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31 May 2015 Integrated Oil US Integrated Oils And S.10-55ibbl oil isn't going to suffice Despite arguments about asset breakevens in the onshore at prices as low as $40/bbl, the number that matters for the resumption of drilling/completion activity is corporate level cash flow, not single well rates of return, in our view. Despite the sector being fairly well capitalized at present, partially thanks to a recent wave of equity issuance. total leverage remains quite high and companies are likely to stick relatively close to cash flow as activity picks up. Across the E&P universe, if we assume 20% decline in well costs and spend within cash flow in 2016/2017, we estimate an average oil price of $70/bbl to support 35% of pre-collapse production growth (our estimated demand for US onshore crude by late 2016). This falls to $60/bbl breakeven when spending 120% of cash flow. In other words. we will need a materially higher price than asset-breakeven prices to make the US onshore "machine" work. Figure 6: Oil Price to generate 35% of prior peak growth in 2016-17 590 580 570 560 350 540 • 530 S20 510 • so MRO Avg Sant Omar*. Sent I. 572 5.6 By late 20 €7, i,c€d on to you; buts By late 2017, rising declines and deferred FIDs will drive a rapidly escalating call on US supply. Major oil project FIDs fell to 6 in 2014, the lowest level in 15 years, well below the average of 23/yr since 2000, with 2015 likely to be even lower. With an average of 1.2 MMb/d of capacity sanctioned a year over the past 10 years, the hole left by deferrals will be difficult to address, sending the call on US crude growth north of 1,000 Mb/d/yr by late this decade. [Figure 7: Major Oil Project Sanctions (190s) by year 40. 16 30 Figure 8: Peak 3002 2SCO capacity of project FIDs by year (Mb/d) 03 ro 2000 1300 3 le 200 4iP 4r 05' 4r 4, 4r 4t 44. 4r 04. 49 4r 4r 0 a 6, 4r 1 1 4r 4' 4, 6r OP 4' se 1 6P 4P 40' Wet C•mawty U.n 4%a4 theat.evor .1..easee Oeurree.11,ea. Mai &WAN:Y. Deutsche Bank Securities Inc. Page CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0058856 CONFIDENTIAL SDNY_GM_00205040 EFTA01367324