Will Oil and Natural Gas Prices Remain Coupled Going Forward?

Natural gas and oil prices have historically been correlated in the US, demonstrated by some very interesting graphs at the EIA that show in the US that natural gas prices and oil prices have followed a similar trend since 1994 (pdf warning)[http://www.eia.doe.gov/oiaf/aeo/conf/pdf/petak.pdf]. The EIA in May of 06 has concluded that the "Oil and gas prices are likely to stay coupled as supply/demand balances remain tight for both fuels," but hedges this forecast with the statement: "however, significant price volatility is likely."

As further background to this issue, citing the oil and natural gas price correlation most energy firms have traditionally used a "6 to 1" ratio in their corversation between oil and natural gas in their reserves statement. For example, the disclosure in Exxon Mobile's 2005 10-K of its treatment of natural gas to reserves is typcial of the industry:

"The volumes of natural gas were converted to oil-equivalent barrels based on a conversion factor of six thousand cubic feet per barrel." (XOM 2005 10-K)

Such a conversion rests on the correlation between oil and natural gas prices on a BTU basis.

The question that stems most directly from this discussion is: will the correlation between oil and natural gas prices continue in the future unaltered? In order to answer this question, a more fundamental question should be asked: what, fundamentally, are the drivers of natural gas prices and oil prices in the US and how are they similiar/different?

It is argued here that the drivers of natural gas prices and oil prices are not linked in the US directly. Natural gas prices in the US (note that the author is not as familiar with the gas industry in Europe and Asia) -- are significantly more volitile than oil prices -- and are driven by the rigid structure of the natural gas industry. Rapid declines in natural gas prices after a warm winter are caused by storage tariffs requiring witdrawals in inventory, causing storage gas to be emptied into a market that is already saturated. On the other hand, rapid increases in natural gas prices are caused by a lack of capacity and storage to fully supply a market under high demand conditions.

In the past the extremes in the natural gas industry were not as pronounced -- as the US has added a significant amount of natural gas fired power plants without a corresponding increase in storage since 2001 (natural gas storage capactiy has actually declined slightly), and further, weather temperatures are expected to increase in volitility going forward. In other words, with a lower storage as a percentage of industry production and demand, and higher weather volitility, the drivers of natural gas and oil prices are set to become more pronouced in future years in the US. So the differences in price drivers are such: in the oil industry the US recieves a world price for oil while the natural gas prices are determined by domestic considerations that are becoming more extreme.

Going forward, the introduction of more LNG will likely -- in the author's opinion (which is different from many industry observers) mean even more volitility in natural gas pricing. LNG will face similar issues as existing natural gas storage in that it is expensive to store, and if existing LNG terminal storage holders are full after a peak season, then they will likely sell (dump) their gas into a market along with traditional natural gas storage. Meaning price collapses will likely be even more pronouced. Further, there will be more variability/uncertainty in natural gas prices as based on the highly uncertain future of LNG supply.

The upshot of this discussion is for the investor to pay more attention to the ratio of oil to gas in the energy company's reserves statement. To the extent that the firm holds more natural gas and less oil as a percentage of reserves, (and has not hedged future years' production) it is likely that the earnings will be more volitile as natural gas prices rise and collapse dramatically. Also, one can conclude that less earnings volitility should give a slight nod to energy firms with a higher percentage holdings of oil verses natural gas.

Expect More Acquisitions in the Oil and Gas Industry

There will likely be more acquisitions in the oil and gas sector, as it is currently cheaper for larger E&P's to acquire oil and gas properties than develop them. For data on the costs of acquiring verses developing oil and gas reserves, see page 20 of this [presentation http://www.oxfordenergy.org/presentations/exploration_production.pdf].

It is more and more difficult for larger Exploration and Production companies to expand, let alone replace oil and gas production year to year. Oil and natural gas production growth for the oil and gas majors over the last three years has averaged less than 5% (see page 17 of this [presentation http://www.oxfordenergy.org/presentations/OilIndustryTrends.pdf] for the data.

90% of the world's oil reserves are located in OPEC countries and the Former Soviet Union, according to the EIA. These countries in general have very restrictive policies towards reserve development for foreign companies. A small or mid-sized independent E&P company with good reserves in politically favorable countries (US, Canada, Australia, EU, New Zealand for example) is very attractive acquisition candidate to larger oil and gas firms given the current situation.

An excellent start to determine which oil and gas firms are attractive acquisition candidates are the reserve valuations of the oil and gas firms compared to their reserves of oil and gas. This data can be found in the first post to this blog.

The very best analysis would be geological analysis of each producing field of the oil and gas firms. I am not a petroleum geologist but a geologist would have a distinct advantage in analysing an E&P co if he/she looked at the geological data for each producing field. This would give a highly detailed view of the future production of each company. It is almost certain that a larger oil firm looking at another firm to acquire would have its team of geologists review their petroleum data.

Every public firm is required by the SEC to have their oil and gas fields reviewed and audited once a year by a repuable outside firm, such as Miller and Lents. It is better if there are two auditing firms, but this is unusual. SThe auditor gives an investor some measure of certainty that the reserves are not misstated, but a detailed, geological view would be a better piece of data for the diligent investor.

