January 11, 2013

Americas: Energy
Equity Research

Takeaways from the 2013 Goldman Sachs Energy Conference

Key takeaway from the 2013 GS Energy Conference
Takeaway #1: Shale scale altering the landscape, stock selection is
critical. We believe continued improvements in resource bases can trump
flattish commodity prices and rig count, though stock selection is critical as
the gap between those with shale scale and shale strain remains wide.
E&Ps with scale and, to a lesser extent, a select few strain-to-scale
domestic oils should benefit from concentrated investments in the big
four shale plays. We believe the push for increased scale favors Oil
Service companies (i.e., pressure pumpers) over land drillers, as the former
benefits from well count growth and higher service intensity. Top picks for
the theme include: COG, EOG, PXD, CXO (E&Ps), MRO, HAL, BAS, CJES.

Takeaway #2: Exploration: Increased activity in 2013 could be

meaningful for deepwater leveraged oil services and select SMID
E&Ps. We believe 2013 will be a more meaningful year for exploration
activity. A number of potentially impactful wells are being drilled in DW
GOM and West Africa. Top picks: CIE, BBG, HK, MRO, SLB, HAL, OII, CAM.

2013 GS GLOBAL ENERGY CONFERENCE

We hosted our 2013 Global Energy Conference in Miami on
January 7-9, 2013.

RELATED RESEARCH
Americas: Energy: Goldman Sachs 2013 Global Energy
Conference preview by Arjun Murti, Brian Singer, Waqar
Syed, Ted Durbin, Michael Cerasoli and team: January 7,
2013.
Americas: Energy: Oil: 2013 preview: Micro trumps macro
Shale strain to shale scale, MidCon refining, returns by
Arjun Murti and team: December 13, 2012.
Americas: Energy: Oil & Gas E&P: 2013 outlook:
Balancing the shale scale with SMID exploration/M&A; Buy
PXD, EOG by Brian Singer and team: December 13, 2012.
Americas: Energy: Oil Services: 2013E outlook: The catalyst
is finally here own NAM services by Waqar Syed,
Michael Cerasoli and team: December 13, 2012.
Research Roundtable: MLP-ification: A focus on Energy by
Ted Durbin and the Americas Energy team: January 8, 2013.

Takeaway #3: Oil logistics constraints continue to benefit refiners (CCorp and MLP) and traditional Pipeline/MLPs. Variations in location and
types of oil being produced and inadequate takeaway capacity should keep
oil differentials at wider-than-expected levels for a longer period of time
than consensus currently expects. Top picks: HFC, MPC, WNR, ALJ, PAA.

Takeaway #4: M&A: not imminent, but 2013 could see a pick-up in
activity. While we did not come away from our conference with a clear
sense that a wave of corporate deals is imminent, we continue to believe
rangebound commodity prices and the disparity between global
commodity producers seeking shale scale/deepwater and advantaged
North American E&Ps should drive activity in 2013. Many integrated oil
and larger independent E&P companies indicated they expect to continue
actively evaluating opportunities to optimize their portfolios via M&A.

Takeaway #5: Investor sentiment Lack of strong directional/thematic

conviction, do not appear to be overweight energy. There did not
appear to be any overarching themes broadly shared by investors in
attendance. Few had especially strong directional views, either bullish or
bearish, on either commodity prices or the attractiveness of individual
subsectors. Ideas that had clear catalysts were most in favor.
Brian Singer, CFA
(212) 902-8259 brian.singer@gs.com Goldman, Sachs & Co.
Waqar Syed
(212) 357-1804 waqar.syed@gs.com Goldman, Sachs & Co.
Arjun N. Murti
(212) 357-0931 arjun.murti@gs.com Goldman, Sachs & Co.
Theodore Durbin
(212) 902-2312 ted.durbin@gs.com Goldman, Sachs & Co.

The Goldman Sachs Group, Inc.

Goldman Sachs does and seeks to do business with

companies covered in its research reports. As a result,
investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making
their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by nonUS affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
Global Investment Research

January 11, 2013

Americas: Energy

GS Energy Conference takeaways: Welcome to the new normal

We hosted our 2013 Global Energy Conference in Miami on January 7-9, 2013, and
highlight the following five key takeaways.

Takeaway #1: Shale scale altering the landscape, stock selection is critical
We believe continued improvements in resource bases can trump flattish commodity
prices and rig count, though stock selection is critical as the gap between those with shale
scale and shale strain remains wide. E&Ps with scale and, to a lesser extent, a select
few strain-to-scale domestic oils should benefit from concentrated investments in the
big four shale plays (Bakken, Eagle Ford, Permian, and Marcellus). Panelists indicated
costs are still falling, drilling is still becoming more efficient and recovery rates are still on
the rise in all four plays. While the impact shale scale has on Oil Services continues to be
hotly debated, we believe the push for increased scale favors service companies (i.e.,
pressure pumpers) over land drillers, as the former benefits from well count growth and
higher service intensity. As support, drilling panelists seemed more resigned to flattish to
modest growth in rig count, while service panelists expect improving profitability (margins)
from increasing utilization and declining input costs throughout the year. Our top picks for
this theme are:
x

E&Ps: COG (Marcellus), EOG (Eagle Ford), PXD (Permian), CXO (Permian)

