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UBS Investment Research Q-Series®: North American Oil & Gas
Global Equity Research
Americas Oil Companies, Major Sector Comment
3 September 2008
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What is the potential for North American unconventional resources?
A euphoric H1/08 for unconventional resource plays H1/08 saw an unprecedented boom in unconventional resource development across North America, with new plays being announced almost on a monthly basis. The fundamental questions for investors, in our view, are: 1) how prospective are these emerging plays and how do they compare versus global opportunities; 2) what is their impact on North American natural gas fundamentals; and, 3) which companies are most exposed to this increasingly important segment? UBS proprietary play database helps facilitate play-by-play comparison We compiled current and expected type curves for a number of resource plays and compared them based on: IRR, degree of delineation and resource potential. N.A. unconventional resources offer world class IRRs averaging 68% Overall we believe North American unconventional resource plays offer some of the best balance of risk/reward of any global oil opportunity set. The average IRR on the plays we examine is 68% after-tax based on US$9/Mcfe. Importantly, these resource plays have much lower political risk and much shorter cycle times than most other global oil and gas development opportunities. Bakken light oil and Haynesville gas shales stand out Of the resource plays we examined, the best risk/reward can be found in the Bakken and Haynesville/Lower Bossier shale, with IRRs of 105% and 89%, respectively, on our estimates. Our Canadian top picks for resource play exposure are ECA in the large cap space, PBG and CPG.un in the small/mid-cap space; our top US stock picks are SWN, PXD, COG and HK.
This report has been prepared by UBS Securities Canada Inc ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 90. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.ubs.com/independentresearch or may call +1 877-208-5700 to request a copy of this research.
Q-Series®: North American Oil & Gas 3 September 2008
Executive summary Unconventional resources primer
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page 4 7
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The resource pyramid ..........................................................................................7 When and why did unconventional gas development begin?................................7 Overview of unconventional gas...........................................................................8 The role of technology........................................................................................10
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Resource play economics
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Methodology ......................................................................................................12 What are the key economic drivers? ..................................................................13 Summary of key resource plays .........................................................................16 Comparing size vs. IRR and stage of life cycle...................................................17 What gas price do you need to breakeven?........................................................18 Resource play drilling boom likely to see inflationary pressures .........................18
How do the plays rank globally? Who are the key players?
Leverage to the resources..................................................................................25 Consolidation among the unconventionals likely to continue ..............................27
Top unconventional stock picks
Top Canadian picks ...........................................................................................28 Top US picks......................................................................................................31
Is too much success a bad thing?
Very strong growth expected from the unconventional plays . . . ........................34 . . . but will demand keep pace? .........................................................................35
Key emerging plays to watch Montney
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Muskwa Shales (Horn River Basin) ....................................................................47 Marcellus Shales................................................................................................55 Utica & Lorraine Shales......................................................................................62 Haynesville Shale...............................................................................................71 Bakken...............................................................................................................78
Select experimental plays to watch Appendix
Cover images: Left: Chesapeake rig drilling in the Barnett Shale, with downtown Forth Worth in the background. Courtesy of Chesapeake Energy Corp. Right: EnCana’s frac job in progress in Cutbank Ridge. Courtesy of EnCana Corporation.
BC) and the Marcellus (NY & Pennsylvania). all together. this suggests that it could see above average rates of return if good well results are achieved. However. and therefore have far higher risk than any other. in our view. Chesapeake and EOG. and Muskwa (Horn River basin) all have strong economics. UBS 4 . The conclusions from our analysis are summarized below: Unconventional resource plays have robust economics. we believe investors should not overlook other emerging plays such as the Montney (BC & Alberta). Of the resource plays we examined in this report.Q-Series®: North American Oil & Gas 3 September 2008 Executive summary The first half of 2008 saw an unprecedented boom in unconventional resource development across North America. with an anticipated IRR of about 89%. The Haynesville/Lower Bossier shale of East Texas and Louisiana also stands out. Marcellus. We expect to see IRRs in the 40-65% range for each of these plays (excluding land costs). with new plays being announced almost on a monthly basis. 3) which companies are most exposed to this increasingly important segment? We built detailed economic and production models on each of the emerging plays to assess the viability and growth potential of each of them. Overall. based a long-term natural gas price estimate of US$9/Mcfe. 2) what is their impact on North American natural gas fundamentals. The Utica shale project in Quebec is at the earliest stage of evaluation of the plays we examined. we found the best risk/reward in the Bakken light oil play. and. on our estimates. but has significant potential. Clearly those companies who are positioned early in the various resource plays will create higher “full cycle” value for shareholders. these resource plays have much lower political risk and much shorter cycle times than most other global oil and gas development opportunities. Muskwa shales (Horn River. There is an early-mover advantage. and has a relatively easy topography. Furthermore. it is the best situated in terms of gas price realization and royalties. We believe companies who have consistently earned early-mover advantage include EnCana. Land acquisition costs vary widely play by play and by company. The average IRR on the plays we examine in this report is 68% after-tax (excluding land costs). Utica is still experimental. Although the Haynesville and Bakken offer the best balance of risk and reward. The fundamental questions for investors. we believe they offer some of the best balance of risk and reward of any global oil opportunity set. Bakken & Haynesville offer the highest returns. are: 1) how prospective are these emerging plays and how do they compare versus global opportunities. Montney. Both these plays have good access to infrastructure and few surface constraints to development. well above the majority of major global oil and gas development opportunities. We looked at the preliminary economics of various emerging unconventional plays in North America. with an average IRR of approximately 105% at a US$90/bbl oil price (excluding land costs).
Growth in unconventional natural gas should keep gas prices disconnected from oil. The economic breakeven point (i. Technology will continue to have a significant impact. partly due to the boom in unconventional gas drilling. particularly if coal prices remain strong. While the Bakken and Haynesville have the lowest breakeven prices. we expect natural gas to average in the $8-12/Mcf range for the foreseeable future (depending on weather fluctuations). We monitor with great interest developments in the Pearsall shale (Maverick Basin). Overall. Mannville CBM in Alberta continues to progress towards wider spread commercialization. Also. and Montney all break even well below current spot prices. but strong enough to still generate good returns. several other new plays are likely to emerge over the coming years. the average share price of the unconventional gas producers has corrected 28%. We believe there will continue to be significant M&A activity in unconventional gas as large global players seek to position themselves in these relatively low risk resources. Horn River etc). In addition to the various emerging unconventional plays evaluated in this report (Bakken. UBS 5 .50/Mcfe.50/Mcfe—well below current spot prices. low-risk assets. Horn River. has dominant positions in many other experimental plays. After a euphoric H1/08 for unconventional gas. We believe the resource plays evaluated in this report could increase production by close to 9 Bcf/d over the next five years. in our view. the Horn River. Deep Bossier etc) and newly emerging resource plays (Haynesville. The majority of unconventional gas players are reflecting very little value for their “unbooked” resource potential. US natural gas production increased 9% from Q1/07 to Q1/08.Q-Series®: North American Oil & Gas 3 September 2008 Resource play boom is by no means over. We also expect industrial and power generation demand for natural gas to remain robust. Interestingly. particularly for shale gas most recently. for investors looking for exposure to these long-life. The only unfortunate aspect of the unconventional drilling boom has been a relatively strong North American production response that has put pressure on natural gas prices. This should keep US natural gas supply growing for the foreseeable future—likely in the 4-5% range. Montney and Utica). Average breakeven price for emerging plays is US$5. Given the recent pullback in natural gas prices. Technology has had a profound impact on unlocking the value of unconventional resources.e. adding significant optionality. and West Texas Barnett/Woodford (Delaware Basin). EnCana. the price required to generate a 15% after-tax IRR) of the plays evaluated in this report averages about $5. Haynesville. We believe there is significant optionality to all unconventional resources as technology still has substantial room to reduce costs and/or increase recovery factors. as well as a number of emerging shale plays in the US Rockies. Pullback creates good second chance to get quality resource play exposure. Marcellus. investors have become concerned about the viability of emerging unconventional plays. making a very attractive entry point. in addition to its inventory of established (Jonah. Marcellus.
as well as the Haynesville shale. Our top picks for large cap unconventional exposure in Canada include EnCana. with exposure to the Fayetteville and the Marcellus shales. and. Galleon trades at just 4. While Nexen and Talisman are relatively new entrants into unconventional gas. which offers exposure to the Huron and Marcellus shales in Appalachia. and significant upside potential from Horn River. which holds a significant land position in the eastern segment of the Montney – while not as prolific as the deeper regions in BC. UBS 6 . 2) Petrohawk Energy. Our top picks for US small/mid-cap plays with unconventional resources are: 1) Cabot Oil & Gas.000 boe/d) and offers an attractive 7. as well as Raton Basin CBM. both have exposure to interesting emerging plays that are not at all reflected in current valuations. 2) Crescent Point Energy Trust. which is the largest Bakken producer in Canada (in excess of 15. and. and. Our top picks for US large cap plays with unconventional exposure are: 1) Southwestern Energy. the earliest entrant into unconventional gas.9x 2009e EV/DACF and provides investors with considerable exposure to the Bakken.4x 2009e EV/DACF. Our top picks for Canadian small/mid cap plays on unconventional resources are: 1) Petrobank. which is trading at only 2. which offers good exposure to the Haynesville and Fayetteville shale plays.Q-Series®: North American Oil & Gas 3 September 2008 Top picks. 2) Pioneer Natural Resources. with the largest opportunity base of any company.6% cash yield (with monthly distributions that represent roughly 45% of cash flow). which offers exposure to the Pierre and Fort Worth Barnett shales. we believe it offers compelling economics. Montney and oil sands (THAI/CAPRI technologies). 3) Galleon Energy.
While there have been sporadic tests of CBM in the 1970s and 1980s. the opportunity base increases.Q-Series®: North American Oil & Gas 3 September 2008 3 September 2008 Unconventional resources primer The resource pyramid The resource pyramid aptly describes the development of North American energy supplies. These programs were credited for having successfully kick-started the commercialization of coalbed methane (CBM). Also known as Section 29. the US government established the Alternative Fuel Production Credit in 1980 and funded various research and development initiatives. It wasn’t until the late 1990s that producers began to think seriously about unconventional gas development UBS 7 . tight and shale gas development in the US. combined with low natural gas prices. abundant conventional natural gas opportunities in western Canada. Sources of conventional supply in the US began to show signs of exhaustion many years ago. Chart 1 depicts the growth and contribution of various natural gas supply sources in the US: Chart 1: Growth of US unconventional gas production by source (Tcf) Conventional 22 20 18 16 14 12 10 8 6 4 2 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Actual Projections Tight Sands Coalbed Methane Gas Shales Source: Canadian Society for Unconventional Gas Source: EIA Data. the non-refundable production tax credit was made available to ethanol or methanol produced synthetically from coal or lignite. the gap is closing. UBS Up until a decade ago. In a move to spur greater development of its unconventional gas resources. but the quality decreases. Figure 1: Resource Pyramid When and why did unconventional gas development begin? While Canada and the US are at very different stages on the resource pyramid. very little sustained effort has been put to commercialize the resources. A move down the pyramid requires some combination of higher prices and/or technological improvements that makes accessing these resources economical. meant Canadian producers had little incentive to explore for unconventional gas. At the top of the pyramid are the easy-to-find and easy-toaccess resources. As we move down the resource pyramid.
It is important to recognize that there can be substantial differences even within each of these play types. UBS 8 . and what works in one play may not work in another. according to the US Department of Energy. It is now estimated that unconventional gas accounts for roughly 12% of Canadian gas supply. Figure 2: Unconventional vs. and. 2) gas which is not density-stratified within the reservoir. Overview of unconventional gas As illustrated in Figure 2. More importantly. unconventional gas production has increased dramatically in western Canada. while conventional gas production continues to decline. the shape of the production curves. low-productivity coals of the Horseshoe Canyon formation. there are also notable differences. In recent years. led by various tight gas resource plays and the Horseshoe Canyon CBM. While the three main types of unconventional gas share some high level similarities. unconventional gas differs from conventional gas primarily by the nature of the deposits in which gas is found. 3) shale gas. conventional sources of gas Source: US Geological Survey The three main sources of unconventional gas in order of current production contribution are: 1) tight gas (basin-centred gas). Key differences include the way in which methane is sourced and stored. and recovery factors. Whereas conventional gas typically targets small discrete stratigraphic or structural plays. but they are still far from commerciality. and. Similarities across these unconventional sources include the need for stimulated production balanced with low exploration risk and long producing lives. there is still significant growth potential for unconventional gas in western Canada. the levels of gas in place. Methane hydrates are also a potential source of unconventional gas. where techniques used in the prolific San Juan coals have little relevance to the dry. 2) coalbed methane. Prompting this change was a combination of strengthening natural gas prices and increasing F&D costs on conventional resources. two important distinctions that mark unconventional gas are: 1) continuous accumulations that do not typically occur above a base of water.Q-Series®: North American Oil & Gas 3 September 2008 in western Canada. A prime example is coalbed methane.
methane content. Because of the complex nature of the internal surface structure of coal. one commonality is that it is typically a dry gas high in methane content. but there is still a network of connected pore spaces between the grains. and. 1 2 3 Centre for Energy Centre for Energy Centre for Energy UBS 9 . tight gas is the most similar to conventional oil and gas.Q-Series®: North American Oil & Gas 3 September 2008 The following provides a brief overview of each of the three main unconventional gas types: Gas shales Shale gas is natural gas produced from reservoirs predominantly composed of shale. low-decline production profile. Recovery rates vary from play to play.e. Although the composition of CBM varies play by play.2 Tight gas Of the three main types of unconventional gas. Given the relative abundance of shales. Natural gas in coal (NGC. etc. coalbeds can store up to seven times the amount of natural gas stored in a conventional reservoir rock. there is a substantial amount of shale gas in place within North American deposits. which is very different from conventional sources. another name for CBM) is adsorbed on the internal surfaces and also stored in pores and fissures in coal under pressure from overlying sediments and fluids. CBM is simply natural gas produced from coalbeds during the coalification process. wherein organic matter is transformed into coal.1 The composition of shale gas varies from play to play (i. with lesser amounts of other fine-grained rocks than more conventional reservoirs. 2) trapped in the pore spaces of the fine-grained sediments interbedded with the shale. Gas is stored in shales in three ways: 1) absorbed onto insoluble organic matter called kerogen. liquids contents. while other CBM plays are dry and produce long-life gas as soon as they are completed. shale deposits are often both the source rock and the reservoir rock for the natural gas. Conventional reservoirs are composed of rock made up of clastic or carbonate grains arranged in such a manner that they are in contact with each other. Porosity (what stores the natural gas) and permeability (how connected the pore spaces are) are important reservoir characteristics. In contrast to conventional deposits. A typical shale gas well is typified by relatively high initial productivity rates followed by steep initial declines before settling into a very steady long-term. Coalbed methane As the name implies. Conventional reservoirs typically have relatively high porosity and permeability and therefore are capable of producing economically without the need for large-scale stimulation. There is no “typical” production profile for an industry CBM well. Some CBM plays require de-watering before they reach peak production rates.). 3) confined in fractures within the shale itself. 20-30% have been recorded as average rates. Similar to shale gas. as each play varies substantially. the coals are both the source and the reservoir. but so far.
low long-term declines. however. The Barnett was originally developed at a fairly moderate pace using vertical wells.Q-Series®: North American Oil & Gas 3 September 2008 Tight reservoirs are those which have low permeability. it is usually in the context of a large. The key technological innovations for unconventional gas revolve around: 1) drilling processes (making rigs more efficient). life in the Barnett was not always good. Poor permeability is primarily caused by the fine-grained nature of the sediments. Chart 2: Number of producing Barnett Shale wells in the Fort Worth Basin Source: Powell Barnett Shale Newsletter Research 03/27/2008 4 Centre for Energy UBS 10 . 2008. or infilling of pore spaces by carbonate or silicate cements precipitated by water within the reservoir. yielding marginal economics. and. The role of technology Technology is the key to unlocking unconventional resources.982 horizontal wells. continuous resource-style play. Wood Mackenzie estimates that horizontals will likely make up 95% of all wells drilled in the future development of the Barnett Shale.4 Tight gas can be found in small discrete accumulations. companies have known of these large unconventional deposits for many years— it was merely a waiting game for the alignment of gas prices and/or technology to make the commercialization of these resources economical. A good example of the power of technological innovation is the Barnett Shale. often quantified as less than 0.1 millidarcies. there were 744. While the Barnett has emerged as one of North America’s largest natural gas resource plays. Tight gas typically displays relatively high productivity rates. It was not until the introduction of horizontal drilling and hydraulic fracturing that the play really took hold. followed by steep initial declines. 2) fracture stimulation designs. There were only four horizontal wells in the Barnett in 1999. In most cases. compaction. when companies refer to tight gas. but followed by exceptionally long-life. there were as many as 4. As of January 1. by the end of 2004.
“StackFrac”. adding optionality to those players that hold large in-place resources. there is substantial room for further improvement to reduce drilling and completion costs and/or increase recovery factors. This improvement allows for a substantially lower cost per frac zone. which typically took a long time to complete. Prior to the new generation multi-stage fracs.Q-Series®: North American Oil & Gas 3 September 2008 The most important innovation over the past few years has been with multi-stage fracture stimulations. and Halliburton’s “Swellpacker Isolation System”—allow good control over long-reach horizontals at much lower costs. and results in a smaller overall surface footprint—key to unlocking value in areas with challenging geography or population density. unlocks more of the reservoir. Whereas typical wells a few years ago would see only 3-4 fracs. that technology will continue to improve. UBS 11 . which is largely responsible for the unconventional boom we are seeing today. we are now seeing wells drilled up to two miles long with up to twelve individual frac stages. The newest versions of multi-stage fracs—led by Packers Plus. Figure 3: StackFrac Schematic There is little doubt. Source: Packers Plus Despite the progress made with current drilling techniques. companies did not have much control over the placement of fracs. in our view.
development will also vary on a play-by-play basis. including land acquisition and exploration costs. Important notes on IRR methodology There are many ways to evaluate oil and gas project economics. Grant Hofer. There are two IRR calculations that we often refer to: 1) the full cycle IRR and NPV (net present value). we have drawn on UBS’s extensive North American resource play coverage (William Featherston. We note that for all well NPVs we have generically assumed a 10-year development timeframe. as the majority of the plays companies are involved in are under current development and therefore have a combination of sunk costs and currently proved value plus a significant component of remaining value. The following section explains our approach to economic modelling and other key assumptions: Type curves The majority of type curves for emerging plays are based on company expectations as they are generally too early to validate with third party data. investors must understand there is risk in estimating well performance. the best measure of value added is the full cycle IRR. True development timeframes will vary company by company according to financial resources and other competing opportunities. The majority of IRRs and NPVs quoted in this report (unless otherwise noted) are half cycle. the industry has had a pretty good track record with estimating type curves for resource plays. So why look at half cycle economics? Half cycle economics are particularly relevant from a net asset value perspective. 2) the half cycle IRR and NPV.: halfcycle economics) . UBS 12 Unless otherwise noted. we need to examine half cycle returns in order to determine the remaining value of unbooked reserves from a NAV perspective. As such. plays with greater numbers of wells drilled into them will have much lower risk of substantial changes in type curve performance. and recycle ratios. IRRs in this report exclude land costs (i. NPV methodology We use a discount rate of 8% in calculating our well NPVs. In our view.e. ranging from “quick and dirty” metrics such as finding and development costs. to true rate-of-return measures such as IRR (internal rate of return). a ‘type curve’ is representative of the average well from a resource play. Because historical costs have already been captured in the firm’s capital base (either as debt or equity). Overall. we believe a 10-year development timeframe is a reasonable generic assumption. To compensate for the historical sunk costs in determining breakeven commodity prices. Individual wells in all resource plays vary widely but average out to form the ‘type curve’. and. and Chad Friess) to construct an extensive well database covering typical wells for each of the emerging and established plays. we argue that a hurdle rate of 15% (approximately 5-7% over the cost of capital) is required.Q-Series®: North American Oil & Gas 3 September 2008 Resource play economics Methodology To assess the potential of the numerous existing and emerging resource plays. Half cycle economics are essentially the internal rates of return on a go-forward investment and excludes previously sunk capital such as land acquisition costs. although until there is substantial well history. Overall. It is important to note that by nature. The full cycle IRR measures the rate of return from “cradle to grave”. Andrew Coleman.
beyond this element that is largely beyond management control. after which point royalties begin to escalate. Companies that secured land early in the development of plays are typically paying royalties of about 12%. Variance in price realizations means that plays located closer to markets can tolerate substantially higher F&D costs to deliver the same IRR as others. The Utica shales will be subject to a very attractive flat royalty of 12. where a 2% royalty is paid until the entire project’s capital is recovered. easy access and a good economic rate of return—not a particularly easy combination to achieve.5%. Overall. Many emerging US resource plays are located on freehold lands where royalties are negotiated directly with landholders. however.Q-Series®: North American Oil & Gas 3 September 2008 What are the key economic drivers? A great resource play possesses a combination of large size. there are a number of factors that clearly affect play economics. they can deliver superior IRRs at similar F&D costs. the vast majority of unconventional gas development is on crown lands where royalties are set by provincial governments. Overall. Overall. Canadian and US Rockies plays with the largest pricing discounts must compensate either through lower costs or royalties in order to enjoy similar margins as plays located in more central locations. Whereas resource plays in the US Northeast and the Utica shales in Quebec can achieve a pricing premium of US$1/Mcf to NYMEX. or. The BC government has just tabled a very compelling royalty structure aimed at promoting unconventional gas development in the province. which do not increase with commodity prices. We discuss some of them below. 1) Gas price realizations There are remarkable differences in price realizations across natural gas resource plays. royalties escalate considerably with commodity prices. This “net profits” royalty is very similar in structure to the oil sands. the Utica and Marcellus plays enjoy the greatest advantage when it comes to price realizations. compared with recently negotiated royalties on “hot” plays ranging between 20-30%. the Utica and Horn River shale plays appear to have the lowest royalty takes relative to the majority of other resource plays. whereas in Alberta. Typically US royalties are set at flat percentages. Utica and Horn River appear to have the lowest royalty takes relative to the majority of other resource plays UBS 13 . Utica and Marcellus enjoy the greatest advantage when it comes to price realizations 2) Royalties Royalty rates vary considerably across resource plays. plays in Canada and the US Rockies tend to receive a US$1/Mcf discount from NYMEX (or sometimes substantially less depending on takeaway capacity). In Canada. put another way. Clearly headline NYMEX natural gas prices are the most important economic driver behind any play.
