RBC Capital Markets February 28, 2013
Kurt Hallead (Co-Head of Global Energy Research) (512) 708-6356 [email protected]
February 28, 2013 This report is priced as of market close February 22, 2013 ET. All values in U.S. dollars unless otherwise noted. For Required Conflicts Disclosures, please see page 53. Royal Bank of Canada: Overview and Global Rankings
5th Largest Bank by Market Capitalization in North America
Market Cap Market Cap Assets Asset Senior Debt Rating US$bn (1) Ranking US$bn (2) Ranking Moody’s (3) S&P (3) $187 1 $2,359 1 A2 A
$185 2 $1,423 4 A2 A+
$134 3 $1,865 3 Baa2 A-
$131 4 $2,210 2 Baa2 A-
$91 5 $825 6 Aa3 AA-
$76 6 $811 7 Aa1 AA-
$76 7 $939 5 A3 A-
$70 8 $668 9 Aa2 A+
$47 9 $782 8 Baa1 A-
$41 10 $526 10 Aa3 A+
(1) Market cap as of February 14, 2013 (2) Assets for US Banks as at Q4 2012. Assets for CDN Banks as at Q4 2012, converted into US$ using period-end exchange rate (3) Issuer Rating (which would generally correspond to a senior debt rating). Source: Bloomberg
Kurt Hallead (512) 708-6356 [email protected] 2 Comprehensive Product and Service Offering
Focused Set of Products and Services Targeting a Variety of Global Clients
Global Fixed Income Global Equities & Currencies Global Investment Banking Global Research
•Convertibles • Agencies & Agency MBS • Convertible Debt • 250+ analysts covering over 1,300 • Electronic Trading • Commodities • Corporate Finance equities & corporate credits • Equity Sales & Trading • Credit – High Yield & • Equity Capital Markets •Credit • ETF Trading Investment Grade • Infrastructure Finance • Economics • Institutional Sales & • Debt Capital Markets • Loan & High Yield Capital Markets • Emerging Markets Service • Interest Rate Derivatives • Mergers & Acquisitions •Equity • Institutional Trading • Emerging Markets • Municipal Finance • Fixed Income & Currencies • Options • Financial Products • Private Placements •FX • Program & Options • FX – across 50 currencies • Restructuring • High Yield Trading • Global Sovereign Debt • Syndicated & Leveraged Finance •Rates • Municipal Bonds •Rates • Structured Finance
RBC Capital Markets We provide a range of fixed Our investment banking group RBC Capital Markets’ global consistently ranks as a income & currencies helps clients finance their ongoing research team delivers in-depth leading distributor of North products as well as debt operations, strategic acquisitions, market intelligence and keen insight American equities to capital markets capabilities expansions, and other critical across asset classes, industry institutional investors projects. sectors, operating disciplines, and worldwide We also have a dedicated geographies to support and help full-service commodities We provide capital raising, M&A guide our clients’ investment We have an integrated team and are a significant and underwriting capabilities with strategies team of global equity market maker with the specific product expertise professionals who manage ability to provide clients with With more than 140 publishing and advise on all aspects of liquidity and risk We are a leading North American analysts worldwide, our proprietary the client trading strategy management services M&A advisor with comprehensive research covers 1,300 equities and cross-border capabilities in corporate credits corporate finance
Kurt Hallead (512) 708-6356 [email protected] 3 Global Research: Overview
RBC Capital Markets Global Research leverages a team of collective expertise to provide deep information and insight across asset classes, industry sectors, disciplines and geographies.
Coverage Highlights RBC Capital Markets Global Research Staff1
. Approximately 300 Research professionals across the Global Equity Research (265 Staff) globe with North American core . More than 1,540 stocks under coverage, including U.S. Equity (125 Staff) Global Mining (26 Staff)2 approximately 815 U.S. stocks Canadian Equity (85 Staff) Global Energy (53 Staff)2 . Economic and Strategy commentary published daily Europe/Australia/Israel/South . Technical and quantitative research with customized Global Financials (32 Staff)2 portfolio analysis Africa Equity (55 Staff) . Daily FX insight with forecasts on 17 currencies Strategy – Quantitative and Technical (10 Staff)2 . Credit and Emerging Markets published strategies Fixed Income, Currencies, Emerging Markets, Credit and Economics (58 Staff)
Fixed Income (14 Staff) U.K. Credit (2 Staff)
Economics (14 Staff) Canadian Credit (4 Staff)
Municipals (2 Staff) High Yield (12 Staff) U.S. Investment Grade Credit (3 Global FX Strategy (7 Staff) Staff)
(1) Includes analysts, associates and all support staff as of 2/7/2013. (2) Individuals are included in U.S., Canadian or European/Australian Equity Staff Count based on office location Kurt Hallead (512) 708-6356 [email protected] 4 RBC Capital Markets Global Equity Research
RBC Capital Markets provides comprehensive coverage in every sector around the globe
Coverage by Market Cap RBC Global Equity Coverage
Small Cap # Companies % of Global Equity Sector 28.0% Covered Coverage Large Cap Consumer Discretionary 137 8.9% 38.8%
Consumer Staples 55 3.6%
Energy 293 19.0%
Financials 312 20.2% Mid Cap Health Care 107 6.9% 33.2%
Industrials 193 12.5%
Information Technology 170 11.1% Coverage by Sector
Materials 201 13.0% Utilities Telecom Consumer Telecom Services 20 1.3% Services Discretionary Consumer Materials Utilities 53 3.4% Staples
Multi-Industry 1 0.1% Energy Info Tech OVERALL 1,542 100%
Industrials Large Cap: > $5 Billion USD; Mid Cap: Between $1 Billion and $5 Billion USD; Small Cap: < $1 Billion USD Financials Source: Starmine Thomson Reuters Competitor Coverage – Global. As of 01/31/2013 Healthcare