Domestic Oil: MRO (Eagle Ford)

Oil Services: HAL, BAS, CJES (all exposed to pressure pumping) and HP driver of
drilling efficiency

Takeaway #2: Exploration: Increased activity in 2013 could be meaningful for

deepwater leveraged oil services and select (particularly SMID) E&Ps
We came away from our conference believing 2013 will be a more meaningful year for
exploration activity to drive share performance than was the case in 2012. A number of
potentially impactful wells are being drilled in the deepwater Gulf of Mexico and West
Africa, benefiting the offshore drillers and service companies drilling the wells and
potentially driving upside in the domestic/integrated oil and E&P companies with interests
in the prospects. While we did not come away from our conference believing many of the
more onshore-focused SMID E&Ps will gain shale scale in general, we do see the potential
for exploration which can be more material to smaller companies than to larger ones to
be a more material driver of stock performance in 2013. Increased exploration activity
should also benefit technology-focused oil service companies. In our view the stocks most
exposed to this theme are:
x

E&Ps: CIE (Gulf of Mexico and West Africa), BBG (northeast Wattenberg), HK
(Woodbine and Utica)

Domestic Oil: MRO (Gabon pre-salt, Kurdistan, Gulf of Mexico)

Oil Services: SLB/HAL (offshore/onshore), OII/CAM/NOV (offshore)

Takeaway #3: Oil logistic constraints continue to benefit refiners (C-Corp and
MLP) and traditional Pipeline/MLPs
Variations in location and types of oil being produced and inadequate takeaway capacity
should keep oil differentials at wider-than-expected levels for a longer period of time than
consensus currently expects; this drives our bullish outlook for refiners (C-Corp and MLP)
and traditional Pipeline/MLPs. We believe in 2013, investors will increasingly recognize that
basin-specific discounts (e.g., Permian, Bakken, Western Canadian Select, and Uinta Basin
Black Wax) will not be easily resolved by major inter-state trunklines and that additional
logistical investment will be needed to the benefit of refiners exposed to the respective
Goldman Sachs Global Investment Research

January 11, 2013

Americas: Energy

regions as well as pipeline/MLPs (some of which are owned by refiners) that will help build
infrastructure. We would note that E&Ps did not appear concerned that wide oil
differentials would negatively impact their activity levels, supportive for refiners.
In addition, refining panelists acknowledged that shale oil supply will increasingly need
to be redirected to the US East and West Coast and away from the Gulf Coast once the
Gulf becomes saturated with light-sweet oil in the 2013-2014 timeframe. This bodes well
for infrastructure providers (MLPs), who we believe have an opportunity to become more
multi-modal, expanding beyond just owning hard assets (i.e., pipelines) into managing
broader transportation networks. Separately, refiners are participating more in last mile
logistics as they are increasingly motivated to control input flows. MLPs are an effective
way to finance their growth in this area given the benefit of a lower cost of capital benefit.
Our top picks for these themes are:
x

Refiners: HFC, MPC, WNR, ALJ

Pipelines/MLPs: PAA

Takeaway #4: M&A: not imminent, but 2013 could see a pick-up in activity
While we did not come away from our conference with a clear sense that a wave of
corporate deals is imminent, we continue to believe rangebound commodity prices and the
disparity between global commodity producers seeking shale scale and advantaged North
American E&Ps should drive activity in 2013. Many integrated oil and larger independent
E&P companies indicated they expect to continue actively evaluating opportunities to
optimize their portfolios via M&A.
x

COG remains our favorite E&P for M&A upside.

Takeaway #5: Investor sentiment Lack of strong directional/thematic conviction,

do not appear to be overweight energy
There did not appear to be any overarching themes broadly shared by investors in
attendance. Few had especially strong directional views, either bullish or bearish, on either
commodity prices or the attractiveness of individual subsectors. Ideas that had clear
catalysts were most in favor, supportive of our view that stock-picking and company-specific
themes will be more important drivers of performance than commodity prices in 2013.
We also conducted an anonymous, informal survey asking conference participants their
views on several topics, specifically oil/gas price expectations, sector positioning, and top
stock picks. From our perspective, the results further support the above, namely stock
picking and company-specific themes will drive performance, and perhaps compel capital
to flow in/out of individual sectors as the landscape evolves. We highlight the following
survey results:
x

Oil/gas prices averaged $89/bbl for WTI, $104/bbl for Brent, and $3.84/mcf for
Henry Hub natural gas. The standard deviation of submitted figures is well below
the averages for 2007-2009, but a near match with 2010-2012. Clearly investor
expectations align with our call that oil/gas prices have entered a new normal.

Investors appear fairly split on favorite sector to own. Votes were relatively evenly
distributed between E&Ps/Domestic Oils (23%), MLPs (23%), Integrated Oils (21%),
Oil Services/Drillers (18%), and Refiners (15%).

By investor type, hedge funds are most bullish on refiners, with 40% of
respondents expecting this sector to be the years top performer. On the other
hand, long only investors viewed refining as the least attractive sector, and were
divided roughly evenly among the other sectors.

Long/short stock picks were widely varied. We specifically identify CIE as the most
frequently mentioned long, while the most common short was SD.