The Importance of Oil and Gas Reserves to the Valuation of an Oil and Gas Company

Reserves of oil and natural gas usually comprise the most valuable asset of most oil and gas firms. "Upstream" activities -- exploration and development of oil and gas reserves generally comprise the highest percentage of profits for almost all integrated majors, in comparison with "downstream" activities -- refining, marketing and pipeline transport of oil and gas. For example, in 2005, exploration and production accounted for 83% of Chrevon's operating profit, 80% of BP PLC's operating profit, and 65% of Exxon Mobil's 2005 operating profit.

To paraphrase Willie Sutton (who was asked why he robbed banks): "Oil and Gas Reserves are where the money is."

A note on separate types of energy firms that exist within the energy world:

- First, there are intregrated majors, which concentrate on both upstream and downstream activities. The largest public integrated major by market capitalization in the world is Exxon Mobile.
- Second, there are independents, which focus almost entirely on upstream activities, with nearly 100% of profits from exploration and production of oil and gas. The largest US independant is Devon Corporation, ticker DVN.
- Third there are downstream and "midstream" firms which focus on refining, pipeline operation, LNG facility operation, and marketing.
- Fourth, in the energy sphere there are service firms such as Halburton, which provide well optimization services.
- And Fifth, Oil Sands firms, as they have economics and technology that do not closely resemble traditional upsteam oil and gas firms (oil sands are the subject of another post).

This investment blog concerns itself with catagories 1 and 2 above -- as well as 5 -- I believe every intregrated and independant above a market capitalization of $100M listed in the three major US exchanges is represented in this investment blog, which to my knowledge, has only been completed by the firm John S. Herold Inc in Greenwich, Conn -- but the charge upwards of $15K per year for acess to their data :).

There are a number of methods to analyze an oil and gas firm's reserves. The first (and most obvious) is to observe the total amount, listed by law in the Company's SEC filings. Generally, most companies will have this information on their website or company description as well. The total amount will be generally be listed in barrels for oil, or more rarely, in tons. Large firms will report billions of barrels -- Exxon Mobile reported approximately 13.37 billion total reserves of oil equivalant in 2005, while smaller companies will generally report millions of barrels of oil equivalent. Reserves of natural gas are generally listed in millions of cubic feet equivalent. Reserves of natural gas can be expressed as "barrels of oil equivalent" by energy -- an online calculator to convert from oil barrels to tons and from gas to barrels of oil equivalent can be found at http://www.questoffshore.com/Home/ConversionCalculator/

Note also, at this point in time, oil is more valuable per energy equivalent than natural gas -- although last year after the hurricane natural gas was more valuable per unit of energy -- so currently it pays to know the percentage of the company's reserves that are in oil verses natural gas (as oil is more valuable currently).

The second method to measure the reserves is through a reserve to production ratio --or R/P for short. This number measures how long, at current production rates, a firm can produce oil and gas with existing proven reserves. Typically the number ranges from 6 years to 15 years, with a higher number indicative of higher reserves.

The third method to find the discounted prsent value of the companies oil reserves, called the Standardized Measure. This measure is explained in the second post of this blog. This is a very important measure for investors interested in Oil and Natural Gas Firms -- and for readers not familiar with this measure, I stress that it would be valuable for the reader to learn about it, reading my post on the Standardized Measure would be a good starting point, as there is not a tremendous amount of information out there concerning it.

All three of these above methods could (ideally, should) be used in conjuction with each other for the investor to gain an understanding of the energy company's reserves.

It is important to note that all public energy companies that file with the SEC MUST publish their proven oil reserves and their production figures and standardized measure, but are not required to publish their probable and possible reserves. Proven reserves are reserves that are known with 90% or more certainty -- probable reserves are known with 50% certainty, and possible, 10% certainty, as defined by the SEC. For more information see: http://energy.ihs.com/News/Press-Releases/2004/pr_012104-resreporting.htm

Also, it is important to note that not all reserves are equally accessable, or in other words, some reported reserves are difficult and expensive to withdraw and others are very expensive -- so the cost of development per barrel can vary widely between firms. Further, many firms can be more efficently and effectively run and therefore have a lower lifting costs and therefore profit per barrel. The standardized measure should, if properly calculated by the firm, should take this disparity of development costs into account. To double check, a diligent investor will check development costs of the firm.

Thoughts on Gazprom's Development of the Shtokman Gas Field

Gazprom appears to be aiming to develop Shotkman mainly on its own. Therefore Gazprom's access to financing is critical -- Gazprom almost certainly won't be able to finance Shtokman from internally generated cash flow.

Gazprom's forecasted budget is still up on the Russian version of the Moscow-based Institute of Energy Policy's website site. The budget is included on page 22 of the December 7, 2005 presentation here: (in Russian): http://www.energypolicy.ru/pv.php?id=1002396 (the English version of this presentation is not available)

There are three highlighted lines towards the bottom of the page, first (towards the top) reads: (translated from Russian): Total Revenues,
Second highlighted line reads: Total Spendings (ie costs), third reads: total debt. All numbers are in US dollar billons.

Summary: In 2012, Gazprom will have revenues of $US46.14 billion and spendings (costs) of $US 74.37Bn, leaving debt to increase from $21.0Bn in 2005 to $119.05Bn in 2012.