00/Mcf. Utica. which may be offset somewhat by a relatively high concentration of CO2 that will require additional processing. land tenure is negotiated directly with the landowner. For the majority of emerging plays.: three years) and have more burdensome drilling obligations. While most of the emerging plays in this report have adequate gas-gathering infrastructure in place to deal with initial drilling plans.e. we believe that is adequate time for industry to plan and develop future capacity expansions.25/Mcf. we believe each of the Marcellus. will likely tend to have lower operating costs than many other plays at a similar stage of the lifecycle. lands are typically granted for a period of five years. a disadvantage relative to many other regions where drilling and completion operations can run yeararound. Many western Canadian resource plays are constrained by winter-only access properties due to muskeg-like surface conditions. In many parts of the US such as Texas and Louisiana. While this threshold will likely be reached in the next 12-18 months. Land tenures within the hot plays of the US are typically shorter in length (i. The Horn River and Montney are somewhat disadvantaged in terms of underdeveloped road infrastructure. The Haynesville is well positioned from a site access perspective. we expect operating costs to average $1. Land tenure dictates more aggressive drilling in the Haynesville. For most emerging plays. we are expecting operating costs to average $1. Of all the plays examined. Beyond the Haynesville. the Haynesville has the easiest access to infrastructure with approximately 1 Bcf/d of excess takeaway capacity. The Marcellus can be drilled yearround. there are differences when it comes to the ability to deal with volumes from full commercial development. with favourable topography and good road infrastructure. such as the Haynesville and Montney.75 to $1. ranging from $0. ranging from $0. with favourable topography and good road infrastructure UBS 14 . for example. 2) well productivity—plays with higher productivity.25/Mcf 4) Land tenure There are substantial differences in land tenure across North America. which leads to higher upfront costs and slightly longer lead times to commercialization. and. but face medium-term constraints. surface topography and population density. whereas some resource plays in western Canada and the US Rockies (government lands with longer tenure) can be developed at a more relaxed pace.Q-Series®: North American Oil & Gas 3 September 2008 3) Operating costs Operating costs vary considerably across play types.75 to $1. The Haynesville has the easiest access to infrastructure. which can complicate drilling operations. Land tenure is important because it dictates the development timeframe. as infrastructure is spread over more wells. Montney and Horn River are roughly equal in terms of infrastructure challenges—all have immediate takeaway capacity. Companies paying large sums recently for lands in the Haynesville need to drill aggressively over the coming years in order to keep their lands. The Haynesville is well positioned from a site access perspective. compared with a more relaxed pace in western Canada and the US Rockies 5) Infrastructure Infrastructure is a key factor when it comes to developing new resource plays. In Alberta and BC.00/Mcf. but faces challenges from high population density. the most significant differences being: 1) the stage of the development lifecycle—plays that are well developed tend to have lower operating costs. Wells in the Horn River basin typically have high productivity. Other considerations for ease-of-site access are road networks. with about 1 Bcf/d of excess takeaway capacity 6) Site access Ease of site access is an important consideration when evaluating resource plays.
it is important to give credit to those companies that are able to get into the right plays early. recent.000 Source: UBS UBS 15 . but a clear difference from the company with the lower cost base.000 acres of land in the Haynesville shale at $1.Q-Series®: North American Oil & Gas 3 September 2008 7) The cost of entry Land costs have a large impact on unconventional gas economics because of the large up-front investment that is required. We believe EnCana.000 $25.000/acre is capable of generating a full cycle IRR of about 60%. as opposed to those that pay extremely high costs later to catch up with their peers.000/acre would yield a return of about 15%—still acceptable.000/acre but have exceeded over $30.000 $5 $6 $7 $8 $9 $10 $11 $15. The Haynesville is a classic example where a year ago. We believe EnCana.000/acre would generate full cycle IRRs of 27%. whereas late entrants paying up to $10.000 $20.000 Long-Term Gas Price (US$/mcfe oil conv erted to gas at 10:1) $1.000 $12 Long-Term Gas Price (US$/mcfe oil conv erted to gas at 10:1) $5. has found itself with high-quality land holdings in many emerging plays at a very low cost.000 Source: UBS $5. these are still very attractive rates of return. On a company-specific basis. We estimate that a company acquiring 100.000/acre in various. mainly due to its pursuit of other plays. Talisman.000 $10.000 $30. lands were easily acquired for under $1. large deals. Chesapeake and EOG Resources stand out as consistently being the early entrants into the majority of emerging plays.000 $10. We also illustrate an example in the Horn River where early entrants into the play at less than $1. Chesapeake and EOG stand out as consistently being the early entrants into the majority of emerging plays Chart 3: Horn River full cycle IRR sensitivity on $/acre 80% 60% IRR (a-tax) 40% 20% 0% -20% $4 $5 $6 $7 $8 $9 $10 $11 $12 Chart 4: Haynesville full cycle IRR sensitivity on $/acre 100% 80% IRR (a-tax) 60% 40% 20% 0% -20% $4 $1. whereas another company acquiring land at recent prices of approximately $30.100/acre would earn full cycle IRRs of 48% at $9/Mcf. While late entrants earn a noticeably lower IRR.
but with high gas price realization and low royalties.850 3.500 $8.67 Low High Source: Company reports. we believe each of these plays is poised for significant growth and will deliver investors very strong returns.10 Avg.2-2. though.400 $7.0 20-60 0.44-0.2-6.89 Medium High Marcellus 2.727 $2. it could also compete with the Haynesville for IRRs. Marcellus and Montney all group together quite closely in terms of rate of return Utica’s IRR is more difficult to define at this early stage. it is difficult to truly define Utica’s IRR.500-8.9 70 0.4->4 DCT Costs ($mm) .30 18% 105% $1. EUR Bcfe 2.Commercial Scale Drilling $3. The second most promising play we see is the Haynesville with a typical IRR expected at the 89% level (assuming commercial scale costs).435 Gas-Filled Porosity (%) 2.750 $9. As is apparent from the previous discussion.1-5. followed by the Haynesville The Horn River.45 Low High US Bakken 8.45 10% 50% $2.0-8.1-2.0 0.30 Typical IP (mmcf/d) 2. The highest IRR play that we see is the Bakken.5-6. Our type curve for Utica.5 30-35 0.000 70-300 1.2 $2.3 $1.500 6.60 1. though.70 190 $87.6 $6.500-7. Overall.500 500 130-250 3.398 $1. UBS UBS 16 .3 F&D Cost ($/mcfe) $1.5 $6.2 2. Marcellus and Montney all group together quite closely in terms of rate of return and therefore we are reluctant to label one as better than the other as there is high variability within each of these plays.000 $8. if the Utica does realize higher IPs and recoveries.000 120-220 40-120 3-10 60-80 0.000-12.45-0. and with it.500 200-240 150-250 0.000 2.7 $2.17 Above Ground Challenges Medium Level of Delineation High Woodford 6.9 8.000 2.89 1.0 1.0 $4.60-0.000 1.8 8-12 (oil) Immature $5.5 1.0 0.55 3.3 $1.0 90-95 0.43 5.76 19% 52% $5. Royalty 17% IRR A-Tax (excluding land costs) 54% NPV / Well ($ million) $2.10 19% 37% $2.285 4.4 $1.500 5.52 3.500 75-350 0.500-8. both in the US and Canada.500-13.000 160-1. is that there is much greater well control on the Montney and therefore lower risk versus both the Marcellus and Horn River plays. Due to its early stage of exploration.33 Low Low Horn River 6.43 10-14 (oil) Immature $1.70 1.632 $1.45 13% 65% $3.7 1.Q-Series®: North American Oil & Gas 3 September 2008 Summary of key resource plays Table 1 provides an overview of many of the key characteristics of each of the key emerging resource plays.0 $3.5 Silica Weight (%) 20-60 Pressure Gradient (psi/ft) 0. It is important to note that due to its high gas price realization and low royalties. The Horn River.900 0.0-12 20-50 0.4 $1. but will not be known until more wells are drilled and tested this fall.1-3.7-0.5-3 $4.805 $0.422 $1.0-12.000 20-50 30 12.500 $9.000-10.55 25% 89% $8.5-4 na 0.000-6.000 Avg.62 High Medium Bossier / Haynesville 10.1 na 0.500 50-200 20-150 1.8-2.893 $1.75 MMcf/d of initial production (IP) and 1. The key takeaway from this analysis is that virtually all of the emerging resource plays that we examined in this report appear set to yield strong rates of return.0-15. This appears to be a pretty achievable threshold.51 Low Low Montney 6.046 $0.84 20% 57% $4. One differentiating factor. it could compete with Haynesville’s IRR Fayetteville Depth (feet) 1.000-10.6 $1.698 NPV / Mcfe $1. Montney and Marcellus.05 High High Canadian Bakken 5.6 Bcf of estimated ultimate recovery (EUR) would deliver a rate of return comparable to the Horn River.000 300-6.0-6. the highest margin of error.300-6.30 20% 95% $5. Despite having different characteristics.843 $2.96 High Low Utica 2.6 $7. which assumes 1. both in the US and Canada.0-9.76 1. Table 1: Emerging resource play comparables The highest IRR play that we see is the Bakken.03 8.0 Maturity (Ro) 1.250 Price Realization (US$9/mcf & $90/bbl benchmark) $8.000 32-40 27 7.65 3.0-6.67 2.1 $1.5-0. there is no one recipe for a successful resource play.6-7. The Haynesville is also ideal in terms of relatively easy surface access and good infrastructure access (at least for the next year).2-3.42 4. they both yield ultra high rates of return with very little in the way of surface obstacles or infrastructure constraints.500 $7.28 500 $87.000 Thickness (feet) 20-200 GIP (bcfe/section) 25-65 TOC Weight (%) 4.9-2.1-4.
Returns are lower at today's 'experimental' well costs. followed by the Marcellus. the Bakken and Montney are the best delineated. resource potential vs. the emerging plays we have looked at have generated an average IRR of 68% at a US$9. Haynesville and Horn River * Assuming commerical scale drilling costs. ** Area of the circles depicts the relative sizes of the resource plays. such as the Horn River.00/Mcf natural gas price—a very attractive rate of return. and Marcellus. economics (the half cycle IRR). are grouped relatively tightly with IRRs in the 40-65% range. with 25 Tcf for the Utica. Montney and Marcellus each have potential for 50 Tcf of recoverable resource potential. the Bakken and Montney are the best delineated. Figure 4: Comparative economics vs. Haynesville and Horn River. The Haynesville. Additionally there are a number of other experimental plays. Of the emerging plays we have looked at in this report. such as the various shale plays emerging in the US Rockies. the Delaware Barnett/Woodford. with 105% and 89%. long-term production history. level of delineation 140% Deep Bossier 120% Typical Well Economics (After Tax IRR) Bakken 100% Haynesville* 80% 60% 40% 20% 0% Utica/Lorraine* Horn River* Woodford Marcellus Montney Fayetteville Horseshoe Canyon Piceance Barnett Jonah Of the emerging plays we look at in this report.Q-Series®: North American Oil & Gas 3 September 2008 Comparing size vs. we expect the second half of 2008 and 2009 to be pivotal years in firming up the commerciality of these plays. Montney. and the Pearsall shale. there is no shortage of emerging resource opportunities. respectively. The Bakken and Haynesville appear to be the two stand-out plays in terms of half cycle IRRs. As illustrated. The emerging resource plays vary significantly in terms of level of delineation. Experimental Emerging Degree of Delineation Established Source: UBS UBS 17 . and the UBS estimate of recoverable resource on the play (size of the circles). which we have not included in these estimates. IRR and stage of life cycle Figure 4 contrasts each of the key North American resource plays in terms of stage of development (separated into different groupings based on how many wells have been drilled). As discussed in the previous section. on our estimates. Given the aggressive exploration/evaluation plans for all these plays. followed by the Marcellus. Horn River. The majority of plays. Investors should regard plays with a lower level of delineation as a higher risk than those that are well established and have firm.
The horizontal line on the chart depicts a 15% after-tax hurdle rate. we expect total well cost inflation at less than 10% per annum for the next few years. the average IRR is 68%. UBS 18 . which the majority of the plays achieve at a price in the US$5-6/Mcf range. producers have shown quite good success controlling costs in a booming drilling environment. The choice of a 15% IRR is somewhat arbitrary. partly due to improved efficiencies and continued improvements in fracturing technology.00/Mcf price.50 $1. At a US$9.Q-Series®: North American Oil & Gas 3 September 2008 What gas price do you need to breakeven? Given the intensive gas price volatility over the past few months.50 -$0. To date. particularly for unconventional resource plays with good starting economics.50 $2.50 $3. we expect inflationary pressures will grow over the next few years as rig utilization increases.50 -$1. As illustrated in Chart 5 and Chart 6. we will no doubt see rig counts increase exponentially. Should natural gas prices remain strong.50 $0. Overall. the majority of these plays offer very robust economics. As such. it is important to understand the IRR sensitivity to natural gas prices. not to mention day rates have remained relatively stable through late-2007/early-2008. Chart 5: IRR sensitivity 180% 130% IRR (a-tax) 80% 30% -20% $4 $5 $6 $7 $8 $9 $10 $11 $12 Long-Term Gas Price (US$/mcfe oil conv erted to gas at 10:1) Bakken Montney Hurdle Rate Hay nesv ille Horn Riv er Marcellus Utica NPV / Mcf (8%.50 $4 $5 $6 $7 $8 $9 $10 $11 $12 Long-Term Gas Price (US$/mcfe oil conv erted to gas at 10:1) Bakken Hay nesv ille Marcellus Montney Utica Horn Riv er Source: UBS Source: UBS Resource play drilling boom likely to see inflationary pressures Cost control is the key to success in any resource type play. a-tax) Chart 6: NPV/Mcfe sensitivity $4. but we believe it is reasonable considering cost of capital is typically in the 810% range and producers would want to achieve a higher half cycle IRR to compensate for sunk land costs.
50 $2. As illustrated.00 $0.00 -$0.00 NPV / Mcfe $1. Chart 8: Average IRR of emerging resource plays 140% 120% 100% IRR (a-tax) 80% 60% 40% 20% 0% -20% $4 $5 $6 $7 $8 $9 $10 $11 $12 Long-Term Gas Price ($/mcf) Base Cost Base Cost+20% Hurdle Rate Chart 9: Average NPV/Mcfe of emerging resource plays 3Q07 $5 $6 $7 $8 $9 $10 $11 $12 Long-Term Gas Price ($/mcf) Base Cost Base Cost+20% Source: UBS Source: UBS UBS 19 .00 $2.Q-Series®: North American Oil & Gas 3 September 2008 Chart 7: US land rig day rates $20 $18 Day Rates ($'000/day $16 $14 $12 $10 $8 $6 $4 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 $3. The NPV/Mcfe (assuming US$9. Oilfield Services & Equipment) Nonetheless.00/Mcf) for a typical resource play (presuming a 10 year development time frame) drops from $1. We expect inflation costs will be moderated by continued efficiency gains in drilling and fracturing techniques for many of these unconventional resource plays.50 Gulf Coast MidContinent ArkLaTex Permian Basin South Texas Rockies 1Q07 $4 Source: UBS (J.32/Mcf. The following charts illustrate the average IRR and NPV/Mcfe for all of the emerging resource plays evaluated in this report (excluding Utica which we have classified as experimental).50 $1.50 $0. we believe the plays evaluated in this report have sufficiently strong economics today to absorb cost increases and still yield strong overall returns. David Anderson.00/Mcf)—a fairly substantial decrease but still a relatively high rate of return.52/Mcf to $1. with a 20% increase to well costs the average IRR for our emerging resource plays evaluated in this report drops from 68% to 48% (US$9. again a pretty substantial drop but still representing a high value.
we studied the full cycle IRRs of the Montney.Q-Series®: North American Oil & Gas 3 September 2008 How do the plays rank globally? We believe unconventional gas has one of the best balances of risk and reward in global oil and gas. selected global returns 70% 60% 50% 40% IRR (a-tax) 30% 20% 10% 0% -10% -20% $40 $50 $60 $70 $80 $90 $100 Long-Term Oil Price (Nat Gas at 10:1) Source: UBS Montney Early Entrant Montney Late Entrant Usan Angola Tupi Oil Sands (2) Lower political risk—While no asset is immune from the risk of changes in fiscal regime. even considering the significant disconnect between North American natural gas prices and global oil prices. the fully cycle IRRs are far superior to global oil opportunities. UBS 20 . Chart 10 highlights the rates of return of various global development opportunities. the rates of return for unconventional gas plays are better than the majority of other global oil exploration opportunities. For early entrants with lower land costs into a play such as this. we believe it is fair to consider on-shore North American resource plays as having a lower-than-average level of political risk. illustrating how unconventional resource plays compete extremely well relative to the global opportunity set. Chart 10: Average North American unconventional vs. As shown in Chart 10. The advantages of unconventional resources include: (1) Higher rates of return—Even after factoring in land costs. the economics for an unconventional play such as the Montney still proves to be superior vis-à-vis other global opportunities. assuming different land acquisition costs for the early and late entrants (we have chosen the Montney as we believe it is a good representation of the average emerging play). While IRRs are reduced with higher land costs for later entrants.
Granted it likely takes as long for unconventional gas to achieve peak production rates as global oil. (4) More flexibility—A key feature of resource play development is a high degree of flexibility. From land acquisition to first gas can be as little as a few months. There is little to lose by cutting back drilling should prices drop. but the earlier cash flow makes it easier from a financing standpoint and a net present value perspective. whereas if prices were to fall significantly during the construction of an LNG or oil sands plant. whereas the cycle time from land acquisition to first production for oil sands of most global oil opportunities is more typically in the 5 to 10 year range.Q-Series®: North American Oil & Gas 3 September 2008 (3) Shorter cycle times—The cycle time on gas resource plays from concept to first production is typically a fraction of the time of other similar sized oil and gas opportunities. UBS 21 . the asset has zero value if construction is halted before completion.
Niobrara Shale) Black Warrior Basin San Juan Basin (Fruitland CBM. Almond) Emerging Plays Fayetteville Shale Uinta and Piceance Basin (Mesaverde Tight Gas. Jonah. Shales and coalbed methane plays are scattered throughout North America. Mesaverde Tight Gas) West Texas Barnett/Woodford Shale Pearsall Shale Barnett Shale Haynesville Shale Woodford Shale Source: UBS UBS 22 .Q-Series®: North American Oil & Gas 3 September 2008 Where are the plays located? The following map provides an overview of the locations of North America’s vast unconventional resource base. The majority of tight gas plays are located alongside the Rocky Mountain belt from British Columbia down into Wyoming and Colorado. Figure 5: Unconventional resource plays in North America Horn River Shale Bighorn/Outer Foothills Tight Gas Horseshoe Canyon CBM Antrim Shale Utica Shale Montney New Albany Shale Manville CBM Bakken Shale (oil) Appalachian Basin (Marcellus Shale. reflecting the abundance of these source rocks. Huron/Ohio Shale) Powder River Basin (Big George) Shale Gas Basins Coalbed Methane Basins Tight Gas Basins Green River Basin (Pinedale.
000 500.000 760.000 ExxonMobil Huron Shale 250.240 Niobrara Shale 60.TO NXY.000 Forest Oil FST Gastem GMR.000 72.TO TLM.000 106.500 Murphy Oil 22.TO CHK COG NFG RRC TLM.200 108.000 341.000 Forest Oil 243.000 Nexen 56.500 Canada Natural Resources 32.000 225.000 San Juan Basin CBM 64.000 Vermilion 85.000 EOG Resources 135.000 300.000 11.000 130.TO CNQ. 63.000 XTO Energy XTO 700.000 Pioneer Natural Resources PXD 64.000 BP BP 227. 42.000 Petroquest Energy 412.750 34.000 The Williams Cos WMB 460. 300.500 Petrobank 140.TO TXCO Acres Piceance 11.000 54.000 Acres 900.TO TLM.800 Haynesville Shale 76.000 Powder River CBM Anadarko Petroleum APC 544.000 325.000 Encana ECA.000 Canada Natural Resources 21.100.732 4.000 EOG Resources 310.000 134.000 Questar Corp STR 122. Table 2: Land positions by resource play Antrim Shale Aurora Oil & Gas Bakken Shale (Canada) Talisman Energy Inc.220 100.000 EnCana 85.TO GMET ECA.TO CHK NFX XTO CLR PBR XEC ECA.000 Cabot Oil and Gas Forest Oil 630.240 Devon Energy 34.200 Carrizo Oil & Gas 74.TO ATN EQT XCO APC EOG CXG UPL QRCP SWN ECA.000 CNX Gas Corp.000 Encana Corp 92.TO ECA. Range Resources 483.000 Equitable Resources Inc.TO SEO.TO CLR HES EOG MRO WLL PXP ECA.TO ECA.600 Encana Corp ECA. Worth Barnett Shale Oil Play EOG Resources AOG TLM. UBS UBS 23 .200.TO RRC CRZO PXD DNR FST EOG Acres Granite Wash 159.000 Oklahoma Woodford Shale n/a Chesapeake Energy n/a Newfield Exploration n/a XTO Energy Continental Resources 2.000 Manville CBM 109. Although we have ignored the quality differences across various acreage positions.069 Horn River 405.000 129. 94.000 Chesapeake Energy Cimarex Energy 340.000 Marathon Oil MRO 115.000 Equitable Resources Inc.000 PetroHawk 320.000 Carrizo Oil & Gas CRZO 44.240 Aurora Oil & Gas CNX Gas 2.000 EOG Resources 100.TO 31.700 Marcellus (Appalachian) Shale 33.000 Encana 50.000 306.000 Encana 295.000 New Albany Shale 10.TO VETUN.000 TXCO ECA.900 Newfield Exploration NFX 105.000 Pioneer Natural Resources PXD 393.TO PBG.TO CHK HK PXP XCO XTO COG FST EOG CRK SM PVA EP STR GMXR GDP PBR ECA.TO DVN ECA.000 Bill Barrett BBG 102.200 Uinta Basin 8.750 30.700 Source: Company reports.000 Monument Butte 356.000 Encana Corp 25.TO APA EOG DVN NXY.000 Junex JNX.000 EXCO Resources Inc 96.TO XOM IMO.000 269.000 Talisman Energy Inc.000 287.000 Plains Exploration and Production 320.000 Pinedale 300.000 ExxonMobil Imperial 137.000 Utica Shale 112.000 BP BP 52.000 Nexen 57.000 Plains Exploration & Prod 340.000 Penn Virginia El Paso 962.000 Chevron CVX 483.500 EOG Resources EOG 464.000 Nexen 18.000 184.000 PennWest 143. Cabot Oil & Gas CNX Gas Range Resources EXCO Resources Inc CHK XEC FST ECA.TO GO/A.427.000 Plains Exploration & Production PXP 640.000 Southwestern Energy 53.000 25.000 127.000 Chesapeake Energy Cabot Oil and Gas 2.000 Royal Dutch Shell RDS/A 125.000 XTO Energy XTO Gasco Energy GSX 471.384 Talisman Energy TLM.000 Galleon Storm 220. Mary Land & Exploration 44.000 National Fuel & Gas Co.000 Compton 250.500 ARC Energy Trust 27.TO ExxonMobil XOM 1.800 130.000 Devon Energy DVN 51.TO TOG ERFUN.TO AETUN.000 Pierre Shale 400.VDD West Texas Barnett/Woodford Shale (Permian Basin) 170.000 70.200.000 Anadarko Petroleum 107.000 30.TO PWTUN.000 Apache Corporation 40.400.800 Devon Energy Encana 529.000 20.TO CR.TO NXY.TO KWK PWTUN.000 Devon Energy 24.631 Apache 155.000 5.000 Ultra Petroleum UPL 161.000 Goodrich Petroleum PetroQuest 851.000 700.000 EXCO Resources Inc 110.TO CPGUN.TO 22.000 Ultra Petroleum 91.000 147. Crescent Point Energy Trust Petrobank Tristar Enerplus Resource Fund Bakken Shale (US) Continental Resources Hess Corporation EOG Resources Marathon Oil Whiting Petroleum Plains Exploration & Production Bighorn / Outer Foothills Tight Gas Encana Corp Talisman Energy Inc.TO AOG CXG NBL PXP FST CRZO ECA.000 Questar Corp GMX Resources 215.000 Newfield Exploration NFX 179.TO 27.000 Petrobank Crew Energy 727.TO ECA.TO MUR CNQ. 459.200 375.000 92.000 Birchcliff 208.TO PGFUN.902 Talisman Energy TLM.000 Talisman Energy Inc.000 34.TO APA DVN XOM EQT COG CXG RRC XCO Acres Jonah 310.200 Horseshoe Canyon CBM 650.000 165.200 Forest Oil FST 128.503 XTO Energy 85.000 Encana 117.TO CMT.500 Duvernay 29.TO BIR. Black Warrior Basin GeoMet Inc. Cutbank Ridge Encana Corp Deep Bossier Encana Fayetteville Shale Southwestern Energy Chesapeake Energy XTO Energy Petrohawk Energy BP Carrizo Oil & Gas PetroQuest Energy Floyd Shale Carrizo Oil & Gas Ft.000 Encana Corp. as well as their overall land holding on the plays.000 720.000 Pengrowth 108.400 Raton Basin CBM 80.TO 120.200 Greater Sierra 137.TO PBG.000 Pearsall Sheale 165.500 PennWest 57.000 Quicksilver Resources KWK 165.000 64.000 Montney 50.000 427.000 Quest Resource Corp.000 Atlas Energy Resources 450.000 Occidental Petroleum OXY 700.000 Quicksilver Resources 185.VDD 380.000 Williams Company WMB 900. Worth Barnett Shale Gas Play Devon Energy EOG Resources Chesapeake Energy Quicksilver Resources XTO Energy Encana Corp Range Resources Carrizo Oil & Gas Pioneer Natural Resources Denbury Resources Forest Oil Ft.900 Questerre QEC.000 Forest Oil 339.960 Greater Natural Buttes Anadarko Petroleum APC 2.640 Questar Corp STR 371.TO PBG.000 Encana 91.000 Cimarex Energy 193.000 Comstock Resources St. 260. it is a good indicator of the degree to which companies are exposed to unconventional gas and the leaders of the various plays.TO DDV.000 Noble Energy 531.000 Chesapeake Energy 411.TO SWN CHK XTO HK BP CRZO PBR CRZO DVN EOG CHK KWK XTO ECA.Q-Series®: North American Oil & Gas 3 September 2008 Who are the key players? Table 2 provides an overview of the companies that are currently exposed to various unconventional gas plays (emerging and established).