Goldman Sachs Global Investment Research

January 11, 2013

Americas: Energy

E&Ps: Resource bases still improving; positives for PXD, COG

Resource bases still improving: Focus on shale scale in Eagle Ford/Marcellus with
EOG and COG our favorites. Most companies indicated that despite the strong shale
growth seen from both oil and gas in recent years, costs are still falling, drilling is still
becoming more efficient and recovery rates are still on the rise. The plays where positive
datapoints or expectations ran the gamut from legacy shale plays such as the Fayetteville,
where SWN indicated it is further reducing costs, to the Eagle Ford where multiple
companies indicated they can drill the same number of wells with 20% fewer rigs to the
Marcellus where multiple companies indicated greater confidence in recovery rates and
efficiencies from pad drilling over time. Coming out of the conference, we feel more
confident about shale scale winners COG (Marcellus) and EOG (Fayetteville).
x

Marcellus COG. We expect COG to exceed the upper end of its production guidance
and viewed positively management comments that (a) the 35%-50% guidance did not
contemplate 1 Bcf/d of gross Marcellus production (achieved in late December 2012)
until mid-year 2013, and (b) management expects to grow production over the first half
in the Marcellus. We believe COG may consider returning cash to shareholders via
dividend growth or other measures late in the year.

Eagle Ford EOG. While we expect inflection in Eagle Ford production for APC later in
the year as more infrastructure comes online, our favorite remains EOG, where we
expect its resource to rise via downspacing and shale scale to drive upward revisions
to EBITDA/returns from: (a) falling costs (management indicated most wells are now at
its $5.5 million target capital cost); (b) strong growth; and (c) improved margins via
oilier mix and improved oil differentials (management indicated it has further
increased oil that reaches seaborne price-driven markets).

Continued confidence in Permian Basin transformation and catalysts new

datapoints positive with catalysts upcoming for PXD. We believe Permian resource
assumptions can continue to rise both in the Delaware Basin (west) and Midland Basin
(east). Companies indicated greater confidence in multi-zone potential in both basins -- we
expect CXO to begin discussing more detail on its northern Delaware Basin wells later this
year (management indicated it sees 2+ zones prospective on average through its acreage),
while Laredo and Pioneer both indicated additional success from secondary zones. CXO
reiterated it does not expect degradation in its liquids mix and sees its near 20% growth
guidance as risked and achievable despite a shift in its drilling program towards horizontal
wells. Devon and Apache among larger companies continue to express optimism
regarding Permian growth potential, though without specifics.
x

We came away particularly positively on PXD: (1) the company announced five
horizontal Wolfcamp Shale wells with 24-hour IPs that were among the highest the
company has drilled in its southern acreage; (2) management indicated optimism
regarding interest levels in and ultimate announcement of a southern Midland Basin
JV in the next month; (3) management is now completing its first wells north of its
successful Giddings Estate Wolfcamp Shale wells with results expected in 1Q -- with
PXD holding a dominant acreage position in the area, success can be a meaningful
positive catalyst for shares.

Improved type curves positive for LPI, though execution key for outperformance.
Separately, Laredo Petroleum raised its EUR guidance type curve and provided more
detail on multi-zone potential in the Wolfcamp. We rate LPI Buy though believe
showing in line to better sequential oil growth is needed for shares to receive credit for
rising Permian per-well recoveries.

Goldman Sachs Global Investment Research

January 11, 2013

Americas: Energy

Restructuring in focus for small and medium-sized diversifieds; exploration success is

needed for SMIDs HK and BBG most impactful. 2012 was a tough year for SMID and
diversified E&Ps that have been challenged to demonstrate shale scale. Most of these
companies have made asset sales, acquisitions and/or are testing new areas to determine
running room. The focus of many of the gas-to-liquids transitional E&Ps remained on
restructuring with QEP announcing (in line with prior strategy) a midstream MLP, Bill
Barrett becoming the third of our companies in the last year to see a surprise CEO change
with the sudden resignation of Fred Barrett, and Chesapeake Energy announcing changes
to compensation structure. We remain skeptical that restructuring alone can drive
outperformance (though potentially it can mitigate underperformance) as long as we are
seeing resource transformation elsewhere in the sector and shale scale remaining a theme.
We did not come away from our conference more confident that covered E&P companies
facing shale strain are on the cusp of showing and being recognized for shale scale. The
opportunity for smaller companies facing shale scale challenges comes from exploration
even if success comes in small positions. We believe the two SMID-cap stocks with the
most favorable onshore exploration trends are:
x

Bill Barrett (Neutral rated), based on 40K northeast Wattenberg acres being tested in
1H 2013. We believe success as drilling moves east within the company's block would
receive recognition in shares by the Street because of the success in Wattenberg
others (such as NBL, APC) have seen.

Halcon Resources (Neutral rated), based on 210K acres in the Woodbine play and
130K acres in the Utica Shale (NW PA being tested presently). At our conference there
were not new Utica datapoints but we expect them over the coming months.

International diversifieds represent the fusing of execution/exploration themes APC and

NBL key favorites, CIE favored for deepwater exploration. We continue to believe the key
for international diversifieds, many of which have lagged and trade at low EV/DACF
multiples, is to show material growth from identified shale plays, material growth/cost
control/execution from major projects (that increasingly include LNG) and replace
production via material exploration success.
x

APC and NBL continue to stand out, due to strong shale growth (both companies),
major project growth (2013 favors NBL), exploration potential (favors APC which in
particular is seeing a step-up in GOM/deepwater drilling in 2013) and managing LNG
financing impact (which presently favors APC due to the potential monetization of a
stake in Mozambique in 1H 2013). For exploration specifically we highlight CIE has a
step-up in exploration in the GOM and pre-salt Angola in 2013.

