1. What’s Happening with Oil & Gas Activity Harold Hunt, PhD Real Estate Center at Texas A&M College Station, Texas hhunt@tamu.edu

2. Thoughts About the Impact of Low Oil Price on Houston CRE

3. A Quick Review: How was this O&G boom different from the 80’s?

4. (They were the “low-cost” producer) Saudis Controlled the Market in 1980’s (They were the “low-cost” producer) Source: Haver Analytics 10 mil./bpd 2 mil./bpd 6 mil./bpd

5. Today, Most OPEC Countries Rely on Oil Revenue for Their Budgets (a lot)

6. Everybody Thought We Were Safe For Many More Years Producing Crude at $100

7. Texas Crude Production Meanwhile, Texas Crude Production Tripled in 4 Years, Contributing to the Glut Source: U.S. Energy Information Administration Field Production of Crude Oil in Texas and North Dakota Texas North Dakota 1.1 mil. BPD in Feb. ‘10 3.2 mil. BPD in Sep. ‘14

8. So Where is the Energy Sector Headed? The most frequent question we’re getting is: How long will drilling activity be depressed in Texas? Source: University of Houston Fall 2014 Symposium Speech by Bill Gilmer

9. What’s Happening With Rig Activity

10. October 17 th, 2014 Active Drilling Rigs in Texas (As of October 17 th, 2014) Source: Baker Hughes

11. February 13 th, 2015 Active Drilling Rigs in Texas (As of February 13 th, 2015) Source: Baker Hughes

12. October 17 th, 2014 February 13, 2015 Rig Counts (Land Rigs: October 17 th, 2014 vs February 13, 2015)

13. 305 rigs as of February 13, 2015 Active Rigs in the Permian (305 rigs as of February 13, 2015) Source: Baker Hughes

14. 164 rigs as of February 13, 2015 Active Rigs in the Eagle Ford (164 rigs as of February 13, 2015) Source: Baker Hughes

15. Completed Wells in the Eagle Ford Source: Texas Railroad Commission 3,868 Producing Oil Wells 1,681 Producing Gas Wells As of July, 2013: An Increase of: 2,178 Producing Oil Wells 971 Producing Gas Wells 971 Producing Gas Wells Total Increase: 3,149 wells 12 Months Later…

16. Completed Wells in the Eagle Ford 6,414 Producing Oil Wells 3,214 Producing Gas Wells As of July, 2014: An Increase of: 2,546 Producing Oil Wells 1,533 Producing Gas Wells 1,533 Producing Gas Wells Total Increase: 4,079 wells 12 Months Later… Source: Texas Railroad Commission

17. Completed Wells in the Eagle Ford Source: Texas Railroad Commission 7,574 Producing Oil Wells 3,886 Producing Gas Wells As of Jan., 2015: An Increase of: 1,160 Producing Oil Wells 672 Producing Gas Wells 672 Producing Gas Wells Total Increase: 1,832 wells 6 Months Later…

18. Rig Efficiency Improvements are Much Better in the Eagle Ford vs the Permian Source: Baker Hughes

19. What is Happening With Natural Gas

20. Shale Gas U.S. Shale Gas Resources by Breakeven Cost $4.00/mcf

21. Biggest U.S. Counties for New Gas Production Source: Drillinginfo Texas Counties moving up or flat. Most of the gas in 2 of these 3 Eagle Ford counties is “associated gas” coming up with oil production.

22. Source: Baker Hughes Red Dots Show Active Gas Rigs (As of February 13 th, 2015) Note the Haynesville

23. ($/mcf billion cubic feet/day) Henry Hub Nat Gas Price vs Production ($/mcf vs billion cubic feet/day) Source: Haver Analytics Production Price Thought $5/mcf for 1 yr.

