Oilfield Services & Equipment
`
`INITIATION OF COVERAGE
`September 10, 2018
`
`Why the Big Pause? Balancing Long-Term Value with Near-Term Headwinds. Initiating
`Coverage of Oilfield Svcs and Equipment
` Summary
`We are launching coverage of 21 companies in the the Oilfield Services & Equipment sector. Despite short-term headwinds due to transitory
`Permian takeaway constraints, we believe the risk/reward in several names in our universe is very compelling. We project strong growth to restart
`in U.S. land activity by mid-2019 and believe international activity is in the early stages of a recovery.
`
` Key Points
`• Crude Outlook Supports Higher Activity: Stifel’s WTI crude oil price forecasts of $67.25, $63.50 and $60.00 in 2018-20, respectively, are
`supportive of rising worldwide drilling activity. We expect the U.S. rig count to increase about 18%, 8% and 14% in 2018-20, respectively,
`following 84% growth in 2017. Internationally, we are forecasting annual growth in the mid- to high-single digits in 2018-20.
`• The Permian Pause: We are expecting takeaway constraints in the Permian basin to lead to a temporary pause in growth, not a material
`decline in activity. Based on detailed work by Stifel’s E&P team, it appears that if completion activity plateaus, production will not overwhelm
`takeaway capacity. As pipeline capacity begins to come on line in 1Q19, Permian completion activity should rise with more significant growth in
`2H 2019. In our view, many of the stocks in our universe are reflecting a material decline in the Permian, not a pause.
`• Short-Term Pressure Pumping Headwinds Should Abate by Mid-2019: The anticipated pause in Permian completion activity over the
`next few quarters combined with new pressure pumping capacity additions will likely lead to utilization and pricing softness for U.S. pressure
`pumpers. We do not expect a dramatic decline in frac pricing, but we do believe spot pricing will fall. As additional Permian takeaway capacity
`comes on line in 2019, we predict a fairly rapid rebound in demand and solid earnings growth for frac operators in 2020.
`• Frac Sand Outlook: Demand for sand continues to rise sharply and we are anticipating continued growth over the next several years. However,
`significant supply growth from in-basin mines have a meaningful delivered cost advantage. While we believe there is a market for high-quality
`NWS and some operators will shun in-basin sand, the in-basin mines will likely lead to sand price weakness over at least the next several
`quarters.
`• International Recovery Appears to be on the Horizon: Following four years of weakness, there have been a few positive signs, including
`a modest uptick in rig activity, that indicate a rebound internationally is on the horizon. We expect gradual improvement and do not expect
`meaningful pricing and margin growth internationally until 2H 2019/2020.
`• Oil Service Stocks Have Underperformed E&Ps and Many Names Look “Cheap”: The OSX (Oil Service Index) has underperformed
`the XOP (Exploration & Production ETF) in 2016, 2017 and thus far in 2018. In addition, despite strong crude oil prices, the OSX has
`underperformed the S&P 500 in 2017 and year-to-date 2018. In addition, on average, names in our universe are down 33% from 52-week highs,
`including 26% for the three large caps, 41% for pure-play pressure pumpers and 50% for frac sand companies. On average, names are trading
`at a 30% discount to median forward EV/EBITDA multiples based on our 2020 forecasts and many sit near the bottom of the historical range,
`particularly pressure pumpers and frac sand companies.
`• Dealing with the Big Pause: Over the next few quarters, we believe Permian takeaway constraints will create volatility and keep many stocks
`in our universe range-bound until visibility improves. In our view, many of our names offer very compelling value for long-term investors but
`lack positive catalysts in the short term. As it pertains to pressure pumping companies and frac sand providers, we suggest being selective and
`very valuation sensitive in the near term. Outside of these groups, we are focused on names with solid return on capital profiles, strong growth
`opportunities, robust free cash flow expectations and potential positive catalysts.
`• Our Favorite Stocks Near-Term: Our favorite large cap names are Tenaris (TS, Buy, $31.22, Select List), Baker Hughes, a GE company
`(BHGE, Buy, $31.42, Select List). On the smaller cap side, we prefer Solaris (SOI, Buy, $15.29), DMC Global (BOOM, Buy, $36.95) and Oil
`States (OIS, Buy, $30.40). We also are recommending National Oilwell (NOV, Buy, $44.24) and Civeo (CVEO, Buy, $3.47).
