bernstein three unwritten rules of energy investing

SEE DISCLOSURE APPENDIX OF THIS REPORT FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS.

COMMODITIES AND POWER APRIL 16, 2010

Bernstein Commodities & Power: Three Unwritten Rules of Energy Investing Neil McMahon, Ph.D. (Senior Analyst) • [email protected] • +44-207-170-5002

Hugh Wynne (Senior Analyst) • [email protected] • +1-212-823-2692

Neil Beveridge, Ph.D. (Senior Analyst) • [email protected] • +852-2918-5741

Oswald Clint, Ph.D., ACA (Senior Analyst) • [email protected] • +44-207-170-5089

Scott Gruber, CFA (Analyst) • [email protected] • +1-212-756-1935

Ben P. Dell (Senior Analyst) • [email protected] • +1-212-407-5817

BERNSTEIN RESEARCH APRIL 16, 2010

Three Unwritten Rules of Energy Investing

by Neil McMahon There appear to be a few very basic principles which control much of the performance of energy stocks in a rising commodity environment. Basically, we think it all comes down to profitable production growth, good exploration potential, and leverage to oil and gas prices. Some might see these rules as over simplistic, as they arguably ignore the yield and defensive characteristics of some of the integrateds but, in general, they have tended to be the drivers of outperformance within the energy sector.

Historically, investors used to like the integrated oil companies (well, some of them at least), especially in the period before, and just after, the merger wave, up until the last five years, when missed targets, and a number of badly thought-through business practices, kicked in. In the late 1990s and early 2000s, for example, the integrated companies still explored, and due to the success of many of their exploration programs from the late 1980s/1990s, these companies had reasonable production growth, which has since run out of steam.

However, as the IOCs have undertaken less true exploration over the last five years, focusing instead on access deals with governments, or indeed recently buying reserves (at market prices) that others have discovered, investors have found other ways to build energy portfolios. Although the Integrateds feel it is their role to manage a portfolio of assets across E&P, Gas and Power and Downstream operations, investors, seeing no real value in integration (with which we tend to agree), can form pseudo integrated companies through investing in upstream and downstream pure plays, which offer more alpha potential, more flexibility from an investing point of view through cycles, but with less yield than the integrated companies. It is this change in the way investors invest in energy, and the movement away from exploration by the integrateds, that the management teams of the Majors are not acknowledging as serious issues. Indeed, we believe that the integrateds continue to think that investors like their current strategies in the same way as they did in the late 1990s and early 2000s.

Today, and arguably over the last five years, investors in E&Ps, IOCs and NOCs, still seem to be looking for the same things as they have historically, namely decent production growth which

does not dilute profitability per barrel; exploration potential which offers substantial NAV enhancement to the company; and significant leverage to oil and gas prices. And this has led to our three simple rules for investing in energy companies, for the purpose of share price performance, especially in a rising commodity environment.

Rule # 1: Production growth >5% CAGR that does not meaningfully dilute profitability per barrel or ret urns

There appears to be a reasonable correlation between share price performance and companies which are growing at >5% CAGR, or have the potential to grow at that rate in the near term. Many integrateds may throw their hands up and say that this is unachievable given their scale, but we would contest that we see little reason for the integrateds to be as big as they currently are. Indeed, we are big believers in a shrink to grow strategy, provided other criteria are met and, furthermore, few have contemplated spinning off pure play E&P companies from their upstream portfolios (such as a global gas company), that could help on this metric.

Additionally, although some of the integrateds will see enhanced production growth if their investments in Iraq go as planned, this is growth that will dilute both the returns and profitability (on a net income/boe basis) of their existing upstream portfolio, and investors can see right through this. Indeed the same can be said for some acquisitions where a full price has been paid. So, in general, we believe investors will reward profitable (or non-dilutive) growth that has originated from organic projects, or even inorganic positions which have then been developed by the company.

