Oil & Gas Valuation Considerations

July 16, 2015

Global Financial Advisory Services

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Outline

Oil Revolution

Valuation Considerations

Current Trends

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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]

Oil Revolution
 What is Driving the Oil Revolution

Conventional vs. Unconventional

Growth in Reserves
Reserves
Discoveries
Millions of Barrels
Millions of Barrels
40,000 6,000

35,000
5,000

30,000
Reserves
4,000
25,000

20,000 3,000

15,000
Discoveries 2,000

10,000

1,000
5,000

0 Source: Tudor, Pickering & Holt & DrillingInfo.com 0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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What is Driving the Oil Revolution
Conventional vs. Unconventional

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What is Driving the Oil Revolution
Technology Conventional vs Unconventional Drilling Targets

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What is Driving the Oil Revolution
Technology - Tools

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What is Driving the Oil Revolution
Operational Efficiency Walking Rig

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What is Driving the Oil Revolution
Upstream Private Equity Capital Focused on U.S. E&P

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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]

Valuation Considerations
Oil and Gas Industry Overview

Supply Chain

Midstream (transportation, processing, and storage)

Natural
Gas Natural Gas
Storage

Gas Mixed
Ethane
Natural Gas Processing / NGLs
Propane
Treating
Butane
Iso-Butane
Nat. Gasoline
NGL
Storage
Crude Oil NGL
Fractionation

Downstream
Upstream (Retail &
(E&P) Storage &
Refined
Products
Distribution)
Terminals
Storage

Refining
(Downstream)
+ Oilfield Services & Equipment

Contract Drilling Compression

Pressure Pumping OCTG
Completion services Rig Equipment
Seismic/geophysical Offshore Equipment
Fluids & drill bits

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 Upstream

Upstream Entities by Size, by Type

Integrated

Independents

Upstream MLPs

Number of Privately Held E&P Operators

Private

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 Value Drivers
Upstream Commodity price directly impacts valuations

Value is highly correlated to commodity price

$160.00 $90.00

$80.00
$140.00

$70.00
$120.00

$60.00
$100.00
Dollars Per Barrel

$50.00

$80.00

$40.00

$60.00
$30.00

$40.00
$20.00

$20.00
$10.00

$- $-
1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 1/3/2013 1/3/2014 1/3/2015

Crude Oil (WTI) XOP (E&P ETF)

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Value Drivers
Price of Oil Break Even

Source: Bloomberg

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 Value Drivers

Upstream M&A Transaction Value

Monthly Global Deal Value

120.00 160.00

140.00
100.00

120.00
Total Transaction Value, US$B

80.00
100.00

Deal Count
60.00 80.00

60.00
40.00

40.00

20.00
20.00

0.00 0.00

Corporate Asset Deal Count

2015 IHS

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 Upstream Valuation

Oil & Gas Ownership Types

Fee minerals (surface and mineral ownership may be severed)
Typically never expire
Economic return primarily in form of (i) upfront lease bonus and (ii) royalty payments
Grants the exclusive right to explore and develop minerals (oil and gas) on the property

Royalty interests (stem from fee mineral ownership)

Non-cost bearing (other than severance, in some cases other costs)
Typically 12.5% to 25.0% of all oil and gas produced (8/8ths)

Working interests (bears all cost of drilling and operations)

a/k/a leasehold interest the lease/interest expires when production ceases
Primary asset base of oil and gas (E&P) companies
Can be an operated working interest or non-operated working interest

Overriding royalty interests

Carved out of the working interest and thus expire when lease expires
Often given by working interest owner, the E&P, to award staff (geologists, landman) and others
Non-cost bearing

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Upstream Asset Valuation Methodologies

Valuation Approach

Producing Fee Market Approach Income Approach Other (Rule of Thumb)

Minerals

Drill-out Scenario
Non-

Transaction Multiples
Created by Reserve Lease Bonus Multiple
($/Net Acre)
Engineer (DCF)
Asset Type

Interests
Royalty

Transaction Multiples Discounted Cash Flow

Multiple of Cash Flow
($/Net Acre) (Reserve Report)
Interests
Working

Transaction Multiples
Discounted Cash Flow
($/boepd or $/proved Multiple of Cash Flow
(Reserve Report)
bbl.)

