Saudi Arabia: Oil Market Update - 2 May

Transcription

1. Saudi All Industries Sector All Industries –All Sectors Saudi Arabia 02 May 2018 January 18, 2010 Key themes In the current macroeconomic situation, an increase in oil price will not weaken but act as an impetus to the global economy given that it will spur more investments, reversing the trend seen in the past few years Global E&P producers will need to accelerate capital spending significantly to meet the anticipated rise in demand US inventory closer to 2014 level amid increased oil demand Compliance to OPEC agreement reached a new record Global economic growth will continue to be healthy even oil prices increase further Average “cash required” price for shale producers to meet capex and costs could increase further on higher capex Oil market update Uptick in prices; Focus on supply Global E&P spending declines amid rising demand. Major E&P companies globally have cut down their spending significantly since oil prices crashed in 2014. Based on major 15 global E&P companies spending data (Figure 1), we found that the cumulative upstream capex of these companies declined at a CAGR of ~14% over 2013-2017 amid weak oil prices. Despite a recovery in oil prices (+23% y-o-y) in 2017, global E&P companies lowered their spending by ~22%, reflecting their hesitation to spend aggressively, while the existing fields continued to deplete (Figure 2). At the same time, the global oil demand grew at a CAGR of 1.7%, aided by improving economic activities. With global oil demand likely to continue to improve in the coming years (2018: 100.3mb/d vs. 98.5mb/d in 2017), we believe global E&P producers will need to accelerate capital spending significantly to meet the anticipated rise in demand. While US shale producers are expected to increase their spending programs post healthy recovery in oil prices, higher spending will put the US shale producers deeper in debt amid rising interest rates. The cash required per barrel for US Shale companies used in our analysis to meet its core capex needs, operating costs, taxes and interest was USD51/barrel (Fig 12) and the same for the conventional companies is USD38/b (Fig 14). Consequently, we expect much of the required investment will come from OPEC members to develop new reserves, thereby leading to higher output in the coming years. Without significant investment, we don’t think the oil production to sustain the current level. Figure 1 Global E&P spending* reduced despite rising oil demand 350 80% 297 286 300 60% 270 262 240 250 227 40% US$ 'bn 205 200 175 180 160 150 20% 134 0% 100 -20% 50 - -40% 2007 2008 2009 2010 2011 Cumulative E&P Capex 2012 2013 2014 2015 2016 2017 Capex change % (Y-o-Y) Source: EIA, Bloomberg, Al Rajhi Capital. * Based on major 15 E&P companies globally. Mazen Al-Sudairi Head of Research Tel +966 11 2119449 alsudairim@alrajhi-capital.com Pritish Devassy, CFA +966 11 211 9370 devassyp@alrajhi-capital.com US inventory closer to optimal level amid increased demand and record OPEC compliance. US commercial inventories have declined by over 140m barrels since 2016 till March 2018, bringing the current inventory levels (March 2018: 1,190m barrels) closer to 2014 levels (1,134m barrels). Given that average global consumption was 93.6m b/d in 2014, and is likely to increase to 100.3m b/d in 2018 and 102.2m b/d in 2019, the optimal level of inventories required to meet any surge in demand or untoward disruption in supply could be higher in general. However, even as oil inventories are declining, we would expect the level to further decline towards its five year’ average before OPEC takes a call on further action. Similarly, OECD commercial inventories have also dropped by more than 200m barrels since 2016 till March 2018, signalling the supply side situation. Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
2. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 Figure 2 Crude oil reserves continues to deplete* Figure 3 OECD inventories reaching towards its optimal level 2014 2015 2016 2017 2018E* 2019E* OECD Commercial inventories (mbbls) 2,688 2,970 2,985 2,838 2,864 2,898 80 78 76.6 75.3 76 76.8 77.4 77.4 Average OECD consumption (m b/d) 75.8 % of average OECD production Bn barrels 74 45.6 46.3 46.7 47.2 16.1% 17.6% 17.5% 16.5% 47.7 48.2 16.4% 16.5% 100.3 102.2 73.1 72 70.4 70 Average global oil demand (m b/d) 93.6 95.4 96.9 98.5 % of OECD inventory 7.9% 8.5% 8.4% 7.9% 7.8% 7.8% 68.5 67.5 68 65.9 66 64 62 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bloomberg, Al Rajhi Capital. * Based on major 15 E&P companies globally. Source: EIA, Al Rajhi Capital. * EIA estimates OPEC and non-OPEC harmony. Strong unity and record compliance among OPEC and their allies (especially Russia), coupled with rising demand have helped them to nearly achieve their objective of reducing global crude inventories to five-year average. We expect this harmony to continue beyond 2018 as well, which will especially help to manage the market balance and any potential risks including rising US production. Based on OPEC’s secondary sources production data of 11 producers (ex-Equatorial Guinea), average OPEC compliance improved to a record level of ~165% (Figure 22) in March 2018. OPEC Kingpin Saudi Arabia’s production dropped ~47kb/d m-o-m, while Venezuela witnessed the lowest production in March in almost two decades, offsetting the rise in production from UAE and Nigeria (exempt from cuts). This has resulted in a net decline in overall production for the OPEC members in March. Meanwhile, non-OPEC members have coordinated well and have also reduced production, reaching a compliance level of 86% by February (as per IEA reported data). Global economic growth likely to remain intact even if oil prices increase further. Despite the significant rise in average oil prices in 2017, global oil demand continued to improve (+1.7% y-o-y or 1.6mb/d), backed by upbeat economic activities amid improved liquidity and higher spending. While WTI oil price may continue to improve, the general perception seems that it could have a negative impact on global economic growth. However, we expect global economic growth to remain healthy in the coming years as the recent rise in oil prices is largely demand driven. As per IBIS world, the oil and gas drilling sector makes up between 4.6% and 6.5% of the global economy for the oil sector to really impact global growth rates. As per EIA, oil demand is likely to rise by 1.8mb/d and 1.9mb/d in 2018 and 2019, respectively, higher than the increase in 2017, reinforcing our view. Cutting taxes in US will also lead to a US$930 benefit for American middle income US households as per a research by Urban Brookings Tax Policy centre. Figure 4 Rising oil demand continues to support global economic growth 4.0% 100.0 3.5% 98.0 3.0% 96.0 94.0 2.0% Mb/d 2.5% 92.0 1.5% 90.0 1.0% 88.0 0.5% 0.0% 86.0 2012 2013 2014 Global GDP growth rate (%) 2015 2016 2017 Oil consumption Source: EIA, IMF, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 2
3. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 Shale/Conventionals health check up 1. Shale profits and stock performance: We note that despite rising crude prices, some of US shale firms under our study were still incurring losses (adjusted for the tax benefits resulting from the Tax Cuts and Jobs Act) till Q4 2017. In addition, average ROA (after adjusting for tax reform impact) was still a measly 0.1% (Figure 18), largely on account of higher leverage. At the same time, the stock performance of most of the companies (under our sample) posted negative returns in 2017, weighted down by the weak earnings performance. Whiting Petroleum and Oasis Petroleum shares plunged