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May 2, 2012

Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com +852-2918-5741


Oswald Clint, Ph.D., ACA (Senior Analyst) oswald.clint@bernstein.com +44-207-170-5089
Bob Brackett, Ph.D. (Senior Analyst) bob.brackett@bernstein.com +1-212-756-4656
Scott Gruber, CFA (Senior Analyst) scott.gruber@bernstein.com +1-212-756-1935
Lu Wang lu.wang@bernstein.com +852-2918-5723

Bernstein Energy: Era of Cheap Oil Over As Secular Growth in


Upstream Cost Inflation Underpins Triple Digit Oil Prices
Please see the Disclosure Appendix for the ratings and price targets of the companies covered in this report.
Highlights

Our analysis of the 50 largest publically traded oil and gas companies (ex-FSU) shows that cost inflation
continues to increase sharply within the global upstream oil and gas industry. In 2011, production costs
increased by 26% while the unit cost of production increased by 21%, which was higher than longer term
trends. In 2011, the marginal cost of production the same companies increased 10.8% to US$92.26/bbl.
We have analyzed cost data for the 50 largest listed international oil and gas companies (ex-FSU)
which we define as the 'Upstream G50'. Following the recent release of 2011 20-F and annual reports
from the 50 largest producing oil and gas companies, we have constructed a database which includes all
key upstream financial and operating metrics.
Production cost inflation for the Upstream G50 was higher last year than long term average trends.
In 2011, upstream production costs increased by 26% y-o-y relative to 10yr CAGR growth rates of 20%.
Unit costs increased by 21% y-o-y to US$35.9 which was also higher relative to the 10yr CAGR growth
rate of 17% , highlighting continued cost pressures facing by the global oil and gas industry. The ratio
between oil prices and upstream unit costs remains at close to three times.

Asia-Pacific Oil & Gas

Organic F&D (reserve replacement) costs for the Upstream G50 increased by a slower rate of 11%
in 2011 as higher reserve replacement rates offset capex growth. F&D costs increased 11% to
US$17.5/bbl which was in line with longer term growth rates. Three year reserve replacement ratios
continue to trend higher to a multi-year high of 130% highlighting improved industry success at
replacing reserves.
The marginal cost of production for the Upstream G50 increased in 2011 by 10.6% to
US$92.26/bbl. The total marginal cost of production for the 50 largest oil and gas producers continues to
trend higher increasing from US$83/bbl to US92/bbl. The rate of growth in F&D costs in 2011 was
slightly lower than the 10 year GAGR growth in marginal of 14% CAGR. The cash cost of production
increased more by 37% to US$39.95/bbl.
De-coupling of oil prices from gas prices and wider Brent/WTI spreads resulted in near record
spreads between revenue per boe and Brent in 2011. Average revenue per boe for the Upstream G50
was US65.54/bbl in 2011 which was 41% lower than benchmark Brent index price for the year. Record
oil/gas price spreads in the US and globally plus Brent/WTI spreads continued to drive the large
differentials in realized price relative to Brent.
Despite the 39% increase in Brent from US$79.73 to US$111.05/bbl in 2011, net income per barrel
remained constant at 15% of the benchmark oil price. Average net income per boe increased by 35%
to US$16.36/bbl in 2011 which was a slight increase in 2011 despite the 26% increase revenue per boe
(relative to 39% increase in Brent). Net income per boe remains flat at 15% of Brent and net income
margins at 25% of realized price.
While we remain cautious on crude prices in the near term, the increase in global upstream costs
continues to be supportive of higher long term oil prices. The increase in unit costs, production costs

See Disclosure Appendix of this report for important disclosures and analyst certifications.

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

and ultimately marginal cost of production continues to be the key driver of global oil prices. Data from
2011 continue to show strong growth in upstream costs remains intact across all regions. Absent a
collapse in demand or growth in a new source of low cost oil supply, rising upstream costs will continue
to be supportive of higher long term oil prices.
Investment Conclusion

Long term oil prices remain fundamentally linked to the marginal cost of production. The key message for
investors from our 2011 survey of global oil and gas companies is that upstream costs continue to increase
sharply. Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU)
indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year
average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by
21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting
continued cost pressures faced by the E&P industry as the incremental barrel continues to become more
expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to
US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming
another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach
close to US$100/bbl.
While we see near term downside to oil prices on weaker demand growth, the longer term outlook for
higher oil prices continues to be supported by the rising costs of production. Globally we continue to like
companies with strong organic upstream growth, high and improving returns, strong reserves replacement
and high operating leverage to commodity prices. Amongst global E&Ps and integrated oil and gas majors
we have outperform ratings on CNOOC, Oil Search, Reliance, Total, Apache, Noble Energy, Gazprom,
GALP, Repsol, EOG, Tullow Oil and BG.
Details

Asia-Pacific Oil & Gas

We have analyzed the 50 largest international oil and gas producing companies globally (ex-FSU) which
we term the 'Upstream G50'. The data for our analysis comes from 20-F reports and from annual reports
where there is no 20-F available. Three companies (Inpex, ONGC and Pemex) have not yet released their
2011annual reports and hence we use quarterly estimates and extrapolate full year result.
Within this report we use several definitions of cost such as cash cost, production cost, unit costs and
marginal costs. These costs are linked in some cased but measure slightly different aspects of cost. The
definitions of costs we use within the report are provided below.
Cash Costs = Operating Costs + Production Taxes+ SG&A
Production Costs = Operating Costs + Production Taxes
Unit Costs = Production Costs + Exploration Expense + DD&A+ SG&A
Organic F&D Costs = Organic Capex / Reserve Additions from Discoveries or Revisions.
The Marginal Cost of Production and Cash Cost of Production use the definitions which can be accessed
from Bernstein Energy: The Non-OPEC Supply Curve; The Rising Marginal Cost of Oil Production
From America To Asia

In this research note, we provide an analysis of the cost trends for the Upstream G50 together with an
updated marginal cost calculation.

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Break down of the global barrel

How is the global barrel broken down? Using the Upstream G50 data base and using production weighted
averages it is possible to define the make-up of the global barrel Exhibit 1, Exhibit 2. Using Brent as the
index, the realization spread between revenue per boe and Brent in 2011 was US$45.41/bbl or 41% of the
price of Brent. Much of the differential in realization results from the spread between oil and gas (currently
domestic gas is around US$15/boe in the US and US$30/boe in Asia) plus the spread between Brent and
international crude prices. The next largest component of the barrel is production costs which include
production related taxes and account for 19% of the barrel. Income tax is the next largest component which
comprises12% of the global barrel followed by DD&A, SG&A and other and exploration expense which
combined make up 13% of the barrel. Net income accounts for 15% of the overall barrel.

