MARCH 2016 SIPES- CHAPTER NEWSLETTER

Aubrey McClendon Oil Price Hits Bottom

Why Booms and Busts Happen Prospect

Wilcox Formation Origin Tim Rynott

$12B War Chest

SIPES-Houston Newsletter | Mar 2016

In This Issue Sipes Houston Chapter Letter From The Editor 1 5535 Memorial Drive Jeff Allen Suite F 654 Houston, Texas 77007 February Luncheon 2 Tim Rynott

Tel: 713-651-1639 Oil Price Bottoms 3 Fax: 713-951-9659 IEA www.sipeshouston.org email: [email protected] Prospect 4

Chapter Officers 2016 Public Relations Chair Why Booms and Busts Happen 6-7 Jeff Lund Zach Beauchamp Chapter Chair (713) 275-1664 James Mertz [email protected] 8 (281) 205-8140 Aubrey McClendon [email protected] Membership Chair(s) Chip Betz Origin of Wilcox Formation 9 Chair Elect (713) 658-8096 x 17 Russell Hamman [email protected] Dr. Don Van Nieuwenhuise (713) 526-7417 [email protected] Newsletter Chair February Luncheon Review 11 Jeff Allen Past Chair (713) 302-5131 Barry Rava Jay Moffitt [email protected] (713) -750-9485 x 104 News From The Board 12 [email protected] Deal Buyers List Chair Barry Rava Bill Smith Secretary (713) 650-3060 Barry Rava [email protected] Houston Unemployment 12 (713) 621-7282 [email protected] Political Affairs Chair Ross Davis Exxon $12B War Chest 13 Treasurer (713) 658-3131 Aleksandra Gjorgievska David Wood rossda- (281) 549-2376x101 [email protected] [email protected] Season Pass 14 Sponsor Coordinator Website Chair Christine Milliner Danny Matranga (562) 881-6326 Saving Rivals Not The Plan 15 (512) 484-6385 [email protected] Collin Eaton [email protected] National Directors Technical Program Chair Ralph Daigle (National Presi- New SIPES Members 16 Michael Steed dent) Chip Betz (281) 404-9490 (281) 292-6859 [email protected] [email protected] Mike Jones Global Oil Freeze? 16 Continuing Education Chair (713) 654-0080 Melvin Backman Bill Bippus [email protected] (281) 364-1881 om bbip- On the cover: [email protected] Office Manager View of the Tungurahua Volcano in Ecuador spewing lava and B. K. Buongiorno ashes March 3, 2014. Hospitality Chair (713) 651-1639

Chris Atherton [email protected] Want to be on the cover? Email Jeff Allen, the editor, at (713) 861-1866 [email protected] [email protected]

1 SIPES-Houston Newsletter | Mar 2016

LETTER FROM THE EDITOR

February was a rollercoaster for the price of oil, dipping down to $26 and then shooting up to $33. The IEA announced the price has hit bot- tom, but many are not sure. Whether it is the bottom or not, some pos- itive signs came up this past month; US production is down, OPEC, Rus- sia and Venezuela seem to have an agreement to freeze production, and spring and summer months usually draw down inventories.

Whether the price begins it’s slow climb or stays bouncing around the bottom, now is the time to set yourself up for success when the price does return. Both SIPES and HGS have seminars on how to adjust and be successful in the independent environment. These seminars have been help in the past with great success. It is vital for an aspiring inde- pendent to attend both of these. For more information please visit HGS.org or SIPESHOUSTON.org.

Let’s March forward, Jeff Allen

IMPORTANT: the Petroleum Club has a new rule concerning food – if you don’t specify your special-needs meal before the luncheon you will be charged an extra $20. We don’t want anyone to be charged extra so please take the time to contact BK for your special meal needs well ahead of time.

2 SIPES-Houston Newsletter | Mar 2016 MARCH SIPES LUNCHEON EVOLUTION AND ECONOMIC IMPLICATIONS FOR U. CRETACEOUS SANDSTONES