000 531. by far.000 42.815. Worth Barnett Shale Oil Play Marcellus (Appalachian) Shale Uinta Basin .500 n/a 357.000 300.373. Worth Barnett Shale Gas Play Total Royal Dutch Shell Pinedale Southwestern Energy Fayetteville Shale Marcellus (Appalachian) Shale Total St.400.000 339.000 130.500 22.000 310.503 184.000 405.000 92.000 31.Greater Natural Buttes Acres 10.000 1. Worth Barnett Shale Gas Play Granite Wash New Albany Shale Total Galleon Montney Gasco Energy Uinta Basin .000 64.069 50.000 34. EnCana stands out as having.000 21.000 8. Marcellus (Appalachian) Shale Newfield Exploration Oklahoma Woodford Shale Uinta Basin .000 225.000 24.000 189.000 11.000 143.000 57.700 427.000 227. Worth Barnett Shale Gas Play Bakken Shale (US) Ft. Worth Barnett Shale Gas Play Jonah Total EOG Resources Ft.732 168.000 20.000 32.000 630.000 159.Monument Butte Pinedale Total Nexen Manville CBM Horn River Horseshoe Canyon CBM Total Noble Energy New Albany Shale Occidental Petroleum Piceance Pengrowth Horseshoe Canyon CBM Penn Virginia Haynesville Shale PennWest Horseshoe Canyon CBM Manville CBM Total Petrobank Bakken Shale (Canada) Horn River Montney Total PetroHawk Haynesville Shale Fayetteville Shale Total PetroQuest Oklahoma Woodford Shale Haynesville Shale Fayetteville Shale Total Pioneer Natural Resources Pierre Shale Raton Basin CBM Ft.000 54.000 108.000 125.000 471.902 Quest Resource Corp.Greater Natural Buttes Total Apache Horn River Horseshoe Canyon CBM ARC Energy Trust Montney Atlas Energy Resources Marcellus (Appalachian) Shale Aurora Oil & Gas New Albany Shale Antrim Shale Total Bill Barrett Powder River CBM Birchcliff Montney BP Fayetteville Shale Pinedale San Juan Basin CBM Total Cabot Oil & Gas Huron Shale Marcellus (Appalachian) Shale Haynesville Shale Total Canadian Natural Resources Manville CBM Montney Total Carrizo Oil & Gas Floyd Shale Ft.000 109.750 835.000 34.000 117.800 51. its landholdings offer good diversification across plays that are well established.100.000 34.200 483.900 127.245.000 640.000 310.000 60.000 630.069 105.000 53.000 30.000 80.000 617. Worth Barnett Shale Gas Play Devon Energy Ft.Greater Natural Buttes Haynesville Shale Pinedale Total Questerre Utica Shale Quicksilver Resources West Texas Barnett/Woodford Shale Horseshoe Canyon CBM Ft.000 129.000 2.700 356.384 573.515.500 269.000 76.000 193.000 30.000 64. Black Warrior Basin GMX Resources Haynesville Shale Goodrich Petroleum Haynesville Shale Hess Corporation Bakken Shale (US) Imperial Horn River Junex Utica Shale Marathon Oil Bakken Shale (US) Powder River CBM Total Murphy Oil Montney National Fuel & Gas Co. we have also sorted the database by total acreage holdings across all plays (Table 3).381 Source: Company reports.000 220.500 11.Greater Natural Buttes Piceance Total Acres 122.000 973.000 140.000 645.200 106. Marcellus (Appalachian) Shale Questar Corp Uinta Basin .500 2.000 380.000 27.200 710.000 325.500 2.800 341.000 120.Greater Natural Buttes Haynesville Shale Ft.000 91.000 137.000 215.000 25.000 1. Worth Barnett Shale Gas Play Oklahoma Woodford Shale Total Chevron Piceance Cimarex Energy Granite Wash Oklahoma Woodford Shale Total CNX Gas New Albany Shale Huron Shale Marcellus (Appalachian) Shale Total Compton Horseshoe Canyon CBM Comstock Resources Haynesville Shale Continental Resources Bakken Shale (US) Oklahoma Woodford Shale Total Crescent Point Energy Trust Bakken Shale (Canada) Acres 720.000 29.000 147.000 134. Generally there is no surprise that names like CHK.000 316. emerging and experimental.000 340.000 250.600. the largest inventory of resource play acreage.000 962.000 33.960 177. Worth Barnett Shale Gas Play Haynesville Shale Horn River San Juan Basin CBM Horseshoe Canyon CBM Total Duvernay Montney El Paso Haynesville Shale Encana Manville CBM Greater Sierra Horseshoe Canyon CBM Cutbank Ridge Piceance Bighorn / Outer Foothills Tight Gas Montney Haynesville Shale Niobrara Shale Pearsall Shale West Texas Barnett/Woodford Shale Deep Bossier Horn River Ft. highlighting the vast potential of its fortuitous unconventional land spread.000 500.240 40. Table 3: Land positions by company Anadarko Petroleum Powder River CBM Marcellus (Appalachian) Shale Uinta Basin .000 44.000 2. and XTO are the largest landholders on the key unconventional gas plays.232 306.700 2. Worth Barnett Shale Gas Play West Texas Barnett/Woodford Shale Fayetteville Shale New Albany Shale Total Chesapeake Energy Marcellus (Appalachian) Shale Fayetteville Shale Haynesville Shale Granite Wash Ft.640 179.631 185.000 128.000 57.240 50.100 650.000 107.406.000 1.000 100.000 56.800 393.000 700.000 1.500 72.000 700.000 112.000 116.000 92.000 192.000 700.000 956.384 243.000 130.000 450. Furthermore. EOG Resources. UBS 24 .000 300.000 287.000 155.000 459.000 900.000 544.200 115.000 320.000 161.000 170.000 94.000 375.000 n/a 1.902 110.400 483.000 96.335.320 64.000 52.900 565.000 4.000 574.000 455.000 250.000 400.000 66.000 85.Q-Series®: North American Oil & Gas 3 September 2008 In addition.200.220 91.000 100.000 529.000 27.000 965.640 85. EnCana. Talisman also screens well on this basis.000 165.000 70.960 300.000 900.000 2.000 412.000 851.000 165.200 320.000 165. Worth Barnett Shale Gas Play Total Range Resources Marcellus (Appalachian) Shale Huron Shale Ft.000 5.427. Worth Barnett Shale Gas Play Oklahoma Woodford Shale Haynesville Shale Uinta Basin .200.240 727.000 295.000 340.000 460.000 1. UBS Although there are many companies with large unconventional landholdings. Mary Land & Exploration Haynesville Shale Storm Montney Talisman Energy Utica Shale Marcellus (Appalachian) Shale Montney Bakken Shale (Canada) Bighorn / Outer Foothills Tight Gas West Texas Barnett/Woodford Shale Total The Williams Cos Powder River CBM Tristar Bakken Shale (Canada) TXCO Pearsall Shale Ultra Petroleum Marcellus (Appalachian) Shale Pinedale Total Vermilion Horseshoe Canyon CBM Whiting Petroleum Bakken Shale (US) Williams Company Piceance XTO Energy Fayetteville Shale Ft.000 Gastem Utica Shale GeoMet Inc.750 74.000 320.600 11.000 464.Greater Natural Buttes Horn River Haynesville Shale Total Equitable Resources Huron Shale Marcellus (Appalachian) Shale Total Enerplus Resource Fund Bakken Shale (Canada) EXCO Resources Inc Marcellus (Appalachian) Shale Huron Shale Haynesville Shale Total ExxonMobil Piceance Horn River Horseshoe Canyon CBM Total Forest Oil Utica Shale Uinta Basin .000 760.000 2.000 338.200 Crew Energy Horn River Denbury Resources Ft.000 337.795.000 22.000 18. Worth Barnett Shale Gas Play Total Plains Exploration & Prod New Albany Shale Haynesville Shale Bakken Shale (US) Piceance Total Acres 108.200 135.400 137.000 63.000 208.809.500 n/a 102.000 44.000 411.000 710.000 260.700 25.000 85.200 371.
000 4. we ran two scenarios for Talisman.000.000. to which we have not attributed any resource estimates.000. with EnCana and Chesapeake representing the largest inventory in terms of total resources.000.000. as well as the highest ratios of unbooked resource potential relative to current proved reserves.000 Acreage 8. shows modest resource upside relative to its large cap peers. In this analysis.Q-Series®: North American Oil & Gas 3 September 2008 Chart 11: Top ten unconventional acreage holders 14. reflecting the higher amount of uncertainty in assessing the company’s unbooked resources because of the early stage of evaluation. in the upside case.000. As illustrated. we look at reserves (2007 year-end pro forma major acquisitions) plus recoverable resources. and producers not covered by UBS.000 10. UBS 25 . is EnCana’s dominant land position in many other still-experimental projects (Niobrara. we see a similar grouping of large cap producers as the dominant resource players. However.000 12. the key North a few selected current proved other probable Similar to the previous tables on relative acreage positions.000 2. which uses the assumptions included in our current NAV. our assumptions are potentially conservative relative to its peers in many of the same areas. however. Delaware Barnett. Talisman could have above-average leverage to unconventional gas.000 0 Equitable Talisman Cabot EOG EnCana BP Chesapeake Anadarko Range Devon Source: UBS Leverage to the resources Chart 12 depicts what we view as the overall potential of American unconventional gas players covered by UBS.000. Mannville CBM). One differentiating factor between EnCana and Chesapeake. The Talisman “Up” case looks at the upside potential if it enjoys a higher level of success in each of its emerging plays. As illustrated.000 6. Pearsall. Our Talisman Base Case.
Q-Series®: North American Oil & Gas 3 September 2008
Chart 12: Proved reserves vs. unbooked resource potential (large caps)
50,000 40,000 Bcfe 30,000 20,000 10,000 ECA CHK DVN NXY NFX EOG TLM TLM XTO GasCo Base Up Proved Reserves
5.0 4.0 3.0 2.0 1.0 0.0
EnCana and Chesapeake have the largest inventory in terms of total resources, as well as the ratio of unbooked resource potential relative to current proved reserves
Ratio Of Unbooked / Proved Reserves
Unbooked / Proved Reserves
The US small- and mid-cap producers generally have the highest leverage to emerging unconventional resource plays, led by Petrohawk, which offers significant exposure to the Haynesville shale.
Chart 13: Proved reserves vs. unbooked resource potential (US small & mid caps)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 COG XEC DNR FST HK PQ PXP KWK SWN SFY UPL Proved Reserves
12.0 10.0 8.0 6.0 4.0 2.0 0.0
The US small- and mid-cap producers generally have the highest leverage to emerging unconventional resource plays
Ratio Of Unbooked / Proved Reserves
Unbooked / Proved Reserves
Among Canadian companies that offer exposure to various emerging resource plays, Compton, Birchcliff and Petrobank offer the highest leverage, with Compton’s upside potential coming primarily from the Hooker tight gas play (not evaluated in this report), while Birchcliff offers significant exposure to the Montney. Petrobank offers exposure primarily to the Bakken (oil sands not included in this analysis), as well as emerging exposure to the Montney and the largest land position of any small cap player in the Horn River. The companies that offer the most leverage to early-stage unconventional gas plays are junior producers in the Utica, such as Questerre, Junex, Gastem and Epsilon (not included in the following analysis).
Q-Series®: North American Oil & Gas 3 September 2008
Chart 14: Proved reserves vs. unbooked resource potential (Canadian small & mid caps)
Ratio Of Unbooked / Proved Reserves
Of the Canadian small and mid caps, CMT, BIR and PBG offer the highest leverage to resources
6,000 5,000 4,000 Bcfe 3,000 2,000 1,000 SEO GO.A PBG AET.UN CPG.UN CMT BIR
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
Source: Company data, UBS
Unbooked / Proved Reserves
Consolidation among the unconventionals likely to continue
The global oil and gas sector has been relatively quiet in terms of M&A activity considering the strength in commodity prices, with producers largely focused on deploying free cash flow toward share buybacks. Transaction activity to date has been heavily focused on strategic acquisitions, such as oil sands and unconventional gas. We expect this trend to continue, particularly as land availability and rapidly escalating land costs make it difficult to execute large scale organic entries into many plays. The largest transaction recently in the world of unconventional gas was Royal Dutch’s $5.9 billion acquisition of Duvernay Oil, a Canadian mid-cap producer primarily focused on the Montney/Doig play in northeast BC. As with other unconventional resource acquisitions, the buyer put substantial value on the unbooked resource potential of the Montney play. After deducting the proved reserve value of Duvernay, we estimate Royal Dutch paid approximately $0.70/Mcfe for Duvernay’s inventory of 6.7 Tcf of unbooked Montney and Doig potential—another illustration of how unbooked inventory has real monetary value. Other recent noteworthy transactions include the $3.3 billion deal between Plains and Chesapeake in the Haynesville, which equated to acquiring Haynesville lands for $30,000 per acre—the highest large-scale land transaction we have seen in any resource play, and once again illustrating the value of unbooked resource potential. Given the recent pullback in share prices within the energy sector (particularly for natural gas weighted names), we see minimal value being reflected in share prices for unbooked resource potential. As each of these emerging plays proves up their potential, and should natural gas prices stabilize in a reasonable range, we would expect share prices to once again begin to reflect more value for the unbooked resource potential.
. . . which are not currently reflected in share prices High strategic value, low risk & good economics mean unconventional consolidation is likely to continue
Recent transactions illustrate the value of unbooked resource potential . . .
Q-Series®: North American Oil & Gas 3 September 2008
Top unconventional stock picks
Given the attractive economics surrounding the bulk of the emerging resource plays, combined with the likelihood of further technological innovation, we believe North American resource plays are some of the most attractive projects in global oil and gas. The following section highlights our top picks in Canada and the US for exposure to this compelling oil and gas asset class.
Top Canadian picks
EnCana was the earliest and most aggressive entrant into the North American unconventional gas arena. While heavily criticized in the early years of this strategic transition, we believe it is now very clear that the move to unconventional was the right move at the right time for the company. Over the last few years, we have seen a heavy move, mostly by US producers, into the unconventional arena. The companies who have joined EnCana to become dominant unconventional gas players include XTO, EOG Resources and Chesapeake. Other than EnCana, Canadian large cap producers have largely lacked meaningful exposure to unconventional gas—but that is changing rapidly. In our view, Nexen and Talisman are the next best positioned to take advantage of the evolution of unconventional gas development, with both companies’ share prices reflecting essentially no value for their prospective acreage positions. Petrobank offers outstanding exposure to the Bakken oil play, as well as the Montney, Horn River and oil sands, at a very low valuation.
EnCana [Buy, PT US$135, covered by UBS analyst Andrew Potter]
EnCana’s early shift to unconventional was the right move at the right time
Nexen and Talisman are the next best positioned, in our view, with Petrobank and Crescent Point rounding out our picks for Canadian producers
EnCana remains one of the most focused North American unconventional gas producers—particularly following its recently announced restructuring into an unconventional gas company and separate oil sands focused producer. EnCana GasCo’s 2007 year-end proved reserves were 11.28 Tcf (net of royalty). Based on our estimate of the company’s well-defined, unbooked natural gas inventory of approximately 36 Tcf (including our estimates of approximately 9 Tcf for Horn River and 11 Tcf from the Haynesville), we believe EnCana GasCo has the opportunity to grow at 7-9% over the next ten years at a minimum. Given its early entrance into many unconventional plays, EnCana is one of the lowest-cost producers—a strong competitive advantage in an increasingly crowded field. While EnCana GasCo trades at a higher EV/DACF valuation versus Canadian large caps, it is essentially trading in line with its US unconventional gas peers (EOG Resources, XTO, Chesapeake) and at a significant discount from its NAV, in our view. Our NAV estimate for EnCana, using current UBS natural gas price forecasts (which are aggressive relative to strip prices), is $156. Using US$9/Mcf flat, the stock is still trading very inexpensively relative to our $135 NAV estimate. In addition to the ~36 Tcf of unbooked resource potential, EnCana has exposure to many other emerging plays that are not yet included in our estimates, but that have high levels of prospectivity. Some of the plays are: 1) Mannville CBM; 3) Niobrara Shales; 4) Pearsall Shales; and, 5) West Texas Barnett. Collectively, these five plays have approximately 220 Tcf of gas in place.
EnCana—exploiting the early mover advantage
Figure 6: Emerging resource plays
We have currently assigned value to approximately 4 Tcfe of resource potential. positive results at its new targeted area of the Bakken play UBS 29 . Success on this new Bakken sweet spot could add significantly to our NAV.Tcf Source: Company reports Talisman [Buy.890 357 GIP/section (Avg) . the stock’s valuation is also the lowest of any North American large cap. We expect Talisman to grow production by approximately 5-10% per year from 2009-2012.0 Mannville CBM Wet 16 3. covered by UBS analyst Andrew Potter] Newly appointed CEO John Manzoni ushers in a new vision at Talisman. We note that our NAV estimate includes only $3/share for Talisman’s emerging unconventional resource plays. Our $30 target price is in line with our NAV estimate. Talisman estimates it has 124 Tcfe of gas in place on its five emerging resource plays.027 49.6 Horn River 100 344 34. the company will now rely on unconventional gas as a key growth engine.1 Tcfe (net of royalty). After many years of avoidance. targeting a new area of the play. Talisman’s proved reserves at year-end 2007 were 8. huge resource potential remains to be seen. excluding contributions from unconventional gas. As the company remains in the early stages of evaluating these plays. over the next 6-12 months. While Talisman’s unconventional exposure is at a much earlier stage of delineation than many other unconventional players. Talisman is currently trading at a 2009e EV/DACF of 2.9x.9 Tcfe (or 36% of total).4 766 11.0 Total 61 5. Bakken.Bcf/section Sections GIP (Avg) . The key catalysts for the market to begin to re-rate Talisman’s valuation are results from its key emerging plays. Talisman—inexpensive unconventional gas exposure Key catalysts for a Talisman re-rating: Positive news flow from its Marcellus and Utica wells. Specifically.2 101. As the company proves up its emerging plays. Montney and Utica). Additionally. The unrisked potential of these plays is approximately $20/share.5 Niobrara Haynesville 125 200 594 508 74. with North American reserves of 2. Talisman has legacy lands in five very compelling resource plays (Marcellus. Talisman has been accumulating significant lands on the Bakken play in Canada. implying the market has not yet given any credit to these emerging plays. but acknowledge the upside could extend well beyond 20 Tcfe.4 Mannville CBM Dry 14. we expect to see significant news flow from its first Marcellus and Utica shale wells. which could be quite material. Outer Foothills. PT C$30. For context. we expect the valuation to begin to expand.1 Pearsall 150 203 30. the cheapest of any North American E&P.Q-Series®: North American Oil & Gas 3 September 2008 Table 4: EnCana’s unconventional gas exposure Barnett Delaware 125 448 56.
Nexen’s unconventional gas strategy was strengthened by the acquisition of a large land position in the Horn River Basin in northeast BC.52 $7.6 1. commercialized the Mannville CBM play in 2005.361 $1.84 $2.1 6. which would increase Nexen’s 2008-2012 CAGR from approximately 4 to 7%.1 0. Nexen’s proved reserves at year-end 2007 were 6. the Mannville represents an important asset for Nexen.45 $1. making unconventional gas an important component of Nexen’s medium term production profile UBS 30 .751 $0. Nexen and its joint venture partner.3 0.550 $7. Nexen has emerged with a very credible and attractive unconventional gas strategy that complements its significant oil sands exposure.579 $542 $1.75 $0. While the Horn River play is still in the early stages of evaluation.75 $0. this asset would also add consistency to Nexen’s growth profile.9 0.356 $2.0 Outer Foothills Tight Gas Prospectivity 50% 100% 10% 25% 50% 100% 10% 25% 50% 100% 5% 10% 20% 100% 5% 10% 20% 100% Industry NPV / Potential NPV / mcfe * Potential NPV Share $0.49 $0.66 $5.2 0.68 $681 $0.12 $2.25 $4. but note that it has the potential to reach over 200 MMcf/d by 2013.85 $0.3 Tcf (before royalties) and the 2P reserve base was reported at 11. making unconventional gas an important component of Nexen’s medium term production profile.8 Tcfe.289 $4.084 $10.33 $2.5 1.34 $0. Between the Mannville and Horn River.70 $0.6 1.75 $2.70 $0.51 $1. Nexen has estimated that it has the potential to yield 3-6 Tcf of recoverable resources.32 $0.84 $0. covered by UBS analyst Andrew Potter] Despite having minimum exposure to western Canada (non-oil sands). We believe the Manville offers the potential for an additional 1 Tcf on top of what is already booked in the 2P reserve base.1 2.70 $0.85 $0. Nexen has been one of the more aggressive companies in the region in terms of implementing an unconventional gas strategy.Q-Series®: North American Oil & Gas 3 September 2008 Table 5: Talisman unconventional upside potential Implied Recoverabe Resource Potential 1.712 $5. Trident Exploration. We believe Nexen’s Horn River asset could achieve over 200 MMcf/d by 2013.84 $2.042 $2.0 1. Importantly. With the potential to reach 150 MMcf/d by 2013 (net to Nexen).50.23 $0.53 $1.85 $0.85 $0.5 3. PT C$52.423 $521 $1.2 2.70 $458 $1.75 $0.67 $0.61 Montney Tight Gas** Bakken Oil** Marcellus Shale Gas** Utica Shale Gas*** * discounted to assume 10 year development time frame ** Type curve economics assume 75% of industry productivity *** discounted to assume 15 year full development time frame Source: UBS Nexen [Buy. which has historically been quite lumpy with its focus on long lead time oil sands and international projects. We have not included production from Horn River in our production estimates for Nexen.76 $1.0 2.38 $0.422 $388 $775 $1. Nexen’s recently acquired Horn River asset could achieve over 200 MMcf/d by 2013.145 $2.02 $2.0 0.84 $2.5 12.2 11.05 $10.6 1. More recently.68 $1.
we believe that the trust is positioned to double its current reserve base (over time).7x 2009e EV/DACF versus the peer group average of 5. and 75% of its 851.9x net debt-to-cash flow) and an attractive cash yield of 7. which includes $55 in NAV for its unbooked portion of the Fayetteville based on the assumption that the play could have 16 Tcfe of net potential. Crescent Point Energy Trust [Buy. The trust has been an aggressive consolidator of the play. While the company is most known for its experimental oil sands technologies (THAI/CAPRI). Our $45 price target implies a one-year total return in excess of 22% and supports our Buy rating on the stock.Q-Series®: North American Oil & Gas 3 September 2008 Petrobank [Buy. with most of its production concentrated in large pools in southern Saskatchewan.000 boe/d of light oil volumes from the play. Top US picks Southwestern Energy [Buy.6% that represents approximately 45% of cash flow. with incremental upside through improved recovery factors. Montney and Horn River development. PT C$45. covered by UBS analyst William Featherston] Southwestern has the strongest and most visible growth profile in our universe. Crescent Point has currently booked reserves to roughly one-third of its 1. our projected NAV estimate ascribes no value to upside related to infill drilling in the Fayetteville.000 net acres is prospective. covered by UBS analyst Grant Hofer] We believe Petrobank provides substantial upside potential on the Bakken value alone. Southwestern is currently trading at a 46% discount from our proved and probable NAV estimate of $71 per share. to invest in the attractive Fayetteville play UBS 31 . The trust trades at a premium valuation—6. Montney and Horn River development Crescent Point is the largest producer in the Canadian Bakken.5x—best among the companies in our universe. More recently Petrobank has expanded its exposure to unconventional resource by adding acreage in the Montney and Horn River areas. covered by UBS analyst Andrew Potter] Petrobank remains one of the most interesting stocks in oil and gas. and continues to aggregate further land through its partially-owned partner. At a minimum. it has a strong balance sheet (0. with what are essentially free options on the oil sands. PT US$71. privately owned). the potential master limited partnership (MLP) of its Southwestern has the strongest and most visible growth profile in our universe. the trust is 87% weighted to crude oil. we could see substantial upside to our $75 target price. with more than 15. $3. Overall. With Petrobank trading at a 2009e EV/DACF of only 2.6x—however.000+ Bakken drilling locations. If the company can solve the reliability issues with the THAI oil sands development. with what are essentially free options on the oil sands. representing roughly 40% of trust production.0 million per well costs. this has unfortunately overshadowed its outstanding success in the Canadian Bakken play. and is the best vehicle. PT C$75. We forecast 2008-09 debt-adjusted production per share growth of 64% and 35% and an unbooked potential-to-proved ratio of 10. We would not be surprised to see Southwestern exceed second-half 2008 production guidance. in our view.9x.5 Bcfe/well. Also. the stock provides substantial upside potential on the Bakken value alone. Our NAV estimate assumes: 2. and continues to direct the vast majority of its capital spending towards growing the play. providing several Tcf of new resource opportunities (unrisked). Shelter Bay (19% CPG. 80-acre spacing.