`• Compelling Risk/Reward Plays: While there are clearly some short-term headwinds, several names appear to offer a compelling risk/reward
`for value-oriented investors. These include Halliburton (HAL, Buy, $36.80) among large caps and small- to mid-caps Keane Group (FRAC,
`Buy, $10.67), Liberty (LBRT, Buy, $16.38), ProPetro (PUMP, Buy, $15.01), and TETRA (TTI, Buy, $4.24).
`
`Stephen Gengaro | (973) 549-4055 | gengaros@stifel.com
`Stifel Equity Trading Desk | (800) 424-8870
`
`Stifel 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.
`All relevant disclosures and certifications appear on pages 206 - 207 of this report.
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`TABLE OF CONTENTS
`Industry Overview ....................................................................................................................................................... 3
`Comparables Table ......................................................................................................................................................27
`Company Reports
`Baker Hughes ..........................................................................................................................................................28
`Civeo .......................................................................................................................................................................38
`Core Laboratories ....................................................................................................................................................46
`DMC Global .............................................................................................................................................................53
`FTS International .....................................................................................................................................................62
`Halliburton ...............................................................................................................................................................70
`Keane Group ...........................................................................................................................................................79
`Liberty Oilfield Services ...........................................................................................................................................87
`National Oilwell Varco .............................................................................................................................................95
`Oil States International ..........................................................................................................................................103
`Pioneer Energy Services .......................................................................................................................................110
`ProPetro Holding ...................................................................................................................................................117
`RPC .......................................................................................................................................................................125
`Schlumberger ........................................................................................................................................................132
`Smart Sand ...........................................................................................................................................................144
`Solaris Oilfield Infrastructure .................................................................................................................................153
`Superior Energy Services ......................................................................................................................................163
`Tenaris ..................................................................................................................................................................172
`TETRA Technologies ............................................................................................................................................181
`U.S. Silica Holdings ...............................................................................................................................................188
`Weatherford ...........................................................................................................................................................198
`
`
`
`
`
`
`
`2
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Exhibit 1: Valuation Summary
`
`Source: Company reports, FactSet and Stifel estimates.
`
`Overview
`
`The Global Oilfield Services and Equipment market includes a wide array of products and services ranging from commodity
`products like simple tubulars to highly engineered, advanced technologies used to access hydrocarbons buried deep below the
`Earth’s surface. We estimate the worldwide Oilfield Services and Equipment market currently stands at approximately $250
`billion, well off its 2014 peak of close to $450 billion. In general, the primary driver of the market is the upstream capital spending
`budgets of oil and gas companies, ranging from major National Oil Companies (NOCs, e.g. Saudi Aramco, Petrobras) to global
`integrated major oil companies (IOCs, e.g. ExxonMobil, BP) to small “mom-and-pop” operators in the U.S. land market.
`From a geographic perspective, historically the rule of thumb was that roughly 75% of the market was driven by international
`activity and 25% by the U.S. market. This has shifted, at least in the near term, owing to the improved economics of U.S. oil
`production and the increasing role of the United States in world oil markets. In fact, over the past two years the U.S. rig count has
`more than doubled from the bottom (404 rigs in May 2016) to more than 1,000 rigs while the international rig count has been
`essentially flat. Looking ahead, we expect the U.S. rig count to continue to rise in 2019-20 (albeit at a slower pace) and it appears
`we are finally beginning to see improvements in the international rig count after several years of anemic activity.
`We believe the first step to evaluating an oil service company is to clearly understand the primary markets it has exposure to and
`the key drivers of those markets. Spears & Associates estimates that North America accounted for 49% of the $230 billion of
`global oilfield spending in 2017 versus 36% in 2016 and well above the historical norm of around 25%. As highlighted in Exhibit 2,
`Latin America is estimated to be about 9% of the global oilfield market and the Eastern Hemisphere 42-43%. While there are signs
`that international activity is gradually improving, we expect the U.S. land market to be the fastest growing segment over the next
`one-to-two years.