TIM RYNOTT

Abstract extending the Upper Cretaceous shelf/slope Recent Upper Cretaceous onshore GOM ac- boundary 30-35 miles basinward from previ- tivity exemplifies re-focused venture capital ous research. towards conventional and semi-conventional opportunities. This trend had started prior to The robust porosity's at these great depths the recent price crash, and conventional oil resulted from the attenuation of quartz over- and gas projects have steadily become more growths when Chlorite was formed after appealing versus unconventional drilling the dissolution of volcanic rock fragments. starting in early 2015. Enhanced sub-salt seis- The resulting high porosity's and extended mic imaging combined with improved com- shelf boundary could potentially add 1000 to pletion techniques in extreme temperature 3000 square miles of new exploration frontier environments, has potentially added trillions in South Louisiana - a very mature basin of cubic feet of new gas reserves to a very which has been a major domestic energy mature basin. source for over 100 years. For example, in early 2015 production started on the Freeport-McMoran (FM O&G) Jeaner- Biography ette #1 in St. Martin Parish, Louisiana. Named Mr. Rynott, founder and owner of Ridge Re- after a historic region of Scotland, sources LLC (Durango, Co), has 33 years of oil “Highlander” encountered over 100 ft of net and gas experience - primarily focused on Cretaceous pay at depths of 24,000-29,000 ft, prospect generation, evaluation, and opera- representing the deepest perforations on tions. During his career he has generated nu- record in Louisiana, plus the first onshore merous discoveries, and has been personally subsalt discovery. The Jeanerette #1 tested investing in oil and gas drilling projects since Date: Thursday, Mar 17th multiple Upper Cretaceous sands at 75 1985. MMCFGD, with future wells expected to pro- Place: Petroleum Club duce greater than 100 MMCFGD. Seismic sug- Prior to Ridge Resources, Mr. Rynott was a 1201 Louisiana St. gests the reservoir could encompass ~25,000 Senior Geologist, and later Geological Manag- Time: Social 11:15 acs, or potentially 4-6 TCF of resource. er, at Red Willow Production stationed near Lunch 11:45 Durango, Colorado. The bulk of Mr. Rynott’s The Highlander success is directly linked to career (25 years) was spent in Lafayette, Luncheon registration deadline the enigmatic 2009 FM O&G Davey Jones La, where he worked for several medium and is Noon, Tuesday Mar 15th well, drilled just offshore in South Marsh Is- small Independents. land Block 230. Louisiana is synonymous with serendipity, and although Davey Jones was Over the past 20 years, Mr. Rynott has served exploring for deep Tertiary (Wilcox) sands,  $30 for Members and Affiliates on the following Boards: AAPG Advisory they found hydrocarbon bearing Upper Creta- Council, AAPG House of Delegates, AAPG As-  $35 for guests and non- ceous sands (Lower Tuscaloosa) below 29,000 sociate Technical Editor, Louisiana Oil and Gas members ft that exhibited anomalous 15-20% porosi- Assoc , Gulf Coast Assoc of Geological Socie-  Additional $5 for walk-ups ties. This deeper revelation lead to the up- basin Highlander triumph, potentially unlock- ties, and Gulf Coast Prospect Expo. He also served as the 2004 GCAGS President-Elect, No-shows will be billed. ing a much larger treasure chest than the Chairman of the 1999 GCAGS Annual Conven- porosity challenged Tertiary targets. Depositionally, these enormous volumes of tion and 2001 Gulf Coast Prospect Expo. Mr Call, fax, or e-mail your reserva- Cretaceous clastics were sourced from the Rynott has multiple publications, plus has tion to the SIPES-Houston Office. erosion of the Ouachita and Appalachian up- provided recent technical presentations for You can sign up online at lifts and funneled into the Gulf of Mexico by www.sipeshouston.org. several Oil and Gas Conferences, including way of the Mississippian Embayment (Woolf AAPG, GCAGS, SIPES, and Emerging Shales 2012). Conventional core data places the Plays USA. newly drilled Highlander discovery in outer neritic paleobathymetric zonation, thereby

3 SIPES-Houston Newsletter | Mar 2016 OIL PRICE HITS BOTTOM; IEA Global oil prices appear to have bottomed out and are ex- pected to rise through this year as investment cuts help to reduce a supply glut, a senior analyst at the International Energy Agency said on Tuesday.

Benchmark Brent crude futures LCOc1 were up 44 cents at $37.01 a barrel at 1304 GMT (06:04 EST), the highest in eight weeks. They hit a more than 12-year low of $27.10 on Jan. 20.

"Oil prices appear to have bottomed out," Neil Atkin- son, the new head of IEA's oil industry and market divi- sion, told a seminar in Oslo. "Prices are expected to grow throughout 2016 and into 2017, reflecting expecta- tions that the market is going back into balance in 2017," he added.

The global oil market was expected to begin rebalancing in 2017 as U.S. output is set to decline under pressure from low oil prices, the Inter- national Energy Agency said on Feb. 22 in its medium-term market outlook. If the U.S. producers were to "remain longer in the game", the market's rebalancing could be pushed back by one year to 2018, Atkinson said. The price rally, however, will be capped in the medium term by a potential increase in the U.S. shale oil production once a rise in oil prices makes it profitable again.

