2010

U.S. Based E&P Companies
Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
Drawing from a sample of over 85 publicly traded U.S. based E&P firms, profiles were developed to gauge and assess trends in the sector between 2007 and 2009. The paper first establishes the over-arching trends in the U.S. E&P sector, discusses the key valuation drivers and then applies the analysis to establish a framework to estimate key valuation metrics for 2010.

Marcus Wolters 1/1/2010

DISCLAIMER The information and opinions in this report were prepared by Marcus Wolters. The information herein is believed to be accurate and reliable and has been obtained exclusively from public sources believed to be reliable. The author makes no representation as to the accuracy or completeness of such information. The material contained in this report is for information purposes only and is not an offer or solicitation with respect to the sale or purchase of any security.

Page 1

U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
Key Sector Trends: Q1 ’07 through Q3 ‘09 ....................................................................................................................................... 3 Market Capitalization Peaked in mid-2008 .................................................................................................................................. 3 Long-term Debt Grew Through 2008 ........................................................................................................................................... 3 Average Price Received Collapsed Rapidly Post Q2 ‘08 ............................................................................................................... 3 Reserves Re-valued at Lower Benchmark Prices at YE 2008 ........................................................................................................ 4 Market Cap and Enterprise Value Trend by Sub-Groups .................................................................................................................. 4 Production Groups ....................................................................................................................................................................... 4 Commodity Focus ........................................................................................................................................................................ 4 Enterprise Value, Market Cap and Book Capitalization ............................................................................................................... 5 Enterprise Value to EBITDA............................................................................................................................................................... 5 U.S. E&P Sector Overview ............................................................................................................................................................ 5 Key Valuation Considerations for 2010 ........................................................................................................................................ 5 Revenue Structure .................................................................................................................................................................. 5 Debt versus Reserves .............................................................................................................................................................. 5 Return Measures ..................................................................................................................................................................... 6 Drilling and Production ........................................................................................................................................................... 6 Benchmark Commodity Price Drivers ..................................................................................................................................... 6 WTI versus Henry Hub ............................................................................................................................................................. 6 New SEC Reserve Reporting Standards ................................................................................................................................... 7 Production Group Comparison of EV to EBITDA .......................................................................................................................... 7 Market Capitalization to Production ................................................................................................................................................. 8 U.S. E&P Sector Overview ............................................................................................................................................................ 8 Market Cap and Production Size .................................................................................................................................................. 8 Why Fundamentals Matter ............................................................................................................................................................... 9 What are the Objectives of Fundamentals Analysis? ................................................................................................................... 9 Mitigate the Price Effect and Focus on the Drivers ...................................................................................................................... 9 Identify the Key Drivers................................................................................................................................................................ 9 Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals .............................................................. 10 Translation into Other Metrics................................................................................................................................................... 10 How Fundamental E&P Drivers Translate into Market Valuations ............................................................................................ 11 Market Cap versus Daily Production ..................................................................................................................................... 11 Enterprise Value to EBITDA ................................................................................................................................................... 11

© 2009 Marcus Wolters. All Rights Reserved

Page 2

U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
Price to CFPS (Trailing Twelve Months) ................................................................................................................................. 11 Two Scenarios for 2010 .................................................................................................................................................................. 12 Assessing the Value of Market Cap to Production ..................................................................................................................... 12 2010 Prices Rise, Cost Pressures ................................................................................................................................................ 12 2010 Prices Weaken, Costs Ease ................................................................................................................................................ 12 2010 Valuation Ranges - Production Groupings. ....................................................................................................................... 13 Final Comments ......................................................................................................................................................................... 13 Data Summary ................................................................................................................................................................................ 14 Data Collection and Management ............................................................................................................................................. 14 Companies Surveyed.................................................................................................................................................................. 15 Financial and Production Summary, Q1 ’07 – Q3 ‘09................................................................................................................. 16 Financial Recap...................................................................................................................................................................... 16 Production and Average Price Recap .................................................................................................................................... 16 Brief Glossary ............................................................................................................................................................................. 17 Author’s Bio .................................................................................................................................................................................... 18 Notes .............................................................................................................................................................................................. 19

© 2009 Marcus Wolters. All Rights Reserved

Page 3

U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.
The behavior in crude oil and natural gas prices from the start of 2007 through 2009 provided a unique opportunity to see not only how the markets responded during the economic turmoil but also to assess the impact on the E&P firm and provide a landscape for 2010. From the events of 2008 we were reminded the importance of placing E&P fundamentals firmly ahead of commodity price projections in assessing the future health of the sector. The high commodity price environment in the first half 2008 brought with it a whole new set of profitability and growth expectations and those optimistic outlooks needed to be looked at in more realistic terms since then.

Key Sector Trends: Q1 ’07 through Q3 ‘09 Market Capitalization Peaked in mid-2008
Nothing particularly good came from the rapid rise in commodity prices through the middle of 2008. Driven by the toxic combination of the credit crisis, the global economic downturn and the collapse of a fundamentally mispriced crude oil and natural gas market, the aggregate market value of the U.S. E&P sector had cratered by the i spring of 2009 . By Q1 ’09, in the span of nine months, $300 Billion of market capitalization ($285 Billion in Enterprise Value) was carved out of the sector, more than any value created since the start of 2007.
$600 $500 +$250 Billion

U.S. E&P Sector Market Cap and Enterprise Value ($US Billions)
-$285 Billion

$400
$300

Net Debt

$200
$100

Market Cap

$0
Q3 '07 Q4 '07 Q1 '08 Q3 '08 Q4 '08 Q1 '09 Q3 '09
Q3 '09 Q1 '07 Q2 '07 Q2 '08 Q2 '09

Long-term Debt Grew Through 2008
The E&P sector added over $30 Billion in debt before the economic crisis took over in late 2008. The long-term debt level has hit a plateau since then. E&P firms could have used the high cash flow period to pay down some debt and set themselves up for a more sober pricing environment with a healthier capital structure – but now some are ill-positioned with weaker profiles and operating in a low price environment. Due to the combination of frozen credit and the E&P sector leery of adding debt in the low-price period, many firms kept their exploration and development programs in-line with cash flow throughout 2009. Appetite for credit, from both sides of equation, has recovered through 2009 - for the E&P sector in general, increasing commodity prices through 2009 has been the incentive.
U.S. E&P Sector Long-term Debt ($US Billions)
$120 $100
$80 $60 $40 $20 $0