`
`
`3
`
`Large-Cap Oil Service
`Baker Hughes, a GE Company Class A
`Halliburton Company
`Schlumberger NV
` Average
`
`Oilfield Equipm ent
`National Oilw ell Varco, Inc.
`Tenaris S.A. Sponsored ADR
` Average
`
`Sm all/Mid Cap
`Core Laboratories NV
`DMC Global Inc.
`Oil States International, Inc.
`Pioneer Energy Services Corp.
`Superior Energy Services, Inc.
`TETRA Technologies, Inc.
`Weatherford International plc
` Average
`
`Pressure Pum pers
`FTS International, Inc.
`Keane Group, Inc.
`Liberty Oilfield Services Inc. Class A
`ProPetro Holding Corp.
`RPC, Inc.
` Average
`
`Frac Sand
`Smart Sand, Inc.
`Solaris Oilfield Infrastructure, Inc. Class A
`U.S. Silica Holdings, Inc.
` Average
`
`Others
`Civeo Corp
`
`Ticker
`
`Rating
`
`Mkt. Cap
`($ Mil.)
`
`Price
`09/08/18
`
`Target
`Price
`
`Upside
`to TP
`
`Price/EPS
`2019E
`2020E
`
`EV/EBITDA
`2019E
`2020E
`
`BHGE
`HAL
`SLB
`
`NOV
`TS
`
`CLB
`BOOM
`OIS
`PES
`SPN
`TTI
`WFT
`
`FTSI
`FRAC
`LBRT
`PUMP
`RES
`
`SND
`SOI
`SLCA
`
`Buy
`Buy
`Hold
`
`Buy
`Buy
`
`Hold
`Buy
`Buy
`Hold
`Hold
`Buy
`Hold
`
`Hold
`Buy
`Buy
`Buy
`Hold
`
`Hold
`Buy
`Buy
`
`34,531
`32,380
`82,632
`
`31.42
`36.80
`59.70
`
`$40.00
`45.00
`69.00
`
`27.3%
`22.3%
`15.6%
`
`16,927
`18,428
`
`44.24
`31.22
`
`54.00
`41.00
`
`22.1%
`31.3%
`
`4,813
`550
`1,824
`231
`1,259
`533
`2,293
`
`1,038
`1,170
`1,936
`1,254
`2,855
`
`194
`719
`1,504
`
`108.87
`36.95
`30.40
`2.95
`8.15
`4.24
`2.30
`
`9.50
`10.67
`16.38
`15.01
`13.29
`
`4.67
`15.29
`19.41
`
`117.00
`53.00
`40.00
`3.00
`9.00
`6.50
`3.00
`
`12.00
`16.00
`21.00
`18.00
`15.00
`
`5.50
`20.00
`26.00
`
`7.5%
`43.4%
`31.6%
`1.7%
`10.4%
`53.3%
`30.4%
`
`26.3%
`50.0%
`28.2%
`19.9%
`12.9%
`
`17.8%
`30.8%
`34.0%
`
`20.9x
`17.2x
`23.0x
`20.4x
`
`44.0x
`16.9x
`30.4x
`
`36.3x
`13.9x
`43.3x
`NM
`NM
`27.7x
`NM
`30.3x
`
`4.6x
`13.4x
`7.4x
`6.8x
`16.5x
`9.8x
`
`4.4x
`5.5x
`7.0x
`5.6x
`
`CVEO
`
`Buy
`
`583
`
`3.47
`
`5.00
`
`44.1%
`
`NM
`
`13.1x
`10.7x
`16.1x
`13.3x
`
`20.1x
`12.5x
`16.3x
`
`27.6x
`10.6x
`20.3x
`57.7x
`55.4x
`14.1x
`NM
`30.9x
`
`3.7x
`8.2x
`6.1x
`6.1x
`12.6x
`7.3x
`
`4.7x
`4.9x
`7.2x
`5.6x
`
`NM
`
`9.7x
`8.9x
`11.5x
`10.0x
`
`14.8x
`9.7x
`12.3x
`
`26.6x
`7.9x
`11.4x
`6.0x
`5.1x
`6.9x
`9.9x
`10.5x
`
`4.2x
`3.7x
`4.0x
`3.8x
`7.1x
`4.6x
`
`3.4x
`3.7x
`4.7x
`3.9x
`
`9.3x
`
`9.2x
`6.7x
`9.3x
`8.4x
`
`10.1x
`7.6x
`8.9x
`
`21.0x
`6.2x
`8.6x
`4.9x
`4.4x
`5.9x
`8.1x
`8.4x
`
`3.4x
`3.1x
`3.5x
`3.4x
`5.9x
`3.9x
`
`3.5x
`3.4x
`4.8x
`3.9x
`
`7.8x
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Exhibit 2: 2017 Global Oilfield Spending by Region (Dollars in Billions) and 2017 Rig Count by Region
`
`
`Source: Spears & Associates (left) and Baker Hughes, a GE company (right)
`
`
`
`It’s a Cyclical Business and Crude Matters
`
`
`
`The global oilfield services market is unquestionably a cyclical business with sharp swings in activity driven by several macro
`factors. As shown in Exhibit 3, industry spending tends to follow fluctuations in crude oil prices, and over the last 10+ years, the
`smallest percentage change in global oilfield spending was roughly 5% in 2017. This rather small change was the net effect of a