Rule # 2: An exploration strategy which offers substantial NAV enhancement to the company

This is one of the most obvious rules, which can clearly be correlated with share price moves, even in some of the larger integrateds (such as the effect of BP's Tiber discovery last year). In general, investors will pay up for a company that has taken risks in exploration hot spots, or indeed has created market enthusiasm around its own hot spots, such as West Africa for Tullow and Anadarko, or even the allure of Greenland in the case of Cairn. We continue to find it strange that the integrateds did not really

BERNSTEIN COMMODITIES & POWER: THREE UNWRITTEN RULES OF ENERGY INVESTING

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embrace exploration over the last five to ten years, as they had historically, given the close correlation of exploration success to share price performance due to the increase in net asset value. Additionally, exploration still remains (in general) the lowest cost method for adding reserves today. We hope that the newfound interest in exploration which many of the integrateds seem to be discussing with the market in 2010, will help the companies become more exciting in the eyes of investors over the next few years.

Rule # 3: Significant leverage to oil and gas prices (not just in upstream but also across the entire company)

In a rising commodity price environment, this is a rule which helps the earnings and cashflow outlook of a company, as analysts and investors have increasingly based EPS expectations on the forward oil and gas price strips. With the increasing desire of more integrateds to divest significant proportions of their downstream businesses (apart from Petrobras which continues to increase capacity), you would think that this rule would start to apply more widely across the energy space. However, the downstream positions of many of the integrateds are still large enough to lower the leverage to oil and gas prices in normal environments, although admittedly, during high demand periods, the downstream business can also have a strong leverage to the oil price. Additionally, the desire to accept PSA contracts and the recent deals in Iraq, do little to help leverage, as the Technical Service contracts do not give the IOCs or the NOCs that are participating leverage to rising oil and gas prices.

Assessing how the energy space stacks up on these rules highlights why these rules are important (Exhibit 1), and arguably highlights why investors have favoured certain stocks over the last five years. Interestingly, the IOC's will typically only tick one, or one and a half of these rules, whereas some NOCs, and many E&Ps tick all three.

Increasingly, the integrateds are used by investors for portfolio construction purposes to hit benchmark targets, for yield, or as a defensive play that historically has worked better during downward market corrections (although this may not work so well in the future), rather than as investments in their own right.

When the integrateds acknowledge these factors and restructure their companies, as well as their business models, with an increasing focus on exploration, we would expect their performance to improve. Indeed, such changes, albeit somewhat fanciful, may even be timely, as there will likely be a number of large exploration licensing rounds over the next 18 months in some of the worlds hot spots (such as Brazil), and many E&Ps are currently cash-strapped, or are struggling to fulfill their recent land-grab license commitments. So, despite being simplistic, we remain convinced that our rules will likely govern the relative performance of the energy sub-sectors, and the stocks within them, over the next few years.

Exhibit 1 Looking across the energy space on our three simple rules

Rule #1 Rule #2 Rule #3

CompanyProfitable / Non-Dilutive Production Growth >

5% CAGRExploration Potential With Significant NAV

EnhancementSignificant Leverage to Oil & Gas Prices

BP 1/2 � � � �Shell 1/2 � � � �ExxonMobil 1/2 � � � � 1/2 � � � �Chevron 1/2 � � � � (low refining exposure & not in Iraq)ConcoPhillipsTotalEniMarathon �� 1/2 � � � �Hess ��

Petrobras 1/2 � � � � (see note below) ��

CNOOC ��

Anadarko ��

Tullow ��

Note: Petrobras has high absolute production growth. However, the likely capital raising would mean that growth would be below 5% CAGR on a per share basis.

Source: Bernstein analysis and estimates


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Changes to Ratings / Target Price

• PBR: downgraded from OP to MP. Price target reduced from $47 per ADR to $45.