Assumptions of forecasted budget: 1. constant price domestically and in Europe and CIS of Gas (maybe reasonable, although likely the price will rise a bit), 2. slower internal Gazprom cost growth than historical, 3. Capex includes Yamal, NEP, Shtokman, but does not count oil, petrochemical, power capex at Gazprom 4. interest rate = 5.6%. 5. lower Russian gas production offset by higher Central Asian production (in which Gazprom collects a tariff) 6. Gas transportation tarrif increases from USD 0.82 per tcm to USD 2 per tcm by 2008 (likely to happen).

It seems to me that as soon as European banks realize the dire situation of the finances within Gazprom, -- if the projection above is accurate and the assumptions are reasonable -- they won't be willing to finance the Shtokman project. And/or the Russian government and Gazprom will have to become more flexible about revenue sharing and access to the project, which may or may not happen -- it depends on the political situation in Russia, which is the subject of another article.

I would lean towards more delays at this point as European banks worry about repayment -- and Russia is not extremely enthusiasic about pushing the project through as there is a saying in Russia: "Why not leave the oil for our grandchildren?" -- they acknowledge that oil and gas is non-renewable and also feel the price they get now is on the low side, so lower supply from less projects will encourage a higher price from their existing supply.

What is the Standardized Measure of an Oil and Gas Company?

The Standardized Measure is defined as the present value of the future cash flows from proven oil and natural gas reserves, minus development costs, income taxes and existing exploration costs, discounted at 10%. Note that all oil and gas firms that list on an US exchange must provide the Standardized Measure in their filings with the SEC, according to FASB 69. see: http://www.fasb.org/st/summary/stsum69.shtml

How is the Standardized Measure calculated according to FASB 69? In order to Calculate the Standardized Measure, the oil and gas firm will forecast production by year in future years of ONLY proven reserves -- not probable and possible reserves --and then will subtract certain costs and income taxes (at a constant income tax rate, which could change if the government decides to tax higher profits at oil and gas firms due to high prices). To the extent that the company has a strong exploration and development program, in which they find reserves at a higher rate than they produce them (in other words, a high "replacement ratio") the Standardized Measure will not reflect this potential.

The Standardized Measure is defined as the present value of the future cash flows from oil and natural gas reserves, minus development costs, income taxes and existing exploration costs, discounted at 10%. The result will be a number in dollars, for large companies, in the billions, and for smaller oil and gas firms, in the millions. The company, in order to calculate the Standardized Measure, assumes a constant price for natural gas and oil in future years -- unusually the year end price of oil and natural gas (but not always, I have indicated the exact price of gas utilized by the firms in my chart in this blog). In 2005 prices for natural gas utilized by companies range from $8.00 per mcfe to $11.00 per mcfe and prices for oil range from $45 to $65 per barrel.

The Standardized Measure is highly sensitive to the price of oil and natural gas assumed in the calculation -- for example, several companies have used a price of $10 per mcfe for natural gas for the standardized measure at the end of 2005, compared to a price of under $6 in 2004 -- an increase of almost 70%! Oil prices also generally (but not always) have been assumed by companies at around $60, up from around $45 in in 2004, an increase of 33%. The increases in oil and gas prices contributes to a very large increase in the Standardized Measure. Further, two companies with similiar resource bases may use widely different price assumptions for oil and natural gas, leading to very different Standardized Measures.

What doesn't the Standardized Measure include that it should?

The Standardized Measure does not include effects from oil and natural gas price hedging, costs from interst on debt, general and administrative costs, and new exploration costs, and does not include special taxes in future years. To the extent that a Company has an effective or uneffective hedge program (read: has hedged gas production in the $9 range for years to come verses not doing so) the Standardized Measure will not reflect this. Also, if the company has a large debt load, and high administrative costs, and/or an uneffective exploration program, the Standardized Measure will be higher than it "should" be.

The question arises: does the Standardized Measure "overvalue" or "undervalue" the true value of the proven reserves in future years, notwithstanding oil and gas price changes and future exploration, due to the items that it does/does not include? There are arguments on both sides:

For those who say the Standardized Measure "overvalues" point to:

- Lack of inclusion of administrative costs
- Lack of inclusion of interest costs from debt
- No new exploration costs
- No inclusion of increased/special taxes

Those who state the Standardized Measure "undervalues" proven reserves point to:

- 10% discount rate is too high in an era of low interest rates

(again, this undervalued/overvalued debate above does not include the impact of probable and possible reserves -- reserves that will be discovered in future years -- the Standardized Measure excludes probable and possible reserves)

Why is the Standardized Measure important?

The Standardized Measure is one very important tool for investors to understand if the oil and gas firm is undervalued. All public oil and natural gas firms can be compared to a candle, in that as they produce oil and natural gas, they "burn" their resources. If an oil and gas firm does not find new resources -- "wax" -- in furture years -- they will "burn" through their resource base. Assuming an oil and gas company finds no new resources besides proven in future years (note a large assumption), and the assumptions of future development costs and income are accurate, the value of the company should be (in an efficient market) roughly equal to the Standardized Measure. Further, to the extent that the market value of the firm is above or below the Standardized Measure, the stock can be considered overvalued or undervalued, respectively.

