EFTA01385324.pdf

3 January 2018 HY Corporate Credit HY Multi Sector,Media, Cable & Satellite The pessimistic shift in US supply data is ending • Although US supply has slowly and surely turned back to growth, the Figure 7: Drilling response to price extent of this growth is still very much up for debate. The negative warning signs about slower growth are now beginning to turn around. To Iis intact _00.4.030, rig wont 08.000 be sure, we still observe a drag in monthly production data compared to 1900 —WTI 1.13 14/4 Ms USC*011 110 100 weekly estimates, measuring almost 300kb/d in August. However, we are 1400 F v 90 now seeing the formation of a trough in drilling activity in response to the 110E wn. mat, lagged 40co 1030 lagged WTI price. We assume that more frequent mentions of capital 60 000 discipline will not stand in the way of an uptick in drilling activity through 50 40 March 2018. 200 20 • In addition, rig productivity is likely to recover as it is assisted by the 0 10 Jen-14 J•i-15 Jen.16 Jen-17 10,1-10 deployment of new frac capacity. The hydraulic fracturing subsector of US oil services is currently undersupplied, according to our US oil services 3144~ 13100telms finbroto IP. Etna, limpok Cloatche Best analyst, as a result of a higher penetration of pad drilling, longer laterals, tighter stage spacing, more frac clusters and higher sand loading. • Our oil services analyst notes that in addition to new capacity totaling 1 Figure 8: Completion/drilling ratio is million hhp, an orderbook of 0.5-1.0 million hhp could begin to be rising... delivered in the first quarter. This has the ability to raise the 1.6 9016Ins the pee completed/drilled ratio from 0.73 in the Permian and 0.86 in all other • 010 r0:0Say 1 1.4 • Reforneft regions towards 0.95, and lifting productivity. This would be a reversal of Ontle 0 05 1_2 the decline in completions since September 2016 which was matched by a 1 decline in rig productivity. 06 06 • We believe that the downward shift in US supply growth expectations 04 arplek40, 0ed rep helps explain stronger oil prices over the second half of 2017. and a 02 —01Mccn43114.1t111•3 000 rebuilding of these expectations over the next 4 months could be 00013 06014 04015 04016 damaging for the oil price. San. US EY% Nagar art I•Estimating the US response function In order to estimate the response of the US onshore tight oil industry to various levels of average realised WTI price in 2018, we take as a starting Figure 9: ...boosting rig productivity point the assumption that the industry is cash neutral with 750 oil-directed 900 Seo-18 pets 0060•061 pro0x4vey canoclesn. reViliaref rigs active at a lagged WTI price of USD 50/bbl. For every USD 5/bbl 800 stmt. N 14k in cargiebov:HIn0 above or below this in average 2018 prices, we assume that incremental 700 role annual cashflow of USD 11bn funds an additional 100 rigs, with each rig 600 drilling 18 wells per year (the current average for all tight oil regions is 300 liov.16 We 141 ao.i >dais 061 17.77, or 20.54 spud-to-spud days per well). 400 300 — 0c81) 4•1 — 149v.17 Ms eel • These simple assumptions, along with current rig productivity and legacy 200 J•614 .1••16 .M.616 decline statistics by region, lead to the below sensitivities in supply growth. These figures deal with onshore tight oil regions only (Anadarko, tans US 11* Osuisttelent Bakken, Permian, Appalachian, Eagle Ford, Haynesville and Niobrara), excluding some conventional and all offshore production. Caveats are that the profile of rig count growth, particularly for the higher priced scenarios, shows an unrealistically sudden jump up from the current level to the 2018 average, but we accept this artificiality as a useful simplification rather than attempt to smooth the ramp-up in activity. Consequently, we accept that the shift in production growth in 2018 would be less dramatic in reality. Also, these scenarios hold legacy decline and rig productivity unchanged over the longer term. Given the so-far steady improvements in productivity, the longer term growth estimates in these scenarios should be regarded as a lower bound. Deutsche Bank Securities Inc. Page 49 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086608 CONFIDENTIAL SDNY_GM_00232792 EFTA01385324