EFTA01367320.pdf

Deutsche Bank Markets Research North America Industry Date United States 31 May 2015 Industrials US Integrated Oils Integrated Oil FITT Research Ryan Todd Igor Gunin3n The "Other" 40 Million Barrels a Day Research Analyst Research Analyst 1+1/ (+1) and the Call on US Crude Growth The Coming Highs & Lows of Non-OPEC Production (and what It means for US) ()avid Peanm%d.n While significant attention has been dedicated to the analysis of the US supply Research Associate dynamics over past 6 months, we turn our attention to the less-well 1+11 understood 40 MMb/d of global crude production (ex-OPEC, ex-US onshore, ex-NGLs), and the outlook for the coming 2-5 years. Key takeaways: 1) Don't expect a major roll-over in Non-OPEC supply through 2017, 2) we still see a call hey Change,' on US onshore growth of 500 Mb/d in 2017 with 2H16 ramp 3) we likely need $65-$70/bbl oil to incentivize and support this growth, 4) post-2017, Non-OPEC Company Target Price Rating shortages to drive rapidly escalating call on US crude and price inflation. CVX.N 120.00 to 125.CO(USD1 Waiting for the Non-OPEC collapse? Don't hold your breath HES.N 90.00 to Ekrir to Hold Despite significant capital cuts (20% across our global coverage), and fears of 75.00ILISO) massive Non-OPEC declines, our analysis suggests greater than expected MRO.N 37.00 to resilience in global Non-OPEC production through 2017, as a slug of major 35.00(USD) projects works its way through the system. Between 2015 and 2017, we MUR.N 51.00 to estimate annual, major project-driven growth barrels of 1380 Mb/d, vs. the 46.03(USD) OXY.N 81.00 to Hold to Buy historical rate of 970 Mb/d between 2004-2013. supporting annual Non-OPEC 90.001USD) supply growth of 150-200 Mb/d through 2017. XOM.N 91.00 to But, there is a call on US onshore oil growth - the new swing producer 89.03(USD) Even with moderate growth in Non-OPEC production, solid global crude DVN.N 70.00 to demand will still result in a call on US onshore production growth, although 81.03(USD) APA N 69.00 to not likely until 2H16 (+350 Mb/d by 4016), rising to -500+ Mb/d in 2017. With 60.00(USD) current activity levels resulting in slightly declining US onshore production in APC.N 96.00 to 2H15, we see the need for increasing activity into late 2015/early 2016 to meet 100.00(USD) a rising call on US crude into 21116. OPEC production, however, remains a PXD.N 182.00 to looming risk, where current elevated levels of production (May 2015 estimated 175.CO(USD) 31.6 MMb/d vs. our assumed 30.5 MMb/d target), a lifting of sanctions in Iran, NBL.N 56.00 to or Saudi strategy could push the US call further into 2017. 52.031USD) Rosy Anathe Oink $55ibbl oil isn't going to suffice Single well economics aside, corporate level cash flow suggests higher price is op prek"; necessary to incentivize sufficient activity. We estimate an average oil price of Marathon Oil (MRO.NLUSD27.19 Buy $70/bbl to support moderated volume growth (ie. 35%-40% of pre-collapse Devon Energy (DVN.NLUSD65.22 Buy peak rate) within producer cash flows. This falls to $60/bbl breakeven when Occidental Petroleum IOXY.NLUSD78.19 Buy spending 120% of cash flow. In other words, we will need a higher price than EOG Resources (E0G.NIUSD88.69 Buy where we are today to make the US onshore "machine" work. Sane Punch* BM Post-2017? Hold on to your hat... 1COMPantrin By late 2017, rising declines and deferred FIDs will drive a rapidly escalating call on US supply. Major oil project FIDs fell to 6 in 2014, the lowest level in 15 Chevron 1CVX.NLUS0103.00 Buy years, well below the average of 23/yr since 2000, with 2015 likely to be even ConocoPhillips (COP.NLUSD63.68 Buy lower. With an average of 1.2 MMb/d of capacity sanctioned a year over the Hess Corporation (HES.NLUSD67.52 Hold past 10 years, the hole left by deferrals will be difficult to address, sending the Marathon Oil IMRO.N)MS027.19 Buy call on US crude growth north of 1,000 Mb/d/yr by late this decade. Murphy Oil 1MUR.NLUSD43.46 Hold Occidental Petroleum 10XY.NLUSD78.19 Buy Thriving in moderation - Stocks to own; Upgrade OX? to Buy; Cut HES to Hold ExxonMobil (X0M.NLUSD85.20 Hold Given the relatively cautious medium-term oil price outlook, our preference Sourer Dane* &int remains largely for names whose combination of asset quality and balance sheet allow them to support moderate, capital efficient growth within a moderate oil price environment. We upgrade OXY to BUY and downgrade HES to HOLD. Other preferred names include MRO, DVN, EOG. Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0058852 CONFIDENTIAL SDNY_GM_00205036 EFTA01367320