24. Strong Rigs Surviving in the Haynesville Source: Energy Information Administration

25. What About Crude

26. Dramatic Drop in Crude Price Since June - 53.7%

27. Simulated Rates of Return for Various Plays What if: $45$3.00 (What if: Crude at $45/bbl & Nat Gas at $3.00/mcf) Source: RBN Energy Services Texas Crude IRRs at $45: Permian: +3% & Eagle Ford: 0%

28. Tight Oil U.S. Tight Oil Resources by Breakeven Cost $50/bbl$80/bbl 80% of resources breakeven w/i $50 to $80

29. Seeing Big Cuts in 2015 Capital Expenditure Spending Since Price Drop Source: SeekingAlpha Almost $5 billion

30. Biggest U.S. Counties for New Oil Production Source: Drillinginfo Top Texas Counties’ new crude production still moving up or flat. 1.Hedging 2.Sunk costs 3.Cash flow needs

31. Inventories Crude Inventories are Soaring as Production Continues to Rise 2014

32. Re-fracking Low-cost Re-fracking Will Add Even More to the Supply

33. The Road Ahead

34. Where is Crude Price Headed?

35. Survey Guesses Avg. Crude Price in 2015

36. Russia and most OPEC countries besides the Saudis Russia and most OPEC countries besides the Saudis really can’t afford to cut production. o Already seeing civil unrest in Venezuela. o Russia already talking recession. U.S. producers U.S. producers see OPEC exceeding their 30 mil. BPD quota and think: OPEC should be the ones to cut. o Also remember shale producers are on a ”drilling treadmill” and really don’t want it to stop. Who (if anyone) Cuts Production First? (and how could it affect U.S. unconventional drilling?)

37. Saudis Saudis would seem to be in the “driver’s seat.” $700 bil. reserve fund. o Have staying power of $700 bil. reserve fund. dampened prices much further o They have dampened prices much further by their inactivity. What are the Saudis really thinking? tie down market share in Asia 1)Did they simply want to tie down market share in Asia? (minimal negative impact) “bring weaker OPEC members in line” 2)Do they want to “bring weaker OPEC members in line”? (minimal negative impact) hurt Russia and/or Iran 3)Are they “working with the U.S.” to hurt Russia and/or Iran? (minimal negative impact) “global swing producer” (negative impact) 4)Do they want the U.S. to be the “global swing producer”? (negative impact) U.S. shale (significant negative impact) 5)Do they see U.S. shale as a threat and want to kill it? (significant negative impact) slow frack technology transfer to other countries * Do they want to slow frack technology transfer to other countries? Who (if anyone) Cuts Production First? (and how could it affect U.S. unconventional drilling?)

38. capital spending on drilling Where will capital spending on drilling get cut the most? The Future of Capital Spending OK LA, MS OK, KS Marginal Plays

39. Investor reaction Investor reaction to extended lower crude prices will be an important determinant of which U.S. producers continue. “high-stakes games of chicken” U.S. shale oil producers some OPEC members o We are witnessing a “high-stakes games of chicken” between U.S. shale oil producers and some OPEC members.  Who will hold out longer at lower prices: Will yield-hungry investors continue funding drilling? 30% (Avg. drilling budget cut in 2015 is about 30%) Can budget-strapped OPEC countries keep running deficits?  Don’t forget:  Don’t forget: Many U.S. producers have hedged their production service co’s The service co’s had no protection and were hit first The “Plastic Bag” Game

40. most efficient operatorssweetest spots low financial leverage The (1)most efficient operators in (2)sweetest spots who have (3)low financial leverage will fare the best.  But how many operators like this are there?  How many employees and/or leases of non-survivors get picked up?  Which employees get cut? White-collar? Blue-collar?  How fast, if at all, will skilled blue-collar workers transition into construction? Winners & Losers

41. The Game-Changing Unknown technology 1)Will technology improve in crude drilling like it has in natural gas drilling? implications 2)If so, what are the implications for rig count and upstream employment?