Exhibit 1
Summary of global barrel key metrics
10Yr

Asia-Pacific Oil & Gas

US $/bbl

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

CAGR

WTI

25.96

26.17

31.06

41.51

56.59

66.09

72.23

99.92

61.99

Brent

24.40

25.02

28.87

38.32

54.51

65.42

72.71

97.69

62.04

79.51

95.05

14%

79.73

111.05

16%

Revenue

14.33

15.70

19.62

28.66

38.24

44.89

48.75

60.97

Resalization Spread

10.07

9.32

9.25

9.66

16.27

20.53

23.96

36.72

40.93

51.93

65.64

16%

21.11

27.80

45.41

16%

Production Costs
Exploration Expense
DD&A
SG&A & Other

3.51
0.63
2.61
0.54

3.97
0.63
3.38
0.87

4.76
0.68
3.55
0.73

6.10
0.82
4.54
1.10

7.71
0.92
5.07
1.72

9.15
1.27
6.04
1.56

10.53
1.70
7.18
1.89

16.78
1.91
8.76
2.40

13.32
1.85
8.40
2.15

16.73
1.78
9.22
1.89

21.14
1.99
9.86
2.89

20%
12%
14%
18%

Income Tax
Implied CT Rate
Net Income
Net Income Margin

2.97
42%
4.07
28%

2.96
43%
3.90
25%

3.89
39%
6.00
31%

8.50
53%
7.59
26%

11.91
52%
10.92
29%

13.93
52%
12.94
29%

14.44
53%
13.02
27%

14.36
46%
16.76
27%

6.82
45%
8.40
21%

10.21
46%
12.11
23%

13.41
45%
16.36
25%

16%

Unit Costs
Organic F&D Costs
RRR (3 Year Average)

7.29
5.10
130%

8.84
5.79
132%

9.73
6.55
119%

12.57
10.32
114%

15.41
12.67
101%

18.02
13.32
105%

21.30
16.54
101%

29.85
20.22
98%

25.72
10.94
108%

29.61
15.76
115%

35.88
17.45
129%

17%
13%

Cash Flow (Pro-Forma)


FCF
Capex
Re-Investment Ratio

7.31
0.60
6.71
92%

7.90
(1.35)
9.26
117%

10.24
1.84
8.40
82%

12.95
2.35
10.60
82%

16.91
2.70
14.21
84%

20.25
1.42
18.83
93%

21.89
2.50
19.39
89%

27.43
3.19
24.24
88%

18.65
(0.30)
18.95
102%

23.11
(3.74)
26.85
116%

28.20
2.84
25.36
90%

14%
17%
14%

Maginal Cost
Cash Cost

25.30
9.69

29.50
9.72

36.27
12.45

45.17
15.00

57.55
21.66

54.39
23.04

63.81
24.35

96.14
32.36

67.80
24.02

83.23
28.87

92.26
39.65

14%
15%

WTI/ Marginal Cost


Brent/ Unit Cost

1.03
3.35

0.89
2.83

0.86
2.97

0.92
3.05

0.98
3.54

1.22
3.63

1.13
3.41

1.04
3.27

0.91
2.41

0.96
2.69

1.03
3.10

15%

Source: Bloomberg, Bernstein analysis and estimates

In addition to the breakdown of the global barrel the components of the global barrel have remained
relatively constant over the past 10 years despite the fact that oil prices have increased from US20/bbl to
over US 100/bbl. For example, the unit costs have remained at about 30-35% of the global oil price, income
tax at 10-20%, while net income has remained at about 15-20% of the global barrel.

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 2
Break down of global barrel
100%
90%
80%

44%

41%

37%

32%

25%

30%

31%

33%

38%

34%

35%

11%

13%

41%

70%
60%
50%
40%
30%
20%
10%

14%
1%
9%
2%

12%

12%
3%

2%
11%

14%

3%

2%

12%

14%

16%

18%

17%

16%

2000

2001

2002

13%
3%
12%

22%

22%

3%

21%

3%

12%

20%

15%

3%

2%

12%

14%

12%

3%

2%

3%
9%
2%

2%
9%
2%

10%
2%

2%
9%
2%

3%

2%

2%

9%
2%

16%

16%

14%

14%

14%

17%

21%

21%

19%

21%

20%

20%

20%

18%

17%

14%

15%

15%

2003

2004

2005

2006

2007

2008

2009

2010

2011

0%

Net Income

Production Costs

Exploration Expense

DD&A

SG&A & Other

Income Tax

Resalization Spread

Source: Corporate Reports, Bernstein Analysis

The most important factor driving oil prices over the long run is the growth in the marginal cost of
production. In addition to marginal cost, cash costs, production costs, unit costs and F&D costs are all
useful measures of costs. Over the past 10 years, these costs have growth at between 10-20% CAGR in-line
with oil prices which have increased at about 16% CAGR growth in the last decade Exhibit 3.

Exhibit 3
Y-o-Y growth rate (2001-2011)

Asia-Pacific Oil & Gas

80%
60%
40%
20%
0%
-20%
-40%
-60%
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Brent

Production Costs

DD&A

Unit Costs

Cash Costs

Organic F&D Costs

Source: Corporate Reports, Bernstein Analysis

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Examining the growth in costs of the past 10 years according to various definitions, production and cash
costs have grown more than others, increasing at close to 20% p.a. Exhibit 4. As we have described
previously, this reflects a combination of higher material costs and reduced productivity per well Bernstein
Commodities & Power: Will Fraccing Lead to A Reversal in Global Oil Industry Productivity and
Energy Deflation? Organic F&D costs have increased at around 13% over the past 10 years which is at the

lower end across the overall measures of cost. Not surprisingly the unit cost of production which is the
broadest measure of cost tracks most closely with overall oil price inflation which has averaged 17% CAGR
over the past decade.

Exhibit 4
10 year CAGR (2001-2011). Upstream oil and gas costs have increased at 10-20% CAGR over the past decade
25%

10 year CAGR

20%

20%

19%

18%

17%

16%
14%

15%

13%

12%

Organic F&D
Costs

Exploration
Expense

10%
5%

0%
Production
Costs

Cash Costs

SG&A & Other

Unit Costs

Oil (Brent)

DD&A

Source: Corporate Reports, Bernstein Analysis

Asia-Pacific Oil & Gas

Last year, oil prices grew at 39%, followed by cash costs and production costs which increased by 29% and
26% respectively Exhibit 5. Unit costs which track oil prices most closely over the past 10 years grew at
21%. Growth in cash production and unit costs were all significantly above the long term 10 year average
growth rates. Although F&D (reserve replacement) costs grew at a slower rate of 11% p.a. the growth was
in line long term growth rates of 13%. One of the factors which kept organic F&D costs lower was the
continued high reserve replacement rate. Three year organic reserve replacement rates are now at a multiyear high of 130%.

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 5
1 year growth rate (2010-2011). Cash Cost and Production costs have increased above the long term 10 year average

1 year growth rate

50%

53%
39%

40%

29%

30%

26%

21%
20%
12%

11%
7%

10%
0%
SG&A & Other

Oil (Brent)

Cash Costs

Production
Costs

Unit Costs

Exploration
Expense

Organic F&D
Costs

DD&A

Source: Corporate Reports, Bernstein Analysis

The 2011 Non-OPEC ex FSU Marginal Cost Curve

As part of this analysis, we have constructed a global database of the 50 largest oil-producing companies
globally (Exhibit 6). We have excluded OPEC and Russian companies given the limited time series or the
data and some of the limitations around how some of the data is reported. In terms of total production, the
largest companies are ExxonMobil, Pemex, PetroChina and BP. We have included 13 companies with total
production greater than 1 million boe per day.