`very sharp rise in U.S. land revenue growth offset by anemic international land markets and weak offshore activity. While 2018 is
`shaping up to be a strong year in the U.S. land markets and possibly a transitional year internationally, it might be a bit optimistic
`to declare 2019 as the year of a synchronized global oilfield recovery, but we do expect higher activity in most areas around the
`globe.
`
`
`Exhibit 3: Change in Upstream Capital Spending versus Change in WTI Crude Oil Price
`
`
`Source: Spears & Associates, FactSet and Stifel estimates
`
`
`
`4
`
`$48
`21%
`
`$52
`22%
`
`$20
`8%
`
`$116
`49%
`
`North America
`Europe/CIS/Africa
`
`Latin America
`Middle East/Asia Pacific
`
`588
`29%
`
`175
`9%
`
`185
`9%
`
`1,081
`53%
`
`North America
`Europe/CIS/Africa
`
`Latin America
`Middle East/Asia Pacific
`
`Change in Upstream Spending
`
`Change in WTI Crude Oil
`
`2006
`
`2007
`
`2008
`
`2009
`
`2010
`
`2011
`
`2012
`
`2013
`
`2014
`
`2015
`
`2016
`
`2017
`
`2018E
`
`100%
`
`80%
`
`60%
`
`40%
`
`20%
`
`0%
`
`-20%
`
`-40%
`
`-60%
`
`-80%
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`
`Crude oil prices have a significant impact on worldwide drilling and completion activity, and on oil service stocks. In the short term,
`fluctuations in crude oil prices tend to create volatility in stock prices and potentially create short-term trading opportunities.
`Importantly, near-term oil price swings are common given the abundance of noise from both expected data (weekly crude
`inventory data, monthly oil reports, etc.) and unexpected news (geopolitical events, rumblings from OPEC, weather, etc.).
`Our investment thesis is largely driven by our expectation for crude oil prices over the next 12-24 months coupled with our view on
`whether the crude futures curve is too bearish, bullish or reasonable. We believe WTI crude oil prices will remain in the mid- to
`high-$60s per barrel level over the next several quarters and normalize to $60 longer term. In our view, this backdrop supports
`strong activity levels in the U.S. land market and rising drilling in intentional land markets. Exhibit 4 highlights WTI crude oil prices
`relative to the U.S. rig count and the international rig count.
`
`
`Exhibit 4: WTI Crude Oil Prices versus Rig Count
`
`Source: FactSet and Baker Hughes, a GE company
`
`
`As noted above, we continue to be fairly bullish on WTI crude oil prices and expect prices to remain in a range that supports rising
`drilling activity, particularly in the U.S. land market. Furthermore, it appears international activity will gradually rise over the next
`several quarters supported by increased confidence in oil prices over the next few years. We currently expect the U.S. count to
`rise roughly 18% in 2018 fueled by a 31% increase in the Permian and a 19% increase in the overall oil rig count. In 2019, we are
`forecasting an 8% rise in the U.S. rig count owing to a pause in the Permian followed by low- to mid-teens growth in 2020.