An illustration is useful here to show the usefulness of the Standardized Measure. Let's say Candle Firm has a candle that will burn for ten years. Candle Firm has no plans to find or buy any new candles. Candle Firm knows that after ten years, the candle will be gone. Candle Firm knows that every year in the future, they will burn 1/10th of the candle, and every year their income from the candle will be equal to the amount they burn times the price of heat they produce, minus their costs and taxes. Candle Firm can forecast the income from their resource over the next ten years, and then discount it to the present using an appropriate discount rate. This should be the value of the Candle Firm.

In the chart of public companies in this website, 86 public companies listed on US exchanges have been analyzed, with standardized measure to enterprise value provided(enterprise value equals market capitalization minus debt plus cash). All other measures equal, a higher standardized measure to enterprise value indicates the oil and gas firm is more undervalued.

In practice, the standardized measure to enterprise value is a good starting point for analysis for investors, as the diligent investor will go further and analyze the quality of oil and gas reserves, the exploration program, cost control, forecast possible future price of oil and gas, analyze the company's hedging program, financial strength, access to drilling rigs, geographic regions and potential, political risk, possible acquisitions, and analyse the competitence and ability of the management team.

OIL AND NATURAL GAS RESERVES OF PUBLICLY TRADED COMPANIES WORLDWIDE AT 12/31/05

The following organizes all US publicly traded (with the exception of over-the-counter) stocks of oil and gas companies, by decending order of standardized measure as defined by FASB 69 divided by enterprise value (market capitalization - net debt). Companies listed below have market capitalization above $100M.

There are three catagories of stocks included in this list, 1) US and Canadian Exploration and Production Companies, 2) US and EU-based Majors, and 3) Oversees Majors and Independents.

Information included:
Ticker
Company Name
Proven Reserves
Proven Reserve to Production (R/P)
Probable & Possible Reserves
Enterprise Value (US dollars)
Standardized Measure (from 10-K 2005) – Proved Only (1)
Standardized Measure (proved)/Enterprise Value


Notes: Noteworthy information included in [ ]’s
Reserves are reported as indicated from the 2005 10-K (% of reserves as oil & gas included in ( )’s)
R/P is calculated: YE 05 Proven reserves/05 production
Probable and possible reserves are from Corp Presentations - SEC does not require disclosure
Enterprise Value equals Market Cap + Net Debt at 10/06
The Standardized Measure or PV-10 is the present value of proven reserves discounted by 10%, as defined by FASB 60 -After tax, no hedging effects (assumed price of gas indicated in ( )’s)

MBoE = millions of barrels of oil equivalent, BBoE = billions of barrels of oil equivalent

US & Canadian Exploration and Production Companies


CPE
Callon Petroleum [100% minority stake Gulf of Mexico]
Res: 34.3 MBoE (41.4% gas, 58.6% oil)
R/P 10.1 years
Probable & Probable: N/A
Enterprise Value $501M
Standardized Measure: $838M ($10.40 gas)
Standardized Measure/Enterprise Value: 1.67x

SFY
Swift Energy [14% of reserves in New Zealand]
Reserves: 139MBoE (38% gas, 51% oil, 11% NGL)
R/P: 11.0 years
Probable and Possible N/A
Enerprise Value $1.50Bn
Standardized Measure: $2.159Bn ($10 US gas)
Standardized Measure/Enterprise Value: 1.44x

COG
Cabot Oil & Gas
Reserves: 218MBoE (95% gas, 5% oil)
R/P: 17.0 years
Probable and Possible 5620-7450bcfe
Enterprise Value $1.98Bn
Standardized Measure: $2.65Bn ($9.53 gas)
Standardized Measure/Enterprise Value: 1.34x

FST
Forest Oil
Reserves: 267MBoE (76.1% gas, 23.9% oil)
R/P: 8.9 years
Probable and Possible: N/A
Enterprise Value: $3.09Bn
Standardized Measure: $3.853Bn ($8.44 gas)
Standardized Measure/Enterprise Value: 1.24x

PXD
Pioneer Natural Resources
987 MBoE (70% gas, 30% oil)
26.1 years
N/A
$5.97Bn
$7.297 Bn (YE prices of oil and gas) [11% in Argentina]
Standardized Measure/Enterprise Value: 1.22x

WLL
Whiting Petroleum
262 MBoE (24% gas, 76% oil)
17.8 years
N/A
$2.38Bn
$2.88Bn ($7.97 gas)
Standardized Measure/Enterprise Value: 1.21x

SGY
Stone Energy
108MBoE (58% gas, 42% oil)
7.1 years
N/A
$1.67Bn
$1.96Bn ($10 gas)
Standardized Measure/Enterprise Value: 1.17x

ABP
Abraxas Petroleum
18.9MBoE (84% gas, 16% oil)
17.2 years
200 bcfe (36.4MBoE)
$280M
$311.9M ($9.50 gas)
Standardized Measure/Enterprise Value: 1.14x

CWEI
Clayton Williams Energy
53mBoE (75% gas, 25% oil)
9.5 years
N/A
$662M
$735M ($10.65 gas)
Standardized Measure/Enterprise Value: 1.11x

APC
Anadarko Petroleum
3.4BBoE (54% gas, 46% oil)
15 years
4.5-6.5Bn BBoE
$26.6Bn
$29.3 Bn (YE prices of oil and gas)
Standardized Measure/Enterprise Value: 1.10x