We estimate a $32 NAV potential for its unbooked portion of the Spraberry. Petrohawk has built up and pruned its assets. As a result. Pioneer Natural Resources [Buy.e. While our US analyst. material unbooked resource potential (1. we expect reserve replacement will be well over 300% over the next few years. Barnett. and could reach 800 Bcfe/year. Petrohawk’s ability to demonstrate repeatable and robust organic growth will be a key catalyst for the share price UBS 32 . We should note that we continue to believe our NAV estimate is conservative relative to the assumptions outlined by two other large players in the Fayetteville (XTO Energy and Chesapeake).Q-Series®: North American Oil & Gas 3 September 2008 midstream business. and Tunisian assets. ultimately building a pure-play resource E&P company.33 Tcfe. We also see catalysts that could propel Pioneer from here: 1) test results from well completions into the shale formation in the Spraberry. Petrohawk has 300. Petrohawk Energy [Buy.000 net acres in the Haynesville shale. Edwards Trend. The 44% discount from NAV compares favourably to the peer group’s 33% discount. and.000-acre Marcellus Shale play or James Lime and Haynesville Shale play in east Texas and Louisiana. Andrew Coleman. We continue to rate Southwestern Buy. covered by UBS analyst William Featherston] After having underperformed the peer group for nine of the past 11 years (by 19% per annum on average). or unrisked resource potential in its 105. believes management will eventually sell the company. 2) results from the uphole shales tests in the Pierre Shale. Primary risks include whether dilution from future deals and leverage restrict NAV growth and debtadjusted performance metrics. in our view. Pierre. Pioneer Natural Resources is just beginning to recapture investor attention with its above-average production growth (18-20% this year and +14% per annum thereafter) and visibility. and discount valuation relative to its peers. With the “clean-up” phase largely over. Since its inception in 2004. Raton CBM. and delivering its robust 25% organic growth rate in 2008 and 30-40% in 2009. While Pioneer has outperformed year to date relative to its peers. management has shifted to aggressively developing the assets. and view Southwestern as the best vehicle to invest in this attractive play.8 billion boe). with resource exposure of over 10x its mid-year 2007 proved reserves level of 1. and it remains our top gassy pick in the sector. PT US$70. and the horizontal tests in the KP1 shale in the Raton basin. Pioneer is trading at a 44% discount from our NAV estimate of $113 per share. Haynesville & Fayetteville shales) will create significant value. key risks include keeping infrastructure growth on pace with development drilling. Operationally. PT US$113. we believe investors are still just beginning to grasp the turnaround at the company given the considerable valuation gap relative to its peers. covered by UBS analyst Andrew Coleman] We believe investors are still just beginning to grasp the turnaround at Pioneer given the considerable valuation gap relative to its peers We believe the focused asset strategy and aggressive development drilling program in the mid-continent (i. Petrohawk’s ability to demonstrate repeatable and robust organic growth will be a key catalyst for the share price.
and significant leverage to Appalachia.Q-Series®: North American Oil & Gas 3 September 2008 Cabot Oil & Gas [Buy. Within the company’s Marcellus Shale resource play. Cabot has emerged as one of the better-run pure-play resource E&Ps. Currently. we project at least $19 per share and 1.4 Tcfe of unbooked reserves valued at $29 per share. The primary risk to the story is whether infrastructure can keep pace with development. although the market is only now beginning to appreciate the company. we foresee potential to capture another 2.1 Tcfe of unbooked reserve upside tied to its two emerging resource plays: East Texas James Lime and West Virginia Lower Huron.5 Tcfe of unbooked potential. and we expect it to deliver double-digit production and cash flow growth (adjusted for asset sales and divestitures) over the next three years. covered by UBS analyst Andrew Coleman] Following the sale of its offshore Gulf of Mexico assets in August 2006. The stock currently trades below our proved plus probable (2P) NAV estimate. expected at >300% for ~$2. We project at least $19 per share and 1. PT US$100. we do not break out the company’s Haynesville potential from its East Texas assets.1 Tcfe of unbooked reserve upside tied to Cabot’s two emerging resource plays UBS 33 .30/Mcfe in 2008. Based on Cabot’s strong reserve replacement metrics. We believe total reserves will double as the plays evolve and management has identified 10-15.
000 500 0 Marcellus Montney Horn River Haynesville Arkoma Basin (Woodford. Will gas supply outpace demand? Very strong growth expected from the unconventional plays .0-2.000 2. combined with some price elasticity. Chart 15 and Chart 16 summarize the expected growth from the key emerging unconventional gas plays.000 6.500 1. Given that US gas production increased a massive 9% in Q1/08 versus Q1/07. Caney) Barnett -500 2008 2009 2010 2011 2012 2013 Marcellus Although the overall production from these plays is high. From a supply perspective.0 Bcf/d of incremental supply growth per year from these plays—a large number but still a manageable growth pace. Chart 16: Key resource play y/y growth (MMcf/d) 2.Q-Series®: North American Oil & Gas 3 September 2008 Is too much success a bad thing? A key question that accompanies most discussions of recent shale gas successes is whether or not gas supply growth will outpace demand. We expect overall US production to increase approximately 4% per year over the next two years. albeit at a slower pace than the Haynesville. will keep North American gas prices at a steep discount from international prices. The Montney. Horn River and Marcellus should also see significant growth. leading to a sharp decline in North American gas prices. Chart 15: Key resource play production (MMcf/d) 16. with virtually every producer talking about the multiple Bcf/d potential of each of these new plays. we expect 1. it is no wonder this is a question on the forefront of investors’ minds. we believe that the continued strength in US gas supply. As illustrated. with production growing from essentially nil in 2008 to over 3 Bcf/d by 2012.000 14. we expect 1. Fayetteville. However.000 Production (mmcf/d) Production (mmcf/d) 12.500 2. given that global natural gas prices continue to trade off record-high oil prices. such as the start-up of the Rockies Express pipeline and the Independence Hub. we continue to believe that the abnormally large supply increase in Q1/08 gas production is largely due to transitory factors.000 0 2008 2009 2010 2011 2012 2013 Montney Horn River Haynesville Arkoma Basin (Woodford.0 Bcf/d of incremental supply growth per year from these plays—a large number but still a manageable growth pace.000 10. we project a remarkable growth profile from these plays. the vast majority of emerging key resource plays will likely earn high rates of return that would be competitive with global oil projects at the US$100/bbl level. Even at the lower end of this price range. remaining production declines roughly 1% per annum. which implies that as production from the aforementioned key resource plays increases. Although the overall production from these plays is high.000 4. .000 1. we expect that North American natural gas prices will likely remain in the $8-11/Mcf range. We estimate true organic US production increased at approximately 4-5% over the same period—still a high level. Overall. but one that is more balanced. Fayetteville.000 8. UBS 34 . Caney) Barnett Source: UBS Source: UBS Table 6 depicts the overall UBS supply outlook for natural gas. We expect the Haynesville shale to lead the charge over the coming years. .0-2.
1 1.0 -4.2) 9.7 0.1% 2.9 9.0 7.9 0.7 61.5 4. we believe the demand side of the equation is in good shape.0% 0.0% 6.8 4.1 52.5% 4.0 1.1 0.1 13. achieving a decent gas price is contingent on significant demand growth soaking up available supply.7 0.5) 9.8 (1.1 10.4 10.0% 0.0 1.7) 52.0 1.2 60.S.4% 12.S.4 (2.0 4.8) 9.8 0.1 50.1% 4.2 62.0% 0.9% 1.4% 8.5% CAGR over the last ten years. Given our outlook for supply growth in the 4-5% range for the foreseeable future.0 -2.7 3.4% 13.6 14.2 50.2 0.9 0.8% 30.2 64.6 0. Power generation a key driver Power generation appears likely to be the key driver for natural gas demand in the coming years—particularly as the growth of coal-fired generation remains at risk because of increased concerns over CO2 emissions.4 0.0% -2.0% 4.1 52.4 55.5% 13.2 62.1 -3.4 0.2 (2.6 8.5 (2. and increased to 8% over the past three years (including 9.3 2.7 0.1% growth.8) 9.4% 2.5% 0. going forward.0% 1.7% 0.7% 0.9 2.0% 1.8 12. Industrial demand forecasted to see modest growth With lower gas prices than major global markets.0% 34.8 (0.2 18.3 9.9% 0.5 0.0% 0.2 0.1 0.5 50.0% 2.2 61.8 1.2 0.9 0.9 8.2 14.4% 7.3 20.7) 8.4 0.2 66. making domestic industries more competitive going forward.9 52. (UBS Estimate) Canadian Imports Mexican Imports Net LNG Imports Total U.0 4.0 10.0% 44.5% 1.0% 11.0% 2.6% 12.7% -47.2 57.6 11.4% 0.4 0.4 0.4 9.3) 51.6 (1.3% 0.2% 10. Reserve margins were maintained at over 20% from 2001 to 2004.3 18.5% this year and 12% in 2012.2 8.7 22.9 63.9 63.8 1.1 4. Exports U.2% 12.2 61.2 -1.1 16.1 14.6 9. Imports Total U.8 0.1) 8. Net Imports Supplemental Gaseous Fuels Total 52.9% growth in 2007). . .5% 0.5 2.0 8.1) 8.3% 4.4 9.4 10.8 53.3 0.0% 3.1% -0.3 9.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 07/'06 08/'07 CAGR 09/'08 02-'07 32.4 20.0 0.7 0.1% 6.9 23. or flat levels at a minimum.2 59.4 0.2 (0.2 18.5% 13.0 0.8% 3.8 52.2 68.8 61.8 (2.1 3. We expect this growth momentum to continue given tightness in electric utility reserve margins and the anticipation of favourable legislation towards the build-out of gas-fired electric generating facilities over coal-fired electricity. (EIA Estimate) Balancing Item U.2% 0.0% -4.2 55.1 68.2 0.0% 5.1 51.7 19.9% 0.4 8.5 59.6 9.6 20.3) 9.4 9.8% 13.1) 9.0 9.7 (1.5 11.2 18.2 0.6% 8.2) 9.2 4.5 0.2 52. Gas consumption for power generation grew at a 5.0% 3.3) 8.0 66.7% -11. Furthermore.7 (0.9 8. now boasts one of the lowest gas prices among major global markets.4 0.8 17.0% 3.0 0. Dry Gas Prod.0% -0.2 64.8) 51.S. we believe domestic industries are more competitive going forward Although industrial demand witnessed a drastic decline of 18% from 2000 to 2007.0 10.2 10.0 64.3 51.9 8. we believe the recent trend of declining demand is behind us and would expect modest growth.8 (2.2 0. backed by a weakened dollar. but will demand keep pace? The demand side of the equation also remains a key question mark.2 60.6 50.2 60.5% 16.4 0.4 (0.6 5.S.4 10.3 5.1 4.5% 4.1 10.1% 13.3 22.4 18.0 61.9 63.7 0.9% 6.9 8. As such.3 18.5 21.7 (0.0 5.3 (1.4% 1.6 19.7 0.6 61.9% 13.5% 12.1 8.6 (0.6 4.8) 9.7 3.5 53.6 15.0 10.4 0.9 8. While coal fuels roughly half of the US’ generation We expect the growth momentum in power generation consumption to continue UBS 35 .0% 0.9% -13.0 1.0% 0.9% 12.1% 0.5 52. Dry Gas Prod.4 0.3% -4.7 59.0% 0.Q-Series®: North American Oil & Gas 3 September 2008 Table 6: US natural gas supply & demand % Growth 1998 Demand Bcf/d Residential Commercial Industrial Electric Power Transportation Total Yr/Yr Growth Supply Bcf/d U.2 61.2 0.7% 13.4 11. the US.9% Source: UBS .5% 4.7 61.2 22.8 15.3 -1.1 0.5 (0.2% 13.1 8.0 1.1 8.4 8.0 0.0% 0.8 17.4 49. its outlook had improved significantly in 2007 with 2.6 60.3 54.9 12.6 0. but are expected to decline 16.1 6.0 2.3 57.S.1% -3.2 4.0% -0.6 5.2 61.2% 0.0 11.1) 10.0 1.0% 6.3 10. Despite the migration of industrial users abroad during the earlier part of this decade because of rising natural gas prices in the US (chemicals and aluminium producers in particular).4 8.
coal has traded at a significant discount from natural gas (between 20-40%). Thermal coal vs. but sufficiently strong to make gas resource play investments highly economic. will grow a further 21% in 2008.50/Mcf. followed by about 22% from natural gas). recent shifts in the global coal market have exposed structural demand/supply deficiencies and strengthened the global demand for US coal. natural gas fundamentals have primarily influenced the domestic pricing relationship between natural gas and coal. assuming that efficient gas plants will displace inefficient coal plants. However. on a cost-to-generate (a megawatt) basis. our UBS US coal analyst.Q-Series®: North American Oil & Gas 3 September 2008 capacity. gas prices expected to remain sufficiently strong Thermal coal prices have surged over the last three months. UBS 36 . driven by weather fluctuations. occurs at roughly $8-10/Mcf. Overall. Florida. Increased international demand for US thermal coal has caused US coal prices to rise substantially (2008e exports are roughly 22m tons greater than 2006). Natural gas will be the clear beneficiary as we estimate 2 Bcf/d will be required in addition to our longer-term growth forecast in order to sustain the current 8% growth rate in gas-fired generation. and. Historically. China has been adding roughly two new coal-fired power plants per week to its electric grid. 4) moderate demand growth. This range is clearly quite disconnected from oil prices. reflecting the relative scarcity of natural gas. while India also continues to expand its coal-fired fleet. Using the UBS coal forecast in our proprietary Fuel Switching Model and assuming a 30% discount from our natural gas prices on a cost-to-generate basis (midpoint of the historical 20-40% discount) implies a natural gas price of $11. This growth in demand comes in the face of decreased export growth from traditional sourcing markets. 3) increased net exports. However. and as a result of the region’s inability to satisfy its own supply needs. US thermal coal exports grew 19% in 2007 and. 2) impediments to Appalachian production growth. Parity. and Oklahoma) have either passed or declared their intent to pass legislation that prohibits additional conventional coal-fired generation. New England. forecasts an increase in US thermal coal prices to reflect: 1) higher production costs. the US has increased its contribution to the global seaborne market. 54% of the plants proposed this decade have been cancelled or delayed. Shneur Gershuni. natural gas Historically. limited fuel switching has been observed during select shoulder months. under unique circumstances. we expect natural gas prices to remain in the $8-11/Mcf range in a normal weather environment. In recent years. we project. Shortterm gas prices could easily move outside of this range. there has been a strong correlation between US natural gas and coal prices because of the ability of US electric generators to substitute natural gasfired generation for coal-fired generation (about 49% of US electric generation is currently derived from coal. and several states (California. The key risks to our forecast are larger than expected supply growth in the US and a reduction to coal prices that would lower the downside support for natural gas. such as Indonesia and Vietnam. Fueled by Asia's voracious (and growing) appetite for coal-fired generation. raising the floor for natural gas prices Recent shifts in the global coal market have exposed structural demand/supply deficiencies and strengthened the global demand for US coal Overall.
Q-Series®: North American Oil & Gas 3 September 2008 Key emerging plays to watch UBS 37 .
pressure mounts and gas in place per section increases at the expense of permeability and porosity. producers have drilled vertical wells in the Valhalla/Knopcik region since the late 1990s. UBS 38 . In the La Glace-Valhalla region to the south. As the play deepens from east to west. producers were beginning to test horizontals—primarily led by EnCana in the Swan Lake/Tupper region and also by Arc in the Dawson area. but still primarily using vertical wells. Although the play covers a large footprint. By 2006.Q-Series®: North American Oil & Gas 3 September 2008 Montney Background The Montney play covers a large section of northwest Alberta and northeast British Columbia in Canada.560 feet (1000 to 2. Generally speaking. As we move down towards the Dawson/Pouce Coupe/Gordondale/Tower/Parkland region. The shoreline on the eastern side of the play resembles that of a structurally driven deposit. Swan Lake. Producers began branching out in 2004/05. Figure 8: Montney depositional environment Figure 7: Montney Locator Source: McDaniel & Associates Consultants Ltd. and Sunset regions. depositional fans start to emerge. the Montney can be found at a depth of 3.000 metres) in the Swan Lake Tupper region. the play ranges from the La Glace-Valhalla region in the southeast up to the Monias in the northwest.280 to 6. It is the large-scale overpressure fans in the Swan Lake/Tupper/Groundbirch/Sunset region to the southwest which characterizes the Montney as a true resource-style play. various regions have starkly different characteristics. Development to date The Montney is not a new resource. testing the Montney in the Dawson. The flurry of activities we see today reflects the strong initial results. The Montney was deposited in a marine environment with the shoreline on the east and deepening to the west. Source: McDaniel & Associates Consultants Ltd.
Q-Series®: North American Oil & Gas 3 September 2008 Figure 9: Evolution of the Montney Source: McDaniel & Associates Consultants Ltd. but several producers have expanded this to up to 12. UBS 39 . there were approximately 600 wells drilled into the Montney. This results in smaller environmental footprints. we have seen approximately 110 wells drilled per year. In each of 2006 and 2007. Recent land sales on the Montney play have seen bids in the $13. Acreage in the Montney continues to rise at a rapid rate. almost all vertical. typically at least six wells per pad. Most operators in the Montney are adopting US best practices and are opting to develop using pad drilling. While current development plans are being pursued based on four wells per section.000/acre range. Although there is a certain amount of secrecy surrounding the technique which was used. 2008 will likely see close to 400 wells drilled into the Montney. but only a dozen of these were horizontals in 2006 and 45 in 2007. Given the strong results produced from horizontal wells drilled thus far. Most Montney operators drilling horizontally in 2008 were completing wells on average with six frac stages. we expect this technological development to play an increasing role in the future development of the play. with an even higher weighting towards horizontal drilling. Prior to 2005. we note that further downspacing to eight wells per section is possible over time. and lower overall costs. it is believed to be primarily a 100 tonne/frac Slickwater job. less time between wells. reflecting strong initial results and high activity levels in the area.
29 $1.000 3. Land) Payout (months) 10.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 736.000 1.500 2. Land) Payout (months) 14. We have calculated the economics for a “shallow” and “deeper” Montney. Shallower Montney wells that are really more conventional prospects. Our Deep Montney type curve assumes a typical well achieves a one-month IP of 4.42 $1.5 Mcfe 1479.05 57% 16.103 $8.0 Mcfe 4418.0 After-Tax $4.000 2.500 1.5 After-Tax $1.000 500 4.90 3.344 $5.000 750 500 250 1.250 1.5 MMcf/d level and recover approximately 1.000 1.54 $7.00/Mcf (8% discount rate and 10-year development timeframe). lower costs and relatively high reserves make the economics comparable to deep Montney wells.632 $6.4 $8.500 1. yielding an NPV per Mcf of approximately $1.500 1.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $6. typically see one month IPs at the 1.Q-Series®: North American Oil & Gas 3 September 2008 Type curves We have constructed two different type curves to reflect the differences in depositional environments across the play.32 $33.000 750 500 250 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Years Source: UBS Source: UBS Chart 18: Deep Montney Type Curve 4.2 $1. We note that we have calculated BC Montney economics using the proposed net-profits royalty program.0 * assuming 10 year development time frame Source: UBS UBS 40 . Montney’s economics appear very robust for all classes of wells.5 Bcf per well assuming five frac stages.42 Pv 8% per mcfe * 65% Well IRR (ex.0 Pre-Tax Pv 8%* $2. Table 7: Shallow Montney economic summary Table 8: Deep Montney economic summary Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 246.32 $35.000 500 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Years Daily Production (mcfe/d) Cumulative Prod (mmcf) Economics Overall.31 Pv 8% per boe * $1.0 $1.40 3.05 using NYMEX of US$9.5 $10.5-2.69 $1.500 2.87 4.65 4.000 2.22 $5. Despite lower initial productivity from a shallow Montney well.91 41% 22.500 3.5 Bcf per well.53 Pv 8% per boe * $1.000 3.500 1.45 $0.55 Pv 8% per mcfe * 91% Well IRR (ex.852 $9. which significantly improves economics versus the previous royalty regime.5MMcf/d and recovers approximately 4. Chart 17: Shallow Montney Type Curve Daily Production (mcfe/d) Cumulative Prod (mmcf) 1.250 1.500 3.500 4.500 4. We estimate Deep Montney wells generate an after-tax IRR of about 57%.22 $5.14 $7.
Chart 19: Shallow Montney IRR sensitivity 100% 80% IRR (a-tax) 60% 40% 20% 0% -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% IRR (a-tax) Chart 20: Deep Montney IRR sensitivity 120% 100% 80% 60% 40% 20% 0% -20% $4 $6 $8 $10 $12 Natural Gas Price ($/mcf) Source: UBS Base Case Base Cost+20% Hurdle Rate Hurdle Rate Source: UBS Chart 21: Shallow Montney Type 1 NPV/Mcf sensitivity $2.50/Mcf under our current cost assumptions.00 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Cost+20% $1.00 $0.00 -$0.50 -$1.50 -$1.00 Base Case $1.50 $0.50 NPV /Mcfe (a-tax) $1.00 $4 Base Case Base Cost+20% $6 $8 $10 Natural Gas Price ($/mcf) $12 Source: UBS Source: UBS UBS 41 . As illustrated.00/Mcf.Q-Series®: North American Oil & Gas 3 September 2008 Chart 19 to Chart 22 provides the IRR and NPV/Mcf sensitivities of the Montney to various natural gas price forecasts.50 NPV /Mcfe (a-tax) $1. which represents robust economics. we expect the Montney to achieve a breakeven 15% after-tax IRR at approximately US$5.00 -$0.00 Chart 22: Deep Montney NPV/Mcf sensitivity $2.00 $0. Assuming costs are 20% higher than our current forecast. Montney development would achieve a 15% after-tax IRR at roughly US$6.50 $0.
which results in significant logistical challenges versus many US resource plays that can drill year-round. bringing production to 1 Bcf/d. Producers are mitigating this challenge by pre-investing in all-season roads.50/Mcf less than NYMEX. As the play is still relatively early in its development. Gas produced in the Montney will typically net roughly $1. From a production standpoint.7 Bcf/d.000 1. it is difficult to gauge a very accurate estimate of recoverable potential.800 1. More recently. much of the Montney is considered winteraccess only. However. Production (MMcf/d) UBS 42 .400 1.600 1. We would not be surprised to see 210 and 255 wells drilled during 2009 and 2010.200 1. with our five-year forecast for the Montney being approximately 1. reflecting normal basis differentials. The Canadian Society for Unconventional Gas (CSUG) has pegged total gas in place within the Montney at up to 250 Tcf. with EnCana being the largest single producer at 140 MMcf/d.000 800 600 400 200 0 2008 2009 2010 Wells Source: UBS 300 250 Annual Wells Drilled 200 150 100 50 0 2011 Production 2012 2013 Challenges to development Like many areas of western Canada. we estimate the Montney as a whole is currently producing approximately 200 MMcf/d. a favourable royalty regime on the BC side of the Montney and overall good F&D costs mitigate much of the lower price realization to keep overall economics comparable to the best emerging resource plays. consolidating early individual company estimates for their current estimates of recoverable resource potential points to total recoverable gas of greater than 20 Tcf. Chart 23: Montney production growth outlook 2. However. TransCanada announced the receipt of expressions of interest for more than 1 Bcf/d of capacity out of the Montney and is currently working out the details for an open season to gauge producers’ commitment. The lower price realization relative to southern/eastern US and other Canadian plays is a burden on play economics.Q-Series®: North American Oil & Gas 3 September 2008 Overall resource size The Montney is a large resource play covering an estimated 680 square miles throughout northeast BC and Alberta. but varies significantly on a company-by-company basis in the form of firm plant access (discussed in further detail below). Infrastructure over the general Montney area remains tight.
covered by UBS analyst Andrew Potter] EnCana holds the largest land position. We believe these estimates are very conservative and.000 net acres. Talisman has not specifically identified its land holdings by area. EnCana has the most processing capacity of any of the Montney players. translating to approximately 25% of its lands being commercial and approximately 4% of total gas in place being recoverable. assuming 4. Talisman estimates its total Montney landholdings at 460. EnCana is one of the most experienced Montney operators.5 Bcf recoverable per well. EnCana estimates it has over 1. with 547. PT US$135. this translates to a total resource potential of about 7 Tcf.Q-Series®: North American Oil & Gas 3 September 2008 Key players EnCana [Buy.C.500 drilling locations in inventory for the Montney. EnCana continues to improve on results in Montney completions. UBS 43 . and is heavily focused on the Deeper Montney in B. with approximately 40 Tcf of gas in place on these lands. with 240 MMcf/d of capacity currently and plans to expand capacity to 365 MMcf/d by year-end 2009 (Bissette expansion). there is little doubt Talisman will achieve a sizeable resource on the play—it is only a question of how big and in which areas. The upside case could see 6 Tcf of potential.000 acres within its “core” Montney project. Talisman recently drilled its first horizontal well on the Montney with rates up to 3. Our valuation assumes Talisman can recover 1. PT C$30. but it appears approximately half of the company’s lands are on the more conventional Montney fairway and half on the Montney resource play. but we would not be surprised to see a significant increase in 2009.6 MMcf/d. and is now producing 140 MMcf/d primarily from its Swan property near Cutbank Ridge. Talisman [Buy. The company plans to spend up to $330 million over 2008-2009 to drill 80-90 wells to better define these assets. noting that it was recently able to complete eight fracs along a horizontal leg in four days compared with one year ago when it averaged four fracs in 20 days—a substantial improvement. having first established production in 2003. we should be able to tighten the range. covered by UBS analyst Andrew Potter] Talisman has a long history of exploiting the conventional Montney in Alberta.5 Tcf from its Montney lands. EnCana plans to drill approximately 50-60 wells on the Montney in 2008. In our view. as the company obtains more drilling results. but has only recently started to evaluate its potential on the more unconventional parts of the play.