`Internationally, after several anemic years, we expect around a 5% increase in 2018 and likely 6-9% growth in 2019-20,
`respectively. Our rig count assumptions are summarized in Exhibit 5.
`
`Exhibit 5: Rig Count Assumptions
`
`
`
`Source: Baker Hughes, a GE company and Stifel estimates
`
`5
`
`
`
`160
`
`140
`
`120
`
`100
`
`80
`
`60
`
`40
`
`02
`
`0
`
`U.S. Rig Count
`
`International Rig Count
`
`WTI ($/bbl - right scale)
`
`2,500
`
`2,000
`
`1,500
`
`1,000
`
`500
`
`0
`
`United States
`U.S. Horizontal
`% U.S. Horizontal
`Permian Basin
`% Permian
`U.S. Oil
`% U.S. Oil
`U.S. Gas
`% U.S. Gas
`
`2014
`1,861
`1,275
`68.5%
`538
`28.9%
`1,527
`82.0%
`335
`18.0%
`
`2015
`979
`744
`76.0%
`277
`28.3%
`750
`76.6%
`229
`23.4%
`
`2016
`509
`400
`78.7%
`182
`35.8%
`408
`80.2%
`101
`19.8%
`
`Canada
`
`380
`
`192
`
`131
`
`International
`
`1,337
`
`1,169
`
`955
`
`Average
`2017
`875
`737
`84.2%
`355
`40.6%
`703
`80.4%
`171
`19.6%
`
`206
`
`948
`
`2018E
`1,020
`867
`85.0%
`465
`45.6%
`836
`82.0%
`184
`18.0%
`
`205
`
`991
`
`2019E
`1,100
`957
`87.0%
`490
`44.5%
`891
`81.0%
`209
`19.0%
`
`2020E
`1,250
`1,088
`87.0%
`575
`46.0%
`1,025
`82.0%
`225
`18.0%
`
`225
`
`250
`
`1,055
`
`1,140
`
`2017
`71.9%
`83.9%
`
`95.1%
`
`72.3%
`
`70.0%
`
`58.1%
`
`-0.7%
`
`Percentage Change
`2018E
`2019E
`16.6%
`7.8%
`17.7%
`10.4%
`
`31.0%
`
`18.9%
`
`5.4%
`
`6.5%
`
`2020E
`13.6%
`13.6%
`
`17.3%
`
`15.0%
`
`7.2%
`
`13.8%
`
`7.7%
`
`-0.8%
`
`4.5%
`
`9.9%
`
`6.5%
`
`11.1%
`
`8.1%
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Hydraulic Fracturing Leading the Way: Over the past decade, according to Spears & Associates the hydraulic fracturing market
`has posted a 5.9% average compound annual growth rate, easily outpacing the second fastest product line (Floating Production
`Systems) which grew at 3.5% per year during the same time period. Furthermore, the hydraulic fracturing market is expected to
`surpass $30 billion in 2018 and will likely be the largest product line segment tracked by Spears & Associates surpassing the
`offshore drilling business. Following more than 40% declines in the hydraulic fracturing market in both 2015-16, the market
`surged about 80% in 2017 and likely will rise at least 25% in 2018. We are estimating 15%+ growth in 2019-20, respectively.
`
`
`Exhibit 6: Oil Service Subsector Compound Annual Growth Rate; 2008-2019
`
`
`
`Source: Spears & Associates
`
`
`
`Overview of U.S. Land Market
`
`As evidenced by significant fluctuations in rig count over the past 20 years, the U.S. land market has historically been viewed as a
`boom/bust business with a high correlation to commodity price swings (Exhibit 5). While clearly rising crude oil prices have
`fueled the sharp increase in U.S. land drilling activity over the past two years, we believe that there are several key differences
`from prior cycles that we expect will underpin continued growth for the next 1-2 years and potentially lead to a bit less volatility
`longer term. These factors include: 1) the importance of U.S. oil production to global markets; 2) an increased focus on returns on
`capital and spending within cash flow from E&P companies; 3) the severe underinvestment in non-OPEC international areas over
`the past four years; and 4) our belief that OPEC increasingly views U.S. production growth as a necessary evil if the cartel wants
`relatively high ($50+) crude oil prices. Owing to these factors, we believe the U.S. land market is currently the most
`important, most dynamic market in the world and possesses some excellent long-term investment opportunities for
`investors.