Kurt Hallead (512) 708-6356 [email protected] 5 Sector Expertise: Global Energy
A global team of professionals providing diverse and in-depth coverage
Experienced . Global Energy includes 26 analysts around the globe and Diverse Select Companies Under Coverage Team of . Nearly 50 Energy research professionals based in major global Analysts energy hubs in North America and Europe
. More than 300 energy stocks under coverage across 9 sub- sectors, including Integrated Oils/Refiners, E&P, Oilfield Services, Utilities, Extensive MLPs and Oil Sands Global . The team provides perspectives on all major energy producing Coverage regions around the world . Companies under coverage represents nearly 25% of RBC’s total equity coverage
E&P 43% Other 4%
Coal 2% Sub Sector Oil Sands 2%
Coverage Integrated Oils 5%
Pipelines & Infrastructure Oilfield Services 7% 16% Utilities & Power MLPs 13% Generation 8%
Kurt Hallead (512) 708-6356 [email protected] 6 RBC Global Energy Research Team
Vancouver Minneapolis Toronto
POWER & PIPELINES, Robert Kwan US E&P Scott Hanold INTEGRATED OIL, Greg Pardy MIDSTREAM Danny Hung JB Jouve SENIOR E&P Carson Tong IPPs Nelson Ng Cory Markling Dillon Culhane Kelsey Roste INVEST. GRADE CREDIT Matt Kolodzie
Edinburgh Calgary INTERNATIONAL E&P Al Stanton CANADIAN E&P Michael Harvey James Hosie Eric Gallie Nathan Piper Shailender Randhawa Victoria McCulloch
OIL SANDS Mark Friesen Sam Roach London OIL SERVICES Dan MacDonald INTEGRATED OILS Peter Hutton Matt Vines Kristine Beese OIL SERVICES Katherine Tonks Austin New York EUROPEAN UTILITIES John Musk OIL SERVICES Kurt Hallead MLPs, MIDSTREAM Elvira Scotto Maurice Choy Justin Sander Ankit Sharma Robbie Pinkard POWER & UTILITIES Shelby Tucker MLPs, MIDSTREAM TJ Schultz Ellen Ngai Melbourne David Askew Insoo Kim OIL & GAS Andy Williams MLPS, UPSTREAM John Ragozzino SP. CHEMICALS Chris Nocella Josh Waudby Peter Knerr Ripapa Ray US E&P Leo Mariani HIGH YIELD Adam Leight INFRASTRUCTURE Paul Johnston Brad Heffern Bob Szuhany Kyle Rhodes Justin Schleifer
Kurt Hallead (512) 708-6356 [email protected] 7 RBC Capital Markets Research Distribution
RBC RESEARCH iPAD APP PUBLICATIONS RBC Capital Markets Global Portfolio Manager’s Summary. A weekly summary of RBC Capital Research is now available on Markets Global Research’s most impactful ideas across all of the product lines. your iPad. Global Directions. The comprehensive, monthly global outlet for Available on the iPad App RBC Capital Markets’ Rates Strategy and Economic Research. GD Store. RBC Insight username consolidates content previously contained in regional weekly reports to offer a macro global outlook as well as regional perspectives. and password required. Total FX. A weekly publication of comprehensive and insightful FX coverage and analysis inclusive of strategy and trade recommendations. Macro Monday Memo. A succinct, weekly publication that highlights RBC INSIGHT the most pressing Macro issues across all products and regions. RBC Insight is RBC Global Research’s premier online destination for in-depth coverage of Equities, Credit, Rates & Currencies, Foreign Exchange, Economics, Emerging Markets and High Yield Research – comprehensive global research through a single website. www.rbcinsight.com
Kurt Hallead (512) 708-6356 [email protected] 8 Global Commodities Coverage
Experienced Teams in Key Commodities Centers Throughout North America and Europe
Calgary - Sales & trading presence Toronto focused on E&P & - Commodities sales team consumer clients focused on consumer clients - Key location for the - Center for Canadian power Canadian energy and trading London utilities sector - Portal to European and Asian energy markets - European markets focused on energy, precious and base metals and futures markets
Cincinnati Houston - Close proximity to the largest utilities in U.S. - Energy center of North America - Houses RBC’s power, carbon, ags, and - Focused team of energy sales coal operations and trading with significant E&P relationships
9Kurt Hallead (512) 708-6356 [email protected] 9 Extensive Commodities Capabilities
Risk Management Solutions Across Various Commodities
Current Trading Capabilities Physical Financial Swaps Options Products
North America, Europe, Asia: WTI, Brent, Dated Brent, JCC and Oil other various grades of crude
North America, Europe, Asia: Distillates (Heating Oil / Diesel / Refined Products Jet), RBOB, Gasoline, Fuel Oil North America (NYMEX/IPE) and basis examples include Natural Gas AECO, TCO, Chicago, Transco, Malin, SoCal, HSC, Dawn, Appalachia, Dominion, Rockies, Waha, Panhandle
North America: All locations including basis, PJM, NEPOOL, Power NYISO, MISO, ERCOT, CAISO
C2 (Ethane), C3 (Propane), C4 (Butane), C5 (Natural NGL * Gasoline), Frac spreads
Carbon emissions: European (EUAs/CERs), North American Emissions (California, CRT, RGGI) and other various offsets
North America, Europe, South Africa: Capp (Nymex), CSX Rail, Coal PRB, API 2 and API 4
North America, Europe: Aluminum, Copper, Zinc, Nickel, Lead, Metals Gold, Silver, Platinum Group Metals, Uranium
Ags / Soft Corn, Wheat, Soybean Oil, Soybean Meal, Canola, Barley, * Cotton, Sugar, Lean Hogs, Cocoa, Coffee, Feeder Cattle, Live Commodities Cattle
* Full capabilities in progress Kurt Hallead (512) 708-6356 [email protected] 10 The Big Picture
Kurt Hallead (512) 708-6356 [email protected] 11 World overview
New t frontier a g d in e n e Steady n u Sp OFS ll R u F Growth
w r Demand e e ti U-shaped N n Growing o recovery fr but at a reduced rate? Lumpy Still recovering
N ew fr on ti er A c c e le New ra t io frontier n DW gas ?