ARC is among the most significant players in the Montney play. Montney development could represent up to 50% of the trust's total capital spending. up from 20% in the current reserve report. Its primary focus is in the Greater Dawson area of northeast BC (including West Dawson. but expects considerable upside from moving to a lower porosity cut-off at 3% (with thicker pay packages). Its 2008 capital program ($125 million) will help to gauge the resource potential on the existing lands. however the trust has plans to increase pipeline capacity to a nearby facility in Alberta (+10 mmcf/d) and will also build a new 60 mmcf/d gas plant in the Dawson region. To date. where the trust has a land position of 100 net sections and P+P reserves of 181 Bcf. and subsequent land purchases. which is slated to begin operations in 2010/11. UBS 44 . Production is currently restricted to roughly 45 mmcf/d due to infrastructure constraints.Q-Series®: North American Oil & Gas 3 September 2008 Figure 10: Talisman’s Montney lands Source: Talisman ARC Energy Trust [Neutral. in the longer term. the trust's independent reserve engineers believe that recovery factors could approach 60-70% within the play. similar to other nearby producers. and Sundown/West Tupper). covered by UBS analyst Grant Hofer] Through its 2003 acquisition of privately owned Star Oil & Gas. With further history and increased drilling density. PT C$31. Sunrise. ARC has focused primarily on formations with 6% porosity. and management expects that.
Q-Series®: North American Oil & Gas 3 September 2008
Duvernay/Royal Dutch [RDSA Buy, PT 2400p, covered by UBS analyst Jon Rigby]
Duvernay is a long-standing landholder in northeast BC, although the Montney has only recently become a significant development target. The company established the majority of its position several years ago, primarily in the Sunset-Groundbirch area of the play and, as such, did not participate in much of the recently high-priced land sales in the area. While Duvernay’s lands are in the generally accepted sweet spot of the fairway, the company has been principally focused on the development of the uphole Triassic Doig zone, for which it has 300 locations in inventory. The company has recently accelerated and expanded its Montney development plan, with plans to drill 35 horizontal wells before the spring break-up in 2009. In total, Duvernay has 180 net sections (115,200 acres) of land which the company estimates are prospective for 350-700 horizontal locations, depending on ultimate downspacing. Management estimates that its average Montney horizontal well has recoverable reserves of 4.5 Bcf; we conservatively see total reserves upside of 1,300–2,900 Bcf, which is very meaningful in relation to the company’s total reserve base of 889 Bcfe. In addition, current estimates only relate to Duvernay’s upper Montney land holdings, but management believes that the lower Montney may hold potential, which is comparable to the shallower zone. Interestingly, up to half of the company’s Doig drilling locations have the potential to be captured as part of uphole Montney wells, translating into savings of approximately $1.7 million per well. Supporting Duvernay’s development inventory is an extensive, 100%-owned infrastructure system, which includes a number of gas plants. Duvernay’s infrastructure is operating at capacity at present, but will be expanded significantly in the latter half of 2008 and again before spring break-up 2009 to accommodate Duvernay’s accelerated Montney drilling program.
Storm [not rated]
Figure 11: Duvernay’s Montney Lands
Storm Exploration’s lands are focused in the Parkland area of the Montney, where it holds 52,000 net undeveloped acres of land, accessible nine months of the year. The company has drilled a number of vertical and horizontal wells into the play and currently estimates its lands hold 330 Bcf of reserve potential, assuming downspacing of four wells/sections. The company has budgeted a $65 million program for 2008 to drill an additional eight horizontal wells in the remainder of the year, as well as eight vertical step-out wells and three new test wells. Storm estimates that its wells have an all-in cost of $5.1 million and initial flow rates of roughly 2.5 MMcf/d.
Birchcliff [not rated]
Birchliff’s lands are primarily located in the Pouce Coupe area of the Montney, where it holds 80 net sections. Based on four wells per section, Birchcliff estimates it has 320 future drilling locations. The company has drilled six horizontal wells thus far into the play, four of which are on production. Using the company’s independent engineer’s assessment of 4.5 Bcf/well for its first two horizontals suggests total reserve upside of 720–1,440 Bcf. The company will drill a further 12 wells (net 10.2) before spring break-up 2009.
Q-Series®: North American Oil & Gas 3 September 2008
Galleon [Buy, PT C$25, covered by UBS analyst Chad Friess]
While Galleon’s acreage in the Dawson area of the Montney play is situated at the eastern extent of the trend, it nonetheless offers returns that are comparable to the generally accepted sweet spots of the fairway. Compared to the highly competitive regions of the Montney, such as Groundbirch, Swan Pouce Coupe, and Kaybob South, etc., Galleon’s acreage is shallower with thinner pay zones of about 165 feet (50 metres), but offers superior porosity and permeability. Galleon has developed its area of the Montney strictly with vertical well bores until very recently, when the company drilled its first horizontal with encouraging initial results. While the deliverability and recovery from each well is generally lower, the cost of drilling and completion is substantially less than in the deeper parts of the Montney ($1.3 million vs. $5-6 million). Whereas the more prolific part of the fairway to the west in BC is estimated to hold gas in place of 50 Bcf per section, Galleon estimates that its lands hold 10 Bcf per section and that it will recover 2 Bcf per well at an all-in drilling cost of just $1.3 million. In total, over 100 horizontal drilling locations have been identified and a further 200 locations may be drilled within the currently mapped boundaries of the pool assuming two wells/section. The company estimates its Dawson Montney lands hold a reserve upside of 200-600 Bcf. A further 240 Bcf of upside has been identified from recently acquired lands in BC and Alberta.
Figure 12: Galleon’s Montney Acreage
Q-Series®: North American Oil & Gas 3 September 2008
Muskwa Shales (Horn River Basin)
The Horn River basin is located in northeast BC, covering an area that spans approximately 1.3 million acres—an area nearly twice the size of the prolific Barnett shale play in Texas. The primary focus of the Horn River Basin is the Muskwa shale—a Devonian-aged shale that resides at a depth of roughly 6,5608,200 feet (2,000-2,500 metres). What makes the Horn River so attractive is a combination of large aerial extent and good rock properties. The stand-out feature of the Horn River is its thickness, which is approximately 50% better than even the core Barnett. Table 9 highlights some of the key attributes of the Muskwa shales in the Horn River basin versus the Barnett:
Table 9: Horn River rock properties vs. Barnett NXY Horn River 572-578 150-450 3.2 - 6.2 2.2 - 2.6 45 - 60 130-250 EOG Horn River Typical Barnett 530 355 230 250 4 4.5 2.8 2.2 65 55 265 193 Figure 13: Horn River Map
Thickness (Ft) Permeability (nd) Gas-Filled Porosity (%) Maturity (Ro) Silica Content (%) GIP (Bcf/Mi2)
Source: Nexen & EOG
Muskwa shales are also present in other areas of northeast BC, with the next big industry focus likely to be the Cordova Embayment (further north from the Horn River). Very little is known about the nature of the Muskwa in the Cordova Embayment, but it is generally believed to be not quite as thick as in the Horn River, but still quite prospective.
Development to date
The Horn River basin has seen development in the past for more conventional opportunities, with over 300 wells having been drilled targeting these other formations (primarily the Debolt and Keg River). Only recently the focus has turned to evaluate the areas with massive shale gas resource potential. We expect to see roughly 90 wells drilled into the Horn River by the end of 2008. The Muskwa shale play in the Horn River has been one of the most fiercely guarded plays in recent history. Land sales in the region have totalled $485 million over the past two years, with 2007 sales averaging $1,863 per acre, up 89% from the previous high of $984 per acre in 2006 ($6,233 per acre being the highest price paid in December 2007). Sales have most recently hit highs of $13,617 per acre. Large contiguous lands with attractive rock properties have attracted a number of North America’s major unconventional gas players, such as EnCana, EOG Resources, Devon, as well as large, but relatively new shale players, such as Nexen, Apache, and Imperial Oil. EnCana and Apache, through their partnership agreement, are the dominant landholders and have been the most active in terms of drilling, with a combined nine horizontal well tests. EOG has been the second most active with seven
000 2. so estimated recoveries and economics are subject to a large margin of error at this point.5-5 MMcf/d—implying IPs of 7.000 2.7-1. which would have a substantial impact on costs.1 MMcf/d—again very positive results. We have constructed type curves for what we believe can be considered a low-end.000 0 2 4 6 7 9 11 13 15 17 18 20 22 24 26 28 29 Years Cumulative Production (mmcf) UBS 48 . EOG announced its three half-length horizontal wells tested at 3.3 and 5. implying rates of 6-12 MMcf/d (assuming six to 12 fracs). We have based our economic analysis on a six-stage frac. the key players were able to keep well results and prospectivity a secret—until EOG publicly disclosed its drilling results. such as EnCana.000 5.000 1. Nexen also announced test results indicating approximately 1 MMcf/d per frac segment. Based on our assumptions.000 Daily Production (mcf/d) 6.000 3. but note that we could see significantly higher fracs than this. although we note that there is a high margin of error in these estimates and only real production history will allow us to better define the type curves. Overall the initial test results look very strong. 6.000 5. have remained quiet about drilling results.7 MMcf/d at full length and EURs of 4–6 Bcf per well. Type curves Despite the massive potential of the play. Various other producers. but it is likely only a matter of time before further results are released. Apache announced that it has drilled three wells testing at 8. Chart 24: Horn River type curves 7.8. we would expect to see a typical well recover four to six Bcf (or 0. More recently.000 Low Case Mid Case High Case 3.Q-Series®: North American Oil & Gas 3 September 2008 wells (two completed and five to be completed by year-end).000 0 0 Source: UBS 7. but it must be noted that the wells lack meaningful production history.000 4. medium-range and high-end Muskwa shale well. Further drilling is ongoing through the summer of 2008 for the operators that have access to the region’s all-weather road. and we expect to see a significant increase in the winter 2008/09 drilling season.000 4.000 1. followed by Nexen with five wells to date (three verticals and two horizontals).0 Bcf per frac segment). spurred by the very positive initial indications.000 6.
Overall. the rates of return are at the lower end of the scale relative to other emerging plays. We would not be surprised to see opex in the $1. To be conservative. Based on our analysis. resulting in a very significant NPV impact. The driver to cost reduction in the Horn River basin is the same as other resource plays—namely achieving economies of scale and improved efficiencies. However. our base case Horn River well would generate an after-tax IRR of 27% and a NPV per Mcf of $0. western Canadian plays (conventional and unconventional) typically realize NYMEX less US$1/Mcf—a $2/Mcf variance versus wells in the Appalachia. Operating costs will likely be slightly higher in the Horn River. but more than Montney wells). UBS 49 . general expectations are that current costs will be in line with Montney costs when the projects move to commercial scale. we see a typical Horn River well paying a 19% royalty. we expect costs will fall considerably as operators move to commercial scale development. at which point the rate escalates at varying thresholds. This royalty applies to a project as a whole and is more akin to the treatment of oil sands. we have run the economics on our base type curve using $7. which would imply roughly $1 million per frac segment.Q-Series®: North American Oil & Gas 3 September 2008 Economics One of the biggest competitive disadvantages of the Horn River versus US shale gas plays is the massive price discount. reflecting a relatively high CO2 content (10%) in the gas that will require extra processing. with a resulting IRR of 52% and a NPV per Mcf of $0. However.25/Mcf range. with the bulk of that payment deferred until later in the production life. At current costs of about $12 million per well.10-1. in our conversations with various operators. Several operators have indicated that costs should move to Montney type levels. Under the BC net profit royalty regime.5 million per well (less than current. indicating well costs as low as $6 million. As illustrated in Table 10 and Table 11. Fortunately. the BC government has implemented a very attractive royalty regime to promote unconventional gas development. only a 2% royalty is paid until the entire project’s capital is recovered. as it has in the Montney and many other resource plays. Whereas Appalachian shales will receive pricing of up to $1/Mcf premium to NYMEX.55 at current well costs. We have little doubt that cost will come down as commercial scale drilling begins. We conducted our economic analysis using both current and expected costs to reflect uncertainties surrounding costs.96. we see the Horn River play as showing very strong initial signs.
Chart 25: Horn River IRR sensitivity (current costs) 60% Base Case 40% Base Cost+20% Hurdle Rate 20% Chart 26: Horn River IRR sensitivity (expected costs) 120% 100% 80% IRR (a-tax) 60% 40% 20% 0% Base Case Base Cost+20% Hurdle Rate IRR (a-tax) 0% -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Source: UBS Source: UBS UBS 50 . At expected costs of $8 million per well.6 Mcfe 5255.46 Pv 8% per boe * $1.33 $33.70 $8. Land) Payout (months) 10.28 $1.55 20% 42.8 $13.9 After-Tax $5.43 $1.00/Mcf— competitive with other resource plays.046 $5.5mm/well) Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 875.575 $8.904 $3.56 $8.1 $2.658 $6.76 $0.$12mm/well) Table 11: Horn River economics (expected cost – $7.08 Pv 8% per mcfe * 34% Well IRR (ex.6 After-Tax $2. the breakeven price to meet the same 15% hurdle rate drops to approximately US$6.Q-Series®: North American Oil & Gas 3 September 2008 Table 10: Horn River economics (current cost . a Horn River well at current costs would require approximately US$8.96 52% 18.33 $35.44 Pv 8% per mcfe * 83% Well IRR (ex.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $7. As illustrated.39 $5.00/Mcf to get a 15% after-tax IRR.65 Pv 8% per boe * $1.9 Mcfe 5255.38 2.1 $1.51 3.8 $8.0 Pre-Tax Pv 8%* $5.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 875.0 * assuming 10 year development time frame Source: UBS Chart 25 to Chart 26 show sensitivity assessments of Horn River IRRs and NPV/Mcf versus varying natural gas price forecasts.06 3.39 $5. Land) Payout (months) 25.32 $0.90 2.
50 $0.00 -$1.Q-Series®: North American Oil & Gas 3 September 2008 Chart 27: Horn River NPV/Mcf sensitivity (current costs) $1.50 NPV /Mcfe (a-tax) $1.50 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case $1.50 -$1.00 -$0.50 $0.50 -$1.00 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Cost+20% Base Cost+20% Source: UBS Source: UBS UBS 51 .00 Base Case $1.00 -$0.50 Chart 28: Horn River NPV/Mcf sensitivity (expected costs) $2.00 NPV /Mcfe (a-tax) $0.00 $0.
and. southwest of Fort St. it is not unreasonable to surmise recoverable gas of about 50 Tcf (assuming 20% recovery). The Horn River basin is located in a remote area of northeast BC. Chart 29: Horn River production outlook 1. We would not be surprised to see industry increase drilling activity to approximately 80 wells next year (EnCana and Apache alone have indicated 50100 wells jointly). 2) lack of infrastructure.400 1. Spectra has announced plans to build a new South Peace gathering pipeline near the Fort St. and connect with the McMahon processing plant in Taylor. with a big bump in drilling activity not expected until 2010 when we could reasonably see about 165 wells drilled as full scale commercial operations begin.Q-Series®: North American Oil & Gas 3 September 2008 Overall resource size Estimates from the BC Ministry of Mines and Energy peg the estimates for gas in place in the Muskwa shales at a massive 250 Tcf. it is hard to define a truly meaningful recoverable gas estimate. but based on recoveries of other shale plays. Despite the large resource potential and productivity similar to the high-profile Haynesville. This challenge is currently being accounted for in our well cost estimates. The 85 km pipeline will have a capacity of 20 MMcf/d. While infrastructure is an issue in the Horn River basin.5 Bcf/d by 2013. and is currently planning to host a firm openseason. UBS 52 . As with all emerging resource plays.600 Production (MMcf/d) 1. TransCanada has also recently noted producers have expressed interest for more than 1 Bcf/d of capacity out of the region by 2012.000 800 600 400 200 0 2008 2009 2010 Wells Source: UBS 300 250 Annual Wells Drilled 200 150 100 50 0 2011 Production 2012 2013 Challenges to development The key challenges in this region are: 1) geography. John resource area. we could see the Horn River average 175 MMcf/d in 2008.800 1. development of the Horn River will occur at a more measured pace because of a combination of infrastructure constraints and a shorter drilling season.200 1. ultimately growing to over 1. it may not be as severe as presumed at first glance. John. We anticipate cost management will remain a key focus on the future development of the region. In addition to private gathering lines and Spectra’s existing capacity in northeast BC. 3) limited summer access. making the Horn River basin one of the most attractive resource plays in North America. which makes drilling and site access more challenging than it is in other plays. characterized by rugged terrain. With this drilling profile.
Buy.1 and 8. Devon. and Nexen). Apache has estimated resource potential on its lands at 9-16 Tcf net to its 50% working interest. as drilling programs are more level-loaded and therefore less prone to inflation. 6. Figure 14: Horn River map Source: Apache EnCana/Apache [ECA. so far. with each player holding a 50% working interest. Together the two players have amassed 417. Key players Adding credibility to the prospectivity of the Horn River play is the fact that virtually all major US shale gas players were early entrants into the play. Buy.8 MMcf/d. early entrants into the Horn River play. Quiksilver and Exxon Mobil. William Featherston] EnCana and Apache were both independent.Q-Series®: North American Oil & Gas 3 September 2008 While winter-access only adds a logistical challenge to this play. but has not yet released results. they now have access to roughly one quarter of its land base in the region all year round. Apache. Nexen. covered by UBS analyst Andrew Potter. EnCana has drilled an additional four wells that are currently in various stages of completion. EOG. UBS 53 . which will smooth out drilling. versus southern US and eastern US that can drill year-round.000 acres of land on the play. Year-round drilling typically results in more stable growth profiles at lower costs. along with the use of wooden mats. EnCana estimates that with the all-season road. PT US$170. Base on a 20% recovery factor. the two companies have drilled a total of nine production wells.3. Apache tested three horizontals in April 2008 with initial rates of 5. The following map highlights the key landholders as EnCana. some operators have built an all-season road (EnCana. It did not take long before the two established the basin as an area of mutual interest (AMI) in order to minimize competition at early land sales. The typical drilling season runs from November through March. Apache. The combination of these factors will mean a slower initial growth profile for the Horn River than comparable US opportunities. APA. PT US$135.
The company plans on further drilling in 2008. with one well testing at 5 MMcf/d and the other two coming in at 4. but the company has not disclosed how much of this it believes to be recoverable.000 net acres of land in the Horn River Basin. covered by UBS analyst William Featherston] Devon holds approximately 109. Approximately half of Nexen’s lands are accessible through all-season roads.2 and 3. it has drilled three vertical and three horizontal wells in the land. EOG released a press release following these results. They have not yet disclosed any detailed drilling plans or estimates of reserves. Neither company has disclosed plans for exploration on the acreage.000 acres of which are located in the Dilly Creek area. More significant levels of production are expected to come on stream in 2009. covered by UBS analyst Andrew Potter. it has conducted a reserve evaluation and stated that there is potential for significant reserves. Nexen drilled two vertical wells in the winter of 2006/07 and one vertical and two horizontal wells in the winter of 2007/08. XOM. Based on a third-party consultant’s report. Nexen estimates its Dilly Creek lands contain between 3 to 6 Tcf of recoverable contingent resources. covered by UBS analyst Andrew Potter] Nexen currently holds 123.240 acres in the Horn River Basin. Crew Energy [not rated] Crew Energy holds 10. however.000 acres in Horn River.50. The first horizontal was fractured across 985 feet (300 metres) and tested over 2 MMcf/d from its two frac segments. The second horizontal well will be fractured this winter.000 acres in the play. Devon Energy [Buy. Ultimate resource potential is estimated at 4-5 Tcf.5 MMcf/d. So far. PT C$52. PT C$57. UBS 54 . Buy. PT US$136 (UR). EOG Resources [Neutral (UR). PT US$100. generally in line with what competitors have reported. covered by William Featherston] Imperial Oil and Exxon Mobil Canada acquired 115. covered by UBS analyst William Featherston] EOG holds 140.Q-Series®: North American Oil & Gas 3 September 2008 Nexen [Buy. Imperial/Exxon [IMO. Each company holds a 50% interest in the land rights. The company has not disclosed any exploration results. indicating its estimated total reserves to be approximately 6 Tcf. with first production coming in June of 2008. Neutral. to be further increased in 2010.000 acres in the Horn River play earlier this year. PT US$160. 85.
While development of the Big Sandy Field in Kentucky began in the 1920s. the shales vary across an aerial extent of possibly as much as 20 million acres (the broader Devonian shale fairway covers over 60 million acres). and shallows slightly into New York. interest in the Marcellus has skyrocketed over the past year. spurred by technology improvements and strong results from other shale plays. constituting the oldest and deepest layers of the Appalachian Basin. The formation is shallowest from Kentucky. Figure 15: Marcellus Isopach map Figure 16:Marcellus depths Source: USGS Open File Report 2005-1268 Source: USGS Open File Report 2005-1268 Development to date The Appalachia is no stranger to oil and gas development. The shales exhibit relatively consistent natural vertical fracturing. The Marcellus is a Devonian-aged shale that spans through Pennsylvania and parts of the New York State.Q-Series®: North American Oil & Gas 3 September 2008 Marcellus Shales Background Like many emerging unconventional plays. The shales themselves are relatively well mapped. the Marcellus is by no means a new resource. Following this early sign. Industry is rapidly advancing the play northward with recent horizontal tests in UBS 55 .920-8. the company returned to employ Barnett style frac techniques. the commercial development of the adjoining Marcellus shales has been a relatively new undertaking. Typical Marcellus shales that are being considered for development vary between 50-200 feet thick. like many of the emerging plays. deepens into Pennsylvania.500 metres).500-2. The majority of work to date has focused in southwestern Pennsylvania. it was just a matter of waiting for the right technology and price to come along to make development a worthwhile cause. The first promising sign of the commercial potential of the Marcellus appeared in 2003 from a well drilled in Washington County. resulting in the first commercial well in 2005. where the shales are deep with relatively high pressure and are also quite thick. Typically found at depths of 4. Also. with 70-150 Bcf of gas in place per section. Pennsylvania by Range Resources.200 feet (1.
More recently producers have begun to experiment with horizontal wells. Range is estimating EURs of approximately 3.500 wells drilled in the Marcellus between 2005 and 2008. Given these results. although we are also seeing a flurry of activity from Chesapeake. New York State is beginning to see substantial interest in the Marcellus play.000 per acre. a type curve is still somewhat difficult to define. We have assumed in our modelling IPs of roughly 2. reflecting the proximity to the New York market (typically realizing prices >US$1/Mcf greater than Henry Hub). reporting an average IP for its last seven horizontals at 4. economics are aided by high gas price realizations. Range Resources appears to be at the forefront of early horizontal drilling. typically drilled to depths of roughly 4. Type curves Early development focused on vertical wells. It is estimated that roughly 30% of existing wells are horizontals. contributing to a low cost of operation. we are now expecting this to begin in earnest in the fourth quarter of 2008.920 feet (1. which has meant a slower ramp-up of horizontal drilling. most wells produce dry natural gas. almost all have been drilled between 2007 and 2008. XTO and Talisman.50/Mcf. New York has only recently begun permitting these relatively shallow horizontal wells (pending environmental review). In addition.5 million for an F&D cost of $1.5 Bcf/well for the average Marcellus well. We have also assumed horizontal drilling and completion costs of approximately $4 million per well.1 MMcf/d. Results from verticals in southwestern Pennsylvania have been very strong. mostly exploration wells. Wells in the Appalachian basin generally produce little or no water.5 Bcf/well. As it is still early days on the horizontal programs. Typical vertical wells are expected to cost between $1-1.Q-Series®: North American Oil & Gas 3 September 2008 far north Pennsylvania.9 MMcf/d—very strong levels—and an increase from its first ten horizontals that achieved an average IP of 4. Stimulation is often applied.5-15%. spurred on by recent good vertical results in the area and the success of horizontals south of the border. which does not require processing. The majority of lands are freehold with typical royalties and mineral taxes in the range of 12. UBS 56 . While we acknowledge the strong results Range has seen in its tests so far.5 MMcf/d with an EUR of 2.500 metres). We expect an explosion in activity in 2009/10 as producers follow up on what generally appear to be very strong initial results. Leasehold costs have quadrupled in recent months to >$2. but Range Resources has had very strong results out of its initial horizontal program.00-1. Range Resources and Atlas Energy Resources appear to have been the two most active operators on the Marcellus.1 MMcf/d from its last ten horizontal wells. with an average peak initial rate of about 4. via slick water or nitrogen foam fractionation with sand. for our industry type curve we continue to use more conservative assumptions until we see broader results across the play.3 MMcf/d and expected EURs of 1 Bcf per well. EOG. with typical IPs in the range of 1. Furthermore. Wood Mackenzie expects the percentage of horizontal wells in the Marcellus could reach as much as 80-90% of all wells drilled over the next 3-4 years. Early development focused on vertical drilling. There have been approximately 1.
