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Raymond James Energy Group

Raymond James Energy Group. How Do You Solve an Oil “Addiction”?... Higher Prices!. Marshall.Adkins@RaymondJames.com Jim.Rollyson@RaymondJames.com John.Tasdemir@RaymondJames.com Darren.Horowitz@RaymondJames.com. Raymond James Oilservice Group (800) 945-6275 . February 2006.

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Raymond James Energy Group

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  1. Raymond James Energy Group How Do You Solve an Oil “Addiction”?... Higher Prices! Marshall.Adkins@RaymondJames.com Jim.Rollyson@RaymondJames.com John.Tasdemir@RaymondJames.com Darren.Horowitz@RaymondJames.com Raymond James Oilservice Group (800) 945-6275 February 2006

  2. What is Your Time Frame? • Bearish Short Term (downgraded group on 1/26/06) • Oil inventories above 5-year highs followed by large inventory builds March-May. • Warm winter has increased natural gas risk • Oil & gas fall until OPEC cuts • Bullish Long Term • 6 – 18 month outlook bullish for oil • Supply interruption wildcards (Iran) more visible • Natural gas “resets” in October 2

  3. Why is This a Long-Term Upswing? • Oil supply bubble is gone • Unprecedented oil demand growth (China transition) • Non-OPEC supply growth slowing (next 5 years) • Minimal oil demand destruction with higher prices • U.S. natural gas supply still falling 3

  4. The Oil Bubble is Gone! 4

  5. Oil Consumption Increases Fastest During Early Industrialization 5

  6. Russian Oil Production Growth Slowing 6

  7. Russian Oil Production Growth Slowing 7

  8. Mature Areas Must Drill Deeper 8

  9. Searching For Smaller Reserves 9

  10. How Will More Rigs Affect Production? 10

  11. Why Were We Worried About 2Q Oil?(RJ Q3 2005 Model) 11

  12. Why Are We More Worried Today? 12

  13. Why the 2Q Oil Problem?(Demand Falls in 2Q) 13

  14. OPEC Must Cut! 14

  15. How Low Could Oil Go?(OPEC Will Defend ±$50 Oil Prices) • Rising Saudi infrastructure costs • Higher shipping costs • Widening differential for poor quality crudes • Devaluation of the U.S. $ • Less OPEC purchasing power • Cheaper international oil prices • OPEC wants highest price w/o demand destruction 15

  16. Discounts on Heavy Oil Have Widened 16

  17. Dollar Devaluation Raises OPEC Target 17

  18. OPEC Production Cuts Support Oil Prices 18

  19. We Are Modeling a Q2 Pullback in Oil 19

  20. Where Could We Be Wrong? 20

  21. Iran Has Changed the Game! • Iran has re-opened nuclear efforts • New leader not backing down • U.S. & Israel will NOT let Iran get nuclear weapons • Iran’s 3.9 million Bpd is at risk • Situation should come to a head in 6 - 18 months 21

  22. What are the Odds? PossibilityProbability Iran backs down voluntarily 20% UN issues sanctions & acts 20% US/NATO send air strikes 20% Israel acts 20% Something else happens??? 20% 22

  23. Oil Will Drive Gas Prices(Within a +/- 6:1 Ratio With Crude) 23

  24. Warm Weather has Destroyed + 400 Bcf. of Winter Gas Demand (vs. normal) 24

  25. Where Will Winter Storage End? 25

  26. What Will This Mean For The Summer? 26

  27. Long Term, U.S. Gas Will Be Linked to Oil • Near term, gas trades 8:1 with crude • Weather drives short-term moves • Falling supply will ultimately drive prices higher • RJ estimate: 2006 = $9.31/Mcf 2007 = $10.00/Mcf • Could $50 oil mean $6.00 gas? 27

  28. Conclusion • Near-term oil & gas price risk • Longer-term bullish secular move is still intact • Oil should see higher highs and higher lows • Gas trades 8:1 through summer • Supply interruption wildcards more visable 28

  29. Disclaimer • Important Investor Disclosures. • Stock Ratings: Within our four-tiered rating system, Strong Buy means that the stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P 500 over the next six months; Outperform means the stock is expected to appreciate and outperform the S&P 500 over the next 12 months; Market Perform means the stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities; and Underperform means the stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. • Out of approximately 519 stocks in the Raymond James coverage universe, 52% have Strong Buy or Outperform ratings, 35% are rated Market Perform and 12% are rated Underperform. Within those rating categories, 25% of the Strong Buy- or Outperform-rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 17% of the Market Perform-rated companies are or have been clients and 9% of the Underperform-rated companies are or have been clients. • Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including the analyst’s success in rating stocks versus an industry index, support effectiveness to the retail and institutional sales forces, traders, and investment bankers, institutional research votes, as well as overall productivity and revenue generated in covered stocks. • Raymond James Relationships: Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years. • RJA or its officers, employees, or affiliates may (1) currently own shares, options, rights or warrants and/or (2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report's conclusions.  • Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at www.rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see www.rjf.com for office locations) or by sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716. • Additional information is available on request. This document may not be reprinted without permission. 29

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