Asia-Pacific Oil & Gas

Exhibit 6
The Upstream G50. Summary of companies included in non-OPEC ex FSU cost curve (2011)
Company

Country

ExxonMobil
Pemex
PetroChina
BP
Shell
Chevron
Petrobras
Total
Statoil
ConocoPhilips
ENI
ONGC
Sinopec
CNOOC
Repsol
Apache
Occidental
Anadarko
Devon
BG
CNRL
EnCana
Chesapeake
INPEX

USA
Mexico
China
UK
UK
USA
Brazil
France
Norway
USA
Italy
India
China
China
Spain
USA
USA
USA
USA
UK
Canada
Canada
USA
Japan

Production
kboepd
4,506
3,649
3,522
3,410
3,256
2,676
2,392
2,227
1,581
1,552
1,472
1,131
1,118
904
767
748
733
674
649
641
599
580
545
427

% oil
51%
70%
69%
63%
51%
69%
85%
55%
59%
51%
57%
60%
79%
78%
50%
50%
72%
42%
35%
26%
65%
4%
16%
57%

M. Cap
$bn
405
NA
286
138
229
209
149
109
85
92
81
43
97
94
23
36
74
37
28
80
37
15
11
24

Company

Country

EOG
Hess
Marathon
Talisman
Husky
PTTEP
Reliance
Imperial
Noble
Nexen
Murphy
Woodside
Penn West
Newfield
Pioneer
Santos
Plains E&P
Tullow
Enerplus
Denbury
Pengrowth
Forest
Berry
OilSearch

USA
USA
USA
Canada
Canada
Thailand
India
USA
USA
Canada
USA
Australia
Canada
USA
USA
Australia
USA
UK
Canada
USA
Canada
USA
USA
Australia

Production
kboepd
423
370
358
352
281
265
257
242
223
188
179
178
163
138
133
129
100
78
72
66
61
56
36
18

% oil
37%
72%
60%
42%
65%
29%
10%
84%
39%
80%
58%
43%
63%
40%
48%
25%
49%
73%
42%
93%
48%
28%
69%
86%

M. Cap
$bn
29
17
21
14
25
19
46
39
18
10
11
30
NA
5
14
14
5
23
4
7
3
1
2
10

Source: Corporate Reports , Capital IQ, Bernstein analysis

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

In this call we calculated the marginal cost and cash cost of production for non-OEPC producers based on a
previously published methodology (Bernstein Energy: The Non-OPEC Supply Curve; The Rising
Marginal Cost of Oil Production From America To Asia and Bernstein Energy: The Global NonOPEC Supply Curve; Why North American Micro E&Ps Set the Marginal Cost).
While OPEC plays a key role in influencing price through production quotas, in the long run we believe
that it is the marginal cost of non-OPEC production which sets the oil price. As global demand has surged
over the past decade the marginal cost of production and oil prices have increased, as the industry has
venture to increasingly higher cost (smaller, deeper fields) and more marginal regions (deep water, high
arctic) to produce the incremental barrel of oil.
The summary of our global marginal cost analysis is shown in Exhibit 7. Taking the top 50 Non-OPEC
producing companies, we have seen the marginal cost of production increase from US$25/bbl to US$92/bbl
which represents a CAGR growth of 14%. At the same time, cash costs of production have increased from
US$10/bbl to around US$40/bbl, which represents a CAGR growth of 15%.

Exhibit 7
The Marginal cost of oil production for the Upstream G50 reached US$92/bbl in 2012
160
WTI

140

Marginal Cost of Supply

Estimated Price of Demand Destruction

US$/bbl

120

Estimated Cash Cost

100

80
60

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

Jan-99

Jan-98

Jan-97

Jan-96

Jan-95

Jan-94

Jan-93

Jan-92

Jan-91

20

Jan-90

Asia-Pacific Oil & Gas

40

Source: Corporate Reports , Bernstein analysis and estimates

We have assembled the 2011non-OPEC supply curve, which shows that the 90th percentile marginal cost of
oil was US$92/bbl. The lowest cost companies were ECA, Reliance, BG and INPEX. The highest cost
companies were Nexen, Pengrowth, Anadarko, and Enerplus (Exhibit 8).

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 8
2011 Global non-OPEC ex FSU marginal cost of supply curve for oil
120
APC,
ERF
CNQ

OXY

60

NFX,
NBL,
DNR

APA

DVN

BP

CEO

COP

PTR

PBR

ENI

STL

TOT

XOM

20

CVX

ONGC

40

PEMEX

ECA,
RIL,
WPL, OSH
BG
PTTEP
INPEX

TLW

SNP

80

RDSA

Marginal Cost ($/bbl)

100

NXY

0
0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

24,000

27,000

Oil Production (mbd)


Source: Corporate Reports , Bernstein analysis

We compared 2002 global marginal cost and production curves with 2011and found the companies with
low costs tend to remain low-cost which the high cost companies have remained high cost (Exhibit 9).

Exhibit 9
2011 vs 2002 global non-OPEC ex FU marginal cost of supply curves for oil
120

NFX,
NBL
DNR
TLW

100
OXY

NXY

CNQ

PEMEX

SNP

ONGC

BP

CEO

COP

PTR

APA

PBR

TOT

RDSA

40

CVX

60

DVN

ENI

ECA,
RIL,
WPL, OSH
BG
PTTEP
INPEX

STL

80

XOM

Marginal Cost ($/bbl)

0
0

3,000

6,000

9,000

CVX

TOT

XOM

PBR

20
PTR

Asia-Pacific Oil & Gas

APC,
ERF

12,000

15,000

18,000

21,000

24,000

27,000

Oil Production (mbd)


Source: Corporate Reports , Bernstein analysis

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Using the same companies, we looked at how the non-OPEC marginal cost of supply has changed over
time. We found that the marginal cost increased dramatically between 2002 and 2005, and then rose slightly
in 2006 and 2007, peaked in 2008, dropped in 2009 and rose again in 2010 and 2011. The 90th percentile for
marginal costs increased with 14% compound annual growth rate while the median marginal costs
increased with 9% compound annual growth rate (Exhibit 10).

Exhibit 10
Non-OPEC ex FSU marginal costs (90th percentile of
production) and median marginal costs, 2002-2011

Exhibit 11
Non-OPEC ex FSU cash costs (90th percentile of
production) and median cash costs, 2002-2011
45

120

40
35
14%CAGR

Cash Costs($/bbl)

Marginal Costs($/bbl)

100
80
60
40
9% CAGR

17% CAGR

30
25
20
15
10

20

11% CAGR
5

90th percentile

Median

Source: Corporate Reports, Bernstein analysis

90th percentile

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Median

Source: Corporate Reports, Bernstein analysis

Asia-Pacific Oil & Gas

The 2011 Non-OPEC ex FSU Cash Cost Curve

In addition to calculating the marginal cost required to replace production with new reserves, we also
calculated the variable cash costs based on production costs (operating expenses and production taxes). This
indicates at what point it becomes uneconomic to produce oil, which would lead to production shut-ins.
Given the variability within each company's portfolio, there presumably is some production that would be
shut in even at higher levels than the overall cash costs, but the cash cost gives an indication of the range.
The large companies with the highest cash costs were PEMEX, Penn West, Imperial and Sinopec. The
companies with the lowest cash costs were TOTAL, Reliance, ECA and Statoil (Exhibit 12)

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 12
2011 global non-OPEC ex FSU cash cost of supply curve for oil
80
70

IMO,
PWT

50
DNR,
CNQ
REP

40

3,000

6,000

9,000

12,000

15,000

18,000

21,000

PEMEX

SNP

PBR

BP

ONGC

PTR

CEO

ENI

STL

TOT

10

XOM

CVX

20

OXY

EOG,
FST

RIL,
ECA

COP

30

RDSA

Cash Cost ($/boe)

60

24,000

27,000

Production (mbd)
Source: Corporate Reports , Bernstein analysis

We compared 2002 global cash cost and production curves with 2011 and found the companies with low
costs tend to remain low-cost, and vice-versa (Exhibit 13).

