PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford

Upstream Supply Chain Update
DUG Eagle Ford 2012

San Antonio, TX
October 15, 2012

Christopher Robart, Principal
crobart@pacwestcp.com
+1 202 352 7805
PacWest Consulting Partners | 920 Memorial City Dr | Suite 160 | Houston, TX 77024

EAGLE FORD SUPPLY CHAIN UPDATE

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© 2012, All rights reserved, PACWEST CONSULTING PARTNERS, LLC.

If you have any questions regarding these terms of use or the content in the following presentation, please contact:

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Houston, TX 77024
+1 888 983 1110
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Client Confidential © PacWest 2012 | All rights reserved | 2


Contents

1. About PacWest
2. Eagle Ford Supply Chain Constraints
- Hydraulic Fracturing Services
- Proppant
- Guar Gum
- Water
3. Summary



PacWest is a boutique strategy consultancy and market intel firm
specializing in energy, industrial, resources; strength in the oilfield
PacWest Overview & Capabilities

Consulting & Advisory Market Intelligence Products
 Provide strategy consulting and  Offer industry-leading, granular
advisory services to energy, industrial, analysis of the oilfield
and resources clients
 Deep knowledge and strength in the
 Strength in the oilfield supply market pressure pumping / frac market
- Often work with E&Ps or suppliers
across range of industries that  Employ combination of primary
supply products/services to it intelligence + secondary research

 Generally work at C-Level or business  Unique in market: apply strategy
lead level consulting capabilities to turn
research into actionable intelligence

All key staff come from top-tier strategy firms; consulting and market
intelligence capabilities reinforce/inform each other


Forecasts are achieved through a comprehensive methodology focused
on primary intelligence, plus rigorous research, and
Methodology
PacWest employs a multi-pronged approach to deliver market intelligence:
Primary Intelligence Secondary Intelligence FracDB
Insights are based on: Regularly consulted sources  The PacWest FracDB is a
 On-going conversations include: proprietary database that
with PacWest source contains detailed data for
 Market research reports
network of on-the-ground over 26,000 wells frac’ed in
 Company annual reports, the US in 2011/12
field experts
10-Ks, 10-Qs
 In-depth surveys,  The database contains
 Speeches and detailed data for each frac
interviews and
presentations by company including:
conversations with
leadership and other - Operator
operators and suppliers
industry experts - Pressure Pumper
 Industry-leading experts
 Analyst reports from - Well/API number
and technical specialists
leading banks - Frac type, chemicals,
 Other PacWest internal
 Government data TVD, water volume, etc.
databases/models



Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



The Eagle Ford rig count grew by 118% between Dec 2010 and May
2011, placing incredible strain on the oil/gas supply chain
Where Have We Been? Growth in Eagle Ford Rig Count
Eagle Ford Rig Count (Oct-2010 – Oct-2012) Comments
300
■ The Eagle Ford rig count increased from
119 in Dec-2010 to 259 in May-2012,
250
an increase of 118% in less than 18
months
200
■ The increase in rig count strained all
150 parts of the oil/gas supply chain and
Rigs

infrastructure
100
■ Shortages in the following areas have
been particularly high profile:
50
- Frac equipment
0 - Proppant
Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

- Guar gum
- Water

Client Confidential Source: Baker Hughes © PacWest 2012 | All rights reserved | 7


However, the supply chain in the Eagle Ford has finally caught up with
the rig count; constraints are now minimal
Where are We Now? Current State of the Supply Chain in the Eagle Ford
■ Minimal supply chain constraints exist in the Eagle Ford today
- The supply chain has caught up with the rig count, minimizing the vast majority of constraints
■ Frac Services: market for frac services entered an oversupply situation starting in
early 2012, oversupply is expected for the foreseeable future
- Prices for frac services continue to fall as supply enters the market and demand dips
■ Proppant: all types of proppant available in abundance
- Even course sand grades (20/40 and 30/5) that were previously in shortage are now available
in abundance; PacWest estimates that frac sand capacity has increased by 59% since 2010
■ Guar Gum: although prices have been on a roller coaster, no shortages have been
reported in 2012
- Guar gum prices reached $25/kg in May 2012 but have since fallen to $3/kg
- Significantly larger crop of guar seed expected in the 2012 harvest (happening now!), reducing
risk of future shortage
■ Water: still a challenge but both groundwater and surface water widely available
since the drought ended in September 2012
- Sourcing water still poses a risk to drilling & completion schedules but we have received few
reports of delays due to problem sourcing water


Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



A falling US land rig count (-7%) is driving a reduction in demand for
hydraulic fracturing services (-8%) in 2012
US Land: Rig Count vs. Frac Demand
Rig Count vs. Frac Demand (11Q4-13Q4) Comments
2,000
US Land Rig Count
■ With the exception of an increase in
US Land Frac Demand 13Q1, US land rig counts are expected to
1,947
1,950 drop through EOY 2013, causing a fall in
1,923 13.5
frac demand
1,898
■ Frac service intensity is also falling,

Frac Demand (MM HHP)
1,900
13.0 causing incremental reductions in
Rig Count

1,850 1,855 1,850
13.0
1,850 12.9 demand, due to:
1,820 1,825
12.5 - Redeployment of frac capacity to
1,795
1,800 lower-service intensity oil/liquids plays
12.4
12.2
12.2 12.0
- Greater adoption of sliding sleeves
12.1 12.1
1,750 12.0
12.0
completions, reducing time per frac
- Improved efficiency of frac crews,
Forecast
1,700 11.5
11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4
reducing time per frac
Rigs / MM HHP Percent Change (%) - Minor changes in frac design, causing
Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆
incremental reductions in HHP per frac
Rig Count 1,947 1,820 1,795 -7% -1%
- Reduction in frac stages per well in gas
Demand 13 12 12 -8% +1%
plays by some operators
Client Confidential Sources: PacWest analysis; Baker Hughes © PacWest 2012 | All rights reserved | 10


However frac capacity is increasing (+19%) through 2012, leading to a
dramatic fall in capacity utilization (-26%)
US Land: Frac Services Supply vs. Demand vs. Capacity Utilization
Frac Supply, Demand, Utilization (11Q4-13Q4) Comments
18
Frac Demand
110% ■ We forecast a net frac capacity increase
17
Frac Capacity
105% of 19% in 2012, compared to a frac
104% Capacity Utilization
demand decrease of 8%, resulting in a
Frac Horsepower (MM HHP)

16 100%
supply/demand imbalance of 2.6

Frac Capacity Utilization
16.0 16.1
15.8 16.0
15 95%
15.2
15.6 95% million HHP
14.7
14
14.2
90%
■ We forecast that capacity utilization,
13.0 12.9
13 12.4
85% 85% nearly 104% in 11Q4, will crash through
13.0 12.2 12.2 12.1 12.1
12.0
81%
12.0 2012, ending the year at 78%
12 80%

11 78% 78%
76% 75%
■ Frac capacity will continue to increase
76% 75%
Forecast
incrementally in 2013 (+3%), expanding
10 70%
11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4
the supply/demand imbalance to 4
million HHP
MM HHP / Utilization (%) Percent Change (%)
Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆
■ We forecast that capacity utilization will
Demand 13 12 12 -8% +1%
fall incrementally through 2013, closing
Supply 13 16 16 +19% +3%
out the year at 75%
Utilization 104% 78% 75% -26% -2%
Client Confidential Sources: PacWest analysis © PacWest 2012 | All rights reserved | 11


All key US plays are now in a negative frac pricing environment, with an
aggregate price change of -14% forecasted for 2012
US Land: Frac Capacity Utilization vs. Price Index (New Bid / Spot Market)
Aggregate Capacity and Price Index (11Q4-13Q4) Comments
110%
Capacity Utilization
110 ■ Available frac capacity surpassed
105%
104% Price Index
105
demand in 12Q1, and we forecast a
100
rapid drop in capacity utilization of 26%

Pricing Index (New Bid / Spot Market)
100% 102 100 from 11Q4 to 12Q4
95
■ We forecast that aggregate US frac
Frac Capacity Utilization

95% 95
95%
91
pricing will decrease by 14% in 2012
90% 88 90
86 and decrease by an additional 8% in
85%
84
82 85 2013
85% 81
80%
81%
80 ■ Frac pricing in gas plays is expected to
78% 78%
stabilize in late 2012 and early 2013
75% Price Index: 76% 76%
75
75%
11Q3 = 100 Forecast ■ Frac pricing in liquids plays is expected
70% 70
11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 to continue to fall in 2012 and early
Utilization (%) / Change in Price Percent Change (%) 2013, with prices stabilizing in late
Metric 11Q4 12Q4E 13Q4E 2012∆ 2013∆
2013
Utilization 104% 78% 75% -26% -2%
Price Trend +2% -4% -2% -14% -8%
Client Confidential Sources: PacWest analysis © PacWest 2012 | All rights reserved | 12