Q1 '07

Q2 '07

Q4 '07

Q1 '08

Q2 '08

Q4 '08

Q1 '09
$57

Average Price Received Collapsed Rapidly Post Q2 ‘08
The U.S. E&P sector is heavily weighted towards natural gas production – roughly two-thirds of production is natural gas. The average price received by the E&P firm ($US per BOE) was cut in half by Q2 ’09, and is recovering. But because of the high gas weighting, this needs to be examined a bit closer. While crude oil prices plunged mid-year 2008 and since recovered somewhat, natural gas prices have not and the historical relationship between the two is broken. One of the reasons is that natural gas supply dynamics have changed dramatically over the past 2-3 years with the advent of unconventional resource development.
$80
$70 $59 $60 $50 $40 $46 $49 $62 $74 $72

U.S. E&P Sector Average Price Received ($US per BOE)

$49
$36 $39 $41

$30
Q1 '07 Q2 '07 Q4 '07 Q1 '08 Q2 '08 Q1 '09 Q2 '09 Q3 '09
Q3 '07 Q3 '08 Q4 '08

Inlcudes realized hedging gains/losses

© 2009 Marcus Wolters. All Rights Reserved

Q2 '09

Q3 '07

Q3 '08

Page 4

Reserves Re-valued at Lower Benchmark Prices at YE 2008
At the end of 2008, E&P companies revalued their proved reserves (for SEC reporting) using much lower commodity prices than in 2007, the result being a significant reduction in the PV of reserves and record impairment charges on the income statement. Based on our sample of 90 U.S.–based E&P firms, the sector’s SEC PV10 Standardized Measure was reduced in aggregate by over $125 Billion between ’07 and ‘08. And notwithstanding the issues surrounding the use of the SEC PV10 as it is determined today and the inherent conservatism in evaluating proved reserves, this was a strong indicator that the underlying asset value had fundamentally changed. At the same time, the sector took reserve and asset impairment charges of over $40 Billion in 2008, which dwarfed any previous years’ impairment charges.
U.S. E&P Sector SEC PV10 Value per BOE Reserves
7.4 5.3 5.6 4.8 3.6 2.0 4.9

2002

2003

2004

2005

2007

2006

Proved Developed Reserves

Market Cap and Enterprise Value Trend by Sub-Groups Production Groups
To make better sense of the U.S. E&P landscape, the sector is split (or stratified) into production sub-groups , and this helps show the characteristics of asset size - an important function in E&P analysis. Not one single E&P in our universe avoided the affects from the downturn in product prices. As the table below suggests, larger producers (Intermediate and up) are back to where they started in 2007. The average market value of Junior producers is far less now than what it was at the start of 2007.
Table 1: Production profile and Market Cap by Production Group
ii

Production Group

E&P Count in Analysis 40 34 7 6

Avg Daily Production (MBOE) 4.1 34.4 108.0 477.0

% Gas

Average Market Cap Q1 ‘07 $323.0 Million $1.9 Billion $5.2 Billion $21.2 Billion

Average Market Cap Q2 ‘08 $598.0 $4.4 $10.3 $39.9

Average Market Cap Q3 ‘09 $259.0 $2.4 $6.5 $25.0

Junior Intermediate Senior Super Independent

65% 68% 65% 67%

Commodity Focus
Isolating crude producers and comparing them with gas producers provides another aspect into how commodity price patterns affect market value. This is particularly useful in sensitivity analysis under iii various price environments. The figure to the right compares 10 E&P’s with a high crude production focus (75% of production, on average) versus 10 E&P’s with a high gas focus (95% of production). The market value of oilfocused E&P’s doubled in eighteen months only to lose that and more in the next seven.
U.S. E&P Sector Market Cap Growth/Decline since January 2007 Oil Focus versus Gas Focus
250% 200% Oil Focus 150% 100% 50% 0%

Gas Focus

-50%
Q2 '07 Q3 '07 Q1 '08 Q2 '08 Q4 '08 Q1 '09 Q3 '09
Q1 '07 Q4 '07 Q3 '08 Q2 '09

© 2009 Marcus Wolters. All Rights Reserved

2008

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Enterprise Value, Market Cap and Book Capitalization
An intuitive way to see how Enterprise Value diverges from Market Cap is to divide one into the other: the EV to MC measure, which averaged 1.3 from Q1 ’07 to Q2 ’08, grew to 2.8 by Q2 ’09, implying that debt comprised a much larger share of total Enterprise Value. The figure to the right shows that as the production size increased, market cap was less and less affected. But it is no coincidence smaller producers experienced the largest divergence. It can be shown historically that the variance in share price risk/return of smaller producers is much wider than larger production groups to begin with. And since 2007, smaller producers added debt at a much faster rate than larger producers, causing wide mismatches in capital structure. In the span of just over 2 ½ years the average debt to cap increased from 35% at Q1 ’07 to 58% at Q2 ’09, and this served to make the impact of the fall in share price even more pronounced. The question remains: how long will it take for this highly-leveraged sector to return to normal? It is clear the credit risk profile for the entire sector has already been in decline even prior to 2007, but the negative price shock that occurred so swiftly in 2008 (the brunt of it in six months) only compounded the problem. Moving into 2010, the capital structure of the E&P sector has fundamentally shifted; this will take a significant amount of time to correct itself.
U.S. E&P Sector Enterprise Value as a % of Market Capitalization
6.00 Junior

5.00
4.00

Intermediate 3.00 2.00 1.00 Senior

0.00
Q2 '07 Q3 '07 Q1 '08 Q2 '08 Q4 '08
Q1 '07 Q4 '07 Q3 '08

Super Independent
Q1 '09 Q3 '09
Q2 '09

U.S. E&P Sector Debt to Capitalization (%) by Production Group
65% 60% 55% Junior

Intermediate

50%
45% 40% 35% 30% Senior

Super Independent
Q2 '07 Q3 '07 Q1 '08 Q2 '08 Q4 '08 Q1 '09 Q3 '09
Q1 '07 Q4 '07 Q3 '08 Q2 '09

25%

Enterprise Value to EBITDA U.S. E&P Sector Overview
From 2002 through 2007 the average EV to EBITDA multiple for the U.S. E&P sector ranged between 5.5 and 12.5, averaging 8.9 Times. This “norm” so to speak has been broken both on the upside and the downside beginning in 2008. Corresponding with the trend in crude oil prices, the metric peaked in Q2 ’08 but rapidly collapsed to lows not seen this decade. Even with a crude oil price recovery (WTI has more than doubled since Q1 ’09) this widely used metric will have a difficult time in 2010 stabilizing within bounds that once were considered appropriate. There are a number of solid reasons for that, as described below.
Quarterly Multiples based on Trailing Twelve Months (TTM) EBITDA