the most, down by ~45% each, followed by Parsley Energy (-~17%). However, Diamondback Energy witnessed a rise of ~25%. Figure 6 Stock performance of shale firms – 2017 US$ 'mn Figure 5 2017 net profit performance of shale firms* 400 30.0% 200 20.0% - 10.0% (200) 0.0% (400) -10.0% (600) -20.0% (800) -30.0% -40.0% (1,000) EGN FANG PXD RSPP WLL OAS CLR PE -50.0% Q1 2017 Q2 2017 Q3 2017 EGN Q4 2017 Source: Company data, Al Rajhi Capital. * Adjusted for one-time impact of non-cash tax benefit resulting from the Tax Cuts and Jobs Act FANG PXD RSPP WLL OAS CLR PE Source: Bloomberg, Al Rajhi Capital 2. “Cash required” per barrel to meet expenses & capex requirements reduces amid largely stable operating efficiencies. The average operating cost per barrel (based on our sample companies and our methodology) decreased in Q4 2017 (Figure 7). However, excluding one company (Pioneer natural Resources) from our analysis, which witnessed a steep improvement in operating cost per barrel, the average operating cost remained largely stable (US$29.9/bbl in Q4 vs US$29.2/bbl). Figure 7 below shows the weighted average operating cost per barrel, while Figure 8 shows the operating cost per barrel for all the shale companies in our study. Figure 8 Top US Shale Oil producers – Op. cost per barrel (US$/bbl) Figure 7 Weighted average operating cost per barrel (US$) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 42.00 40.00 Concho Resources Inc. 38.0 34.5 32.7 31.0 29.7 29.1 28.8 28.3 38.00 Energen Corp. 37.6 33.9 34.9 36.1 37.7 30.6 28.8 25.8 36.00 Diamondback Energy 24.2 25.2 21.6 20.5 21.4 19.6 20.3 21.7 34.00 Pioneer natural Resources 47.4 53.8 54.2 48.0 54.0 52.6 57.4 50.9 RSP Permian Inc. 31.2 31.6 29.0 26.1 27.1 24.8 24.7 24.5 Whiting Petroleum Corp. 37.3 38.9 40.0 41.4 37.4 36.3 35.1 38.8 Oasis Petroleum Inc. 44.1 45.7 45.4 44.8 46.1 43.6 44.7 47.4 Continental Resources Inc. 29.2 29.7 29.7 29.1 28.8 27.6 27.0 26.7 Parsley Energy 33.4 32.2 30.3 27.1 25.8 27.4 26.7 30.5 Weighted average* 34.5 34.2 33.4 32.6 31.6 29.7 29.2 29.9 32.00 30.00 Combined Combined (ex-Pioneer natural Resources) Source: Company data, Bloomberg, Al Rajhi Capital Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 28.00 Source: Company data, Bloomberg, Al Rajhi Capital. * Calculated based on weighted average production of major shale producers under our sample (ex-Pioneer). Disclosures Please refer to the important disclosures at the back of this report. 3
4. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 3. Cash required to meet expenses declined amid recovery in oil prices and relatively flat spending in Q4 Despite largely stable operating efficiencies of US shale producers, our calculations show that “Cash required per barrel” declined to US$51/bbl in Q4 2017 from ~US$54/bbl (restated) in Q3 2017 (Figure 7 and 9), primarily on account of increased oil prices and relatively flat capital spending. Within the Permian basin, Concho Resources and Energen Corp., which are pure play Permian shale producers, have one of the lowest requirements of cash per barrel of ~US$48/bbl, while Diamondback Energy and RSP Permian need ~US$53/bbl and US$68/bbl, respectively to start generating positive free cash flows. Figure 9 Average “cash required per barrel” for major US shale producers (US$/bbl)- for FCF less interest and tax expense*** Figure 10 Cash required per barrel for major US shale producers (US$/bbl) - for FCF plus interest and tax expense*** Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 Weight* 65.0 Concho Resources Inc. 60.0 55.0 50.0 45.0 40.0 NM 35 45 38 81 62 40 48 16% Energen Corp. 32 46 53 56 88 86 65 48 7% Diamondback Energy 50 44 47 45 42 42 53 53 7% Pioneer natural Resources 65 57 51 56 58 82 63 58 23% RSP Permian Inc. 54 50 52 55 58 70 66 68 5% Whiting Petroleum Corp. 45 29 88 42 34 46 31 32 10% Oasis Petroleum Inc. 45 45 51 