EFTA01385323.pdf

3 January 2018 HY Corporate Credit HY Multi Sector.Media. Cable & Satellite Oil Macro: Recovery gains stronger footing Excerpted from 201$ Outlook: Cash jaws sot to open published on December 4 2017 OPEC's US light Oil Round 3> of 0.5-1.0 million hydraulic hp begins to be • Falling US tight oil breakevens have not ruined delivered over the course of the first quarter. This OPEC's game plan. So far, it has been remarkably risks lifting productivity as the completion rate rises successful in managing the difficult task of both toward the drilling rate, reversing the move holding on to market share gains since 2014 and initiated in September 2016. Cost inflation is likely also establishing a floor under prices, all while to be modest as US frac pricing remains subdued facing a tight oil industry which is becoming ever at -60% of the 2011 level. more efficient. We expect that the abiding interest • The economics of non-OPEC pre-FID projects in maintaining market share will make OPEC's Dec- shows a decline in full-cycle costs from USD 53/bbl 18 extension the last. to USD 46/bbl over the last twelve months. • One theory holds that Saudi Arabia's difficulty in Deepwater reserves still contribute the most further lowering its fiscal breakeven (USD 77/bbl, reserves by resource theme, and we see USD down from USD 107/bbl in 2014) means that it 65/bbl as the marginal cost of new supply from oil would prefer overshooting on the oil price. sands projects. However, we believe the fear of re-incentivising Sit-month rally beginning to look mature another wave of strong supply growth in the US • The six-month rally in the crude oil price is now in must factor equally into the calculus, especially danger of being overextended if prices were to rise since well productivity growth shows no signs of beyond USD 65/bbl in our view, a level reflecting leveling off yet. Additionally, the risk of denting the cost of new oil sands projects. A key driver has demand and driving consumers to purchase more been falling US supply growth forecasts, a trend fuel-efficient vehicles should also reduce the which we believe is now poised to turn around. In interest in deliberately sparking an overshoot. addition we see a modest global oversupply in the • Visibility on US supply growth remains poor. first quarter, slowing the pace of inventory Analysts were asked to present on US tight oil to declines. Although Saudi Aramco CEO Amin OPEC on 24 Nov and offered tight oil growth Nasser states oil prices are in "continuous outlooks ranging from +500kb/d to +1.7mb/d in improvement" we believe the road will be more 2018. Our view on US supply growth tends rocky. We see US supply growth as the next towards the lower end of the range at +773kb/d (unquantified) bump in the road in 2018, followed tight oil and +940kb/d total liquids, although we by OPEC expansion in 2019. before we come on to have raised this by 100kb/d on expectation of a the first substantial deficit of roughly -750kb/d in recovery in rig productivity. Sensitivities to the WTI 2020. Only then do we see potential for prices price range from +539kb/d tight oil in the case of rising above the equilibrium defined by marginal WTI averaging USD 45/bbl, and +1.113kb/d tight full-cycle project breakevens. oil at USD 65/bbl. In the next sections we describe (i) the reasons • Tight oil breakevens are likely to rise as long as the behind the next wave of optimism in US supply rate of completions is held back by insufficient growth, (ii) how we might expect US supply to capacity. We expect that the completion respond to various oil price levels in 2018, and (iii) bottleneck will show signs of being loosened by how the economics of pre-FID projects have fallen the end of 01-18 as newly commissioned frac since 2016. capacity begins to be employed, and an orderbook Page 48 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0086607 CONFIDENTIAL SDNY_GM_00232791 EFTA01385323