Preferred
Difficult
Rare

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 Upstream Asset Valuation

Discounted Cash Flow

Most commonly cited value from reserve reports is PV-10 (present value using discount
rate of 10%).
PV-10 values do not capture the risk attributes of different reserve categories or different
plays.
As a risk-averse investor, which of the two following opportunities would you prefer?
PV-10

Reserve Category Drilling Costs Low Oil Prices Base Case High Oil Prices
Well A PDP $ 0 $ 500,000 $ 1,000,000 $ 1,500,000
Well B PUD 3,000,000 (1,000,000) 1,000,000 3,000,000

Typically, market participants either apply direct haircuts to PV-10 values or use different
discount rates for different reserve categories (e.g., PV-8 for PDP and PV-25 for PUD)

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 Upstream Asset Valuation

Key Metrics

Oil and gas mix

Production and reserve figures are often cited in terms of barrels of oil equivalent or
boe which combines oil and gas statistics into a single measure, generally based on
the energy content. As oil has been more valuable in recent years, oil-focused
production is more valuable.
Reserve life
The R/P ratio (Reserves/Production) measures the time it would take to fully produce
proved reserves at current production levels.
Percent Developed
The amount of proved reserves that have been developed (PDP or PDNP).

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 Upstream Valuation

Guideline Public Company Method

In Thousands of U.S. Dollars Range of Indicated Multiples Indicated

Harmonic Selected ABC Enterprise
Measure of Performance Minimum Mean [a] Median Maximum Multiples Results Value

1 EV / 2015 EBITDAX 4.7x 5.7x 5.7x 7.4x 5.3x 22,135 116,762

2 EV / 2016 EBITDAX 3.7x 5.0x 5.5x 6.5x 4.2x 54,206 230,098
3 EV / LFY Proved Reserves (Mboe) 8.2x 12.6x 11.8x 23.9x 9.9x 19,094 188,225
4 EV / LFY Avg Daily Production (Mboe/d) 47,265.7x 72,279.9x 73,175.5x 126,417.1x 57,024.2x 6 333,021
5 EV / 2015 Avg Daily Production (Mboe/d) 34,231.6x 61,274.9x 64,462.6x 106,592.7x 55,940.1x 7 366,004

6 Concluded Enterprise Value $ 246,822

Additional metric to consider, EBITDAX:

EBITDAX: EBITDA before exploration/drilling costs. GAAP allows for two different accounting
treatments for exploration expenses.

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 Midstream
Midstream Representative Companies

Diversified

Natural Gas Pipeline

Crude/Refined Products

Gathering and Processing

Other MLPs General Partners, Propane, Upstream, Refiners, OFS

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 -50%
0%
100%
150%
200%

-100%
50%
Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08
Value Drivers

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Crude Oil (WTI)

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

^AMZI (MLP)
WTI vs. Alerian MLP Infrastructure Index

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Apr-15

Jul-15
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 Midstream

Midstream Overview

Moving, storing, treating, and Market Capitalization and Number of MLPs

$700 160

separating

Market Capitalization (in Billions)

$600 140

120

Number of MLPs
Pipelines $500
100
$400
Gathering and processing 80
$300
60
MLP-centric businesses $200
40

$100
Distribution history and growth 20

$- 0
prospects 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Market Cap Count

Source: Bloomberg

Unconventional production presents strong opportunities some challenges

Production increases benefit the industry broadly
Location of the production sources have changed, creating growth opportunities and challenging
certain legacy assets

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 Value Drivers
Midstream Master Limited Partnerships Yields