"As soon as oil rises to $40-50 per barrel, it will give a signal to light tight oil producers (to ramp up)," Atkinson said. The IEA ex- pects prices to reach $80 per barrel by 2020, with U.S. oil production reaching a record high of 14.2 million barrels per day by 2021.

Some analysts disagreed with the IEA's outlook on the speed of oil price rebound. "The change is not going to be gradual, but it will be sud- den," Torbjorn Kjus, senior oil analyst at Norway's leading bank DNB. "We think the price will be above $60 per barrel within the next 12 months," he added. DNB analysts estimate that it would take about a year for the U.S. shale oil producers to ramp up output after prices rise to levels that make it profitable again.

4 SIPES-Houston Newsletter | Mar 2016 PROSPECT Are you a member of SIPES? Do you have a prospect to sell? If so, please talk to Jeff Allen, the newsletter editor, to inquire about being published in the newsletter on this page. Below is an example of a current proposal.

70 Square 3D Program

South Texas

Seeking investors that share the understanding now is the time to shoot 3D programs. This op- portunity covers a proven area with a team of geoscientists that have commercial success in the immediate area.

Non-Pipe Shallow Oil Multiple stacked oil sands Record low price for 3D

Contact Jeff Allen 713 302 5131 [email protected]

5 SIPES-Houston Newsletter | Mar 2016 EVENTS March 2016

Sun Mon Tue Wed Thu Fri Sat

1 2 3 4 5

6 7Amber Se- 8 9 10 11 12 crets: Feathers from the Dino- saurs 13 14 15 16 17 18 19 HGS Dinner Deadline For SIPES Crude Oil Ex- SIPES Luncheon port Ban Luncheon Tim Rynott 20 21 HGS Dinner 22 23 24 25 26 Regional Interp Pre-Colombian Across entire Iconography GOM 27 28 29 The Poison 30 31 in Our Food Supply

6 SIPES-Houston Newsletter | Mar 2016

WHY OIL BOOMS AND BUSTS HAPPEN; NAWAR ALSAADI The 1979-1985 oil bull market is what a manipulated market looks like, and this market has no resemblance to the bull market that preceded the current price collapse. Unlike the early 80s price surge, oil prices were not manipulated higher in the early 2000s, but rose due to natural supply and demand forces. In 2005 oil prices averaged $54 per barrel, a near doubling from the $28 per barrel at the start of the decade. 2005 is often mentioned as the official start of the 2000s raging oil bull market that lasted for almost ten years, except for a brief interruption following the financial crisis. Between the years 2000 and 2005 OPEC increased its crude and NGL production by 4 million barrels per day, inching up total production from 30.7 million to 34.8 million barrels, however this was insufficient to meet the over 7 million barrels per day growth in global demand growth during this period, with OPEC excess capacity virtually eliminated, the additional increase in supply had to come from non-OPEC sources.

However, after rising from 46 million bpd to 49 million bpd (all liquids) from 2000 to 2004; non-OPEC supply stalled at around 49 million bpd for 3 years from 2004 to 2006, before finally crossing into the 50 million bpd mark in 2007. The pressure on non-OPEC to increase production could only translate into a sizable increase in prices, which in turn encouraged the industry to significantly in- crease its capex spending.

World supply hits a wall ... U.S. supply to the rescue

Yet, as prices exploded higher and capex spending hit record after record, something curious happened: Non-OPEC all liquids supply (ex-U.S.) ground almost to a halt, after crossing 43.4 million bpd barrels in 2007, non-OPEC (ex-U.S.) all liquids supply increased by a measly 1.5 million bpd over a 7 years period, a period during which demand increased by over 6.6 million bpd.

As a matter of fact, between 2010 and 2014 non-OPEC (ex-U.S.) supply did not grow at all as it averaged around 44.5 million bpd for five years, while demand increased by 4.1 million bpd during this time. OPEC did marginally better than non-OPEC supply (ex-U.S.), OPEC production stagnated at 34.6 million bpd from 2007 to 2010, before increasing to 36.6 million bpd by 2014, or increasing by 2 million bpd from 2007 to 2014 (OPEC did cut supply in late 2008 and 2009 in response to the financial crises). Powered by the shale revolution, U.S. supply was a different story, from 2010 to 2014 U.S. all liquids supply grew by 4.2 million bpd, thus meeting the to- tality of global demand growth in the 5 years preceding the current crisis. Eventually, the strong increase in shale production com- bined with the resumption of growth in OPEC production led to prices collapsing by late 2014.