Exhibit 13
2011 vs 2002 global non-OPEC ex FSU cash cost of supply curves for oil
80

60
IMO,
PWT

50
DNR,
CNQ
REP

40

3,000

6,000

9,000

12,000

18,000

21,000

PEMEX

SNP

PBR

BP

ONGC

PTR

15,000

CEO

ENI

STL

TOT

10

XOM

CVX

20

OXY

EOG,
FST

RIL,
ECA

COP

30

RDSA

Cash Cost ($/boe)

Asia-Pacific Oil & Gas

70

24,000

27,000

Production (mbd)
Source: Corporate Reports , Bernstein analysis

10

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Where Have Global Costs Been Trending

Unit costs are comprised of production cost, DD&A, exploration expense, SG&A and other expenses.
Analysis of the 50 largest non-OPEC ex FSU oil and gas producers shows that production weighted average
unit costs (group total costs/group total production) in the industry increased from 7.3 US$/boe in 2001 to
35.9 US$/boe in 2011 with 10 year CAGR of 17% (Exhibit 14). Unit costs plus realization spread
increased from 17.4 US$/boe in 2001 to 81.3US$/boe in 2011 (Exhibit 15).

Exhibit 14
Global unit costs increased to a record high of 35.9 US$/boe
40

120

35

100

80

25
20

60

15

BrentI ($/bbl)

Unit Costs ($/boe)

30

40

10
20

5
0

0
2000

2001

2002

Production Costs

2003

2004
DD&A

2005

2006

2007

Exploration Expense

2008

2009

2010

SG&A & Other

2011
Brent

Asia-Pacific Oil & Gas

Source: Corporate Reports, Bernstein Analysis

11

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 15
Unit costs plus realization spread increased to a record high of 81.3 US$/boe
90

120
100

70
60

80

50
60
40
30

Brent ($/bbl)

Upstream Unit Costs ($/boe)

80

40

20
20
10
0

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Production Costs

DD&A

Exploration Expense

SG&A & Other

Resalization Spread

Brent

Source: Corporate Reports, Bernstein Analysis

The ratio between oil price and global unit costs has remained close to a constant ratio of 3.1x (i.e. oil price
= 3.1x unit costs) (Exhibit 16). Average revenue is almost two times of unit costs in the past ten years
(Exhibit 17).

Exhibit 16
Oil price (Brent) / unit costs have remained constant at
3x

3.0

4.0

2.0x

2.5

3.1x

2.0
3.0
1.5
2.0

1.0
1.0

0.5

Brent / Unit Costs


Source: Corporate Reports, Bernstein Analysis

Average

Revenue / Unit Costs

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Asia-Pacific Oil & Gas

5.0

Exhibit 17
Revenue per boe / unit costs has been closer to 2x over
the past decade

Average

Source: Corporate Reports, Bernstein Analysis

12

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

30

120

25

100

20

80

15

60

10

40

20

Brent ($/bbl)

Cash Costs ($/boe)

Exhibit 18
Global cash costs of oil and gas production increased to 24 US$/boe

0
2000

2001

2002

2003

2004

2005

Production Costs

2006

2007

2008

SG&A & Other

2009

2010

2011

Brent

Source: Corporate Reports, Bernstein Analysis

Exhibit 19
Net income increased to 16.4 US$/boe with a margin of 25% in 2011.
18

35%

16

30%

14

10

20%

15%

Net Income Margin

Net Income ($/boe)

Asia-Pacific Oil & Gas

25%
12

10%
4
5%

2
0

0%
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Corporate Reports, Bernstein Analysis

Organic finding and development (F&D) is one of the best measures of costs within the oil and gas
industry. F&D cost per barrel is simply the capital expenditure spent in finding and developing a barrel of
oil organically (ex acquisition). Analysis of the 50 largest non-OPEC ex FSU oil and gas producers shows

13

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

that average organic F&D costs in the industry increased from US5.1/bbl in 2001 to US17.5/bbl in 2011
with 10 year CAGR of 13% (Exhibit 20).

Exhibit 20
Organic F&D costs increased from US$5.1/bbl in 2001 to US$17.5/bbl in 2011 with 10 year CAGR of 13%.
25

120

100

80
15
60
10

Brent ($/bb;)

Organic F&D Costs ($/boe)

20

40
5

20

0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Corporate Reports, Bernstein Analysis

Given that development costs are the single most important driver of the economics of oil and gas projects
(as capital is spent up front), it should not come as a surprise that F&D costs have moved lock step with oil
prices over the past 10 years. As a result, the ratio between oil prices and global organic F&D costs has
remained close to a constant ratio of 4.8x (i.e. oil price = 4.8 x organic F&D costs) (Exhibit 21).

Asia-Pacific Oil & Gas

The ratio between total revenue and global organic F&D costs has remained close to a constant ratio of 3.1x
(i.e. total revenue = 3.1x organic F&D costs) (Exhibit 22), which indicates average blended oil and gas
revenue as percentage of oil price was about 65% during last ten years.

14

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

Exhibit 21
Oil price (Brent) / organic F&D ratio remained stable
around 5x in the last 10 years.
8.0

+852-2918-5741

Exhibit 22
Revenue / organic F&D remained stable around 3x over
the last 10 years.
5.0

7.0

3.1x

4.0

4.8x

6.0

5.0

3.0

4.0
2.0

3.0
2.0

1.0

1.0

Brent / Organic F&D

Average

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Revenue / Organic F&D

Average

Source: Corporate Reports, Bernstein Analysis

Source: Corporate Reports, Bernstein Analysis

Exhibit 23
Global 3-year average reserve replacement ratio
exceeded 10 year average and came in at c. 130% in
2011.