U.S. E&P Sector Enterprise Value to EBITDA Multiple

16.0 14.0 12.0 10.0 8.0

6.0
4.0 2.0 0.0

2002

2003

2004

2005

2007

2006

Q1 '08

Q3 '08

Q4 '08

Q2 '09

Key Valuation Considerations for 2010
Revenue Structure: Gas prices will likely remain flat, demand will be stable, and the E&P sector is heavily weighted to natural gas production. In the short-term, inventory levels moving into winter are at record levels and per-capita usage is down slightly. For the long-term, unless there is a more serious initiative to move structurally away from coal-fired electricity generation to natural gas fired generation, demand growth will be mitigated. Debt versus Reserves: From 2004 the relationship between debt and reserves has been deteriorating. While Debt per BOE reserves has

U.S. E&P Sector Debt to Proved Developed Reserves, PV10 to Debt
8.5 7.0 5.5 4.6 3.8
7.4

2004
5.6 5.4 4.6

2005
2006 2007
2.0

2008

Debt to PDR

SEC PV10 to debt

© 2009 Marcus Wolters. All Rights Reserved

Q3 '09

Q2 '08

Q1 '09

Page 6

been increasing, the actual value of the reserves has been decreasing (see figure on previous page). This will almost necessarily place capital structure and strategic limitations on future earnings potential. Corporate Netbacks and Returns: In 2008, the Corporate Netback margin (Average Price Received minus all pre-tax cash costs) was cut in half in the span of one quarter and has marginally recovered since then. For 2009 the margin will likely exit the year at roughly 40%, which is still much lower than the average of 56% in prior years. This will take time to recover, especially in light of the commodity price outlooks that might prevail for 2010. The production and ad valorem tax component of operating costs will be significantly lower as the taxes are a function of the price received.
U.S. E&P Sector Corporate Netback as a percent of Average Price Received
62% 57% 57% 57% 60%

52%

54%

55% 53%
47% 40% 32% 38%

2002

2003

2004

2005

2006

2007

Q1 '08

Q2 '08

Q3 '08

Q4 '08

Q1 '09

Q2 '09

Return Measures: Return on Equity (along with P/E and other returnrelated metrics) became un-measurable in 2008 and not much better in 2009. Net earnings in 2008 were extremely poor for the year and 2009 results, although stronger than 2008, are lower than in years past. Over 40 E&P’s reported losses in 2008 and the aggregate sector net income was $1.29 Billion. This was due in large part by the size of asset impairment charges that were taken. By comparison the exact same set of E&P firms reported net income of $18.9 Billion in 2007. The expectation for the sector in 2010 is that key return, profitability and netback metrics will not likely return to the levels seen in ’02-’07, and valuation metrics will also continue to be lower. Drilling and Production: Operating costs on a BOE basis in 2009 are lower than in 2008, some of this driven by lower Production Taxes due to low commodity prices. This is a plus. But this will likely not compensate for the stagnant and low natural gas prices which will suppress netbacks. Drilling costs have been lower as well from 2007-2008, which strengthens the F&D cost and enhances the recycle ratios. Drilling activity, however, will not likely recover to ‘07 – ‘08 levels and reserve and production growth will be limited. Benchmark Commodity Price Drivers: The factors that determine the price of a barrel of crude have drifted further beyond supply/demand fundamentals. For example, with crude hovering at about $US 70 per Barrel, the discussion is not so much these days about supply/demand fundamentals but rather how playing WTI against the U.S. exchange rate will affect price and exchange rates. Until there is clearer understanding of the price drivers, from a fundamental standpoint we cannot forecast the price of WTI with any great confidence solely on the basis of supply/demand. And there have been recent events to indicate that WTI might be losing its power while still being the key North American benchmark price. For example, Saudi Aramco recently announced it will use the Argus Sour Crude Index for its U.S. deliveries over WTI as it better reflects the crude characteristics. In addition, Gulf Coast pricing/volumes are more liquid and transparent. Kuwait has followed in the same footsteps. Moreover, WTI prices will continue to be distorted from time to time against other crude prices and remain volatile in the near-term because of local distortions and the actual trading point – Cushing, Oklahoma – is land locked. WTI versus Henry Hub: The relationship between oil prices and natural gas prices continues to diverge and weaken (see right). Before 2005 the relationship between WTI and Henry Hub was fairly predictable: natural gas prices would move roughly in tandem with oil prices. Since then a number of factors have transformed the nature of the North American natural gas market, and oil prices no longer have the same drawing power: 1. Continental gas supply has increased with the development of unconventional resources. LNG and Northern gas (Alaska, MacKenzie Valley) supplies, which were once considered the solution to the dwindling continental supply base, have really

Henry Hub WTI 25 20 15 10 5

U.S. E&P Sector WTI versus Henry Hub, 1999 - 2009 ($US per MMBtu Basis)

0
Jul-99 Jul-00 Jul-02 Jul-03 Jul-05 Jul-06 Jul-08 Jan-99 Jan-01 Jan-02 Jan-04 Jan-05 Jan-07 Jan-08
Jan-00 Jan-03 Jan-06 Jan-09

1 Barrel = 5.825 MMBtu

Data Source: Bloomberg

Source: Bloomberg

© 2009 Marcus Wolters. All Rights Reserved

Jul-09

Jul-01

Jul-04

Jul-07

Q3 '09

Page 7

been pushed out of main consideration. 2. For 2010, gas- in- storage volumes are at record levels. Unless the winter heating season is consistently colder (much colder), winter season prices will be suppressed. 3. Fuel switching capabilities: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. New SEC Reserve Reporting Standards: From www.sec.gov: On June 26 , 2008 the SEC announced that it has proposed revised oil and gas company reporting requirements to help provide investors with a more accurate and useful picture of the oil and gas reserves that a company holds. The new reporting standards become effective January 1, 2010. The rule proposal reflects the significant changes that have taken place in the oil and gas industry since the adoption of the original reporting requirements more than 25 years ago. The proposed rule changes incorporate improved technologies and alternative extraction methods, and enable oil and gas companies to provide investors with additional information about their reserves. The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace, the less that the marketplace is forced to rely solely upon information provided by speculators. The enhanced reporting standards will add a broader aspect of valuation with respect to reserves on a standardized basis. Some the key changes include: Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes. Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves. Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves. Requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria. Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit. Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month periodrather than year-end prices, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date. In addition to the SEC working paper there are several very good opinion papers on the proposed reserve reporting standards.
th