Mississippi Lime trip: Very little consensus speaks to varied

company strategies, need for greater clarity on quality of play
Following our energy conference, we toured the Mississippi Lime area in Oklahoma with
SandRidge Energy and discussed the play with other companies in Oklahoma City,
including Range Resources and Devon Energy. Unlike other resource-focused trips where
we tend to hear similar comments by managements, these meetings highlighted that
company strategies for delineating the play and views on sweet spots are quite varied. We
believe this is reflective not only of the cultural differences of the companies with whom
we met but also that we are very much in the early stages of developing horizontally a
resource area that is likely to see more meaningful variability in well performance.
x

Most companies agreed that the most prospective area was when chat or chert
was encountered above the Mississippi Lime formation due to more favorable porosity.

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January 11, 2013

Americas: Energy

RRC believes its Nemaha Ridge area is exposed almost entirely to a thick chat, while
other companies that have larger positions see the chat in certain areas.
x

There was disagreement on the returns enhancement from 3-D seismic to help define
sweet spots and avoid faults.
o

SandRidge Energy has decided against using 3-D seismic over its 1.85 million
net acres, believing there is little risk faulting keeps wells from staying in zone
on its acreage and that effective locations can be selected based on historical
vertical datapoints. Management expects to statistically improve initial
production rates over time by beginning over a wide areal extent (which helps
to hold acreage) and then narrow its focus on pad drilling to areas where the
initial drilling was more productive. SD plans to drill a higher percentage of
second/third wells in a section in 2013, which if its strategy plays out should
lead to rising average initial rates. Overall, however, SD seemed most willing
to drill and least willing to spend capital and time on science.

Devon Energy believes 3-D seismic is needed on much of its 545K acres to
help define sweet spots and avoid faulting. It is planning a seismic shoot in
some areas not far from where SandRidge has decided against 3-D seismic,
but highlighted that is southeast acreage is more prone to faulting which more
directly warrants 3-D seismic. At the same time, DVN believes the southeast is
more prone to natural fractures which can also be aided by 3-D. Overall, DVN
seemed to be most slow-and-steady in its approach even as it is also ramping
up its rig count. We expect more specifics on well performance with 4Q 2012
results in February. Management seemed more optimistic than others
regarding multi-zone horizontal drilling over time within the Mississippian
section.

Range Resources has taken a very narrow focus to the Nemaha Ridge area
that it believes benefits from thicker and more present chat, and has access
to previously-shot 3-D seismic in some areas. RRCs well tests have been
narrowly focused in southern Kay County, and we expect the company to step
out more to the northeast within its 157K acres in 2013.

Chesapeake indicated it sees a stronger sweet spot in the north but can extend
well west of the Nemaha Ridge.

There were different views on liquids mix and what areas are oilier than others.
o

Range uses historical data from vertical penetrations to the Mississippi Lime
that it believes is indicative that the Nemaha Ridge area in Kay County, OK and
Crowley County, KS can show superior percentages of oil (the ridge is higher
up which allows for an oilier mix within the zone). Range assumes its mix will
be evenly split between oil/gas/NGLs.

SD sees 37% oil but does not break out NGLs. However, we see potential for
SD to sign new agreements which for incremental wells would allow SD to sell
its NGLs and shift its mix to similar percentage oil as Range, 25% NGLs and
42% gas. The implication vs. RRCs view is that there is minimal differentiation
in oil content between the shallower Nemaha area and SDs area.

Overall, we believe more drilling is needed to have greater confidence in sweet spots, areal
extent and rates of return. We believe the play may be more heavily discounted by the
Street because of its variability but that it has potential to be meaningful to each of the
companies involved. Those that can demonstrate liquids (particularly oil) growth
contribution from their Mississippian assets without Mississippian capital spending
perceived as contributing to sharp outspending of total company cash flow are more likely
to receive credit from the equity market for the play.
Goldman Sachs Global Investment Research

January 11, 2013

Americas: Energy

Integrated/Domestic oils & Refiners: Shale scale and logistics

Domestic oils: From shale strain to shale scale
All four domestic oils at our conference, including ConocoPhillips, Marathon Oil, Murphy
Oil, and Occidental Petroleum, expressed confidence in their ability to execute on key shale
acreage. Most importantly, the companies appear to be on the verge of potentially
meaningful efficiency gains as acreage is increasingly held be production (i.e., at least 1
well drilled per parcel of acreage, which secures the acreage for the long term), allowing
companies to begin shifting to more efficient development methods such as pad drilling.
The key benefit of pad drilling is the ability to drill multiple wells from a particular location,
reducing spud-to-spud drilling days. As such, companies can generally drill more wells
with a particular rig in a given year. For the companies at our conference, we expect
slightly lower rig counts to be more than offset by faster drilling days, leading to an
increase in overall wells drilled, which in turn drives improved confidence in achieving
production growth objectives. We believe both Marathon Oil and Conoco are particularly
well positioned to move to pad drilling in the Eagle Ford Shale in 2013, with the Eagle Ford
growth a key driver of our Buy-rating on Marathon. Conoco also noted that it still has a
sizable backlog of previously drilled wells to bring on-line in the Eagle Ford Shale, which
adds confidence to its production growth objectives.
For Oxy, management stated that it was making solid progress on reducing capital and
operating costs, as it had promised on its 3Q 2012 earnings conference call. For example,
the company noted that it had cut costs in California by about 10%. Coming out the
conference, we feel more confident that Marathon Oil will move from a period of shale
strain to shale scale, with Oxy also appearing to make solid steps towards that end.

