EFTA Document EFTA01367320

Deutsche Bank Markets Research North America United States Industrials Integrated Oil Industry US Integrated Oils The "Other" 40 Million Barrels a Day and the Call on US Crude Growth The Coming Highs & Lows of Non-OPEC Production (and what It means for US) While significant attention has been dedicated to the analysis of the US supply dynamics over past 6 months, we turn our attention to the less-well understood 40 MMb/d of global crude production (ex-OPEC, ex-US onshore, ex-NGLs), and the outlook for the coming 2-5 years. Key takeaways: 1) Don't expect a major roll-over in Non-OPEC supply through 2017, 2) we still see a call on US onshore growth of 500 Mb/d in 2017 with 2H16 ramp 3) we likely need $65-$70/bbl oil to incentivize and support this growth, 4) post-2017, Non-OPEC shortages to drive rapidly escalating call on US crude and price inflation. Waiting for the Non-OPEC collapse? Don't hold your breath Despite significant capital cuts (20% across our global coverage), and fears of massive Non-OPEC declines, our analysis suggests greater than expected resilience in global Non-OPEC production through 2017, as a slug of major projects works its way through the system. Between 2015 and 2017, we estimate annual, major project-driven growth barrels of 1380 Mb/d, vs. the historical rate of 970 Mb/d between 2004-2013. supporting annual Non-OPEC supply growth of 150-200 Mb/d through 2017. But, there is a call on US onshore oil growth - the new swing producer Even with moderate growth in Non-OPEC production, solid global crude demand will still result in a call on US onshore production growth, although not likely until 2H16 (+350 Mb/d by 4016), rising to -500+ Mb/d in 2017. With current activity levels resulting in slightly declining US onshore production in 2H15, we see the need for increasing activity into late 2015/early 2016 to meet a rising call on US crude into 21116. OPEC production, however, remains a looming risk, where current elevated levels of production (May 2015 estimated 31.6 MMb/d vs. our assumed 30.5 MMb/d target), a lifting of sanctions in Iran, or Saudi strategy could push the US call further into 2017. $55ibbl oil isn't going to suffice Single well economics aside, corporate level cash flow suggests higher price is necessary to incentivize sufficient activity. We estimate an average oil price of $70/bbl to support moderated volume growth (ie. 35%-40% of pre-collapse peak rate) within producer cash flows. This falls to $60/bbl breakeven when spending 120% of cash flow. In other words, we will need a higher price than where we are today to make the US onshore "machine" work. Post-2017? Hold on to your hat... 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. Thriving in moderation - Stocks to own; Upgrade OX? to Buy; Cut HES to Hold Given the relatively cautious medium-term oil price outlook, our preference remains largely for names whose combination of asset quality and balance sheet allow them to support moderate, capital efficient growth within a moderate oil price environment. We upgrade OXY to BUY and downgrade HES to HOLD. Other preferred names include MRO, DVN, EOG. Date 31 May 2015 FITT Research Ryan Todd Igor Gunin3n Research Analyst Research Analyst 1+1/ (+1) ()avid Peanm%d.n Research Associate 1+11 hey Change,' Company Target Price Rating CVX.N 120.00 to 125.CO(USD1 HES.N 90.00 to Ekrir to Hold 75.00ILISO) MRO.N 37.00 to 35.00(USD) MUR.N 51.00 to 46.03(USD) OXY.N 81.00 to Hold to Buy 90.001USD) XOM.N 91.00 to 89.03(USD) DVN.N 70.00 to 81.03(USD) APA N 69.00 to 60.00(USD) APC.N 96.00 to 100.00(USD) PXD.N 182.00 to 175.CO(USD) NBL.N 56.00 to 52.031USD) Rosy Anathe Oink op prek"; Marathon Oil (MRO.NLUSD27.19 Devon Energy (DVN.NLUSD65.22 Occidental Petroleum IOXY.NLUSD78.19 EOG Resources (E0G.NIUSD88.69 Sane Punch* BM 1COMPantrin Chevron 1CVX.NLUS0103.00 ConocoPhillips (COP.NLUSD63.68 Hess Corporation (HES.NLUSD67.52 Marathon Oil IMRO.N)MS027.19 Murphy Oil 1MUR.NLUSD43.46 Occidental Petroleum 10XY.NLUSD78.19 ExxonMobil (X0M.NLUSD85.20 Sourer Dane* &int Buy Buy Buy Buy Buy Buy Hold Buy Hold Buy Hold 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) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0058852 SDNY_GM_00205036 EFTA01367320