This Week’s Reports (available on FirstCall / bernsteinresearch.com)

Global Integrated Oils

Global Integrated Oils: Petrobras - Downgrading to Market Perform on Lower Downstream Returns and Dilution Risks (4/12/2010) Despite PBR's strong growth outlook, we have a number of concerns over the company. Firstly, planned refining expansion to meet growing product demand in Brazil & a dramatic increase in downstream capex next year is unlikely to help shareholder returns. Secondly, uncertainty remains on the size & timing of the capital raising. We believe the value of reserves transferred could vary from $16.5bn to $35bn, and at the top end PBR could pay the government partially in cash to limit the size of the offering. Having revised forecasts for the increased capex and for the 2009 results, we decrease our target price from $47 to $45 per ADR. With limited upside to the current share price and continued uncertainty over the capital raising, we therefore downgrade PBR to Market-Perform.

U.S. E&Ps

Bernstein E&Ps: From a Flood to a Trickle; The Moderating Effect of Local Demand Growth on Middle East LNG Exports. (4/14/2010) The bear case for US gas fears growing LNG from the Middle East, but much of the region is actually short on natural gas. Regional gas demand, led by increasing electricity consumption and water desalination, is growing more quickly than production. While Qatar will likely be approaching peak liquefaction capacity in early 2011, Kuwait and Dubai already have plans to take LNG deliveries during periods of high seasonal demand, and we anticipate Saudi Arabia following suit within the next few years. Therefore we see total net exports from the region only growing by 1.6 Bcfd between 2008 and 2012. Given demand growth from South America, Europe, and Asia, net flows of LNG from the Middle East to the US should only grow marginally, if at all.

U.S. Oil Services

Bernstein Oil Services: Capitalizing on Near-Term Concern for Long-Term Profit Transcript (4/14/10) Upstream spending abroad should rise over 2010 to catch up to cash flow at $80/bbl crude. Domestic capex will drop following the gas price trend, but the magnitude and duration should be more limited than in 2009. The Services remain attractive given greater crude/int'l gas exposure (2/3rds currently), mitigating factors in North America (deepwater growth and rising service intensity) and below normal valuations. We prefer HAL and BHI (both O). The Drillers offer attractive value stocks for long holding periods but near term challenges make a cycle bet unattractive. Relative outperformance

should be generated by NBR within the land drillers and RIG and PDE among the offshore drillers (all O).

European/Russian Oil& Gas

Euro Oil & Gas: European Shale Gas - So Will It or Won't It Work? Learnings Post Our Polish Shale Gas Management Trip (4/15/2010) Our recent management trip to Poland to visit companies exploring for natural gas has failed to temper our view that expectations for a European shale gas revolution are pre-mature for three reasons. Firstly, geology, faulting & thermal maturity data indicate to us that Northwestern Poland may be the only location to find a successful shale. Secondly, even with lower taxes the $10M/vertical well implies IRR of only 13% if pure oil-linked prices are achieved. Thirdly, land access, environmental, water usage and rig availability will be material bottlenecks to rapid growth. Indeed if all Europe's 67 land rigs were in Poland, plateau production of 2.2Bcfd could be achieved by 2020 or only 4.5% of current demand.

U.S. Utilities

U.S. Utilities: What Can We Learn from the Similarities Between the MIR/RRI and FE/AYE Mergers? (4/13/2010) Neither the Mirant/RRI nor the FirstEnergy/Allegheny merger seeks to diversify generation by region or by fuel; rather, these transactions serve to concentrate generation portfolios in particular regions and fuel types. By significantly increasing the proportion of regional capacity and generation controlled, the proposed mergers should increase leverage over coal suppliers, facilitate efficiencies in operation and possibly enhance market power. A risk to the success of the mergers, therefore, is the possibility that FERC or state regulators will find the transactions to be anti-competitive, and require the merged entities to divest a significant portion of their combined generation capacity.

