Transcript Energy Group Presentation

Raymond James Energy Group
How Do You Solve an Oil
“Addiction”?...
Higher Prices!
Raymond James Oilservice Group
(800) 945-6275
February 2006
[email protected]
[email protected]
[email protected]
[email protected]
What is Your Time Frame?

Bearish Short Term (downgraded group on 1/26/06)
– Oil inventories above 5-year highs followed by large inventory
builds March-May.
– Warm winter has increased natural gas risk
– Oil & gas fall until OPEC cuts

Bullish Long Term
– 6 – 18 month outlook bullish for oil
– Supply interruption wildcards (Iran) more visible
– Natural gas “resets” in October
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Why is This a Long-Term Upswing?

Oil supply bubble is gone

Unprecedented oil demand growth (China transition)

Non-OPEC supply growth slowing (next 5 years)

Minimal oil demand destruction with higher prices

U.S. natural gas supply still falling
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005E
2006E
2007E
OPEC Excess Capacity
(MMbls/day)
The Oil Bubble is Gone!
Average Excess OPEC Capacity
16
14
12
10
Arab
Embargo
Iran Crisis
8
Kuwait War
Sources: IEA, RJ&A, Bloomberg
4
Demand
Growth
6
4
2
0
OPEC Excess Capacity
Normalized Excess Capacity
Oil Consumption Increases Fastest
During Early Industrialization
Oil Consumption and Industrialization
35
Per Capita (Barrels per year)
30
USA
China
Japan
South Korea
India
25
USA
20
15
Japan
South Korea
10
India
5
China
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Source: BP Statistical Review of World Energy; Respective Census Bureaus; Marc Faber Limited, RJ&A Estimates
5
Russian Oil Production Growth Slowing
Russian Oil Production Growth (Year-Over-Year)
0.9
0.8
Million barrels per day
0.7
0.6
0.5
?
0.4
?
0.3
0.2
0.1
0.0
1998
1999
2000
2001
2002
Source: IEA, RJ&A Estimates
6
2003
2004
2005E
2006E
Russian Oil Production Growth Slowing
Russian Oil Production Growth Slowing
9.8
Yukos-driven declines
Production (MMbpd)
9.6
9.4
9.2
9
8.8
8.6
8.4
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Source: IEA
7
Apr-05
Jul-05
Oct-05
6,500
4,000
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005YTD
Well Depth (in ft.)
Mature Areas Must Drill Deeper
Average U.S. Well Depth
6,000
5,500
40%
5,000
4,500
Source: EIA
8
Searching For Smaller Reserves
Mean GOM Field Discovery Size
Field Size (BBOE)
0.25
0.20
0.15
0.10
0.05
Source: Minerals Management Service.
9
1999
1994
1989
1984
1979
1974
1969
1964
1959
1954
1947
0.00
How Will More Rigs Affect Production?
Total U.S. Rigs vs. "Lower 48" Oil Production
Total Rig Count
4,000
10,000
Oil Production
9,500
3,000
2,500
9,000
"Lower 48" Oil Production
8,500
Total Rigs
8,000
2,000
7,500
1,500
10
1981
1980
1979
1978
1977
Source: DOE
1976
6,000
1975
0
1974
6,500
1973
500
1972
7,000
1971
1,000
1970
Total Rigs
3,500
MBbls Per Day
4,500
Why Were We Worried About 2Q Oil?
(RJ Q3 2005 Model)
Total U.S. Petroleum Inventories As of Sept. 2005
RJ 2006 Estimate
780
760
Q2 2006 Problem
740
RJ 2005 Estimate
720
700
680
660
640
620
2005A
2005E
Source: EIA, RJ&A
11
2006E
Dec
Nov
Oct
Sep
Jun
May
Apr
Mar
Feb
Jan
5 Yr Range
Aug
2005 Actual
600
Jul
Total U.S. Petroleum Inventories
(MMBbls)
800
Total U.S. Petroleum Inventories Actual vs. Estimates
780
760
740
720
700
2006 Estimate (original)
Current Inventory
Level
RJ 2005 Estimate
680
660
640
620
600
580
5 Yr Range
2005A
2006A
Source: EIA, RJ&A Estimates
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2005E
Week 52
Week 49
Week 46
Week 43
Week 40
Week 37
Week 34
Week 31
Week 28
Week 25
Week 22
Week 19
Week 16
Week 13
Week 10
Week 7
Week 4
2005 Actual
Week 1
Total U.S. Petroleum Inventories
(MMBbls)
Why Are We More Worried Today?
2006E
Why the 2Q Oil Problem?
(Demand Falls in 2Q)
MMbbls/day
Oil Demand Seasonality
82.0
81.5
81.0
80.5
80.0
79.5
79.0
78.5
78.0
77.5
77.0
1.8 MMbbl/day Typical Demand Drop
Q1
Q2
Q3
5 Year Average Global Oil Demand
Source: IEA
13
Q4
Total U.S. Petroleum Inventories
800
Current
Inventory
Level
780
760
740
2006 E
2005
720
700
680
660
640
620
5 Yr Range
2005 Actual
2006 Actual
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
600
Jan
Total U.S. Petroleum Inventories (MMBbls)
OPEC Must Cut!
2006 E
Source: EIA, RJ&A Estimates
Source: AP
14
How Low Could Oil Go?
(OPEC Will Defend ±$50 Oil Prices)

