Energy: U.S. Research

U.S.
Research
Published by Raymond James & Associates
Energy
J. Marshall Adkins, (713) 789-3551, Marshall.Adkins@RaymondJames.com Collin Gerry, (713) 278-5275, Collin.Gerry@RaymondJames.com James M. Rollyson, (713) 278-5254, Jim.Rollyson@RaymondJames.com Aryan Barto, Res. Assoc., (713) 278-5243, Aryan.Barto@RaymondJames.com
June 25, 2012 Industry Brief
Energy: Stat of the Week _______________________________________________________________________________________
Rigging Down; Lowering 2012 & 2013 U.S. Rig Count Forecasts
In todays Stat, we take a deeper look into our new rig count assumptions that drive our proprietary bottom-up production-byplay model. Recall, on April 16, we lowered our 2013 U.S. rig count forecast to a 3% average annual DECLINE (or a 10% beginning-toend-of-year decline in 2013). Following the further reduction in our oil price outlook last week, we now expect average annual onshore rig growth of only 4% in 2012 and a 13% DECLINE in 2013. In fact, we think the looming oil supply problem potentially could be so severe that WTI oil prices must fall far enough to drive the total U.S. onshore rig count down roughly 25% from now until exit 2013. Keep in mind that consensus expectations for 2013 still assume increasing drilling activity y/y. To put this into perspective, last week the total rig count reached 1,966 rigs, and we anticipate by the end of 2013 there will be roughly 1,470 active rigs.
Old vs New Rig Count Forecast

2350 2250 2150 2050
April 16 Forecast Jan 30 Forecast/Current Consensus
1950 1850 1750 1650 1550 1450

Jan 30 Forecast/Current Consensus April 16 Forecast New Forecast
New Forecast
May-12
May-13
Oct-12
Mar-12
Aug-12
Nov-12
Mar-13
Aug-13
Oct-13
Nov-13
Feb-12
Sep-12
Feb-13
Dec-11
Dec-12
Sep-13
Jan-12
Jun-12
Jan-13
Jun-13
Jul-12
Jul-13
Source: Baker Hughes; Raymond James Research
Oil Activity Starts to Slow Now; Tumbles Later We believe the oil rig count needs to drop ~300 rigs from today through exit 2013. Where are the rigs going to drop? On absolute numbers, the largest number of rigs will likely come out of the Big 3 plays (Eagle Ford, Permian, Bakken). However, the more marginal oil plays, particularly the Midcontinent (sans the Mississippi Lime), should represent the largest percentage declines as they tend to be most cost intensive. Looking outside the 14 major basins, we suspect there should be significant decreases as these smaller, more mature reservoirs tend to have the highest breakeven points on average. While we anticipate the rig count beginning to turn over in the summer (read July 2012) as spot rigs start to rig down and as contracts are not renewed, we expect the pace to meaningfully accelerate starting in 2Q13. Overall, we expect the U.S. onshore oil rig count to fall from its current level of 1,421 rigs to roughly 1,100 rigs by the end of 2013. The charts below depict our oil rig count assumptions by basin (right) and total (left).
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Dec-13
Apr-12
Apr-13
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U.S. Research
Oil Rig Count

1500 1400 1300 1200 1100 1000 900 120 100 80 60 40 20 0 -20 -40 -60 -80 -100 Eagle Ford
Source: Baker Hughes; RJ Est.
Oil Rig Growth

2011 2012 2013
Bakken
Permian
Granite Wash
Mississippi Lime
Other
Dry Gas Rig Count Continues to Bleed & Wet Gas Follows Oil Downward Despite the large shift out of gassy plays, there are still ~560 gas directed drilling rigs. Of these we estimate roughly one-third are drilling for dry gas. This component of the rig count has fallen at a dramatic pace with a >40% decrease year to date. Given the over-supplied gas market, we expect these rigs to continue to drift lower, albeit at a slower pace than we have seen thus far. By year-end 2013 we still think the dry gas rig count will fall from its current level of 182 rigs to ~100 rigs. The more important and glaring change is our expectation for decreases in the wet gas rig count. While wet gas has held up better as a result of higher oil prices, it too has taken a licking, but we dont think it will keep on ticking. With crude oil coming down, NGL pricing should follow suit and should fall meaningfully faster as many wet gas plays are more marginally economic when compared to oil. Specifically we expect the wet gas count to fall from 359 rigs active today to roughly 270 rigs by year-end 2013. As illustrated below, the lions share of these rigs are dispersed in some of todays largest plays (Eagle Ford, Marcellus, Utica, Granite Wash, etc.). Overall, we expect the U.S. gas rig count to fall about 190 rigs (or 33%) from current levels.
Gas Rig Counts

