An Oil & Energy Insider Exclusive Report

An Oil & Energy Insider Exclusive Report

Table of Contents INTRODUCTION Page 3 ENHANCED OIL RECOVERY Page 4 SUBSEA EXPLORATION AND PRODUCTION Page 5 ANALOG EXPLORATION & SEISMIC MAGIC Page 7 LNG EXPORTS ENGINEERS FIRST Page 8 NATURAL GAS PRICES Page 9 CONCLUSION Page 10 www.oilprice.com I 2

Introduction Getting in early * Watching Technology * Managing Risk * Great Timing There are many aspects of successful energy investing. The profit opportunities are huge, but so is the risk. One of the most important considerations of energy investing is technological advancements and recognizing them before BEFORE they go viral. Call it predictive investing, and it takes an active intelligence network, analysis, a keen understanding of the industry as well as good timing. There are hints that one will learn to recognize; bread crumbs that lead to opportunity, profits and a strategic ability to avoid unnecessary risk. There was an obvious trail of bread crumbs leading from hydraulic fracturing to the shale revolution, and for those who were astute (and patient) enough to follow it, it paid off nicely. But there is more to it than getting in ahead of mass awareness of the technology; it s about understanding the limits of it and establishing a balance of risk and reward. It also about predicting where something like new shale drilling technology will turn up next? Offshore, possibly? Thus, those companies who put all their eggs in the natural gas basket and then saw gas prices plummet, are in a poor investment position right now. More balanced companies spread out their risk. You should too. Another factor we must consider is market sentiment, perhaps the most difficult variable to manage. Engaged investors should have been able to foresee a reduction in national gas prices resulting from the shale boom, but sometimes greed obscures even the most obvious warnings. Today, there are plenty of bread crumb trails we are following for you. They lead to massive opportunity, and it s all about getting in at the right time: Enhanced Oil Recovery (EOR) and by default, Carbon Capture (as gas prices remain low for now, this is what it s all about) Subsea exploration and production (the final, final frontier, and it s a huge one) Analog exploration, the supercomputing and seismic magic that gets you there faster, with less risk and a higher rate of drilling success A future rise in natural gas prices courtesy of Mexico and broader US exports LNG Engineering (the next trend and the first beneficiaries) www.oilprice.com I 3