Production Group Comparison of EV to EBITDA
Assessing the EV/EBITDA in smaller parts shows unique characteristics based on production size. Historically, Junior producers have had valuations roughly twice that of the largest producers, and this relationship held through the market upswing, downswing and now in the current more stable period:
Table 2: Enterprise Value to EBITDA: Trend by Production Group

Production Group

2002 – 2007 Average 12.1 8.1 6.1 5.8

Q2 ’08 (Peak)

Q1 ’09 (Low)

Q3 ’09 (Current)

Junior Intermediate Senior Super Independent

14.3 11.5 10.1 7.7

5.2 3.8 3.8 3.4

9.5 9.1 9.4 7.2

© 2009 Marcus Wolters. All Rights Reserved

Page 8

Market Capitalization to Production U.S. E&P Sector Overview
It took only nine months (July 2008 – March 2009) for the average Market Cap per BOEQ to slip to levels not seen since 2003. The metric has started to recover mid-2009, but perhaps for the wrong reasons: is the WTI outlook propping up E&P valuations? If so, then there might well be a correction come Q1 earnings season should gas prices remain stagnant - the more important price marker for the E&P sector is always natural gas. It was argued previously that the WTI/Henry Hub relationship is has weakened in this era, so it is harder to explain the increase in the multiple when natural gas prices are far less robust. Operating costs and production taxes are lower in 2009 than in 2008, which increase EPS, and this in turn helps explain some of the increase in share price and market cap. Along with the collapse in commodity prices came a related drop in costs – drilling, chemicals, wireline, seismic etc. Another factor that explains the increase in value is the renewed appetite and ability to add debt. Much of the E&D exploration activity in 2009 was done on a cash flow basis only and this appear to be easing up. The outlook for growth is enhanced as appropriate leveraging can be put into E&D activities again.
U.S. E&P Sector Market Cap per BOE Daily Production $US per Daily BOE
$160,000

$120,000

$80,000
$40,000

$0

2003

2004

2006

2002

2005

2007

Q1 '08

Q2 '08

Q4 '08

Q1 '09

Q2 '09
Q2 '09

U.S. E&P Sector Operating Cost per BOE Trend, E&P Sector ($US per BOE)
13.30 14.00 12.30 12.80 12.90

15.40 15.90 15.60
11.60 11.10 11.80

Q1 '07

Q2 '07

Q4 '07

Q2 '08

Q4 '08

Q1 '09

Q3 '09
Q3 '09

Q3 '07

Q1 '08

Lease Operating + Production and Ad Valorem Taxes

Market Cap and Production Size
The relationship between production size and market capitalization holds under this metric as well, but the share prices of Junior producers was hit much harder between the peak of ’08 and the floor of ’09, depressing the values much more than larger producers. The breadth of valuation in this current period shows, at least on the surface, much less distinction between the production groups.
Table 3: Market Capitalization per Daily BOE Production: Trend by Production Group ($US per BOE)

Production Group Junior Intermediate Senior Super Independent

2002 – 2007 Average $74,000 63,700 39,850 41,670

Q2 ’08 (Peak) $145,500 118,700 96,300 87,900

Q1 ’09 (Low) $28,000 31,400 31,250 33,400

Q3 ’09 (Current) $54,000 56,530 52,450 48,920

© 2009 Marcus Wolters. All Rights Reserved

Q3 '08

Q3 '08

Page 9

Why Fundamentals Matter What are the Objectives of Fundamentals Analysis?
The objective is to develop a range of expectations, establish norms and identify qualities/deficiencies from each E&P firm that will:    Either insulate from or expose the firm to market downturns, or Provide for or take away from the ability to take advantage of opportunities in market upswings, and Establish a framework of the U.S. E&P landscape to do deeper company specific analysis.

In and by itself, this level of analysis is not sufficient to make a particular “call” on a single E&P. Fundamentals provide the strong backbone to do comparative assessments and gauge trends in the E&P sector: It sets the framework.

Mitigate the Price Effect and Focus on the Drivers
Gauging E&P performance is especially challenging when oil & gas prices are strong. Lots of companies look good when revenues are strong and that is when analysis slants towards an optimistic view based more on price outlooks and less on fundamentals. But when commodity prices fall, it is valuable to see which of the E&P firms held up and were in a better position to take advantage of an upswing in prices. The reality is that oil & gas prices are highly cyclical, have been for many years, and analysis has to be addressed with this idea in mind. It must be emphasized the E&P sector and its firms are rather at the mercy of the market when it comes to oil & gas prices – factors that are driven more by economic and geo-political events and largely out of the firm’s control. And most shortterm and long-term decisions E&P firms make will take a commodity price view into consideration. But wouldn’t it make sense to assess the E&P sector and its companies less on terms of prices and more on the workings of the firm? What was needed were methods and analysis that stripped out the revenue factor and examined the underlying drivers that dictate how E&P firms react to price environments. The P5 Index and its counterpart the L5 Index was developed using selected key drivers based on the principle that assessing the parts of a company’s operations – reserves management, iv operations and capital management – together can provide strong indicators of total performance . Identify the Key Drivers The first step was to identify key metrics that would capture a broad range of E&P business. Each of the six metrics listed below brings in a unique financial and operational aspect of the firm:
Table 4: Key Performance Drivers

Key Metric 3 Year Reserve Replacement Cost ($US per BOE)

The metric reflects: Reserve management performance. The three-year measure is used as it captures the reserve development life-cycle better than a one-year measure. Oil & Gas production efficiency.

Lease Operating Expenses – 1 Year ($US per BOE) Long-term Debt to Proven Reserves ($US per BOE) SEC PV10 Value to Total Debt BOE Production Growth – 1 Year Production Replacement – 1 Year

The prudent use of debt to build reserves.

The future value of reserves compared against the current debt levels. The effectiveness of the firm to increase production levels. The effectiveness of the firm to grow reserves in tandem with producing them.

