Lyons Presentation CERI 2015 Petrochemical Conference

2015 Calgary upstream
CFO survey
Final report
June 2015
We live in challenging times
We undertook this study to gain a deeper understanding of the

perspectives of upstream oil and gas Chief Financial Officers
(CFOs) on several topics, specifically:
The trajectory of oil prices and implications on their strategy
Actions to sustain performance in the current environment
The first quarter of 2015 will

look atrocious, because the oil
shock is a big deal for us.
Governor of the Bank of Canada, March 30, 2015
Actions to position for market recovery

Priorities for the business and finance team during the next
312 months
We conducted individual interviews with each CFO between
March 30, 2015 and April 30, 2015.
Amid the gloom and cut backs

in industry, the strong will get
stronger.
The Economist, January 24, 2015
Darwinian oil patch will result in

future damage of scarcer
supply.
Peter Tertzakian, ARC Financial, March 11, 2015
WTI USD/bbl
5/29/2014
104.26
44.88
WTI USD/bbl
3/13/2015
WTI pricing per www.eia.gov

Deloitte LLP and affiliated entities. | 2015 Calgary upstream CFO survey Final report
Study overview
Participant profile
The aggregate production of respondents accounts for over
30% of Canadas total 2014 production of oil and gas
Both public and private companies are represented
Participants have domestic and foreign assets
Producers have conventional and unconventional oil, gas
and NGLs with the commodity mix varying from over 65% oil,
balanced production, to over 65% gas
Daily production from 25,000 boe/day to 500,000 boe/day,
including some of Canadas Top 10 producers
Range of net debt vs projected cash flows ranged from less
than 2.0 to over 4.5
Number of participants (CFOs) interviewed individually
18
Combined boe/day production of participants
>2.1
million
Range of commodity mixes of respondents
Respondents % of Canadas overall production (2014)

7 respondents
>65% oil
production
>30%
6 respondents
Balanced oil and
gas production
5 respondents
>65% gas
production
Range of daily production of respondents
7 respondents
25,000 50,000 bbl/day
6 respondents
50,000 -150,000 bbl/day
5 respondents
> 150,000 bbl/day
Participant range of net debt vs projected cahflows*

* Projected 2015 cashflows were used as conditions that presently prevail and
were only manifested in the latter stages of calendar 2014.
<2.0
2.0-4.5
>4.5
3
This time is different
OPEC pricing announcements and forecasts

Increased US production
Stalling growth in Asian economies
How insane is it that the

industry has relied on
OPEC to artificially inflate
pricing and their massive
capital investments have
been predicated on OPEC
continuing to play that role.
Saudis are looking to

crush marginal
producers.
Higher growth rate of the US economy

Decline rates are
much steeper.
Access to Capital
2008-09 was a global
economic crisis, this is
really limited to energy.
Saudis will go all the way

to erode balance sheets
and investor confidence to
create potential long-term
market share.
The risk profile of the WCSB has changed
Structural shift away from natural gas drilling

Full cycle dry gas has been uneconomic in Canada for
several years no indication that this will change
The average cost per well drilled in the WCSB has risen
dramatically as:
new technologies are implemented (multi-stage fracturing)
deeper, more technically difficult reservoirs are targeted
(i.e. Duvernay)
Liquids rich strategies can work but are challenged by

infrastructure constraints and depressed gas prices
station 2 pricing in NEBC at significant discount
Remain cautious on gas due to LNG uncertainty and

mountain of gas in the Marcellus
Risk for new entities has shifted from exploration to

development
Balance sheets need to adjust accordingly hence larger
initial capital raises
Undercapitalization remains a risk
The outlook for WTI?
Which of the following describes your outlook of

when WTI prices will return to US $70 80/bbl?
Recovery of WTI prices to US $70-80/bb
<12
28%
Longer than 12 months

Many also commented on factors that have softened the
impact of the price decline:
The weakening of the CAD vs the USD
Hedging positions for the remainder of 2015
Months
>12
Months
72%
CAD and USD WTI prices

(FX rates per Bank of Canada)S
USD WTI
CAD WTI
Interview
Period
April 2015
CAD WTI $72
USD WTI $60
June 2013
CAD WTI $96
USD WTI $93
Weakening FX rate resulting in favourable CAD WTI
WTI pricing per www.eia.gov
*from May, 2015
Hedging provides additional runway for some companies
Many indicated they are reluctant to lock in

losses by entering into hedges at current
prices, despite their belief that prices will
remain below US$70 for the foreseeable
future.
Larger producers appeared more reluctant to

incur the costs of a hedging program and
prefer to self-insure.
A third group saw a multiple year hedging

strategy as a key element of their financial
strategy. These producers appeared more
concerned with the health of their balance
sheets should WTI stay at current levels (as
they predict) in excess of 12 months. CFOs
also pointed out that US$60 WTI at an FX rate
of 1.25 is still C$75.
Source: Peters & Co. Limited estimates, Company reports. Note: Peters & Co. Limited is currently
restricted on Storm Resources Ltd., Tamarack Valley Energy Ltd., and TORC Oil & Gas Ltd.
Challenge or opportunity?
CFOs described the current situation as both a

challenge and an opportunity, pointing out that
those who can effectively handle the volatility will
likely be rewarded with the chance to acquire
assets at compelling valuations and emerge as
stronger companies moving forward.
Proportion of participants (CFOs) identifying current

conditions as an opportunity or challenge
Helps us to be more
nimble; forces us to
correct.
As long as you have the

balance sheet, this is an
opportunity.
This is a reset on capital

allocation in the industry
cost structure needs to
change.
Because of our debt level, it is a

problem; if we can manage it, it
will turn into an opportunity.