BDE
Bois D’Arc
58.2 MBoE (64% gas, 36% oil)
9.7 years
1900 bcfe (347MBoe
$1.1Bn
$1.2Bn ($10 gas)
Standardized Measure/Enterprise Value: 1.09x

THX
Houston Exploration
157MBoE (92% gas, 8% oil) (no GoM)
10.0 years
1639bcfe (298MBoE)
$1.81Bn
$1.97Bn ($8.15 gas)
Standardized Measure/Enterprise Value: 1.08x

EPL
Energy Partners
59.3 MBoE (47% gas, 53% oil)
7.3 years
N/A
$1.22Bn
$1.26Bn ($10 gas)
Standardized Measure/Enterprise Value: 1.03x

ME
Mariner Energy
107 MBoE (68% gas, 32% oil)
5.9 years
380 bcfe
$2.17Bn
$2.2Bn ($10 gas)
Standardized Measure/Enterprise Value: 1.01x

APA
Apache Corp
2.1BBoE (43.5 gas, 46.5% oil)
11.8 years
N/A
$24.8Bn
$24.5Bn ($9.44 gas)
Standardized Measure/Enterprise Value: 0.99x

ATPG
ATP Oil & Gas
96 MBoE (59% gas, 41% oil)
10 years
42 prob – 63 MBoE pos
$1.89Bn
$1.86Bn ($10 gas)
Standardized Measure/Enterprise Value: 0.98x

EAC
Encore Acquisition Co
198 MBoE (24.5% gas, 75.5% oil) (low GoM)
17 years
285 MBoE
$1.94Bn
$1.9Bn ($9.44 gas)
Standardized Measure/Enterprise Value: 0.98x

PPP
Pogo Producing Co
340 MBoE (58% gas, 42% oil)
9.3 years
N/A
$4.68Bn
$4.56Bn ($8.15 gas)
Standardized Measure/Enterprise Value: 0.97x

HES
Hess Petroleum [refining & marketing: 33% of 05 income, E&P 67%]
1.07BBoE (35.3% gas, 64.7% oil) +50% own 1 refinery
9 years
2.4BBoE
$15.13Bn
$14.489Bn (YE prices of oil and gas)
Standardized Measure/Enterprise Value: 0.96x

XEC
Cimarex Energy Co.
254MBoE (72% gas, 28% oil)
8.0 years
N/A
$3.25Bn
$3.03Bn ($7.89 gas)
Standardized Measure/Enterprise Value: 0.93x

XTO
XTO Energy
1.51BBoE (83% gas, 17% oil)
22.8 years
12.7tcfe
(2.3BBoE)
$19.0Bn
$17.1Bn ($9.26 gas)
Standardized Measure/Enterprise Value: 0.90x

HEC
Harken Energy
7.7MBoE (19% gas, 81% oil)[82% undeveloped in Columbia]
20+ years (production under-developed)
N/A
$85.1M
$73.4M ($10 gas) (+$104M ad in Columbia undeveloped
Standardized Measure/Enterprise Value: 0.86x

NBL
Noble Energy
807 MBoE (65.4% gas, 34.6% oil)
11.5 years
490-1484MBoe
$10.29Bn
$8.77Bn ($8.59 US gas)
Standardized Measure/Enterprise Value: 0.85x

EPEX
Edge Petroleum
17.2 MBoE (80% gas, 20% oil)
6.2 years
N/A
$406.7M
$344M ($10 gas)
Standardized Measure/Enterprise Value: 0.85x

NFX
Newfield Exploration
360 MBoE (70% gas, 30% oil)
9.3 years
N/A
$5.98Bn
$5.05Bn
Standardized Measure/Enterprise Value: 0.84x

DNR
Denbury Resources
167MBOE (38% gas, 62% oil)
12.4 years
4.0tcfe or 728 MBoE
$3.82Bn
$3.215Bn (w/$10 gas, $61 oil)
Standardized Measure/Enterprise Value: 0.84x

TLM
Talisman Energy
1.64 BBoE (55% gas, 45% oil)
9.7 years
943MBoE
$21.72Bn
$18.2Bn ($10.87 gas)
Standardized Measure/Enterprise Value: 0.84x

BEXP
Brigham Exploration
30.4MBoE(85% gas, 15% oil)
10.2 years
809 bcfe (147MBoe
$403M
$322 ($9.40 gas)
Standardized Measure/Enterprise Value: 0.80x

BRY
Berry Petroleum
146 MBoE (60% heavy oil, 27% gas, 13% other oil & NGL)
15.4 years
N/A
$1.58Bn
$1.25Bn ($8 gas)($48 heavy oil)
Standardized Measure/Enterprise Value: 0.79x

FPP
Fieldpoint Petroleum
1.27 MBoE (26% gas, 74% oil)
10.3 years
N/A
$21.7M
$17.05M ($6.66 gas)
Standardized Measure/Enterprise Value: 0.79x

CRK
Comstock Resources
114MBoE (86% gas, 14% oil)
14.9 years
N/A
$1.37Bn
$1.08Bn
Standardized Measure/Enterprise Value: 0.79x

DNE
Dune Energy
4.9 MBoE (88.2% gas, 11.8% oil)
5.7 years
N/A
$125M
$99M ($9.49 gas)
Standardized Measure/Enterprise Value: 0.79x