So very different, so very the same

This brief oil market history illustrates the substantial difference between what transpired in 1979-1985 and what happened be- tween 2005 and 2014. While the 1980s oil bull market was an unquestionably manipulated market that was bound to collapse at some point, the 2000s oil bull market was mostly driven by market fundamentals. The resolution to the last oil bull market was deliv- ered by market forces as high prices unleashed new sources of supply, namely U.S. shale oil. This was different from the 1986 oil price collapse which was triggered by OPEC ceasing its doomed effort to artificially inflate oil prices.

Yet, OPEC hands are not completely clean in this price collapse episode. The oil price collapse of 2014 was compounded in 2015 by the arrival of geopolitically restricted oil from several OPEC countries. Iraq increased its production by 650,000 bpd in 2015. This sup- ply should have been added to the market many years ago, but due to decades of turmoil, this oil only made it to the market last year. Saudi Arabia’s decision to bring in some of its spare capacity to the market (450,000 bpd production increase) last year also added to the oversupply situation that was created by market forces.

Additionally, politically restricted oil from Iran is being intro- duced to the market in 2016, thus yet again contributing to the oversupply. The sizable increase in Iraqi, Saudi and Iranian oil exports to the market in 2015 and 2016 has created (unintentionally or intentionally) the reverse of the OPEC price manipulation episode from 1979 to 1985. This time oil prices are being forced lower by a geopolitical oil supply increase that has little to do with market supply and demand fundamentals; just as OPEC aggressively withdrawing oil supply from the mar- ket in 1979 to 1985 had nothing to do with supply and demand fundamentals. Continued on Page 7 >

7 SIPES-Houston Newsletter | Mar 2016

WHY OIL BOOM AND BUSTS HAPPEN, PT. 2; NAWAR ALSAADI What now?

The surge in shale oil production between 2010 and 2014 was the trigger to this oil crisis, and thus a reduction in non-OPEC supply through a reduction in shale/global oil capex is a proper response to shale’s oversupply. This is how free markets balance them- selves. However, the arrival of the above mentioned geopolitical oil has interfered with the natural balancing mechanism. As oil pric- es overshot to the downside (and stayed low) due to the arrival of the geopolitically constrained non-market sensitive oil, the O&G industry has been forced to under invest in future oil supply as cash flows dried up and financing costs skyrocketed. The extent of under investment in shale has even been more severe with capex cuts averaging double the global average.

The substantial capex-to-supply lag for most of non-OPEC oil and OPEC’s unwillingness to restrict production or gradually ease back the increase in geopolitical supplies has forced an undue burden on shale/tight oil to balance the market on its own. Yet the shale balancing mechanism is far from perfect, shale while relatively fast moving in comparison to other sources of supply, is still a much less efficient balancing tool in comparison to OPEC. This in turn means the market is lacking the proper tools to balance itself in a timely manner in order to avoid a supply crisis down the line, as the ongoing large capex cuts flow to all non-OPEC supply (as well as some OPEC supply) through higher decline rates, and deferred or cancelled greenfield supply projects.

This delayed rebalancing caused a large build up in global inventories; those excess inventories could act as a shock absorber of sorts once supply undershoots, but it remains unclear whether excess inventories alone or in combination with OPEC will be able to com- pensate for an eventual dual collapse of both shale and non-OPEC supply in the context of sustained demand growth.

Conclusion

This oil boom-bust cycle is not a repeat of the 1980s, however the arrival of shale oil to the global oil sce- ne has created a new oil pricing reality. Nonetheless, it is highly unlikely that this new oil reality is any- where close to $30 or $40 a barrel as the futures curve is indicating and many forecasters are fore- casting.

Outside of Iran and Libya, OPEC is producing close to its maximum capacity, with little prospect of a siza- ble increase in supply over the next several years. In essence, OPEC alone is not in a position to compen- sate for shale and non-OPEC declines as well as meet future demand growth. Yet, for shale and non-OPEC to assist OPEC and grow a price in the $60 to $70 range is most likely required to incent the develop- ment of marginal oil reserves.

By 2017 as global demand and supply come into bal- ance, and inventories start to draw oil prices may snap back substantially above the $60-$70 price range as the market transitions from a flood to a drought at some point next year, however once the next price spike period settles down as shale produc- tion catches up to demand once again, prices will likely settle in the $60 to $70 range long term, and remain there until the next noticeable change in de- mand/supply fundamentals or until the arrival of unforeseen geopolitical events.

8 SIPES-Houston Newsletter | Mar 2016 AUBREY MCCLENDON

A public memorial service for Aubrey McClendon will be held at 10 a.m. Monday at Crossings Community Church, 14600 N Portland in .

McClendon, who founded and led Corp. and then American Energy Partners LP, died Wednesday in a car crash in Oklahoma City. McClendon, 56, also was part-owner of the basketball team.