Refining: Shale oil will need to head to the East Coast, supporting
wider normalized discounts than is reflected in equity values
We came away from our refining panel, which included HollyFrontier, Marathon Petroleum,
Tesoro, Valero Energy, and Western Refining with increased confidence in our bullish MidContinent (MidCon) refining outlook. Commentary from Valero Energy and Tesoro
bolstered our belief that the Gulf Coasts ability to process light/sweet crude will soon be at
capacity. Both Valero and Tesoro noted that there are practical limits to how much lightsweet crude oil could effectively be run at refineries that are otherwise geared to run
heavy-sour crude oil. As such, refining executives at our conference broadly agreed with
our view that we will ultimately need to see shale oil head to either the East or West
Coasts, where additional light-sweet processing refineries exist. In our view, this supports
long-term Brent-WTI oil spreads toward the higher end of our $7-$12/bbl normalized band
(our refiner models currently assume $7/bbl).
We expect to see the MLP-ification of energy logistics assets continue, and believe
refiners such as Western Refining are well positioned to benefit from this trend. There was
a general appreciation among refining panelists for the MLP structure as it relates to midstream assets, owing in large part to the low cost of capital enjoyed by MLPs. While
creating an MLP has historically not been a priority for Western, management is
increasingly focused on the issue owing to an improved balance sheet and the desire to
spend capital on logistics assets in the Permian. HollyFrontier, Tesoro and Marathon
Petroleum also noted they would look to further grow existing mid-stream MLPs, in part as
a means to increase access to advantaged crudes.

Goldman Sachs Global Investment Research

January 11, 2013

Americas: Energy

Oil Services: NAM services bottoming; offshore drilling still strong

US land activity to pick up in 2013 vs. 4Q12; favor NAM services
over land drilling as well count/complexity growth trump rig count
We favor the North American (NAM) services sector as we believe activity and rig count
bottomed in 4Q12 and will see a gradual increase through 2013. Some companies,
including HAL (CL Buy), should see margins inflect in 1Q13, while others could see margins
flattening in 1Q13 and improving in 2Q13. For HAL, margins should inflect from a pick up in
utilization, declines in guar prices, and higher profitability in the US Gulf of Mexico (GOM)
and Canada, slightly offset by the roll-over of the last tranche of high priced pressure
pumping contracts to lower spot prices.
Additionally, we heard from several E&P companies that they have 10+ years of drilling
inventory and are just starting to go into development mode. This move will call for
increased pad drilling, which significantly increases the annual per rig demand for services
and equipment like pressure pumping, drill bits, drilling fluids, wellheads, and more. We
therefore favor oil services names like HAL (CL Buy), BAS (CL Buy), CJES (Buy) and PES
(Buy) over neutral-rated land drillers HP, PTEN and NBR. However, of the land drillers we
prefer companies with a higher percentage of high-spec rigs, like HP, which will continue to
see market share gains. Drilling contractors expect rates for high spec rigs to increase
during the course of the year. We believe that even flat land drilling dayrates would be a
positive surprise for the market, as many investors expect rates to fall.

NAM pressure pumping activity to bottom in 4Q12: We continue to believe margins for
pressure pumping will inflect in 1Q13, with company commentary supporting our view.
Panelists believe that the worst is over for pressure pumping, and that utilization and
profitability should improve through the course of the year. While no one expects pricing
to pick up during the year, profitability could improve on the back of lower input costs and
higher equipment utilization. We expect 1Q13 to be the first quarter with sequentially
higher revenues following four successive quarters of declines and favor Conviction List
Buys HAL and BAS as most levered to this theme.
x

Utilization picking up with increased activity: Both CJES and Trican Well
Service Ltd (Trican) expect 1Q13 activity to be higher than 4Q12, resulting in
improved utilization. Trican has approximately 4-6 weeks visibility with its order
book and expects 1Q13 utilization could be about 70%, up from 40% in 4Q12. This,
combined with lower guar costs should help margins inflect for the company.
CJES also expects stronger utilization, but margins could be a touch light given
existing contracts rolling to spot pricing.

Pricing stabilizing: CJES indicated that it is not seeing further pricing declines in
the spot market, echoing recent comments made by other pressure pumping
companies. However, for pricing to pick up both CJES and Trican emphasized that
excess capacity must fall, driven by a combination of increasing activity and
additional growth in the market. CJES estimates that about 10% of US capacity is
parked currently, while Trican believes excess capacity could be as high as 20%.
Similarly, BAS believes the industry needs to see a 10% pick up in rig count to
absorb excess frac equipment.

