UPSTREAM OIL CAPITAL EQUIPMENT CALL

CALL WITH THE WOODLANDS GROUP (MATT AND JAMES MCDEVITT)

JAY VAN SCIVER, CFA

INDUSTRIALS TEAM

DISCLAIMER

TERMS OF USE

DISCLAIMER

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U.S. Shale Equipment Market James McDevitt / Matt McDevitt | OIL The Woodlands Group

January 5, 2015

Agenda

CAPEX Budgets & Capital Markets

High Horsepower Diesel Engine Market

Drilling Rigs

Equipment Costs

Power Generation / Electrical Houses

Solids Control / Top Drives

Additional Equipment

Oilfield Equipment Refurbishment

Oilfield Logistics

Fracking Equipment Outlook

2015 – 2016 Game Changers

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Disclaimer: Neither the information nor any opinion expressed constitutes an offer, or an invitation to make a offer, to buy or sell any security or any options, futures, or other derivatives related to such securities. Although we believe the information in this document to be accurate, we make no such guarantee. This document is for general information purposes only, it does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Any statements regarding future prospects may not be realized, and past performance is not necessarily a guide to future performance. This document is strictly private, confidential and personal to its recipients and should not be copied, distributed or reproduced in whole or in part, nor passed to any third party.

U.S. Shale Market

CAPEX Budgets & Capital Markets

Decision to Drill U.S. Shale Market

Decision to Drill

Oil Prices

IP (Initial Production)

Drilling and Completion

Costs

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Common Theme for 2015 CAPEX Budgets for Shale Producers

Oasis Petroleum Inc. (Houston, TX)

Plans to cut capital expenditures (CAPEX) by 44% in 2015

Oasis currently has 16 rigs running in Indian Hills (Bakken)

Move to a 10-rig drilling program by the end of January

Then drop to a six-rig program by the end of March

Expect to boost production by 5-10%

Strong hedge position in 2015 with over 53% of 2015 oil volumes hedged with an average floor of $89.13

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Source: NGI (Article by Charlie Passut)

Capital Markets as of January 2015

"The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43% from an all-time low of 5.68% in June", says BoAML.

Banks are currently in the process of reviewing their portfolios for companies that have Oil and Gas exposure

Stress Test: 30% reduction in EBITDA to see if the company can meet loan covenants

Banks are increasing reserves to cover additional risk

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Source: RigZone

Typical U.S. Shale Well Budget

U.S. Shale Market

Oilfield Equipment

2015 Equipment Spending Trend

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Diesel Engine Market for Oil & Gas Drilling Rigs

“According to several industry experts, at least 80% of the diesel engines are made by Caterpillar, followed by smaller market shares for Cummins and MTU Detroit Diesel.”

Source: Reuters

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Cat Prime Power Generation

The Cat 3512 @ 1200RPM Large Field Population – in Production Early 1980s Industry Proven Durability: Overhaul Lives of 33,000-45,000+ Hrs Seen in Field on Land-Electric 3512B 3512C Update – Better Power Density Than Competitors The engine generator combo ranges from $375K in cost to $425K. The average drilling rig has 3 to 5 Cat units installed.

The Mechanical Cat 3512 @ 1900RPM

Cat Well Service Oilfield Engine

High Horsepower Diesel Engines

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MTU Prime Power Generator

The MTU 12V 4000 @ 1500RPM DL1200M Generator Set is the most common oilfield configuration. The MTU Series 12V 4000 T95 @ 1900 RMP Has Tier 4 Model available

MTU Well Service Oilfield Engine

High Horsepower Diesel Engines (cont.)

Cummins Prime Power Generator

The Cummins QSK38 @ 1800RPM The Cummins QSK50 @ 1900 RPM

Cummins Well Service Oilfield Engine

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Qty Description Ext. Price Qty Description Ext. Price Qty Description Ext. Price

1 2000HP Drawworks AC w/motors $1,562,500 1 Shaker Tank $225,000 2 Floor Winch/Man rider 10k lifting capacity $125,000

1 Deadline Anchor 1 1/2" $31,250 2 Shale Shakers 3 Panel $100,000 1 BOP Trolley System pneumatic troley & lift $187,500

1 Hydraulic Catheads $56,250 1 Mud Cleaner 3 Panel 2 desander 20 Desilter $93,750 1 Choke/Degasser Skid $56,250

1 500T Block $100,000 1 Vacum Degasser Swaco $40,000 1 Choke Manifold 5K Psi $200,000