The family requests that, in lieu of flowers, donations be made to The Boys and Girls Clubs of Oklahoma County, or to the charity of your choice. Donations to The Boys and Girls Clubs of Oklahoma County may be sent to P.O. Box 18701, Oklahoma City, OK, 73154, or made at www.bgcokc.org.

9 SIPES-Houston Newsletter | Mar 2016 NEW EVIDENCE ABOUT GOM PAST—ORIGIN OF WILCOX FORMATION The drop in water levels and the warm- ing, known as the Paleocene-Eocene thermal maximum (PETM), occurred around 55.8 million years ago. The Gulf refilled about 850,000 years later.

Geologist Don Van Nieuwenhuise said the study, published in the February edition of Interpretation, explains the distribution of the Wilcox Formation from onshore Texas and Mexico into the deep waters of the Gulf and offers in- sight into the episode of extreme warm- ing more than 55 million years ago, with potential implications for climate change today.

Van Nieuwenhuise, director of profes- sional geoscience programs at the Uni- versity of Houston, is an author of the study, along with lead author Stephen P.J. Cossey, Joseph Davis, Joshua H. Rosenfeld and James Pindell. Cossey, Davis, Rosenfeld and Pindell are independent geologists.

The findings support the theory that the Gulf of Mexico was landlocked as the Paleocene Epoch morphed into the warmer Eocene, punctuated by a massive loss of water due to evaporation and, millennia later, was inundated again.

Van Nieuwenhuise said oil producers long have been puzzled about the Wilcox Formation's appearance in the Gulf's deeper wa- ters, hundreds of miles from where it appears onshore. This new information could mean there are still-undiscovered sections of the formation, also known as the Paleocene/Eocene Chicontepec Formation, he said. But while the research offers a better un- derstanding of where additional oil reservoirs might be located, Cossey said it also expands what is known about the history of the Gulf.

"There have been geologists working in the Gulf of Mexico for decades," said Cossey, who is based in Durango, Colo. "After all these years, we're still finding out things we didn't know. This is important for oil and gas exploration, but it's also important in the history of the Gulf of Mexico and our knowledge of climate change." The researchers said waters in the Gulf dropped at least 650 feet, leaving an exposed area that refilled less than a million years later -- the blink of an eye in geologic time.

"Proving the existence of the Paleocene-Eocene drawdown would profoundly alter the interpretation of the Gulf's geologic history with academic and economic ramifications," the researchers wrote. "The theory, if further validated, would provide a revised con- text and would enhance predictability for petroleum exploration. ... We can add another line of evidence that the (Gulf of Mexico) drawdown occurred and that it likely happened near the Paleocene-Eocene boundary," or in the era between the Paleocene and Eocene epochs.

Several members of the team had previously worked near the village of Chicontepec, in Veracruz. Cossey, in fact, has written a book about the region, "Chicontepec: A Mexican National Treasure."

 University of Houston. "New evidence about the Gulf of Mexico's past: Geologists find clues to historic climate change, origin of Wilcox Formation." ScienceDaily. ScienceDaily, 16 February 2016. .

10 SIPES-Houston Newsletter | Mar 2016

SIPESHOUSTON.ORG  If you are not yet registered as a member on the site please do so ASAP.

 You can now pay your national and local dues online. If you have not paid them please do so ASAP.

 For events and announcements please visit the website.

 Attendance confirmation and payment for luncheons can be done through the website.

 Many growing pains with the website have now been resolved and will continue to be fixed.

 Any questions or issues with the website can be directed to [email protected]

SIPES Houston February Luncheon at the Petroleum Club of Houston

11 SIPES-Houston Newsletter | Mar 2016

FEBRUARY LUNCHEON REVIEW BY BARRY RAVA The February luncheon lecture was by David Kessler and he spoke on how reprocessing old seismic data added new life to an old field, Main Pass 73. This field has over 30 productive sands in the lower Pliocene and Miocene sections on the steeply dipping flanks of a salt dome. Slides depicting legacy seismic data were presented as well as discussions around the problems with streamer data. A 3D sur- vey acquired in 1992 did not seem to adequately image the dome and existing geological and production models were not updated. Ownership of the property changed and in 2007 Energy XXI no- ticed discrepancies in the well and seismic data. Several itera- tions of PSDM, salt modeling and salt flooding were used by Seis- micCity to reprocess the data. The most startling revelation using this technique was that the salt was not one body but was actual- ly several different detached bodies connected through a series of salt welds that formed a ‘curtain’ of salt. The new salt model allowed for a re-interpretation of the geologi- cal and production model around the dome. This led to the drill- ing of two new successful wells that increased production. Also additional exploratory leads were identified. The reprocessing also pointed out that the more models that were constructed the more accurate the models became, the economic success sled to the acquisition of a new 3D data set and there needs to be a very close link between processing/model Speaker, Dr. David Kessler with Michael Steed building/depth migration and interpretation to reduce drilling risk.