The Week Ahead

• 4/19: HAL 1Q earnings

• 4/20: WFT 1Q Earnings

• 4/21: ECA, NBR & NE 1Q earnings

• 4/22: DO, ESV 1Q earnings & STO 1Q operational update

• 4/23: SLB 1Q earnings & WPL 1Q operational update

• 4/23: RIL full year 2009/10 results


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Commodity Price Information

15/04/2010 Spot Price Last Week Last MonthNatural Gas 4.16 3.92 4.27Crude Oil 85.51 85.39 82.93

SCB Estimates 2010 2011 2012Natural Gas 7.00 8.50 9.18Crude Oil 80 102.60 110.81

Source: Bloomberg L.P. and Bernstein estimates.

Risks

Risks to energy and commodity stocks include economic conditions and commodity price swings. If the global or US economy turn down significantly, global demand growth for oil could decelerate, putting pressure on prices and thus on the cash flow of oil producers. Economic swings also affect refiners and utilities. Utility stocks could be further impacted by swings in demand for electric power. If demand drops, utilities could suffer.

Exhibit 5 Company Summaries – Valuation Based on Bernstein Es timates

Ticker Rating Curr.Target Price Upside 2009 2010E 2009 2010E

Last Week

Last Month

Last 12 months

Majors and RefinersBP M USD 60.57 58 -4% 4.42 7.11 13.7 8.5 3% 6% 54%CVX O USD 81.59 88 8% 5.24 8.33 15.6 9.8 5% 10% 22%COP M USD 57.06 53 -7% 3.24 6.47 17.6 8.8 6% 9% 44%ENI O USD 48.33 60 24% 3.54 6.03 13.7 8.0 4% 0% 25%MRO O USD 32.70 36 10% 1.63 4.26 20.1 7.7 3% 3% 15%TOT M USD 59.41 59 -1% 5.27 6.65 11.3 8.9 1% 1% 24%RDS/A O GBP 19.93 23 14% 1.02 2.22 19.5 9.0 3% 2% 41%XOM M USD 68.26 70 3% 4.01 6.60 17.0 10.3 1% 3% 0%PBR M BRL 33.60 36 7% 3.06 2.71 11.0 12.4 -6% -9% 12%HES O USD 64.91 73 12% 2.27 4.45 28.6 14.6 1% 5% 16%SUN M USD 30.52 27 -12% -2.81 0.01 -10.9 3052.0 1% 1% 10%TSO M USD 12.98 13 0% -1.01 0.19 -12.9 68.3 -2% -7% -14%VLO M USD 19.87 21 6% -3.67 0.92 -5.4 21.6 -1% -3% -5%NES1V.FH O EUR 13.77 15 9% 0.86 0.74 16.0 18.6 3% 6% 39%PPHN.VX M CHF 21.97 17 -23% -3.20 1.72 -6.9 12.8 6% 13% 20%FTO O USD 13.46 16 19% -0.81 0.29 -16.6 46.4 -2% -4% -7%MOH.GA O EUR 10.20 12 18% 0.97 1.02 10.5 10.0 6% -5% 29%SRS.IM M EUR 2.10 2 -5% 0.08 0.11 26.3 19.1 3% 7% -4%E&PsAPA O USD 106.67 142 33% 5.61 10.77 19.0 9.9 0% 2% 58%APC O USD 74.74 100 34% -0.95 2.83 -78.7 26.4 2% 4% 77%CHK O USD 24.37 33 35% 2.67 2.76 9.1 8.8 1% -4% 16%CNQ M USD 78.53 74 -6% 4.07 4.64 19.3 16.9 0% 8% 72%DVN O USD 66.59 88 32% 3.24 7.22 20.6 9.2 1% -2% 33%ECA O CAD 31.96 47 47% 2.59 2.53 12.3 12.6 -1% -2% -40%EOG O USD 110.50 132 19% 3.78 5.76 29.2 19.2 3% 15% 87%MUR M USD 61.67 78 26% 2.88 4.90 21.4 12.6 3% 13% 31%NFX O USD 53.73 63 17% 5.20 4.85 10.3 11.1 -3% -1% 97%OXY U USD 86.47 71 -18% 3.48 5.25 24.8 16.5 0% 5% 48%TLM O USD 17.08 25 46% 0.31 0.92 55.1 18.6 -3% -7% 39%XTO O USD 48.01 65 35% 3.55 2.71 13.5 