Oil Drilling in US
Finance & Investment Club
Fall 2012
Senior Analyst: Jeremy Lim
Junior Analysts: SeYoung Kim, Ricardo Garcia, Jacob Rettig,
Kotaro Miyagawa, Kevin Foo, Mel Chandiramani, Xunchao Chen,
Joanna Orlova
Industry Definition - Oil Drilling in the US
 Firms in this industry operate and develop oil field properties in United
States. They may also operate oil wells on their own account.
 Activities include exploration and production of crude petroleum; the mining
and extraction of oil from oil shale and oil sands, sulfur recovery from natural
gas; and recovery of hydrocarbon liquids.
W&T Offshore Inc.
(NYSE: WTI)
Approach Resources Inc.
(NASDAQ: AREX)
Bill Barrett Corp.
(NYSE: BBG)
Breitburn Energy Partners L.P.
(NASDAQ: BBEP)
Vanguard Natural Resources, LLC
(NYSE: VNR)
Sources: IBISWorld, Yahoo Finance
Quicksilver Resources Inc.
(NYSE: KWK)
Northern Oil and Gas, Inc.
(AMEX: NOG)
2
Industry Overview
Industry Revenue ($MM)
Overall
Outlook
Positive
Revenue
$345.9 B
Profit
$159.1 B
Annual
Growth
3.1%
Expected
Growth
3.5%
Exports
$6.2 B
Key
Economic
Drivers
World Price of Oil
GDP growth of China
Yield on 10-year Treasury Notes
Key Trends
Increase in World Supply & Demand for Oil
Growth in China’s Economy
Rising Crude Oil Prices
Shift Toward Domestic Production
Risks
450,000
Forecasted
400,000
40%
30%
350,000
20%
300,000
10%
250,000
0%
200,000
-10%
150,000
-20%
100,000
-30%
50,000
-40%
0
-50%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenue ($MM)
Growth %
Product and Segmentation (2012)
41.6%
58.4%
Price Volatility
High Economy Dependence
Close Scrutiny of Permit Application
Natural Gas
Sources: IBISWorld
Crude Oil
3
Oil Drilling Industry Breakdown – Market Cap. ($BLN)
Breakdown By Market Cap1
Basic Materials
$188,060.4B
(100%)
9.9%
5.6%
13.3%
14.1%
17.5%
Major Integrated Oil & Gas
$96,462.1B
(51.29%)
Oil Drilling
$4266.6B
(2.27%)
1Total
9.0%
WTI
BBEP
BBG
AREX
$1.24 B VNR
$1.31 B NOG
$904.4M KWK
Market Cap. = $7,369,090,000; Sources: Yahoo Finance
9.7%
$843.13 M
$1.63 B
$922.51 M
$519.05 M
4
Oil Drilling Industry Breakdown – TTM Revenue ($BLN)
Oil, Natural Gas & NGLs
Total Natural Gas Equivalent (bcfe)
Sources: Companies 10-K report
Others
5
Oil Drilling Industry Breakdown - Geography
Sources: Companies 10-K report
6
General Business Model
Searching &
Exploration
Production
Sector
Gathering
system
Refinery
Recovery
Transportation
Marketing
Selling &
Distribution
Upstream
Midstream
Downstream
Consumers
Sources: Datamonitor
7
Industry Revenue Generation
Metal Pipe &
Tube
Manufacturin
g
Oil & Gas
Field Services
Exploration
Tertiary
Recovery
Seismic Survey
Secondary
Recovery
Oil Drilling
Primary
Recovery
Recovery
Pump &
Compressor
Manufacturin
g
Supply Side
Sources: Datamonitor, IBISWorld
Gathering
System
8
Trend 1a – Increasing World Supply and Demand for Oil



World oil consumption grew by an estimated
1 million bbl/d2 in 2011
World consumption growth of about 700,000
bbl/d in 2012 and 900,000 bbl/d in 2013
Countries outside the OECD driving global
consumption growth
China’s annual consumption growth
projected to increase from 330,000 bbl/d in
2012 to 430,000 bbl/d in 2013
90
CAGR: 0.9%
88
86
84
82
World Supply
80
78
2007 Q1
CAGR: 1.4%
World Demand
2008 Q1
2009 Q1
2010 Q1
Forecasted
2011 Q1
2012 Q1
2013 Q1
Oil consumption Vs. World GDP
3.0
120
2.5
2.0
115
1.5
1.0
110
0.5
0.0
-0.5
105
2008
2009
2010
2011
2012
2013
-1.0
100
-1.5
-2.0
2 bbl/d
World Supply and Demand of Oil
92
million barrels per day

World supply and demand are increasing
together at CAGR of 0.9% and 1.4%
respectively
y-o-y change, mil barrels per day