PXP
Plains Exploration
401MBoE (11% gas, 89% oil)
17 years
650MBoE
$3.98Bn
$3.1Bn
Standardized Measure/Enterprise Value: 0.78x

RRC
Range Resources
255MBoE (80% gas, 20% oil)
15.3 years
5.9 tcfe
$4.37Bn
$3.38Bn
Standardized Measure/Enterprise Value: 0.77x

CHK
Chesapeake Energy
1.74BBoE (91% gas, 9% oil) (low GoM)
14.2 years
14.4tcfe - 2.5BBoE(90%+gas)
$20.76Bn
$15.97Bn ($8.76 gas)
Standardized Measure/Enterprise Value: 0.77x

SM
St. Mary’s Land Expl
145 MBoE (52.5% gas, 47.5% oil)
9.1 years
371MBoE (includes possible)
$2.24Bn
$1.7Bn ($10.08 gas)
Standardized Measure/Enterprise Value: 0.76x

XCO
Exco Resources
235 MBoE (pro-forma acq6/06)(90% gas, 10% oil)
17.1 years
127 MBoE(pro-forma)
$2.16Bn
$1.6Bn (pro-forma)($11 gas)
Standardized Measure/Enterprise Value: 0.74x

EOG
EOG Resources
1.11 BBoE (91% gas, 9% oil)
11.8 years
N/A
$16Bn
$11.7Bn ($8.45 gas)
Standardized Measure/Enterprise Value: 0.73x

ECA
Encana
2.96 BBoE (66.4% gas, 34.6% oil)
incl oil sands – 647 MBoE
N/A
6.5BBoE unbooked potential (50% gas)
pos oil mainly oil sands
$44.8Bn
$32.8Bn (includes proven oil sands)
Standardized Measure/Enterprise Value: 0.73x

LINE
Linn Energy
77.3 MBoE (60% gas, 40% oil)
30 years
N/A
$802.1M
$552.1M (pre-acq, 32 MBoE, $10 gas)
Standardized Measure/Enterprise Value: 0.69x

DVN
Devon Energy
2.1BBoE (64% gas, 36% oil)
10 years
3-12 BBoE Shl, GoM, Afrca, Chn Brazl
$34.7BN
$23.43 Bn
Standardized Measure/Enterprise Value: 0.68x

WTI
W&T Offshore
81.9 MBoE (44% gas, 56% oil)
6.9 years
93.5 prob, 114.3 MBoE pos
$2.35Bn
$1.6Bn ($10.15 gas)
Standardized Measure/Enterprise Value: 0.68x

PQ
PetroQuest Energy
130.9 bcfe (83% gas, 17% oil)
7.7 years
1086 bcfe
$708M
$483M ($8.61 gas)
Standardized Measure/Enterprise Value: 0.68x

GMXR
GMX Resources
27 MBoE -pred 47 MBoE 12/06 (93% gas, 7% oil)

604 bcfe prob 104 possible
$449M
$302.4M ($11.22 gas)
Standardized Measure/Enterprise Value: 0.67x

CNQ
Canadian Natural Resources
1.6 BBoE (30% gas, 70% oil) ex oil sands
16 years
687 MBoE ex oil sands
$30.0Bn
$18.5Bn ($9.44 gas)
Standardized Measure/Enterprise Value: 0.62x

OXY
Occidental Petroleum [E&P 92% of Inc]
2.66BBoE (22% gas, 78% oil)
12.9 years
N/A
$41.7Bn
$25.6Bn ($10 gas)
Standardized Measure/Enterprise Value: 0.61x

PVA
Penn Virginia [E&P: 52% 05 inc]
69MBoE (95% gas, 5% oil)
14 years (not incl coal assets)
109 bcfe – prob – 700 pos
$1.7Bn
$1.0Bn ($10 gas)
Standardized Measure/Enterprise Value: 0.59x

MMR
McMoRan Expl.
14 MBoE (49% gas, 51% oil) + possible future LNG facility
6.4 years
91MBoE
$715.5M
$383.1M ($10.37 gas)
Standardized Measure/Enterprise Value: 0.54x

PCZ
Petro-Canada [dnstrm:20% 05 Profit]
1.23 BBoE (30% gas, 70% oil)
8 years (ex oil sands
2P: 2.3 BBoE “other”: 5 BBoE
$22.7Bn
$12.2Bn ($10 gas) (ex oil sands)
Standardized Measure/Enterprise Value: 0.54x

CRED
Credo Petroleum
1.9 MBoE (82% gas)
9.7 years
N/A
$117M
$60M (only P-10 given, est.)($10gas)
Standardized Measure/Enterprise Value: 0.51x

AOG
Aurora Oil & Gas
108 bcfe (60% gas, 40% oil)
46 years (production ramping +)
2 tcfe (possible)
$325M
$152M ($9.89 gas)
Standardized Measure/Enterprise Value: 0.47x

GDP
Goodrich Petroleum
28.8MBoE (82.3% gas, 17.7% oil)
14 years
1254 bcfe (209MBoe
$902M
$410.6M ($10.50 gas)
Standardized Measure/Enterprise Value: 0.46x

CMT
Delta Petroleum
44.9 MBoE (67% gas, 33% oil)
18.7 years
N/A
$1.63Bn
$749.6M ($9.44 gas)
Standardized Measure/Enterprise Value: 0.46x