600 500 400 300 200 100 0 Wet Gas Dry Gas
Wet Gas Breakdown

June 2012
Granite Wash 14% Cana Woodford 11% Barnett 9% Marcellus 15%
Other 22%
Eagle Ford 21% Permian 8%
What Does Sub-$80 WTI Do For E&P Cash Flows? As you may suspect, our forecasted E&P cash flows will likely be coming down as we see production growth more than offset by significantly lower crude oil and NGL prices. After inserting our new price deck and adjusting for our current production forecasts given the lower rig count, E&P cash flows are expected to decline significantly both this year and in 2013. This is not surprising, however we think the proper way to view this is to look at the expectations for 2014 and 2015. With our long-term oil forecast at a reasonable $80 WTI, we suspect that the increase in production combined with the rebound in oil prices and a recovery in gas prices should leave energy companies well positioned for a 2014 and 2015 recovery. Under our forecasts, 2014 cash flows should rebound to near 2011 levels, while 2015 cash flows should be ~7% higher year over year. As such, our expectations for drilling activity follow as we suspect that the rig count should meaningfully rebound in the second half of 2014 and through 2015.
Raymond James
U.S. Research
E&P Cash Flows Available for Drilling

$150,000 $140,000 $130,000 $120,000 $110,000
+7%
+32%
$100,000 $90,000 $80,000 2010 2011 2012E 2013E 2014E 2015E
-14% -15%
Sources: U.S. Energy Information Administration, Spears and Associates, Inc., RJ Est.
We should note that we fully recognize that looking only at E&P cash flow available for drilling to forecast drilling activity is overly simplistic. Most industry veterans would be quick to tell you that E&P companies habitually outspend cash flow. Conclusion: Our increased negativity is predicated on the belief that significantly rising U.S. oil production in the face of weaker global oil demand growth is on track to drive oil prices lower in 2013. As a result, we believe that U.S. drilling activity must eventually come down in order to rein in supply growth to help balance the market. We now believe that the 2012 rig count will average 1,944 rigs. This is down 4% from our old forecast. Perhaps more importantly, we are now expecting the 2013 rig count will average 1,693 rigs, this is down 13% from our expected 2012 average rig count assumption and down 13% from our prior forecast.
Raymond James
To better illustrate some of our basin-by-basin assumptions:
Permian
520 510 500 490 480 470 460 450 440 430 420
U.S. Research
Marcellus
Decrease of 76 rigs or 15%
150 140 130 120 110 100 90 80 70 60
Source: Baker Hughes; RJ Research
Eagle Ford
280 270 260 250 240 230 220
Haynesville/Bossier
120 110 100 90 80 70 60 50 40 30 20
Bakken
230 220 210 200 190 180 170 160
Granite Wash
90 80 70 60 50 40 30 20
Raymond James
New U.S. Rig Count Forecast
Oil Gas Total Oil
U.S. Research
Q/Q Change
Gas Total Oil
YOY Change
Gas Total
Old U.S. Rig Count Forecast