Land drilling contractors expect a slow and steady increase in drilling rig count:
Companies were slightly positive on rig count activity, emphasizing a slow and steady
upward grind throughout 2013. However, given declines in 2H12, 2013 rig count could end
up flattish yoy.
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January 11, 2013

Americas: Energy

Dayrates stable, with potential for modest increases for AC system rigs: HP,
PTEN, and Sidewinder Drilling Inc. indicated that dayrates have been stable to date
despite rig count declines and also highlighted the potential for modest dayrate
increases for Tier 1 AC system rigs. Specifically, HP said AC rig dayrates may need
to move into the $30k/day range to make newbuilding economic once available
rigs are absorbed.

Land drillers were not concerned about increasing efficiencies: Companies

maintained that efficiencies are a normal feature of the market. However, while
increased operator focus on efficiency implies a shift towards high spec AC rigs
and positively impacts exposed companies through share gains, we remain
cautious as lower quality rigs will likely be replaced by a combination of
efficiencies and newbuilds. Sidewinder, however, maintained that drilling
efficiencies are a strong positive for the industry, as they make drilling smaller
geologic prospects more economic, which combined with downspacing, could
counter efficiency impacts on overall rig count.
Newbuild activity to slow in 2013: HP expects about half as many newbuilds to
be ordered in 2013 as in 2012.

Services ex. pressure pumping to see gradual recovery in 2013: In contrast to the
pressure pumpers, BAS, KEG and PES indicated that they do not expect a snap back in
activity in 1Q13, but rather see a gradual recovery. BAS maintained that the worst is over
for most of its product lines and that overall pricing has bottomed, while KEG and PES
commented on stable coiled tubing pricing and wireline activity respectively. In addition,
BAS indicated that natural gas fundamentals need to improve to boost workover utilization.
x

Well servicing continues its resilience: Well servicing continues to be the

segment most in favor, with panel members highlighting its strength and a need
for more shale-capable equipment. KEG maintained that the industry will need a
different style of rig as horizontal well count increases, and highlighted its 550 HP
franchise rigs. It also indicated that completion activity will be an important driver
of growth for the segment going forward and that lower well costs combined with
increased efficiencies could leave more room for cash flow for completions.

Leverage strong offshore market through equipment manufacturers

as offshore dayrates have limited upside
Companies highlighted the continued strength of the offshore market, with offshore
contractors and transportation companies positive on dayrates and equipment
manufacturers increasingly constructive on the upcoming subsea order cycle. Given the
prior run on leading edge dayrates, we favor the equipment manufacturers OII (CL Buy),
NOV (Buy), and CAM (Buy). Panelists were also extremely positive on the Gulf of Mexico
(GOM), saying it could see the biggest pick up in activity in coming years, which is positive
for OII given its high exposure to GOM drilling and construction.
x

Offshore dayrates could rise further: Companies were positive on the dayrate
outlook for 2013, with ESV highlighting the need for more DP rigs. Though some
dayrate upside could be likely for deepwater floaters, we believe that much of the
momentum took place in 2012 and that only limited upside remains. ESV also
stated that it sees a bifurcation between newer, more capable assets vs. older rigs,
but believes there is more upside to high spec assets than downside to low spec
assets given current market tightness.

PSV dayrates positioned to rise as well: HOS remarked that dayrates for
deepwater supply boats could increase again following a period of stabilization, as
it believes there is a shortage of vessels with ultra-deepwater equipment.

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Additionally, Tidewater mentioned that dayrates for shallow water boats could
also rise with the expected entry of 45 to 60 jackups over the next 12-15 months.

Subsea and aftermarket key areas of growth for equipment manufacturers: Panelists
agreed that the subsea and aftermarket businesses will be key drivers of earnings growth
over the next several years. FTI (Sell) mentioned that there were several large awards
worth $150mn or more expected to be awarded in the next 12-18 months. However, we
remain concerned about FTI as our channel checks suggest that the contract award for
Egina project in Nigeria may be further delayed by several months, as it has become a
hostage to negotiations between the government and the operator. Given that most
investors consider the Egina award announcement to be imminent, we see downside risk
in FTI and remain Sell-rated. Companies are also bullish on aftermarket opportunities and
margin impact and are likely to invest in growing this business further. NOVs aftermarket
business saw 15-20% annual growth over the past several years and it believes this can
continue. We favor OII (CL Buy), NOV (Buy), and CAM (Buy) on these themes.
x

Margins expected to rise, though not to prior peak levels: Margins for the
group reached peak levels in 2008/2009 as a result of strong pricing coupled with
low costs. NOV and FTI expect margins to improve from current levels given a
strengthening market and increasing pricing traction, while CAM was an outlier in
saying margins could return to their previous highs given pricing as well as a mix
shift towards higher margin aftermarket.

Delays in major projects a result of higher costs: As large project awards shifted
from 3Q12 into 1Q13 and possibly beyond, FTI sees the overarching issue to be
project economics. This applies to Statoil in the North Sea as well as to Egina in
West Africa, where FPSOs have been a challenge. In Brazil, FTI mentioned that we
will likely see smaller but more frequent awards rather than one large award.

GOM for be a hot spot in coming years: Panelists throughout the conference
highlighted excitement for the US GOM, with HOS saying it could be the hottest
market in the world. OII indicated that it has not seen a significant construction
uptick in the region from the recent surge in deepwater activity, but expects
projects to pick up in 18-24 months. This should help its ROV and Subsea Products
segments.