The Eagle Ford is expected to be in a negative frac pricing environment
throughout 2012
Eagle Ford: Frac Supply vs. Demand vs. Capacity Utilization vs. Price Index
Supply & Demand (MM HHP) Market Trends
3.4 ■ Despite the consistent recent historical
3.1 3.1 3.1
3.2 3.0 3.0 3.1 increases, rig count is expected to fall
2.9
3.0 slightly for the remainder of 2012, with
2.7
2.8
2.8
a similar impact on demand
2.6 2.8 2.8 2.8 2.8
2.7 2.7
2.4
■ An influx of frac capacity has decreased
2.2
2.2
2.4 utilization from 109% in 11Q4 to 98% in
2.0
2.2 Forecast 12Q2, which has been reflected in
11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4
pricing
Utilization & Price Index (New Bid / Spot)
110% 109% 120 ■ Sources report price concessions for
Price Trend: 110 new bids in the range of 10% to 20% in
105% 11Q3 = 100 Price index (11Q3 = 100)
96
106 12Q1 reflected in our model
Capacity Utilization

100
89
100% 82 90
97% 77
75 73 72 71
80 ■ Sources report prices of between
98%
95% 94% 70 $120K and $150K per stage for LG/XL
90% 92%
90%
89% 89% 60 fracs, depending on the service
Utilization
Price Index
90%
Forecast
50
provider
85% 40
11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4
Client Confidential Sources: company documents; field staff interviews; PacWest FracDB / FracFocus.org © PacWest 2012 | All rights reserved | 13


Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



Frac sand is expected to be readily available through 2016 with the only
constraints a direct result of transportation/logistics
Summary of Frac Sand Market Trends
■ Demand growth moderated due to uncertainty about commodity prices
- Frac sand utilization intensity (i.e. sand demand per well) at the US aggregate level has hit a
plateau and is not expected to drive meaningful demand increases
■ Supply is expected to increase by nearly 25% between 2012 and 2013: the market is
expected to be awash in sand by 2013
- Despite falling prices, frac sand economics still appear strong – one source disclosed operating
costs of $22/MT – translating into continued economic incentives to enter the market
- Geological and capital barriers to entry are relatively low, i.e. there is lots of decent sand
available and capital is available for greenfield and brownfield projects
- Recent barrier to entry includes environmental health and safety concerns spurred by silicosis
risks; permitting new sand facilities in or near populated areas is becoming more of a challenge
■ Pricing is expected to decline sharply in the near-term but fall moderately in the
long-term
- Sand suppliers have already discussed a number of contract renegotiations, and indicate they
have made price concessions during these sessions
- Competitive advantages may now center on logistical capabilities



We forecast moderate growth in the near-term but strong long-term
growth in the frac sand market
Frac Sand Supply & Demand Trends

Frac Sand Supply vs. Demand (MM MT) Discussion
100
■ We expect frac sand supply to
Supply 88
90 grow by 25% between 2012
Demand 80
80 74 and 2013
69 79
70 ■ Supply of frac sand is expected
60 55 67 to surpass demand from 2012
47 60 through 2016
50 44 56
52
40 49 ■ Even coarse grades of sand,
heavily constrained in 2010
30 35
and 2011, are widely available
20
in today’s market
10
■ Demand for fine grades is
Forecast
0
expected to increase in
2010 2011 2012 2013 2014 2015 2016
2015/2016, as a result of a gas
Metric Growth (‘12-’16) CAGR (‘12-’16)
Demand 53% 11%
price forecast above $4.50
Supply 60% 13%
Client Confidential Source: PacWest Analysis © PacWest 2012 | All rights reserved | 16


We forecast that average frac sand prices will drop 8% in 2013 but that
price will stabilize through 2016
Frac Sand Pricing Trends (average price: contract + spot)

Frac Sand Mine-Gate Price Outlook ($/MT) Discussion
$90 ■ Prices are expected to decline
over the long-term, but will do
$80 so gradually
■ Key exception will be 2013,
$70 where price will fall much
faster
$60
- Recent analysis suggests a
$59
drop of nearly 8% between
$50 $53 2012 and 2013
$48 $50 $49 $49

$40
■ The supply/demand imbalance
will stabilize after 2013,
Forecast resulting in stable prices as well
$30
2011 2012 2013 2014 2015 2016

Composite 20/40 30/50 40/70
Source: PacWest Analysis


The use of ceramics and resin-coated sand has increased in the Eagle
Ford in 2012
Eagle Ford: Frequency of Proppant Usage
Frequency of Proppant Usage (% of wells) Comments
15%
Use of RCS & ■ The use of both RCS and
13% ceramics increasing!!! ceramics has been on the
rise in early 2012
Frequency of Proppant Usage (% of Wells)

11%
■ The use of ceramics in the
10% 10%
10%
9% 9% Eagle Ford increased
8% 8%
9%
8% dramatically in early 2012
7% 9%
5%
8%
■ Sources in the field validate
6% 5%
the increased usage of
5% 5% 5% 5% RCS/ceramics
3%
4% 4% 4%
4%
4% - They report superior
3% 3%
3%
3% production results
0% 0% 0% 0% 1%
compared to frac sand in
0% 90 and 180 day IP figures