1 Hook American Block 500 T $200,000 2 8x6 Centrifugal Pumps Mission $25,000 $1,208,750

1 Swivel American Block 500 T $200,000 1 Agitators Brandt $10,000 1 Mech Rigup $750,000

1 Swivel Union Kit 5,000 Psi $5,000 1 Suction Tank $250,000 1 Elec Rigup $687,500

1 Rotary Table $237,500 2 8x6 Centrifugal Pumps Mission $25,000 1 Test/Com & Trainning $125,000

$2,392,500 3 Agitators Brandt $30,000 $1,562,500

2 Weatherford MP 16 5000 PSI $950,000 1 Hopper Skid w 2 standard Hoppers $25,000 $14,662,625

$950,000 1 Reserve Tank $200,000

3 3512 Diesel Engine w/Kato Gen $1,432,500 4 Agitators Brandt $40,000 Qty Description Ext. Price

3 Engine Skid $195,000 1 8x6 Centrifugal Pumps Mission $12,500 1 1250 AC Canrig Top Drive $1,906,250

2 Air compressors GD ST 75 $70,000 1 Suction System $50,000 1 Hydraulic Catwalk (Canrig 3000) $587,500

1 Air Dryer Gardner Denver DGH 370 $10,000 1 HP System $125,000 1 Floorhand & HPU (FH 100) $286,235

1 Cold Start $9,375 $1,251,250 1 Bop Stack 13 5/8"x 10k $852,253

2 Air Receivers - 240 Gallon $3,750 1 Drill Water Tank/Trip Tank Combo $81,250 1 Handling Tools $200,000

1 Air Receiver - 400 Gallon $4,375 1 400 BBL Fuel Tank $68,750 1 Skidding System $325,000

$1,725,000 1 Mech/Electritian House $68,750 1 4TH Generator set $595,000

1 4X5 VFD System with TD AC Module $2,687,500 $218,750 1 3rd Mud Pump Package $825,000

$2,687,500 1 Catwalk $31,250 1 Mud Watch and 7 Pen Geolograph Digital. $343,750

1 152' X 30' 1.0 M Mast $1,250,000 1 Grasshopper/Cable Trays $125,000 1 20,000ft Drill Pipe $1,500,000

1 30' Substructure $1,125,000 1 Drill spooler and line 7500 ' $85,000 Subtotal $7,420,988

1 Dual Standpipes 5,000 Psi $56,250 1 Closing Unit (HMI Controls) $250,000 Total $22,083,613

1 Standpipe Manifold 5,000 Psi $75,000 1 Closing Unit Skid $50,000

1 Rathole Scabbard $3,750 1 Vibrator Hoses $31,250

1 Mousehole Scabbard $3,750 1 Rotary Hose $16,250

1 Mast Stands & Support Equipment $152,625 1 Wire Line Unit $20,000

$2,666,375 10 Pipe Racks $31,250

Equipment Costs for a

2000HP Drilling Rig

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Diesel Generator Systems on Land Drilling Rigs Equates for Only 10% of Capex Budget on Complete Rig Package

Cat Prime Power Preferred in Drilling Rig Market Due to Reliability and Large Service Network World Wide

$1.2M to $1.5M Worth of High Horse Power Engines per Drilling Rig

Power Generation for Drilling Rigs

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Silicon Control Rectifier (SCR) Houses are the Prime Electrical Control for DC Electric Rigs. Prices Ranges from $600K to $1M

Variable-Frequency Drive (VFD) Houses are the Prime Electrical Control for AC Electric Rigs. Prices Range from $1.8M to $4.5M

VFD & SCR Electrical House Manufacturers

Siemens, ABB, Vecon, Unico Provide 50% to 75% of Capex for Electrical House Components

Omron Sold Out Production thru 2015

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DC Rig Drilling Controls & Console AC Rig Drilling Controls & Drillers Cabin

85% of All New Drilling Rigs Built

Today are AC

DC vs. AC Drilling

Controls

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Solids Control Equipment

Manufacturers

Drill Rig Mud Systems Cost Between $1.2M to $4M

Derrek, MI Swaco and NOV Brant Dominate the Solids Control Systems

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Top Drive Manufacturers

Top Drives Range in Price Between $1.8M to $3.5M 85% of Drilling Rigs Worldwide Use Top Drives

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Weatherford Iron Derrickman CANRIG Hydraulic Catwalk CANRIG Iron Roughneck

The Iron Derrickman costs between $1.7M to $1.9M. This increases safety speed by using a Derrickman in the monkey board.