`
`Key U.S. Market Segments
`
`Within the growing U.S. land market, there are a few key areas that drive revenue and profitability for most of the companies in
`our coverage universe. We believe it is useful to divide the market as follows:
`
`
` Hydraulic Fracturing (a.k.a, Pressure Pumping) Players: These companies own pressure pumping assets
`used to fracture (frac) wells during the completion process. Rising demand and higher prices have driven strong
`revenue and earnings growth recently, but a short-term pause in U.S. land growth and new capacity from
`existing and new entrants likely creates price headwinds for a few quarters. Pure-play pressure pumpers in our
`coverage universe include FTS International, Keane Group, Liberty Oilfield, and ProPetro, while Halliburton,
`Schlumberger, RPC and Superior Energy have varying exposure to this market as well.
`
`6
`
`8%
`
`6%
`
`4%
`
`2%
`
`0%
`
`-2%
`
`-4%
`
`-6%
`
`-8%
`
`-2% -2% -2% -2% -2%
`
`-2% -1% -1% -1% -1% -1% -1% -1%
`
`-4% -4% -4%
`
`-3%
`
`-7% -7% -7% -6%
`
`-5%
`
`-6%
`
`6%
`
`4%
`
`1% 2% 2%
`
`1% 1%
`
`0%
`
`0%
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
` Sand (Proppant) Providers: There is a robust secular growth trend that is leading to sharply higher sand usage
`per well drilled. This trend is fueling excellent growth in sand/proppant demand but rapidly increasing supply,
`especially from in-basin mines, is at the forefront of investor’s minds. The primary names in our universe in this
`group include U.S. Silica and Smart Sand.
` Non-Pressure Pumping/Sand Names Exposed to the Completion Business: This bucket captures names
`that are exposed to the rising secular trend of longer lateral lengths and increasing completion intensity but
`generally don’t face the rising supply that could upset the pricing dynamics of the commoditized pressure
`pumping and sand markets. On the small- to mid- cap side, these names include Oil States, Solaris, DMC
`Global, and Pioneer, as well as companies with broader product lines and more international exposure like the
`three large caps as well as Core Labs, Tenaris, Superior Energy, and TETRA.
` Drilling Leveraged Companies/Businesses: These businesses tend to be more leveraged to drilling activity as
`opposed to completion intensity. This includes rig companies, drilling fluids providers, drill bit manufacturers and
`a wide array of drilling technologies (including rotary steerable drilling tools). While no names in our universe fall
`cleanly into this category, clearly the three large caps as well as National Oilwell, Tenaris, Weatherford, Superior,
`and Pioneer have exposure here.
`
`
`
`Crude Matters
`
`Exhibit 7 summarizes our regression analysis that highlights the relationship between the Oilfield Service Index (OSX) and WTI
`crude oil prices. The R-squared using crude oil as a predictive tool for the OSX is roughly 0.88. In Exhibit 7, the upper and lower
`blue lines represent two standard deviations from the predicted value of the OSX, and the orange line is the actual OSX
`performance. Although the standard deviation is relatively large and we don’t rely on this as a predictive tool, it is useful when the
`disconnect between crude and the OSX is very large. Over the last 20 years, the OSX has violated the two-standard deviation
`bands very few times and it currently sits very close to the lower end suggesting the OSX is undervalued relative to oil prices. As a
`point of reference, if the OSX rebounds to its predicted value of about 200 (based on $70 WTI), it implies 40%+ upside from
`current levels. In our view, the key catalysts that will drive the recovery include visibility that the expected near-term softness
`caused by the pause in the Permian is temporary and not overly significant. In the near term, turbulence likely persists as
`investors weigh various data points and try to gauge the duration and severity of the expected air pocket. Furthermore, as visibility
`on the timing of an international recovery unfolds, it should underpin improvement in the OSX.