Exhibit 24
Global R/P ratio for the Upstream G50 remains stable at
around 13x

140%

18.0

114%

16.0

120%

13.0x

14.0

100%

12.0

80%

10.0

60%

8.0

6.0

40%

4.0

20%

2.0

3 yr avg RRR
Source: Corporate Reports, Bernstein Analysis

Average

R/P

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

0%

2001

Asia-Pacific Oil & Gas

2001

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Average

Source: Corporate Reports, Bernstein Analysis

Summary

Long term oil prices remain fundamentally linked to the marginal cost of production and the key message
for investors from our 2011 survey of companies is that costs continue to relentlessly march higher. Ten

15

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

years ago production costs were less than US4/bbl and F&D costs US$5/bbl. Last year production costs
were over US$20/bbl and F&D cost US$18/bbl. While we see near term downside to oil prices on weaker
demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs
of production.
Appendix -- Costs by company and cost inflation

Exhibit 25
Marginal cost by company in 2011
100
90

Marginal Cost $/bbl

80
70
60
50
40
30
20
10

NXY
PEMEX
ERF
APC
CNQ
HSE
PGF
MUR
PWT
TLM
HES
MRO
BRY
REP
SNP
EOG
DNR
PXP
NBL
NFX
ONGC
TLW
BP
CEO
COP
PTR
PBR
ENI
IMO
APA
OXY
PXD
DVN
STO
FST
STL
TOT
CVX
OSH
RDSA
PTT
WPL
XOM
INPEX
BG
RIL
CHK
ECA

Asia-Pacific Oil & Gas

Source: Corporate Reports , Bernstein analysis

16

PEMEX
NXY
APC
ERF
PGF
SNP
DNR
HES
CEO
PWT
MUR
PBR
MRO
BRY
TLW
TLM
HSE
PTR
INPEX
OSH
COP
STO
CNQ
WPL
BP
EOG
NFX
RDSA
IMO
PXP
NBL
OXY
ONGC
CVX
PTT
APA
XOM
PXD
REP
STL
ENI
BG
TOT
ECA
DVN
FST
RIL
CHK

Unit Cost, US $/boe

Asia-Pacific Oil & Gas

PEMEX
PWT
IMO
SNP
PBR
PGF
BP
ONGC
CNQ
CEO
REP
DNR
PTR
INPEX
ERF
BRY
HSE
NXY
XOM
TLW
NFX
HES
PXP
COP
RDSA
APC
OXY
PXD
MUR
TLM
MRO
STO
CVX
DVN
OSH
APA
WPL
PTT
NBL
ENI
EOG
FST
CHK
STL
BG
ECA
TOT
RIL

Cash Cost $/bbl

May 2, 2012

Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 26
Cash cost by company in 2011
45

40

35

30

25

20

15

10

Source: Corporate Reports , Bernstein analysis

Exhibit 27
Unit costs by company in 2011

70

60

50

40

30

20

10

Source: Corporate Reports, Bernstein Analysis

17

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 28
Unit costs inflation by company 2011 over 2010. Chinese oil majors highlighted in grey.
80.0%
70.0%

Unit CostsY-o-Y Inflation

60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

-20.0%

APC
FST
NXY
STL
NBL
BP
CEO
MUR
SNP
CNQ
MRO
STO
PTR
NFX
DNR
HES
PBR
HSE
XOM
TOT
OXY
CVX
WPL
INPEX
APA
PTT
EOG
PEMEX
BG
COP
RDSA
BRY
TLM
PWT
ONGC
PXP
DVN
PXD
PGF
IMO
CHK
TLW
OSH
ECA
REP
RIL
ENI
ERF

-10.0%

Source: Corporate Reports, Bernstein Analysis

Exhibit 29
Unit cost 5 yr CAGR by company
50.0%

Unit Costs CAGR

30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%

PEMEX
PTR
REP
IMO
ERF
CEO
MRO
BP
PBR
SNP
APC
DNR
HES
PWT
BG
RDSA
PGF
WPL
NXY
CVX
TOT
STO
COP
EOG
HSE
NBL
BRY
OSH
PTT
INPEX
ONGC
STL
MUR
XOM
PXP
NFX
APA
ENI
TLW
ECA
TLM
OXY
CNQ
DVN
FST
PXD
CHK
RIL

Asia-Pacific Oil & Gas

40.0%

Source: Corporate Reports, Bernstein Analysis

18

PEMEX
SNP
PBR
INPEX
CEO
PGF
PTR
DNR
PWT
IMO
BP
BRY
ERF
RDSA
NXY
XOM
ONGC
CNQ
TLW
COP
STO
HES
MRO
OSH
TLM
WPL
HSE
MUR
NFX
PXP
CVX
OXY
APC
PXD
PTT
REP
APA
DVN
EOG
STL
NBL
ENI
FST
BG
CHK
ECA
RIL
TOT

-10%

PEMEX
CEO
IMO
BP
RDSA
REP
PWT
ERF
NXY
PGF
STO
SNP
MRO
CVX
PBR
PTR
OSH
STL
NFX
HES
DNR
WPL
BG
TLW
COP
MUR
XOM
INPEX
BRY
ENI
HSE
APC
ONGC
PTT
TOT
PXD
OXY
EOG
APA
TLM
PXP
NBL
CNQ
DVN
CHK
ECA
FST
RIL

Production Cost CAGR

Asia-Pacific Oil & Gas


Production Cost, US $/boe

May 2, 2012

Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 30
Production cost by company in 2011
60

50

40

30

20

10

Source: Corporate Reports , Bernstein analysis

Exhibit 31
Production cost 5 yr CAGR by company

30%

25%

20%

15%

10%

5%

0%

-5%

Source: Corporate Reports , Bernstein analysis

19

NXY
HSE
PWT
MRO
PGF
PXP
CNQ
TLW
HES
DNR
TLM
MUR
ERF
BRY
ECA
EOG
NFX
APA
CEO
APC
SNP
STO
PXD
COP
RIL
STL
NBL
PTT
OXY
ONGC
CVX
FST
ENI
WPL
PTR
RDSA
DVN
CHK
PBR
BP
BG
XOM
REP
OSH
TOT
IMO

OSH
WPL
HES
MUR
TLM
NXY
SNP
MRO
HSE
APC
TLW
STL
STO
NBL
PBR
BG
PTR
CEO
PTT
ENI
REP
RDSA
COP
INPEX
EOG
PEMEX
BP
XOM
TOT
CVX
IMO
OXY
RIL
APA
BRY
CHK
CNQ
DNR
DVN
ECA
ERF
FST
NFX
ONGC
PGF
PWT
PXD
PXP

Exploration expense , US $/boe

Asia-Pacific Oil & Gas


DD&A, US $/boe

May 2, 2012

Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 32
DD&A by company in 2011
30

25

20

15

10

Source: Corporate Reports , Bernstein analysis

Exhibit 33
Exploration expense by company in 2011

10

Source: Corporate Reports , Bernstein analysis

20

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 34
3yr avg F&D costs by company in 2011
40
35

25
20
15
10
5
-

INPEX
RIL
TLW
WPL
CNQ
NXY
MRO
ERF
BRY
TOT
STL
SNP
APA
PGF
ONGC
ENI
XOM
OXY
MUR
PWT
CEO
HES
PXP
NFX
BG
TLM
PTR
PTT
PBR
APC
FST
DNR
EOG
PEMEX
BP
PXD
NBL
REP
HSE
OSH
COP
ECA
CVX
DVN

3yr avg F&D Cost, US $/boe

30

Source: Corporate Reports , Bernstein analysis

Exhibit 35
3yr avg F&D costs 5 yr CAGR by company

50.0%

F&D Cost CAGR

30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%

RIL
TLW
WPL
CNQ
XOM
MRO
BRY
TOT
SNP
PTR
NXY
ONGC
ERF
OXY
APA
BG
ENI
CEO
STL
PBR
EOG
NBL
MUR
DNR
ECA
HES
DVN
PGF
NFX
PXP
BP
TLM
HSE
FST
APC
PEMEX
COP
CHK
CVX
PTT
IMO
STO
INPEX
OSH
RDSA
PXD
PWT
REP

