Crude Oil: The Forgotten Factor in Domestic E&P?

1. E Investment Bankers nergy to the Industry Crude Oil:The Forgotten Factor in Domestic E&P? IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer SIMMONS & COMPANY INTERNATIONAL

2. Discussion roadmap • A 30,000’ look at domestic crude oil • The incremental nature of domestic crude oil • The deepwater factor • The independents’ presence on the domestic oil front • The distraction (and attraction) of natural gas • Domestic oil – mostly a niche E&P strategy • Implications and thoughts on the future

3. U.S. crude oil production peaked in 1972 • 5.7 MMBbl/d in 2003 • vs. 9.4 MMBbl/d peak in 1972 • 40% drop from peak • Domestic production satisfies 28% of current demand • vs. 57% in 1972 Source: DOE/EIA and Simmons & Company Intl. analysis

4. U.S. oil production is an incremental business • 520,000 producing oil wells • 11 Bbl/d per-well average Right Scale Left Scale Source: DOE/EIA and Simmons & Company Intl. analysis

5. Key states are well past their prime • Alaska & California: • Politically challenging • Costs always an issue • Texas & Louisiana: • Gas is king • Key oil producing properties still in the majors’ hands Source: DOE/EIA and Simmons & Company Intl. analysis

6. Most domestic giants are OLD • Top 10 = 25% of total production, 26% of total proved reserves • Top 50 = 47% of production, 44% of reserves • Top 100 = 57% of production, 53% of reserves Source: DOE/EIA.

7. Crude oil is secondary on the domestic drilling front • Current • Total rig count = 1,311 • Oil-directed rigs = 201 (15% of total) • 1999 Trough • Total rig count = 816 • Oil-directed rigs = 169 (21% of total) • CAGR (since 12/99) • Gas rigs = +10%/year • Oil rigs = +3%/year Sources: Smith International and Simmons & Company Intl. analysis

8. Offshore, particularly deepwater, has provided some recent stability, but… • Offshore production now accounts for 36% of total vs. 15% in 1990 • Offshore volumes have grown 5%/year since the 1990 trough • Onshore production has declined by 4%/year over the same period Sources: DOE/EIA and Simmons & Company Intl. analysis

9. …deepwater drilling activity has ebbed, and… • Majors operating 12 rigs in deepwater GOM vs. mid-’01 peak of 27 • Mid-cap independents operating 6 rigs vs. mid’01 peak of 9 • Total deepwater GOM rig count of 21 rigs =57% of 2001 peak (37 rigs) Sources: Smith International and Simmons & Company Intl. analysis

10. …the number of imminent lease expirations is staggering Deepwater Lease Expirations: 2005-2012 • 2005 = 300 • 2006 = 800 • 2007 = 1,200 • 2008 = 800 • 2009 = 175 Source: Pioneer Natural Resources Lease Expirations By Year

11. Majors dominate the crude oil landscape “Top 10” - 2003 Domestic Oil Production Statistics • Crude oil production relatively concentrated • Dominated by the majors, legacy integrateds • Only one legacy independent among the Top 10 domestic oil producers Crude Oil Top 10 Source: DOE/EIA.

12. Independents more of a force in natural gas “Top 10” - 2003 Domestic Gas Production Statistics • Natural gas production relatively fragmented • Although majors remain dominant, independents are prominent players Natural Gas Top 10 Source: DOE/EIA.

13. Crude oil vs. natural gas – key factor comparison • Crude oil development is: • Legacy asset dependent • Infill drilling plus workovers • Longer cycle time projects • Multiple recovery phases • More facility intensive • Inherently higher cost • Harder to monetize • More technically complex • Natural gas development is: • Acreage dependent • Primarily infill drilling • Shorter cycle time projects • Primary recovery only • Less facility intensive • Inherently lower cost • Easier to monetize • More technically straightforward Bottom line: Natural gas has a lower “hassle factor” than crude oil

14. New gas well returns are compelling, and… • Key advantages • Shorter cycle time…NPV acceleration • Independents more likely to use NYMEX strip price case as basis for gas wells than oil projects • After-tax IRRs exceed 40% on current prices Sources: Dwights/PI and Simmons & Company Intl. analysis

15. …maintaining domestic gas production is a resource intensive proposition • Gas-directed rig count up 10%/year since 1990 • U.S. wellhead gas production essentially flat over same period • 2004 decline = 2%-3% vs. 2003, as indicated by public company production data Sources: DOE/EIA and Baker Hughes..

16. An oil niche can be a winner…DNR case example • CO2 EOR model concentrated in Mississippi • Integrated, monopoly position • Competitively insulated • DNR owns the sole CO2 source • Predictable, long-term growth less dependent on M&A, regional rig competition Source: Bloomberg

17. Implications & thoughts on the future • Domestic crude oil production likely in permanent structural decline • Onshore giants old & declining and many legacy assets remain in the majors control • Deepwater offers the most promise, but remains a scale players game • Natural gas acreage, projects provide more compelling opportunities to smaller, more “ad hoc” oriented independents • Niche, oil-focused strategies have proven successful, but are likely to remain the E&P exception

18. E Investment Bankers nergy to the Industry IPAA Mid-Year Meeting St. Francis Hotel – San Francisco June 16, 2005 Mark Meyer SIMMONS & COMPANY INTERNATIONAL