Pausing for breath ? g in im T
Source: RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 12 Macro Assumptions
2013 and 2014 Estimates Roughly Flat Oil Prices in 2013 2012 2013E 2014E • A flat oil environment should continue to be Crude Oil (WTI) $94 $91 $96 supportive of most oil-directed drilling activity in the Brent $112 $106 $105 US and internationally. Natural Gas $2.75 $3.75 $4.50 NGLs (Belvieu) $46 $45 $45 Natural Gas to Remain Sub $4 Rig Counts • We don’t see a meaningful pick-up in US natural gas US Land 1,871 1,784 1,890 activity in this environment. Oil 1,335 1,360 1,440 Gas 536 424 450 US Land Rig Count Down 5% y/y but Up from Horizontal 1,151 1,146 1,226 Current Levels Offshore 48 60 70 • Rig count should climb modestly throughout the year Canada 352 348 431 from depressed 4Q12 levels, but not expected to hit International 1,243 1,345 1,435 2012 peak. Offshore 305 340 388 Land 938 1,005 1,047
Activity Should Continue to Rise in the Gulf of YoY % Change '12 to '13 '13 to '14 Mexico US Land -5% 6% Oil 2% 6% Canadian Rig Count Roughly Flat y/y Gas -21% 6% Horizontal 0% 7% Steady Growth Internationally Offshore 25% 18% • We are forecasting an 8% rise in int’l rig count in Canada -1% 24% 2013 with offshore up 11% and land rig count up 7%. International 8% 7% Offshore 11% 14% Land 7% 4% Source: Baker Hughes, RBC Capital Markets estimates Kurt Hallead (512) 708-6356 [email protected] 13 Commodity Price Outlook
Crude Oil 2011 2012 2013E 2014E Long Term Brent Posted (US$/bbl) $110.97 $112.02 $106.00 $105.00 $102.00 Brent Differential to WTI (US$/B) -15.96 -17.88 -15.00 -9.00 -7.00 WTI Crude Oil (Cushing, US$/bbl) 95.01 94.14 91.00 96.00 95.00 Edmonton Light Oil Differential to WTI (US$/bbl) -1.32 7.75 8.92 8.96 3.00 Edmonton Light Oil Posting (C$/bbl) 95.22 86.35 82.08 87.04 92.00 Bow River Heavy Oil Differential (C$/bbl) 17.52 12.07 12.65 9.30 17.00 Bow River Differential/Edmonton Par (%) 18% 14% 15% 11% 18% Bow River Heavy Oil Posting (C$/bbl) 77.70 74.28 69.43 77.74 75.00
Natural Gas Henry Hub Natural Gas (US$/mmBtu) $3.99 $2.75 $3.75 $4.50 $5.00 Henry Hub/AECO Basis Differential (US$/mmBtu) 0.33 0.37 0.35 0.50 0.75 AECO C Natural Gas (C$/mcf) 3.62 2.38 3.40 4.00 4.25 Foreign Exchange (US$/C$) 1.01 1.00 1.00 1.00 1.00
NGLs Belvieu Composite Price ($/bbl) $45.71 $44.81 $47.56 $49.01 Belvieu Component Prices ($/gal) Purity Ethane non-LDH $0.40 $0.35 $0.43 $0.46 Propane TET/LDH $1.00 $1.10 $1.22 $1.30 Iso-Butane LDH $1.80 $1.70 $1.70 $1.70 Normal Butane TET/LDH $1.70 $1.55 $1.55 $1.55 Natural Gasoline LDH $2.25 $2.17 $2.15 $2.15
Source: RBC Capital Markets estimates, Bloomberg
Kurt Hallead (512) 708-6356 [email protected] 14 RBC Crude Oil Price Outlook – WTI & Brent
US$/bbl
$125 Brent Forecast
$115
$105
$95
$85
$75 WTI
$65 2010 2011 2012 2013EE 2014
Source: Bloomberg; RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 15 Forward Natural Gas Price Curve Improving Slowly
Back End16 of Natural Gas Forward Curve Starting to Head Back Up Again
14
12
10
8
6 Natural Gas ($/mmbtu) Gas Natural
4
2
0
5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 -0 -1 -1 -1 -1 -1 -1 -1 -1 -2 -2 -2 g g g g g g g g g g g g Aug-0 Aug-0 Aug-0 Aug-0 Au Aug-1 Au Aug-1 Au Au Au Au Au Au Au Au Au Au
Actual 30-Jun-08 31-Dec-10 12-Feb-13
Source: SNL Financial; RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 16 Crude, Nat Gas, NGL and LNG Trends
Kurt Hallead (512) 708-6356 [email protected] 17 2013 Crude Outlook – Setting the Stage
. 2013 – Global Oil Market Relatively Well
Balanced millions of bbl/d 2011 2012E 2013E 2014E
Sluggish Oil Demand Growth Global Demand 88.9 89.7 90.5 91.6 Limited OPEC-11 Spare Capacity (3.3 % Change 1.0% 0.9% 0.9% 1.2% million bbl/d) mbd/change 0.8 0.8 0.8 1.1 Supply . US Light Oil Production Growth a Game Non-OPEC 52.8 53.3 54.0 55.1 Changer % Change 0.3% 0.9% 1.5% 2.0% mbd/change 0.1 0.5 0.8 1.1 Structural Wedge between WTI & Brent OPEC-11 27.2 28.5 27.8 27.7 Spurred US Refined Product Exports OPEC (incl NGL) 35.7 37.7 37.3 37.5 % Change 3.0% 5.6% -0.9% 0.5% . Crude Oil Differentials → Mixed Bag mbd/change 1.0 2.0 (0.3) 0.2
WTI-Brent: Narrowing to US$8-$10/bbl in Global Supply 88.4 90.9 91.3 92.6 2H-2013 % Change 1.4% 2.8% 0.5% 1.4% mbd/change 1.2 2.5 0.4 1.3 Canadian Light-WTI: Widening until Mid- 2014 Estimated OPEC-11 Spare Capacity 4.3 3.9 4.5 5.1 Usable OPEC-11 Spare Capacity 3.9 2.8 3.3 3.8 Canadian Heavy Oil Prices: Brighter Days Usable Spare Capacity as a % of Global Supply 4.4% 3.1% 3.6% 4.1% Ahead Average Brent Price (US$/bbl) $110.97 $112.02 $106.00 $105.00
Average WTI Price (US$/bbl) $95.01 $94.14 $91.00 $96.00
Source: IEA; RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 18 OPEC Spare Capacity
OPEC Spare Capacity as a % of Oil Demand 25% $120
20% $100
$80 15% $60 10% $40
5% $20
0% $0 1971 1976 1981 1986 1991 1996 2001 2006 2011
OPEC Spare Capacity as a % of Oil Demand Oil Prices - WTI, Full Year Avg
Source: IEA; RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 19 Unconventional Oil Resuscitating US Growth 2,750,000 70%
2,500,000 60% 2,250,000
2,000,000 50%
1,750,000 Onshore Lower-48 % of
40% 1,500,000
bbls/d 1,250,000 30%
1,000,000
20% 750,000
500,000 10%
250,000
0 0% Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Permian (all formations) Williston (all formations) Eagleford % of On Shore Lower 48
Source: RBC Capital Markets, IHS, EIA Kurt Hallead (512) 708-6356 [email protected] 20 Cushing (Crude Oil) Inventory Levels
mmbbl 50
45
40
35
30
25
20
15
10
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: EIA, The U.S. Department of Energy started reporting Cushing inventories in 2004
Kurt Hallead (512) 708-6356 [email protected] 21 Saudi Arabia: Production Volumes
Saudi Arabia Production est Short-term surge, not sustainable capacity – is
this time different ? 10500
10000
9500
9000
8500 kbd
8000 Drilling focus 7500 on gas 7000
6500
6000
Lowest drilling on oil since 2004 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11
Saudi Aramco Well Data Saudi Aramco Well Data Drilling focus on gas 140 500 10 12 450 9 120 10 400 8 100 350 7 8 300 6 80 250 5 6 60 200 4 No of newNo wells of 150 newNo wells of 4 Oil Production mbd Production Oil 3 40 mbd Production Oil 100 2 20 2 50 1 0 0 0 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2003 2004 2005 2006 2007 2008 2009 2010 2011 Oil wells Oil Production Gas wells Gas production
Source: Bloomberg, Saudi Aramco Annual Reviews Kurt Hallead (512) 708-6356 [email protected] 22 Global Oil Review: We Believe Saudi Capacity Is Still Constrained
Saudi Aramco Estimated Production by main Fields
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ghawar 5.00 5.00 5.00 5.00 5.00 4.85 4.70 4.56 4.43 4.29 Adjusted to get to target
Abqaiq 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Extra Light Shaybah 0.50 0.50 0.50 0.50 0.50 0.70 0.75 0.75 0.75 0.75 +250 by end 08
Qatif 0.00 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Abu Safah 0.00 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30
light Haradho Expansi0.00 0.00 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 Jan 06 - Aramco review 06
light Khursaniyah 0.00 0.00 0.00 0.00 0.20 0.50 0.50 0.50 0.50 0.50 +300 June, to 500 November light Khurais 0.00 0.00 0.00 0.00 0.00 0.20 0.80 1.20 1.20 1.20
Super Light Nuayim 0.00 0.00 0.00 0.00 0.00 0.10 0.10 0.10 0.10 0.10 +100 by end 08 ("Dec" AR06)
Safinayah 0.50 0.48 0.45 0.43 0.41 0.39 0.37 0.35 0.33 0.32
Zuluf 0.50 0.48 0.45 0.43 0.41 0.39 0.37 0.35 0.33 0.32
Berri 0.40 0.38 0.36 0.34 0.33 0.31 0.29 0.28 0.27 0.25
Marjan 0.30 0.29 0.27 0.26 0.24 0.23 0.22 0.21 0.20 0.19
Hawtah trend 0.20 0.19 0.18 0.17 0.16 0.15 0.15 0.14 0.13 0.13
heavy Manifa 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.45 0.9mbd, postponed from 07 to 11 then to 2013, now accelerated ?