NXY
Nexen Incorporated [8% ownership of Syncrude (tar sands)]
795 MMBoE (62% gas, 38% oil) reserves exclude oil sands
11 years
(ex oil sands
835 MBoE
$17.8Bn
$8.0Bn (no tar sands) ($9.44 gas) (ex oil sands)
Standardized Measure/Enterprise Value: 0.45x

UPL
Ultra Petroleum
364MBoE (94% gas, 6% oil)
27 years
746 MBoE
$7.87Bn
$3.5Bn ($8.00 gas)
Standardized Measure/Enterprise Value: 0.44x

MUR
Murphy Oil Corp [Refining & Marketing: 52% 05 inc, E&P: 48% of 05 income]
220 MBoE (83% oil, 17% gas)
5.7 years
N/A
$9.94Bn
$4.2Bn ($10.44 gas)
Standardized Measure/Enterprise Value: 0.42x

PLLL
Parallel Petroleum
30 MBoE (9.06) (30% gas, 70% oil)
12 years
N/A
$851M
$361M ($8.60 gas)
Standardized Measure/Enterprise Value: 0.42x

KWK
Quicksilver Resources
203MBoE (92% gas, 8% oil)
21.7 years
2000bcfe (364MBoE)
$3.25Bn
$1.2Bn
Standardized Measure/Enterprise Value: 0.37x

CRZO
Carrizo Oil
25.1MBoE (68% gas, 32% oil)
15.6 years
N/A
$904M
$299.3M ($8 gas)
Standardized Measure/Enterprise Value: 0.33x

HAWK
Petrohawk Energy
73 MBoE [+6/06 aq KCS 175 MBOE] (60% gas, 40% oil)
5.4 years [13 years w/ KCS acquisition]
N/A
$2.41Bn
$742M [pre-acquisition]
Standardized Measure/Enterprise Value: 0.31x

SWN
Southwestern Energy
150 MBoE (94% gas, 6% oil)
13.4 years
N/A
$5.52Bn
$1.4Bn ($10.08 gas)
Standardized Measure/Enterprise Value: 0.25x

IMO
Imperial Oil
[includes oil sands segment]
888 MBoE (ex oil sands
(23% gas, 77% oil & NGL’s)
7.2 years (ex oil sands
N/A
$31.2Bn
$4.3Bn ($9.44 gas) (ex oil sands)
Standardized Measure/Enterprise Value: 0.14x

SU
Suncor Energy
[Oil Sands: 83% 05 oil production & 76% of Net Income]
1.5 BBoE (95% oil sands, 5% gas)
28 years
Prob: 862 MBoE (oilsands)
Total resource: 12 BBoE
$37.3Bn
$1.66Bn (year end prices, excludes oil sands)
Standardized Measure/Enterprise Value: 0.04x







US/EU Majors:

CVX
Chevron
[E&P: 83% 05 EBIT]
reserves exclude oil sands segment
Reserves: 10.2 BBoE (35% gas, 65% oil & NGL) (14% Kazak (TCO) 23% US
R/P: 15.5 years
Probable and Possible Reserves: N/A
Enterprise Value: $119.05Bn
Standardized Measure: $95.7Bn (12% at TCO -50% own Kazak) (05 YE prices of oil and Standardized Measure/Enterprise Value: 0.80x

COP
ConocoPhilips [E&P: 62.3% 05 inc, Refining & Marketing 30.8%]
Reserves ex oil sands segment
8.9 BBoE (36% gas, 64% oil & NGL’s)(29% oil in US, 23% Lukoil, 19% Venezuela)
13.6 years
N/A
$92.48Bn
$70.6Bn (YE prices of oil and gas)(13.8% standardized measure in Russia, 9.8% in Venezuela)
Standardized Measure/Enterprise Value: 0.76x

BP
BP PLC
[E&P: 80% 05 income, Refining & marketing: 20%]
18.0 BBoE (44.8% gas, 55.2% oil and NGL’s) (39% oil in US, 22% oil in Russia)
12.4 years
N/A
$241Bn
$128.2Bn ($9.21 gas)(47% St. Meas. In US, 0% Russia)
Standardized Measure/Enterprise Value: 0.53x

STO
Statoil (Norway)
[E&P: 92% 05 inc, marketing & manufacturing: 8%]
4.26 BBoE (67% gas, 33% oil)(81% in Norway)
8.9 years
N/A
$57.0Bn
$28.9Bn (YE prices of oil and gas) (58% standardized measure in Norway)
Standardized Measure/Enterprise Value: 0.51x

REP
Repsol YPF
[E&P: 53% of 05 income, Refining & Marketing 43.5%]
3.3 BBoE (52% gas, 48% oil)
7.9 years
N/A
$48.8Bn
$24.2Bn (56% in Argentina, 1.3% in Boliva)
Standardized Measure/Enterprise Value: 0.50x

E
Eni SPA
[E&P: 75% 05 EBIT, Refining & Marketing 11%]
6.8 BBoE (44% gas, 56% oil) [31% of reserves in North & West Africa]
8 years
N/A
$119.1Bn
$55.7Bn (05 YE prices of oil and gas)
Standardized Measure/Enterprise Value: 0.47x