Asia-Pacific Oil & Gas

40.0%

Source: Corporate Reports , Bernstein analysis

21

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Exhibit 36
3yr avg RRR by company in 2011
300%

3yr avg RRR

250%
200%
150%
100%

0%

OSH
IMO
STO
CHK
RDSA
PXP
EOG
HSE
DNR
NFX
NBL
DVN
ECA
BG
PXD
PTT
TLM
MUR
PBR
FST
APC
HES
COP
PTR
CVX
CEO
XOM
PWT
NXY
BRY
REP
APA
SNP
ENI
BP
OXY
PGF
MRO
STL
ONGC
WPL
TOT
PEMEX
ERF
TLW
CNQ
RIL
INPEX

50%

Asia-Pacific Oil & Gas

Source: Corporate Reports , Bernstein analysis

22

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Disclosure Appendix
Ticker Table

Asia-Pacific Oil & Gas

Ticker
857.HK (PetroChina)
883.HK (CNOOC)
386.HK (SinoPec)
PTTEP.TB
ONGC.IN
RIL.IN
STO.AU
OSH.AU
WPL.AU
2883.HK (COSL)
REP.SM
RDSA.LN
RDSA.NA
RDSB.LN
RDSB.NA
RDS/A
RDS/B
TOT
E
BP
STO
STL.NO
GALP.PL
BG/.LN
ENI.IM
BP/.LN
FP.FP
ECA
ECA.CN
EOG
TLM
CHK
APA
TLM.CN
NBL
DVN
APC
TLW.LN
OGZD.LI
MXAPJ
MSDLE15
SPX

Rating

CUR

M
O
M
M
M
O
M
O
M
O
O
M
M
M
M
M
M
O
M
M
U
U
O
O
M
M
O
M
M
O
M
U
O
M
O
M
M
O
O

HKD
HKD
HKD
THB
INR
INR
AUD
AUD
AUD
HKD
EUR
GBp
EUR
GBp
EUR
USD
USD
USD
USD
USD
USD
NOK
EUR
GBp
EUR
GBp
EUR
USD
CAD
USD
USD
USD
USD
CAD
USD
USD
USD
GBp
USD

30 Apr 2012
Closing
Price
11.76
16.54
8.36
175.00
264.20
739.95
14.02
7.35
34.92
12.58
14.45
2193.00
26.87
2246.50
27.60
71.54
73.36
48.11
44.56
43.41
26.91
152.80
11.89
1450.50
16.77
445.00
36.07
20.94
20.18
109.81
13.06
18.44
95.94
13.08
99.32
69.85
73.21
1534.00
11.54
441.15
1062.69
1397.91

Target
Price

TTM
Rel.
Perf.

12.00
21.00
9.50
200.00
290.00
900.00
14.30
8.70
41.50
15.00
20.50
2410.00
28.00
2410.00
28.00
76.00
76.00
68.00
52.00
50.00
24.00
135.00
19.00
2020.00
20.00
530.00
51.00
18.00
18.00
127.00
14.00
17.00
129.00
14.00
125.00
81.00
92.00
2150.00
17.00

19.0%
-0.1%
20.5%
9.8%
0.2%
-10.8%
6.4%
17.9%
-11.8%
-4.5%
-42.6%
-11.0%
-8.1%
-12.0%
-9.0%
-13.3%
-14.6%
-17.0%
-3.2%
-9.6%
-6.1%
-4.0%
1.0%
1.9%
1.2%
-6.9%
-12.2%
-40.1%
-37.4%
-5.4%
-48.3%
-47.8%
-30.6%
-46.0%
0.7%
-25.8%
-9.8%
5.9%
-3.0%

EPS

P/E

2011A

2012E

2013E

2011A

2012E

2013E

Yield

0.89
1.88
0.98
13.44
33.90
62.00
0.51
0.17
2.03
1.08
1.80
247.57
3.31
247.57
3.31
7.94
7.94
7.57
5.35
7.49
2.89
16.50
0.30
86.57
1.92
77.88
5.44
1.62
1.60
3.79
0.58
2.80
11.83
0.57
5.31
6.00
3.37
48.00
3.55
33.19
95.95
95.92

1.03
1.89
1.10
14.78
31.80
61.20
0.68
0.15
2.36
1.34
1.56
293.67
3.47
293.67
3.47
9.22
9.22
8.12
5.52
6.18
2.88
16.20
0.61
94.74
2.08
65.55
6.10
0.98
0.98
5.17
1.06
1.84
10.93
1.06
6.38
6.73
3.76
51.00
3.20
37.30
100.63
105.00

1.11
2.18
1.26
18.90
33.07
71.30
0.77
0.15
2.57
1.62
1.68
339.49
4.01
339.49
4.01
10.66
10.66
8.76
6.41
7.38
2.84
15.99
0.82
110.60
2.41
78.36
6.59
0.27
0.27
7.66
1.39
2.83
13.39
1.39
9.52
7.20
4.34
76.00
3.27
42.25
112.47
118.09

13.2
8.8
8.5
13.0
7.8
11.9
27.5
43.2
17.2
11.6
8.0
8.9
8.1
9.1
8.3
9.0
9.2
6.4
8.3
5.8
9.3
9.3
39.6
16.8
8.7
5.7
6.6
12.9
12.6
29.0
22.5
6.6
8.1
22.8
18.7
11.6
21.7
32.0
3.3
13.3
11.1
14.6

11.4
8.8
7.6
11.8
8.3
12.1
20.6
49.0
14.8
9.4
9.3
7.5
7.7
7.6
8.0
7.8
8.0
5.9
8.1
7.0
9.3
9.4
19.5
15.3
8.1
6.8
5.9
21.4
20.6
21.2
12.3
10.0
8.8
12.3
15.6
10.4
19.5
30.1
3.6
11.8
10.6
13.3

10.6
7.6
6.6
9.3
8.0
10.4
18.2
49.0
13.6
7.8
8.6
6.5
6.7
6.6
6.9
6.7
6.9
5.5
7.0
5.9
9.5
9.6
14.5
13.1
7.0
5.7
5.5
77.6
74.8
14.3
9.4
6.5
7.2
9.4
10.4
9.7
16.9
20.2
3.5
10.4
9.4
11.8

3.4%
2.7%
2.9%
2.9%
3.4%
1.5%
2.6%
0.5%
3.3%
1.3%
8.0%
5.0%
4.8%
4.9%
4.7%
4.8%
4.7%
6.3%
6.2%
4.4%
4.3%
4.3%
1.7%
1.0%
6.2%
4.6%
6.3%
3.8%
3.8%
0.6%
2.1%
1.9%
0.7%
2.1%
0.9%
1.2%
0.5%
0.4%
2.2%
3.1%
4.1%
2.0%

O Outperform, M Market-Perform, U Underperform, N Not Rated


* ONGC.IN, OGZD.LI estimates are financial year ended in March of FY2011A/FY2012E/FY2013E;RIL.IN estimates are financial year ended in March of
FY2011A/FY2012A/FY2013E.