Neutral Zone 0.30 0.29 0.27 0.26 0.24 0.23 0.22 0.21 0.20 0.19 Other 2.50 2.38 2.26 2.14 2.04 1.93 1.84 1.75 1.66 1.58
Total 10.60 11.17 11.24 11.03 11.03 11.49 11.81 11.90 11.59 11.76 Target 12.5mbd in 2012
Source: RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 23 Canadian Oil Sands Production Outlook: 2006-2020E
million bbl/d 5.0
4.5
4.0
3.5
3.0
2.5 Synthetic Crude Oil 2.0 Bitumen + Other 1.5
1.0
0.5
0.0
2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
Bitumen Synthetic Crude Oil Note: Bitumen includes conventional heavy oil
Source: Alberta government, Company reports, RBC Capital Markets Estimates
Kurt Hallead (512) 708-6356 [email protected] 24 Heavy Oil Differentials – Forecast to Narrow in 2013
• Heavy oil differentials have widened over the past two months and the WTI-WCS spread is now at ~$30 (WTI-WCS), due
to increasing Canadian oil sands Western Canada Select versus WTI production, refinery outages in PADD II, $120 and unexpected pipeline outages $100
(Keystone pipeline was shut down for ~5 $80
days in mid October). $60 C$/bbl $40 • We expect differentials to remain wide for $20 1H13 but narrow longer term when $- infrastructure moves into place in the
back end of the year, better integrating Jul-12 Sep-12 Apr-12 Jun-12 Jan-12 Aug-12 Feb-12 Oct-12 Nov-12 Mar-12 Dec-11 May-12 Canadian heavy oil production with the WTI - WCS Differential West Texas Intermediate U.S. Gulf Coast. Western Canada Select
Source: Bloomberg • These infrastructure projects including PADD II refinery expansions (Marathon and Whiting), Seaway expansion (Cushing to PADD III), and the start-up of several rail loading facilities in the North Dakota Bakken.
Kurt Hallead (512) 708-6356 [email protected] 2525 Natural Gas Macro Outlook
EIA Weekly Gas Storage Stocks (Bcf) Near Term 4,000 . Oversupply Concerns Persist: Storage still 3,500 tracking above 5 year average 3,000
. Seeing a Production Response: EIA data 2,500
showed a production response for three months 2,000 (June – August) followed by a 0.6% increase in September onshore production. 1,500 Long Term 1,000 J FMAMJ J ASOND 5-Yr Max 5-Yr Min 2011 . Structural trends drive long-term growth in 2012 5-Yr Avg 2010 natural gas demand from the industrial, power generation and, potentially, transportation fuel sectors. RBC Natural Gas Price Deck ($/MMBtu) 2008A 2009A 2010A 2011A 2012A 2013E 2014E . The RBC price deck sees long-term equilibrium Q1 $9.12 $7.69 $6.86 $5.39 $3.58 $3.50 $4.50 prices of $4-$5/Mcf over the next 3-5 years Q2 $10.39 $7.85 $6.45 $5.43 $3.36 $3.75 $4.50 based on shale play economics / marginal cost Q3 $9.62 $7.50 $5.91 $5.09 $3.49 $4.00 $4.50 of supply and and global LNG capacity. Q4 $8.39 $7.40 $5.58 $4.41 $3.74 $4.50 $4.75 $9.38 $7.61 $6.19 $5.08 $3.55 $3.75 $4.50 . The US could become an exporter of LNG over FY Current $3.19 the next several years. The recently released
DOE study on the impact of LNG exports to the Source: Bloomberg, EIA and RBC Capital Markets estimates US economy is generally supportive of non-FTA permitting of LNG liquefaction.
Kurt Hallead (512) 708-6356 [email protected] 26 NG Supply: Shale Gas Growth Continued in 2011 but Moderated in Late 2012
30 40% . In the Barnett and the Fayetteville, acreage-capture drilling has been successful as significant acreage is now HBP which has Bcf/d initiated a modest deceleration to production growth. 35% . High growth in the Marcellus has continued with production now likely above 7 Bcf/d, driven by advantaged well economics. 25 Midstream build-out will be crucial to maintaining the pace of growth in 2H12 and into 2013. 30% . Haynesville rig count has declined by 85-90% since its peak in 2Q10 and the backlog of wells to be completed is at normalized 20 levels. Equipment has been shifted to liquids plays. Steep 25% production growth should start in 4Q12 as the backlog of wells awaiting completion is worked through and curtailed production is all brought back online. 15 20% . At $4.50 in 2014, production growth in Haynesville and
8.0Fayetteville start up again.
7.0 15% Haynesville 6.0 10 Barnett Marcellus
5.0 10%
4.0 5 3.0
Production (Bcf/d) Production Fayetteville 5%
2.0
1.0 0 0% 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 0.0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Production Year
Haynesville-Bossier Fayetteville Barnett Marcellus Barnett Fayetteville Haynesville Marcellus % of Total
Source: RBC Capital Markets & Company reports Kurt Hallead (512) 708-6356 [email protected] 27 NGLs (Ethane) Macro Trends
. Ethane prices have rolled over to multi-year lows reaching $0.23/gallon at Mont Belvieu as ethane Mont Belvieu Ethane Frac Spread ($/gal) storage inventories remain elevated. $0.80
Current Spread:$0.03 . Ethane is uneconomic to process after including $0.60 transportation and fractionation (T&F) costs. Producers $0.40 in the Rockies, Mid-con, and Permian are rejecting
ethane (likely at ~100 - 150Mb/d). $0.20
Ave Spread:$0.23 . Typical seasonal slowdown at US ethylene plants with $0.00 nameplate operating rates down to ~90% from mid- ($0.20) 90% range throughout most of 2012. Jul-11 Ju l-09 Jan-03 Apr-04 Apr-06 Apr-08 Mar-12 Mar-10 Nov-12 Nov-10 . Declining propane prices due to mild weather and Sep-03 Dec-04 Aug-05 Dec-06 Aug-07 Nov-08 higher ethylene co-product values (propylene, butadiene, etc.) has made propane the most preferred feedstock (could drive switching at the margin).
