Industry Themes and Capital Raising

Will RathvonGlobal Head, Resources & Energy Group

Global Banking and Markets

June 2010London

2

Themes

• Emerging markets aren’t as dependent on developed economies as they used to be

• Who depends on who is unclear today. Trade between emerging economies are

growing twice as fast as global world trade

• Growth is headed south; debt is headed north

• Who’s economic policies are most appropriate?

• How will the trillion dollars of capital needs of the oil sector be financed?

• How has capital raising and financing been impacted?

Capital Raising

4

Sources of financing in Oil & Gas

Equity sources

• Equity capital markets

• Sovereign Wealth Funds

• Financial investors

Debt sources

• Banks (syndicated loans)− Corporate finance− Structured trade finance− Reserve based lending− Project finance

• Debt Capital Market (bonds)

• Export Credit Agencies

5

Equity capital markets backdrop

Lehman’s Chapter 11

insolvency and banking sector deterioration

HSBC rights issue and other jumbo rights issues launched in

order to strengthen balance sheets and banks’ capital ratios

Equity markets recovery and

lowered volatility tempered by the

sovereign debt crisis

50

60

70

80

90

100

110

Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10

S&P 500 FTSE 100 DJ Stoxx 50

Source: Bloomberg rebased to 100

Equity capital markets’capacity has increased

significantly over the past decade

Equity indices have recovered to a large extent

from the lows seen in March 2009

Early 2010 saw a resurgence of confidence in

the market although this has been dampened by the recent European sovereign

debt crisis in May 2010

6

Deal Value ($bn)

Oil & Gas IPO volumes

0

5

10

15

20

35

2005 2006 2007 2008 2009 2010

China EuropeNorth America Other Asian/OceaniaME/Africa/Other Russia & FSU

• Oil & Gas IPO issues dominated by emerging markets players

• Trend of BRICs players to capitalize on surging interest in these economies

• Following peak in 2006, market collapsed in 2009 for Oil & Gas issues

• Petrobras is preparing a US$25bn share issue for July; analysts have estimated that the share offering could reach between US$50-60bn which would make it the largest ever launched IPO

Source: Dealogic(1) YTD from June 2010

1

7Source: Dealogic(1) YTD from June 2010

Oil & Gas DCM volumes

Deal Value ($bn)• Collapse in IPO volumes coincides with

increasing DCM issues

• Market dominated by Majors as investor appetite for risk has reduced

• Recent activity includes Total (US$2.5bn) and Shell (US$2.75bn)

• Record issuance in 2009 as corporatessought to lengthen maturity profile and diversity funding away from the bond market

• 2010 volumes lower due to extent of pre-financing in 2009 – Companies willing to incur cost at carry to

secure certainty of funding in volatile markets

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010

China EuropeNorth America Other Asian/OceaniaME/Africa/Other Russia & FSU

1

8

0

200

400

600

800

1000

1200

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-100

20

40

60

80

100

iTraxx Main iTraxx Crossover VIX

Corporate debt capital markets backdrop

950bps

Significant spread compression

New issue volumes down significantly on 2009

(c. 50%)

But sovereign risk now impacting corporate

spreads

Increasing risk appetite from investors as they

search for yield

Banking Sector CollapseStability and strong corporate

performance

M&A refinancing progresses strongly

Downside risk focus returns lead

by sovereign distress

320bps

Spread (bps) Equity Volatility Pts

9

PIGS and BRIC CDSEven OECD countries under pressure

0

100

200

300

400

500

600

700

800

900

1,000

01/0

1/20

09

01/0

2/20

09

01/0

3/20

09

01/0

4/20

09

01/0

5/20

09

01/0

6/20

09

01/0

7/20

09

01/0

8/20

09

01/0

9/20

09

01/1

0/20

09

01/1

1/20

09

01/1

2/20

09

01/0

1/20

10

01/0

2/20

10

01/0

3/20

10

01/0

4/20

10

01/0

5/20

10

01/0

6/20

10

Portugal Italy Greece Spain Brazil Russia China

Source: Bloomberg

10

Upstream financing

• Pre-export finance (including Contract Pre-payment)

Downstream financing• Warehouse finance (for inventories of exchange traded

commodities)

• Tolling and processing • Receivables finance (for trade and other receivables)

• Funding investment in capital equipment or production assets

• Borrowing Base finance (funding a revolving asset base)

• Development or refurbishment or production facilities (with or without project risk)

• Provision of payment guarantees for sellers of crude oil and refined products

Structured Trade Finance

Structured Trade Finance1. Structured Trade Finance Facilities involve monetization of commercial long term agreements, thereby shifting focus from the “strength” of the borrower to the underlying cash flow and structures to enhance safety of financing

Examples of Structured Trade Financing Products in Oil & Gas

11

Strategies for Success in Raising FinancingReserve Based Lending

Products available at different stages of a field’s life

Equi

tyD

ebt i

nstr

umen

ts

$[50-100] million cash to fund long lead itemsTenor: 12-18 monthsWarrants instead of some upfront fees