62 65% 15. versus northern Pennsylvania and the New York State.000 500 0 Years Source: UBS Source: UBS Economics The Marcellus is well positioned from an economic point of view given a combination of relatively high gas price realizations because of its proximity to key consuming centres and relatively low royalties.3 After-Tax $1.29 4.67 $1.3 Mcfe 923.2 After-Tax $3.000 1.500 1. Based on the type curves discussed above. The majority of Marcellus lands are freehold.0 * assuming 10 year development time frame Source: UBS UBS 57 . Our vertical type curve with a 1 Bcf recovery and 1 MMcf/d IP for a $1. Land) Payout (months) 10.378 $8. We have also assumed horizontal drilling and completion costs of $4 million per well.00/Mcf above NYMEX versus Gulf Coast resource plays that typically sell in line with NYMEX and US Rockies.31 Pv 8% per mcfe * 97% Well IRR (ex. The Marcellus will typically yield natural gas prices of roughly $1.000 Daily Production (mcfe/d) 800 600 400 200 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 1. and western Canadian resource plays that sell at significant discounts from NYMEX.01 $7.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $1.Q-Series®: North American Oil & Gas 3 September 2008 As with any play. we expect deviations across the play in terms of well performance and economics.500 Daily Production (mcfe/d) 2.05 4.32 $42.8 $9.5 Bcf recovery yields an IRR of 65%.000 1. a 2.542 $13. with legislated royalties of 12.85 Pv 8% per boe * $2.5 million capital cost would result in an IRR (after tax) of approximately 55%.000 500 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 2.29 4.500 1.49 55% 18.96 $1. we see strong economics emerging from the Marcellus shales. Table 12: Marcellus horizontal Table 13: Marcellus vertical Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 399.7 $1.500 Cumulative Prod (mmcf) Chart 31: Marcellus vertical type curve 1.0 Pre-Tax Pv 8%* $5.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 153. where the wells are deeper but higher pressured and slightly thicker.2 Mcfe 2396.87 Pv 8% per boe * $2.75 $7.74 $1.1 $1.5 MMcf/d IP and a 2.05 4.976 $12.62 $1.5 to 15%—the lower end of royalties on most emerging plays. Our horizontal type curve with a $4 million well cost.22 $7.32 $42.5 $10.22 $7.000 800 600 400 200 0 Years Cumulative Prod (mmcf) 2. Chart 30: Marcellus horizontal type curve 2. Generally speaking EURs and economics are likely slightly better in Pennsylvania. Land) Payout (months) 12.14 Pv 8% per mcfe * 83% Well IRR (ex.893 $9.
with potential recoverable gas in the 50 to 100 Tcf range (assuming 10% and 20% recovery factors).50 NPV /Mcfe (a-tax) $2. We estimate current production from the Marcellus at less than 100 MMcf/d. but the results to date are compelling.50 NPV /Mcfe (a-tax) $2.50 $0.00 $0.00 $1. which would likely push production to about 400 MMcf/d UBS 58 .00 $0.00 $2.00 $1. Chart 32 and Chart 33 summarize the IRR and NPV/Mcf for Marcellus horizontal and vertical wells: Chart 32: Marcellus horizontal IRR sensitivity 120% 100% 80% IRR (a-tax) 60% 40% 20% 0% -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% IRR (a-tax) Chart 33: Marcellus vertical IRR sensitivity 120% 100% 80% 60% 40% 20% 0% -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Hurdle Rate Hurdle Rate Source: UBS Source: UBS Chart 34: Marcellus horizontal NPV/Mcf sensitivity $3. with studies suggesting 168-516 Tcf of gas in place.00 $2.50 $1.50 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Chart 35: Marcellus vertical NPV/Mcf sensitivity $3.50 $0.00 -$0. The Marcellus covers a very large aerial extent.00 -$0. making it one of largest potential emerging plays in North America. We estimate the price required to generate a 15% after-tax IRR on a Marcellus well is approximately US$5. We would not be surprised to see industry activity ramp up to over 300 horizontals in 2009.25/Mcf.50 $1. the play has a relatively low economic breakeven price.Q-Series®: North American Oil & Gas 3 September 2008 Given the robust economics of the Marcellus.50 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Source: UBS Source: UBS Overall resource size It is still in the very early stage in commercializing the Marcellus.
Legislation was recently put in place governing these wells. 2) sourcing and disposing of water for frac operations. Chesapeake has drilled 30+ wells in the Marcellus and the Lower Huron shales. The company currently has 1.2 million net acres of property in the Marcellus. we could see production increase to the 1.8 Tcf of unrisked reserves. To date. PT US$80.9 Tcf of risked or 12. Up until very recently. The most recent ten horizontals had IPs between 2. with an estimated 1.000 net acres in the Marcellus. Chesapeake was one of the first large cap E&P with land interests in the Appalachian.600 1. and. So far. covered by UBS analyst William Featherston] Figure 17: CHK’s Marcellus Acreage While there are a number of players in the region. New York State did not have regulations in place for the relatively shallow horizontal wells required to develop the Marcellus. pending an environmental review of shale gas development. two horizontal wells have been completed.200 1. with an estimated resource potential of 10 to 15 Tcf.8 MMcf/d. With a continued ramp-up in the number of wells per year to between 400 and 500 wells from 2010+.400 Production (MMcf/d) 1.5 Bcf/d level by 2013. Range Resources [not rated] Range Resources has 700. Source: Chesapeake UBS 59 . Range plans to drill 60 wells in 2008.000 800 600 400 200 0 2008 2009 2010 Wells 2011 2012 Production 2013 500 450 400 350 300 250 200 150 100 50 0 Annual Wells Drilled Source: UBS Challenges to development The two key challenges of developing a shale play in this region are: 1) population density.Q-Series®: North American Oil & Gas 3 September 2008 on average for the year. Key players Chesapeake [Buy. The company has been credited with the modern exploration and development of the play in 2004 given its successes with horizontal drilling.6-5. 40 of which will be horizontal. and plans to drill 165 more during 2008/09. Chart 36:Marcellus production growth outlook 1. with an average estimated EUR of 4+ Bcf per well.
Exco Resources [not rated] Exco has a reported 276. however. with the remainder primarily located in Northern Pennsylvania. with an estimated 20-100 Bcf/section.000 net acres in the over-pressured. and 415. covered by UBS analyst Ron Barone] Equitable Resources has exposure to multiple resource plays in the Marcellus. The majority of Talisman’s lands (about 80%) are located in New York State. including 20 horizontal and four vertical wells. PT US$86. While the company has yet to disclose the results of its one horizontal well drilled to date. We will review our resource estimates for Talisman as it releases specific well results. approximately 224. PT US$51.000 acres in the underpressured area of the play. Atlas estimates 4-6 Tcf of resource potential on its lands with 4. Talisman plans to test five pilot areas on the play by the end of 2009. We note.Q-Series®: North American Oil & Gas 3 September 2008 Talisman Energy [Buy. Atlas has drilled over 27 wells to date. The company currently has 400. that this number increases to over 1. Marcellus fairway. the company has plans to drill three more horizontal and seven to ten vertical wells in 2008 for a total capital expenditure of roughly $243 million. in addition to 300. or 14 Tcf of gas in place. covered by UBS analyst Ron Barone] Atlas has control over 483. and has had successes with its multilateral and stacked multilateral horizontal wells to date. CBM and tight gas. Atlas Energy [Buy.000 acres on the Marcellus play.000 potential drilling locations (assuming 40-acre spacing). We could see upside potential on Talisman’s Marcellus acreage to over 5 Tcf.000 net acres in the broader play.000-6. with an estimated reserve of 2 to 3 Tcf and 4. PT C$30.3 Bcf per well excluding the first five wells. we believe the results were encouraging as Talisman has plans to accelerate its investment in the Marcellus. Given the early stage of Talisman’s Marcellus program.000 net acres in the Marcellus. covered by UBS analyst Andrew Potter] Talisman holds approximately 640. UBS 60 . The company’s first horizontal well spudded in the second quarter of 2008. with reserves per well of approximately 1 Bcf.000 of which has been delineated in southwestern Pennsylvania.000 drilling locations. we have assumed approximately 600 Bcf of recoverable resource on its land base—likely a very conservative assumption as it implies only 5% of lands are commercial and translates roughly to a 4% recovery factor. including shale.000 acres in the over-pressured Marcellus. for a total of 7-12 Tcf of potential reserves in the Appalachian shales. The company plans to drill 150 vertical wells over the next 18 months and is also evaluating the potential for horizontal development. Equitable Resources [Buy.
2-1.5-2. Cabot Oil & Gas [Buy. and increasing from three rigs to eight in 2009. UBS 61 .000 acres. currently producing 25 MMcf/d. Cabot has plans for 21 vertical and 12 horizontal wells for 2008 in Pennsylvania and West Virginia. and 2-4 Tcf of resource potential from the Marcellus shales.5 Bcf of reserves/well.000 acres in the Pennsylvanian section of the over-pressured zone.Q-Series®: North American Oil & Gas 3 September 2008 XTO Energy [Buy. The company has 135. covered by UBS analyst Andrew Coleman] Cabot has drilled eight and completed four wells in the Marcellus shale to date. PT US$76. covered by UBS analyst William Featherston] Figure 18: XTO’s Marcellus Acreage XTO acquired Linn Energy for US$600 million in April 2008 to gain exposure to the Marcellus. It has a net position of 152. with recent vertical well IPs of 1. Others Source: XTO Other companies with interests in the Marcellus include Southwestern Energy and North Coast Energy. The company estimates 1.8 MMcf/d. PT US$100. and considers the Marcellus one of its most exciting plays in the US.
6 25-160 Source: Talisman Source: Talisman UBS 62 .5 1.000 300-1.6 50-190 Utica 1. Lawrence River between Montreal and Quebec City. The play appears to be largely defined by the Yamaska growth fault to the north and Logan’s Line to the south.5 0. with industry setting its sights on the possibly immense shale gas potential of the Quebec lowlands.500 0.2-3. The current area of focus is the Quebec lowlands running parallel to the St. The depth of the Utica varies from 1. the Lorraine has higher gas in place. however. Table 14: Basin cross-section Table 15: Lorraine & Utica cross-section Parameter Prospective Depth (ft) Thickness (ft) TOC weight (%) Ro (%) Silica Weight (%) Clay Weight (%) Gas-filled porosity (%) Pressure gradient (psi/ft) OGIP (bcf/section) Lorraine 1.2 0.5 1.500-6. it is important to note that the Lorraine is also very prospective.500-10.3-2. However.500-11.Q-Series®: North American Oil & Gas 3 September 2008 Utica & Lorraine Shales Background Historically there has been very little oil and gas activity in Quebec. While the current industry buzz is largely focused on the potential for Utica shale development.350 metres).000 feet (460-3.1-4. Between the Yamaska fault and Logan’s Line there is both a structured and unstructured component.1-1.000 0.2-3.1-4. that appears to have changed.0 30-35 30-38 1. with potential for both Utica and Lorraine shales development.500-11. overlain throughout by the Lorraine shales.000 1.0 Dec-51 8-66 2. Rock properties for the Utica are more akin to the Barnett and likely a key reason for Forest Oil’s focus on that shale.
UBS 63 . Second. The first two wells drilled by Forest reportedly tested at rates up to 1 MMcf/d from vertical wells. Activity levels in Quebec are set to increase significantly over the next six months as Talisman and Forest. as well as a low and high case that are +/. Talisman is planning to spend $130 million over the next 18 months to evaluate the commerciality of its gas shales in the region. Talisman very recently announced that it recompleted a well for the Utica shale testing 800 Mcf/d over 18 days—a very good initial indication. it is nearly impossible to determine a type curve for this play. we have constructed our economic analysis for this play in two ways. which likely implies expected one-month IPs in the 1-2 MMcf/d range. testing up to 1 MMcf/d each. however. investors will likely begin paying more attention to this play. Prior to the 2007/08 wells. Type curves Given that only five wells have been drilled into the Utica in recent history.20% from our base case. critical details such as the length of time these rates were held are not available. Francois du Lac well. First. and. royalties. commercial development will likely use multistage fractured horizontal wells to unlock more of the reservoir. taxes. In total. If Forest can successfully de-risk the play by demonstrating good frac results on the Utica. As with other shales.Q-Series®: North American Oil & Gas 3 September 2008 Development to date Both the Utica and Lorraine shales in Quebec are at very early stages of evaluation. Forest oil has indicated that. the two largest landholders on the play. while Forest is planning to spend roughly $70 million.8 MMcf/d IP and 1. well costs and work back to what rate would be “required” to achieve economic breakeven.3-2. there have now been five shale tests (two in 2007/08 and three prior) plus approximately 50 other penetrations from other deeper wells. follow up on Forest’s positive initial test results. full commercial development of the Utica would begin in 2010. there had been three different discoveries in three zones: 1) Utica siltstone/shales with the St. 3) the Trenton BlackRiver with the Gentilly well.2 Bcf/well range. Should the results be confirmed. which are expected to occur in the summer/fall of 2008.6 Bcf of recoverable reserves for our base case. Francois Romaine well. The key focus in the short term will be Forest’s first horizontal tests. Due to the lack of information on the Utica. Forest Oil recently drilled two wells. 2) the Lorraine siltstone/shales with the St. if pilot results warrant. we estimated a horizontal type curve with a 1. we take the known variables such as gas price assumption. Quebec will be poised for an unprecedented drilling boom. Forest has indicated it expects to see EURs for Utica wells in the 1. although very limited data has been disclosed.
000 Daily Production (mcfe/d) 1. which combined with the high gas price realization and low royalties.500 1.500 1. it must be heavily cautioned that this type curve is entirely theoretical until industry tests its first horizontal wells. With a $3 million well cost and the aforementioned type curve. We note that it is entirely possible that higher rates are achievable. the Utica would generate an IRR at the 50% level— competitive with all other emerging plays. On top of the attractive pricing regime and good land tenure. the royalty in Quebec is 12. likely to average about $3 million (industry cost estimates appear to vary between $2. we would expect well costs to come down dramatically as the play becomes commercialized.000 500 0 Source: UBS 2. realized gas prices in Quebec typically run at $1/Mcf premium to NYMEX. As with all resource plays. we expect current Utica horizontal costs to be in the $5 million per well range.5-5.5%—attractive relative to many emerging resource plays. which is expected to occur this summer. 2) low royalties. and. However. as well as high local consumption for natural gas. At these costs.000 1.000 500 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Years Cumulative Prod (mmcf) Economics While there is a lot of information required on the actual flow rates. As illustrated in the following table. a typical well generates a 17% IRR. and with the aforementioned type curve.0 million). could still make Utica a top tier resource play. Due to its geographical proximity to New York State.Q-Series®: North American Oil & Gas 3 September 2008 Chart 37: Utica horizontal (potential) type curve 2. oil and gas development in Quebec benefits from two very nice factors: 1) premium realized natural gas prices. This is in stark contrast to regions like western Canada or the US Rockies that typically receive pricing of US$1/Mcf less than NYMEX—a significant economic advantage. UBS 64 .
978 $7.0 $18.0 $11.52 $1.89 $1. The recent test data from Forest Oil would seem to validate the EnCana estimates.00 $7.0 MMcf/d level and to recover approximately 1. A study by EnCana several years ago estimated that the Lowlands contain 163 Tcf of gas in place. although it is important to note that many more data points are required before this can be considered truly reliable.87 $6.32 $6.9 Mcfe 1589.3 After-Tax $906 $3.57 16% 55.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 265.27 3. For a well costing $3 million and assuming a US$9.61 3.50 $2. Overall resource size As it is still early days in terms of defining the Utica shales.9 After-Tax $2.4 Tcf recoverable.27 2.14 $1. a typical Utica shales well would need IP at the 1.258 $8.00 $0.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $3.0 Bcf to achieve a 15% IRR.50 $0.00 -$0. Chart 38: Utica IRR sensitivity (expected costs) 100% 80% IRR (a-tax) 60% 40% 20% 0% -20% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Hurdle Rate NPV /Mcfe (a-tax) Chart 39: Utica NPV/Mcf sensitivity (expected costs) $3.50 $1.57 Pv 8% per boe * $2. As illustrated. Given that recent verticals have tested at 1 MMcf/d.42 47% 21. we look at the required breakeven rates of the wells.0 Pre-Tax Pv 8%* $1.9 $1.00 $1.42 $0.Q-Series®: North American Oil & Gas 3 September 2008 Table 16: Utica horizontal (current costs) Table 17: Utica horizontal (expected costs) Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 265.09 Pv 8% per mcfe * 73% Well IRR (ex.00 $43. Land) Payout (months) 13.0 * assuming 10 year development time frame Source: UBS Chart 38 and Chart 39 illustrate the IRR and NPV/Mcf sensitivity of the aforementioned Utica type curve to varying natural gas prices.3 Mcfe 1589. UBS 65 . Land) Payout (months) 35.50/Mcf natural gas price.330 $12. it is difficult to reasonably estimate size and scope of the play.00/Mcf (NYMEX) gas price.24 Pv 8% per mcfe * 26% Well IRR (ex.00 $43. with up to 24.00 $2.00 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Base Cost+20% Source: UBS Source: UBS From another perspective.46 Pv 8% per boe * $1.50 -$1. it would seem that the Utica is in a good position to develop into a commercial play. to get a 15% after-tax IRR would require approximately a $5.9 $3.00 $7.61 2.
1 . The 572km pipeline system is fully contracted by TransCanada as a tie-in to the Canadian Mainline. by no means insurmountable. Lawrence River.0.1.6 2. TQM currently has two relevant receipt points for the Lowland’s shale gas: a 16” lateral connected to Quebec City with a 50 MMcf/d capacity during the summer (could be upgraded to 30”).> 6 1.88 Bcf/d (currently has up to 500 MMcf/d spare capacity in the summer). we also note that this includes no resource potential for the Lorraine shales. is the lack of local oilfield services.9 0.5 . UBS 66 . as with any other play. across the St.2 .2 Shale Gas Resource In-Place Recoverable (tcf) (tcf) bcf/sec Pmax Pmax p50-Pmax 24 3. Gaz Metro runs a number of feeder pipelines to the local distribution system throughout the St.7 . Challenges to development The Quebec Lowlands appear to offer one of the most attractive balances of accessible geography and relatively low population density. with capacity of roughly 0.2 . Lawrence Lowlands to which shale gas production could be connected. and another at Trois-Rivières with roughly 140 MMcf/d total design capacity via two Gaz Metro pipelines connected to the idle TransCanada Bécancour Power Plant.14 163 24.mi 359 470 1030 1859 TOC % 0.10 46 6.7 0. bringing the total for the play to the 20 Tcf level— generally in line with previous analysis for EnCana. The biggest challenge.1 Thermal Maturity Rhstd ---1.9 4. which could also be very prospective in the region.5 .4 Ile D'Orleans Villeroy South Central Total Source: EnCana Based on its initial test program.1 Tcf on its lands. transporting natural gas from Montreal to Quebec City.5 . Forest has publicly estimated the unrisked resource potential at 4. In addition.15 93 13.8 0. in sharp contrast to many US shale plays where population density is a major barrier. However.4 . However.Q-Series®: North American Oil & Gas 3 September 2008 Table 18: Rock properties in the Utica Area Name Area sq. where it joins with the Portland System. Applying the same recoverable gas assumption to Talisman’s lands would indicate approximately 12 Tcf recoverable to Talisman.2. the service providers will move quickly to establish a foundation in the Utica if material opportunities were to emerge. The Trans Québec & Maritimes Pipeline (TQM) lies to the northwest of the Utica fairway.4.
000 acres after drilling its four-well commitment. We have assumed 600 Bcf of recoverable resources to Talisman in our valuation. Talisman has committed to spend $100-130 million to evaluate the Utica/Lorraine shales over the next 18 months. UBS 67 . Talisman’s resource potential from the Utica could be about 12 Tcf. which implies only 5% of its Utica lands are prospective and also translates to a meagre 1% recovery factor of its total gas in place from the Utica and Lorraine.000 net acre position on the fairway of the Utica shale play. PT C$30.Q-Series®: North American Oil & Gas 3 September 2008 Figure 19: Pipeline access in the Utica Source: TransCanada Key players Talisman [Buy. We will review our valuation as Talisman and competitors release drilling results. The majority of Talisman’s lands have been acquired through a farm-in on Questerre’s land base—the company expects to earn the final 600. with a total of six vertical and ten horizontal wells planned. with a 760. If we apply the same resource assumptions as Forest Oil announced in early 2008. Talisman’s testing program will involve approximately 3-4 pilot areas. covered by UBS analyst Andrew Potter] Talisman is the largest acreage holder in the Lowlands. with further upside from the Lorraine.
with a current land base of 72.000 net acres over the broader context of the play. Under their earn-in agreement.108.Q-Series®: North American Oil & Gas 3 September 2008 Figure 20: Talisman’s Utica acreage Source: Talisman Forest Oil [Buy. in addition to the much larger Bécancour lease signed during June 2006 (15% WI). The company currently has plans for three horizontal wells in 2008 to refine its drilling and completion techniques in the Utica in order to firm up its earn-ins. Forest Oil will carry Junex for the amount of $10 million over the course of 2008 as it drills three horizontal wells to confirm the concept of the play. the company’s partner. Junex [not rated] Junex is a Quebec-based.1 Tcf of unrisked resource potential based on 70% prospectivity. Forest Oil subsequently exercised its completion option on the two wells and undertook a hydraulic fracture stimulation and production trials on the St Francois-du-Lac #1 well in late December 2007 and early 2008. The initial results were encouraging. Gastem. while Junex has committed to complete a multi-zone target well in Contrecoeur.200 net acres on the fairway. The partners expect full scale production and drilling on UBS 68 . as well as 1. the latest Contrecoeur/Richelieu agreement was signed as recently as April 2008 (40% WI). Forest Oil estimates it has 4.200 net acres in the Quebec Lowlands. drilled two test wells under the Yamaska permit to evaluate the potential of the Utica shale. 269. Junex has farm-out agreements with Forest Oil for two of its properties on the fairway. under leases or various farm-out agreements with Gastem and Junex. with production testing up to 1 MMcf/d. 93 Bcf of OGIP per section and 100-acre spacing. covered by UBS analyst Andrew Coleman] Over the last two years. During 2007. PT US$103. with full scale drilling to commence 2010+. First production is expected in 2009. junior exploration company. It began acquiring land positions in the Lowlands in 2002. Forest Oil has accumulated.