Oil Gas Total Oil
Vs. Original
Gas Total
FY AVG 2007 2008 2009 2010 2011 2012E 2013E QTR AVG 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E
297 379 278 591 984 1,346 1,257
1,466 1,491 801 943 887 595 436
1,768 1,879 1,089 1,546 1,879 1,944 1,693
28% -27% 113% 67% 37% -7%
2% -46% 18% -6% -33% -27%
6% -42% 42% 22% 3% -13%
FY AVG 2007 2008 2009 2010 2011 2012E 2013E QTR AVG 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12E 2Q12E 3Q12E 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E
297 379 278 591 984 1,392 1,458
1,466 1,491 801 943 887 622 497
1,768 1,879 1,089 1,546 1,879 2,017 1,955
-3% -14%
-4% -12%
-4% -13%
279 196 270 359
-8% Source: Raymond James Estimates, Baker Hughes
450 536 631 725 808 938 1,043 1,130 1,262 1,372 1,386 1,363 1,352 1,306 1,232 1,137
1,053 729 689 738 882 957 977 952 900 880 894 874 722 595 547 518 492 460 414 378
1,344 934 970 1,108 1,345 1,506 1,618 1,688 1,716 1,826 1,944 2,010 1,990 1,972 1,932 1,882 1,844 1,766 1,646 1,515
-30% 38% 33% 25% 19% 18% 15% 11% 16% 11% 8% 12% 9% 1% -2% -1% -3% -6%
-31% -6% 7% 19% 9% 2% -3% -5% -2% 1% -2% -17% -18% -8% -5% -5% -7% -10%
-9%
-30% 4% 14% 21% 12% 7% 4% 2% 6% 6% 3% -1% -1% -2% -3% -2% -4% -7%
-8%
279 196 270 359
61% 174% 133% 102% 79% 75% 65% 56% 56% 46% 33% 21% 7% -5% -11% -17%
-16% 31% 42% 29% 2% -8% -9% -8% -20% -32% -39% -41% -32% -23% -24% -27%
0% 61% 67% 52% 28% 21% 20% 19% 16% 8% -1% -6% -7% -10% -15% -19%
450 536 631 725 808 938 1,043 1,130 1,262 1,370 1,433 1,503 1,503 1,480 1,447 1,401
1,053 729 689 738 882 957 977 952 900 880 894 874 722 598 594 574 549 518 476 446
1,344 934 970 1,108 1,345 1,506 1,618 1,688 1,716 1,826 1,944 2,010 1,990 1,973 2,028 2,078 2,052 1,998 1,923 1,847
0% -3% -9% -10% -12% -15% -19%
0% -8% -10% -10% -11% -13% -15%
0% -5% -9% -10% -12% -14% -18%
Raymond James
U.S. Research
U.S. Rig Count Breakdown

6/22/2012 Total Count U.S. Rig Count By Basin* Permian Eagle Ford Bakken Marcellus Granite Wash Mississippi Lime Cana Woodford Haynesville DJ Basin Barnett Uinta San Joaquin Basin Utica Powder River Basin Pinedale Piceance Basin Fayetteville Arkoma Woodford Other Drill For Oil Dry Gas Wet Gas Thermal Trajectory Horizontal Oil Horizontal Gas Horizontal % Horizontal 1966 518 266 218 101 72 64 55 48 39 39 36 36 21 19 19 17 16 8 374 1421 182 359 4 792 373 1165 59% 6/15/2012 1971 515 261 218 103 73 61 55 51 42 41 36 35 21 19 19 17 18 8 378 1405 191 371 4 774 388 1162 59% W/W (5) 3 5 0 (2) (1) 3 0 (3) (3) (2) 0 1 0 0 0 0 (2) 0 (4) 16 (9) (12) 0 18 (15) 3 0% YTD (41) 63 30 26 -37 1 16 -3 -66 -3 -20 6 4 5 -2 -10 -10 -10 -12 -19 228 (154) (114) (1) 164 (166) (2) 1% YTD % -2% 14% 13% 14% -27% 1% 33% -5% -58% -7% -34% 20% 13% 31% -10% -34% -37% -38% -60% -5% 19% -46% -24% -20% 26% -31% 0% Y/Y 84 95 79 46 -27 -8 30 -2 -91 0 -29 12 7 10 8 -6 -12 -13 -8 -7 418 (180) (152) (2) 330 (246) 84 2% Y/Y % 4% 22% 42% 27% -21% -10% 88% -4% -65% 0% -43% 50% 24% 91% 73% -24% -41% -45% -50% -2% 42% -50% -30% -33% 71% -40% 8%
Source: Baker Hughes, Inc, Raymond James Estimates *Includes all trajectories
Raymond James
Oil Rig Count
1600 1400 1200 1000 800 600 400 1300 1200 1100 1000 900 800 700 600 500
U.S. Research
Horizontal Rig Count
2010
2011
2012
2010
2011
2012
This W eek
Rig Count Percent Change 1421
Last W eek
1405 1.1%
Beginning of Year
1191 19.3%
Last Year
1003 41.7% Price Percent Change
This W eek
1165
Last W eek
1162 0.3%
Beginning of Year
1160 0.4%
Last Year
1081 7.8%
Source: Baker Hughes 6
Source: Baker Hughes
W Gas Rig Count et