© 2009 Marcus Wolters. All Rights Reserved

Page 10

Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals
Taking the tops and bottoms and then comparing them gives us the range of quality that we can assess for the whole E&P sector. The table below shows the differences between the five “best” E&P firms and the five “poorest”:
Table 5: Comparing Performance Metrics (YE 2008 Results)

Key Metric 3 Year Reserve Replacement Cost Lease Operating Expenses – 1 Year Long-term Debt to Proven Reserves (Times) SEC PV10 Value to Total Debt BOE Production Growth – 1 Year Production Replacement – 1 Year

Strong Fundamentals (P5) $12.55 $7.47 1.74x 5.36x 32% 398%

Poor Fundamentals (L5) $42.19 $14.59 8.72x 1.17x -13% 150%

Translation into Other Metrics
To illustrate how the key input driver results translate into other metrics, selected key ratios are tabled below . Operations metrics are calculated on the quarterly average between Q1 ’07 and Q3 ’09. Debt Related metrics are calculated as at Q3 ’09. Returns and margins are the annual average of year end 2006-2008.
Table 6: Other Metrics and Performance Drivers
v

Functional Area

Metric Lease Operating & Taxes General & Admin

Strong Fundamentals (P5) $6.20 3.10 1.50 3.32x 30% 0.90x 35.4x 66% 29% 19% 15% 10%

Poor Fundamentals (L5) $13.00 3.40 4.30 1.13x 60% 1.70x 14.7x 71% -5% -9% -5% -3%

Operations ($US per BOE) Interest & Pref Dividends Recycle Ratio Debt to Capitalization Debt Related Debt to EBITDA (TTM) EBITDA Interest Coverage EBITDA Margin Profit Margin Returns & Margins Return on Equity Return on Capital Employed Return on Assets

© 2009 Marcus Wolters. All Rights Reserved

Page 11

How Fundamental E&P Drivers Translate into Market Valuations
The translation from corporate and operating performance into market valuation is a fairly intuitive exercise: strong underlying health will translate into stronger valuation. But the ability to identify and assess individual E&P’s across the whole sector (+100 publicly traded, many more private) presented a whole different challenge. Market Cap versus Daily Production: Not a single U.S. E&P was left unaffected when crude prices collapsed in mid-2008. Regardless of performance ranking, market values fell by the same magnitude across the board. The E&P sector bottomed in the first quarter of 2009. Based on the sample of 84 U.S.-based E&P’s, the average Market Cap per Daily BOE was $34,000 in Q1 ‘09. Corresponding with increasing crude prices, the metric increased to $66,000 per BOEQ by the third quarter, which could be used as the starting point for these valuations moving into 2010. The value will be slightly higher for Q4 2009 as share price continue to recover. At Q3 ’09, companies with strong performance metrics averaged just over $90,000 per BOEQ. E&P’s with the poorest performance metrics averaged $29,600 per BOEQ. Enterprise Value to EBITDA: Very similar behaviors are seen when assessing EV against cash earnings (EBITDA). On a trailing twelve month basis (TTM) the total E&P sector averaged 12.5 EV to EBITDA at Q2 ’08 (commodity price peak) and fell to 4.4 by Q1 ’09. Setting the framework for2010, the U.S. E&P sector will exit 2009 at roughly 10x EV to EBITDA. E&P’s with strong performance metrics peaked at 19.2x and at Q3 ’09, EV to EBITDA averaged 13.1x. The value exit-2009 will be slightly higher as share prices continue to increase. At the peak of the cycle, EV to EBITDA for the E&P’s with weaker fundamentals was 4.0x and recovered to 5.4x by Q3 2009. Price to CFPS (Trailing Twelve Months): Especially over in the past eighteen months, looking at Price to Cash Flow instead of Price to Earnings has been more effective at establishing a 2010 perspective. Corresponding with the other two metrics, the trend has been very similar, but with a twist: with the anticipation of sustained high commodity prices in mid-2008, there was less distinction between fundamentally stronger E&P’s than fundamentally weaker ones from at that point in time. But when commodity prices collapsed through the end of 2008, value collapse with a far greater magnitude than what really should have - that is, were share prices valued correctly in the first place at Q2 ’08.
U.S. E&P Sector Performance Group Comparison Enterprise Value to EBITDA - 2008 and 2009
25.0 20.0 Q1 '08 Q2 '08

U.S. E&P Sector Performance Group Comparison Market Cap per BOEQ - 2007 through 2009
$200,000
Q1 '07 Q3 '09

$150,000

$100,000

$50,000

$0 Strong Fundamentals Weak Fundamentals

15.0
10.0 5.0 0.0 Strong Fundamentals Weak Fundamentals

Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09

U.S. E&P Sector Performance Group Comparison Price to Cash Flow per Share - 2008 and 2009
8.0 Q1 '08 Q2 '08 Q3 '08 4.0 Q4 '08 Q1 '09 2.0 Q2 '09 Q3 '09 0.0 Strong Fundamentals Weak Fundamentals

6.0

© 2009 Marcus Wolters. All Rights Reserved

Page 12

Two Scenarios for 2010 Assessing the Value of Market Cap to Production
The sensible objective of sensitivity analysis is to provide the user with perspectives of possible outcomes without overspecifying the inputs, and at the same time choosing metrics that capture a broad range of ideas. Sensitivities were done on Market Capitalization using relationships between Cash Flow per Share, revenue/expense drivers and the average price received for crude oil and natural gas. The result for each E&P was then tied back to daily production to calculate the metric. The sensitivities were assessed using production groups as the back drop. Four key factors were considered: 1. The variables that drive the sensitivity must be highly relevant to the problem. This sounds intuitive, but sometimes the choice of variable misses the business case. For these tests, three variables were used: oil price, natural gas price and lease operating costs. The range for each variable should be within a “possible outcome” for the time frame considered. The starting data must reflect the most recent results. In these three cases, Q3 ’09 results are the starting point. The results could be assessed from different viewpoints – for this paper, Production Groups were examined.

2. 3. 4.

2010 Prices Rise, Cost Pressures
Changes: Oil Prices increased by 50%, natural gas prices increase 50%, operating expenses increase 20% Result: Market Cap per BOEQ rises ~60% on average. Growth in smaller producers is stronger than larger producers.
76,500

$USD per Daily BOE Production

U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE 2010 Price Spike, Moderate Cost Pressures

104,000

Base Case Scenario
76,200 69,200 54,100 59,500 50,000 44,800

This is not unrealistic. Based on the sample, on average, the price received for natural gas in Q3 was $4.34 per Mcf and the average price for crude oil was $63.74 per Barrel. A 50% increase over the year would result in natural gas at $6.50 and crude oil at $95.50. This could be a situation that would reflect the U.S. economy regaining momentum and increasing demand for energy: air travel on the increase, miles driven increasing –overall demand for refined products increasing. Natural gas prices would increase at the same rate with normal seasonality, keeping the WTI/Henry Hub ratio steady.
Junior