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Pipelines & MLPs: Midstream opportunity set remains robust

Robust midstream infrastructure opportunity outlook: There is an abundance of
midstream projects driven by North American energy production growth. Below we
highlight the strategies being pursued by each midstream company:
x

Natural Gas/NGLS Williams. WMB remains focused on natural gas and NGL
infrastructure based on the view that low commodity prices will accelerate demand,
offering the best sustainable growth. Given the vast quantity of reserves, it does not
believe supply can sustainably rise above $5/MMBtu. WMB cited the potential for
natural gas intensive industrial growth such as steel and fertilizer manufacturing in
addition to power generation as opposed to slowing oil-linked refined product demand.
Natural Gas/NGLs/crude Spectra. SE is adopting a diversification approach,
underscored by its recent acquisition of the Express-Platte oil pipeline system. In
addition to organic-growth related opportunities associated with its acquisition, SE
likes the financial profile (vs. natural gas) as inflation-indexed oil pipeline tariffs ensure
steady revenue growth compared to rate base depreciation which can cause tariff
decreases. It also sees growing southeastern natural gas demand and potential
opportunities for pipeline re-purposing.
Bakken/MidCon/Gulf Coast Oneok. OKE remains focused within its footprint where
it can generate the best returns by leveraging its existing asset base. It would
potentially consider other basins and commodities (outside of natural gas and NGLs),
however does not currently see a basis to create a sustainable competitive advantage
relative to its existing opportunities. Gas distribution remains a core business for OKE
given its credit-friendly cash flows.

Panelists cite different catalysts for potential NGL rebound: Ethane prices at both
Conway and Mt. Belvieu are deep into rejection economics following high petrochemical
turnaround activity last year. Midstream panelists were in general agreement that over 150
bpd of ethane is currently being rejected, aided by improved cryogenic processing
technology in the Rockies and Gulf Coast. However, there was less of a consensus on the
catalyst that would lead to a price rebound. OKE took a more technical view that storage
needs to drop to 27-28 days supply (vs. 36 days currently) before prices could recover.
WMB thought lower prices were structural, and would likely remain weak until additional
cracker startups scheduled for 2015-2017 come online.

Smaller scale-projects coming into focus: There was a general acceptance that most of
the larger-scale pipeline projects have either already been announced or are currently
under development, shifting future focus to pipeline laterals, storage, and rail infrastructure.
This should result in mid single-digit growth for the midstream sector as opposed to the
double-digit growth investors have become accustomed to in the past. However, a
transition away from acquisitions, to organic projects, will likely increase the quality of
growth while limiting downside risk, in our view.

Potential logistic asset spinoffs: Shale-scale driven production growth will put a greater
emphasis on the need to develop midstream solutions in coming years. For oil in
particular, refiners are becoming bigger participants in the build out of last mile logistics
motivated by their strategy to increase control of crude input flows. Given the limited
valuation credit refiners receive for their midstream businesses, the MLP structure is
acknowledged as an effective way to fund growth in this area given its inherent lower cost
of capital benefit.

MLPs to remain key for US midstream development: Beyond the scope of last-mile
crude logistics, independent MLPs are likely to remain important participants in the buildGoldman Sachs Global Investment Research

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out of infrastructure required to handle both natural gas and liquids production growth in
North America. Additionally, the rapid rate of production growth has underscored the
need for creative transportation solutions which are becoming increasingly multi-modal.
This is helping to create an opportunity for midstream companies to transition away from
just owners of hard assets (i.e., pipelines) and into energy logistics services.

Pricing and rating information

Basic Energy Services, Inc. (B/A, $12.25), C&J Energy Services, Inc. (B/A, $22.49), Cameron
International Corp. (B/A, $58.24), Halliburton Company (B/A, $36.90), Oceaneering
International, Inc. (B/A, $56.31), Helmerich & Payne Inc (N/A, $58.87), National Oilwell Varco
(B/A, $70.41), Patterson-UTI Energy, Inc. (N/A, $19.37), Schlumberger, Ltd. (B/A, $73.25),
Pioneer Energy Services Corp. (B/A, $7.93), Ensco plc (N/A, $61.50), Hornbeck Offshore
Services (N/A, $36.90), Key Energy Services Inc. (N/A, $7.75), Nabors Industries, Ltd. (N/A,
$14.59), FMC Technologies (S/A, $44.43), Anadarko Petroleum Corp. (B/A, $77.66), Cobalt
International Energy, Inc. (B/A, $26.56), Apache Corp (N/A, $80.71), Bill Barrett (N/A, $18.96),
Tidewater Inc. (N/A, $46.14), Cabot Oil & Gas Corp. (B/A, $47.76), Concho Resources Inc.
(B/A, $86.40), Devon Energy Corp. (B/A, $53.88), EOG Resources Inc. (B/A, $126.10), Halcn
Resources Corporation (N/A, $7.72), Laredo Petroleum Holdings, Inc. (B/A, $18.80), Noble
Energy (B/A, $104.59), Pioneer Natural Resources Co. (B/A, $112.56), QEP Resources, Inc.
(N/A, $29.45), Range Resources Corp. (N/A, $63.83), SandRidge Energy, Inc. (S/A, $6.87),
Southwestern Energy Co. (B/A, $32.09), The Williams Companies, Inc. (B/A, $33.81), Plains
All American Pipeline, L.P. (B/A, $49.53), ONEOK, Inc. (N/A, $44.85) and Spectra Energy
Corp. (N/A, $27.88).