Sponsor, Geo Wolf, Mike Sheahan 12 SIPES-Houston Newsletter | Mar 2016 NEWS FROM THE BOARD HOUSTON UNEMPLOYMENT≥NATIONAL AVG

The season pass option for luncheon payment and regis- Houston is America’s oil capital, and in oil’s boom times it was a tration is now being offered and will be available for pur- great place to be. But now that energy prices are slumping, the local chase through March. By taking care of the details in ad- job market is no better than that of the average American city. The Houston area’s unemployment rate hit 4.9% in December, just shy of vance with a season pass you save on the cost of the the national rate of 5% at the time. luncheons and have more time for networking at the luncheon as there is no line – just pick up your pass and enter. To date 38 season passes have been purchased. Also in vein of the luncheons, bar sponsorship is availa- ble. Please give Chris Atherton a call if you or someone you know might be interested in a sponsorship.

Planning has already started for the fall continuing edu- cation seminar. The topic will be coordinated with the HGS class being offered in mid-year. Titles, content, and speakers are all under consideration. Bill Bippus is head- ing up this effort. The HGS class, offered in May, will fo- cus on young geoscientists just getting started as a self- employed individual. SIPES will offer its course in the fall Should the jobs picture get any worse locally, or any better for the and the class will be titled “How to be an Independ- rest of the country overall, Houston’s unemployment rate could rise ent.” It was noted that in January the Oklahoma City above the national rate for the first time since November 2006. chapter staged a similarly titled course and there were It isn’t just the drop in oil prices that is hurting Houston. Years of over 200 in attendance. easy financing sent the area’s energy companies on a borrowing binge. But now that US interest rates are rising, the music has The SIPES booth at NAPE was an active booth and over stopped. Between July 2014, when crude prices first began falling, 20 people signed up to receive membership information. and December 2015, 65% of oil industry bankruptcies have taken place in Texas, per Deloitte (pdf). Last but not least, in these ‘hard-to-sell-a-deal’ times is that the Deal buyers list is being updated. This is an on- A shock like this creates ripple effects. Thus, you get stories like this going effort in gathering contact information and ‘deal one from Reuters, about how energy industry executives’ declining earnings are hurting the housing market, and this one from Nation’s criteria’ from the active buyers. If you know of any active Restaurant News, reporting the pain that the corporate parent of the buyers, and would like to make them known, please con- Chili’s restaurant chain is feeling in the oil-heavy economies of Texas, tact Bill Smith. Louisiana, and Oklahoma. But with large-scale crude production cuts from major exporters like Saudi Arabia off the table, it’s not clear where relief is going to come from.

Probably the best Houston can hope for right now is a production freeze.

13 SIPES-Houston Newsletter | Mar 2016 EXXON’S $12B WAR CHEST; ALEKSANDRA GJORGIEVSKA Exxon Mobil Corp. raised $12 billion in its biggest bond sale on record and may use the funds to snap up rivals amid a commodities bust.

The world’s largest oil company, which is at risk of losing its top-notch credit rating, sold the debt in eight parts at above average yields, according to data compiled by Bloomberg. The sale comes after Moody’s Investors Service cut Exxon’s outlook to negative from stable on Feb. 25 and warned that the oil-market collapse imperils cash flow needed to cover debt payments and new investments.

"If you are Exxon, you have to be looking around at all of the wreckage in the energy sector these days and feel like a kid in a candy store,” said Spencer Cutter, an analyst at Bloomberg Intelligence. The debt offer is a sign that Exxon may "start picking up great assets at fire-sale prices" and "take advantage of the downturn and start shopping," he said.

Exxon said proceeds from the sale may be used toward "funding for working capital, acquisitions, capital expenditures, refinancing a portion of our existing commercial paper borrowings and other business opportunities," according to a Monday regulatory filing. With oil prices fall- ing to a 12-year low earlier this month, many energy companies have lost much of their market value.

"We are very surprised there have not been more acquisitions by the big guys -- it seems a generational opportunity if you are one of the strongest and biggest," according to Timothy Doubek, a money manager at Columbia Threadneedle Investments, which has about $176 bil- lion in fixed-income assets under management. "You have to move the needle -- you can’t just do little tiny things."

