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A&D Market Update Presented to MOGA Adrian Goodisman Managing Director May 18, 2006.

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Presentation on theme: "A&D Market Update Presented to MOGA Adrian Goodisman Managing Director May 18, 2006."— Presentation transcript:

1 A&D Market Update Presented to MOGA Adrian Goodisman Managing Director May 18, 2006

2 1 Agenda Scotia Waterous is pleased to have the opportunity to present its thoughts on the national acquisition and divestiture market. Scotia Waterous Introduction U.S. A&D Market Update Onshore Case Study

3 Scotia Waterous Introduction

4 3 Leading Upstream Focused M&A Firm in the World  Global offices: Houston, Denver, Calgary, London, Buenos Aires, Singapore Unrivalled Market Intelligence  Conducting 50+ mandates per year globally  Selling over $500 million/month in oil and gas transactions  Proprietary databases on global transactions and oil and gas companies Most Comprehensive Technical Capabilities and Broadest Relationships  75 + staff world wide  Engineers, Geologists, Geophysicists and Investment Banking backgrounds  Advised 23 of the 25 largest oil and gas companies in the world over past 18 months, as well as many smaller private and public companies  Access to senior management on several continents In 2005 Scotiabank, through its Investment Banking subsidiary Scotia Capital, acquired Waterous & Co. to create a full-service upstream M&A firm.  Scotia Waterous combines the engineering and geoscience technical knowledge of Waterous with the capital markets knowledge and financing capability of Scotia Capital  Full service M&A advisory services covering technical analysis of assets, financial analysis, financing, and execution strategy Scotiabank Quick Facts  Canada’s most international bank and second largest bank  Maintained energy lending office in Houston since 1962  Currently banking over 30 U.S. E&P clients Summary Scotia Waterous Introduction

5 4 Scotia Waterous Worldwide Activity Since January 2005, Scotia Waterous has offered over $20 billion globally in oil and gas companies and assets, including over $11 billion in North America. Global A&D Trends

6 5 Recent U.S. Advisory Mandates May 2005 Exclusive Financial Advisor Advised on divestiture to Pecos Production Company $200,500,000 for June 2005 Exclusive Financial Advisor Advised on corporate sale to Everlast Energy LLC Undisclosed for October 2005 Exclusive Financial Advisor Advised on divestiture to Permian and Mid-Continent Kerr-McGee Corporation $104,000,000 Encore Acquisition Company Scotia Waterous Introduction Since January 2005, Scotia Waterous has advised on approximately $4.0 billion in oil and gas assets in the United States.

7 U.S. A&D Market Update

8 7 Commodity Price and Capital NYMEX Henry Hub 1 NYMEX WTI Start of 4Q/05 Start of 1Q/05 Start of 2Q/06 Current Strip Months Forward NYMEX Henry Hub Natural Gas ($/MMBtu) Current Strip May 8, 2006 NYMEX WTI Crude Oil ($/bbl) Months Forward Start of 4Q/05 Start of 1Q/05 Start of 2Q/06 Current Strip Current Strip May 8, 2006 Excess Cash Flow 2005 Op Costs G&A Int. Exp. Capex Excess CF Cash Flow Leverage Net Debt/EBITDA (x) Majors Large Cap Mid Cap Mid Cap Small Cap Small Cap Note: (1) Natural gas futures have been “smoothed” to mitigate the impact of seasonality. Source: Scotia Waterous, Bloomberg. Strong commodity prices, especially oil, have resulted in substantial cash flow, creating additional buying power for most E&P companies. U.S. A&D Market Update

9 8 Cash Flow vs. Asset Supply ($ Billions) Average Yearly Spot Cash Flow Asset Supply Asset Supply NYMEX Henry Hub ($/MMBtu) Note: (1) Cash flow figures represent public independents. Source: Scotia Waterous, Bloomberg. While asset supply has increased over the past few years, it is not nearly enough to satisfy demand generated by the rapid increase in industry cash flow. U.S. A&D Market Update

