Steering Into The StormO&G Economic Outlook

Presented by Joseph Triepke | March 2016

Extreme Downturn, Epic Proportions, No Exaggeration

Sources: BHI, NOV, SLB, ESV, Haynes & Boone, Company Filings, Bloomberg Intelligence, PacWest, Barclays, Our Estimates

• Global 2016 E&P Capex 42% Below 2014

• Last Time The US Rig Count Was This Low, Abe Lincoln was President

• ½ US Frac Fleet Is Being Cannibalized

• 68 Projects Representing 3mmbpd Deferred

• 300,000+ Layoffs (75% OFS/Drilling, 25% E&P)

• 50+ Offshore Drilling Rigs Scrapped Is A Start

• Over 80 Chapter 11s, Chapter 7s Still To Come$0

$200

$400

$600

$800

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016E

E&P

Sp

end

($

Bn

)

E&P Capex Spending Trends

Global E&P Spend

North America

Overbuild, Capitulate, Rinse, Repeat

Source: Bloomberg, BP Statistical Review

$0

$20

$40

$60

$80

$100

$120

$140

$160

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

Industry Lifestyle Adjusted To High Prices

WTI Spot Price

10-yr Avg ($78)

5-yr Avg ($85)

Hypothetical Cyclical Gyration (Supply Driven For Past 5 Decades)

Oil Demand

Industry Capacity

High oil prices encourage overbuilding

Oversupply sends oil prices lower and capacity capitulationfollows

A period of industrialunderinvestment sets up the next commodity upcycle

Peak oil theorists gain traction

Peak oil theoryscoffed

Sales/Employee Trends Shed Light On Resizing Impact

Source: Company Filings, Bloomberg

$0.0

$0.1

$0.2

$0.3

$0.4

$0.5

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

E

Mill

ion

s O

f $

Per

Em

plo

yee

(20

16

$)

Mill

ion

s O

f $

Per

Em

plo

yee

(20

16

$)

IOC, E&P (Left Axis)Oil Service, Drilling, Equipment (Right Axis)

Oil Price Scenario Analysis: Workforce Resizing

Source: Company Filings, Bloomberg, Our Estimates

Hiring In O&G Is Falling To Maintenance Levels

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

0

10

20

30

40

50

60

70

80

90

100

New O&G Job Openings Listed Each Month Are Down About As Much As Oil Prices

O&G Hiring Strength Index

WTI Oil Price

Source: Global Review Of New O&G Job Listings. Note: new job listings indexed to 100 in August 2014.

Big Production Response Coming… Timing Is Tricky

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E

$ T

rilli

on

s

Cumulative Capex During The Shale Decade For 59 NAM Independent E&Ps

- $1 Trillion Spent

- $200 Billion Debt Outstanding

- Lofty Return Expectations Transforming Into Write-Offs

Source: Bloomberg, Company Filings, Wall Street Research, Our Estimates

Russia

Saudi Arabia

Other OPECOther Non-OPEC Production

Deepwater

US Unconventional

Other Non-OPEC High Cost Cost

Production

US Conventional

Global Oil Production By Source

Barrels from >1/4th

world supply are cost disadvantaged

This Is Still The Most Important Chart In O&G

Source: Bloomberg, Baker Hughes

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

2,000

4,000

6,000

8,000

10,000

12,000

2005 2007 2009 2011 2013 2015

US

Oil

Rig

Co

un

t

US

Oil

Pro

du

ctio

n (

'00

0s

bp

d)

US Oil Production US Oil Rig Count

Rig count peaked Sep. 2014, down 75%

Productionpeaked Jun. 2015, down 5%

Oil Won’t Follow The Natural Gas Trajectory

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

10

20

30

40

50

60

70

80

90

Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 Nov-14

US Natural Gas Marketed Production (Bcf/d) US Natural Gas Rig Count

Source: Bloomberg, Baker Hughes

Extreme Volatility Usually Marks End Of Price Discovery

Source: Bloomberg

$0

$20

$40

$60

$80

$100

$120

$140

$160

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Mar-83 Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13

Daily % Change & WTI Price

1986 Crash

GulfWar

SubprimeFinancial

Crisis

2015Crash

AsianFinancial

Crisis

0

20

40

60

80

100

120

May-07 May-09 May-11 May-13 May-15

Oil Fear Index (CBOE Oil VIX)

WTI Rallied 60% In 40 Days… But Remember Spring ‘15

Source: Bloomberg

$0

$20

$40

$60

$80

$100

$120

Jul-

14

Sep

-14

No

v-1

4

Jan

-15

Mar

-15

May

-15

Jul-

15

Sep

-15

No

v-1

5

Jan

-16

Mar

-16

WTI Oil Prices, Beware Of False Rallies

+40%

+60%

Traders Ignoring Storage? This Overhang Weighs Heavy

Source: Bloomberg

250

300

350

400

450

500

550Se

p-8

7

Sep

-89

Sep

-91

Sep

-93

Sep

-95

Sep

-97

Sep

-99

Sep

-01

Sep

-03

Sep

-05

Sep

-07

Sep

-09

Sep

-11

Sep

-13

Sep

-15

Mill

ion

Bar

rels

of

Oil

5-Yr Range 5-Yr Range US Oil Inventory

Downturn Psychology Influences Business Decisions

Feels Normal

Peak Optimism

Shock

Denial

AggressionBargaining

Adjust

Adapt

Acceptance

Peak Pessimism

1Q16

Feels Normal?

2Q14

Depression

2H2014 1H2015 2H2015

The Downturn’sPsychological

Stages

The Evolution Of Industry Conversation

$100 Oil

$35 Oil

Bears Dismissed

Frustration

Fear Sets In

Brief Relief

Emotions Run High

Bulls Dismissed

People Leave

Industry

Layoffs Get Personal

“This Is Temporary”

Vultures Descend

In 2016, Value Buyers ArrivePermian Basin Billboard Offers “Quick Cash For Rigs”

• Value buyers new to the industry are arriving in the US oilpatch from Europe, Asia, NY, and S. America interested in bargain purchases in both E&P and OFS/drilling

• We are also seeing offshore operators and contractors shifting focus to shorter cycle, lower cost onshore development

• Experienced oilfield hands are being sought out by novice O&G investors trying to understand the market

• Setting up a potential buying spree that could supportthe industry

2020 Vision: A Wide Cone Of Uncertainty Prevails

• Analysts are struggling with a wide cone of uncertainty on the future of O&G at this point in the cycle. Every forecast should be taken with a grain of salt at this time.

• Consensus has become skeptical of the recent rally in oil prices and most believe it is too early. Most analysts have joined the lower for longer camp.

• However, consensus also sees the downturn as cyclical and finite. We believe production response clarity will emerge in 2017 that will set the stage for a modest recovery by 2018.

• Industry’s ability to quickly ramp production is being significantly impaired, potentially setting up for large oil price spikes in the 2020s.