Financial advisory disclosures

Goldman Sachs is acting as financial advisor to another party in an announced strategic
transaction which may be material to Cameron International Corporation.
Goldman Sachs is acting as financial advisor to Chesapeake Energy Corporation in an
announced strategic transaction.

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Disclosure Appendix
Reg AC
We, Brian Singer, CFA, Waqar Syed, Arjun N. Murti, Theodore Durbin and Michael Cerasoli, CFA, hereby certify that all of the views expressed in this
report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our
compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.

Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.

GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate
performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the
environmental, social and governance issues facing their industry).

Disclosures
Coverage group(s) of stocks by primary analyst(s)
Brian Singer, CFA: America-Exploration & Production. Waqar Syed: America-Oil Services. Arjun N. Murti: America-Integrated Oils, America-Refining
& Marketing. Theodore Durbin: America-Diversified Pipelines, America-Energy MLPs, America-Gas Utilities. Michael Cerasoli, CFA: America-Oil
Services.
America-Diversified Pipelines: Enbridge Inc., Kinder Morgan, Inc., ONEOK, Inc., Spectra Energy Corp., The Williams Companies, Inc., TransCanada
Corp..
America-Energy MLPs: Access Midstream Partners LP, Buckeye Partners, L.P., CVR Partners, LP, Chesapeake Granite Wash Trust, Delek Logistics
Partners, LP., El Paso Pipeline Partners, L.P., Enbridge Energy Management, Enbridge Energy Partners, L.P., Enduro Royalty Trust, Energy Transfer
Partners, L.P., Enterprise Products Partners LP, Holly Energy Partners, Kinder Morgan Energy Partners, Kinder Morgan Management, Linn Energy,
LLC, LinnCo, LLC, Magellan Midstream Partners, Niska Gas Storage Partners LLC, NuStar Energy L.P., NuStar GP Holdings, LLC, ONEOK Partners,
L.P., Plains All American Pipeline, L.P., Spectra Energy Partners, L.P., Suburban Propane Partners, L.P., Summit Midstream Partners, LP, Sunoco
Logistics Partners L.P., TC PipeLines, LP, Williams Partners L.P..
America-Exploration & Production: Anadarko Petroleum Corp., Apache Corp., Berry Petroleum, Bill Barrett Corp., Cabot Oil & Gas Corp., Chesapeake
Energy Corp., Cobalt International Energy, Inc., Concho Resources Inc., Devon Energy Corp., EOG Resources Inc., EXCO Resources, Inc., EnCana
Corp., Forest Oil Corp., Halcn Resources Corporation, Laredo Petroleum Holdings, Inc., Magnum Hunter Resources Corporation, Midstates
Petroleum Company, Inc., Newfield Exploration, Noble Energy, Pioneer Natural Resources Co., Plains Exploration & Production Company, QEP
Resources, Inc., Quicksilver Resources, Inc., Range Resources Corp., SandRidge Energy, Inc., Southwestern Energy Co., Talisman Energy Inc., Ultra
Petroleum.
America-Gas Utilities: AGL Resources Inc., Atmos Energy Corp., WGL Holdings, Inc..
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America-Integrated Oils: Canadian Natural Resources Ltd., Cenovus Energy Inc., Chevron Corp., ConocoPhillips, Exxon Mobil Corp., Hess Corp.,
Husky Energy Inc., Marathon Oil Corp., Murphy Oil Corp., Nexen Inc., Occidental Petroleum Corp., Suncor Energy Inc..
America-Oil Services: Atwood Oceanics, Inc., Baker Hughes Inc., Basic Energy Services, Inc., Bristow Group Inc., C&J Energy Services, Inc., Cameron
International Corp., Diamond Offshore Drilling, Ensco plc, FMC Technologies, Geospace Technologies Corp., Halliburton Company, Helmerich &
Payne Inc, Hercules Offshore, Inc., Hornbeck Offshore Services, Key Energy Services Inc., Nabors Industries, Ltd., National Oilwell Varco, Noble
Corporation, Oceaneering International, Inc., Patterson-UTI Energy, Inc., Pioneer Energy Services Corp., RPC, Inc., Rowan Companies, Plc.,
Schlumberger, Ltd., Tidewater Inc., Transocean Ltd., Weatherford International Ltd..
America-Refining & Marketing: Alon USA Energy, Inc., Alon USA Partners, CVR Energy, Inc., HollyFrontier Corporation, Marathon Petroleum Corp,
Northern Tier Energy, LP., Phillips 66, Tesoro Corp., Valero Energy Corp., Western Refining, Inc..

Company-specific regulatory disclosures

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe
Rating Distribution

Buy

Hold

Investment Banking Relationships

Sell

Buy

Hold

Sell

Global
31%
55%
14%
49%
42%
35%
As of October 1, 2012, Goldman Sachs Global Investment Research had investment ratings on 3,442 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell
for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Price target and rating history chart(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this
compendium can be found in the latest relevant published research

Regulatory disclosures
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See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
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Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer
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