17.7 1% 2% 44%HK M USD 22.94 25 9% 0.38 1.00 60.4 22.9 3% 7% 5%RRC O USD 51.04 60 18% 0.63 1.34 81.0 38.1 6% 1% 23%SWN O USD 41.63 76 83% 1.52 2.67 27.4 15.6 2% -2% 36%UPL M USD 47.74 57 19% 1.86 3.38 25.7 14.1 0% -1% 19%CVE O CAD 30.14 32 6% 1.93 1.87 15.6 16.1 6% 15% naServicesPDE O USD 31.99 39 22% 2.20 1.91 14.5 16.7 4% 6% 45%SII M USD 45.51 56 23% 0.91 1.36 50.0 33.5 1% 1% 85%HP O USD 40.74 50 23% 3.25 2.20 12.5 18.5 5% -1% 38%BHI O USD 49.08 70 43% 1.80 2.29 27.3 21.4 1% -5% 57%DO U USD 91.54 79 -14% 10.13 9.11 9.0 10.0 1% 5% 28%ESV M USD 48.92 53 8% 5.36 4.05 9.1 12.1 4% -30% 54%HAL O USD 32.52 43 32% 1.36 1.43 23.9 22.7 3% 29% 82%NE M USD 42.03 51 21% 6.37 5.11 6.6 8.2 1% -4% 56%NBR O USD 20.06 36 79% 1.21 1.30 16.6 15.4 0% -7% 49%PTEN O USD 14.66 19 30% -0.15 0.28 -97.7 52.4 4% 1% 21%RDC M USD 31.15 29 -7% 3.01 2.45 10.3 12.7 4% 12% 111%RIG O USD 88.02 117 33% 11.83 9.86 7.4 8.9 1% 3% 33%SLB M USD 67.21 80 19% 2.75 2.78 24.4 24.2 1% 1% 48%WFT M USD 16.98 23 35% 0.56 0.60 30.3 28.3 -14% 15% -56%European E&PsBG/.LN O GBp 1,154.00 1450 26% 67.00 80.00 17.2 14.4 13% 10% -7%STO M USD 24.81 24 -3% 1.47 2.00 16.9 12.4 -99% -99% 41%CNE.LN O GBP 4.25 6 29% -0.01 0.19 -303.6 22.4 -99% -99% 93%GALP.PL M EUR 13.56 11 -21% 0.33 0.57 41.1 23.8 -99% -99% 43%PMO.LN O GBP 13.32 14 1% 0.38 0.98 35.1 13.6 -99% -99% 19%TLW.LN O GBP 13.28 14 7% 0.11 0.22 120.7 60.4 -99% -99% 83%Russian Oil & GasLKOD.LI U USD 60.80 52 -14% 9.10 11.40 6.7 5.3 3% 6% 34%NVTK.LI O USD 77.90 90 16% 4.44 5.93 17.5 13.1 6% 5% 180%OGZD.LI O USD 25.57 32 26% 3.24 4.25 7.9 6.0 8% 8% 50%ROSN.LI U USD 8.67 7 -19% 0.59 1.02 14.7 8.5 2% 9% 68%SGGD.LI U USD 10.19 8 -22% 0.97 1.12 10.5 9.1 3% 15% 46%Asia-Pacific Oil & Gas883.HK O HKD 14.06 16 10% 0.80 1.22 17.6 11.5 3% 8% 55%857.HK O HKD 9.41 13 33% 0.70 0.91 13.4 10.3 1% 3% 35%386.HK M HKD 6.62 8 19% 0.82 0.83 8.1 8.0 3% 5% 11%OSH.AU O AUD 5.85 7 21% 0.11 0.14 53.2 41.8 -1% 3% 10%STO.AU M AUD 14.67 16 11% 0.29 0.40 50.6 36.7 0% 4% -13%WPL.AU M AUD 47.50 56 18% 1.78 1.53 26.7 31.0 1% 5% 22%ONGC.IN U INR 1,040.30 1340 29% 109.20 120.41 9.5 8.6 -2% -3% 16%RIL.IN O INR 1,090.70 1250 15% 117.55 173.57 9.3 6.3 -1% 2% 19%UtilitiesAEP M USD 33.77 39 15% 2.97 3.06 11.4 11.0 -1% -3% 27%D M USD 41.44 38 -8% 3.27 3.47 12.7 11.9 0% 4% 36%DUK M USD 16.13 15 -7% 1.22 1.26 13.2 12.8 -1% -3% 15%EXC M USD 44.41 45 1% 4.12 3.79 10.8 11.7 0% -2% -5%FE O USD 38.59 49 27% 3.77 3.45 10.2 11.2 -2% -3% -3%EIX M USD 34.53 37 7% 3.25 3.37 10.6 10.2 1% 0% 23%PCG O USD 42.80 49 14% 3.21 3.36 13.3 12.7 1% -1% 13%FPL M USD 48.83 51 4% 4.05 4.27 12.1 11.4 0% 2% -3%Relevant IndicesSPX 1,211.67 61.70 80.03 19.6 15.1 2% 4% 42%MSDLE15 1,188.66 71.05 90.32 16.7 13.2 2% 4% 40%MXAPJ 437.46 23.68 29.12 18.5 15.0 1% 5% 41%MXEF 44,664.10 60.91 79.61 733.3 561.0 0% 4% 44%

