Transportation Impacts Prepared for: Rail Equipment Finance - PowerPoint PPT Presentation

Engineering Supply Chain Logistics Shale Development: The Evolving Transportation Impacts Prepared for: Rail Equipment Finance Conference 2013 March 3, 2014

About PLG Consulting Partial Client List Boutique consulting firm with team members throughout North America  Established in 2001  Over 90 clients and 250 engagements  Significant shale development practice since 2010 Practice Areas  Logistics  Engineering  Supply Chain Consulting services  Strategy & optimization  Assessments & best practice benchmarking  Logistics assets & infrastructure development  Supply Chain design & operations  Hazmat training, auditing & risk assessment  M&A/investments/private equity Industry verticals  Energy  Bulk commodities  Manufactured goods  Private Equity 2 Shale Development: The Evolving Transportation Impacts

Shale Supply Chain and Downstream Impacts Direct Downstream Inputs Wellhead Thermal Fuels Raw Materials Output Products All Manufacturing Generation Steel Gas Process Feedstocks Fertilizer (Ammonia) Proppants Home Heating Methanol (Propane) OCTG NGLs Other Fuels Feedstock (Ethane) Chemicals Chemicals Byproduct (Condensate) Water Petroleum Products Cement Petro-chemicals Crude Other Fuels Gasoline 2010 onward DEMAND ON RAIL CARS 2016 onward 3 Shale Development: The Evolving Transportation Impacts

Burning Questions Frac sand: Resurgent growth? - Denouement of coal? - Is “reshoring” real ? - Crude by rail: Is it safe? Here to stay? 4 Shale Development: The Evolving Transportation Impacts

Correlation of Operating Rig Count with Sand and Crude Shipments 250,000 2,500 Operating On Shore Rigs All Sand Carloads Petroleum Carloads * 200,000 2,000 Operating Onshore Rigs 150,000 1,500 Carloads * 100,000 1,000 50,000 500 0 0 2007 Avg. 2008 Avg. 2009 2010 2011 2012 2013 * Q4 2014 UP carloads estimated STCC 14413 (sand) and 13111 (petroleum) Source: US Rail Desktop, Baker Hughes, Surface Transportation Board, PLG Analysis, February 2014 5 Shale Development: The Evolving Transportation Impacts

U.S. Frac Sand Industry Trends • Rapid growth and maturation of both industries Total Delivered Cost per Ton ~ $122 (hydraulic fracturing and sand production) over the past 5 years Destination • Transload & Ownership shifting supply chain responsibilities – Sand Trucking reduced tasks by end customer 33% 25% • Sand supply base growing and consolidating at the same time Rail - Freight, FSC and Eqp Lease • Mines continue to open; supply base is consolidating 42% • Large fluctuations in price of sand based on supply/demand balance • Unit train shipping is the game-changing logistics development – spurring investment in larger load- out sand transload facilities Logistics costs drive ~ 67% of total • “Benchmark” high-efficiency unit train example – delivered sand cost Illinois to South Texas • Single-line haul (one rail carrier), private railcars achieving two Source: PLG analysis using BNSF public pricing – round trips per month, origin sand facility has direct rail load-out does not include fixed assets at origin or and destination trucking is less than 100 miles destination, December 2013 6 Shale Development: The Evolving Transportation Impacts

Sand Railcar Market Conditions Small Covered Hoppers Proppant Consumed by Volume  Freedonia Group Analysis 8/13 Current market described as “high demand,” “red hot” by leasing companies Increased frac sand per well demand, surging liquids  production Additional sand sources opening in Wisconsin  New orders from cement shippers   Best availability is May/June 2014 (limited)  Most likely availability is August-October 2014  Typical full service lease rates $535 - $575 5-7 year leases  Less than 75,000 mileage caps   Frac sand shippers/receivers will continue to move towards more efficient methods of rail transportation Manifest shipments require 2X the number of railcars  vs. unit trains due to increased cycle times Use of manifest service usually encourages use of railcar  as storage at destination, further increasing fleet requirements  Cement consumption is expected to grow by 6.4% in 2014 and 6.2% in 2015, encouraging railcar orders 7 Shale Development: The Evolving Transportation Impacts