NHY
Norsk Hydro ASA (Norway) [E&P: 77% 05 inc, Alum: 12%]
2.05BBoE (58% gas, 42% oil)
9.9 years
N/A
$29Bn
$13.3Bn (YE prices of oil and gas)
Standardized Measure/Enterprise Value: 0.46x

RDS-A; RDS-B
Royal Dutch Shell [E&P: 68% 05 income, Oil products: 31%]
11.24 BBoE (59% gas, 41% oil)
Excludes oil sands segment
25.6 years
N/A
$230Bn
$75.0Bn (39% standardized measure in US & EU)
Standardized Measure/Enterprise Value: 0.33x

TOT
Total (France)
[79% 05 income E&P, 16.8% ref & marketing]
9.92 BBoE (33.6% gas, 66.4% oil and NGL’s)
11.4 years
N/A
$170Bn
$49.4Bn (YE prices of oil and gas) (37% standardized measure in Africa)
Standardized Measure/Enterprise Value: 0.29x

XOM
ExxonMobile
[65% 05 income E&P, 22% ref & marketing]
13.37 BBoE (42% gas, 58% oil and NGL’s) reserves exclude oil sands
9.0 years
N/A
$392Bn
$99.2Bn (YE prices of oil and gas) (55% of standardized measure in US/Can/EU)
Standardized Measure/Enterprise Value: 0.25x







Foreign Majors & Independents

TNT
Tatneft (Tatarstan, Russia)
[E&P: 96% 05 Income]
6.113 BBoE (4% gas, 96% oil)
29.8 years
Prob: 2.32 BBoE, pos:411.3 MBoE
$9.4Bn
$17.1Bn (YE Russian Prices – pre-inc. tax?)
Standardized Measure/Enterprise Value: 1.82x

HNR
Harvest Natural Res. [US owned, based in Venezuela]
36 MBoE (100% oil & NGL’s)
4.0 years
$207M
$329M (does not include proposed taxes in Venezuela)
Standardized Measure/Enterprise Value: 1.57x

TMY
Transmeridian Expl [US owned, based in Kazakhstan]
72.9MBoE (100% oil) (4% developed)
N/A (production not initiated)
129MBoE
$591M
$761M ($40 oil)
Standardized Measure/Enterprise Value: 1.28x

PBR
Petrobras (Brazil)
[E&P: 90% 05 income]
11.775 BBoE (17% gas, 83% oil)
15.4 years
N/A
$108Bn
$109Bn (YE prices of oil and gas)
Standardized Measure/Enterprise Value: 1.01x

PTR
PetroChina
[E&P: 100% 05 income, Marketing: minimal inc Refining: loss]
19.56 BBoE (41% gas, 59% oil)
18.4 years
N/A
$198Bn
$175.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.88x

PZE
Petrobras Energia [Based in Argentina, 56% owned by Petrobras (Brazil)]
760 MMBoE (29% gas, 71% oil) (40% of reserves in Argentina, 35% in Venzula,2% in Bolivia)
12.2 years
N/A
$4.40Bn
20-F:$17.7Bn (does not include proposed taxes in Venezuela), est. $3.38Bn
Standardized Measure/Enterprise Value: 0.77x

CEO
China Ntnl Offshr Oil Co [E&P 100% 05 Income]
2.36 BBoE (68% oil)
5.6 years
N/A
$34.3Bn
$25.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.73x

LUKOY
Lukoil (Russia)
[E&P: 52% 05 income, Ref & marketing 47.5%, Chemicals 2%]
20.33 BBoE (20.8% gas, 79.2% oil)(98% in Russia & Caspian)
29.6 years
Prob: 12.3 BBoE, Pos: 6.04 BBoE
$80Bn
$54.7Bn (YE 05 Russian Prices)
Standardized Measure/Enterprise Value: 0.68x

SNP
Sinopec (China)
[E&P: 70% 05 income, Marketing 15%, Chem: Refin: 15% loss]
3.362 BBoE (14.7% gas, 85.3% oil)
10.6 years
N/A
$81Bn
$44.1Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.54x

EGY
Vaalco Energy [US owned, based in Gabon]
7.8 MBoE (99% oil) [99% in Gabon]
4.8 years
N/A
$428M
$161M ($56 oil) [note: 15% royalty to Gabon]
Standardized Measure/Enterprise Value: 0.38x

SSL
Sasol
[Synfuels: 52% 05 inc, Chemicals: 17.3%, refining: 13.1%, oil&gas:6.4%]
245 MBoE (93% gas, 7% oil)(excludes coal res)(93% in Mozambque
32.7 years
N/A
$24.0Bn
$4.0Bn
Standardized Measure/Enterprise Value: 0.17x

OGZPY
Gazprom (Russia)
130 BBoE (90+% gas)
N/A
N/A
$260Bn
n/a
Standardized Measure/Enterprise Value: n/a

ONGS
Oil and Natural Gas Corp (India)
4.5 BBoE
N/A
N/A
$40Bn
n/a
Standardized Measure/Enterprise Value: n/a

(1): Standardized Measure is defined by FASB 69 http://www.fasb.org/st/summary/stsum69.shtml as future cash flows from proven oil and gas properties assuming constant prices in future years, minus development costs, discounted at 10%. PV-10 does not include interest cost from debt, new exploration costs, hedging, and general and administrative costs.