Price as of Apr 15, 2010

EPS P/E Stock Change

Note: This week's changes to target prices and earnings estimates are shaded. Source: CapitalIQ and Bernstein analysis.


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Valuation Methodology

For the E&Ps our target prices are calculated by taking a 2011 CFPS estimate and a P/CF multiple adjusted for the company's future growth, ROACE and recycle ratio. These are then multiplied together to calculate our target prices.

Our target price methodology for the oil services is based on P/CF and P/BV multiples using 2011 estimates. We weight our P/CF multiple by 0.75 and P/BV by 0.25. For our P/CF multiples, we apply the group average multiple but adjust by the historical company specific spread. For the P/BV multiple, we use the historical industry correlation of P/BV to Roe and then adjust by the historical company specific spread

Our methodology for the offshore drillers utilizes 2012 forecast CFPS as long duration contracts cause the group to trade on forecast cash generation further into the future. We apply a normal 10x multiple discounted for two years at 10% to our 2012 forecasts and then adjust the multiple based upon fleet quality. In calculating our target prices for the land drillers, we utilize our 2011 CFPS estimates. We apply an 8x multiple to next year's cash stream but also adjust the multiple for fleet quality.

Our target price for Frontier of $16 is derived by applying a PE multiple of 10.75x to our 2011 EPS forecast. Our target price for Motor Oil of €12 is derived by applying a PE multiple of 10x to our 2011 EPS forecast. Our target price for Neste of €15 is derived by applying a PE multiple of 10.50x to our 2011 EPS forecast. Our target price for Petroplus of CHF17 is derived by applying a PE multiple of 8.0x to our 2011 EPS forecast (using an exchange rate of CHF/USD 1.20 to translate EPS into CHF). Our target price for Sunoco of $27 is derived by applying a PE multiple of 9.5x to our 2011 EPS forecast. Our target price for Valero of $21 is derived by applying a PE multiple of 8.5x to our 2011 EPS forecast. Our target price for Tesoro of $13 is derived by applying a PE multiple of 8.0x to our 2011 EPS forecast.