Resin-coated Sand Ceramic
Source: PacWest analysis; PacWest FracDB / FracFocus.org


Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



Constrained supply and increasing demand, exacerbated by hoarding by
Indians and stockpiling by OFS drove price surge
Supply & Demand Drivers
Supply Demand
■ Extremely small 2011 harvest led to ■ Strong oilfield demand increases 2009-2011
seedstock tightness - Continued rig/frac activity increases; shift
- Catastrophic monsoon in 2011 led to from gas- to liquids-driven activity: oil well
extremely low yields and small harvest consumes 2.5x more gum than gas well
■ OFS stockpiling of guar gum. Aggressive
Historic To Early 2012

■ Limited carryover seedstock
- Steady oilfield demand increases since 2009 purchases to build stockpiles and avoid
consumed virtually all of 2010 harvest shortages in March-May 2012

■ Hoarding exacerbated seedstock constraints; - Effectively pulled demand forward,
players across all parts of Indian value chain exacerbating demand increases
engaged in seedstock hoarding ■ OFS direct sourcing
- Increased seedstock constraints and price - Shift in sourcing strategies to direct sourcing
increases in early part of 2011-2012 by many medium sized OFS players
- Some cases of market manipulation, though - Inflationary factor impacting perceived
less important demand
Late 2012

■ Planting expansion in 2012 will increase ■ OFS using previously built up stockpiles;
seedstock supply, though unclear to what purchase demand low and prices declining
extent


Still too early to determine results of harvest; magnitude of planting
increase will determine price, but constraints unlikely
Guar Gum Price Outlook
Guar Gum Price Forecast, FOB India ($/kg) Discussion
$10.0
■ Price has fallen dramatically
from a high of $25/kg in May
$9.0
2012
Scenario 1:
$8.0 Moderate Planting Increase ■ Customers in ‘wait-and-see’
mode, driving down current
$7.0 demand
■ Harvest size still unclear; size
$6.0
of planting increase over
2011 will drive size of
$5.0
harvest
$4.0 ■ Assuming moderate planting
Scenario 2: increase (10-20%), expect
$3.0 Large Planting Increase prices to range $6-7/kg
much of 2013
$2.0 ■ Assuming large increase
(100%), expect prices near
$3 for most of year
Source: PacWest Analysis


Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



There is little pressure for recycle/reuse of frac flowback water due to
wide availability of water and disposal wells
Water Demand for Hydraulic Fracturing in the Eagle Ford
Water Demand for HF in the Eagle Ford Discussion
130 105,000 ■ Disposal is the main method for
Water Required for Hydraulic Fracturing in the Eagle

120 102,434 managing frac flowback given the
110 101,168 abundance of wells
100,000
100 100,488
- Water disposal costs average

Average Water / Well (BBL)
90 $2.30/bbl
96,787
80
Ford (MM BBL)

94,645 95,000 - Regulatory pressure is low,
70
Water Required for HF in EF (MM BBL) supporting disposal solutions
60
50 EF Frac Flowback Water (MM BBL) 90,000 - Flowback volumes are relatively
low (~10%)
40 Avg. Water/Well (BBL)
30 ■ Water stress is driving interest in
85,000
20 treatment/re-use
10 - EF market for water treatment
0 80,000 services is an estimated $70
11Q1

11Q2

11Q3

11Q4

12Q1

12Q2

12Q3

12Q4

13Q1

13Q2

13Q3

13Q4

million
■ The water pre-treatment market is
Year Avg. Water/Well Total EF Water EF Frac Flowback
growing substantially, driven by
2011 99,125 bbl 291 MM bbl 29 MM bbl uptake of biocides and scale-
2012 102,278 bbl 409 MM bbl 41 MM bbl inhibitors
Client Confidential Source: PacWest Analysis; PacWest FracDB / FracFocus.org © PacWest 2012 | All rights reserved | 23


Contents

1. About PacWest
- Proppant
- Guar Gum
- Water
3. Summary



Near-term Eagle Ford supply constraints are minimal, only short-term,
intermittent issues are foreseen until overall US activity ramps up
Eagle Ford Supply Chain Summary

■ The upstream supply chain in the Eagle Ford has finally caught up with the rig count;
constraints are now minimal

■ Minor shortages are expected from time to time in the near-term, due primarily to
problems with planning, logistics, and transportation

■ We don’t expect any major upstream supply chain issues in the Eagle Ford until natural
gas prices return and overall US D&C activity ramps up



Questions & Answers

???

Christopher Robart
Principal, PacWest Consulting Partners
crobart@pacwestcp.com
+1 202 352 7805

PacWest Upstream Oil/Gas Supply Chain Update - Eagle Ford

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