elm ridge on energy - valuewalk ridge on energy february 2016 . ... saudi/iraq increase yoy 400 iran...
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ELM RIDGE ON ENERGY February 2016
February 2016 1 ELM RIDGE
Please see Elm Ridge Disclosures on Slide 25.
What We Think
Oil is unlike other commodities because it depletes and requires constant reinvestment
Depressed prices will hit future supply. US production has begun to fall
and will leave the world undersupplied by mid-2016 Higher oil prices are needed to incentivize enough new production to
meet demand
Price, not economic growth, has a greater impact on trend demand Our holdings have enormous upside
How Did We Get Here?
February 2016 2 ELM RIDGE
Lower For Longer?
Please see Elm Ridge Disclosures on Slide 25.
February 2016 3 ELM RIDGE
U.S. Shale – Quicker Payback, Faster Declines
Quicker payback periods and easy credit drove the shale boom
Please see Elm Ridge Disclosures on Slide 25.
February 2016 4 ELM RIDGE
The U.S. Would Have Eclipsed Saudi Arabia By 2016
Estimated Production as of Fall 2014 2010 2011 2012 2013 2014 2015 2016E
U.S. Crude Production, kbd 5,476 5,636 6,475 7,452 8,705 9,435 10,200
Global Liquids Production, kbd 87,418 88,670 90,930 91,350 93,740 96,205 96,970
U.S. Crude Market Share % 6.3% 6.4% 7.1% 8.2% 9.3% 9.8% 10.5%
Saudi Arabia Crude Market Share % 9.3% 10.2% 10.5% 10.3% 10.2% 9.9% 9.8%
Note: Saudi Arabia market share is based on their maintaining flat production in 2015 & 2016
Source: IEA, EIA, Elm Ridge Analy sis
Please see Elm Ridge Disclosures on Slide 25.
February 2016 5 ELM RIDGE
That Did Not Sit Well With The Saudis
Saudi Arabian production, level since 2012, jumped 800kbd, but has since flattened
1Q-14 2Q-14 3Q-14 4Q-14 1Q-15 2Q-15 3Q-15 4Q-15
OPEC Crude Production (kbd)
Saudi Arabia 9,467 9,483 9,617 9,530 9,770 10,290 10,270 10,160
Iraq 3,297 3,333 3,217 3,480 3,500 3,940 4,240 4,240
Iran 2,810 2,827 2,780 2,800 2,820 2,850 2,870 2,890
Rest of OPEC 14,427 14,453 14,913 14,700 14,410 14,420 14,360 14,380
Total 30,000 30,097 30,527 30,510 30,500 31,500 31,740 31,670
Saudi Arabia Market Share % 10.3% 10.2% 10.2% 10.0% 10.3% 10.7% 10.6% 10.5%
Source: IEA
2014-2015 Liquids Supply/Demand (kbd)
2014 Excess Production 948
2015 Demand Grow th (1,788)
Saudi Arabia YoY Increase 593
Iraq YoY Increase 650
Rest of OPEC YoY change (103)
Non-OPEC, Non-US YoY change 445
U.S. Grow th 880
2015 Excess Production 1,625
Source: IEA
Please see Elm Ridge Disclosures on Slide 25.
February 2016 6 ELM RIDGE
Investment Has Been Slashed
U.S. Activity Continues To Fall All Basins Are Down
Non-U.S. Spending Will Decline In Consecutive Years For The First Time Since 1986
Please see Elm Ridge Disclosures on Slide 25.
February 2016 7 ELM RIDGE
Yet U.S. Production Grew As Prices Fell
Drilling appears profitable at low prices
Please see Elm Ridge Disclosures on Slide 25.
February 2016 8 ELM RIDGE
An Economic Slowdown Could Kill Demand
The market fears a repeat of 2008-09
Please see Elm Ridge Disclosures on Slide 25.
February 2016 9 ELM RIDGE
And The Stocks Do Not Look Cheap
1. The sector has traded below this range in only 6 out of the last 80 quarters through 2014; Bernstein Research, “North American E&P: Understanding Upstream Enterprises”, dated February 19, 2015
Please see Elm Ridge Disclosures on Slide 25.
February 2016 10 ELM RIDGE
But…
Please see Elm Ridge Disclosures on Slide 25.
February 2016 11 ELM RIDGE
While GDP vs. Demand Looks Like A Pretty Picture
Please see Elm Ridge Disclosures on Slide 25.