Epsilon must finance 25% of Gastem’s costs on each property. St. However.Q-Series®: North American Oil & Gas 3 September 2008 their leases to commence in 2010. Epsilon has the right to an “in or out” provision on a well-by-well basis. Junex also has plans over the next year to survey its leases on the perimeter of the proven Utica play. Epsilon [not rated] Epsilon and Gastem signed a joint participation and exploration agreement on their respective properties in December 2007. being one of the first companies in the region since 1998 through the involvement of Terrenex. Gastem [not rated] One of the first movers in Quebec. the company is partnered with Forest Oil and Questerre on Yamasaka. The company has a total land position of 306. Questerre has farmed out the majority of its land position to Talisman. The company expects Talisman to drill four test wells within the next 18 months to firm up its earn-in. We would highlight that Epsilon has not participated in either of the two wells drilled by Gastem to date.000 net acres situated mostly on the fairway of the play. and hence. whereby Epsilon was granted 25% of Gastem’s undivided participating interests and properties in Quebec in exchange for 25% of its interests in the Appalachian basin. Jean Nord.000 net acres on the fairway of the play (the majority of its land position is farmed out) and an additional 155. in addition to future properties that Gastem may acquire in the Quebec Lowlands. UBS 69 . does not own any interest in the Utica. Gastem’s key permits include Yamaska. Gastem has 108. To earn its share. but is partnered solely with Questerre on the remaining two permits. Jean. Figure 21: Junex’s Lowlands acreage Source: Junex Questerre [not rated] Questerre has the highest leverage to shale gas in the Lowland among the juniors. assuming Forest’s pilot wells begin producing in 2009.400 net acres across the broader context of the Lowlands. and St. and is also partnered with Forest Oil and Gastem on the Yamaska and St. Jean leases in the Lowlands.
began acquiring interest in the Lac St. Altai’s partners are Talisman and Pétro St-Pierre (private). Black Cliff Mines.000 net acres in the Utica. now Altai.Q-Series®: North American Oil & Gas 3 September 2008 Altai [not rated] Altai is a junior exploration company with an interest in 170. just 2 km off of the fairway from Forest Oil’s discovery wells. UBS 70 . Pierre area in 1989.
100 feet (3. Figure 22 provides an overview by Wood Mackenzie of the currently estimated Haynesville field boundaries: Figure 22: Haynesville Map Source: Wood Mackenzie UBS 71 . although limited testing has yet to occur. None of the operators have published specific numbers in terms of thermal maturity.000 metres). but it is understood that the parameters are comparable to proven shale plays. The Haynesville shale has emerged as one of the most talked about emerging shale plays and all the known operators are still very secretive about acreage positions and early well results. which could ultimately be commingled with Haynesville production. The Haynesville shale lies between the Bossier shale and Smackover formations..Q-Series®: North American Oil & Gas 3 September 2008 Haynesville Shale Background The Haynesville shale is located largely in northwest Louisiana and East Texas. A key attribute of the play is the combination of relatively high thickness and extraordinarily high reservoir pressure that in combination appears to result in superior deliverability. and Elm Grove fields.200 and 4. quartz content etc. covering an area of approximately 3.500-13. This upper Jurassic shale is typically found at depths of 10. but the boundaries of the play are expanding at a rapid pace.5 million acres (currently estimated core area). and is consistently 200-300 feet (60-90 metres) thick. The Bossier shale is also considered a prospective formation. Bethany-Longstreet. The play unfolded primarily in the Johnson Branch.
Chesapeake kick-started the Haynesville hype with its announcement early in the year that the Haynesville could have a bigger impact on its portfolio than any other play it has previously drilled. UBS 72 . Recent horizontal well tests by Chesapeake have seen IPs of 5 to 15 MMcf/d on restricted chokes with a five-stage frac. we expect the Haynesville to see the most aggressive growth curve of any shale play to date. Chesapeake remains the most active operator in the Haynesville. However.500-4. Chesapeake expects to have 12 rigs running by year-end. as with many plays.0 Bcf (we have used 6. and >100 rigs running in 2010 drilling over 400 wells. Based on early indications.5-8. we expect costs to come down to the $6. we would expect drill times to decline as operators become more experienced and move toward in-fill drilling off existing pads. Currently wells are taking approximately 60 days to drill with a 21-day tie-in period—a pretty good cycle time. reflecting what is still largely considered experimental development. with the expectation that the number will increase drastically.5 million level per well. while EnCana has seen rates between 58 MMcf/d with six to nine-stage fracs. As companies roll out full-scale commercial developments. but we expect the well count to explode over the coming year. a very strong result. we now expect a typical Haynesville well to yield a 30-day IP rate of approximately 6.000 feet (760-1.Q-Series®: North American Oil & Gas 3 September 2008 Development to date The Haynesville has received more hype than any play in recent history. There are currently about 10-20 rigs operating on the play.660-4. Petrohawk recently disclosed one well with an IP of 16 MMcf/d from an 11-stage frac. Given the combination of strong drilling results and short land tenure. we could see 40 rigs running in 2009 drilling over 200 wells. we estimate approximately 20 wells have been drilled into the Haynesville to date.000 feet (3.00014. According to the early plans of these main operators. but it is expected that wells will be drilled to at least 80-acre spacing (eight wells/section).0 in our base case view) based on six frac segments.5 MMcf/d.270 metres) along with 2. Current drilling costs are at the $12 million level. results are looking very promising. with Petrohawk at ten rigs and EnCana at approximately five. with EURs on the play ranging from 4. Current development is focused on drilling one well per section to hold lands (the land tenure is relatively short). Type curves Typical Haynesville wells will be drilled to a depth of approximately 12. Although the play is still in an evaluation stage.220 metres) of horizontal laterals and six to twelve frac segments. In total. followed by Petrohawk and EnCana.
7 Mcfe 6318.16 2.000 1.0 * assuming 10 year development time frame Source: UBS Chart 41 to Chart 44 depict the sensitivity of the aforementioned Haynesville type curves to varying natural gas prices.2 $1.00 $1.000 4. We fully expect these cost reductions to materialize the same way they have for the vast majority of other resource plays.000 2. generally good fiscal burden.03 $1.5mm/well) Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 1053.000 Daily Production (mcfe/d) 6.32 $31.19 5.000 5.000 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 7.84 Pv 8% per mcfe * 131% Well IRR (ex.75/Mcf.Q-Series®: North American Oil & Gas 3 September 2008 Chart 40: Haynesville type curve 7.16 5. Land) Payout (months) 8.000 3.04 Pv 8% per boe * $1.$12 mm/well) Table 20: Haynesville economics (expected costs $6.000 3.000 1. the Haynesville would achieve the same 15% IRR with a natural gas price as low as US$3.19 2. UBS 73 .25 Pv 8% per mcfe * 44% Well IRR (ex. Assuming costs decline to the $6.0 Pre-Tax Pv 8%* $7.000 5.000 4. would generate an IRR of approximately 27%.5 million per well range as companies roll out commercial scale programs.704 $4.000 0 Years Cumulative Prod (mmcf) Source: UBS Economics As illustrated in Tables 19 and 20. our base case Haynesville.33 89% 12.7 After-Tax $4.51 Pv 8% per boe * $1.90 $1.0 $11.32 $31.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $11.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 1053. we would expect IRRs of roughly 89% to reflect a combination of the low F&D. and high gas price realization—the highest of any of the emerging resource plays. with well costs in the $12 million range (current pre-commercial costs).17 $7.000 6.22 $5.908 $7. Land) Payout (months) 21.0 After-Tax $8.74 28% 33. The NPV per Mcf from the play for a well drilled today is approximately $1.22 $5. a Haynesville well drilled at current costs of approximately $12 million would require a natural gas price at the US$7. As illustrated.0 $6.0 Mcfe 6318. as they transition from experimental to commercial development.2 $1.422 $8. Table 19: Haynesville economics (current costs .40 $7.000 2.33/Mcf.47 $0. As costs decrease as commercial scale drilling and economies of scale are achieved.00/Mcf level to achieve a 15% after-tax IRR.626 $11.
50 NPV /Mcfe (a-tax) $1.50 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Source: UBS Source: UBS UBS 74 .50 $2.00 -$0.00 -$0.50 -$1.00 $1.00 $0.50 $0.00 $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Chart 44: Haynesville NPV/Mcf sensitivity (expected costs) $2.50 $0.50 $1.Q-Series®: North American Oil & Gas 3 September 2008 Chart 41: Haynesville IRR sensitivity (current costs) 60% 50% 40% IRR (a-tax) 30% 20% 10% 0% -10% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Hurdle Rate Chart 42: Haynesville IRR sensitivity (expected costs) 175% 150% 125% IRR (a-tax) 100% 75% 50% 25% 0% -25% $4 $6 $8 $10 Natural Gas Price ($/mcf) $12 Base Case Base Cost+20% Hurdle Rate Source: UBS Source: UBS Chart 43: Haynesville NPV/Mcf sensitivity (current costs) $2.00 $0.00 NPV /Mcfe (a-tax) $1.
500 1. with approximately 1 Bcf/d of capacity available in the region and good gathering systems already in place. having witnessed the wealth created by the Barnett shale in Texas. there is sufficient infrastructure to handle the massive growth from the region.500 3. Based on estimates from producers.000 500 0 2008 2009 2010 Wells Source: UBS 500 400 300 200 100 0 2011 Production 2012 2013 Annual Wells Drilled Challenges to development The Haynesville play is ideally situated from a development perspective. it is obvious that substantial infrastructure will be required to avoid prolonged gas-on-gas competition.Q-Series®: North American Oil & Gas 3 September 2008 Overall resource size Based on estimates of resource potential to date. Total production from the play is minor currently. the Haynesville shale appears destined to become one of the most prolific gas fields in North America. UBS 75 . The rapid pace of development is due to a combination of high productivity and good industry access. infrastructure is not a constraint. Chart 45: Haynesville production growth outlook 4.000 2. Regional geography in Louisiana and East Texas are attractive from a drilling perspective with few surface impediments. Frac water. but expected to reach over 2 Bcf/d in the next two years. we believe the recoverable resource potential of this play is well over 50 Tcf—even larger than the Barnett.000 1.000 Production (Mmcf/d) 3. However. We would expect industry to begin moving quickly for the next stage of infrastructure advancements given the large potential of this play. In the short term. a key concern for a frac intensive play. though.500 4. is readily available. For the next 12-18 months.500 2. Freehold landowners are generally in favour of oil and gas development. given the play is expected to reach 2-3 Bcf/d within the next two years.
6.000 acres of mineral rights. Chesapeake was the dominant landholder in the Haynesville. Chesapeake has drilled four vertical and eight horizontal wells in the Haynesville thus far. To date. Chesapeake plans to increase drilling activity from five rigs in 2008 to 60 rigs by the end of 2010. Chesapeake [Buy. plus an additional 89. with 550. Devon has drilled 14 vertical wells and intends to drill its first horizontal during Q3/08.000 net acres comprised of 370. and one is in the completion phase. The company had tapped the equity market for a 25 million share issuance in July and has plans to monetize $8-8. noting this is possibly its largest discovery to date and perhaps one of the largest gas fields in the US.9 Tcf of net unbooked resource potential.5 billion in assets to fund its massive $4 billion budget for the Haynesville in 2008. as at the Barnett and Fayetteville wells).300 horizontal wells for a total of 16 Tcf of resource potential. We note this does not include any value/resource associated with the 89. The company has evaluated the play for over two years. PT US$160. PT US$135.5 Bcf per well and 80-acre spacing (similar assumptions as employed in Chesapeake). UBS 76 . Risk-adjusted. EnCana has drilled three wells so far in the Haynesville. We have assumed 50% prospectivity.000 net acres post sale). The company estimates its acreage position contains 73 Tcf of gas in place based on 64% prospectivity. In our valuation of EnCana. Of the vertical wells drilled. Assuming 80-acre well spacing and 60% prospectivity (UBS estimate). the play could support up to 3. with a recent well IP at 15 MMcf/d with eight frac segments. we assumed 11 Tcf of recoverable resource potential its Haynesville lands.000 acres of mineral rights in which the company will earn a royalty on production. UBS currently ascribes $5/share to the play using conservative assumptions until further well results are released. leaping ahead of EnCana's leading land position with 483. covered by UBS analyst William Featherston] Until recently. PT US$80.000 net acres of lands partnered with Royal Dutch. covered by UBS analyst William Featherston] Devon announced its entry into the Haynesville in early August.000 net acres. we would not be surprised to see this number reach 10-15 by late 2009. UBS estimates Devon’s Haynesville position could hold 9. EnCana [Buy. four are currently producing. covered by UBS analyst Andrew Potter] EnCana has emerged as the second largest landholders on the Haynesville. The company plans to ramp up the rig count to five by year-end 2008.Q-Series®: North American Oil & Gas 3 September 2008 Key players Devon Energy [Buy. 450. making this one of the company’s biggest resource opportunities. with 459. with horizontal IPs ranging from 5 to 15 MMcf/d on restricted chokes (the company believes flow rates could be higher with open chokes.000 acres (before the sale to Plains Exploration & Production.
with three rigs currently drilling and targets up to ten rigs in the Haynesville by the fourth quarter of 2008. Chesapeake will remain the operator on the JV acreage. with an estimated 2-5 Tcf of recoverable resources (company’s estimate).6 Tcf of risked resource potential. Cabot Oil & Gas [Buy. Management plans to drill 3-4 horizontal wells by year-end. PT US$70.000 net acres. and notes its acreage lies more in the thicker and more porous Haynesville shale as opposed to the shallower Bossier shale. PT US$76. Forest Oil [Buy. Petrohawk [Buy.65 billion to fund Chesapeake’s share of drilling costs over the next few years. when the company acquired 20% of Chesapeake’s acreage (110. Petrohawk has 150. XTO Energy [Buy.2 Tcf of risked resource potential based on 120-acre spacing and 70% prospectivity (UBS estimate).000 net acres) at a cost of $1. Management is in the process of evaluating its acreage given results from two vertical well drilled to date. covered by UBS analyst William Featherston] XTO acquired 65. UBS 77 . with plans to drill 10-15 vertical wells and two to three horizontal wells in the area over the remainder of 2008.65 billion plus a further commitment of $1. PT US$100. following the spudding of its Bossier test well. EXCO Resources [not rated] EXCO has a 107.000 net acre position in the Haynesville.000 acres in the Haynesville through the bolt-on acquisition of Hunt Petroleum in June 2008. The company’s first horizontal well in the Haynesville is expected to come on stream in November. covered by UBS analyst Andrew Coleman] Partaking in the Haynesville frenzy. PT US$103. Forest Oil has accumulated roughly 90.000 net acres. Applying 120-acre spacing.000 net acres in East Texas that target the Bossier and Haynesville plays. covered by UBS analyst Andrew Coleman] Cabot has 94. implying a EUR of 6 Bcf per well. 70% prospectivity and EURs of 5 Bcf per well (UBS estimate) would imply 2. and plans to drill three more horizontals and 17 verticals over the remainder of the year for a total capex program of $90 million. for a total of 100. Cost estimates are currently at $6-7 million per well.000 net acres with an estimated 7. The company has budgeted a $384 million capex program for 2008. PT US$101. covered by UBS analyst Andrew Coleman] One of the early movers in Haynesville. covered by UBS analyst Andrew Coleman] Plains Exploration & Production entered into a joint venture with Chesapeake in June 2008.Q-Series®: North American Oil & Gas 3 September 2008 Plains Exploration & Production [Buy.
For instance. 2) middle sandstone.000 square kilometres) of the Williston Basin in parts of Montana.000-500.500 metres). Reflecting the differences in depth. balancing these differences are much lower drilling costs and a more attractive royalty regime in Saskatchewan. Figure 23: Bakken formation Source: Geology. the US Bakken tends to be much more productive.050 metres). UBS 78 . but the bulk of success over the past few years has been with the middle sandstone. The middle sandstone member varies in thickness. One key difference is depth. Bakken oil is typically around 40° API.Q-Series®: North American Oil & Gas 3 September 2008 Bakken Background The Bakken light oil resource play covers approximately 25. the Bakken is typically found at 9.com and UBS Although the Bakken is one large. The Bakken formation is Upper Devonian to lower Mississippian in age and is present in three general members: 1) lower shale. which overall makes the Canadian Bakken comparable to the US Bakken in terms of IRRs. North Dakota and Saskatchewan. However.900 feet (1.000 barrels of recoverable resource per well.000 barrels. pressure and thickness. and.000 feet (2.000 square miles (65. Both the upper and lower shale members are organic-rich marine shale of fairly consistent lithology. which is widely regarded as the heart of the play in southeast Saskatchewan. relatively continuous resource.740-3.000-150. providing for exceptionally high price realizations.000-10. with initial rates in the 300-600 bbl/d range and reserves per well of 300. Each succeeding member is of greater geographic extent than the underlying member. in the Viewfield area of Saskatchewan. whereas in the Elm Coulee field in Montana. Early development of the play focused more on the upper shale. lithology. there are significant differences across the play in terms of geology and fiscal terms of the various provinces/states. typical wells IP at 200 bbl/d with about 125. the Bakken is found at roughly 4. 3) upper shale. In the Viewfield region. they are also the source rocks and part of the continuous reservoir for hydrocarbons produced from the Bakken formation. and petrophysical properties—the resultant development of matrix porosity is that which enhances oil production in both continuous and conventional Bakken reservoirs.
but many operators in North Dakota in particular are drilling dual leg horizontals (as opposed to single legs in Canada). In the late 1980s to late 1990s. In southeast Saskatchewan. By 2007.300-4.900 feet (1. Spurred by the successes in Montana.900 feet (1. Typical wells will see initial productivity rates (one-month average) of approximately 200 bbl/d.050 metres) deep and significantly over-pressured relative to the Canadian Bakken. Petrobank and TriStar. industry moved its focus to North Dakota and southeast Saskatchewan. is not a new play.Q-Series®: North American Oil & Gas 3 September 2008 Development to date The Bakken. One curve represents the bulk of southeast Saskatchewan activity and the other reflects typical US (Montana and North Dakota) activity. This year has been a turning point in the Bakken. Typical Bakken wells drilled in Montana and North Dakota are 9. which is dominated by Crescent Point. The best example of this new wave of Bakken development was the Elm Coulee field of Richland County in eastern Montana. following up on several Bakken wells that could signify a major new core area on the play. with one 3. with further growth anticipated in 2009. There were 70 wells producing 940 bbl/d in the southeast Saskatchewan Bakken in 2004. the main industry focus remains in the Stoughton/Viewfield region.000 bbl/d.000 feet (2. industry will no doubt continue to widely extend the boundaries of this play. The Bakken was first developed on a very limited scale in Montana during the 1950s to the 1980s. where production began in 2000. wells are typically drilled to 4. with wells drilled into the play having grown exponentially. Industry best practice is typically a Packers Plus StacFrac with seven frac segments per well with an allin cost of approximately $2 million. However. Completions vary significantly. In Canada. Given the size of the Bakken fairway. there has also been a very aggressive land grab far to the west.220-2. As of year end 2007.000 bbl/d in 2007 while southeast Saskatchewan Bakken averaged more than 24. industry continues to push the play to the east.000-1.900 feet (1.500 metres).000 bbl/d. with EOG’s Parshall field seeing particularly strong results.000-8. production from the Elm Coulee field exceeded 53. running at lengths of 4. Note that production performance is broadly exceeding current type curves.000 barrels per well. The early focus targeted the upper shale via vertical wells. there were 449.000 barrels of oil (recent 2P estimates). US Bakken oil production averaged approximately 35. implying a potential increase in type curve reserves to 150.000-10.740-3. and recover approximately 125.500 metre) horizontal leg. according to the Canadian Association of Petroleum Producers (CAPP). In North Dakota. making it one of the largest onshore oil fields in the US. but technological challenges prevented well completions. We expect we will likely see more than 450 wells added in 2008. the true potential of the resource began to emerge. Well costs are significantly higher UBS 79 . the focus migrated to horizontal wells with some success. Type curves We have constructed two general industry type curves to reflect the significant differences in Bakken rates and fiscal regimes across the play. As horizontal technology began to improve in 2000.700 metres)—far longer than those being drilled in Canada. like many of the resources discussed in this report.
With these results and using our US$90/bbl long-term oil price. However.71 ($2. A key feature of the Bakken in southeast Saskatchewan is a very generous royalty regime that sees a producer pay only a 2. As lands are predominantly freehold in Montana and North Dakota. Operating costs in the Canadian Bakken are typically about $7/bbl. with individual producers seeing a wide range of results. rates are negotiated independently with landowners.000 barrels. which combined with the low royalty rates. due to the higher well productivity. with typical costs in the $4-7 million range to reflect the greater depth and longer reach of the horizontals. with operating costs in the $3-4/bbl range. implies very strong netbacks. The low up-front royalty makes a significant difference to economics. Chart 46: Canadian Bakken type curve 200 Daily Production (bbl/d) 150 100 50 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Source: UBS Chart 47: US Bakken type curve 150 Cumulative Prod (mbbl) Daily Production (bbl/d) 500 400 300 200 100 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 Source: UBS 400 300 200 100 0 Years Cumulative Prod (mbbl) 100 50 0 Years Economics Bakken wells on both sides of the border benefit from outstanding crude oil quality. but downspacing to eight wells/section (80-acre spacing) is being considered.000-500. typically around the 40° API level. making it one of the highest rates of return of any emerging resource play.02. with some wells in select areas in North Dakota seeing IPs >1.45/per Mcfe). We note that this is a good representation of average US Bakken. with reserves per well of 300.000 bbl/d. resulting in price realizations on par with WTI to approximately a 5% discount. Current development is largely focused on four wells per section (160-acre spacing). UBS 80 .5% royalty on the first 37. before reverting to a 25% royalty thereafter. Incorporating all the aforementioned variables results in a typical well yielding an IRR of about 95% with an NPV per boe of $16. significantly higher than southeast Saskatchewan. We note that well performance in the US Bakken appears to be more variable than in Canada. a typical Bakken oil well yields an IRR of approximately 105% and an NPV per boe of $14. Typical well IPs are in the range of 300-600 bbl/d.Q-Series®: North American Oil & Gas 3 September 2008 than in Canada. but are generally about 13-17%.500 barrels produced from a well. they also tend to have lower unit operating costs than the Canadian Bakken.
8 $2.843 $16.8 Mcfe 2188.8 After-Tax $5. while the Canadian Bakken requires a slightly higher price of approximately US$50/bbl— with both plays offering very robust breakeven economics.4 $2.34 Pv 8% per boe * $3.18 $7.70 $10.4 $16. Land) Payout (months) 6. Land) Payout (months) 5.0 Pre-Tax Pv 8%* $2.727 $14.2 After-Tax $1.65 $67.0 * assuming 10 year development time frame Source: UBS Chart 48 and Chart 49 depict the IRR sensitivity of the Bakken to varying oil prices.59 4.8 $13.00 per Mcfe).28 $0.21 $65.45 105% 9.63 4.71 $2.149 $22.480 $21.0 * assuming 10 year development time frame Source: UBS Pre-Tax Pv 8%* $8.12 Pv 8% per boe * $3.2 Mcfe 704.71 $4.02 $2. the US Bakken plays can clear a 15% IRR (after-tax) down to approximately a US$42/bbl price (US$7.94 4.70 $1.67 95% 10. As illustrated.0 Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 364.28 $11.72 Pv 8% per mcfe * 148% Well IRR (ex.52 Pv 8% per mcfe * 177% Well IRR (ex. Chart 48: Canadian Bakken IRR sensitivity 250% 200% IRR (a-tax) 150% 100% 50% 0% -50% $40 $60 $80 Oil Price (US$/bbl) Source: UBS estimates Source: UBS estimates Chart 49: US Bakken IRR sensitivity 200% Base Case Base Cost+20% 175% 150% IRR (a-tax) 125% 100% 75% 50% 25% 0% $100 $120 Base Case Base Cost+20% Hurdle Rate Hurdle Rate $40 $60 $80 Oil Price (US$/bbl) $100 $120 UBS 81 .Q-Series®: North American Oil & Gas 3 September 2008 Table 21: Canadian Bakken Economic Summary Table 22: US Bakken Economic Summary Before Royalty Analysis Reserves (Before Royalty) F&D (before royalty) Op Cost (First 5 Yrs) Op Netback (First 5 Yrs) Recycle Ratio Mboe 117.27 4.
00 $10.00 $40 $60 $80 Oil Price (US$/bbl) $100 $120 Base Cost+20% NPV /Mcfe (a-tax) $25.85 Tcf of associated natural gas and 148 million barrels of natural gas liquids—a relatively low recovery to the large amounts of oil in place. which likely underestimates the true potential of this resource.65 billion barrels.00 $0.00 $5. but still a significant resource. However.00 -$5. In the current core Bakken fairway in southeast Saskatchewan.00 $0.00 -$5.Q-Series®: North American Oil & Gas 3 September 2008 Figure 24: Canadian Bakken NPV/bbl sensitivity $25. along with 1. making for flat easy access with many all-season roads.00 $20. Challenges to development The Bakken is well situated for continued rapid development because of a combination of generally good pipeline access in both Canada and the US.00 Base Case $20.00 $40 Base Base Cost+20% $60 $80 Oil Price (US$/bbl) $100 $120 Source: UBS estimates Source: UBS estimates Overall resource size The US Geological Survey recently estimated that the Bakken has an impressive 200-400 billion barrels of oil in place on the US side of the Williston Basin.00 $5. Surface topography is favourable as the majority of the Williston basin is farmland.00 NPV /Mcfe (a-tax) $15.00 $10. we could quite easily see a scenario where the potential of the Canadian Bakken is in the order of one billion barrels.00 $15. Mean estimates peg undiscovered volumes of recoverable oil in the Bakken at 3. we estimate the three largest players alone have identified over 300 million barrels of recoverable potential (based on only four wells/section or a 15% recovery).00 Figure 25: US Bakken NPV/bbl sensitivity $30. UBS 82 . as the play is further defined to the west and recoveries expanded through EOR or downspacing. The study encompasses only the Montana and North Dakota portions of the Bakken fairway.