. Ethane prices likely to remain weak near-term and rejection should continue at higher rates. RBC Ethane Price Deck ($/gallon) 2008A 2009A 2010A 2011A 2012A 2013E 2014E Q1 $1.02 $0.35 $0.73 $0.66 $0.56 $0.39 $0.42 Q2 $1.05 $0.43 $0.55 $0.78 $0.40 $0.39 $0.42 Q3 $1.10 $0.47 $0.47 $0.78 $0.34 $0.40 $0.42 Q4 $0.42 $0.66 $0.63 $0.85 $0.29 $0.42 $0.42 FY $0.90 $0.48 $0.59 $0.77 $0.41 $0.40 $0.42 Current $0.23 Source: Bloomberg and RBC Capital Markets estimates Kurt Hallead (512) 708-6356 [email protected] 28 NGLs (Propane) Macro Trends
. Propane prices have fallen to $0.82/gallon at Mont Weekly US Propane Inventories Belvieu after reaching $1.00/gallon in mid-October. 75,000
65,000 . Concern over a second mild or non-winter have exacerbated record propane inventories. 55,000 45,000 . The US National Oceanic and Atmospheric 35,000 Administration expects 2012 to surpass 1998 as the warmest year on record according to its monthly 25,000 climate report. 15,000 JFMAMJJASOND 5-Yr Max 5-Yr Min 2011 2012 . Propane Exports: Enterprise propane export project 5-Yr Avg 2010 has been slightly delayed to early 2013. Enterprise and Targa increasing export capacity by ~170 Mb/d in 2013.
. Propane and heavier NGL components still offer uplift to E&Ps compared to natural gas price. RBC Propane Price Deck ($/gallon) 2008A 2009A 2010A 2011A 2012A 2013E 2014E Q1 $1.47 $0.68 $1.24 $1.39 $1.26 $1.06 $1.25 Q2 $1.70 $0.73 $1.09 $1.50 $0.97 $1.12 $1.30 Q3 $1.69 $0.86 $1.08 $1.54 $0.89 $1.18 $1.30 Q4 $0.81 $1.09 $1.26 $1.44 $0.89 $1.20 $1.30 FY $1.42 $0.84 $1.17 $1.47 $1.00 $1.14 $1.29 Current $0.83 Source: Bloomberg, EIA and RBC Capital Markets estimates Kurt Hallead (512) 708-6356 [email protected] 29 Oil Services
Kurt Hallead (512) 708-6356 [email protected] 30 Flat Oil Price Outlook Implies Flat OSX on a Year-to-Year Basis
OSX Performance Linked to Oil Prices. With a flat oil price outlook, we believe subsector positioning and a focus on stocks with company-specific catalysts will be important to driving outperformance in 2013.
400 OSX Correlation to WTI, Brent Prices
r2 = 0.82 150
350
130
300
110
250 90
200 70
150 50
100 30 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
OSX (left) WTI - spot and forward curve, $/bbl (right) Brent - spot and forward curve, $/bbl (right)
Source: Bloomberg, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 31 Transition to Oil and Horizontal Rig Activity
US Land Rig Count
1600
1400
1200 Now 77% Oil Directed
1000
800
600
400
200
0 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
Oil Land Gas Land US Land Rig Count
1600
1400
1200
1000 Now 61% Drilling Horizontally
800
600
400
200
0 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12
HORZ. Non-Horz Source: Baker Hughes
Kurt Hallead (512) 708-6356 [email protected] 32 Subsector Themes
Subsea - Best Secular Growth. We Like CAM, OII, TEC. Early indications are for an ~25-30% increase in industry subsea project awards to ~$12bn in 2013.
US Land - Cyclical Rebound Possible, use HP to Play the Uplift. Uptick in US activity from 4Q12 levels should begin during 1Q13, though the magnitude remains unknown. AC (Tier 1) pricing is holding firm. Mechanical (Tier 3) rigs should continue to be replaced by AC rigs. The US frac market is ~15-30% under- utilized. Pricing degradation has slowed and will likely base in 1Q13, though any rebound is likely to be tepid.
International - Slow and Steady Growth. SLB Is Our Preferred Name. International E&P spend is expected to increase ~7-10%, with an activity uptick in every major region (LAM, ECA, MEFE).
Canada - Mixed Views on Winter. We Prefer PDS. Activity is expected to be lower year-over-year in 1Q13, which will set the tone for FY13. Drillers are planning for a ~5-10% y/y reduction in 1Q13, while service companies are expecting a ~20-25% decline.
Offshore Drilling - RIG and NE for Company-Specific Stories. Pricing gains are expected to moderate for most asset classes, though UDW rates may see another ~5-10% increase for short contract duration.
Seismic - Positive Industry Fundamentals - PGS Is Our Choice. We expect 2013 demand growth in marine seismic (+15%) to exceed supply growth (+5%), yielding support to pricing. Recent fleet upgrades should further enhance productivity gains.