Our sum-of-the-parts valuation for Saras uses 2011 EPS estimates for the refining, wind and other divisions, and multiplies these by forward multiples for the non-refining businesses to derive an implied valuation. The R&M divisional earnings are multiplied by the average multiple assigned to the complex European refiners in our coverage, including, Neste and Motor Oil. The power generation business is valued using our estimate for 2011 cashflow per share and multiplying this by long-term average comparable company multiples, less a risk discount for potential changes in legislation that could negatively impact cash flow and Italian GAAP earnings. Details of the calculation are available in Exhibit 6.

Exhibit 6 Sum-of-the-parts valuation for Saras (SCB valuation )

Valuation Type

SegmentImplied Equity

2011 Shares

2011 Earnings/OCF (€m)

EPS/ CFPS

P/E or P/CF

Multiple

Implied Price

Rationale

Earnings R&M 847 592 65 0.11 10.0x 0.71 Forward multiple for Complex Eur Refiners (NES1V & MOH)Cash flow Power Gen 416 290 109 0.37 7.1x 0.85 LT-average for PowerGen co's less legislative risk discountEarnings Wind 28 20 13 0.66 28.6x 0.41 Forward multiple for Wind companies (IBR, EDPR, EEN)Earnings Other 21 14 1 0.04 17.7x 0.01 Average of other segments

Total 1311 916 2.00€ Target Price

Source: Capital IQ, Company reports and Bernstein estimates

Our target prices for the Global Integrated Oils are calculated by applying our estimates for 2011 cashflow per share (CFPS) to a forward price-to-cashflow (P/CF) multiple. This P/CF multiple is generated through the relationship, and historically strong correlation, between 12 month forward P/CF multiples and Return on Average Capital Employed (ROACE) within the Global Integrated Oils group. Our calculation utilizes this relationship and an estimated long term, through the cycle, ROACE to generate the target P/CF multiple. The price calculations are summarized in the Exhibit below. A key assumption is that investors continue to reward companies with higher returns, as has been the case historically. We use $60/bbl WTI and $4.15/mcf for US gas in 2009 and $80/bbl WTI and $9.00/mcf for US gas in 2010 and $102.6/bbl WTI and $8.50/mcf for US gas in 2011.


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Exhibit 7 Target price methodology summary for Global Integra ted Oils

Ticker FXAdjusted P/CF

Multiple 2011 CFPS Target PriceBP (US) $ 4.2 13.71 58BP (UK) GBp 4.2 145.55 614CVX $ 4.6 19.31 88COP $ 3.8 13.90 53ENI (EUR) € 3.6 6.35 23ENI (US) $ 3.6 17.31 62MRO $ 3.0 11.61 35TOT (EUR) € 4.5 10.04 46TOT (US) $ 4.5 13.69 62RDSA LN GBp 4.5 498.71 2268RDSB LN GBp 4.5 498.71 2268RDSA NA € 4.5 5.74 26RDSB NA € 4.5 5.74 26RDS/A US $ 4.5 15.66 71RDS/B US $ 4.5 15.66 71XOM $ 5.7 12.19 70

PBR ADR (PREF) $ 6.1 7.36 39PETR4 SHR (PREF) $R 6.1 6.92 36PBR ADR (ORD) $ 6.1 7.36 45PETR3 SHR (ORD) $R 6.1 6.92 42HES $ 4.3 17.16 73

Target Price = P/CF Multiple x 2011 CFPS

Source: Bernstein Estimates

For the European Energy Stocks, our price targets are based on 2011 cashflow per share estimates, to which we apply a target price-cashflow multiple based on historical trading ranges and the expected recycle ratio (cashflow per barrel produced to F&D per barrel of reserves added). We have found historically a correlation between the recycle ratio and price-cashflow multiples. Our price objectives are also sanity checked using NAV based valuations, though we prefer the use of the PCF valuation methodologies as it can be back-tested and builds in fewer assumptions. We use this relationship together with our estimate of the company's near term recycle ratio to derive target multiples. These we apply to our estimates of the 2011 cashflow per share to derive price targets.

