The Association of Professional Engineers, Geologists and Geophysicists of Alberta

Oil & Gas Strategy…The Long and Short of it…”

Calgary, AlbertaSeptember 2006

Brian Prokop, P.Eng, CFAVice-President, Oil and Gas SpecialistInstitutional SalesCanaccordAdams

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Lunch Talk Coping Strategies

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Overview• Industry Themes and Issues

• Commodity Price Forecasts

• Investment Themes

• Key Investor Criteria

• Stock Picks– Oilfield Services– Royalty Trust– Large Cap– Small Cap

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E&P Sub-Index Historical Performance

As at September 11, 2006Source: Bloomberg

0

1,000

2,000

3,000

4,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

E&P Sub-Index 200 day moving avg.

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Can This Bull Market Continue?

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• Seasonally volatile commodity prices

• Cash-rich, relatively opportunity-poor E&P companies

• Shortages of services shifting pricing power away from E&P sector

• Escalating cost structure– Rising finding and development costs– Rising overhead and operating costs

• Consolidation

• Internationals

Industry Themes

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Near-month Crude Oil Prices

As at September 11, 2006Source: Bloomberg

$0

$20

$40

$60

$80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

WTI (US$/b) 200 day moving avg. (US$/b)

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Crude Oil Price Drivers

• Supply– OPEC– FSU – ability flat-out– Supermajors – buy/not find– Hubbert’s Peak

• Demand– Real Price of Oil – below peak– China & India– FSU - industrialization

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Crude Oil Price Drivers

• Expectations– Reversion to Mean – what mean?

• $30 - $40 - $50/B– OPEC Capacity – Indonesia, Saudi Arabia– OPEC Instability – Iraq, Nigeria, Venezuela, Mexico,

Iran– Alternatives

• Price Forecast – will be wrong – just hope to get trend right!– CCI 2006E/2007E – US$70.00/B (upward bias)– Strip Implies Higher in 2006

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Near-month NYMEX Gas Prices

As at September 11, 2006Source: Bloomberg

$0

$4

$8

$12

$16

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

NYMEX Nat. Gas (US$/mmbtu)200 day moving avg. (US$/mmbtu)

z

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Natural Gas – Price DriversSupply• Drilling Activity• Storage, LNG, GOM prod – still small hurricane uncertainty

Demand• Weather, Economy, Demand Destruction• Oil Price/Alternatives

Expectations• Warm Winter – price weakness (relative)• Long-term Bullish• Alternatives/Complements – LNG, Coal, CBM

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Canaccord Adams Commodity Price Assumptions

Source: Canaccord Adams estimates, Bloomberg

2005A 2006E 2007E

Crude Oil

WTI (US$/b) $56.67 $70.00 $70.00

Heavy (Lloyd Blend @ Hardisty C$/b) $45.33 $55.51 $54.65

Edm. Par (C$/b) $69.18 $76.66 $76.67

Natural Gas

NYMEX (US$/mmbtu) $9.02 $7.30 $9.00

Alberta Spot (C$/mcf) $8.92 $6.80 $8.80

FX Rate (US$/C$) $0.826 $0.890 $0.900

Forward Strips, as at September 11, 2006

WTI (US$/b) $68.05 $70.45

Upside (3%) 1%

NYMEX (US$/mmbtu) $7.15 $8.77

Upside (2%) (3%)

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Investment Themes• Current industry activity still robust, although stocks have drifted over the spring and summer due to wet weather. Weak Q2, stronger Q3

• Commodity strip shows winter strength, although current spot price has been weaker. Warm winter would threaten pricing – potential weakness in natural gas stocks

Focus on Service companies offering:• Increasing Rates• Additional Units

Focus on Royalty Trusts and E&P companies offering:• Low Cost – always within commodity environment• Growth – scalable, repeatable results

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Investor Wants/Expectations• Value Creation/ROCE• Growth• Clear and Honest Communications• Clear and Sensible Strategy• Excellent Management/Board Independence• Sound Financial Structure• Respect for Shareholders and Other Stakeholders• Liquidity

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Investor Wants/Expectations• Value Creation/ROCE

– Focus on underlying economics of companies• Reserves - • Assets – land – large and contiguous• Capital costs – F&D• Operating costs - $/BOE

– Maximize Value• Perform (Grow) or Sell

• Growth– Solid underlying value (reserves and reserves credibility)– Ability to show definable, long term, repeatable activities

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Risks to Consider

• Mild winter weather– Reduces heating demand– Hurts oilfield activity

• Price volatility– Restoration of GOM production– Transition from heating to shoulder season in Q2

• Access to oilfield services - Bad – E&P’s, Good – Services– E&Ps – higher costs, difficult availability– Services – greater demand, higher prices, better

margins

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Services – Savanna Energy Services (SVY : TSX)Strengths• Currently 4th largest drilling firm – will be 3rd after current rig

build– Largest fleet of new equipment (an average of less than 3 years

old)– SVY – coiled tubing hybrid rigs – disruptive technology– WLE – deep rigs and access to First Nation’s land and labour

• Over $1B in market cap ($1.3B) – hits new radar screens• High utilization – above industry average• Clear visibility for growth for both entities• Trust conversion potential• CHEAP – trading at 8.8X 2007 EPS (24% discount to peers)

Risks• Precipitous commodity price drop• Excessive E&P consolidation

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O&G Royalty Trust – Canadian Oil Sands (COS.UN : TSX)

Strengths• Multi-decade reserve life• Largest and cheapest – P/NAV of 85%• Transition to dividend play – upward target price bias• Distributions – increases pending• Further long-term growth – Stage 4 & 5

Risks• Asset concentration• Stage 3 timing – minor (back on)• Stage 4 & 5 timing

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Large Cap Pick – Nexen Inc. (NXY : TSX, NYSE)

Strengths• Strategically positioned for near-term and long-term

growth – Oilsands – Long Lake (30,000 b/d) and Syncrude (10,000

b/d)– Conventional – Buzzard, North Sea (85,000 b/d)– Exploration upside – GOM, West Africa– Strong balance sheet– Responsible management

Risks• Timely and cost effective access to services and

construction• Timing delays• 80% oil-weighted

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Small Cap Pick – TAG Oil Ltd. (TAO : TSX-V)Strengths• Leveraging energy crisis in New Zealand• Large inventory of drilling opportunities – large

potential exploration targets (100 mmb+)• Access to over 1,000,000 net acres of undeveloped land

in immature basin• Strong balance sheet to finance aggressive capital

spending program• Experienced management• First production last month – 100 B/d

Risks• Timing delays• Limited infrastructure in some areas of focus resulting

in longer lead times to convert investments to cash flow• International

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Summary

• Commodity Price Forecast – higher trendOil range - $60.00/b to $70.00/bNatural Gas range - $7.00/mcf to $11.00/mcf

• Top Picks– Service – SVY– Royalty Trust – COS.un– Large Cap. – NXY– Small Cap. – TAO

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Questions?

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