37 47 57 51 51 5% Continental Resources Inc. 27 26 29 37 45 47 46 38 21% Parsley Energy 90 78 73 64 69 73 101 97 6% Weighted average** 39 41 52 46 57 63 54 51 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 35.0 Source: Company data, Bloomberg, Al Rajhi Capital Weighted average required cash per barrel Source: Company data, Bloomberg, Al Rajhi Capital. * Weights are based on production. ** based on production of major US shale producers to start generating positive free cash flow. *** Calculated based on weighted average production of major shale producers under our sample. *** Excluding the one-time impact of non-cash tax benefit resulting from the Tax Cuts and Jobs Act. Excluding the one-time impact of non-cash tax benefit resulting from the Tax Cuts and Jobs Act. Excluding the impact of interest and tax expenses on the free cash flow, our calculations show the similar trend as well with average cash required per barrel declining for most of the companies being covered in the study (Figure 11 and 12). Figure 11 Average “cash required per Barrel”* for major US shale Figure 12 “Cash required per barrel” for major US shale producers producers to generate FCF positive (US$/bbl) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 Weight* 56.0 Concho Resources Inc. 63 48 43 43 41 50 43 52 16% Energen Corp 61 37 41 61 78 79 65 43 7% Diamondback Energy 46 40 44 42 39 41 52 52 7% 50.0 Pioneer natural Resources 73 64 53 56 57 70 61 55 23% 48.0 RSP Permian Inc. 52 45 47 50 46 59 59 65 5% Whiting Petroleum Corp. 43 32 31 36 33 45 59 41 10% Oasis Petroleum Inc. 42 49 47 36 35 48 47 49 5% Continental Resources Inc. 30 26 28 28 38 44 39 26 21% Parsley Energy 89 77 68 56 58 64 97 94 6% Weighted average** 52 44 42 44 45 55 54 49 54.0 US$/bbl 52.0 46.0 44.0 42.0 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 40.0 Source: Company data, Bloomberg, Al Rajhi Capital. Weighted average required cash per barrel Source: Company data, Bloomberg, Al Rajhi Capital. * Weights are based on production. ** based on production of major US shale producers to generate positive cash flow. Calculated based on weighted average production of major shale producers under our sample. We have replicated the same exercise for some of the major conventional oil producers in Figure 14. Please note that this is not a calculation of breakeven price and could be volatile and misleading in periods of high capex. However, this could provide an indicator of the appetite for new investment based on historical bands/patterns. Disclosures Please refer to the important disclosures at the back of this report. 4
5. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 Figure 13 Average “cash required per Barrel”* for major conventional producers to generate FCF positive Figure 14 “Cash required per barrel” for major conventional producers (US$/bbl) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2016 2016 2016 2017 2017 2017 2017 Weight* 50 45 US$/bbl 40 35 30 25 BP PLC 30 39 33 48 36 39 32 43 23% Chevron Corp 48 21 42 47 42 27 36 40 17% Exxon Mobil Corp 27 33 27 18 21 26 28 29 25% Husky Energy Inc 22 30 16 46 17 26 18 31 2% Imperial Oil Ltd 21 33 18 10 27 42 22 34 2% Statoil ASA 26 35 35 50 17 13 43 42 13% TOTAL SA 28 30 31 44 22 26 18 38 16% Weighted average** 31 32 32 38 28 28 30 38 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 20 Source: Company data, Bloomberg, Al Rajhi Capital. Weighted average required cash Source: Company data, Bloomberg, Al Rajhi Capital. * Weights are based on production. ** Calculated per barrel based on production of major conventional producers to generate positive cash based on weighted average production of major conventional producers under our sample. flow.. 4. Hedging losses in Q4 2017. A look at the US shale producer’s average hedged realization indicates that most of producers (under our sample) incurred