Rising Saudi infrastructure costs

Higher shipping costs

Widening differential for poor quality crudes

Devaluation of the U.S. $
– Less OPEC purchasing power
• Cheaper international oil prices

OPEC wants highest price w/o demand destruction
15
Discounts on Heavy Oil Have Widened
Discount From WTI Price for Maya (Heavy) Crude
$20
$18
Price per Barrel
$16
Historic Average Spread =
~$5
$14
Light/Heavy
Spread
$12
$10
$8
$6
$4
$2
Source: Bloomberg
16
Oct-05
Oct-04
Oct-03
Oct-02
Oct-01
Oct-00
Oct-99
Oct-98
Oct-97
Oct-96
Oct-95
$0
Dollar Devaluation Raises OPEC Target
Dollar / Euro Exchange Rate vs. WTI Crude Oil Price
0.8
0.9
Dollar is dow n 34% since Jan 2002
USD / EUR
1
1.1
1.2
USD/EUR
1.3
So urce: OA NDA .co m,
Reuters
USD / EUR Exchange Rate
17
Linear (USD / EUR Exchange Rate)
Sep-05
Jun-05
Mar-05
Dec-04
Oct-04
Jul-04
Apr-04
Jan-04
Nov-03
Aug-03
May-03
Feb-03
Dec-02
Sep-02
Jun-02
Mar-02
Jan-02
1.4
OPEC Production Cuts Support Oil Prices
OPEC Quota Changes
75
WTI Oil Price
$70
$65
70
65
$42.53
$60
60
Quota Cuts
$55
55
$32.83
$50
$45
50
45
$26.93
$40
40
(Higher Lows)
$35
35
Source: Bloomberg
18
Dec-05
Oct-05
Aug-05
Jun-05
Apr-05
Feb-05
Dec-04
Oct-04
Aug-04
20
Jun-04
$20
Apr-04
25
Feb-04
$25
Dec-03
30
Oct-03
$30
Sep-03
WTI front-month oil price ($/Bbl)
$75
We Are Modeling a Q2 Pullback in Oil
Oil Price Forecast
$64
$62
$59.25 Average Price
$60
$58
$56
$54
$52
$50
Q1 06E
Q2 06E
Q3 06E
Source: RJ&A Estimates
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Q4 06E
Where Could We Be Wrong?
Excess Capacity
10,500
Estimated Second Quarter 2005 Production
8,500
6,500
4,500
2,500
Source:: Bloomb erg, RJ&A Estimates
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Qatar
Algeria
Indonesia
Libya
Kuwait
U.A.E.
Nigeria
Iraq
Venezuela
Iran
500
Saudi Arabia
Estimated Production ('000 B/day)
OPEC Global Over/Under Supply
Iran Has Changed the Game!