Average MLP Distribution Yield by Industry

14.00%
12.44%
12.00%

10.00% 8.73%
7.81% 8.20%
7.66% 7.54% 7.41%
8.00%
5.57% 5.59%
6.00%

4.00%

2.00%

0.00%

Source: Source: National Association of Publicly Traded Partnerships and S&P Capital IQ; data as of 6/30/15

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 Oil Field Services
Oil Field Services Representative Companies

Diversified

Equipment & Suppliers

Well Services and Fluid

Management

Contract Drilling

Contract Compression, Seismic Service, Oilfield

Specialty Providers
Distribution, Offshore Transport

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Oil Field Services
Oil Field Services EBITDA Multiples
Oilfield Equipment Manufacturers and
16.0x Oilfield Services & Equipment - Diversified 16.0x Suppliers
14.0x
14.0x 14.0x
12.0x 12.3x 11.9x
12.0x
12.0x
10.6x 9.5x
10.0x 8.8x
10.0x 8.3x 7.9x 8.5x
8.9x 8.0x 7.7x
7.6x 7.7x
8.0x 6.9x 7.3x 7.2x
8.0x 7.4x 7.3x
6.6x 6.8x
6.0x
6.0x
4.0x
4.0x
2.0x

2.0x 0.0x

0.0x
CY 10 CY 11 CY 12 CY 13 LTM LTM LTM LTM LTM
Aug-14 Nov-14 Feb-15 May-15 Jun-15

Oilfield Services Contract Drilling

16.0x
16.0x

14.0x 14.0x
11.9x
12.0x 11.1x 12.0x
9.5x 9.4x
10.0x 8.6x 8.3x 10.0x
8.3x 8.5x 8.0x 8.0x
8.0x 7.5x 7.2x
6.9x 7.3x
8.0x
6.0x 5.8x
6.0x
4.0x 4.4x 4.2x 4.0x
3.5x 3.7x 3.6x 3.9x
4.0x
2.0x

0.0x 2.0x

0.0x
CY 10 CY 11 CY 12 CY 13 LTM LTM LTM LTM LTM
Aug-14 Nov-14 Feb-15 May-15 Jun-15

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Oil Field Services
M&A Transactions Oilfield Services and Equipment

M&A Transactions - Oilfield Service and Equipment

80.0 180

70.0 160

140
60.0

Number of deals
120
50.0
In Billions

100
40.0
80
30.0
60
20.0
40
10.0 20

0.0 0
2008 2009 2010 2011 2012 2013 2014 2015
Asset Corporate Deal Count YTD

Source: IHS Herolds, Inc.; SRR research

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[Update image to B&W version of cover photo see graphics library in wizard. Copy, paste and update this slide as needed to separate sections.]

Current Trends
 Current Trends

Shell Merger with BG Group

Transaction value of approximately $70 billion (cash and stock)

Rationale
Financial considerations at BG
Access to the liquefied natural gas (LNG) market
Synergy realizations, particularly for international projects

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 Current Trends

Halliburton Merger with Baker Hughes

Implications for the industry

Response to concerns over North American activity levels
$2 billion in annual synergies announced
Increase offerings for lower risk, large international projects
Potential hurdles
Antitrust challenges to the merger many, many jurisdictions and
overlapping service offerings
Extraordinary 10% break-up fee
Synergy realizations, particularly for international projects

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Consolidation: Who is next?

Hunters?

Hunters or Prey?

Prey?

Source: IHS
Questions?

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Contact Information

For further information regarding this document please contact the following:

Shishir R. Khetan, CFA

Managing Director
+1.713.221.5119
skhetan@srr.com

Stout Risius Ross Inc.

815 Walker, Suite 1140
Houston, TX 77002

SRR is a trade name for Stout Risius Ross, Inc. and Stout Risius Ross Advisors, LLC, a FINRA registered broker-dealer and SIPC member firm.

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