hedging losses in Q4 2017 compared to gains in Q3 2017 ($1.5/bbl loss vs. gain of $1.0/bbl), which is miniscule, in our view. This compares meekly with the numbers for FY15 and FY16 at ~US$15/bbl and ~US$9/bbl, respectively. Despite oil prices are increasing, we don’t see a significant improvement in hedging benefits in the nearterm, as most of the US shale producers have already hedged their part of production at lower than the current market prices. However, if oil prices sustain at the current level, then US shale producers could start increasing their hedging positions at higher rate, which would help them to surpass 11.4mb/d volume at the end of this year (as per EIA) Figure 15 US shale producer's average realized gain / losses Figure 16 US shale producer's average realized gain / losses (US$/bbl) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 20.0 US$/bbl 15.0 Concho Resources 19.9 11.4 17.4 21.2 31.0 19.8 18.4 4.7 3.0 6.9 2.5 (4.3) Energen Corp. 24.0 15.4 27.2 34.7 1.5 (5.5) (1.2) (4.2) (2.0) 0.0 1.2 (2.0) Diamondback Energy 20.4 12.6 15.5 15.3 2.0 (0.2) (0.1) (0.9) (0.4) 0.9 1.3 (0.9) Pioneer natural Res. 20.4 13.0 20.5 23.1 17.3 9.0 13.6 10.4 0.8 1.6 1.9 0.3 RSP Permian 27.3 13.5 12.5 13.7 1.2 0.5 (1.1) (1.0) (1.0) (0.2) (0.7) (2.2) 10.0 5.0 Whiting Petroleum 0.0 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 (5.0) Source: Company data, Bloomberg, Al Rajhi Capital. Calculated is based on weighted average production of major shale producers under our sample. 4.2 3.3 4.7 6.4 5.5 3.9 5.3 2.8 0.2 0.7 0.7 (0.3) Oasis Petroleum 27.2 26.0 19.2 19.8 18.9 8.1 3.3 1.6 (1.9) (2.1) (2.9) (1.6) Continental Res. NA NA NA NA NA NA NA NA NA NA NA NA Parsley Energy 12.4 7.2 15.0 12.3 16.7 5.2 4.0 2.7 (1.5) 0.0 (0.3) (3.1) Weighted average* 16.4 11.1 15.3 17.9 14.4 7.7 8.8 4.3 0.4 1.8 1.0 (1.5) Source: Company data, Bloomberg, Al Rajhi Capital. * Calculated is based on weighted average production of major shale producers under our sample. 5. Shale producers raising debt to fund their capex programs, which could weaken their own financial health in case of decline in oil prices amid rising US production. After bottoming out in the H2 2016, capital expenditure by the shale producers in our study had been on an upward trend till Q3 2017, primarily due to recovery in oil prices post the OPEC agreement. However, we observed that capital spending remained largely flat in Q4 Disclosures Please refer to the important disclosures at the back of this report. 5
6. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 2017, as the US shale producers might have preferred to finish the huge inventory backlog (DUC wells; Figure 21), which is already created during the low oil price environment. Given the higher decline rate from shale wells and their relatively short life as compared to conventional wells, the shale producers need to accelerate capex spending to maintain production rates. Accordingly, the rise in capital spending puts the producers deeper in debt, reflecting in rising total debt for these companies (Figure 17) amid rising interest rates. Figure 17 Total debt begins to rise as capex increases US$ mn 25,000 Figure 18 Weighted avg. ROA still lower than the historical level* US$ mn 4,000 6.0% 3,500 23,000 3,000 2.0% 2,500 21,000 2,000 -2.0% 19,000 1,500 1,000 17,000 -6.0% 500 Q4 2017 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Capex (RHS) Source: Company data, Bloomberg, Al Rajhi Capital Q2 2014 Q3 2017 Q2 2017 Q1 2017 Q4 2016 -10.0% Q1 2014 Total debt Q3 2016 Q2 2016 Q1 2016 Q4 2015 Q3 2015 Q2 2015 - Q1 2015 15,000 Source: Company data, Bloomberg, Al Rajhi Capital. * Adjusted for one-time impact of non-cash tax benefit resulting from the Tax Cuts and Jobs Act. Figure 19 Market shares Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Jan-18 Feb-18 Mar-18 OPEC 39.1% 38.6% 38.5% 38.5% 38.6% 