10 9 U.S. Quarterly Transaction Trends U.S. Asset Transactions Transaction Value – Gas Transaction Value – Oil Transaction Value – Undisclosed Transactions (#) Transaction Value ($MM) Transactions (#) U.S. A&D Market Update Source: Scotia Waterous, J.S. Herold. Recent transaction supply value increased due to select large scale divestitures. The number of transactions fluctuates due to a mixture of factors, including high commodity prices, corporate growth targets and retention of bottom tier assets. 2-year Quarterly Average ~$4,000MM 4-year Quarterly Average ~$1,500MM

11 10 Supply/Demand Imbalance – Buyer Profile U.S. Market Segmentation by Asset Value Hunt Petr. Merit Celero Apache XTO YTD 2006 (1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous. Traditionally, Large Caps have been the dominant buyers. However, W&T’s $1.34 billion acquisition of Kerr-McGee’s Gulf of Mexico assets have made Mid Caps a close second in YTD Whiting Transactions by Company Category as % of Total Transaction Value U.S. A&D Market Update Chesapeake/Undisclosed Marubeni/Pioneer W&T/Kerr-McGee LCX Acq’n TXOK Black Stone Oxy Statoil XTO Apache Burlington

12 11 Supply/Demand Imbalance – Seller Profile U.S. Market Segmentation by Asset Value Transactions by Company Category as % of Total Transaction Value Anadarko Pioneer Devon EnCana Kerr-McGee (1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous. Large caps became the leading sellers in 2005 and YTD 2006, when both Pioneer and Kerr- McGee divested their Gulf of Mexico assets. Privates came second during the same periods. ExxonMobil Amerada Total Shell ExxonMobil Chevron YTD 2006 Marubeni/Pioneer W&T/Kerr-McGee Anschutz Celero Winwell SG Interests LLOG CrownQuest Chesapeake/Undisclosed U.S. A&D Market Update

13 12 Proved Reserve Valuations 2Q 2005 – 1Q 2006 (1)Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q Liquids converted at 6:1. Source: Scotia Waterous $1.64/Mcfe $2.44/Mcfe $1.85/Mcfe $1.94/Mcfe $1.53/Mcfe $1.49/Mcfe $1.42/Mcfe $2.92/Mcfe $1.99/Mcfe U.S. A&D Market Update

14 13 Production Valuations 2Q 2005 – 1Q 2006 (1)Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q Liquids converted at 6:1. Source: Scotia Waterous $13,230 Mcfe/d $9,228 Mcfe/d $10,929 Mcfe/d $5,923 Mcfe/d $7,132 Mcfe/d $11,052 Mcfe/d $9,501 Mcfe/d $8,045 Mcfe/d $4,573 Mcfe/d U.S. A&D Market Update

15 14 Selling Earlier in the Cycle – Overview Selling within the Asset Life Cycle 0% 30% 50% 70% 100% % of Asset Developed Production/Value Development Plan Potential Downside Sell or Grow Decision Point Today Sell or Grow Decision Point 1-2 Years Ago U.S. A&D Market Update Source: Scotia Waterous In response to buyers’ eagerness to acquire assets with significant “running room,” sellers have started bringing their assets to market much earlier.

16 Kerr-McGee Case Study

17 16 Summary The marketing process (October 2005) for the Kerr-McGee Asset Divestiture Program brought in a number of aggressive buyers willing to pay substantial value for unexploited upside Offering characteristics  ~ 7,345 boe/d (~ 56% oil)  ~ 40,800 Mboe (~ 49% oil) Bidder profile  Interest from a wide variety of domestic producers including mid-caps, small-caps, pipeline, privates, private equity, and international firms Transaction parameters (1)  Approximate overall sales price $400MM  $52,553/boe/d  $9.46/boe (1) Reserve and production figures based on Kerr-McGee internal estimates Kerr-McGee Case Study

18 17 Offering Highlights The Kerr-McGee divestiture presented an opportunity to acquire 5 unique packages including Permian Basin, Mid-Continent, South Texas, Rockies, and the Gulf Coast. Kerr-McGee Case Study

19 18 Participation Profile – Overall Offering Overview of Process Bidders - New Entrants vs. Existing Producers CAs by Size Category Bidders - Public vs. Private Scotia Waterous generated significant interest in the offering, receiving over 120 CAs from a mix of companies including, pipelines, internationals, and Canadian trusts 90 1,018 Source: Scotia Waterous Kerr-McGee Case Study