February 2016 12 ELM RIDGE
OECD Demand Is Price Elastic
Demand Fell Despite a Strong Economy
Changes in Prices Produce Changes In Trend Demand
Please see Elm Ridge Disclosures on Slide 25.
February 2016 13 ELM RIDGE
Non-OECD Consumption Just Grows
You don’t re-steel a building but you do refill a car
Please see Elm Ridge Disclosures on Slide 25.
February 2016 14 ELM RIDGE
Producing Oil Is Not Like Turning A Faucet
It Takes Time To Get Oil Out of The Ground U.S. Producers Scaled Back To Their Best Rigs
The Gulf of Mexico Grew As Multi-Year Projects Came Online
Please see Elm Ridge Disclosures on Slide 25.
February 2016 15 ELM RIDGE
U.S. Production Is Declining We analyze production by basin based on operating rigs, production per rig, and estimated decline rates
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
ER Eagle Ford Forecast
Total Crude Production (kbd) 889 1,004 1,115 1,165 1,278 1,410 1,501 1,592 1,683 1,620 1,528 1,362 1,240 1,163 1,097 1,045
Pre 2013 Wells 613 548 532 493 446 405 414 336 404 487 409 334 286 276 263 246
1Q13 277 166 118 100 87 78 71 65 60 56 53 50 47 44 41 39
2Q13 290 183 129 110 95 85 78 71 65 61 57 54 51 48 45
3Q13 282 167 119 101 87 79 72 66 60 56 53 50 47 44
4Q13 276 187 130 110 95 86 78 71 65 61 58 54 51
1Q14 330 195 139 118 102 92 84 77 71 66 62 59
2Q14 406 245 173 147 127 115 105 96 88 82 78
3Q14 349 199 143 122 105 95 87 79 73 68
4Q14 449 282 198 169 146 132 120 110 100
1Q15 316 127 81 69 59 54 49 45
2Q15 200 77 50 43 37 33 30
3Q15 242 89 58 50 43 39
4Q15 168 62 41 35 30
1Q16 131 48 32 27
2Q16 101 38 25
3Q16 87 33
4Q16 86
Est. New Well Production (30-day IP Rate) 549 583 508 521 545 660 531 698 546 406 682 676 670 626 618 618
Source: EIA and Elm Ridge Analysis
1Q-15 2Q-15 3Q-15 4Q-15 1Q-16 2Q-16 3Q-16 4Q-16
Crude Production (kbd)
Bakken 1,221 1,223 1,209 1,159 1,105 1,045 991 947
Eagle Ford 1,683 1,620 1,528 1,362 1,240 1,163 1,097 1,045
Haynesville 56 56 54 53 52 52 52 52
Marcellus 53 55 55 53 51 49 48 47
Utica 58 69 73 76 77 76 75 74
Niobrara 468 482 474 433 406 388 372 360
Permian 1,795 1,911 1,953 2,007 2,036 2,025 1,992 1,965
Total Shale 5,334 5,414 5,346 5,142 4,967 4,799 4,627 4,490
Total U.S. Crude (excl. NGLs) 9,485 9,496 9,430 9,331 9,058 8,795 8,672 8,490
Source: EIA and Elm Ridge Analysis
And These Declines Will Accelerate
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
ER Permian Forecast
Total Crude Production (kbd) 1,281 1,326 1,373 1,417 1,507 1,579 1,656 1,775 1,795 1,911 1,953 2,007 2,036 2,025 1,992 1,965
Pre 2013 Wells 1,134 1,047 982 944 877 867 816 764 738 732 708 672 640 612 583 546
1Q13 148 99 81 72 66 62 58 55 51 48 46 43 40 38 36 34
2Q13 180 110 91 81 74 70 66 62 58 55 51 48 46 43 40
3Q13 200 134 109 97 89 83 78 74 70 65 62 58 55 51
4Q13 177 125 100 89 82 77 72 68 64 60 57 53 50
1Q14 250 167 136 121 111 104 98 92 87 82 77 72
2Q14 212 136 111 99 91 85 80 75 71 67 63
3Q14 262 158 130 116 107 100 94 89 83 78
4Q14 336 208 170 152 140 131 123 116 109
1Q15 241 204 162 143 131 122 115 108
2Q15 241 163 132 117 108 101 95
3Q15 241 163 133 118 108 101
4Q15 261 173 141 125 115
1Q16 245 161 131 117
2Q16 200 131 106
3Q16 168 112
4Q16 166
Est. New Well Production (30-day IP Rate) 243 274 317 283 395 335 385 471 449 452 547 602 593 562 541 541
Source: EIA and Elm Ridge Analysis
Please see Elm Ridge Disclosures on Slide 25.