Intermediate

Senior

Super Independent

2010 Prices Weaken, Costs Ease
Changes: Oil Prices decrease by 20%, natural gas prices decrease 20%, operating expenses decrease 5% Result: Market Cap per BOEQ decreases ~27% on average. Impact on smaller producers is stronger than larger producers. Reflects possible “double dip” fall in commodity prices. Costs would ease primarily as sliding scale production taxes would decrease. This scenario would capture a lower bound of valuations based on price and cost sensitivities. A 20% drop in crude prices would roughly equate to $51.00 per barrel for the year. A 20% drop in natural gas prices would equate to roughly $3.50 per Mcf.
Junior $USD per Daily BOE Production

U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE 2010 Price Collapse, Operating Costs Ease

76,500

Base Case Scenario
54,300

54,100 39,100

50,000 44,800 37,000 34,900

Intermediate

Senior

Super Independent

© 2009 Marcus Wolters. All Rights Reserved

Page 13

2010 Valuation Range Possibilities - Production Groupings.
The table below details the ranges of three metrics based on the two scenarios, arranged by production groups. EV to EBITDA is approximated based on an historical relationship between the two ratios. See endnote ii for a table of production ranges for each group. Metrics for Q3 2009 are calculated on actual results.
Table 7: Market Cap to Daily BOE Production: 2010 Outlook by Production Group

Production Group Junior Intermediate Senior Super Independent

Q3 2009 (Actual) $54,000 per BOEQ 56,530 52,450 48,920

2010 High Price Case $104,000 per BOEQ 76,200 69,200 59,500

2010 Low Price Case $54,300 per BOEQ 39,100 37,000 34,900

Table 8: Enterprise Value to EBITDA: 2010 Outlook by Production Group

Production Group Junior Intermediate Senior Super Independent

Q3 2009 (Actual) 9.5x 9.1 9.4 7.2

2010 High Price Case 11.3x 8.8 8.2 7.3

2010 Low Price Case 8.2x 5.4 5.2 5.0

Table 9: Average Market Capitalization ($USD) Outlook by Production Group

Production Group Junior Intermediate Senior Super Independent

Q3 2009 (Actual) $258 Million $2.4 Billion $6.5 Billion $25.1 Billion

2010 High Price Case $370 3.2 8.6 30.6

2010 Low Price Case $167 1.6 4.6 17.9

Final Comments
The U.S. E&P sector has clearly come off its early 2009 lows and the outlook for 2010 appears to be more robust. But several questions will remain on the table which will affect valuations. For example:    Will the continental gas oversupply subside? In the short term, the main factor will be weather related and if North America will experience a colder than normal temperatures in winter and/or the summer season will be warmer. How will new government/environmental policies translate into reduced energy consumption? This is a longer-term consideration, but valuations will be effected nonetheless. Will the credit markets continue to ease?

© 2009 Marcus Wolters. All Rights Reserved

Page 14

Data Summary Data Collection and Management
Aggregating & developing the proper information for the U.S. Independent industry requires, first and foremost, a strong understanding of what factors comprise the sector – the companies, the resource landscape and cost considerations, and oil & gas economics. The methodologies developed for this analysis can be loosely described in six steps as shown in the figure to the right. Each phase has its own set of objectives and one “process” leads into the other. For instance, calculating key metrics would be impossible without effective data management; failure in designing a proper data structure would make research cumbersome, time-consuming and ultimately ineffective. So there is no single analytical function in this process that outweighs another in terms of importance. The challenge is to be able to design analysis with an industry-wide perspective and at the same time maintaining the unique characteristics of each company. There are over 100 publicly traded U.S. E&P companies with a meaningful market capitalization – daily production ranges from less than 100 BOE to over 600,000 BOE. Each company has a unique capital structure, a unique production profile (oil versus gas) and every single E&P is active in different degrees in producing regions and formations.
Verification and validation

Data Management

Define sources

Collection

Metrics

Financial measures

Operational measures

Trend calculations

Define the Characteristics of the Firm

Producer Group

Commodity Focus

Growth Mode

Performance Measurement

Reserve management

Operating efficiency

Capital structure

Data Conversion

Convert to functional forms

Reporting

Market Measures

Credit Benchmarks

Peer Analysis

The primary goal in building this information backbone is not simply to be able to construct a data system that compares any company to any other company (there are scores of free internet services that do just that), but rather to be able to position a company or sub-group within the U.S. E&P sector in a proper perspective. The system used to gather, calculate and stratify the data from the various was developed using a combination of Microsoft Access, Microsoft Excel and Visual Basic 6.0. Data has been compiled and processed for U.S. based E&P firms annually since 2002, and quarterly information has been processed since Q1 2007. Effective analysis is impossible without a foundation of reliable information, and this requires a rigorous approach to identifying, arranging and processing data. Data was collected and validated in groups with respect to how the data fits categorically. It is essential that the data collection system is efficient as the data and information is the backbone to our research. In terms of data sources and requirements, the table below shows where the data is sourced from and how the data is categorized:
Category Reserves Data Requirement Reserve Reconciliations, Daily Production, PV10 Values, BOE & McfE conversions Drilling, Land Positions, Operating Oil & Gas Wells, Employees Balance Sheet, Income Statement, Statement of Cash Flows, Oil & Gas Capital Expenditures, Debt Maturities, Shares Outstanding Share Prices, Company Activity, Industry Activity Sources SEC 10-k, SEC 10ksb, SEC 10-Q

Operations

SEC 10-k, SEC 10ksb, SEC 10-Q

Financial

SEC 10-k, SEC 10ksb, SEC 10-Q

Other

Company websites, newswires, The EIA, E&P associations.