42. (Thousands, 1979 to Present) U.S. Oil & Gas Extraction Employment (Thousands, 1979 to Present) Source: Haver Analytics

43. (1979 to Present) Historical Active Rig Count Dropping (1979 to Present) Source: Haver Analytics and Baker Hughes

44. What if the U.S. becomes the “low-cost” producer What if the U.S. becomes the “low-cost” producer: Murphy Oil CEO: “Our plan is to maintain our Eagle Ford Shale 2014 production level flat in 2015, with a 46% reduction in capital spending year-on-year.” A Future of Lower Costs and Higher Production? Source: SeekingAlpha Q4 2014 Earnings Transcripts

45. What if the U.S. becomes the “low-cost” producer What if the U.S. becomes the “low-cost” producer: Apache Corp. CEO: “We're able to come in now and contract what prices for drilling should be in a $50 price environment and the same thing applies on the frac crews.” ” And it gives us a chance to really look at our processes, our efficiencies, our inventory and really spend some time grading that. I promise you, we will do it differently than the way we are doing it right now when we ramp up again.” Source: SeekingAlpha Q4 2014 Earnings Transcripts A Future of Lower Costs and Higher Production?

46. What if the U.S. becomes the “low-cost” producer What if the U.S. becomes the “low-cost” producer: Anadarko CEO: “If we were fortunate enough to have 20% reductions in service calls, and you think about it being in a prior world at $90 per barrel and the economics they gave us at the well head, $70 could be the new $90.” Source: SeekingAlpha Q4 2014 Earnings Transcripts A Future of Lower Costs and Higher Production?

47. What if the U.S. becomes the “low-cost” producer What if the U.S. becomes the “low-cost” producer: Pioneer Resources CEO: “For the industry, this is probably an unintended consequence of OPEC’s pricing policies that are forcing us to further reduce our breakeven economics and we’ll be the beneficiary of that as an industry as we move forward.” Source: SeekingAlpha Q4 2014 Earnings Transcripts A Future of Lower Costs and Higher Production?

48. lower future rig count permanently lower employment The future would seem to be lower future rig count, leading to permanently lower employment. most vulnerable If so, who is most vulnerable? Conclusion

49. Metro % Annual Payroll from Energy* Metro % Annual Payroll from Energy* Midland, TX41.8Oklahoma City, OK8.9 Odessa, TX22.2Shreveport, LA7.6 Farmington, NM16.0Greeley, CO7.2 Lafayette, LA13.3Victoria, TX7.1 Casper, WY12.7Abilene, TX6.8 Houma-Thibodaux, LA12.3Houston, TX6.5 Grand Junction, CO10.0Wichita Falls, TX6.2 Corpus Christi, TX9.8Tulsa, OK5.6 Longview, TX9.4San Angelo, TX5.5 Bakersfield, CA9.3Tyler, TX5.0 * NAICS 211111 Crude Petroleum and Natural Gas Extraction, 213111 Drilling Oil and Gas Wells, 213122 Support Activities for Oil and Gas Operations, 333132 Oil and Gas Field Machinery and Equipment Manufacturing Source: 2012 County Business Patterns 20 Most Vulnerable U.S. Metros Source: Greater Houston Partnership

50. Metro % Annual Payroll from Energy* Metro % Annual Payroll from Energy* Levelland, TX37.5Dickinson, ND20.8 Williston, ND37.4Weatherford, OK20.7 Woodward, OK35.7Vernal, UT18.9 Elk City, OK33.8Duncan, OK17.3 Andrews, TX29.4Marshall, TX17.2 Hobbs, NM28.9Morgan City, LA15.5 Snyder, TX27.5Bradford, PA15.1 Carlsbad-Artesia, NM26.5Riverton, WY14.9 Zapata, TX26.5Minot, ND14.8 Gainesville, TX22.5Pampa, TX14.6 * NAICS 211111 Crude Petroleum and Natural Gas Extraction, 213111 Drilling Oil and Gas Wells, 213122 Support Activities for Oil and Gas Operations, 333132 Oil and Gas Field Machinery and Equipment Manufacturing Source: 2012 County Business Patterns 20 Most Vulnerable Micro Areas Source: Greater Houston Partnership

51. My disclaimer My disclaimer: unpredictable external shocks Don’t forget about unpredictable external shocks that always make forecasting the future price of crude extremely difficult. o A widening of the current Middle East conflict by ISIS o Iran gets bombed by Israel over possible nuclear capability o Iran comes off sanctions for reducing nuclear capability o A global recession occurs o Any number of other “black swans” impossible to predict that could have a positive or negative effect on price

52. http://recenter.tamu.edu REAL ESTATE CENTER at TEXAS A&M UNIVERSITY Mays School of Business