Proportion of participants (CFOs) considering or applying
the following strategies to manage current and potential
future prices
REDUCING
COSTS
SHORT-TERM CASH
FLOW
CASH FLOW
MANAGEMENT
DEBT
MANAGEMENT
ALTERED PLANS
TO ACCESS
FINANCING
IMPROVING THE
BALANCE SHEET
DEFER SPEND
STRATEGIC
ACQUISITIONS
CUT DIVIDEND
DIVESTITURES TO
MONETIZE ASSETS
MANAGING
CAPITAL
M&A
Industry-wide, increasing cost efficiency is a

focus. CFOs whose companies are smaller
and in weaker financial positions were more
likely to identify this as a priority.
Debt reduction and managing lenders

expectations were consistent themes.
Growth capital has largely been deferred,

with sustaining capital reduced as well in
some cases. Despite having cut dividends,
many are adopting a wait-and-see
approach noting additional cuts may be
required.
Most indicated that the current market is
challenging buyers believe assets are
overvalued while sellers want to avoid
selling at low valuations.

Cash flow management
Reducing contractor and employee headcount.
Percentage cost reduction achieved by CFOs,

shown proportionally
Seeking cost reductions from suppliers. Most

indicated that achieving approximately 10%
reduction is realistic.
Improving management of receivables from JV
partners while being strategic in vendor
payments and realizing discounts for
early payment.
8%
17%
8%
67%
Achieved 10% reduction

10
Priorities for the future

Operational excellence
The resounding feedback from CFOs is that there is
increased focus on getting the most out of what
youve got. In their view, relevant areas being
considered include:
CFOs were asked what elements of operations excellence

are priorities in the next 3 to 12 months
Field productivity, optimizing production and reducing

field costs was identified as a main priority.
Operational
Readiness
Asset management, managing field assets more

strategically and more analytically was identified as a
moderate-to-high priority by the majority of participants.
Field
Productivity
Many highlighted recent or planned investments in

operations technology to do more with field data
available, as well.
Operations
Technology
Operational readiness was also highlighted as a priority

by those dealing with the transition of capital projects
to operations.
Operational
Risk
Management
Operational
Excellence
Operations
Management
Systems
Regulatory,
Safety and
Environment
Asset
Management
Sustainability
Highest
priority
Medium
priority
Low
priority
11
Global breakeven prices
12
Global oil and bitumen production will reduce as a result of

cancelled projects
13

Capital cuts
Some degree of reduction in capital spending was noted by almost all

participants
Growth capital was the first to be cut
CFOs far less likely to reduce sustaining capital for fear of negatively impacting
longer term cash flows
% cut to capital spending completed*
No cut
1-20%
20-40%
Proportion of participants (CFOs) who had

completed all planned capital cuts
>40%
*Some participants have made further cuts as part of their

Q1 releases, not captured in the above chart
Yes (67%)
No (33%)
14
E&P capital spend public announcements

Public E&P 2015 capital spending announcements to date
are over 50% below prior year
15

Capital deployment
CFOs emphasized that capital deployed was largely focused on sustaining production in existing plays rather than
growth or diversification. Capital decisions and planning are being based predominantly on current pricing, with little
allowance for any increase in WTI. Companies that had improved their capabilities, skills and speed associated with
running scenarios and cash flow projections commented that they were enjoying significant benefits in these
dynamic times.
WTI USD/bbl used in making capital decisions
16

M&A
We are not looking for other peoples

low quality assets.
If prices stay flat, people will

be forced to sell.
Always marketing non-core

properties and looking for ways to
grow.
Positioning
for strategic
acquisitions
56%
Forced to
consider
monetizing
assets
44%
Difficult to do strategic
acquisitions now.
Looking to monetize the balance

sheet or assets.
People have lost faith in looking at

disposals at the moment.
Selling our assets does not make sense today. We are

planning transactions to align our portfolio, not because of the
oil price change.
17
Global M&A activity: Since 1st Dec 2014