Valuation Methodology

Asia-Pacific Oil & Gas


We value large cap oil and gas companies by identifying the forward price to book multiples they should
trade at based on returns on equity, long term earnings growth expectations, dividend payout ratio and cost

23

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

of equity. Our starting point is that Fwd P/B = (ROE x PO) / (Ke g), where is our estimates of ROE for
2012, PO is the dividend payout ratio, Ke is the cost of equity, and g is the long term growth rates.
For Santos, Oil Search and Woodside, we believe an NAV approach is appropriate given a significant
portion of their values are attached to future LNG projects. In calculating the NAV, we have assumed a
long term oil price of $90 (real).
We value RIL using a sum of the parts methodology at INR 990.
We value COSL using a sum of the parts method. We value COSL's drilling segment by NAV calculated
based on the liquidation value of COSL's drilling rigs according to their Bernstein Complexity score. Well
services, marine services and transportation and geophysical segments are valued using peers 2013
EV/EBITDA multiples. On a SOTP basis, COSL is valued at HK$15/sh.
Our target prices for the European Integrated Oils are calculated by applying our estimates for 2012
cashflow per share (CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated
through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and
Return on Average Capital Employed (ROACE) within the Integrated Oils group. Our calculation utilizes
this relationship and an estimated long term, through the cycle ROACE to generate the target P/CF
multiple. The price calculations for the Integrateds are summarized below. We use $90/bbl Brent and
$3.75/mcf for US gas in 2012 and $115/bbl Brent and $4.25/mcf for US gas in 2013.
European Oil & Gas
Our target prices for the European Integrated Oils are calculated by applying our estimates for 2012
cashflow per share (CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated
through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and
Return on Average Capital Employed (ROACE) within the Integrated Oils group. Our calculation utilizes
this relationship and an estimated long term, through the cycle ROACE to generate the target P/CF
multiple. The price calculations for the Integrateds are summarized below. We use $90/bbl Brent and
$3.75/mcf for US gas in 2012 and $115/bbl Brent and $4.25/mcf for US gas in 2013.

Asia-Pacific Oil & Gas

North American Oil & Gas Exploration/Production


Our valuation framework for our coverage of North American E&P oil & gas stocks is based on the strong
correlation of P/CF multiple and the recycle ratio (cash flow per barrel divided by F&D costs). The recycle
ratio-implied target multiples are supplemented by company-specific catalysts, which are valued
independently under a full-life cycle NPV methodology and applied in the form of incremental (positive or
negative) change. We adjust our target multiples to include the effects of growth, capitalization, capital
efficiency, and risk.
Our target price methodology for the US Oil Services is based upon P/E multiples applied to our 2013 EPS
estimates. Our P/E multiples are determined by the relationship between relative P/E multiples and returns
relative to the market for each Service stock. We then adjust the multiples for forecast earnings revisions.
Our target price for NOV is based upon a P/E multiple of 11.8x applied to our 2013 EPS estimate of $7.67.
The P/E multiple is derived from our crude price and company backlog forecasts, and their historical
influence on the stock's multiple. Next we add the net cash balance of $7.12/share to arrive at our $98 target
price.
Our valuation methodology for the Offshore Drillers combines an EV/EBITDA based approach and Net
Asset Value. Our EV/EBITDA based target prices utilize 2013 forecasted EBITDA, as long duration

24

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

contracts cause the group to trade on forecasted cash generation further into the future. We apply a modeled
group EV/EBITDA multiple, utilizing the year over year change in crude prices and the ratio of newbuild
orders to working rigs, discounted by 10%. Next, we adjust the company specific multiple based upon fleet
complexity. We tweak the multiple upward for Diamond (dividend), Ensco (operational quality) and
Seadrill (dividend), and tweak down for Transocean (Macondo liability). Our NAV incorporates both recent
rig orders and transactions, and utilizes our rig complexity index to benchmark the global fleet. For Seadrill,
we apply a 3x NAV multiple given fleet quality and growth, as justified by DCF. Given robust contract
backlogs and rising rig rates, we also add the discounted free cash flow that each Driller will generate in
2012 and 2013 to account for the potential growth in assets. Finally, we apply a 2:1 weighting to our
EV/EBITDA and NAV target prices, respectively, to calculate our published target price for each Driller.
Our Land Driller target price methodology combines two approaches. First, we calculate an appropriate
EV/EBITDA multiple based upon a prediction model incorporating the year-over-year change in
commodity prices, weighted by the US active rig count split and the Land Driller reinvestment rate. The
model inputs are leading indicators for changes in land rig supply and demand. Second, we calculate the
NAV including asset additions in 2011. To the NAV, we add the forecast free cash flow to be generated
during 2012. Free cash flow is defined as operating cash flow less maintenance capex, which captures the
cash available for asset growth and/or shareholder return. Finally, we take a simple average of the two
methodologies.
Risks

Asian Oils & Gas

Asia-Pacific Oil & Gas

CNOOC: Risks to our CNOOC price target include a decline in oil prices given the high correlation and
beta with oil and production problems which cause CNOOC to under deliver on their production targets.
The change in strategy to become an integrated oil company through the purchase of parent company assets
such as refineries and downstream assets could is also a potential risk.
PetroChina: downside risks to our PetroChina price target include a decline in oil prices given the high
correlation and beta with oil, accelerated production decline at Daqing oil field and larger than expected
losses in their refining division as a result of government fuel price subsidies. The introduction of resources
tax is a further downside risk. Better than expected refining margins and domestic gas prices as a result of
policy changes represent an upside risk to our price target.
Sinopec: Risks to our Sinopec price target include an increase in oil prices given the large contributions of
their downstream refining business to earnings. Other risks include accelerated production decline at
Shengli oil field, overseas M&A transaction with their parent company which results in value leakage from
the company and the introduction of resource tax. Better than expected refining margins as a result of policy
changes represent an upside risk to our price target.
COSL: Risks to our COSL price target include a decline in oil prices which could impact CNOOC's capex
budget. International sanctions against Iran which limits the ability to CNOOC to operate in country or
results in the expropriation of assets. An equity rights issue to fund the purchase of deep water drilling
equipment significantly in excess of 5billion shares currently expected in the market.
Reliance: Risks to our Reliance price target include a decline in oil prices given the high correlation and
beta with oil and operational problems relating to Reliance as it ramps up Dhirubhai which result in a
significantly lower than expected production output. Sustained weakness in refining and petrochemical
margins could be a further downside risk if economic recovery is slower than expected and demand growth
remains weak.
25