= Barrels per day; Sources: US EIA
World GDP (right axis)
Others
United States
Forecasted
China
95
9
Trend 1b – Growth in China’s Emerging Economy


Rapid industrialization in China bolstered
demand for oil and gas
China increases energy demand as they
sustain economic growth
China's oil consumption/World consumption
25%
CAGR: 6.5%
20%
15%
10%


Growing at a CAGR of 6.5% as a proportion of
the world’s consumption and is currently
responsible for 20.2% of global consumption
Natural Gas production more than tripled over
the last decade
5%
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Energy Production (kt of oil equivalent)
2500000
CAGR: 8.6%
2000000

Increase consumption and increase in
production drives prices up
1500000
1000000

Growing portion of OPEC’s output is going to
China
500000
0
2002
Sources: US EIA, World Bank, IEA
2003
2004
2005
2006
2007
2008
2009
10
Trend 2 – Rising Crude Oil Prices
Spot Crude Prices vs. Growth rate
120
50%
40%
USD per barrel
100
30%
20%
80
10%
60
0%
-10%
40
-20%
-30%
20
-40%
0
-50%
2002
2003
2004
2005
2006
Spot Crude Prices



2007
2008
2009
2010
2011
Growth Rate %
Drop of 42% in 2009 was due to the recession and the plummeted demand
Rising prices have positive effect on industry revenue and profit
Expected to grow over 2013 and beyond and remain at historic high
Sources: Platts
11
Trend 3 – Shift Toward Domestic Production
 Oil imports will drop from 10 million to 4 million barrels
a day – significant efforts to improve energy efficiency
in the transport sector
 Faster-than-expected development of hydrocarbon
resources locked in shale and other tight rock
formations have started to be unlocked by new
combination of 2 technologies – hydraulic fracturing
and horizontal drilling
 US need for oil imports from Middle East will fall to
almost 0 in the next decade
 US energy independence could redefine military
alliances, with Asian countries replacing US in
securing shipping lanes from Persian Gulf
 Kevin Book, managing director at Clearview Energy
Partners LLC “Now, we have a different reality – the
age of energy adequacy.”
Sources: IEA, WSJ
 Oil production will peak at 11.1 million
barrels a day in 2020, from 8.1 million
in 2011
12
Risks
Risk 1: Volatile in crude oil prices
 Roller-coaster industry revenue and profit
 Overall growth in industry revenue disguises high revenue volatility
 Ripple effects from tensions throughout Middle East, an influential variable of volatility, remain
threats – government transitions in Tunisia and Egypt
Risk 2: High economy dependency
 Movements in GDP affects revenue and prices of crude oil directly
 Follows a lagging indicator with a correlation coefficient close to 1
 Eg. 2008 Financial Crisis
Risk 3: Close government scrutiny of permit application
 Hampers companies from exploration and production activities
 Environmental and safety issues – oil spills into the ocean and casualties from blow-out and
explosion
 Eg. Explosion of BP’s Deepwater Horizon oil platform in the Gulf of Mexico on April 20, 2010
Sources: WSJ, IEA, IBISWorld
13
Recommendation
Oil Drilling Industry
Key Industry Drivers/Trends
TREND 1a
Increasing World
Supply and
Demand for Oil
TREND 1b
TREND 2
Growth in China’s
Emerging Economy
Rising Crude Oil
Prices
TREND 3
Shift Toward
Domestic
Production
INDUSTRY RATING:
POSITIVE
14
Q&A







Industry Definition
Industry Overview
Market Cap. Breakdown
Companies Revenue Breakdown
Geographical Breakdown
General Business Model
Industry Revenue Generation






Trend 1a – Increasing World Supply
and Demand for Oil
Trend 1b – Growth in China’s
Emerging Economy
Trend 2 – Rising Crude Oil Prices
Trend 3 – Shift Toward Higher
Domestic Production
Risks
Recommendation
15
Conclusion

Profit has increased over the past 5 years due to combination of asset divestiture
and increasing prices and will continue doing so.

Tensions in Middle East and strong growth in emerging countries will place upward
pressure on crude oil prices, benefitting industry revenue

The Obama Administration believes that increased shale gas development will
reduce greenhouse gas emissions.
Risks to Overcome:
• Government’s moratorium on offshore-drilling is unlikely to be long term because of the
strong need for crude oil and tax revenue to address deficit issues.
• Must stay abreast of global influence on price volatility
16
Revenue Breakdown - Portfolio
15.9%
19.1%
5.7%
6.3%
6.7%
2.6%
W&T Offshore Inc
Bill Barrett Corp
Vanguard Natural Resources, LLC
15.5%
Breitburn Energy Partners L.P
Approach Resources Inc.
Northern Oil and Gas, Inc
17