`
`
`Exhibit 7: WTI Crude Oil versus the Oil Service Index
`
`Source: FactSet and Stifel estimates
`
`
`
`7
`
`y = 2.26x + 40.0
`Standard Deviation: 25.0
`R-Squared: 0.88
`
`450
`
`400
`
`350
`
`300
`
`250
`
`200
`
`150
`
`100
`
`50
`
`0
`1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Summary of Crude Oil Price Outlook
`
`We are expecting WTI crude oil prices to hover in the $65-70 range for the balance of 2018 with a modest dip to the $60-65 range
`throughout 2019 before normalizing to around $60 in 2020. The keys to our view are summarized below and our expectations are
`consistent with the Stifel E&P team’s forecast for WTI of $67.25, $63.50 and $60.00 in 2018-20, respectively.
`The keys to our outlook for crude oil include:
`1) Our expectations for continued growth in U.S. oil production, albeit moderated by near-term Permian takeaway
`constraints.
`2) Anemic international rig count activity over the past four years.
`3) Our projection that OPEC compliance will remain fairly high, especially given the mess in Venezuela and the Iran
`sanctions.
`4) Our belief that OPEC increasingly views rising U.S. oil production as a necessary evil, and something it has to live with if
`the cartel wants oil price north of around $50-$55.
`5) Solid underlying demand growth.
`
`
`We believe Exhibit 8 captures the global crude oil supply and demand balance fairly well. The chart simply highlights world oil
`demand and supply, as well as implied inventory changes from 2013 through 2019. The data is primarily sourced from the
`International Energy Agency (IEA) but also includes our expectations that OPEC production remains fairly stagnant. As shown in
`Exhibit 9, outside of the seasonal build in the first quarter of 2019, oil supply and demand appear to be in balance at least through
`2019. In our view, this supply/demand dynamic is supporting of relatively high crude oil prices at least over the next few years.
`
`
`Exhibit 8: Global Crude Oil Supply and Demand Balance, 2013 – 2019E (in millions of barrels per day)
`
`Source: The International Energy Agency and Stifel estimates
`
`
`Exhibit 9 highlights the sharp decline in the non-North America, non-OPEC rig count since April 2014 relative to the OPEC rig
`count and oil production from non-North America, non-OPEC producers. In total, these producers represent roughly 40% of the
`world’s production base and the rig count in these markets has dropped roughly 35% since April 2014, although there are recent
`signs of modest improvement. In our view, the severe underinvestment in these areas over the last four years has finally started
`to lead to at least modest declines. This, in our view, is a positive and has helped offset the sharp production increases from U.S.
`land markets.
`
`
`
`8
`
`0.6
`
`0.4
`
`104
`
`102
`
`100
`
`98
`
`96
`
`94
`
`92
`
`90
`
`88
`
`2.2
`
`2.1
`
`1.2
`
`2.0
`
`1.5
`
`1.8
`
`1.3
`
`1.3
`
`1.0
`
`0.9
`
`(0.3)
`
`(0.7)
`
`(1.8)
`
`0.2
`
`0.1
`
`0.1
`
`0.1
`
`0.0
`
`0.1
`
`0.1
`
`(0.4)
`
`(0.6)
`
`(0.4)
`
`(0.5)
`
`(1.1)
`
`Implied inventory change (Right axis)
`
`Global oil demand (Left Axis)
`
`Global oil supply (Left Axis
`
`2.5
`
`2.0
`
`1.5
`
`1.0
`
`0.5
`
`0.0
`
`(0.3)
`
`(0.5)
`
`(1.0)
`
`(1.5)
`
`(2.0)
`
`(2.5)
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`
`
`Exhibit 9: Non-North America, Non-OPEC Rig Count versus Oil Production; 2007-2018
`
`
`
`Source: Baker Hughes, a GE company, the International Energy Agency and Stifel estimates
`
`
`
`The Evolution of the U.S. Market
`
`Over the last decade, advancements in technology have enabled oil & gas companies to exploit the huge hydrocarbon potential
`trapped in unconventional reservoirs in North America. In the words of one long-time industry CEO, technology “has enabled
`economical production of crude oil from some of the worst rock in the world.” These technologies and techniques include
`more efficient drilling rigs, more precise directional drilling capabilities, longer lateral wells, a better understanding of frac stages
`per well, significantly more hydraulic frac horsepower per well and dramatically more proppants (sand) per well.