Natural Gas Displacement of Coal for Thermal Generation Natural gas now supplying 27% of U.S. Electricity Generation  US coal electricity generation share capture has dropped 10% from 2006 Adversely affecting coal industry, railroad coal loadings  2013 coal production hit 20 year low (less than 1B s/t) Source: EIA, February 2014  Export opportunities diminishing due to weak demand in Europe, declining demand and competition in Asia Despite recent increases in prices, natural gas share capture expected to maintain or grow  Environmental regulations of coal burning  Scheduled coal unit retirements; 55GW through 2020 8 Shale Development: The Evolving Transportation Impacts

Shale Related Rail Traffic Still Small Relative to Coal Volumes Railcars Handled: Sand, Crude, & Coal 2,500,000 2,000,000 1,500,000 Carloads Sand 1,000,000 Crude 500,000 Coal 0 2008 2009 2010 2011 2012 * * * Crude Coal 2013 Sand Quarterly Data * Q4 2014 UP carloads estimated STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop, Surface Transportation Board, PLG Analysis, February 2014 9 Shale Development: The Evolving Transportation Impacts

Coal, Crude & Sand Trends: Carloads and Revenue Total Coal Carloads and Revenue Combined Sand and Crude Carloads and Revenue Sand Crude Revenue Carloads Revenue 1,400 $4.5 10 $18 Millions Billions Thousands Billions $4.0 9 $16 1,200 8 $3.5 $14 1,000 7 $3.0 $12 6 800 $2.5 $10 5 $2.0 600 $8 4 $1.5 $6 400 3 $1.0 $4 2 200 $0.5 $2 1 - $0.0 - $0 STCC 14413 (sand), 13111 (petroleum), 11212 (coal) Source: US Rail Desktop 10 Shale Development: The Evolving Transportation Impacts

Shale Gas Is More Important to US Industry Competitiveness Than Oil Natural gas has recently been ~5X cheaper WTI & Henry Hub Natural Gas Energy Equivalent Pricing than oil on a BTU-basis  Innovation will convert more transportation fuels and other energy requirements to natural gas US electricity prices are the lowest in the ~5X industrial world  US industries now have substantial power cost advantage  Electricity costs 2x higher in China, 8x higher in Europe Source: EIA, February 2014 US gas downstream products will have world class competitiveness - are the “building blocks of manufacturing”  Chemicals  Resins Natural gas is a cleaner burning fuel compared to other hydrocarbons (coal, oil) Source: International Energy Agency, October 2013 *estimate 11 Shale Development: The Evolving Transportation Impacts

Low Cost NGLs Will Give US Long Term Material Cost Advantages US Ethane has significant structural cost advantage vs. Europe and Asia  Europe and Asia petrochemical plants utilize oil-based Naphtha as their feedstock  Domestic ethane supplies to quadruple by 2025  Prices at historic lows NGLs (especially ethane) are basic building blocks in chemical supply chain Source: IHS Chemical, September 2013 Source: American Chemicals Council, February 2014 Source: Townsend Solutions, December 2013 12 Shale Development: The Evolving Transportation Impacts

Shale Gas Driving Steel, Methanol, & Fertilizer Manufacturing in US Shale gas boom makes direct-reduced iron steel economical  DRI process uses natural gas in place of coal to produce iron  $2+B in new US projects announced  DRI-derived steel of higher quality than that created from recycled scrap, further driving demand Opportunity in U.S. methanol production  Capture price spread between low-cost natural gas and Source: GE Capital presentation, November 2013 methanol  Methanol is a very cost-efficient way to move natural gas to higher-value foreign markets  US represents 10% of the global market  U.S. imports 89% of its supply on average Natural gas is a feedstock for ammonia production  Represents ~70% of cash costs (CF Industries)  12MM mt new domestic manufacturing capacity announced Source: IHS Energy, September 2013 13 Shale Development: The Evolving Transportation Impacts

US Shale Gas Background and Future US gas demand will grow due to:  Coal-fired generation plant converting to gas  More industrial use – steel, fertilizer, methanol  Mexican export via pipeline and LNG export overseas  Increasing use as transportation fuel US gas cost competitiveness is sustainable  30+ year supply at ~$4 mm/btu; cost of production decreasing  Supply will overwhelm demand as prices approach $5 mm/btu  US government will likely limit LNG export to protect US from world gas market price  Source: RBN Energy Industrial use will represent only ~1/3 of 2020 production (75B cf/d) 14 Shale Development: The Evolving Transportation Impacts