Kurt Hallead (512) 708-6356 [email protected] 33 Subsea Sector Overview – Secular Growth Continues
. Investment thesis: We have a long-term 16,000
positive view on the subsea space due to the 14,000 2012-15E CapEx CAGR - NAM: +3%, SAM: +43%, NS: +15%, AfMed: +20%, APAC: +38% strong demand for deepwater infrastructure. 12,000
2013E-15E CAGR of 15-20% for SPS 10,000
capex, driven at 75% by Africa, Brazil and $ Mn 8,000
North Sea. 6,000
Resilience in the capex spend as 60% of 4,000
future subsea capex in the hand of 5 super 2,000 majors + PBR, STL. 0 Fleet utilisation for DW/HE should bounce 2009 2010 2011 2012E 2013E 2014E 2015E 2016E back in ’13E, providing a tailwind for margin NAM SAM North Sea Africa/Med. Asia Pacific expansion. 2013-15E CapEx by Region But timing / scope of large WA projects could put ’13E under pressure. Asia Pacific NAM 15% 12% . Potential Catalysts
Contract awards and…contract awards. SAM Tightening in capacity utilization resulting in 24% better contractual terms / improved pricing. Africa/Med. 28% Increasing project complexity which calls for further differentiation between the big-3 North Sea and the rest of the competition. 21%
Source: Quest Offshore, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 34 Subsea Prospects: West Africa Key to the Sector’s Success
Expec ted W inners Operator Project Location Nb of trees Due Status SPS Pipelay
ExxonMobil Hadrian North ph 2 US GOM 16 4Q12 Awarded FTI Shell Malikai Malaysia 16 1Q13 Awarded FTI TEC Petrobras Cernambi Brazil 20 1Q13 Awarded FTI/CAM Technip ExxonMobil Erha North ph2 Nigeria 11 1Q13 Awarded CAM Subsea 7 Statoil Aasta Hansteen Norway 8 1Q13 Awarded AKSO SUBC / TEC BP Block 31 South East Angola 40 4Q13 LOI CAM TEC & SUBC BP Quad 204 West of Shetlands 24 1Q13 Awarded CAM Technip
Total Egina Nigeria 48 1Q13 Pending award FTI Saipem ExxonMobil Julia US GOM 10 1Q13 Bidding FTI Tullow T.E.N Ghana 16 1Q13 Bidding FTI TEC & SUBC Total Moho North Congo 17 1Q13 Bidding AKSO SUBC Petronas Kebabangan Malaysa 12 1Q13 Bidding Petrobras Lula Norte (P-70) Brazil 20 2Q13 Bidding Frame Agreement SPM / TEC/ SUBC Petrobras Lula Alto Brazil 20 2Q13 Bidding Frame Agreement SPM / TEC/ SUBC Total Kaombo (block 32) Angola 64 2Q13 Bidding AKSO SPM & SUBC Total Dalia ph 5 Angola 10 2Q13 Bidding AKSO BP N Alex Ph 1 Egypt 18 2Q13 Bidding Petrobras Carioca (P-69) Brazil 20 2Q13 Bidding Frame Agreement SPM / TEC/ SUBC Petrobras Franco (P-74) Brazil 20 2Q13 Bidding Frame Agreement SPM / TEC/ SUBC Petrobras Franco (P-76) Brazil 20 2Q13 Bidding Frame Agreement SPM / TEC/ SUBC Chevron Rosebank - Lochnagar West of Shetlands 18 3Q13 Bidding GE Enquest Kraken UK 24 3Q13 Bidding BP Plutonio Infills Angola 15 3Q13 Bidding FTI TEC & SUBC Chevron Gendalo Gehem Indonesia 18 3Q13 Bidding FTI/GE BP Mad Dog ph 2 US GOM 33 3Q13 Bidding FTI / CAM TEC ENI Eastern Hub Angola 23 4Q13 Bidding GE SPM
Source: Company reports, FMC, Quest Offshore, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 35 Subsea Equipment – Regional Trends
Subsea tree orders by Quarter – Busy 2013E Orders by Region: AfMed ~1/3 1H13E 200 APAC NAM 13% 17% 150
100
SAM
Nb of subsea trees subsea of Nb 50 AfMED 19% 34% 0
1Q12 2Q12 3Q12 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E North Sea NAM SAM North Sea AfMED APAC 17%
. 2012 tree orders should reach ~410, short of our last forecast of 500 due to delays in Brazil and softening from Australia.
. For 2013, we expect ~520 trees to be awarded. This includes a recovery from Nigeria (assuming PIB is finally passed) but a decline.
. Subsea equipment opportunity is seen about $12bn, 25-30% above 2012 levels.
Source: Quest Offshore, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 36 Offshore Drilling Outlook
. Offshore drilling day rate momentum stabilizing Near-term focus will be on cost control and efficient operations as repricing opportunities for 2013 seem pretty uneventful. UDW / DW assets have the best repricing opportunities, with a 5-10% upside potential from current spot market. Focus on repricing may come back later in 2013 when rigs to be delivered in 2014 will be actively marketed by drillers.
. Potential Catalysts Newbuilds adding optionality in ’14/’15. M&A to drive re-rating of the peer group. Fleet upgrade through the sale of older units (NE, RIG) or through more complex operations (SDRL). More LT commitments (7-10y) are signed increasing the visibility of revenue.
Source: ODS Petrodata, Company reports, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 37 Offshore Drilling Supply / Demand Analysis
Floater Supply / Demand Model Jackup Supply / Demand Model
Total Floater Fleet: Contract Status Total Jackup Fleet: Contract Status Current 2013 2014 Current 2013 2014 < 3000' Midw ater Mat Jackups . ~99% of the UDW fleet is currently Total 102 102 104 Total 47 47 47 Contracted 79 79 81 Contracted 25 25 25 under contract despite the influx of % Contracted 77% 77% 78% % Contracted 53% 53% 53% new rigs. 3000' - 4999' Midw ater Sub 250' Independent Leg Total 25 25 28 Total 72 72 75 Contracted 22 22 25 Contracted 59 59 62 . 73% of NB with delivery in 2013E are % Contracted 88% 88% 89% % Contracted 82% 82% 83% 5000'-7499' Deepw ater 250'-350' Independent Leg contracted, 14% for 2014E; we Total 51 51 53 Total 206 217 218 believe there is sufficient operator Contracted 49 49 51 Contracted 178 179 179 demand to absorb these rigs as they % Contracted 96% 96% 96% % Contracted 86% 82% 82% 7500'+ Ultradeepw ater +350' Independent Leg near delivery date. Total 127 149 171 Total 155 197 217 Contracted 126 142 145 Contracted 146 156 158 % Contracted 99% 95% 85% % Contracted 94% 79% 73% . 94% of the Hi-Spec JU fleet is
Total 305 327 356 Total 480 533 557 currently contracted. Contracted 276 292 302 Contracted 383 394 399 % Contrac ted 90% 89% 85% % Contrac ted 80% 74% 72% . This drops to 73% as 62 new units Newbuild Supply/Demand Floaters Newbuild Supply/Demand Jackups come on line by 2014E. 2013 2013 Deliveries Contracted % Contracted Deliveries Contracted % Contracted 7500'+ 22 16 73% 250'-350' 11 1 9% 2014 +350' 42 10 24% Deliveries Contracted % Contracted 2014 7500'+ 22 3 14% Deliveries Contracted % Contracted 250'-350' 1 0 0% +350' 20 2 10% Rig Demand Needed for 85% Utilization Current 2013 2014 Rig Demand Needed for 90% Utilization < 3000' 8 8 7 Current 2013 2014 3000' - 4999' 1 1 1 Sub 250' 6 6 6 5000'-7499' 0 0 0 250'-350' 7 16 17 7500'+ 0 0 0 +350' 0 21 37 Source: ODS Petrodata, RBC Capital Markets estimates Kurt Hallead (512) 708-6356 [email protected] 38 Floater Market: Day Rates Trend and Optionality