`This phenomenon has gained momentum as technology has evolved and advanced techniques including rotary steerable drilling
`systems, horizontal drilling and hydraulic fracturing have led to improved well economics and sharp rises in production from
`unconventional wells. Owing to these technological innovations, there has been a sharp rise in drilling efficiency, lateral lengths,
`stages completed per well and proppants used per well. As discussed below, we believe these strong secular trends will underpin
`rising demand for U.S. drilling and completion products and services over the next several years. Exhibit 10 highlights the current
`estimated break-even oil price for select areas.
`
`
`
`
`9
`
`Oil Production (mbpd)
`
`60
`
`55
`
`50
`
`45
`
`40
`
`35
`
`30
`
`25
`
`20
`
`15
`
`10
`
`Down 316 rigs, or
`35% since April 2014
`
`OPEC Rig Count
`
`Non-North America, Non-OPEC Rig
`Count
`Non-North America, Non-OPEC
`Production
`
`1000
`
`900
`
`800
`
`700
`
`600
`
`500
`
`400
`
`300
`
`Rig Count
`
`200
`Jan-07
`
`Jan-08
`
`Jan-09
`
`Jan-10
`
`Jan-11
`
`Jan-12
`
`Jan-13
`
`Jan-14
`
`Jan-15
`
`Jan-16
`
`Jan-17
`
`Jan-18
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Exhibit 10: Break-even Oil Prices by Basin
`
`
`
`Source: Rystad Energy
`
`The Hydraulic Fracturing Process: One of the key technologies that has fueled robust growth in U.S. oil production in hydraulic
`fracturing. The hydraulic fracturing process involves pumping a highly-pressurized stream of fracturing fluid (typically a mixture of
`water, chemicals and proppant) into a well in order to fracture (or crack) the underground formation. These fractures release
`trapped hydrocarbons and provide a conductive channel for the oil or natural gas to flow to the wellbore. Proppants (generally
`sand) become lodged in the cracks created by the hydraulic fracturing process, “propping” them open to facilitate the flow of
`hydrocarbons from the reservoir to the well. The fracturing fluid is engineered to lose viscosity, or “break,” and is subsequently
`flowed back from the formation, leaving the proppant suspended in the fractures. Once fracturing fluids are flushed from the well
`using a controlled flow-back process, the fluid and water are recycled or disposed.
`Hydraulic fracturing is critical to economically develop and produce the vast oil and gas resources in the U.S. land market. The
`key takeaway is that hydraulic fracturing is very positive for oilfield service demand, particularly directional drilling, pressure
`pumping, frac sand and other completion-related products and services.
`
`Drilling activity has surged in the U.S. market over the past two years with the rig count more than doubling from 404 rigs in May
`2016 to over 1,000 rigs currently. The current rig count of 1,148 includes 862 rigs drilling for oil and 184 for gas. The sharp rise
`has been largely driven by oil-targeted activity and over half the increase has been in the Permian basin (486 currently versus
`about 130 at May 2016 trough). Other key areas of growth include the Eagle Ford and Cana Woodford on the oil side and the
`Utica and Haynesville on the gas side.
`
`10
`
`$100
`
`$90
`
`$80
`
`$70
`
`$60
`
`$50
`
`$40
`
`$30
`
`$20
`
`$10
`
`$0
`
`2012
`
`2014
`
`2016
`
`2018
`
`Bakken
`
`DJ
`
`Eagle Ford
`
`Mid-Con - SCOOP
`
`Mid-Con - STACK
`
`Permian - Delaware
`
`Permian - Midland
`
`DynaEnergetics Europe GmbH
`Ex. 2007
`
`

`

`Initiation of Coverage
`September 10, 2018
`
`Exhibit 11: U.S. Rig Count
`
`Source: Baker Hughes,