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

ONGC: Risks to our ONGC price target include delays in the deregulation of fuel prices in India which
will increase crude oil under-recoveries as fuel demand continues to surge which will be negative for the
stock. Other potential risks could be a major acquisition which transforms ONGC's international portfolio
and will be positive for the stock.
Oil Search: Risks to our Oil Search price target include a decline in oil prices given the high correlation
and beta with oil, or failure to progress their PNG LNG project in a timely way due to political or social
unrest, for which a significant amount of value is already embedded within the share price. Given the
position of XOM in the project we believe that cost overruns and delays will be avoided.
Santos: Risks to our Santos price target include a significant change in oil prices given the high correlation
and beta with oil. The possibility of cost overruns on this project also represents a possible risk.
Woodside: Risks to our Woodside price target include a decline in oil price as given the high correlation
and beta with oil or delays in the construction of Pluto 1. Upside risk will be a major discovery in the
Carnarvon basin over the next 6 months which transforms their ability to deliver the Pluto 2 LNG project.
PTTEP: Risks to our PTTEP price target include a negative outcome from the Australian enquiry into the
uncontrolled release on the Montara project, which could result in reputational damage and financial
penalties and further environmental claims if PTTEP are found to be at fault, and domestic unrest in
Thailand which results in an economic slowdown and a drop in demand for natural gas. Other potential
risks include sanctions imposed in Myanmar by US or EU governments which impact operations or supply
of equipment in the country and delay to the start up of international projects which are key to underpinning
growth over the next 3 years.
European Oil & Gas
For the European Majors, the greatest risk to our target prices is a significant decline in crude oil prices, as
the Majors commonly trade in line with commodity prices. Additionally, downward revisions to production
volume targets could adversely impact share prices.

Asia-Pacific Oil & Gas

North American Oil & Gas Exploration/Production


The primary risk to our target prices for the North American E&Ps is lower than expected commodity
prices over the next few years. For instance, oil prices could be negatively affected by slower than expected
economic growth, higher global supply, or faster switching to alternative fuel sources, which could depress
product demand and drive oil prices below the marginal cost of supply. For natural gas, prices could be
negatively affected by warm weather, continued healthy supply growth, lower coal-to-gas power switching,
or higher LNG/pipeline net imports. Additionally, government policy and administration, including but not
limited to the BOEM/BSEE's pace of permitting or leasing, or changes to various countries' tax rates/fiscal
terms, have the potential to positively or negatively affect the commodities and companies.
The primary risk to our target prices on the US Oil Services is a renewed economic recession, which would
depress product demand and drive commodity prices below the marginal cost of supply. Should this occur,
the oilfield services market would likely become oversupplied, especially given healthy service
reinvestment today. Under this scenario, margins would remain depressed for the foreseeable future, likely
driving underperformance by the group. For Halliburton specifically, their involvement in providing cement
for the Macondo well may expose them to significant fines and penalties, which if levied, could yield
underperformance for the stock.
The primary risk to our target prices on the Drillers is a cessation of global economic growth, which would
precipitate crude prices trading below the marginal cost of supply. Should this occur, utilization in the rig
26

May 2, 2012
Neil Beveridge, Ph.D. (Senior Analyst) neil.beveridge@bernstein.com

+852-2918-5741

Asia-Pacific Oil & Gas

market would fall meaningfully, as the drop off in demand would be compounded by capacity additions.
This would drive spot rates toward cash costs and cause the group to underperform the market.
Alternatively for the Offshore Drillers, an elongated deepwater drilling moratorium in the US Gulf of
Mexico would also spur a sharp drop in deepwater rig rates as well as earnings power for most of the
Offshore Drillers under coverage given their earnings exposure to this market.

27

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 04/30/2012, Bernstein's ratings were distributed as follows: Outperform - 41.1% (1.5% banking clients) ; Market-Perform - 49.3%
(0.4% banking clients); Underperform - 9.6% (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.

Neil Beveridge maintains a long position in BP PLC (BP).

Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of
the following companies RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC, BG/.LN / BG Group PLC, BP/.LN / BP
PLC.

The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment bankingsecurities related services and received compensation for such services BP / BP PLC, BP/.LN / BP PLC.

An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies BP /
BP PLC, BP/.LN / BP PLC.

This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can
also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or
Sanford C. Bernstein Limited, Director of Compliance, 50 Berkeley Street, London W1J 8SB, United Kingdom; or Sanford C. Bernstein
(Hong Kong) Limited, Director of Compliance, Suites 3206-11, 32/F, One International Finance Centre, 1 Harbour View Street, Central,
Hong Kong, or 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, Director of Compliance,
30 Cecil Street, #28-01 Prudential Tower, Singapore 049712.

12-Month Rating History as of 04/30/2012


Ticker

Rating Changes

2883.HK
386.HK
857.HK
883.HK
APA
APC
BG/.LN
BP
BP/.LN
CHK
DVN
E
ECA
ECA.CN
ENI.IM
EOG
FP.FP
GALP.PL
NBL
OGZD.LI

O (RC) 04/17/12
M (RC) 03/09/12
M (RC) 04/20/11
O (RC) 12/01/11
O (IC) 05/13/11
M (IC) 05/13/11
O (IC) 01/22/09
M (IC) 08/03/10
M (IC) 08/03/10
U (IC) 05/13/11
M (IC) 05/13/11
M (RC) 03/09/12
M (IC) 05/13/11
M (IC) 05/13/11
M (RC) 03/09/12
O (RC) 11/02/11
O (IC) 08/03/10
O (RC) 05/26/10
O (IC) 05/13/11
O (RC) 07/16/09

M (IC) 11/29/11
O (RC) 08/23/11
M (RC) 08/23/11
O (DC) 08/02/10
O (DC) 08/02/10

O (DC) 08/02/10
M (DC) 08/02/10
O (IC) 08/03/10
O (DC) 08/02/10
O (DC) 08/02/10
O (IC) 08/03/10
M (IC) 05/13/11

M (IC) 06/29/09
O (IC) 06/29/09

O (DC) 08/02/10

ONGC.IN M (RC) 11/17/09


OSH.AU O (IC) 06/29/09
PTTEP.TB M (IC) 06/11/10
RDS/A
M (RC) 03/09/12
RDS/B
M (RC) 03/09/12
RDSA.LN M (RC) 03/09/12
RDSA.NA M (RC) 03/09/12
RDSB.LN M (RC) 03/09/12
RDSB.NA M (RC) 03/09/12
REP.SM O (IC) 03/19/12
RIL.IN
O (RC) 01/19/11
STL.NO U (RC) 04/20/11
STO
U (RC) 04/20/11
STO.AU M (RC) 04/20/11
TLM
M (RC) 08/02/11
TLM.CN M (RC) 08/02/11
TLW.LN O (IC) 01/22/09
TOT
O (IC) 08/03/10
WPL.AU M (RC) 08/23/11

O (IC) 08/03/10
O (IC) 08/03/10
O (IC) 08/03/10
O (IC) 08/03/10
O (IC) 08/03/10
O (IC) 08/03/10

U (IC) 05/13/11
U (IC) 05/13/11

O (DC) 08/02/10
O (DC) 08/02/10

O (RC) 11/17/09

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated


Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES
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CERTIFICATIONS

I/(we), Neil Beveridge, Ph.D., Bob Brackett, Ph.D., Oswald Clint, Ph.D., ACA, Scott Gruber, CFA, Senior Analyst(s)/Analyst(s), certify that
all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers
and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this
publication.

Approved By: CDK


Copyright 2012, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein (Hong Kong) Limited, and AllianceBernstein (Singapore) Ltd., subsidiaries of
AllianceBernstein L.P. ~1345 Avenue of the Americas ~ NY, NY 10105 ~212/756-4400. All rights reserved.
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