The Hydraulic Catwalk costs between $450K to $700K. The unit improves safety and efficiency of delivering the drill pipe to the drill floor.

The Iron Roughneck costs between $225K to $650K depending on size and manufacturer. The unit improves makeup and breakup time between drilling and tripping pipe.

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Rig Up Yard Conroe, Texas (2014)

2000HP Drilling Rigs being Refurbished

Total Project Scope

was for 9 complete drilling rig packages refurbished

Total Project Value $500M, Completion 1st quarter 2015

Drilling Rig Refurbishment

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When Oil Prices Collapse, Drilling Rig

Equipment Manufacturers Rely on

Refurbishment of Equipment

Refurbishing Equipment is only

30% to 50% of New Equipment Cost

Cost of American Mud Pump Package Refurbishment is roughly $375K

Cost of New American Mud Pump Package is roughly $900K

Oilfield Equipment Refurbishment

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National 110-UE Drawworks 1500HP Removed from Drilling Rig for Refurbishment

National 110-UE Rebuild Cost Roughly $850K National 110-UE Brand New Cost $1.9M

Refurbished Equipment

Delivery Times Average 50% to 75% Less Then

New Equipment

Oilfield Equipment Refurbishment (cont.)

U.S. Shale Market

Oilfield Logistics

Truckloads - Site Prep to Well Completion

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Cranes in the Oilfield

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Leasing vs. Rentals Crane Size (100 to 225 Ton) Drilling Rig and associated equipment moves

every 10 to 20 days per well (Eagle Ford) Mobilization 1 to 3 days Skid – Less than one day (Pad Drilling)

Estimated Crane Rental Rates

Move in Rate Starting at $3 to 5K

Hourly Rate $350+ per Hour

After 4:00pm Overtime

Overnight Per Diem Charge

Minimum 8 Hrs

U.S. Shale Market

Fracking Equipment Outlook

Engine Manufacturer Backlog for US Fracking Market (Rough Estimate)

New Engines for Fracking Fleet Growth

Estimated Additional HP to be added in 2015

1.1 Million

Engine Size 2500 HP

Estimated New Engines 440

Estimated Backlog $ 143 Million

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Replacement / Rebuilt

Estimated Engines that Need to be Replaced/Rebuilt

3,000

Engine Size 2500 HP

Estimated New Engines 1000 (Low Side)

Estimated Backlog $ 325 Million

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Nabors Well Services

Fracking a well (6 to 10 days)

Fracking Pump Engine can consume up to 90 gallons of diesel per hour (10 -20 units per site)

Burn Rate per day for a 10 Pump Fleet averages about 10 thousand gallons of diesel per day

US Fracking Fleet burns approximately 1.7 Billion Gallons of Diesel per year (Rough Estimate)

Diesel Usage on a Frac Spread

2015-2016 Game Changers

Electric Frac

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Turbine Diesel Engine

CAPEX High Low

Maintenance Low High

Fuel Cost Low High

Weight/Footprint Low Medium

Emissions Low High

Solution: • Replace Mechanical Engines in a Frac Spread with 1-2 Turbine and Traction Motors • Use Field Gas or LNG

Problem: • High Wear and Tear on Mechanical Engines, Rebuild or Replace Every 2 Years • Extremely High Diesel Usage

Many North American E&P companies are actively moving towards natural gas for their Drilling and Fracking Operations

Reducing Pressure Pump Maintenance for Frac Fleets

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Source: Energy Resources

Problem: Abrasive Sand used in Fracking causes tremendous wear and tear on the Pressure Pumps Maintenance Costs for Pumps can run into the millions of dollars annually for a fleet of 10

Pumps Downtime on Pumps can cost hundred of thousands of dollars per incident

Solution: Avoid Abrasive Sand from Entering the Pressure Pump Use an Energy Transfer System

• Hydraulic pressure is transferred directly from clean water to the fracturing fluid

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QUESTIONS / DISCUSSION

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