The longest portion of Exxon’s debt sale is $2.5 billion in 4.114 percent 30-year bonds yielding 150 basis points more than comparable gov- ernment debt. While that’s lower than an originally offered premium of as much as 180 basis points, according to a person with knowledge of the matter, it’s six basis points more than the average yield on corporate debt of similar maturity and rating, according to Bank of America Merrill Lynch Indexes.

Exxon’s $2.5 billion tranche of 3.043-percent 10-year notes sold at 130 basis points more than comparable Treasuries -- a 48 basis-point pre- mium to comparable debt, Bank of America Merrill Lynch data shows.

Standard & Poor’s placed Exxon on credit watch with negative implications on Feb. 2, saying that Exxon’s credit measures will probably re- main weak through 2018. Despite the volatility in the energy space, the investment-grade market is increasingly drawn to names like Exxon for their quality and liquidity, said Doubek. The oil giant is one of three U.S. corporate issuers with AAA ratings from Standard & Poor’s, along with Microsoft Corp. and Johnson & Johnson.

That Exxon is at risk of being downgraded isn’t weighing on its borrowing costs as much as the outlook for the rest of the energy industry, according to Andrew Brenner, head of international fixed income at National Alli- ance Capital Markets in New York, since cuts by Moody’s and S&P are lag- ging indicators. "If energy was not in the headlines over the last year, the 30-year would probably come to market at somewhere around 125 basis points,” Brenner said. “Exxon is a great company in what is perceived to be a terrible industry right now." 14 SIPES-Houston Newsletter | Mar 2016 SEASON PASS 2016

CLICK ON THE IMAGE TO PURCHASE

Would you like to purchase a 2016 Season Pass to all SIPES Houston luncheons for a discount? Any current member can purchase a 2016 Season Pass, entitling you to 11 luncheons for the price of 9.

Please note: Season Pass holders must RSVP online so that BK, our event coordinator, can get an accurate number for The Petroleum Club of Houston. 15 SIPES-Houston Newsletter | Mar 2016 SAVING RIVALS NOT IN PLANS The collapse of crude oil has sent U.S. shale drillers into such a severe financial tailspin that the one company that could rescue them with its wallet — Exxon Mobil Corp. — has all but laughed off the idea.

The underlying value of the biggest U.S. oil boom in four decades has been buried under a massive pile of debt and diluted by a de facto Wall Street bailout of shale companies, so buying a rival driller probably wouldn’t pay off for the Texas oil giant, even though the nation’s oil and gas plays are actually impressive, Exxon Mobil Chairman and CEO Tillerson told investors on Wednesday.

“There are a lot of quality resources out there. It’s just how they’ve been encumbered,” Tillerson said during an annual gathering of analysts and investors. “It’s like buying a home with a big mortgage, and there’s not a lot of equity.”

Tillerson’s assessment is likely to disappoint ailing companies wondering if Exxon Mobil, the biggest U.S. oil company and possibly the only one that could afford a major purchase, might be planning to write them a multibillion-dollar check anytime soon. That might have sparked more consolidation, and perhaps salvation, for struggling oil producers. In the years of $100-a-barrel oil, U.S. oil companies took out half a trillion dollars in risky corporate debt known as junk bonds and leveraged loans, both of which are considered at high risk of default. In those days, it was easy for drillers to score cheap, easy-flowing money to fuel the nation’s oil bonanza.

Equity investors have ponied up another $9.54 billion since December to help some of those same domestic explorers cover their swelling debt obligations. The investments are on top of the $14 billion in stock the companies sold last year.

Both the debt and the stock sales, Tillerson said, have “destroyed” the value of the oil beneath Texas and North Dakota, unless those compa- nies are willing to part with their best acreage for cheap. Scores of companies have filed for bankruptcy, more than 1,000 drilling rigs have gone silent and 250,000 jobs have evaporated around the world. About 70,000 of those jobs were in the U.S. More than $230 billion in oil pro- jects have been deferred so far.

Exxon Mobil, still one of the most valuable U.S. public companies by stock-market value, has largely operated above the worst of it, but it has not been immune to the downturn. The Irving-based company has cut its U.S. rig count by nearly two-thirds and lowered its production guid- ance. It said Tuesday it would aim for flat oil and gas production through the end of the decade, instead of the 3 percent growth it had envi- sioned last year. It plans to cut $7.9 billion in spending this year.

“This is austerity on steroids,” said Pavel Molchanov, an analyst at investment bank Raymond James in Houston. Exxon Mobil is perhaps the only large integrated oil company with the balance sheet to purchase a major rival amid the oil downturn. But even after a year and a half, it hasn’t explicitly telegraphed it will be part of an impending wave of corporate consolidation in the oil industry.

