Energy Prospectus

Raymond James "Energy Stat" 12-17-2018:

Energy Stat: Lower Oil Prices Will Hit 2019 U.S. Oilfield Activity:
How Bad Will it Get and When Will Activity Rebound?

With the recent collapse in oil prices, it is now clear that 2019 will not be as strong of a year in
the U.S. oilfield as was expected even one month ago. This quarter’s drop in prices came squarely
during E&P budget season, giving some U.S. operators second thoughts about their 2019 capex
plans. Put simply, E&P cash flows available for drilling at $75/bbl WTI oil prices are MUCH, MUCH
higher that at $50/bbl. Since we see oil prices remaining challenged in early 2019, our forecast
for 2019 E&P cash flows, capital spending and oilfield drilling and completion expectations have
been reduced. More specifically, we are now assuming the following: 1) U.S. E&P cash flows
will decline by ~7% y/y at current $53 WTI “strip” prices; 2) U.S. E&P initial budgets will
likely decline by ~10% y/y in 2019; 3) the U.S. rig count will decline from peak to trough by
7-10% in 1H19; 4) U.S. completion activity will relatively outperform drilling activity; and 5)
oilfield service pricing will generally be under pressure through 1H19.

With these five points in mind, it is now clear that the first half of 2019 will be a challenge for oil service activity. The recent decline in oil prices
has compounded what was already expected to be a weak 4Q18 and 1Q19 resulting from operators exhausting their capital budgets earlier in the
year. While estimates varied as to the timing of the recovery, it is now clear that a quick return to work in January of 2019 will not materialize.
Outside of the U.S. oilfield, we believe the nascent international oil service recovery, which had begun with increased activity but not yet pricing
power, will also be further pushed to the right. That said, our forecasted recovery in oil prices for 2H19 sets up the likelihood of a sharp ramp in
activity at the end of the year, followed by a strong 2020 as shown below.

RJ's Conclusion

Given the recent deterioration in oil prices, it is now unlikely that 2019 sees higher OFS spend. Accordingly, we are now assuming: 1) U.S. E&P
cash flows will decline by ~7% y/y at current $53 WTI “strip” prices; 2) U.S. E&P initial budgets will likely decline by ~10% y/y in 2019; 3)
the U.S. rig count will decline from peak to trough by 7-10% in 1H19; 4) U.S. completion activity will relatively outperform drilling activity;
and 5) oilfield service pricing will generally be under pressure through 1H19. That said, our expectations for improving oil prices in the back
half of 2019 support our belief that U.S. oilfield completions activity and drilling rebound during the back half of the year, in a move that should
support both activity and pricing later in 2019. We predict niche parts of the space, especially where equipment usage is already running tight like
premium drill pipe, premium drilling rigs, and certain coiled tubing units, will hold up better than more commoditized segments (such as pressure
pumping) in 2019. As oil prices likely find a bottom over the next few months, we believe early 2019 should represent attractive opportunities for
investors with a 1-2 year time frame. All in, if the futures prices we see today hold for the duration of the year, investors should expect recoveries
in international markets to be again shifted further to the right, and U.S. oil services names to post down results in early 2019 followed by a robust
recovery in the back half of 2019.

Remember: They call them cycles for a reason.