© 2009 Marcus Wolters. All Rights Reserved

Page 15

Companies Surveyed
Drawing from a sample of just over 95 publicly traded U.S. based E&P companies the final analysis was based on 84 firms. The main factors that reduced the sample to 84 firms were data quality issues: very small E&P firms with small market capitalizations or firms that had listing requirement issues were taken out of the sample:

Junior Producers Abraxas Petroleum Corp. (AXAS) Adams Resources & Energy, Inc. (AE) American Oil & Gas Inc. (AEZ) Approach Resources Inc. (AREX) Arena Resources, Inc. (ARD) Brigham Exploration Co. (BEXP) Callon Petroleum Company (CPE) Cano Petroleum, Inc. (CFW) Carrizo Oil & Gas (CRZO) Contango Oil & Gas Company (MCF) Delta Petroleum (DPTR) Double Eagle Petroleum Co. (DBLE) Dune Energy, Inc. (DNE) Edge Petroleum Corp. (EPEX) EV Energy Partners, L.P. (EVEP) Evolution Petroleum Corporation (EPM) Fieldpoint Petroleum Corporation (FPP) Gasco Energy, Inc. (GSX) Gastar Exploration Limited (USA) (GST) GeoMet, Inc. (GMET) GeoResources, Inc. (GEOI) GMX Resources Inc. (GMXR) Goodrich Petroleum Corp. (GDP) Gulfport Energy Corp. (GPOR) Kodiak Oil & Gas Corp. (KOG) Legacy Reserves LP (LGCY) Magnum Hunter Resources Corporation (MHR) Meridian Resource Corp. (TMR) NGAS Resources, Inc. (NGAS) Parallel Petroleum Corporation (PLLL) PrimeEnergy Corporation (PNRG) RAM Energy Resources, Inc. (RAME) Rex Energy Corporation (REXX) Royale Energy, Inc. (ROYL) TXCO Resources Inc. (TXCO) Vanguard Natural Resources, LLC (VNR) Warren Resources (WRES) Senior Producers Cimarex Energy Co. (XEC) Forest Oil Corporation (FST) Newfield Exploration Co. (NFX) Noble Energy (NBL) Pioneer Natural Resources (PXD) Plains Exploration & Production Company (PXP) Southwestern Energy Company (SWN)

Intermediate Producers Atlas Energy Resources, LLC (ATN) ATP Oil & Gas Corporation (ATPG) Berry Petroleum Company (BRY) Bill Barrett Corporation (BBG) BreitBurn Energy Partners L.P. (BBEP) Cabot Oil & Gas Corporation (COG) Clayton Williams Energy (CWEI) CNX Gas Corporation (CXG) Comstock Resources (CRK) Concho Resources Inc. (CXO) Continental Resources, Inc. (CLR) Denbury Resources Inc. (DNR) Encore Acquisition Co. (EAC) Energy XXI (Bermuda) Limited (EXXI) Exco Resources (XCO) Linn Energy, LLC (LINE) Mariner Energy, Inc. (ME) McMoRan Exploration Co. (MMR) Penn Virginia Corporation (PVA) Petrohawk Energy Corporation (HK) Petroleum Development Corporation (PETD) PetroQuest Energy (PQ) Quicksilver Resources Inc (KWK) Range Resources Corp. (RRC) Rosetta Resources Inc. (ROSE) SandRidge Energy Inc. (SD) St. Mary Land & Exploration Co. (SM) Stone Energy Corporation (SGY) Swift Energy Company (SFY) Ultra Petroleum Corp. (UPL) Unit Corporation (UNT) Venoco, Inc. (VQ) W&T Offshore, Inc. (WTI) Whiting Petroleum Corporation (WLL)

Super Independent Producers Anadarko Petroleum Corporation (APC) Apache Corporation (APA) Chesapeake Energy Corporation (CHK) Devon Energy Corporation (DVN) EOG Resources (EOG) XTO Energy Inc. (XTO)

© 2009 Marcus Wolters. All Rights Reserved

Page 16

Financial and Production Summary, Q1 ’07 – Q3 ‘09

Financial Recap Based on the sample of 84 companies: Cumulative operating and net income was wiped out in two quarters, Q4 ’08 and Q1 ‘09 Asset impairment charges exceeded $40 Billion at year-end 2008 and continued through the first quarter 2009.
$US Millions Total Revenues Total Expenses Operating Inc Depreciation EBITDA Interest Exp Net Income Total Assets Total Equity Total Debt Q1 '07 18,254 12,648 5,606 5,259 10,865 1,156 2,568 115,268 273,619 79,060 2007 Q2 '07 Q3 '07 22,165 21,867 13,514 13,828 8,651 8,039 6,558 6,031 15,210 14,070 1,214 1,227 4,797 4,117 125,421 132,253 289,194 302,745 82,045 86,448 2008 Q2 '08 Q3 '08 25,825 45,294 18,496 20,430 7,328 24,864 6,743 9,317 14,072 34,181 1,077 1,210 813 19,125 143,973 179,655 364,401 390,304 89,671 97,882 2009 Q2 '09 17,997 16,207 1,790 6,717 8,507 1,325 -237 145,954 328,820 104,251

Q4 '07 27,587 15,112 12,476 5,293 17,769 1,525 7,519 141,783 322,928 85,613

Q1 '08 24,895 16,325 8,570 6,484 15,046 1,247 3,786 144,785 338,450 88,161

Q4 '08 22,642 53,110 -30,468 54,914 24,442 1,397 -22,838 161,053 360,741 104,737

Q1 '09 18,466 49,163 -30,697 40,360 9,663 1,190 -20,732 143,979 328,072 101,178

Q3 '09 20,328 15,571 4,756 6,336 11,092 1,301 2,532 150,430 330,064 98,505

Production and Average Price Recap Crude Oil & NGL’s expressed in $US per Bbl. NGL volumes converted at 1.5x Natural Gas expressed in $US per Mcf BOE values converted at 1 Bbl = 6 Mcf, McfE values converted at 6 Bbl = 1 Mcf
Average Price Received 2007 Crude & NGL's Natural Gas $US per BOE $US per McfE Q1 '07 52.54 6.75 46.44 7.74 Q2 '07 59.13 6.88 49.08 8.18 Q3 '07 67.20 6.24 49.21 8.20 Q4 '07 76.50 7.18 59.41 9.90 Q1 '08 85.37 8.06 62.37 10.40 2008 Q2 '08 Q3 '08 101.81 101.02 9.74 9.18 74.39 71.97 12.40 11.99 Q4 '08 71.17 7.10 56.85 9.48 Q1 '09 43.06 5.16 36.08 6.01 2009 Q2 '09 56.23 4.56 39.17 6.53 Q3 '09 63.74 4.34 40.78 6.80

Average Daily Gas Production by Production Group (MMcf per Day) 2007 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Junior 13.0 14.6 15.6 16.5 16.8 Intermediate 110.4 122.0 126.2 133.8 140.0 Senior 323.0 357.6 387.0 404.0 416.7 Super Ind. 1,723.1 1,728.0 1,773.9 1,853.5 1,913.8