20 19 Asset Overview - Permian Area Permian Area Overview Kerr-McGee’s West Texas assets contain legacy Permian Basin fields with classic long life waterfloods with potential for CO2 tertiary floods in the future 1Q 2005 net sales of 809 BOE/day 1Q 2005 cash flow of $2 MM Located in Andrews, Howard, and Cochran Counties, Texas Legacy West Texas production  San Andres waterfloods in Levelland and Slaughter Fields  Queen waterfloods in McFarland Field  Devonian production in Hutex Field  Wolfcamp production in Nolley Field Upside potential:  Optimization of waterflood operations  Conversion of waterflood to WAG CO2 floods in San Andres waterflood units  Installation of surfactant flood in Nolley Kerr-McGee Case Study

21 20 Asset Overview - Mid-Continent Area Mid-Continent Area Overview Kerr-McGee’s Mid-Continent assets in Anadarko Basin contain three long-life waterflood units with predictable and stable production decline rates. 1Q 2005 net sales of 615 BOE/day  All properties Kerr-McGee operated 1Q 2005 cash flow of $1.5 MM Located in Canadian, Woods, and Grady Counties, Oklahoma Properties include:  Oakdale Field – Cottage Grove sand waterflood  Calumet Field – Redfork sand waterflood  Rush Springs SW – Medrano sand waterflood Upside potential:  Improved recovery factors in waterfloods  Expansion of waterflood areas Kerr-McGee Case Study

22 21 Permian & Anadarko Basins Transaction Parameters In October 2005, Encore Acquisition Company announced the acquisition of Permian Basin and Anadarko Basin assets for $104 MM Combined TP reserves of 6.2 MMboe (1) Cash Flow (2)  2005A/F:7.3 (x) Production (1)  $80,000/boe/d TP Unit Value (1)  $16.77/boe (1) Based on EAC press release (2) Based on Kerr-McGee internal estimates Kerr-McGee Case Study

23 22 Asset Overview - South Texas South Texas Overview Kerr-McGee’s South Texas Properties make up the majority of the production and value of the Offering Estimated net sales of 10 MMcfe/day (1)  33% of Offering production Estimated TP reserves of 88 Bcfe (75% gas) (1) 1Q 2005 cash flow of $6.5 MM Located in Hidalgo, Kleberg, Webb and Starr Counties, Texas  All Kerr-McGee operated properties Complex, highly faulted structural and stratigraphic traps  Rincon – Frio and Vicksburg production  TCB – Frio and Vicksburg production  San Carlos - Frio production  Vaquillas Ranch – Lobo production Multiple drilling and recompletion locations identified Notes: 1. Based on Houston Exploration Company press release Kerr-McGee Case Study

24 23 South Texas Transaction Parameters Houston Exploration Company (THX) announced the acquisition of South Texas assets for $163MM Cash Flow (1)  2005A/F:5.3 (x) Production (2)  $16,270/Mcfe/d TP Unit Value (2)  $1.85/Mcfe (1) Based on Kerr-McGee internal estimates (2) Based on THX press release Kerr-McGee Case Study

25 24 Conclusions Scotia Waterous was pleased to have had the opportunity to present its thoughts on the national and global acquisition and divestiture market. Supply is being driven by sellers believing they can achieve high valuations as well as portfolio clean-ups  Majors are/will still be selling assets (e.g. Chevron, ConocoPhillips)  Corporate consolidates will continue and lead to non-core asset sales (e.g. Petrohawk)  Privates and Private equity backed companies will continue to turn their assets Demand is being driven by well financed buyers that lack organic growth, as well as an abundance of cash in the market place  Many buyers stock prices are high providing an attractive currency to use in acquisitions  Private equity looking to invest in the upstream is abundant  New money is looking to do invest in the upstream industry Record oil prices, along with an aggressive long term outlook for gas prices, along with record available private equity, along with limited supply in the industry, will continue to lead to record prices being paid for assets/companies??? International companies (e.g. Canadian Royalty Trusts, Asians) are increasingly taking a more active interest in U.S. assets/companies Global A&D Trends

26 25


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