Recent trends: Deals and intelligence
M&A activity trend by asset vs Corporate/JV/Licensing
Asset Vs Corporate/JV/Licensing M&A Activity
80
80.0
250
60.0
200
60
40.0
150
40
100
20.0
Count of Deals
China
Brazil
Russia
India
Value Sum US$ bn
Argentina
Corporate, JV, Licensing
0
Mexico
Asset Value
Mar
Apr
Corporate, JV, Licensing
Australia
Feb
UK
Dec
Jan
Asset Count
Canada
50
US$ bn
20
Count
M& Activity in top 10 countries
300
USA
100
M&A activity in top 10 countries
Asset Vs. Corporate
There is an increase in M&A Activity involving both assets and

corporate or JV or licensing instances since January. There was
a drop in M&A activity in January corresponding to the bottoming
of oil price
The total value of M&A related deals or interests shown by
companies has shown mixed results. Activities involving assets
increased gradually since January. However, value of M&A
intelligence involving corporate takeovers, Joint Ventures or
Licensing decreased in February before rising sharply in April
(reflecting Shell-BG deal of US$ 70 bn)
M&A Activity in top 10 Countries
USA tops the list with maximum number of M&A related

intelligence and deals in past 20 weeks followed by Canada, UK
and Australia
In terms of total value of such M&A intelligence and deals, UK is

significantly higher compared to other nations. This includes the
US$ 70 bn deal between Shell and BG
General observations:
M&A activity picked up towards the end of Q1 2015
as oil prices moved upwards and stabilized
around US$ 50.
North America dominates the number of deals as
well as value from 2013-2015 YTD including in
recent weeks, except for the anomalous US$ 70 bn
takeover bid of BG by Shell in Europe.
Last 15 days in April recorded maximum number
of M&A activities in Q1 2015 with 68 instances.
18
Deloitte perspective
M&A and managing uncertainty
Upstream M&A activity in Canada

25,000
120
80
Deal value ($MM)
15,000
60
10,000
40
5,000
-
Volume of deals
100
20,000
20
Q1 10Q2 10Q3 10Q4 10Q1 11Q2 11Q3 11Q4 11Q1 12Q2 12Q3 12Q4 12Q1 13Q2 13Q3 13Q4 13Q1 14Q2 14Q3 14Q4 14 Q115
Total disclosed deal value
Number of announced deals
Number of announced deals with disclosed values
Note: Shaded green represents Talisman deal

Source: Cap IQ announced deal, quoted in USD
19
Closing
Longer than 12 months
Both a challenge and an opportunity
Preserve cash flow through reducing dividends, deferring capital, reducing
staff and pressing suppliers for discounts
Will have long-term benefits for the industry. Increased competitiveness,
greater productivity and improved quality of the workforce
Asset management, field productivity and operations technology
20
www.deloitte.ca
Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an
Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a U.K. private company limited by guarantee, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal
structure of Deloitte Touche Tohmatsu Limited and its member firms.
Deloitte LLP and affiliated entities.
21

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2015 Calgary upstream

We live in challenging times

We undertook this study to gain a deeper understanding of the

The first quarter of 2015 will

Actions to position for market recovery

Amid the gloom and cut backs

Darwinian oil patch will result in

WTI pricing per www.eia.gov

Number of participants (CFOs) interviewed individually

Range of commodity mixes of respondents

Respondents % of Canadas overall production (2014)

Range of daily production of respondents

Participant range of net debt vs projected cahflows*

This time is different

OPEC pricing announcements and forecasts

How insane is it that the

Saudis are looking to

Higher growth rate of the US economy

Saudis will go all the way

The risk profile of the WCSB has changed

Structural shift away from natural gas drilling

Liquids rich strategies can work but are challenged by

Remain cautious on gas due to LNG uncertainty and

Risk for new entities has shifted from exploration to

The outlook for WTI?

Which of the following describes your outlook of

Longer than 12 months

CAD and USD WTI prices

*from May, 2015

Hedging provides additional runway for some companies

Many indicated they are reluctant to lock in

Larger producers appeared more reluctant to

A third group saw a multiple year hedging

CFOs described the current situation as both a

Proportion of participants (CFOs) identifying current

As long as you have the

This is a reset on capital

Because of our debt level, it is a

Actions to sustain performance in the current environment

Industry-wide, increasing cost efficiency is a

Debt reduction and managing lenders

Growth capital has largely been deferred,

Actions to sustain performance in the current environment

Reducing contractor and employee headcount.

Percentage cost reduction achieved by CFOs,

Seeking cost reductions from suppliers. Most

Achieved 10% reduction

Priorities for the future

CFOs were asked what elements of operations excellence

Field productivity, optimizing production and reducing

Asset management, managing field assets more

Many highlighted recent or planned investments in

Operational readiness was also highlighted as a priority

Global breakeven prices

Global oil and bitumen production will reduce as a result of

Actions to sustain performance in the current environment

Some degree of reduction in capital spending was noted by almost all

Proportion of participants (CFOs) who had

*Some participants have made further cuts as part of their

E&P capital spend public announcements

Actions to sustain performance in the current environment

WTI USD/bbl used in making capital decisions

Actions to sustain performance in the current environment

We are not looking for other peoples