UPSTREAM NEWS

APA ESTIMATES NORTH SEA ASSET POTENTIAL

On November 17, Apache Corp. hosted a webcast with analysts and investors to provide an update on the company's North Sea operations. The company noted its assets in the region could yield an incremental 574 to 1,054 MMboe of net resource potential from development and exploration projects, noted Raymond James after the call. Since its acquisition of Forties field and Beryl, Apache has invested nearly $2.6 billion in infrastructure.

WOOD MACKENZIE: KEY THEMES FOR THE MAJORS IN 2016

Wood Mackenzie's corporate upstream research team has assessed the third quarter (Q3) results from the Major oil and gas companies, identifying four key themes to look out in 2016. Wood Mackenzie says the latest round of earnings results offered the industry an early glimpse at what lies ahead in 2016 in terms of companies' budgets and strategies. The stand out themes that Wood Mackenzie notes include: weak financial performance in Q3, surging production levels, deep cost cutting; and tighter allocation of limited capital.

Tom Ellacott, Head of Corporate Upstream Analysis at Wood Mackenzie commented: "The crash in oil prices this year is having a transformative impact on the industry. The majors are now making real progress in reshaping their investment strategies for a sustained period of low prices."

Earnings fall sharply: upstream earnings were weak for the fourth quarter in succession, the effect of a 50% year-on-year fall in oil prices accentuated by over US$9 billion of impairments. Another stellar quarter for refining provided some support, and further reinforced the benefits of the integrated business model.

A strong quarter for production but growth will flatten out: production surged as the benefits of the last investment cycle, the impact of low prices on production sharing contract (PSC) volumes and reduced maintenance downtime flowed through. Total was the top performer, delivering double digit production growth. Eni, Statoil and Shell also had strong quarters. But longer-term growth prospects are starting to suffer from lower investment. Chevron and Total have now downgraded their 2017 production targets and longer-term growth trajectories will be flatter as companies focus on value not volume.

A new phase of cost cutting is under way: deeper cost cutting was a core theme as the Majors adapt to a scenario of lower oil prices for longer. The aim is to fund dividends through organically generated cash flow. Chevron's revised Capex projection for 2016 - 2017 alone could be up to US$17 billion lower than the guidance in its 2015 Analyst Day earlier this year. Spending levels in 2017 could be down by around 30% versus guidance prior to the oil price crash as more projects are deferred and underlying costs continue to fall.

Capital discipline being tightened up: BP provided a barometer of how companies are adjusting planning assumptions in the new world of lower prices, announcing that it is using a mid-teen hurdle rate for major greenfield projects at an oil price of US$60/bbl. We expect other Majors to be screening pre-FID projects under similar hurdle rates.

STATOIL AWARDED NEW LICENSES OFFSHORE EAST COAST CANADA

Statoil and its partners were the successful bidders for six exploration licenses in the Flemish Pass Basin, offshore Newfoundland, and two licenses offshore Nova Scotia.

The licenses offshore Newfoundland total 14,670 square kilometers, and are located in an area in proximity to the Statoil-operated Bay du Nord discovery. Statoil will operate five licenses, and participate in one license as a partner.

The licenses offshore Nova Scotia (NS15-1 Parcels 1 and 2) cover an area totalling 6,500 square kilometers, and are located approximately 250 kilometers from Halifax, Nova Scotia.

The licenses awarded are located in an area nearby to Statoil's previous discoveries in the Flemish Pass Basin - the Mizzen discovery was made in 2009, and Harpoon and Bay du Nord were both discovered in 2013.

SHELL CONFIRMS GOM DISCOVERY POTENTIAL, OUTLINES REORGANIZATION

Shell has confirmed that Kaikias, discovered in the Mars-Ursa basin in August 2014, is a "high-value opportunity" in the deepwater Gulf of Mexico.

Appraisal drilling revealed more than 300 feet of net oil pay in August 2015, the company noted, saying the development potential of Kaikias could exceed 100 million barrels of oil equivalent recoverable. Full evaluation of the well results continues.

Kaikias, located approximately 60 miles offshore, south of the Louisiana coast at water depths of 4,575, is 100% owned by Shell. Additionally, the company owns and operates three infrastructure hosts in the Mars-Ursa basin and the company believes near field infrastructure presents opportunities for cost efficiencies.