Iran has re-opened nuclear efforts
– New leader not backing down

U.S. & Israel will NOT let Iran get nuclear weapons

Iran’s 3.9 million Bpd is at risk

Situation should come to a head in 6 - 18 months
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What are the Odds?
Possibility
Probability
Iran backs down voluntarily
UN issues sanctions & acts
US/NATO send air strikes
Israel acts
Something else happens???
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20%
20%
20%
20%
20%
Oil Will Drive Gas Prices
(Within a +/- 6:1 Ratio With Crude)
Heating Oil/Residual Fuel Prices vs. Natural Gas Prices
$17.00
$16.00
$16.00
$15.00
$15.00
$14.00
$14.00
$13.00
$13.00
$12.00
$12.00
Heating Oil
$11.00
$11.00
$10.00
$10.00
Natural Gas
$9.00
$9.00
$8.00
$8.00
$7.00
$7.00
$6.00
$6.00
Residual Fuel
$5.00
$5.00
(1) Henry Hub natural gas incl. trans. co st
Residual Fuel
Heating Oil
Natural Gas
(2) New Yo rk 1% residual fuel (co nverted @6.3 M mbtu/barrel).
(3) New Yo rk # 2 heating o il (co nverted @5.8 M mbtu/barrel).
So urce: B lo o mberg.
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2/1/2006
1/1/2006
12/1/2005
11/1/2005
10/1/2005
9/1/2005
8/1/2005
6/1/2005
5/1/2005
4/1/2005
3/1/2005
2/1/2005
1/1/2005
12/1/2004
11/1/2004
10/1/2004
9/1/2004
8/1/2004
7/1/2004
6/1/2004
5/1/2004
4/1/2004
3/1/2004
2/1/2004
1/1/2004
12/1/2003
11/1/2003
$3.00
10/1/2003
$3.00
9/1/2003
$4.00
8/1/2003
$4.00
7/1/2005
$/Mmbtu
$17.00
Warm Weather has Destroyed + 400 Bcf.
of Winter Gas Demand (vs. normal)
300
Total Degree Days - 2005/6, 2004/5 and Normal
2005/6
Normal
2004/5
250
200
150
100
Est. for
2/25/06
50
0
Nov-05
Dec-05
Jan-06
Source: NOAA
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Feb-06
Mar-06
Where Will Winter Storage End?
Winter 2005/2006 Ending Storage?
2004/2005 Withdrawals
(Year-Over-Year Changes)
U.S. Supply (Net flat)
Net Hurricane Impact (+1.3 Bcf/day)
Weather (7% warmer vs. last year - 1.3 Bcf/day)
Price-induced Demand Destruction/Switching (- 2 Bcf/day)
Gas Imports/Exports
2005/06 Withdrawals
Beginning Storage
Ending Storage (Theoretical)
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2,044 Bcf
0 Bcf
+200 Bcf
-200 Bcf
-300 Bcf
0 Bcf
1,744 Bcf
3,289 Bcf
1,545 Bcf
What Will This Mean For The Summer?
Y-O-Y Changes
Summer 2006 Ending Storage?
2005 injections
Summer weather impact (2005 ~ 11% warmer vs. normal)
Net hurricane impact in 2005
RJ est.
1,980 Bcf
100 Bcf
100 Bcf
Net supply change (flat)
Price-induced Demand Gains/Switching (1 Bcf/day)
Total 2006 Injections
2005/06E Winter Ending Storage
2006 Summer Ending Storage (10/31/06)
0 Bcf
(215 Bcf)
1,965 Bcf
1,545 Bcf
3,510 Bcf
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Long Term, U.S. Gas Will Be Linked to Oil

Near term, gas trades 8:1 with crude

Weather drives short-term moves

Falling supply will ultimately drive prices higher

RJ estimate: 2006 = $9.31/Mcf

Could $50 oil mean $6.00 gas?
27
2007 = $10.00/Mcf
Conclusion

Near-term oil & gas price risk

Longer-term bullish secular move is still intact

Oil should see higher highs and higher lows

Gas trades 8:1 through summer

Supply interruption wildcards more visable
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