18 June 2013
Bernstein Energy Russia & the FSU
Russian Oil Production: Winners & Losers Iain Pyle Senior Research Associate European & Russian Oil & Gas
Oswald Clint PhD, ACA Senior Research Analyst
[email protected] +44 20 7959 5089 See Disclosure Appendix of this publication for important disclosures and analyst certifications BernsteinResearch.com
Iain Pyle, CFA, ACA Senior Research Associate
[email protected] +44 20 7170 0564
Rob West Senior Research Associate
[email protected] +44 20 7170 0589
Soviet Oil Production in 1985: Mature Production in Volga-Urals and the Caucasus, Large New Fields in Timan-Pechora and West Siberia
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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Russian Oil Production in 2011 – Production base has matured in core areas; newer fields are increasingly far North or far East
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
2
Russian production growth has decelerated to 1% y-o-y as learning curves flattened off and mature fields are declining Vankor
11
11%
10%
10
9% 8%
8
7%
7
6%
6
5%
5
4%
4
3%
Y-o-Y (%)
Oil Production (Mbpd)
9
2%
3
1%
2
0% -1%
0
-2%
Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
1
Lukoil W. Siberia
Lukoil Other
Rosneft Yugansk
Rosneft Other
Rosneft Vankor
Yukos
GazpromNeft
Surgut
TNK-Samotlor
TNK Other
Slavneft
Tatneft
Basneft
PSAs
Others
Total (y-o-y)
Source: Interfax, Bernstein Analysis
BernsteinResearch.com
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Russian Oil Production by Company
2010-2012 Oil Production Growth
1.7%
-3.3%
0.5%
11.0%
1.4%
-3.1%
0.2%
-1.4%
4.5%
3.7%
Average Oil Production - Mbpd
2.5
2
1.5
1
0.5
0 Rosneft
Lukoil
TNK-BP
Other 2010
Surgut 2011
Gazprom
Tatneft
Slavneft Bashneft Russneft
2012
Source: Company reports, Bernstein estimates
BernsteinResearch.com
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Declining Russian Productivity has been countered by rising Capital Intensity Russian Upstream Capex 7.0 50,000
6.0
40,000
5.0 4.0
30,000
3.0
20,000 2.0 10,000
1.0
Russian Upstream Growth By Activity
0 2000
2001
Gazprom SurgutNG Novatek Bashneft
2002
2003
2004
2005
2006
LUKoil TNK Russneft Other
2007
2008
2009
2010
2011
Capex / boe produced ($/boe)
Russian Upstream Capex ($M)
60,000
0.0 2012E
Rosneft BP Tatneft Capex / boe produced
Source: Company reports, Bernstein estimates BernsteinResearch.com
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Companies Are Drilling More Every Year
18,000
Production Drilling (000m / year)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2005
2006
2007
Surgutneftegas
2008 Rosneft
Lukoil
2009 Gazprom Neft
2010
2011
2012
TNK-BP
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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Some Companies Get More Production by Drilling Less
3 Rosneft
Oil Production (Mbpd)
2.5
2
Lukoil TNK-BP
1.5
Surgutneftegas
1 Gazprom Neft
Tatneft 0.5 Slavneft Bashneft 0 0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Annualised Production Drilling in 2012 ('000m)
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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Surgut costs have accelerated at a 17% CAGR as drilling rose 8% CAGR, yet production has fallen at 2% CAGR since 2006
65
5000
63
4000
61
3000 59
4,687
6,012
4,548
5,856
4,208
4,580
3,657
3,416
3,127
4,054
3,191
3,718
3,069
2,708
2,963
1,958
1000
2,861
2000
0
57
Annual Production (MT)
6000
1,552
Upstream Capex ($M), Development Drilling ('000m)
7000
55 2004
2005
Upstream Capex ($M)
2006
2007
2008
2009
2010
Development drilling (thousand meters)
2011
2012E
Production (MTA)
Company Reports: Bernstein Analysis
BernsteinResearch.com
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“Doing more” not “doing better”? Surgut’s vertical annual drilling of new wells has risen by 50% since 2006, but still only 11% are horizontal
67 1403
1400
1305
66 65
New Wells / Year
1200 1000
1131
922 935
887
982
64
972
63 62
800
61
600
60
400
59
200
118
126
131
141
153
159
199
156
58
Annual Production (MT)
1600
57
0
56 2004
2005
2006
Oil Wells brought onstream
2007
2008
Horizontal Wells
2009
2010
2011
Production (MTA)
Company Reports: Bernstein Analysis
BernsteinResearch.com
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Gazprom Neft: Increased application of technology has a positive effect Gazprom Nef t: Horizontal Wells Drilled
Gazprom Nef t: Production per Well 88
7 5 3
1Q 2012
1Q 2013
Production per Well (tonnes/day)
Wells Drilled
22
90
12-15
Simple Horizontal Wells Multi Stage Fracking Wells Dual Leg Horizontal Wells
Historic Average Horizontal Wells Dual Leg With Multi Stage Horizontal Wells Hydrofracs
2012 Upstream production +20% versus 2010 2012 Upstream capex per barrel -11% versus 2010
BernsteinResearch.com
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Russian Oil Production: Winners and Losers 2012 Russian Oil Production
2016 Russian Oil Production
Oil Production Growth 2012-16 CAGR
2012 Upstream Capex
2012 Upstream Capex per Barrel Produced
2012 Production Drilling
Production Drilling per Barrel Produced
kbpd
kbpd
%
$M
$/bbl
000 m
m / kbbl
TNK
Stable production with low capex per barrel and production drilling
1,779
1,718
-0.9%
4,500
6.93
1,670
2.57
Gazprom Neft
Highest forecast production growth based on increased horizonatal, fracked, wells
986
1,091
2.6%
2,921
8.12
2,441
6.78
Lukoil
Production expected to decline with higher than average capex per barrel
1,771
1,697
-1.1%
6,152
9.51
3,405
5.27
Surgut.
