1) Natural Gas and Oil derivation 2) Aluminum Extraction and Production Finance & Investment Club Materials Sector Summer 2012 Stafani Wan INDUSTRY DEFINITIONS

2 Industry Definition – Natural Gas and Oil Derivation  Firms in this industry engaged in development and harvesting of natural gas and natural gas liquids (NGLs) in fields and basins found mainly in North America  These companies derive revenue through servicing mid stream companies, utility companies and industrial users; and NGLs to natural gas processors both domestically and abroad Concho Resources, Inc. (NYSE: CXO) Pioneer Natural Resources Corporation (NYSE: PXD) Noble Energy, Inc. (NYSE: NBL) SM Energy Company (NYSE: SM) Range Resources Corporation (NYSE: RRC) Continental Resources, Inc. (NYSE: CLR)

3 Revenue Generation Flow Acquire Land Geophysical & Geological Evaluation Geophysical & Geological Evaluation Exploratory Drilling Exploratory Drilling Obtain Crude Oil Harvest Natural Gas Exploration Hydraulic Fracturing End Customers Transport Crude Oil Transport Crude Oil Gather Natural Gas Gather Natural Gas Pipelines, Trucks & Rail Processing Plants e.g. ConocoPhillips, Suncor Energy, Dow Chemical Co

Revenue Generation By Operating Segments

5 Industry Summary Materials $ B (100%) Oil & Gas $132450B (64.43%) Oil & Gas Exploration and Production $63.9B (0.0311%) Sub-Sector Breakdown By 2011 Revenue ($mm) Industry Breakdown by Market Capital ($B) CXO1,739,967,000 PXD2,786,600,000 NBL3,763,000,000 CLR1,649,789,000 RRC1,218,656,000 SM1,603,318,000

6 Trend II: Increasing exploration expense and total proved reserves Increasing exploration expense indicate more resource allocated in area Exploration expense increasing with average CAGR of 31.81% Resulting in proved reserves increasing with average CAGR of 38.85% Increased reserves are part of future production volumes, shows positivity CAGR: 31.81% CAGR: 38.85%

7 Trend II: Decrease in prices leads to increase domestic demand especially in electric power According to the Energy Information Administration(EIA), natural gas prices is decreasing with an average CAGR of 6.2% Natural gas consumption data published by EIA shows overall increase with CAGR of 2.1% Largest increase in consumption came from electric power generation, with CAGR of 4.1% Increases reflected in industry revenue growth, shows CAGR of 13.9%

8 Trend III: Technological advancements with horizontal drilling allows greater productivity by unlocking new areas On land, reduces area damaged by drilling operations; On sea, allows multiple wells to be drilled from single platform Areas previously inaccessible by vertical drilling e.g. below buildings, under roads, now accessible Costs can total to about times that of vertical well 1 Under conditions of low matrix permeability in rocks or obstruction by water aquifers, horizontal drilling capable of producing 2.5 – 7 times rate of vertical wells 1 Study results reported by North Dakota Department for mineral resource, under the state government

9 Risks Increased government regulations Require extensive efforts to ensure compliance and incremental compliance costs Additional regulatory review results in longer development cycle time Extreme Weather Conditions Hurricanes, tropical storms, extreme winters may affect harvesting of gas Transportation Availability and Infrastructure marketability gas production depends on the availability, proximity and capacity of pipeline Price and availability of alternative fuel sources Natural gas serves as a close substitute for many other energy sources, such as coal Increase in supply and decrease in price of energy substitutes will erode competitive edge

10 Valuations High $38, Low $10, Median $17, Mean $22, Symbol Market Cap (B) Stock Price (31/8/11)EPSP/E Net Debt/ EBITDA Return on Equity EBITDA Margin Operating Income /Mboe SM3.08$ % x16.07%62.50$12, CXO9.36$ % x20.44%76.09$38, RRC10.59$ % x2.51%58.44$10, PXD11.98$ % x17.05%61.93$19, CLR13.4$ % x24.40%75.11$37, NBL15.63$ % x6.42%63.55$16,636.56

11 Cross-Sectional Analysis

12 Conclusion and Recommendation Within the subsector, trends reflect that: 1.Increased reserves indicate positive future production outlook 2.Low prices spurs demand and increases popularity of natural gas as an energy substitute The oil production and exploration industry must however reduce the risk of: 1.Depending on third party companies for supporting infrastructure 2.Increasing production time to comply with new regulations Continental Resources is set to outperform its sub-sector because: 1.Low Net Debt EBITDA: 0.97x (Median 1.23x, Mean 1.48x) 2.High Operating Income/Mboe: 38, (Median $17,912.10, Mean $22,332.25) 3.Development of Eco-Pad Drilling Technology, equipped to increase production in response to demand Continental Resources, Inc. (NYSE: CLR)

13 Back-up slide Decrease in amounts of electric power being generated by coal is responded with increasing amounts of that generated by gas Gas set to replaced coal not only in generation of electricity but as an energy source because of low prices and abundance