• • • • 3 January 2018 HY Corporate Credit HY Multi Sector,Media, Cable & Satellite The pessimistic shift in US supply data is ending Although US supply has slowly and surely turned back to growth, the extent of this growth is still very much up for debate. The negative warning signs about slower growth are now beginning to turn around. To be sure, we still observe a drag in monthly production data compared to weekly estimates, measuring almost 300kb/d in August. However, we are now seeing the formation of a trough in drilling activity in response to the lagged WTI price. We assume that more frequent mentions of capital discipline will not stand in the way of an uptick in drilling activity through March 2018. In addition, rig productivity is likely to recover as it is assisted by the deployment of new frac capacity. The hydraulic fracturing subsector of US oil services is currently undersupplied, according to our US oil services analyst, as a result of a higher penetration of pad drilling, longer laterals, tighter stage spacing, more frac clusters and higher sand loading. Our oil services analyst notes that in addition to new capacity totaling 1 million hhp, an orderbook of 0.5-1.0 million hhp could begin to be delivered in the first quarter. This has the ability to raise the completed/drilled ratio from 0.73 in the Permian and 0.86 in all other regions towards 0.95, and lifting productivity. This would be a reversal of the decline in completions since September 2016 which was matched by a decline in rig productivity. Figure 7: Drilling response to price Iis intact _00.4.030, rig wont 08.000 110 011 1900 F v —WTI 1.13 14/4 Ms USC* 100 1400 90 110E wn. mat, lagged 40co 1030 000 60 50 40 200 20 10 0 Jen-14 J•i-15 Jen.16 Jen-17 10,1-10 3144~ 13100telms finbroto IP. Etna, limpok Cloatche Best Figure 8: Completion/drilling ratio is rising... 1.6 1.4 1_2 1 06 We believe that the downward shift in US supply