2008 Q2 '08 Q3 '08 18.4 17.6 145.1 143.4 429.7 445.1 1,908.9 1,963.0

Q4 '08 18.5 151.0 460.7 2,032.6

Q1 '09 19.5 158.7 476.5 2,103.7

2009 Q2 '09 18.8 157.9 475.0 2,166.7

Q3 '09 18.7 156.2 468.8 2,138.7

Average Daily crude Oil & NGL Production by Production Group (‘000 Barrels per Day) 2007 2008 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Junior 1.1 1.2 1.3 1.4 1.6 1.7 1.6 Intermediate 9.6 10.6 10.8 11.2 11.5 12.1 11.4 Senior 35.1 36.0 36.4 38.8 40.8 40.9 40.4 Super Ind. 154.1 160.6 153.9 155.9 156.3 145.9 145.8

Q4 '08 1.7 11.8 39.8 154.2

Q1 '09 1.8 12.1 39.2 162.8

2009 Q2 '09 1.9 12.5 39.8 175.7

Q3 '09 1.7 12.1 40.2 165.5

© 2009 Marcus Wolters. All Rights Reserved

Page 17

Brief Glossary
The contents and expressions used in this report are written at a fairly advanced level. In order to avoid possible confusion, tabled below is a list of some terms that have been used by themselves and used interchangeably throughout the report: BOE: Barrel of Oil Equivalency: 1 Barrel = 6 Mcf Natural Gas BOEQ: Daily Oil & Gas Production in Barrel of Oil Equivalent (BOE) Terms McfE: Mcf Natural Gas Equivalency: 1 Barrel Oil = 1/6 Mcf Natural Gas EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization Market Capitalization, Market Cap or MC: Share Price x # Shares Outstanding Enterprise Value or EV: Market Capitalization + Total Long-term Debt – Cash & Cash Equivalents 3 Year Reserve Replacement Cost: ∑ Oil & Gas Capital Expenditures Most Recent 3 Years l ∑ Extensions, Discoveries, Acquisitions and Improved Recoveries, 3 Years
th

Note: Reserve Replacement Costs are also calculated with Revisions – but due to the high fluctuation in Revisions reporting over the past few years, it was felt the RRC without revision was the appropriate metric to use. Operating Netback ($US per BOE): Average Price Received – Lease Operating Expenses – Production, Ad Valorem Taxes Recycle Ratio: m Operating Netback m 3 Year Reserve Replacement Cost

© 2009 Marcus Wolters. All Rights Reserved

Page 18

Author’s Bio

Marcus Wolters
 Over fifteen years of oil & gas and energy analysis experience: o Summer Intern Positions:  1991: Amoco Canada Production Company  1992: Research Assistant, University of Calgary, Department of International Finance  1993: Crestar Energy Inc. o Career Positions:  Ziff Energy Group (1994-1997)  Royal Bank of Canada, Global Energy Group (1997 – 2001)  Enbridge Pipelines Inc. (2001-present) o Current position: Senior Advisor, Commodities Forecasting Group, Enbridge Pipelines Inc. Areas of specialization: o Oil & Gas fundamentals o Credit risk assessment o Production analysis and forecasting o Statistical analysis and corporate benchmarking o Economic modeling o Database design Education: o University of Calgary, Finance (1988-1992) o University of Western Ontario, Statistics (1992-1993) Contact Information: o Email: mwolters@telus.net o LinkedIn Profile: http://ca.linkedin.com/in/marcwolters

© 2009 Marcus Wolters. All Rights Reserved

Page 19

Notes
i

The U.S. universe comprises 84 publicly traded American based E&P’s. For the full detailed list, please see the section “Companies Surveyed.” Throughout the report, outliers and extreme values were removed from the analysis where it was deemed appropriate. Unless otherwise stated, all analysis was developed in-house. All data was obtained from its original source: the United States Securities and Exchange Commission (www.sec.gov). Share prices obtained from Yahoo! Finance. Presentations, news releases, outlooks and other relevant operational information obtained from company websites. Institutional ownership data obtained from Thomson-Reuters.
ii

The sample of 84 U.S. E&P firms was divided into four production sub-groups: Junior, Intermediate, Senior and Super Independent. This widely accepted approach is very useful in examining many aspects of the E&P sector, from financial analysis to operations. The production sizes are tabled below: Production Group Junior Intermediate Senior Super Independent
iii

Range of Daily Production 0 - 15,000 BOE 15,000 - 75,000 BOE 75,000 – 250,000 BOE Greater than 250,000 BOE

The “Oil 10” and “Gas 10” E&P companies were determined by ranking the universe of 84 publicly traded E&P companies on the basis of oil production and gas production, not revenue weighted and indifferent to the size of the firm or any performance considerations:
Oil Focus Companies Arena Resources, Inc. Continental Resources, Inc. Evolution Petroleum Corporation Fieldpoint Petroleum Corporation Gulfport Energy Corp. Legacy Reserves LP Magnum Hunter Resources Corporation Rex Energy Corporation TXCO Resources Inc. Whiting Petroleum Corporation
iv

% Oil ARD CLR EPM FPP GPOR LGCY MHR REXX TXCO WLL 83% 74% 55% 65% 93% 73% 74% 73% 65% 77%

Gas Focus Companies Atlas Energy Resources, LLC Cabot Oil & Gas Corporation CNX Gas Corporation Double Eagle Petroleum Co. Gastar Exploration Limited (USA) GeoMet, Inc. Goodrich Petroleum Corp. PrimeEnergy Corporation Southwestern Energy Company Ultra Petroleum Corp. ATN COG CXG DBLE GST GMET GDP PNRG SWN UPL

% Gas 97% 95% 100% 98% 100% 100% 97% 65% 100% 96%

Performance measurement: Junior producers are not included in these types of performance assessments. The 2008 “P5” and “L5” E&P firms are tabled below:
P5 – Strong Fundamentals Group CNX Gas Corporation EOG Resources Range Resources Corp. Southwestern Energy Company Ultra Petroleum Corp.
v

L5 – Weak Fundamentals Group CXG EOG RRC SWN UPL ATP Oil & Gas Corporation Clayton Williams Energy Stone Energy Corporation Swift Energy Company W&T Offshore, Inc. ATPG CWEI SGY SFY WTI

Key industry measures are assessed from first principles through to valuation measures: Input Metrics look at the drivers of what defines the E&P sector: the efficient management of oil & gas resources and the efficient exploitation of reserves. Corporate Metrics provide guidance as to how the sector (as well as the individual company) manages its capital, asset and manpower requirements to give working strength to the reserve base. Output Metrics provide the tools which place a value on the individual company and the sector - trend analysis becomes an essential component in market valuations, returns and margins.

© 2009 Marcus Wolters. All Rights Reserved

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