7,500’+ - day rates still growing but at a moderate pace DW day rates on the rise
UDW Dayrates DW Dayrates $500,000 $650,000
$625,000
$600,000 $450,000 $575,000
$550,000
$525,000 $400,000 $500,000
$475,000
$450,000 $350,000 Feb-12 Mar-12 Apr-12 May-12May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-12 Mar-12 Apr-12 May-12May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13
Hi Spec JU Day Rates Standard JU Day Rates
Standard JU Dayrates Hi Spec JU Dayrates $150,000 $200,000 $140,000
$130,000
$175,000 $120,000
$110,000
$100,000 $150,000 $90,000
$80,000 $125,000 $70,000
$60,000
$100,000 $50,000 Feb-12Mar-12 Apr-12 May-12May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-12Mar-12Apr-12May-12May-12Jun-12 Jul-12 Aug-12Sep-12 Oct-12 Nov-12Dec-12Jan-13
Source: ODS Petrodata
Kurt Hallead (512) 708-6356 [email protected] 39 Offshore Pipelay – Utilisation Should Continue to Pick Up into 2014
Offshore Pipelay Demand in km
14,000
12,000
10,000 . Demand in km of pipes should increase by 17% in 2013. 8,000 6,000 . Conversely, supply growth in km ofpipe installed 4,000 2013E/14E seems limited at about 5% p.a. 2,000
0 . This should be supportive of 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E margin expansion for the industry NAM SAM Europe Africa APME as fleet utilisation recovers. Evolution of Offshore Pipelay Fleet 200 . Recovery in fleet utilisation 180 remains however company 160 140 specific (i.e., backlog scheduling). 120 100 . Longer lead times and margin
Nb of Vessels 80 dilution from procurement likely to 60 dampen the magnitude of margin 40 expansion. 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E . Asia Pacific opening up to Pipelay Derrick Pipelay European/US installers as its moves into deeper waters. Source: Company reports, IHS estimates, RBC Capital Markets Estimates
Kurt Hallead (512) 708-6356 [email protected] 40 EPC Opportunities: Middle East Bid Pipeline Looks Healthy
160
140
120 100 EPC contract outlook – overall the 80 picture is relatively good
60
Contract value ($bn) value Contract 40
20
0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12E '13E '14E Awarded Bidding PQ FEED Study
100%
80%
60% Korean yards made a push in 2010- 40% 12. Chinese yards appearing on the bid lists. 20%
0% '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12E Asian Euro/US Other
Source: MEED, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 41 Energy Infrastructure Projects
Kurt Hallead (512) 708-6356 [email protected] 42 US Crude Pipeline & Logistics: Production Drives Infrastructure Demand
IEA Est. US Light Tight Oil Production (Mb/d) . Growing Production and Changing Flow 2010 2011 2012 2013 2014 2015 2016 Patterns: Rapid growth in US and Canadian Williston Basin 270 400 580 730 800 840 880 production and refinery conversions drives long- Barnett 20 20 30 40 50 50 50 term demand for additional infrastructure: Eagle Ford 30 100 140 200 260 340 390 Monterey 10 10 10 20 30 40 50 gathering (pipeline, truck), transportation Niobrara 30 40 60 70 90 100 120 (pipeline, rail and barge) and staging (terminalling Utica 0000105090 and storage). Other Light Tight Oil 20 50 50 80 80 110 120 Total Light Tight Oil 380 620 870 1,140 1,320 1,530 1,700 Other Crude / . US consumes ~19MMbpd of crude oil, of which 5,090 5,040 4,910 4,750 4,630 4,750 4,920 Condensate US produces ~6MMbpd. Total Crude / 5,470 5,660 5,780 5,890 5,950 6,280 6,620 Condensate . Projections indicate US crude oil production could grow by as much as 4MMbpd over the next 5-7 INGAA Est NGL & Oil Pipeline Infrastructure CapEx years. Average 2011-20 2011-35 Annual NGL Pipeline Infrastructure . Expect Sustained Investment in Pipeline Miles of Transmission Mainline (1000s) 10.6 12.5 0.5 Infrastructure as Long-term Solution: INGAA Cost of Transmission Mainline (Billions 2010$) $12.3 $14.5 $0.6 study estimates capital requirements of $41.4 Oil Pipeline Infrastructure Miles of Transmission Mainline (1000s) 13.0 19.3 0.8 billion for oil pipeline infrastructure over the next Cost of Transmission Mainline (Billions 2010$) $19.6 $31.4 $1.3
25 years. Total NGL and Oil Pipeline Infrastructure Miles of Transmission Mainline (1000s) 23.6 31.8 1.3 Cost of Transmission Mainline (Billions 2010$) $31.9 $45.9 $1.8 . Best Positioned for Long-term Pipeline Source: North American Midstream Infrastructrure Through 2035 - A Secure Energy Future (June 28, 2011) Development: EEP, EPD, MMP and PAA given Study prepared for the Interstate Natural Gas Association of America Foundation by ICF International leading existing liquids asset positions. Source: Interstate Natural Gas Association of America (INGAA) and Bloomberg
Kurt Hallead (512) 708-6356 [email protected] 43 North American Liquids Pipelines: Existing and New Projects
Pipeline Projects Helping Canadian Crude Reach New Markets
Source: CAPP
Kurt Hallead (512) 708-6356 [email protected] 44 Oil Sands Projects: Small-to-Big Transition H2/13
Larger-scale project construction presents risk to industry
Our view Capacity Additions Peak in 2016 . Projects to achieve first steam in 2013 include: 900,000 800,000 Capacity Adds Upgrading MEG Christina Lake Phase 2B (35 mbbl/d) 700,000 Capacity Adds Mining 600,000 Capacity Adds Insitu Cenvous Christina Lake Phase E (40 mbbl/d) 500,000 Grizzly Algar Lake Phase 1 (5.7 mbbl/d) 400,000 300,000 bbls/d of capacity Laricina Germain Phase 1 (5 mbbl/d) 200,000 Suncor Firebag Stage 4 (62.5 mbbl/d) 100,000 0 Sunshine West Ells A Phase 1 (5 mbbl/d) 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 . Projects under construction in 2013 include: Source: Company reports and RBC Capital Markets Athabasca Hangingstone Phase 1 (12 mbbl/d) Oil Sands Capital Spending Forecast $40,000 ConocoPhillips Surmont Phase 2 (83 mbbl/d) CAPP Actual Capex $35,000 RBC Unconstrained Estimate North West Upgrading Partners Redwater Upgrader $30,000 CAPP Estimate (77 mbbl/d) ERCB Forecast $25,000
$20,000
. Large-scale project construction in 2013 $mm presents higher risk of decreased labour $15,000 productivity and increased capital costs. $10,000 Smaller-scale phased projects at relatively $5,000 lower risk of cost inflation. $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: CAPP, ERCB and RBC Capital Markets estimates Sources: Company Reports and RBC Capital Markets Estimates
Kurt Hallead (512) 708-6356 [email protected] 45 US Natural Gas Pipeline Projects: Near-term Cautious
Near term Pipeline Additional Capacity (Bcf/d)