1. ENHANCED OIL RECOVERY 89 billion barrels up for grabs Up to 75% of oil is left in a well after primary and secondary production methods are exhausted (that s about 89 billion barrels of additional oil trapped in onshore reservoirs in the US alone). Primary oil recovery is when hydrocarbons naturally rise to the surface or are pumped to the surface. Secondary oil recovery is the use of water and gas injection to displace oil and drive it to the surface. Despite the efficiency of both methods of extraction, about 75% of the oil remains trapped in a well. Tertiary oil recovery, which is EOR, can increase well production by 75%. Essentially, EOR changes the properties of hydrocarbons using one of three processes (and it s going to hit offshore soon): Gas injection: natural gas, nitrogen or carbon dioxide injected into the reservoir to expand and push gases through to mix with or dissolve in the oil and increase flow. (CO2 EOR is gaining in popularity, fast; and it kills two birds with one stone, using carbon captured from industrial output and diverting it for EOR. (around 50% of US EOR is via gas injection) Thermal recovery: heat is introduced to reduce the viscosity of the oil in the well, often with steam applied to thin the oil and make it flow better (50% of EOR procedures in the US are of this type for now) Chemical flooding: polymers introduced into the reservoir to increase water-flooding efficiency (used in less than 1% of all EOR procedures) Water-flooding: low-salinity water flooding is also gaining in popularity and initial results say it could increase production by 20% (not as much as other methods, but cheaper) Well stimulation: This is the cheapest solution only because it can be done to a single well, while the other EOR procedures must be applied to an entire reservoir at once EOR-Related Stock Pic In May 2012, what was then the largest carbon capture project in the US went on line in Port Arthur, Texas, to capture CO2 from industrial operations and funnel it to oil producers for EOR. The first thing that caught our eye was the estimate that the diverted CO2 from this single plant will increase production in the West Hastings oil field (south of Houston) by between 1.6 and 3.1 million barrels annually. This is just one field! As of late June 2014, the plant had captured a million metric tons of carbon dioxide. But since then, an even larger carbon capture project again in Texas has been put in motion. Construction began in late July 2014 on the Petra Nova project, near Houston. The captured emissions will be transported via pipeline to the West Ranch oil field in nearby Vanderbilt, Texas for EOR. So we are treating EOR and carbon capture as a profitable marriage made in heaven that is going to make some companies a lot of money and immediately increase the value of their assets. EOR * The One to Watch Denbury Resources (DNR) Our top pick here is Plano-based Denbury Resources (DNR), which will be the biggest beneficiary of the Port Arthur CO2 project. This CO2 will be shipped via Denbury s Green Pipeline-Texas to its West Hastings oilfield. Denbury stands to benefit greatly from this because CO2 EOR is already a proven and lucrative process in Texas. Denbury already has a nice set of assets that are about to get a production boost. Plenty of investors think Denbury is a forward-thinking company, with smart, effective management. The market has been kind to Denbury, which is on the upward climb and still riding high on a 2012 asset exchange deal with ExxonMobil Corp. Denbury sold 196,000 acres in the Bakken Shale to Exxon in return for $1.3 million in cash plus operating interest in older oilfields in Texas where it can put EOR to work. The market continues to reward Denbury, and investors have shown their confidence in its EOR ambitions even when it means trading new for old. As of August 2014, Denbury still remains the leader in using EOR techniques to extract more oil per well from its older holdings, and we believe EOR is going to become even cheaper through the rest of this decade. www.oilprice.com I 4

2. SUBSEA EXPLORATION AND PRODUCTION Two for the price of one Right now, we re looking at a 70%-30% spread for total global onshore and offshore oil and gas production, respectively. Of that 30% of offshore production, subsea oil and gas production represents 9%. That is about to change as Exploration & Production companies go deeper and deeper, taking advantage of new technology that can handle higher pressure and higher temperatures to ward off declining production. Subsea production systems are wells located on the sea floor rather than the surface. Petroleum is extracted at the sea floor, and then 'tied-back' to an already existing production platform. The well is drilled by a moveable rig and the extracted oil and gas is transported by riser or undersea pipeline to a nearby production platform. The real advantage of subsea production systems is that they allow you to use one platform strategically placed to service many well areas. And as the cost of offshore production rises, this could represent significant savings. Subsea production could rival traditional offshore production in less than 15-20 years, and we re looking at expected market growth for subsea facilities of around $27 billion in 2011, to an amazing $130 billion in 2020. The subsea market will grow at a CAGR of 6.72% from 2014-2018, driven by an increasing trend towards deepwater oil and gas development, brought about by continued high oil prices, key technological improvements and the need the replace maturing shallow-water basins, Infield Systems notes in its most recent report. Between 2014 and 2018, Latin America (led by Brazil and Petrobras) and Africa will maintain their dominance in the subsea sector, accounting for over half of total global forecast Capex combined. Also look to Europe, says Infield, which will become the largest region in terms of subsea tree installations, though it will only contribute to around 11% of subsea Capex. Other emerging opportunities in his sector will be in Asia and Australia, which are projected to increase their combined market share from 8% to 14% in the next five years. There are vast opportunities here in a multitude of sub-sectors: Subsea technology development and manufacturing, to supply, installation, service and maintenance, and exploration and production. Analysts expect E&P companies to invest more than $19 billion in subsea production equipment in 2013/14 alone--and up to $33 billion by 2017. www.oilprice.com I 5