Based on discounted NPV of cashflowAdditional value given to remaining portfolioPotential to fund 100% of development costTerminate at completion/ continue corporate facility

Based on discounted NPV of project cashflowsTenor: 7 yearsFreedom to bring in and remove assets every 6 months (at redeterminations)

Letter of Credit backed by NPV / Cash Collateral

Commercial Threshold passed

FDP Approval

Bridge Facility(based on market value multiple of P90 reserves orContingent Resources)

Conversion to Project Finance/Borrowing Base(based on P90 reserves)

Potential to increase Borrowing Base (P50 reserves)

Provisioning for Abandonment

Discovery

Appraisal

Development

Production

Abandonment

12

Export Credit Agencies A key source of Term Debt

• A reliable source of long term financing, reaffirmed during the peak of the financial crisis

• Significant risk capacity

• A deep understanding of the oil and gas sector increasing flexibility of the product offering for major corporates, including framework agreements and ECA wrapped bonds

• Halo effect of ECA involvement in financing

• Highly competitive in pricing versus other sources of finance, and a relatively stable debt source throughout market fluctuations

• Value as a diversification play

BBB- Rated 5 Year CDS vs. estimate of ECA all in Spread

56.044.8

23.827.0

0

20

40

60

2006

2007

2008

2009

Source: Dealogic

All ECA Backed LoansUS$ billions

Source: Bloomberg (18/06/10), ECA website premium calculators, HSBC estimate of all in spread

0100200300400500600700

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10

13

0

100

200

300

2006 2007 2008 2009 2010E 2011E

Equity Bonds Loans Government/Multilateral suppor

The Project Finance market has been a historical provider of funds• A source of structured long term financing

tailored to cash flows of a project (LNG, refining, expansions) for sponsors

• Industry understanding is a key to tailor the financing package to sponsors needs

• Increasing links with ECA and Islamic Financing. Project Bonds are increasing

Largest Project Finance transactions

Source: Infrastructure Journal – Global Infrastructure Finance Review 2009, estimates from HSBC

Global Project Finance VolumesUS$ billions

Source: Factiva, HSBC analysis

Dec 2009

US$14bn

Financing of the US$16.5bn-plus liquefied natural gas project in Papua New Guinea

June 2010

US$14bn

Financing of the 400,000bpd Jubail Refinery in Jubail Industrial City, Saudi Arabia

Ongoing / Oct 2009

>US$1.0bn / US$1.7

Odebrecht Oil & Gas and DelbaFinancing the construction and operation of two dynamically positioned drillships

Industry Themes Impacting Financing

15

Global Oil & Gas trendsOil prices

Source: Brokers’ (details in Appendices), Bloomberg, Wood Mackenzie, CERA

Brent oil price futures/forwards and forecasts (US$/bbl)

Source: Bloomberg

20

40

60

80

100

120

140

2004 2006 2008 2010 2012

Broker high/ low range Historical Brent ICE Brent futures (Jun-10)

Wood Mackenzie (Mar-10) CERA Asian Phoenix (Jun-10) Broker average (Jun-10)

OPEC ‘acceptable’ range

16

Oil & Gas Supply & demand balances

Eurasia

Africa

North America

Europe

Asia Pacific

Net supply regionNet demand region

(15.7)(15.4) (15.6)

3.74.55.0

(10.4) (11.1) (12.0)

2010 2015 2020(4.4)(3.9) (4.1)

19.219.218.414.5 15.1 14.8

2010 2015 2020

(9.4)(7.3) (8.3)

37.634.230.8

23.5 25.9 28.2

2010 2015 2020

Middle East

Latin America

(4.1)(3.3) (3.6)

13.113.211.88.5 9.6 9.0

2010 2015 2020(19.5)(17.5) (18.4)

9.19.78.7

(8.8) (8.7) (10.4)

2010 2015 2020

Net position (mmbpd)

Demand (mmbpd)Production (mmbpd)

(22.0)(21.4) (21.9)

12.111.810.9

(10.5) (10.1) (9.9)

2010 2015 2020

(9.6)(8.2) (8.8)

11.611.110.82.6 2.3 2.0

2010 2015 2020

Rebased to 100

97

99

101

103

105

107

2010 2012 2014 2016

China OECD

The China Factor

17

Offshore development: drilling deeper and deeperHigher cost of development will require capital raising

Source: IFP

Depth (m)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1,852

1,650

1,027

752

540

312

1.709

1997Marlim Sul

1997Mensa

1978Cognac

1989Jolliet

1991Marlim

1994Marlim 4

1999Roncador

Shallow Water:<200-500m of Water Depth (WD)

Deep Offshore:WD = 500m – 1,500

Ultra Deep Offshore:WD = 1,500m – 3,000m

Very Deep Offshore:Next target depth = 3,000m

18

0

100,000

200,000

300,000

400,000

500,000

600,000

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Above 7,500ft Between 5,001-7,500ft Below 3,000ft

Evolution of drilling costs

Average cost of drilling (US$)