February 2016 16 ELM RIDGE
Yes, Some Drilling Is Profitable At $40…
…But Not Enough
Please see Elm Ridge Disclosures on Slide 25.
February 2016 17 ELM RIDGE
Even The Operators Agree
Occidental Petroleum, 10% of the mighty Permian, has less than 15% of its acreage economic below $50 (with depressed service costs)
Please see Elm Ridge Disclosures on Slide 25.
February 2016 18 ELM RIDGE
Even With Iran, Supply Will Fall Short In 2016
Iranian production will require significant time and investment and will not be enough to offset declines elsewhere
Outside of Iran, OPEC is nearing its theoretical production capacity
2015-2016 Liquids Supply/Demand (kbd)
2015 Excess Production 1,600
2016 Demand grow th (1,500)
Saudi/Iraq Increase YoY 400
Iran YoY 450
Rest of OPEC YoY (100)
Non-OPEC, Non-US YoY (550)
U.S. YoY (at current rig count) (1,000)
2016 Shortfall (700)
Source: IEA, Elm Ridge Analy sis
Please see Elm Ridge Disclosures on Slide 25.
February 2016 19 ELM RIDGE
(More Stats)
Growth in Canada offset by declines in Mexico
Petrobras has lowered production targets 2x in last year
The world will be short oil in 2016, accelerating through the 2nd half of the year
2014 2015 2016E
Liquids Demand, kbd
United States 19,103 19,510 19,698
Other North America 5,030 4,965 4,918
Europe 14,058 14,365 14,498
Fomer Soviet Union 4,920 4,860 4,984
China 10,615 11,250 11,600
Middle East 8,050 8,165 8,374
ROW 31,018 31,465 32,004
Total 92,793 94,580 96,077
Liquids Supply, kbd
United States 11,990 12,870 11,818
Other North America 7,090 6,975 6,916
Fomer Soviet Union 13,870 13,980 13,703
Brazil 2,350 2,528 2,622
OPEC NGLs 6,500 6,598 6,750
OPEC 30,980 32,023 32,643
ROW 20,960 21,233 20,932
Total 93,740 96,205 95,384
Net Supply Balance 948 1,625 (693)
Please see Elm Ridge Disclosures on Slide 25.
February 2016 20 ELM RIDGE
The Futures Curve Is Only A Reflection Of Today’s Price
It has been a bad indicator of future oil prices
Please see Elm Ridge Disclosures on Slide 25.
February 2016 21 ELM RIDGE
Leading E&Ps May Not Be Cheap, But Ours Are
While E&P crowd favorites trade on average at 9x EBITDA assuming $60 oil, ours trade at 4x
1. The sector has traded below this range in only 6 out of the last 80 quarters through 2014; Bernstein Research, “North American E&P: Understanding Upstream Enterprises”, dated February 19, 2015
Please see Elm Ridge Disclosures on Slide 25.
February 2016 22 ELM RIDGE
Averages (1995-2014) ER Holdings 14.7% S&P 500 13.8% E&P Favorites 11.7%
These Are Good Businesses
And Ours Are Just As Good
Please see Elm Ridge Disclosures on Slide 25.
February 2016 23 ELM RIDGE
We’d Rather Own Our Stocks Than Oil
Our holdings offer significant upside vs. the commodity
Note: Stock return is calculated using a steady-state oil price, assumes production costs rise with that steady-state oil price and a 6x EBITDA multiple
Please see Elm Ridge Disclosures on Slide 25.
February 2016 24 ELM RIDGE
“Be Fearful When Others Are Greedy.
Be Greedy When Others Are Fearful.”
― Warren Buffett
Please see Elm Ridge Disclosures on Slide 25.
February 2016 25 ELM RIDGE
Elm Ridge Disclosures
Any projections, targets, or estimates in this report are forward looking statements and are based on Elm Ridge's research, analysis, and assumptions made by the Adviser. All expressions of opinions are subject to change without notice. Due to various risks and uncertainties, actual events, results or the actual performance of the investments may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this Presentation may be relied upon as a guarantee, promise, assurance or a representation as to the future. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
Please see Elm Ridge Disclosures on Slide 25.
Contact: [email protected]