Additionally, in its November 3 management day presentation, the company outlined its plan to reorganize its upstream organization. The goal is to create a simper organization "that reflects recent changes in the company's portfolio, facilitates our planning for the integration of BG post-completion of the recommended combination and that will facilitate subsequent streamlining of the portfolio." Starting January 1, 2016, Integrated Gas, which has grown into a business that generated over the last 3 years on average $11 billion cash flow-per-year from around $2 billion in 2009, will be established as a stand-alone organization. It will be led by Maarten Wetselaar, who will become Integrated Gas Director and a member of the executive committee. A new upstream organization will span Shell's worldwide conventional oil and gas businesses. It will be led by the current Upstream International Director, Andrew Brown. Marvin Odum, currently Upstream Americas Director, will lead and become director of a new Unconventional Resources organization, spanning heavy oil and shales activities in the Americas.

MORNINGSTAR: CVX, OTHER US OIL FIRMS LEAD IN EFFICIENCY, VALUE, DIVIDEND PRESERVATION

American integrated oil firms hold greater dividend safety, better assets, and more attractive valuations than their European counterparts as oil prices look to remain lower for longer, according a recent Morningstar report.

Investor concerns about dividend sustainability may be overblown, as increasing capital flexibility enables firms to trim investment budgets in a way that ensures dividend safety.

Key takeaways from the report include:

• Dividends are largely safe thanks to falling capital expenditures, but outside of Exxon and Chevron, Morningstar equity analysts expect stagnancy during the next five years.
• European firms lack the US shale acreage of American firms, leaving them without potentially valuable short-cycle investment opportunities in a volatile environment.
• European firms lead in cost-cutting measures, but have historically lagged in operational efficiency, a dynamic that's unlikely to change. More efficient companies like Exxon should also deliver cost savings, despite a lack of public pronouncements.
• The firms with the most at-risk dividends-Total, Shell, and BP-are offering dividend payments in the form of additional shares to further preserve cash. However, this move is unlikely to generate sufficient free cash flow to cover dividends by 2018, so these less-efficient firms will need to sell assets to fund future shortfalls.
• Chevron looks like the most undervalued integrated oil company, with improving coverage ratios, falling breakeven levels, potential for dividend growth, and an upstream portfolio that includes a large cost-advantaged Permian acreage position.
• European firms remain largely overvalued, in Morningstar analysts' view.

CHEVRON BEGINS FIRST PRODUCTION FROM LIANZI DEVELOPMENT OFFSHORE THE REPUBLIC OF CONGO AND ANGOLA

Chevron Overseas (Congo) Ltd., has commenced oil and gas production from the Lianzi Field, located in a unitized offshore zone between the Republic of Congo and the Republic of Angola.

Located 65 miles offshore in roughly 3,000 feet of water, Lianzi, discovered in 2004, is Chevron's first operated asset in the Republic of Congo and the first cross-border oil development project offshore Central Africa. The project is expected to produce an average of 40,000 barrels of crude oil per day.

Chevron Overseas (Congo) Ltd. is operator of the Lianzi Field and has a 15.75% interest, along with its affiliate Cabinda Gulf Oil Co. Ltd. (15.5%), Total E&P Congo (26.75%), Angola Block 14 BV (10%), Eni (10%), Sonangol P&P (10%), SNPC (the Republic of Congo National Oil Co. - 7.5%), and GALP (4.5%).

In late October, Cowen and Company analysts commented on Chevron's cuts to ongoing Capex, noting the company's 2017 cashflow neutrality target. Chevron plans to reduce its spending outlook by as much as 31% from roughly $35 billion/$32 billion /$29 billion in 2015/16/17 to $25-28 billion in 2016 and $20-24 billlion in 2017/18.

"We see CVX as having one of the most flexible near-term capex profiles among its peers with several major capital projects (Gorgon, Wheatstone, Lianzi, Moho Nord, etc.) transitioning from cash consumers to cash producers. Opex has also been reduced by 12% y-y and upstream unit operating costs are running 14% lower YTD. Additionally $4 billion of spend reductions are expected through headcount reduction of around 6-7k, supplier engagements (~$2 billion) and efficiency gains. Lastly, asset sales target was increased by about $5 billion by year-end 2017," the analysts detailed.

CONSOL UTICA WELL HITS 24 HOUR IP RATE OF 44.7 MMCFE/D

In its Catalyst Week in Review for the week ending November

19, Raymond James noted flow back on CONSOL's first Utica Shale well in Monroe County, Ohio. "The well had a 24 hour IP rate of 44.7 MMcfe/d, roughly 40% higher than any previous Utica well in the county." The company has plans its next Utica well in Green County, Pennsylvania, the analysts said, "near EQT's prolific Scotts Run well."