600 550 500 325 450 400 350 275 225 175 475 425 375
Dry Gas Rig Count
2010
2011
2012
2010
2011
2012
This W eek
Price Percent Change 359
Last W eek
371 -3.3%
Beginning of Year
473 -24.1%
Last Year
511 -29.8% Price Percent Change
This W eek
182
Last W eek
191 -4.7%
Beginning of Year
338 -46.2%
Last Year
362 -49.7%
Raymond James
U.S. Research
Raymond James Weekly Oilfield Review

For Week Ending:
6/22/2012
12 Month Oil Calendar Strip

Brent
$130.00 $120.00 $110.00 $100.00 $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $2.50 $3.50 $4.50 $5.50 $6.50
12 Month Gas Calendar Strip

Henry Hub
2010
2011
2012
2010
2011
2012
This Week
Price Percent Change $92.15
Last Week
$97.02 -5.0%
Beginning of Year
$111.60 -17.4%
Last Year
$106.06 -13.1% Price Percent Change
This Week
$3.13
Last Beginning Week of Year

$3.02 3.6% $3.38 -7.3%
Last Year
$4.52 -30.8%
Source: Bloomberg
Source: Bloomberg
22-Jun-12 This Week

1. U.S.Rig Activity U.S. Oil U.S. Gas U.S. Miscellaneous U.S. Total U.S. Horizontal U.S. Directional U.S. Offshore U.S. Offshore Gulf of Mexico Fleet Size # Contracted Utilization U.S. Weekly Rig Permits * 2. Canadian Activity Rig Count 3. Stock Prices (6/22/12) 192.7 1,335.0 12,640.8 487.4 364.0 3,006 583 868,861 115 77 67.0% 0 238 1,421 541 4 1,966 1,165 233 48
15-Jun-12 Last Week
24-Jun-11 Last Year
Change From: Last Last Week Year
1,405 562 4 1,971 1,162 233 51 115 76 66.0% 1,337 248
1,003 873 6 1,882 1,081 236 33 122 67 54.9% 1,351 250
1.1% -3.7% -0.3% 0.3% 0.0% -5.9% 0.0% 1.3% 1.5% -100.0% -4.0%
41.7% -38.0% 4.5% 7.8% -1.3% 45.5% -5.7% 14.9% 22.0% -100.0% -4.8%
OSX S&P 500 DJIA S&P 1500 E&P Index Alerian MLP Index 4. Inventories U.S. Gas Storage (Bcf) Canadian Gas Storage (Bcf) Total Petroleum Inventories ('000 bbls)
203.3 1,342.8 12,767.2 507.1 362.2 2,944 575 861,924
248.7 1,268.5 11,934.6 602.1 363.5 2,354 366 887,562
-5.2% -0.6% -1.0% -3.9% 0.5% 2.1% 1.3% 0.8%
-22.5% 5.2% 5.9% -19.1% 0.1% 27.7% 59.2% -2.1%
5. Spot Prices (US$) Oil (W.T.I. Cushing) $79.36 Oil (Brent) $91.33 NGL Composite $0.00 Gas (Henry Hub) $2.50 Residual Fuel Oil (New York) $13.39 Gas (AECO) $1.95 UK Gas (ICE) $8.72 Sources: Bak er Hughes, ODS-Petrodata, API, EIA, Oil * Note: Week ly rig permits reflect a 1 week lag
$84.03 $90.83 $97.55 $105.12 $0.00 $55.09 $2.44 $4.20 $14.38 $16.21 $1.77 $3.92 $8.71 $9.33 Week , Bloomberg
-5.6% -6.4% #DIV/0! 2.3% -6.9% 10.2% 0.1%
-12.6% -13.1% -100.0% -40.4% -17.4% -50.3% -6.4%
Raymond James
U.S. Research
Raymond James Weekly Coal Review