SUBSEA EXPLORATION AND PRODUCTION contʼd The Ones to Watch - Cameron International Corp. (NYSE: CAM) and Schlumberger (NYSE: SLB) There are the obvious choices, the key manufacturers of subsea infrastructure systems, including: Oceaneering International Aker Solutions Cameron FMC Technologies Schlumberger National Oilwell Varco Of these, and thinking ahead, we like Cameron International Corp. (NYSE: CAM) and Schlumberger (NYSE: SLB) best. Why? Most importantly, the two have now combined their subsea businesses through the OneSubsea joint venture which will allow them to capture a significant amount of the subsea services market. In August 2014, they took expansion a step further, to include an alliance with Helix Energy Solutions to develop technologies, equipment, and services for the subsea well intervention market. CAM has also procured a contract from Brazil s state-run Petrobras to provide subsea equipment for the development of Pre-Salt and Post-Salt areas offshore Brazil and enjoys a long-standing relationship with Petrobras, which is on a discovery roll in the Santos Basin. But we re also keeping a close eye on GE Oil & Gas, which represents the strongest growth segment within GE (NYSE: GE) these days and has shown a keen ambition to stay ahead of the game on the technology sides of the oil and gas business. In August 2014, GE launched its new Deepwater Vertical Xmas Tree (DVXT), expanding the company s portfolio of pre-engineered, pre-qualified modular systems, designed to enable products to be brought to market faster. www.oilprice.com I 6

3. ANALOG EXPLORATION & SEISMIC MAGIC No such thing as a sure thing? Supercomputing represents the incredible addition of a new dimension to seismic imaging, making it easier and easier to find the next sweet spot without drilling it first. This is analog geology, and what these supercomputing systems allow companies to do is analyze vast amounts of seismic imaging data collected by geologists using sound waves; giving us 3-dimensional imaging with a much more accurate blueprint. It doesn t stop there. There is 4-dimensional imaging as well: time. This 4th dimension decodes a variable that allows oil and gas companies not only to determine the geological characteristics of a potential source, but also provides insight into how a reservoir is changing LIVE, in real time. The sound waves rumbling through a reservoir predict how its geology is changing over time. This is advancing continually; at this point enough to tell us that standing in Brazil is the same as standing in Angola (the same fossil fuels story is being told). Whoever has the best supercomputing, gets to the best spots first. The One to Watch - Franceʼs Total SA In this segment, we like Franceʼs Total SA, which has recently unveiled its own new supercomputing system, Pangea, which will help it find new discoveries 15 times faster than before. The new system was inaugurated in March 2013, and is behind Total s success in Angola, where it was able to analyze its seismic data from the Kaombo project in only 9 days, while it would have taken over four months with its old system. Pangea processes geological data to help determine with much greater accuracy where the best place is to explore and drill fast. Pangea can process at 2.3 quadrillion operations/second. This is as powerful as the simultaneous operation of 27,000 regular computers. Total says it s among the Top 10 most powerful computing systems in the world. www.oilprice.com I 7

4. LNG EXPORTS ENGINEERS FIRST More new LNG export facilities are being approved. In June 2012, the US government approved the Texas-based Freeport LNG Development project, and while the process has been slow, it is now picking up speed, with more approvals since then and more to come. In mid-august 2014, the US Department of Energy implemented a new approach to approval LNG projects on the waiting list: it will favor those that have already completed expensive environmental reviews. There s a ton of money to be made here, first and foremost for the LNG infrastructure specialists. The One to Watch - Chicago Bridge & Iron (CBI) We like Chicago Bridge & Iron (CBI) ere, and not just because Warren Buffet has acquired a 6.1% stake (that certainly doesn t put us off), but because in the immediate and near-term we re focusing on the engineering companies who will be the FIRST beneficiaries as they build the massive LNG export terminals. CBI won the key contracts for the Freeport terminal, and it has a backlog well beyond its competitors, such as Fluor Corp (FLR), KRB Inc, Matrix Services (MTRX), Caterpillar (CAT), and Jacobʼs Engineering (JEC). CBI turned out a great performance in 2013, and 2014 is shaping up to be another great year as the company brought in new contracts worth more than $6 billion. Growth appears to be a sure thing, and shares are trading at around $83 as of late August 2014 and this constitutes a 42% increase over 12 months. CBI recorded record revenue in 2013, more than doubling from the previous year s $5.48 billion to $11.09 billion. It also helped that Buffet s Berkshire Hathaway acquired 6.5 million shares in a major boost of confidence that CBI will remain a major competitor for new LNG infrastructure projects. On the other side of the LNG opportunity the longer-term prospects the DOEʼs new approach to approval will benefit Houston-based Cheniere Energy, which owns the Sabine Pass LNG terminal now under construction in Louisiana. Cheniere wants to add liquefaction capacity to Sabine Pass, but under the old approach would have had to wait around two years to see this happen. The new approach will put it at the top of the list because it already has an environmental review. Exxon Mobil Corps. Golden Pass LNG project in southeast Texas will also benefit from the new approach, bumping to closer to the top of the waiting list due its progress with an environmental review. On the LNG export end of this equation, though, Cheniere is definitely the one to watch, and it will be the first out of the LNG export starting blocks. www.oilprice.com I 8