We expect the company will continue to ramp up spending in the Bakken for the remainder of the year and into 2009. along with continued land acquisition and drilling activity (84 wells planned for the second half of 2008).000 net acres in the Bakken located in southeastern Saskatchewan.2% recovery factor). Talisman has so far identified 50-60 well locations and targets to spend $60-70 million on the Bakken in 2008 to drill 22 horizontals. Petrobank’s drilling inventory on the play is estimated at over 624 locations (based on four wells per section). management expects it will reach its targeted well count ahead of schedule in November.000 bbl/d later this year.Q-Series®: North American Oil & Gas 3 September 2008 Key Canadian Bakken players Talisman [Buy. covered by UBS analyst Andrew Potter] Talisman has 340. 4-8 wells per section and a recovery factor of 12%. with approximately 495 net unbooked drilling locations. We would expect the company to provide an update on its Bakken program following the October Saskatchewan land sale. particularly if the company is successful in extending the play fairway. with recent horizontals averaging 190 bbl/d. The company is currently evaluating the potential for secondary recovery and/or potential downspacing. TriStar drilled a total of 15 horizontal wells (8.900-3. We note that there have been large land sales to the west of the current Bakken fairway where Talisman has recently drilled wells (and licensed to drill others). Eleven wells have been drilled to date. The company expects Bakken production to ramp up from 800-900 boe/d in 2008 (annualized) to 2. PT C$30. The funds are primarily allocated towards facilities and infrastructure construction.1 net) with 100% success. PT C$75.000 net acres in the Bakken. but note that the upside could be substantial. We have currently assigned $1/share of NAV to Talisman’s existing Bakken inventory. the company estimates its lands contain as much as 62-134 million barrels of additional reserves over what is currently booked in its reserve report (which used a 1. Petrobank is one of the largest Bakken producers. The company increased its full-year Bakken capex guidance by $65 million.000 bbl/d.000 boe/d in 2009. Petrobank [Buy. covered by UBS analyst Andrew Potter] Petrobank has approximately 137. UBS 83 . The company plans to drill 154 horizontals in 2008 (net). With current production in excess of 13. TriStar Oil & Gas [not rated] Figure 26: Talisman’s Bakken acreage Source: Talisman TriStar has a 92. to a total of $200 million. after acquiring an additional 7. of which 171 locations are included in its 3P reserve evaluation. During the second quarter of 2008.800 net acre position in southeast Saskatchewan Bakken. Assuming 580 million barrels of net OOIP. We believe Petrobank’s Bakken production is on track to reach 20. The key for Talisman to turn the Bakken into a meaningful production/resource contributor will be in proving up a new sweet spot and/or extension to the current Bakken fairway.5 sections at the Crown land sale in February.
In aggregate. based on four wells per section. Shelter Bay (privately held. UBS 84 . as well as the potential for the development of the Parshall periphery. EOG has 320.900 boe/d for the last ten completions. During the second quarter of 2008. but managed by CPG). Continental currently has 13 rigs operating in the Bakken.0 billion barrels of OOIP on its 243. to increase to eight to ten by 2009/10. The company reported average IPs of 1. The company is still in the process of information gathering and land acquisition. covered by UBS analyst William Featherston] Source: Continental Resources Hess has a strong acreage position in the US Bakken with 411. currently under development based on 640-acre spacing.000 net acres in North Dakota.Q-Series®: North American Oil & Gas 3 September 2008 Crescent Point Energy Trust [Buy.200 net undeveloped acres of land.050 unbooked drilling locations in inventory. covered by UBS analyst William Featherston] One of the early movers. EOG Resources [Neutral (UR). Hess is currently operating a six-rig program in 2008. but expects to increase its rig count materially moving forward.445 boe/d (net) during Q2/08. We note that the company’s wells have IPs in the range of 100-400 bbl/d. Key US Bakken players Continental Resources [not rated] Figure 27: CLR’s Bakken acreage Continental is the largest landholder in the US Bakken. in addition to the capital spending planned on behalf of its 19%-owned partner. the trust has 1. PT US$136 (UR). representing more than ten years of drilling at current rates.000 net acres. with more than 15. PT C$45. with plans to increase this number to 16 by year-end. with 529.000 boe/d of Bakken production. below EOG’s much-touted results in the Parshall field. Continental’s current estimated drilling and completion costs in the Bakken are $5. with an estimated 80 million barrels of net reserves on the Parshall field.03 (81% above the group average). the trust’s operating netback averaged $94. The trust boasts more than 4. PT US$121. Using the company’s estimate of 546 net potential unbooked locations and 325. Hess Corporation [Neutral.000 net acres. production in the area averaged 8. The company has committed to a $245 million capex program for 2008. representing 28% of the total budget.8 million per well. EOG continues to evaluate secondary recovery potentials on the Parshall core area. Crescent Point plans to spend about $325 million in 2008.000 boe of net reserves per well implies a total of 177 million barrels of potential reserve. covered by UBS analyst Grant Hofer] Crescent Point is a dominant player in the core of the southeast Saskatchewan play.
Figure 28: Marathon’s Bakken acreage Source: Marathon Oil Enerplus Resource Fund [Buy. Enerplus continues to develop its Bakken resource base with spacing of three wells per section and plans to spend an additional $27 million in the second half of the year (full year Bakken spending of $60 million). PT C$50.000 net acre position in the US Bakken primarily located in North Dakota. with a potential resource estimate exceeding 100 million barrels net (company’s estimate). covered by UBS analyst William Featherston] Marathon has a 320. PT US$55. management has identified 400 potential well locations (gross). There are six rigs currently running. Marathon’s total Bakken production recently averaged 4. So far. The resource play produces roughly 12.600 boe/d. It is estimated that Enerplus has about 200 mMBoe of OOIP and 76.Q-Series®: North American Oil & Gas 3 September 2008 Marathon Oil [Neutral. the company plans to exit 2008 at 6-7 MBoe/d and reach 20 MBoe/d by 2012. Source: Enerplus UBS 85 .800 net acres of undeveloped land.000 boe/d (12% of trust production) and had proved reserves of approximately 42 mMBoe at year-end 2007 (assuming an 18% recovery factor). but the company is targeting a total of eight by the end of 2008 and 60 wells for the full year. covered by UBS analyst Grant Hofer] Figure 29: Enerplus’ Bakken acreage Enerplus operates and owns approximately 70% of the Sleeping Giant Bakken play located in Montana and North Dakota.
Cody. The following table summarizes a few of the known attributes of these shales: Table 23: Summary of US Rockies shale plays Shale Gothic Cody Cane Creek Baxter Mancos Lewis Pierre Niobrara Basin Paradox Montana Thrust Belt Paradox Vermillion Uinta San Juan. the boom in unconventional resource opportunities is by no means limited to the these plays.Q-Series®: North American Oil & Gas 3 September 2008 Select experimental plays to watch While the bulk of this report has profiled the potential of the Bakken.000 5.000-6. All are at early stages of development.000 4. tight gas and CBM production—resulting in development/production at lower costs.000-7.500 2.000-6.000 9.500 1.000 85-100 2.900 1. the opportunity to commingle shales. Cane Creek.000 1.000-12. We fully expect we will continue to see a number of new plays emerge over the next few years.000-16. Montney. Green River Raton Piceance Vertical Depth (ft) 4.000 12.5 5. EnCana is the most active player attempting to commercialize the Mannville CBM—understandable given EnCana’s dominant land position on the overall UBS 86 .800 IP (mcfd) 160-400 N/A 4. it is currently producing approximately 80 MMcf/d. Gtr. but it appears the Cane Creek and Niobrara stand out as the best-performing shales to date. these were typically commingled with other zones.8 NA Well Cost (US$M) N/A 2. Utica and Marcellus.300-2.500-3. mainly because play characteristics differ significantly over the wide fairway and it is taking producers time to solve the commerciality challenge outside of Corbett Creek.6-1.000-13.0 0. Haynesville. the key challenge is takeaway capacity and the inherent low price realizations that will make it challenging for many of these plays to compete with other opportunities in the short to medium term. in many cases.0 0.500 3.500-3.000 Thickness (ft) 80-150 900-2.0-5.500-6. Pierra and Niobrara. Horn River. but the focus was primarily on CBM and tight gas. Baxter. The key advantages to development in this region are the gas gathering infrastructure in place and.5 7 5 N/A 1 NA Source: Wood Mackenzie except Niobrara. Although activity is picking up on these shales. Outside of Nexen/Trident. While there has been some shale gas activity (Lewis and Mancos). which is provided by EnCana Mannville CBM The Mannville CBM fairway extends over a large portion of Alberta with part of the fairway being prospective for more traditional “wet” CBM and another part being prospective for a “drier” CBM (more to the west). the play has failed to see widespread development. We see activity picking up in six shales in the US Rockies including the Gothic.200-1.1-2.000-2.000-9.000 3. a number of these are outlined below: US Rockies Shales The US Rockies have been a hot bed of unconventional drilling activity over the years.500 10.500 500-1.2 0. Despite the successes achieved by Nexen/Trident in the Corbett Creek area. The Mannville CBM play was first commercialized by Nexen and its JV partner Trident Exploration in 2006.105 100-500 75 1000 EURs (bcf) N/A N/A 6 2.900 1.
Mannville ERCB/AGS. comparable to many of the emerging shale plays. Gas in place per section is estimated at 125-175 Bcf per section. HSC-ERCB. making fracs a bigger challenge.000 net acres and TXCO Resources with 341. at the higher end of other shale plays. Ardley . The dominant land holders in the Pearsall shale are EnCana with 380.CERI Pearsall Shale The Pearsall shale is located in south Texas within the Maverick Basin. As TXCO is a relatively small company (~$400 million market cap). The shale appears to be quite thick at 300-500 feet. similar to the Fort Worth Barnett. The Delaware Barnett is typically found at 8. although the bulk of the focus thus far has been on the Barnett. A key challenge is that the shale appears softer than many emerging plays. with typical thickness of 600 feet versus 300 feet in the Fort Worth Barnett. The shale is lower Cretaceous-aged and is located at 7.000-12. but a more recent horizontal provided more promising results at 3.000 feet. but tends to be thicker.000 net acres of land. Outside of EnCana. Delaware Barnett & Woodford The Delaware Basin is located in west Texas and is prospective for both the Barnett and Woodford shales. UBS 87 .Q-Series®: North American Oil & Gas 3 September 2008 fairway.000 feet. Initial horizontals yielded relatively low IPs at the 1 MMcf/d level.000 net acres and EnCana with 287. Canadian Natural Resources and Penn West also have significant exposure to this play. The play is thought to have approximately 100-150 Bcf of natural gas in place per section. it is the highest-leveraged Pearsall shale play.000 net acres. The biggest players in the Delaware Barnett and Woodford shales are Quicksilver with 375. EnCana plans to drill four wells in 2008 on the Pearsall. although not insurmountable. Figure 30 and Figure 31 depict the vast resource potential of the Mannville CBM play: Figure 30: Mannville CBM Fairway Figure 31: Significance of Mannville CBM Source: EnCana Source: EnCana (US CBM Basins from Sproule.5 MMcf/d using a five-stage frac.
Gas in place is estimated at approximately 28 Bcf per section.C. providing a significant resource potential resource base at shallow depths. which has unlocked the play. One of the most active players developing the Lower Shaunavon is Penn West Energy Trust. Lower Shaunavon Figure 32: Farrell Creek Geology Source: Canadian Spirit Resources Located in southwest Saskatchewan. Various producers are experimenting with a “rock package play” in the relatively shallow Gething formation found at approximately 2. However. shales. BC will likely continue to see various other unconventional gas developments.Q-Series®: North American Oil & Gas 3 September 2008 Northeast BC Gething “Rock Package Play” Outside of the Montney and Horn River. Small cap producer Canadian Spirit Resources is the most active in evaluating the Gething play at its Farrell Creek property in northeast B.300 feet (700 metres). significant improvements have been made to drilling and completions techniques (similar to those used in the Bakken). but with lower quality crude oil (primarily medium gravity). While development has taken place in the region for several years it has been largely focused in the Upper Shaunavon due to difficulty in producing from the Lower Shaunavon trend. silts and sandstones. the Lower Shaunavon is an emerging play that offers similar characteristics to the nearby Bakken trend. N. which will drill 30 wells this year and is targeting 250-300 wells over the next five years. over the past two years. UBS 88 .E. The Lower Shaunavon trend contains large oil-in-place reservoirs characterized by pay zones ranging from four to 16 meters in thickness with lower permeability and 22° API crude. which could be commingled. The rock package in the Gething includes a mix of coalbed methane.
00 Buy Buy Buy Chad Friess Chad Friess Andrew Potter Apache Chesapeake Devon Energy EOG Resources Hess Corporation Marathon Oil Pioneer Natural Resources Southwestern Energy XTO Energy US Lg Cap Avg APA CHK DVN EOG AHC MRO PXD SWN XTO US$ US$ US$ US$ US$ US$ US$ US$ US$ 106.8x 2.3x 3.8x 6.9x 5.00 80.7x 2.2 1.9x 4.2x 5.0x 2.6x 5.7x 5.2x 9.4x 2.5x 14.1x 5.7x 3.3x 4.8x 8.6 9.8 6.6x 5.7x 2.1x 8.6x 5.00 71.0x 9.6 19.7x 17.0x 10.8x 9.0x 8.97 103.2x 9.47 97.00 Neutral Buy Buy Grant Hofer Grant Hofer Grant Hofer Compton Petroleum Galleon Energy Petrobank Canadian Sm Cap Avg CMT GO/a PBG C$ C$ C$ 8.2x 3.2x 3.8x 8.6x 5.00 160.2 4.4x 15.1 2.2x 3.9x 2.64 70.7x 10.0 25.2x 2.2 30.8x 19.1x 2.9x 4.6x 6.4x 3.7x 17.6x 14.0x 6.4x 1.8x 4.5x 4.2x 3.5x 6.8x 4.2 4.7x 4.66 13.5x 6.6x 5.00 75.5x 13.3x 3.9x 12.5x 5.65 170.6x 8.1x 6.0 13.5x 9.4x 4.6x 3.2 34.5x 6.5x 7.9x 5.9x 5.3x 16.3 31.1x 11.1x 6.4 38.9x 9.7x 8.8x 5.6x 11.8x 7.5x ARC Energy Trust Crescent Point Energy Trust Enerplus Resource Fund Canadian Income Trust Avg AET.9 1.1 10.7 24.3x 4.9 7.38 15.2 17.2 1.8 25.7x 4.4x 8.72 46.1x 8.0x 3.0x 3.4 23.2x 5.6 7.8 53.0x 6.5 4.4x 4.3x 2.6x 5.4x 4.2 6.8x 7.4x 7.24 46.5x 8.5x 7.7x 2.5x 4.2x 4.2x 7.9x 9.8x 8.9 31.8x 2.3x 3.8x 4.2x 8.00 76.3x 5.00 50.9x 3.9x 14.00 59% Buy 73% Buy 66% Buy 39% Neutral (UR) 22% Neutral 26% Neutral 87% Buy 96% Buy 63% Buy 59% William Featherston William Featherston William Featherston William Featherston William Featherston William Featherston William Featherston William Featherston William Featherston Atlas Energy Cabot Oil & Gas Equitable Resources Forest Oil Petrohawk Plains Exploration & Production US Sm/Mid Cap Avg ATN COG EQT FST HK PXP US$ US$ US$ US$ US$ US$ 35.0 3.7 42.5x 2.2x 7.5x 5.00 25.5x 10.Q-Series®: North American Oil & Gas 3 September 2008 Appendix Table 24: UBS unconventional resources valuation Local Price Target Upside Rating Analyst EV $b Mkt Cap $b 2008E 2009E EV / DACF 2010E 2011E 2012E 2008E 2009E P/E 2010E 2011E 2012E EnCana Imperial Oil Nexen Talisman Energy Canadian Lg Cap Avg ECA IMO NXY TLM US$ C$ C$ C$ 71.8x 5.9x 4.2x 6.15 44.0x 9.6x 6.8x 3.0 48.8x 4.0x 5.0x 7.9x 8.0x 9.9 5.5x 6.9x 13.9 4.4x 6.34 52.1x 6.00 121.2x 1.0x 3.99 86.3x 6.9 6.6x 3.0x 13.4x 6.7x 7.7x 14.1x 8.8 37.23 45.2x 5.8x 10.7x 6.9x 2.88 43.82 100.00 136.1x 4.5x 7.0 2.4x 5.8x 6.3x 11.3 5.5x 1.5x 10.6x 6.5x 6.0x 4.8x 12.3x 5.3x 3.2x 6.5x 3.0x 5.3x 10.0x 8.2x 6.1x 3.1x 5.7x 5.5x 7.00 98% Buy 96% Ronald Barone Andrew Coleman Ronald Barone Andrew Coleman Andrew Coleman Andrew Coleman Source: UBS UBS 89 .3x 6.9x 4.5x 4.00 31.08 51.6x 30.9x 4.00 45.4x 5.8x 20.5x 8.8x 10.3x 12.5x 22.3 48.un C$ 29.4x 4.6x 4.6 6.8x 9.4x 10.8x 8.2x 1.3x 4.8x 5.00 79% Buy 53.00 113.00 45% Buy 41.4x 10.9 2.3x 4.1x 10.7x 9.2x 8.5x 9.5x 3.5x 4.1x 8.5 7.00 91% Buy (CBE) 31.3x 3.6x 2.3x 6.6x 7.00 55.3x 4.0 7.6x 11.6x 12.6x 6.5x 4.7x 11.un C$ CPG.5 7.2 38.82 60.00 121% Buy 50.7x 3.6x 3.2x 5.3 24.2 4.1x 14.0x 4.8x 15.1 21.3 6.5x 1.2x 10.8 7.6 47.52 98.9x 5.3 33.0x 5.un C$ ERF.15 37.4x 9.1x 2.18 31.4 24.1x 4.3x 8.0x 7.0x 5.9x 9.05 135.3x 9.00 90% 11% 68% 67% 59% 6% 21% 11% 13% 73% 90% 69% 77% Buy Neutral Buy Buy Andrew Potter Andrew Potter Andrew Potter Andrew Potter 62.3x 5.1x 10.8x 6.0 35.5x 2.2x 22.0x 4.8x 6.1 12.97 101.00 51.5 8.1x 19.9 2.50 17.6x 15.47 36.1x 3.8x 4.3x 3.4x 6.3x 9.5 5.8x 3.0x 12.3x 12.8x 6.5x 6.9 1.5x 7.95 30.5 4.6x 9.7 39.1 34.0x 4.1x 10.4x 12.5x 10.0x 2.3x 2.8x 8.9x 15.55 57.4x 5.00 139% Buy 47.5x 4.0x 14.5 6.9x 8.29 96.3x 10.
or will be. UBS 90 .Q-Series®: North American Oil & Gas 3 September 2008 Statement of Risk The risks associated with our investment thesis include volatility in oil and natural gas prices. directly or indirectly. drilling costs and access to oilfield services. and (2) no part of his or her compensation was. well performance. certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers. is. Analyst Certification Each research analyst primarily responsible for the content of this research report. in whole or in part. related to the specific recommendations or views expressed by that research analyst in the research report.
For information on the ways in which UBS manages conflicts and maintains independence of its research product.com/disclosures. branches and affiliates are referred to herein as UBS. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. its subsidiaries. UBS AG. historical performance information. UBS Investment Research: Global Equity Rating Definitions UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell Definition FSR is > 6% above the MRA. UBS Investment Research: Global Equity Rating Allocations UBS 12-Month Rating Buy Neutral Sell UBS Short-Term Rating Buy Sell Rating Category Buy Hold/Neutral Sell Rating Category Buy Sell Coverage 57% 36% 8% 3 Coverage less than 1% less than 1% 1 IB Services 38% 35% 29% 4 IB Services 31% 38% 2 1:Percentage of companies under coverage globally within the 12-month rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. UBS 91 . and certain additional disclosures concerning UBS research recommendations. 3:Percentage of companies under coverage globally within the Short-Term rating category. FSR is > 6% below the MRA. please visit www.ubs. FSR is between -6% and 6% of the MRA. Rating allocations are as of 30 June 2008. an affiliate of UBS AG.Q-Series®: North American Oil & Gas 3 September 2008 Required Disclosures This report has been prepared by UBS Securities Canada Inc. Additional information will be made available upon request. Source: UBS. Definition Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.
management. and not a forecast of. usually in response to an event that may affect the investment case or valuation. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for. management. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are : Buy: Positive on factors such as structure. Core Banding Exceptions (CBE) : Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). they will be identified in the Company Disclosures table in the relevant research piece. Neutral: Neutral on factors such as structure. discount. performance record.Q-Series®: North American Oil & Gas 3 September 2008 KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. management. stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. indicating that the stock's price target and/or rating are subject to possible change in the near term. Under Review (UR) Stocks may be flagged as UR by the analyst. Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result. When such exceptions apply. performance record. performance record. UBS 92 . discount. Sell: Negative on factors such as structure. discount. the equity risk premium). Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case.
16 ExxonMobil Corp. They may be more recent than the stock pricing date 2a.TO PBG. 5a.TO XTO.34 US$34.25 US$40. 2a.34 C$28. 13.N COG. UBS Securities LLC is acting as Advisor to Chesapeake Energy on exploring strategic alternatives for its midstream natural gas assets.01 US$71. 5a.N ECA. its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 4a. 4a. Atlas Energy Resources. 6a. 16 Company 2c. 16.04 C$30.51 US$46. UBS Securities Canada Inc is acting as advisor to Compton Petroleum on exploring strategic alternatives. 7. UBS 93 . 16 Pioneer Natural Resources Co.N CMT.TO CPG_u. 4a.N NXY. 4a.N TLM.32 US$53.Q-Series®: North American Oil & Gas 3 September 2008 Company Disclosures Company Name Apache Corporation2c.N PXP. 4a. its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. 6a. 4a. 16 2a. 16 Marathon Oil Corporation 2b.N GOa. 5a.60 C$36. 7. 6a. 6a. 2b. 22 3a. 5b.TO HES. 16 EOG Resources 2a. 7.76 C$17. 6c. 4c. Devon Energy Corporation 6c.57 C$50. All prices as of local market close. 7.TO DVN. 20 Forest Oil Corporation Galleon Energy 16 Hess Corp.N CHK. UBS AG.N XOM. 5a. UBS AG.N PXD.TO HK. 16. Within the past three years. 16 ARC Energy Trust 2a. 5a.67 US$59. 16 2a. 6c.N AET_u. Ratings in this table are the most current published ratings prior to this report.91 US$47.68 C$43.07 1. 4b. UBS AG. 22 Royal Dutch Shell 16 Southwestern Energy Company 2b.N 12-mo rating Short-term rating Buy N/A Neutral N/A Buy Buy Buy Buy Buy Buy Buy Buy Neutral (UR) Buy Buy Buy (CBE) Buy Neutral Neutral Neutral Buy Buy Buy Buy Buy Buy Buy Buy Buy N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Price US$106. 2c.L SWN. LLC 6a.28 US$77. 16. 4b. its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past three years.26 C$44.24 C$8. 16 Reuters APA. 16 EnCana Corporation 16 Enerplus Resources Fund 2a. 16 Equitable Resources 6b.N RDSa.83 US$45. UBS Securities Canada Inc or an affiliate has received compensation for investment banking services from this company/entity. 16. UBS AG. 6b. Within the past 12 months. 3b.N EQT.11 US$101. 6a. 22 XTO Energy Corp.02 C$13. Petrobank Energy 2a. 15. Chesapeake Energy Corp.05 US$43. 22 Nexen Inc. 5a. 6a. 15. Within the past 12 months.TO ATN.70 US$96.56 US$50.N ERF_u. Plains Exploration & Production 5a.N IMO. 4a. 16 16 Compton Petroleum Crescent Point Energy Trust 4a. 6a. 4a. 16 Imperial Oil Ltd. its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.75 US$95. 3a. 16.90 US$30. its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past five years. its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months. 16 Talisman Energy Inc. UBS AG.80 Price date 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 02 Sep 2008 Cabot Oil & Gas Corporation 2a. 6a.N FST.TO MRO. 3b.863p US$35. Source: UBS. 2c. 4a. 4c.TO EOG. Petrohawk Energy Corporation 4a. 6a. 4a. UBS AG.
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