38.6% 38.7% 38.7% Aug-17 Sep-17 38.8% 38.8% Oct-17 38.5% Nov-17 Dec-17 38.1% 38.6% 38.3% 38.2% 37.9% OECD 13.1% 13.3% 13.3% 13.6% 13.3% 13.0% 12.6% 12.7% 12.6% 12.2% 12.4% 12.6% 12.3% 12.9% 12.7% 13.1% US non-conv. 6.1% 6.3% 6.5% 6.6% 6.6% 6.7% 6.7% 6.7% 6.8% 7.1% 7.5% 7.7% 7.8% 7.7% 7.9% 8.0% Others 41.7% 41.8% 41.6% 41.3% 41.5% 41.7% 42.0% 41.8% 41.9% 41.9% 41.5% 41.6% 41.3% 41.1% 41.2% 41.0% Source: OPEC, EIA, IEA, Al Rajhi Capital Figure 20 US shale rig count and production* Figure 21 Rising DUC wells 1,800 18.0 8,000 1,600 16.0 7,500 1,400 14.0 1,200 12.0 1,000 10.0 MMbbl/d 7,000 6,500 6,000 800 8.0 600 6.0 400 4.0 200 2.0 4,500 - 4,000 US Oil rig count (LHS) US production Source: Baker Hughes, EIA, Al Rajhi Capital. * Crude and other condensates Disclosures Please refer to the important disclosures at the back of this report. 5,000 3,500 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 0 5,500 Source: EIA, Al Rajhi Capital 6
7. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 OPEC compliance level Figure 22 OPEC compliance to agreement 2017 Compliance Jun Jul Aug Sep Oct Nov Dec Jan 2018 Feb Mar 38% 58% 58% 178% 158% 98% 138% 114% 212% 97% 104% 91% 117% 91% 181% 206% 232% 185% 290% 155% 69% 31% 108% 108% 131% 123% 77% -89% -89% 22% -89% 89% 189% 27% NA NA NA NA NA NA NA 15% 77% 62% 34% 39% 57% 64% 49% Jan Feb Mar April May Algeria 78% 78% 78% 58% 58% 58% Angola 142% 129% 142% 117% 181% 117% Ecuador 88% 88% 108% 69% 69% 69% 31% 31% 31% Gabon 22% 22% 78% 22% 22% 22% -200% 244% 133% NA NA NA NA NA NA NA NA NA 53% 67% 62% 67% 39% 29% 34% 34% Iran, I.R.*** Iraq Avg. Kuwait 98% 98% 106% 98% 90% 98% 105% 105% 98% 105% 98% 105% 105% 105% 104% 101% Qatar 127% 193% 127% 93% 60% 93% 127% 127% 227% 127% 93% 127% 93% 200% 147% 131% Saudi Arabia 153% 116% 126% 120% 128% 102% 106% 120% 118% 102% 122% 118% 116% 115% 125% 119% UAE 38% 60% 74% 60% 60% 60% 53% 60% 60% 60% 81% 103% 117% 137% 105% 75% Venezuela 18% 18% 39% 49% 71% 28% 39% 81% 134% 186% 313% 481% 481% 555% 613% 207% 105% 90% 100% 95% 95% 77% 75% 86% 87% 101% 120% 132% 138% 149% 165% 108% Total OPEC 11# Source: IEA OMR, OPEC OMR, Al Rajhi Capital. ^ December data based on OPEC report’s secondary data sources. *** Iran was given a slight increase. # Excluding Equatorial Guinea, which joined OPEC from 25th May, 2017. Non-OPEC compliance level Figure 23 Non-OPEC compliance to agreement 2017 Compliance Jun Jul Jan Feb Mar April May Azerbaijan 34% 83% 207% 85% 85% 56% Kazakhstan 42% -138% -324% -218% -54% Mexico 73% 79% 71% 77% Oman 103% 86% 101% 99% Russia 39% 40% 59% Others*** 14% -40% Total 47% 38% 2018 Aug Sep Oct Nov Dec Jan Feb 53% 215% 61% 37% 65% 10% -3% 22% Avg. 79% NA NA 162% -111% 54% -583% -564% -520% -604% -232% 79% 91% 112% 195% 401% 231% 266% 285% 213% 260% 176% 91% 95% 100% 97% 80% 79% 109% 63% 100% 106% 93% 77% 91% 93% 92% 104% 106% 97% 90% 88% 88% 87% 81% -28% 86% -13% -55% -69% 59% 46% 48% -2% 24% 54% 25% 50% 51% 70% 74% 66% 68% 126% 142% 111% 90% 88% 81% 86% 85% Source: IEA OMR, Al Rajhi Capital. *** Bahrain, Brunei, Equatorial Guinea, Malaysia, Sudan and South Sudan. Disclosures Please refer to the important disclosures at the back of this report. 7
8. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Disclosures Please refer to the important disclosures at the back of this report. 8
9. Saudi Oil and Gas Sector Oil and Gas –Industrial 02 May 2018 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information onl y. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Explanation of Al Rajhi Capital’s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations. Contact us Mazen AlSudairi Head of Research Tel : +966 1 211 9449 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Saudi Arabia Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37. Disclosures Please refer to the important disclosures at the back of this report. 9