5. NATURAL GAS PRICES We think natural gas prices are going up, not immediately, but in the medium term. Three developments will boost demand (so be ready and time investments wisely): Increasing Mexican demand (this is already clear) and pipelines in the works to back up this demand Ongoing approval of more large-scale LNG export projects (but weʼre still probably five years away from seeing any real market results from this) Obamaʼs new climate strategy is based on natural gas (at the expense of coal) The One to Watch - Anadarko Petroleum (APC). First, we would just like to reiterate that we aren t keen on those companies who have put all their eggs in the natural gas basket, when they should have been balancing natural gas investments with oil. One company that has gotten into some trouble in this respect is Chesapeake. Regardless of our medium- to long-term natural gas price predictions, we still put more stock in companies who are proactively managing risk of their assets NOW. This requires a nice balance between oil and gas. So who do we like? Anadarko Petroleum (APC). The company has a steady cash balance and a strong focus on increasing exploration and production (over a wide geographic region), and continues to conduct a smart, strategic asset divestiture plan and will further boost growth and seems to guarantee regular dividends. Anadarko is riding high on its Eagle Ford liquids bonanza to the tune of about 600 million barrels of oil equivalent; 65% of which is oil and natural gas liquids. The company has had record sales in the Marcellus Shale, in East Texas and in its Permian Basin oil assets. Anadarko s market cap stands at $55 billion, and reported $1.32 EPS for the second quarter of 2014, with revenues up 26.9% on a year-on-year basis. The company is beating revenue estimates and analysts are looking at up to 14% revenue growth over the next two years. But what investors should really like is the cash flow, which has grown by 60% over the last two years and ensures the company has the capital to develop some of its lucrative assets. Anadarko s market cap stands at $55 billion, and reported $1.32 EPS for the second quarter of 2014, with revenues up 26.9% on a year-on-year basis. The company is beating revenue estimates and analysts are looking at up to 14% revenue growth over the next two years. But what investors should really like is the cash flow, which has grown by 60% over the last two years and ensures the company has the capital to develop some of its lucrative assets. www.oilprice.com I 9

Conclusion What it all means Ultimately the knowledge that I hope you take away from this special report is a real appreciation for the tremendous opportunities that exist in the Energy sector for savvy investors. The beauty of the sector and of most if not all of the industries within it is clear: we need energy, demand is growing, and there are limitless resources supporting it. The single best thing that you can do to ready yourself to take advantage of these opportunities is fine reliable sources of information and analysis. If you, like I, believe that energy represents huge profit potential for investors, you may want to consider joining Oil & Energy Insider today. What you read here in this Special Report is a true representation of the accessible and actionable intelligence we provide our members each week. Knowing what, when and why to invest in the energy sector is itself one of the best investments you can make. Join us today for FREE. James Stafford Publisher Oil & Energy Insider OILPRICE.com Please look out for this coming Friday s letter where we will have more reports such as this alongside geopolitical intelligence, market forecasts and trading advice. www.oilprice.com I 10