Companies that would consider selling themselves are still expecting too-high prices, so deal-making has “gotten more difficult, not easi- er.” “It’s tough for us because we would like to do something,” he said. “We see there’s a lot of quality resources out there. It’s just how they’ve been encumbered. What we’re finding is we’re spending more of our time on asset deals.” Exxon Mobil this week said it would borrow $12 billion in corporate debt, which could supplement its war chest if it wanted to buy another company.

“We’re going to put the money to work,” he said. “We’re not going to borrow to write a check to somebody.” Exxon Mobil spends roughly $12 billion a year on its shareholder dividend, an investor payout that won’t be covered by internal cash flow if oil prices stay around $35 a barrel this year, Molchanov said. Exxon Mobil’s debt, which has remained low for the energy industry, has risen from 7 percent to 18 percent of its capital within the last three years.

“That cash is going to be needed to pay the dividend,” Molchanov said. “Clearly, there are companies with balance sheet problems. (For Exx- on), there’s no excessive leverage here, but it is on the rise.” Exxon Mobil is planning to cut its capital spending 25 percent this year to $23.3 billion, after a rough 2015 in which it wrung less than half the cash out of the dollars it spent compared with the last five years. The company’s return on capital employed, one of the most important financial metrics for Exxon Mobil, sank from an average 18 percent over the past five years to 7.9 percent in 2015, but it was still 4 percentage points above its closest rival, French oil company Total.

As it cuts back, the company believes it will produce between 4 million and 4.2 million barrels of oil equivalent a day through the end of the decade, keeping its production flat, in line with last year’s 4.1 million barrels a day. That’s less than the daily 4.3 million barrels it had planned in 2017, but it doesn’t deter Exxon Mobil from its true goal — building shareholder value, Tillerson said. [email protected]

16 SIPES-Houston Newsletter | Mar 2016 NEW MEMBER APPLICATIONS GLOBAL OIL PRODUCITON FREEZE? During 2015 the Houston Chapter of SIPES has submitted 24 OPEC and other players in the global oil market are growing Full or Limited new members to national for approval. Twenty increasingly desperate to revive crude prices—not desperate have been approved and four are waiting on the next newslet- enough to cut production, mind you, but willing at least to ter. This does not include the one new Full Member for De- cember and the two new Chapter Affiliate candidates. This is freeze supply where it is. the hard work of Christopher Betz. Saudi Arabia, Russia, Qatar, and Venezuela are all on board. Reportedly joining them are Mexico, Colombia, and Ecuador, which will be meeting in Quito, Ecuador, to discuss, along with Full Membership Applications representatives of Venezuela, how to put a freeze into effect. Phillip Salvador graduated from Stanford University with a The boldfaced names among the Latin American cohort are Master’s of Science in Geology before becoming a Exploration Venezuela, which has been begging its fellow OPEC members to and Development Geologist with Conoco. He has also worked as cut production for weeks, and Mexico, whose state-controlled a development and operations Geologist with Qator Petroleum oil company Pemex is running into financial difficulties and will and Afren Resources. He has worked on projects in the United likely have to cut production anyway. Kingdom, Dubai, Iraq and Qatar. Phillip is a DPA member of AAPG, SPE member and HGS Member. Some action, even symbolic, might still better in the eyes of in- vestors than nothing. But even this gesture has obstacles— namely Iran. The country is fresh off nuclear program-related sanctions from the US, and it’s trying very hard to boost its Chapter Affiliate crude exports. Last week, Bijan Zanganeh, Iran’s oil minister called a production freeze “ridiculous,” and even at a relatively John Humble is an independent Landman and owner of T.G.C. weak 3.1 million barrels per day, the country still produces Acquisition Fund, Inc.. John has worked in the Eagle Ford and more oil than any of Latin America’s major exporters.—Melvin Mississippian Lime as well as other plays to acquire leases for Backman, qz.com independent oil and gas companies.

Jeff Lund, Rosemary Mullin , Norman Neidell, David Rensink, and Rusty Riese at the February SIPES Houston Luncheon

Click on the image for an interactive chart of historical monthly West Texas Intermediate (WTI or NY- MEX) crude oil prices per barrel back to 1946. The price of oil shown is adjusted for inflation using the headline CPI and is shown by default on a logarithmic scale. The current month is updated on an hourly basis with today's latest value. The gray shadow lines represent time periods of recessions.

SIPES Houston Chapter, 5535 Memorial Drive, Suite F654, Houston, Texas 77007 Tel: 713-651-1639  Fax: 713-951-9659  www.sipeshouston.org  e-mail: [email protected]

* * *