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Oil and Natural Gas Markets The Intersection of Greed and Fear

Unocal Gulf Coast Alumni Club Riverbend Country Club February 12, 2009 Dave Pursell. Oil and Natural Gas Markets The Intersection of Greed and Fear. Important disclaimer on page 30 of this document. Oil Price Nymex Current Month. 2. Natural Gas 12 Month Strip. 3.

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Oil and Natural Gas Markets The Intersection of Greed and Fear

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  1. Unocal Gulf Coast Alumni Club Riverbend Country Club February 12, 2009 Dave Pursell Oil and Natural Gas MarketsThe Intersection of Greed and Fear Important disclaimer on page 30 of this document.

  2. Oil Price Nymex Current Month 2

  3. Natural Gas 12 Month Strip 3

  4. Futures – Are They Accurate? "That's mathematics, son.  You can argue with me, but you can't argue with figures.“ Foghorn Leghorn

  5. Commodities (before peak) 5

  6. Commodities (to current) 6

  7. General Thoughts • Crude Oil • Demand problem • 1998, 1980 or 1930? • Natural Gas • Demand AND supply problem • Demand – when will to recover? (see oil comments) • Supply – rig count falling…fast! 7

  8. Onshore Supply Growth A ~42% (400) rigs activity decline in 2001 impacted supply growth in 2002: 2000 42.8 bcf/day 2001 43.9 bcf/day 2002 43.6 bcf/day 6% onshore supply growth with ~flat rig count from early 2006 – early 2008 – see our March 2007 report “The Yin and Yang of Natural Gas…” B B A Source: Baker Hughes, EIA, TPH Estimates The day we stop lookin', Charlie, is the day we die. Lt Col Frank Slade – Scent of a Woman

  9. GOM Production “I can hardly remember how I built my bankroll, but I can't stop thinking about the way I lost it." Mike….Rounders 9

  10. Shale Plays – Arresting Decade-Long Trend • Historical trend was more wells = lower production per well (marginal wells drilled last). • Explosion of unconventional gas shale plays with strong/high first year production reversed trend in 2007 (and almost certainly 2008) • Average shale well first year production is >1mmcf/day (Barnett, Woodford, Fayetteville). Average 2001 – 2004 well productivity <1mmcf/day. • Note: not enough Haynesville wells to impact the average…yet. Source: DOE and TPH “If I had it to do all over again, I'd still hit that shot.” Roy McAvoy Tin Cup

  11. Rig Count and Production Growth Relationship • March 2007 Yin and Yang Report details rig count and production growth relationship. • Flat production at ~1,100 gas-directed rigs. • 2008 will average 1,500 gas rigs. Activity needs to fall 400 rigs to flatten production. • With demand weak, it may take dropping several hundred more rigs to balance the market. • Graph illustrates increasing impact of a larger rig count drop. The first traunch of rigs “laid down” is less impactful than subsequent rigs. Source: TPH

  12. Got Shale? • Rationale – Transition in Public Company E&P Mindset • 10 years ago - hard to find, but easy to produce • Exploration focus • Seismic / Geology driven • Now - easy to find, but hard to produce • Shale plays – going to the source rock/formations • Presence of gas not a big risk • Engineering risk increase 12

  13. Resource Triangle Source: Holditch

  14. Marcellus Shale “According to the map we've only gone 4 inches.” Harry…Dumb and Dumber 14

  15. Haynesville Shale Resource Summary The only thing better than a crawfish dinner, is five crawfish dinners. Coach Red Beaulieu The Waterboy 15

  16. Shale Comparison Source: CHK "Ah! It's a profit deal! Takes the pressure off! Navin Johnson: The Jerk 16

  17. Basin Breakeven Analysis 17

  18. Natural Gas – Power Generation US GDP and Total Power Generation Load US Natural Gas Demand driven by electricity sector expansion and growth 18

  19. Industrial Demand Components Source: DOE • Uncertain economic outlook creates uncertainty when forecasting natural gas demand as industrial sector accounts for ~30% of total US gas consumed. • Weak automotive, chemical and steel outlook will likely result in lower industrial demand in 2009. • US industrial sector accounts for 20% of total electricity output. Weakness in the industrial sector will have spill-over impact into US power sector, magnifying the natural gas demand impact.

  20. Capital Market Issues • E&P companies can’t / won’t outspend cash flow • Raise Equity….nope • Debt…good luck • Sell assets…not so much • Cut spending/rig count…most likely • Pipeline companies • How to fund new pipes? • Basis issues harder to solve via more pipes • Need to solve via lower production in near term

  21. Change! Gas Market Implications • Carbon Tax (er….Legislation) is Coming • Natural Gas should benefit • Lower carbon than oil and coal • Drilling • Wait and see • Magnitude of Tax? • Skeptic says taxing fossil fuels last great gov’t revenue source • Demand side management • Expect legislation to encourage lower consumption "Oh, uh, there won't be any money, but when you die, on your deathbed, you will receive total consciousness." So I got that goin' for me, which is nice. Caddyshack - Carl Spackler

  22. Crude Oil • Demand • Global demand visibility poor • Crude markets anemic until picture clears • US demand weak – may improve with $2/gal gasoline • Rest of world - ?? • Non-OPEC supply growth • Base Case = low growth • Financial crisis = emerging market economic issues (Russia, Mexico, Venezuela etc.) = potential decline in 2009. • Market ignores until visibility on demand restored • Long Term pricing = set by marginal cost of consumption? 22

  23. Too….Much….Oil (or not enough demand!)

  24. US Gasoline Demand – Long Term

  25. Demand Is THE Cycle Killer Global Oil Demand Growth

  26. Cushing OK – The Most Important Barrels 26

  27. Global Oil Consumption Max – Road Warrior I'm just here for the gasoline.

  28. Non-OPEC Supply • Non-OPEC supply poised to decline in 2009. • Sluggish base line growth, low oil price and volatile capital markets combine for tough sledding for oil production. • Components of 2009/2010 decline include: • Mexico – continues. • Russia – decline after growing continuously since 1998. • North Sea declines continue. Source: IEA and TPH

  29. Conclusion Formula for success: “Rise early, work hard, strike oil.” J. Paul Getty Formula for success - 2008: “Rise early, work hard, buy acreage.” Anonymous landman Formula for success - 2009: “Rise early, work hard, survive.” Anonymous landman

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  31. Tudor, Pickering, Holt & Co., LLC is an integrated energy investment and merchant banking boutique, providing high quality advice and services to institutional and corporate clients. Through the company’s broker-dealer, Tudor, Pickering, Holt & Co. Securities, Inc., the company offers securities and investment banking services to the energy community. The firm, headquartered in Houston, Texas, was formed through the 2007 combination of Tudor Capital and Pickering Energy Partners, Inc. and today has approximately 70 employees. Pickering Energy Partners was founded in 2004 and has quickly grown to be one of the most highly regarded equity research, sales and trading firms covering the upstream, midstream and oilfield service sectors. This expertise was complemented by the addition of Tudor´s investment banking team, which provides focused advisory and financing services to its clients. Contact Us Houston (Research, Sales and Trading): 713-333-2960 Houston (Investment Banking): 713-333-7100 Denver (Sales): 303-300-1902 Denver (Investment Banking): 303-300-1905 www.TudorPickering.com 31

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