Expect the highest decline in oil production, even with high levels of production drilling.
1,233
1,056
-3.8%
4,493
9.98
4,671
10.38
Rosneft (Ex. TNK)
Production growth expected, but high capex required
2,439
2,584
1.5%
9,585
10.77
4,172
4.69
Source: Company reports, Bernstein estimates
BernsteinResearch.com
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Additional Slides
BernsteinResearch.com
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The average Russian field is 30 years old: With new fields taking 10 years to ramp-up, production is about managing declines
80% Average Russian field has been producing for 30 years
60%
40%
20%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Production as % of Peak
100%
Years Since First Production (Years) Norway
BernsteinResearch.com
UK
Gulf of Mexico
Russia
13
The median field has declined at just -1.3% per year, but declining fields fell more rapidly at -6.5% / year; and 10-15% declines are common
y-o-y Change in Field Production (%)
30%
Benefits arising from field ramp-up, infrastructure ramp-up, EOR & reservoir management
20%
10% 3.4% 0.3%
-1.3%
0%
-0.7% -10%
-10.5%
-6.5% -15.4%
-20%
-30% 0%
5%
10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% Percentile
Russia (ex-Small Fields)
Russia (ex-Small Field) Declining Fields
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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The average decline rate for Russian fields is 1.3% per ye
0.0%
1 -9.4%
-11.2%
-10.2%
-12.2%
-12.5%
-12.0%
-12.9%
-16.0%
-17.5%
Decline Rate (%)
-5.0%
-1 -3
-10.0%
-5
-15.0%
-7 -9
-20.0%
-11 -25.0%
Second Quartile - Median
Third Quartile - Median
-15 Caucasus
PreCaspian
West Siberia
Samara
Timan Pechora
Far East
Middle Ob
Tatar
-30.0%
Volga Urals
-13
Mean Average
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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Russian learning curves have matured with recent wells, fracs, horizontals and sidetracks all yielding productivity below peak
919
1,148
Average Flow Rate Per Well (bpd)
1,000
325
365
268
139 137.1 100 79
74.0
10
10
100
1000
10000
Cumulative Wells Drilled New wells
Drilling of horizontal wells
Drilling of sidetracks
Hydrofracturing, wells
Source: Company reports, Bernstein estimates BernsteinResearch.com
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Unconventional Technology vs Geology – The historical precedent from Russian Horizontals & Fraccing is that eventually the rocks win
11.0
Russia - Learning Curve Slows & declines after the mid-to-late 2000s
Slowing? Declines?
10.0
9.0
US - Learning Curves Drive 5-year Production Gains In Early 2010s?
