3Q Upstream Preview: Rigging the Outlook for Growth

Deutsche Bank Markets Research North America United States Industrials Integrated Oil Industry US Integrated Oils and Refiners Date 18 October 2016 Industry Update 3Q Upstream Preview: Rigging the Outlook for Growth 3Q16 Preview: Slowly building momentum ________________________________________________________________________________________________________________ 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) 057/04/2016. Ryan Todd Research Analyst (+1) 212 250-8342 ryan.todd@db.com David Fernandez Research Associate (+1) 212 250-3191 david.fernandez@db.com Joe McKay Research Associate (+1) 212 250-5717 joseph.mckay@db.com Key Changes Company Target Price Rating APA.N 57.00 to 62.00(USD) - EOG.N 108.00 to 110.00(USD) - PXD.N 210.00 to 226.00(USD) - Source: Deutsche Bank Valuation/Risk/Reward Companies in our integrated/large-cap space are valued on either on a EV/DACF multiple (CVX, XOM, COP, OXY) or on a blended NAV, EV/DACF multiple methodology. NAVs assume $70/$65 bbl and $3.25/mcf for Brent/ WTI and HH pricing. Primary downside risks include a decline in global oil demand and/orprice. Upside risks include increased demand and operator efficiency. Companies in our refining coverage are mostly valued under a 2017 multiple-based (EV/EBITDA) SOTP valuation. We find the refiners trading at a 4.5x/2.3x consolidated/ refining-only 2017 EV/EBITDA multiple, below the historical multiple of 4.0-4.5x (consolidated). Upside risks include widening crude differentials, /gasoline inventory draws while key downside risk is a wane in gasoline demand. With OPEC (potentially) reducing some of the downside risk to crude, we (as well as corporates and the market) remain broadly positive heading into 3Q results, with crude, natgas and activity/production offering the potential of positive revisions in 2017. 2H16 acceleration plans across our group have largely set the stage for 2017, with a likely focus into results on potential '17 activity ramps/budget outlooks, continued resource expansion (downspacing and horizon tests) in Permian and STACK, and portfolio management (both buying and selling). We favor DVN and APC into the quarter. Portfolio management (ie. Do you have enough Permian?) One of the more notable aspects of the explosion in Permian transactions (other than valuations) has been who has been completely absent: Integrateds and large-cap E&Ps. With attention shifting to the long-term outlook for growth, large-cap portfolios are under increasing pressure to address perceived imbalances, both as a seller and a buyer. We expect updates from PXD/APC/APA/DVN on the outlook for monetization of non-core assets and/or inventory “tails” (eg. PXD’s selling 15k-30k+ non core Midland acres ~YE/16), both highlighting value and funding future core acceleration. In contrast, we see increasing focus on others (NBL, HES, etc.) to address perceived holes in the portfolio, but with current valuations proving challenging. Resource expansion (Permian, STACK) a steady tailwind The Delaware and STACK basins have commandeered headlines in 2016 as downspacing pilots lent support to resource expansion, and land grabs in the Delaware have reheated a once frosty M&A market. In the Delaware we look for updated/improving drilling results (APC, DVN, NBL, OXY, APA), derisking plans (APC – 2nd BS, Avalon; DVN – Wolfcamp), and new discoveries/purchases (APA, EOG). In the STACK, we look for well results to continue outpacing type curves, and resource expansion on downspacing and as activity moves to the north and west (DVN, MRO). Not to be left behind, initial results from MUR in the Duvernay and Austin Chalk/Upper EF activity in EF should improve long-term outlooks. We provide a full rundown of onshore activity on page 6. Oil growth inflecting, and time to dust off the natgas sensitivities With a stabilization in crude offering support for ongoing acceleration plans, we estimate an increase in rig count of 8%/30% by YE16 vs. 1H16/2Q exit, with another 36% increase expected for 2017, helping to drive an inflection in crude volumes into 1Q17. We estimate 3Q oil vols down 1.3% vs. 2Q, but see 11% growth by 4Q17 (vs. 3Q16), and look for additional color on 2017 budgets and medium-term growth outlooks