For Week Ending:
6/22/2012
12 Month Big Sandy Barge Prices

$90.00 $17.00
12 Month Powder River Basin 8800 Prices
$75.00
$15.00
$13.00 $60.00 $11.00
$9.00 $45.00 $7.00
$30.00
$5.00
2010
2011
2012
2010
2011
2012
This Week
Price Percent Change $52.00
Last Week
$52.65 -1.2%
Beginning of Year
$67.50 -23.0%
Last Year
$67.25 -22.7% Price Percent Change
This Week
$8.05
Last Beginning Week of Year

$6.90 16.7% $12.00 -32.9%
Last Year
$12.60 -36.1%
Source: Bloomberg
Source: Bloomberg
22-Jun-12 This Week

1. Coal Prices Eastern U.S. CSX 1% Western U.S. Powder River 8800 2. Production Eastern U.S. Western U.S. Total Source: Bloomberg
16-Jun-12 Last Week
25-Jun-11 Last Year
Change From: Last Last Week Year
$52.00 $8.05 9-Jun-12 8,260 9,603 17,863
$52.65 $6.90 2-Jun-12 8,153 10,645 18,798
$67.25 $12.60 12-Jun-11 9,042 11,885 20,927
-1.2% 16.7%
-22.7% -36.1%
1.3% -9.8% -5.0%
-8.6% -19.2% -14.6%
Raymond James
U.S. Research
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Energy: U.S. Research

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U.S.

June 25, 2012 Industry Brief

Energy: Stat of the Week _______________________________________________________________________________________

Old vs New Rig Count Forecast

1950 1850 1750 1650 1550 1450

Source: Baker Hughes; Raymond James Research

Oil Rig Count

Oil Rig Growth

Source: Baker Hughes; RJ Est.

Gas Rig Counts

Wet Gas Breakdown

Granite Wash 14% Cana Woodford 11% Barnett 9% Marcellus 15%

Eagle Ford 21% Permian 8%

Source: Baker Hughes; RJ Est.

Source: Baker Hughes; RJ Est.

E&P Cash Flows Available for Drilling

Decrease of 34 rigs or 33%

Source: Baker Hughes; RJ Research

Source: Baker Hughes; RJ Research

Decrease of 29 rigs or 55%

Source: Baker Hughes; RJ Research

Source: Baker Hughes; RJ Research

Decrease of 43 rigs or 57%

Source: Baker Hughes; RJ Research

Source: Baker Hughes; RJ Research

Old U.S. Rig Count Forecast

297 379 278 591 984 1,346 1,257

1,466 1,491 801 943 887 595 436

1,768 1,879 1,089 1,546 1,879 1,944 1,693

28% -27% 113% 67% 37% -7%

2% -46% 18% -6% -33% -27%

6% -42% 42% 22% 3% -13%

297 379 278 591 984 1,392 1,458

1,466 1,491 801 943 887 622 497

1,768 1,879 1,089 1,546 1,879 2,017 1,955

279 196 270 359

-8% Source: Raymond James Estimates, Baker Hughes

279 196 270 359

0% -3% -9% -10% -12% -15% -19%

0% -8% -10% -10% -11% -13% -15%

0% -5% -9% -10% -12% -14% -18%

U.S. Rig Count Breakdown

Source: Baker Hughes 6

Source: Baker Hughes

W Gas Rig Count et

Dry Gas Rig Count

Source: Baker Hughes

Source: Baker Hughes

Raymond James Weekly Oilfield Review

12 Month Oil Calendar Strip

12 Month Gas Calendar Strip

Last Beginning Week of Year

22-Jun-12 This Week

15-Jun-12 Last Week

24-Jun-11 Last Year

Change From: Last Last Week Year

1,405 562 4 1,971 1,162 233 51 115 76 66.0% 1,337 248

1,003 873 6 1,882 1,081 236 33 122 67 54.9% 1,351 250

203.3 1,342.8 12,767.2 507.1 362.2 2,944 575 861,924

248.7 1,268.5 11,934.6 602.1 363.5 2,354 366 887,562

-5.2% -0.6% -1.0% -3.9% 0.5% 2.1% 1.3% 0.8%

-22.5% 5.2% 5.9% -19.1% 0.1% 27.7% 59.2% -2.1%