell from +350 thousand BPD YoY to +8
7.6
8.0
J F M A M J J A S O N D
5 Year Range Average
2014 2015
Diesel demand fell from +350 thousand BPD YoY to +8 thousand BPD in March, partly due the 2014 cold winter
Compared to the five year average, demand was up 170 thousand BPD
V hi l il t ll d (billi f il ) Di l ti ( illi BPD)
250260270280Vehicle miles travelled (billions of miles) Diesel consumption (million BPD)
4.3
4.8
5 Year Range 2015
Average 2014
210220230240250
5 Year Range 20153.8
Page 23
200210
J F M A M J J A S O N D
Average 2014
Source: Macquarie Capital (USA), Bloomberg, EIA, June 2015
3.3J F M A M J J A S O N D
Offshore projects even more at risk than US shaleGlobal offshore breakevens versus reserves and FID Year (1965-2014)
Dak
even
US
DB
rea
71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Page 24Source: Macquarie Capital (USA), Bloomberg, IHS, June 2015
197
197
197
197
197
198
198
198
198
198
199
199
199
199
199
200
200
200
200
200
201
201
ETF flows a negative technical factorIn spite of outflows, oil-based ETFs have received $3.1B of inflows year to date
Accounting for leverage and direction (long/short), these funds resulted in about $4 1 billion of net new derivative
Crude oil ETF weighted contract equivalents65
200 Brent Contract Equivalents funds resulted in about $4.1 billion of net new derivative length, but is about half of its height in mid March
This equates to ~85 thousand of net contract equivalent length in the market
Long crude oil ETFs have received $2.2B of outflows
act E
quiv
alen
ts
50
55
60
100
150
200WTI Contract EquivalentsWTI Prices, RHS
since the end of March however Recent outflows mitigate the negative technical factor,
although speculators recently increased longs
S l t ETF d WTI d il f WTI d il i t t (f t d ti )
Con
tra
40
45
0
50
J-15 F-15 M-15 A-15 M-15 J-15
14.2%
25.3%15.9%
36.6%
18.7%20%
40% 2QTD
Select ETF and WTI crude oil performance WTI crude oil open interest (futures and options)
3.0
3.520%
25%Speculative Length, % of OITotal Open Interest
-1.4%-10.9%
-2.9%11.6%
-20%
0%
1.5
2.0
2.5
5%
10%
15%
Page 25
-31.3%-40%USO UCO OIL UWTI WTI Spot
1.00%D-05 D-06 D-07 D-08 D-09 D-10 D-11 D-12 D-13 D-14
Source: Macquarie Capital (USA), Bloomberg, Company reports, CFTC, June 2015
Reducing our long-term normalized price
12014040120
We estimate F&D costs have fallen to the mid-$20s, accommodating a $85/bbl Brent price
Crude oil finding and development costs Brent realized price and reinvestment model
100
100
120
Brent
Brent FwdsReinv. Economic Model
30
35110
Global Oil Demand (MM BPD, LHS)
Oil Focused F&D ($/bbl, RHS)
60
80
60
80
100
20
25
90
100
20
4040
60
10
15
70
80
0
20
0
20
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
0
5
60
70
1993 1996 1999 2002 2005 2008 2011 2014 2017E2020E
Page 26
E E E
Source: Macquarie Capital (USA), Macquarie Global Oil S&D Model, June 2015
The new normalCall on America is the new framework with OPEC as a price taker
Reinvestment economics are the most consistent and fundamental way to look at long-term oil prices
Line # Value Unit Flow
1 93 MM BPD Global demand fundamental way to look at long term oil prices We expect F&D costs to decline from highs of $33/bbl to
$24/bbl Largely due to higher production from US tight oil
plays
2 x 1.1% Demand growth
3 1.0 MM BPD Demand growth
4 30 MM BPD OPEC production Also due to growth from Iraq, Saudi Arabia, & Libya
Fair value of oil is ~3.5 times F&D costs
WTI il i ($/bbl) US d ti th (K BPD)
4 30 MM BPD OPEC production
5 x 1% OPEC growth required to keep market share
6 0.32 MM BPD OPEC'S share of demand growth
G f f f
$80
$90
$10010% cost deflation15% cost deflationHistorical cost curve
WTI oil price ($/bbl) versus US production growth (K BPD)0.68 MM BPD Growth leftover for rest of world (ROW)
679 K BPD Growth leftover for rest of world (ROW)
$50
$60
$70What price incentivizes approximately 679 K BPD of non-OPEC production growth
Simplifying assumption: Rest of World is just the US
Page 27
$400 200 400 600 800 1,000 1,200
S p y g assu pt o est o o d s just t e US
Source: Macquarie Capital (USA), Macquarie Global Oil S&D Model, June 2015
Important disclosures:
Recommendation definitions
Macquarie Australia/New Zealand
Volatility index definition*This is calculated from the volatility of historic price
Financial definitions
All "Adjusted" data items have had the followingMacquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark returnUnderperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
y pmovements.
Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.
High stock should be expected to move up or down
All Adjusted data items have had the following adjustments made:
Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expenseExcluded: non recurring items, asset revals, property revals appraisal value uplift preference
Macquarie – Asia/Europe
Outperform – expected return >+10%Neutral – expected return from -10% to +10%Underperform – expected <-10%
Macquarie First South - South Africa
High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.
Medium – stock should be expected to move up or down at least 30-40% in a year.
Low–medium – stock should be expected to move up or down at least 25 30% in a year
property revals, appraisal value uplift, preference dividends & minority interests
EPS = adjusted net profit /efpowa*ROA = adjusted ebit / average total assetsROA Banks/Insurance = adjusted net profit /average total assetsROE = adjusted net profit / average shareholders
Outperform – return > 10% in excess of benchmark returnNeutral – return within 10% of benchmark returnUnderperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark returnNeutral return within 5% of benchmark return
or down at least 25-30% in a year.
Low – stock should be expected to move up or down at least 15-25% in a year.
*Applicable to Australian/NZ stocks only
ROE = adjusted net profit / average shareholders fundsGross cashflow = adjusted net profit + depreciation*equivalent fully paid ordinary weighted average number of shares
All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (InternationalNeutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark returnNeutral – return within 5% of benchmark returnUnderperform – return > 5% below benchmark return
Recommendation – 12 months
Note: Quant recommendations may differ from Fundamental Analyst recommendations
stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions – For quarter ending 31 March 2015
AU/NZ Asia RSA USA CA EUR
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Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients)Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients)Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients)
Company-Specific Disclosures:Vikas Dwivedi invests from time to time in oil and gas commodities and / or related derivative and futures products consistent with published views.Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.
Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd ABN 94 122 169 279 (AFSL No. 318062) (MGL) and its related entities (the Macquarie Group) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
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M i l l t d d th f i l id l itt k t t t di t t i t li t th t fl t i i hi h t t th
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l i ith ti 25 27 d 36 f th Fi i l Ad i A t All Si b d i i t f h d d b M i C it l (E ) Li it d M i C it l M k tcomplying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of research produced by Macquarie Capital (Europe) Limited, Macquarie Capital Markets Canada Ltd, Macquarie First South Securities (Pty) Limited and Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures Act. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving this report directly from M i C it l (USA) I d i hi t ff t t ti i it d ib d h i h ld d ith M i C it l (USA) I I t t di l i f ti di
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Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group
Contact Macquarie Capital (USA) Inc.SALES TRADINGUSEd Bartleson (212) 231 2555Steven Belge (617) 598 2515Steve Brown (212) 231 8067Greg Calvino (212) 231 0902
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( )
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Email [email protected] [email protected]
Kristina Weekley (212) 231 1932
Page 31
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