50 . $46B of natural gas pipeline expansion capital 44.6 45 1997-2006: 78 Bcf/d (+110Bcf/d of capacity) from 2007-2011 has led to 40 2007-2011: 110 Bcf/d gas on gas competition and flattening of basis 35 differentials. 30 25 22.3 19.9 19.0 20 15.1 . Emerging shale plays (i.e., Marcellus), have altered 14.5 13.8 15 11.2 8.9 8.7 9.0 9.7 10 8.1 regional supply/demand dynamics. Marcellus 6.7 5.8 6.6 6.1 5.5 4.5 remains a bright spot with highly supportive 5 economics. 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 E 2013 E 2014 E 2015 E . Gas on gas competition, flattened basis across the U.S. and changing gas flows has led to Katy - Waha Basis discounting on contract renewals. 2.50 Current 2.00 Ave: 0.25 Ave 1.50 . Re-contracting risk and reduced utilization rates in +1 Stdev Current: -0.01 1.00 -1 Stdev some areas likely to persist in the near term. 0.50 0.00 . Most exposed in the near term: BWP, SEP. (0.50) (1.00) (1.50) (2.00) 4/4/01 5/6/05 3/2/06 4/5/10 1/29/02 9/15/03 7/13/04 1/27/11 8/12/08 6/10/09 11/19/02 11/30/11 10/22/12 12/22/06 10/16/07 Source: EIA, RBC Utilities Team, RBC Capital Markets estimates
Kurt Hallead (512) 708-6356 [email protected] 46 Proposed North American LNG Terminals
Canadian West Coast Projects
Rabaska
Canaport
Cove Point
Cameron LNG / Sabine Pass
Jordan Cove Energy Project Freeport / Lake Charles / Gulf Coast LNG
Sonora Port Esperanza
Energia Costa Azul
Source: Company reports and RBC Capital Markets estimates Kurt Hallead (512) 708-6356 [email protected] 47 Utility Infrastructure Investments
16,000
14,000 12,000 Capital Spending for Transmission 10,000 Has Doubled in 10 Years 8,000
6,000
$ Millions - Real 2009$ 4,000
2,000
-
1999 2000 2001 2202 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E Source: Edison Electric Institute, RBC Capital Markets estimates
State Deadline Mandate State Deadline Mandate Arizona 2025 15% North Dakota* 2015 10.0% California 2020 33% New Hampshire 2025 23.8% Colorado 2020 30% New Jersey 2021 22.5% Connecticut 2020 23% New Mexico 2020 20% District of Columbia 2020 20% Nevada 2025 25% Delaware 2026 25% New York 2015 30% Hawaii 2030 40% Ohio 2025 25% Iowa 105 MW required Oregon 2025 25% Illinois 2025 25% Pennsylvania 2021 18% 30 States Have Passed Renewable Laws Indiana* 2025 10% Rhode Island 2020 16% Kansas 2020 20% South Dakota* 2015 10% Massachusetts 2020 15% Texas 5,880 MW by 2015 Maryland 2022 20% Utah* 2025 20% M aine 2017 10% Virginia* 2025 15% Michigan 2015 10% Vermont* 2017 20% Minnesota 2025 25% Washington 2020 15% Missouri 2021 15% Wisconsin 2015 10% Montana 2015 15% West Virginia* 2025 25% N orth Carolina 2021 12.5% *Goal only Source: Database of State Incentives for Renewables and Efficiency Kurt Hallead (512) 708-6356 [email protected] 48 Chemicals: Beneficiary of Advantaged Natural Gas Liquids
Our View: NGL-based Ethylene Margins Will Continue to Improve
Ethylene Chain Margins: Shifting in favor of Ethylene U.S. Ethane Production vs. Demand
Ethane Margin Ethylene Margin PE Margin U.S. Ethane Production U .S. Ethane Demand 40 30-35 c/lb 2,000 '000 b/d 20-25 c/lb 30 1,500
20 10-15 c/lb 1,000
10 500
0 0 1H'12E 2H'12E 1H'13E 2H'13E 1H'14E Phase 1 Phase 2 Phase 3 1H'12E2H'12E 1H'13E2H'13E1H'14E -10 Ethane Fractionation A dditions U.S.Ethane to ChainPE Margin, c/lb Base Additions 2000-'09 2010-'12E 2013E-'16E+ Recent Max Production
Source: Company reports, IHS Chemical, RBC Capital Markets estimates
• With roughly half of the global ethylene production naphtha-based in regions such as Europe and Asia, these higher cost producers have been the global ethylene price setters, making little margin.
• With the expectation that U.S. natural gas will continue to be relatively advantaged, we expect the NGL-based chain margins to improve along with global operating rates in the next few years.
• NGL-related investments will outpace ethylene production growth, therefore shifting the chain margin in favor of the ethylene producers; similar to what was experienced in mid 2012.
Entering Phase 3: Natural Gas Liquids Become Cheaper, Ethylene Producers Benefit
Kurt Hallead (512) 708-6356 [email protected] 49 Summary
• RBC is a Top 10 Global Investment Bank with a strong global energy presence.
• Our forecast calls for flat oil prices in 2013 with a modest improvement in natural gas.
• NGL markets likely to remain oversupplied.
• International rig count should continue to grow at a slow and steady pace while US rig count should rebound from recent dip.
• Global energy infrastructure build-out should benefit many PESA members.
Kurt Hallead (512) 708-6356 [email protected] 50 Companies Mentioned
Ticker Company Name Rating1 Risk Rating2 CAM Cameron International Corporation TP A 4 OII Oceaneering International, Inc. OP A 3 TEC Technip S.A. OP A HP Helmerich & Payne Inc OPA SLB Schlumberger Limited OP A PDS Precision Drilling Corporation OP AA 4 RIG Transocean Ltd. OP A 5 NE Noble Corporation OPA 3 PGS Petroleum Geo‐Services ASA OP A 6 EEP Enbridge Energy Partners, L.P. SP A 6 EPD Enterprise Products Partners L.P. OP A 7MMP Magellan Midstream Partners, L.P OP A 7 PAA Plains All American Pipeline, L.P. OP A 7 BWP Boardwalk Pipeline Partners, LP SP A 7 SEP Spectra Energy Partners, LP SP A 1 TP = Top Pick; OP = Outperform; SP = Sector Perform; UP = Underperform 2 A = Average Risk; AA = Above Average Risk; S = Speculative Risk 3 Covered by RBC Europe Limited Analyst Katherine Tonks +44 20 7029 0787 [email protected] 4 Covered by RBC Capital Markets, LLC Analyst Justin Sander 512- 708-6386 [email protected] 5 Covered by RBC Capital Markets, LLC Analyst Leo Mariani 512-708-6381 [email protected] 6 Covered by RBC Capital Markets, LLC Analyst TJ Schultz 512-708-6385 [email protected] 7 Covered by RBC Capital Markets, LLC Analyst Elvira Scotto 212-905-5957 [email protected]
Kurt Hallead (512) 708-6356 [email protected] 51 Required Disclosures
Conflicts Disclosures This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses to provide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).
RBC Capital Markets, Equity Research Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY[TP/O] 788 50.48 285 36.17 HOLD[SP] 701 44.91 181 25.82 SELL[U] 72 4.61 9 12.50
Kurt Hallead (512) 708-6356 [email protected] 52 Required Disclosures
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Kurt Hallead (512) 708-6356 [email protected] 53 Disclaimer
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Copyright © RBC Capital Markets, LLC 2013 - Member SIPC Copyright © RBC Dominion Securities Inc. 2013 - Member CIPF Copyright © RBC Europe Limited 2013 Copyright © Royal Bank of Canada 2013 All rights reserved Kurt Hallead (512) 708-6356 [email protected] 54