19

Development58%

Santos Pre-Salt17%

Exploration13%

International12%

Brazil requires significant capex over next few years

Worldwide Oil & Gas Reserves (bboe) Robust investments from Petrobras

Breakdown of Petrobras’ Business Plan Investments

Total investments of ~US$126bn in E&P through 2014

• Petrobras aims to become one of the five largest integrated energy companies in the world in the short run

• Petrobras’ Strategic Plan for 2010-2014 envisages total investments of US$220 billion

• In the Santos Basin pre-salt layer alone, Petrobrasestimates recoverable Oil & Gas reserves between 9.5 billion and 14 billion boe

100

13

264

138

115

102

99 98 7944 40 36 30 29 27 15 14 12 12 8

Sau

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bya

Kaz

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Nig

eria US

Can

ada

Qat

arC

hina

Ang

ola

Bra

zil

Alg

eria

Mex

ico

Nor

way

E&P60%

RTC25%

G&E7%

Others8%

After pre-salt discoveries~8.0x

Note:(1) Brazil Post Pre-Salt

1

20

Potential impact of unconventional gas

Already affected

Five to 10 years

Not to be ruled out

< five years

> 10 years

Source: Wood Mackenzie’s Unconventional Gas Service; National Petroleum Council; BP Statistical Review of World Energy

37%

47%

17%

8,228 trillion cf

North America

1%

61% 37%

3,448 trillion cf

South America

83%

17%

39,094 trillion cf

Conventional / Unconventional gas split

CBM Tight sands Shale gas

63%17%

20%

6,739 trillion cf

Europe

18%

64%

19%

9,678 trillion cf

Asia

1%

63% 36%

4,467 trillion cf

Middle East and Africa

Independents with unconventional gas assets…

…Majors with access to capital buying into upside

Unconventional

Conventional

21

Macondo Effect – winners / losersWinners

Anyone who needs DW rig capacity – NOCs with deepwater ambitions, Brazil

Players in onshore, unconventional or shallow water plays – good for OFS companies with NOC exposure

Players in offshore inspection or maintenance services

Established equipment suppliers (when the dust settles) – Possibility renewal or replacement of hardware

Oil prices – risk of higher decline rates and delayed or lost new production

LosersIn the near term players in seismic, well services to be impacted as demand falls or shifts

Deepwater drilling in 2011/2012 – lower rates / delayed recovery

Smaller E&P with deepwater ambitions – can they afford it?

Frontier offshore areas – host governments will likely want larger clean-up funds, local “safety” infrastructure

New entrants in drilling or offshore equipment – who will trust them?

22

Impact of six-month moratorium in deepwater drilling

Top 10 deepwater GoM producers in 20111

Source: Wood Mackenzie, FitchRatings report(1) BP figures do not include recently acquired Devon

0

50

100150

200

250

300

350400

450

500

BP

She

ll

Ana

dark

o

BH

P

Che

vron

Exx

onM

obil

Eni

Hes

s

Sta

toil

Mar

atho

nWor

king

inte

rest

pro

duct

ion

(000

' boe

/d)

0

5

10

15

20

25

30

35

40

GoM

as % of Total P

roduction in 2009 (%)

2011 Production Delayed Production (%)

23

Opportunity for other deepwater players?

• Three areas (Brazil, West Africa and Gulf of Mexico) formed the Golden Triangle of deepwater drilling

Deepwater “Golden Triangle”

Newbuild rigs with contracts in deepwater GoM

Selected rigs and companies affected by drilling moratoriumSubseaDrillship1

• GSF Development Driller I• GSF CR Luigs• GSF Development Driller II,

Development Driller III, West Sirius• Discoverer Enterprise

• Discoverer Deep Seas, Discoverer Inspiration, Discoverer clear Leader

• Noble Paul Romano• Ocean Confidence• ENSCO 8501, Noble Clyde Boudreaux• Frontier Driller, Noble Danny Adkins,

Noble Jim Thompson, Deepwater Nautilus

• Maersk Developer• Discoverer Americas

• Ocean Saratoga

• Ocean Voyager

• Noble Lorris Bouzigard

• ENSCO 8500, Noble Amos Runner, Ocean Monarch• Discoverer Spirit

Subsea• ENSCO 8502

• ENSCO 8503

• Noble Jim Day

• Scarabeo 9

Drillship1

• Bully 1

• Deep Ocean Ascension

• Deep Ocean Clarion

• Deepwater Pathfinder

Source: Wood MackenzieNote:(1) Rigs are semi-submersibles unless otherwise noted

Will RathvonGlobal Head, Resources & Energy Group

Global Banking and Markets+44 20 7991 6284

will.rathvon@hsbcib.com

Americas

John Robinsonjohn.m.robinson@us.hsbc.com

+1 212 525 4157Evan Hazell

evan_hazell@hsbc.ca+1 403 693 3700

Middle East

Darren Davisdarren.davis@hsbc.com

+971 44235744Jerome Fileni

jerome.fileni@hsbc.com+971 45093531

Asia

Jonathan Drewjonathandrew@hsbc.com.hk

+852 2841 8162 David Gardner

davidgardner@hsbc.com.hk+852 2841 8133