8.0
7.0
6.0
Dec-01 May-02 Oct-02 Mar-03 Aug-03 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15
Oil and Condensate Production (Mbpd)
12.0
Russia - Learning Curves Drive 5-years of Production Gains In Early 2000s
United States
Russia
US Forecast
Russia Forecast
Source: IEA, Bernstein Analysis BernsteinResearch.com
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Russian onshore oil requires an order of magnitude more wells than offshore oil
Production (kbpd)
1,000
Lula 100
10
1 1
10
100 Total Wells Drilled (#)
Lukoil - Major Oil Fields Gulf of Mexico - 25 Largest Fields Brazil - Largest 25 Fields
1,000
10,000
Norway - 25 Largest Fields Lula
Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
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0%
BernsteinResearch.com
2.7%
Length Per Well
5%
W. Siberian Active Production Wells
4.6%
W. Siberian Active Injection Wells
Number of Russian Fracs
8.2%
OFS Seismic Market
8.8%
OFS Tech Services Market
8.8%
Number of Horizontal Wells
10%
Number of Rigs Employed in Russia
10.7%
OFS Drilling Market
Production Drilling / Year
18.9%
W. Siberian Production Wells Drilled
20%
OFS Workovers Market
2006-2011 Five-Year CAGR
How is capex being spent? We see a case of more spending rather than better spending
30%
25%
17.7%
15%
10.6% 7.9% 4.5% 1.1%
Source: Company reports, Bernstein estimates
19
New / Redeveloped
2,000
1,500
1,000
500
Lukoil-West Siberia
Lukoil-Komi
Lukoil-Perm
Naryanmarneftegas
Lukoil-AIK
Ritek-Nadymneft
Volgodeminoil
Lukoil-Kaliningradmorneft
Uraloil
KhantymansiiskNGgeologia
Lukoil-Nizhnevolzhskneft (Yuri Korchagin)
Ritek
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
0
Base Decline -5.1%
Lukoil Production By Field (kbpd)
Lukoil's mature production base has been declining at -5.1% per year on average since 2008
Source: Company reports, Bernstein estimates
BernsteinResearch.com
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We believe Lukoil’s production targets are ambitious SCB Estimates 3,500
3,000
3,000 Production (kboed)
3,500
2,500 2,000 1,500 1,000
2,500 2,000 1,500 1,000 500
0
0
Russia - Oil kbpd Gas Production mmcfd
International - Oil kbpd
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
500
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E
Production (kboed)
Lukoil Production Guidance
Russia - Oil kbpd
International - Oil kbpd
Gas Production mmcfd
Source: Company reports, Bernstein estimates
BernsteinResearch.com
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Low growth from Russian production is reflected in company valuations
1,000,000 Circle Size denotes future production growth; circle colour denotes percentageof production from oil (blue) vs gas (red)
Upstream EV ($Millions)
Novatek
100,000 Gazprom
10,000 Rosneft Surgut
Rosneft
1,000 GazpromNeft
100 10
100
1,000
10,000
100,000
2P Reserves (Mboe) Source: Company Reports, Russian Oil Ministry, BOEM, NPD, Bernstein Analysis
BernsteinResearch.com
22
TNK’s Samotlor shows how well-implemented EOR can stem decline rates (and how poor field management can exacerbate declines) 1,400
1984-1985 - Aggressive waterflooding led to rapid declines - Approximately 1000 producers failed
Annual Oil Production (Mbbls)
1,200 1986 - Gorbachev implemented new investment
1,000
800
600
400
200
-
-
5.00
10.00
15.00
20.00
25.00
30.00
Cumulative Oil Production (Bn bbls)
BernsteinResearch.com
23
TNK Production By Field (kbpd)
2,500
2,000
1,500
1,000
500
Yuganskneftegas Tomskneft Krasnodarneftegas Vankorneft
Samaraneftegas Purneftegas Stavropolneftegas
Udmurtneft Northern Oil Rosneft-Dagneft
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
0
Base Decline -1.0%
New / Redeveloped
We believe TNK’s underlying decline rate is lower, at -1% y-o-y
Polar Lights Sakhalinmorneftegas Tomsk-Petroleum-Und-Gas
Source: Company reports, Bernstein estimates
BernsteinResearch.com
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Disclosure Appendix
BernsteinResearch.com
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Disclosure Appendix - Valuation Methodology & Risks
Valuation Methodology We use DCF valuations for Russian Energy stocks' price targets, with WACC rates between 12-15% and terminal growth rates between 0.5- 3.0%.
Risks The greatest risk to our target prices is a significant decline in crude oil prices, as these stocks trade in line with commodity prices. Oil prices forecasts are dependent on GDP expectations. As such, stronger or weaker than expected GDP could materially change the outlook for the cash flow generation of the peer group. In addition supply disruptions caused by weather or terrorism remain a material risk and would place further upward pressure on pricing. Additionally, downward revisions to production volume targets could adversely impact share prices. Other risks to our view include Iran, a U.S. dollar debasement and shale liquids growth. Russian equities fall into the emerging market (EM) category and are therefore sensitive to the risks associated with EM economies such as currency devaluation, debt default and political risk, all of which could materially alter the outlook for the companies.
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Disclosure Appendix SRO REQUIRED DISCLOSURES References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and Sanford C. Bernstein (business registration number 53193989L), a unit of AllianceBernstein (Singapore) Ltd. which is a licensed entity under the Securities and Futures Act and registered with Company Registration No. 199703364C, collectively. Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues. Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings: Outperform: Stock will outpace the market index by more than 15 pp in the year ahead. Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead. Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily. As of 06/11/2013, Bernstein's ratings were distributed as follows: Outperform - 38.4% (0.9% banking clients) ; Market-Perform - 49.0% (0.4% banking clients); Underperform - 12.6% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months. 12-Month Rating History as of 06/16/2013 Ticker
Rating Changes
LKOD.LI M (RC) 06/28/12 NVTK.LI O (RC) 06/28/12 OGZD.LI O (RC) 07/16/09 ROSN.LI M (RC) 01/29/13 SGGD.LI M (RC) 06/28/12
U (IC) 01/15/09 M (RC) 04/20/11 O (RC) 06/28/12 U (IC) 01/15/09
U (IC) 01/15/09
Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change
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