For the Russian energy stocks, we use DCF valuations to determine our price targets, incorporating WACC rates ranging from 13-14% and terminal growth rates ranging from 1% to 2.5%.

For the Utilities, our target prices reflects the results of three alternative valuation methodologies: (i) a multiple-based valuation calculated by applying the median valuation multiples of a group of comparable companies to our estimates of a utility’s future earnings, dividends and EBITDA; (ii) a discounted cash flow model over the forecast period of 2010-2014, and a terminal value in 2015, discounted back to present value at the weighted average cost of capital; and (iii) a discounted dividend model over the forecast period of 2010-2014, and a terminal value in 2015, discounted back to present value at the cost of equity.

Our valuation methodology for Asia-Pacific large cap integrated oil and gas companies (PetroChina, Sinopec, ONGC and RIL) is based on the historically strong correlation between price to book ratio and return on equity (Exhibit 8). This relationship is based on average values for the past 5 years. Using this relationship we derive a regression co-efficient of 0.8. Target prices are calculated by applying our 2011E ROE estimates to derive our target P/B multiples which we multiply by our forecast book value per share for 2011E to derive targets (Exhibit 9).


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Exhibit 8 ROE% drives P/B multiples

Exhibit 9 Summary of Valuation for Integrated majors

PTR

SNP

ONGC

PBRBP

RDS

CVX

XOM

COP

ENI

TOT STL

GAZP

y = 805%x + 45%

R2 = 80%

1.0

1.5

2.0

2.5

3.0

3.5

4.0

10% 20% 30% 40%

5Yr Avg ROE% - 2004-08

5Yr

Avg

P/B

- 2

004-

08

Summary of Price Targets

PTR SNP ONGC RIL

Cur. HKD HKD INR INR

2011E ROE 20.5% 14.3% 21.5% 15.6%

Target P/BV* 2.0 1.3 2.2 2.2

2011E BVPS 6.2 6.1 611 567

Price Taget 12.5 7.9 1340 1250

* For RIL, P/BV has been lifted by 10% due to strong gas growth.

For SNP we apply a 20% discount to P/BV due to regulated refining margins

Source: Bernstein estimates


Within our E&P coverage, we value CNOOC based on the correlation of recycle ratio and P/CF multiples. Our valuation framework uses the recycle ratio which is the ratio of operating cash flow per barrel of production (revenue per barrel – cash costs and production taxes) to the finding and development costs required to replace one barrel of reserves. Overall we find a strong correlation between the recycle ratio and forward P/CF multiples for international E&P companies (Exhibit 10). We use this relationship, together with our estimate of the near term recycle ratio (average 2009E to 2011E) to derive target multiples. We then use our target multiples, applied to our 2011E cash flow per share estimates to generate our price targets. For Santos, Oil Search and Woodside, we believe an NAV approach is appropriate given a significant portion of theirs values are attached to future LNG projects (Pluto expansion, Browse and Sunrise for Woodside, PNG LNG for OSH, GLNG and PNG LNG for Santos). We calculate the NPV of the base business and future projects separately using discount cash flow. The combined value of the NPV for the base business and future projects yields our price targets (Exhibit 11). On this basis, we set our price targets for Santos, Oil Search and Woodside respectively at AUD56.00, AUD16.30 and AUD7.10.


9


Exhibit 10 P/CF multiples have historically correlated to recy cle ratio

Exhibit 11 Summary of Price Targets

CNQ

OXY

XTO

TLM

EOG

ECADVN

APC

APASTO

OSH

WPL

CEO

y = 222%x + 254%

R2 = 49%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0% 100% 200% 300% 400%

Recycle Ratio, 2006-08

P/C

F, 2

006-

08 A

vg

Summary of Price Targets

CNOOC WPL STO OSH

Cur. HKD AUD AUD AUD

09-11E RR 190% 250% 947% 3120%

Target P/CF 6.7 n/a n/a n/a

2011E CFPS 2.3 n/a n/a n/a

Price Target 15.5 56.0 16.3 7.1



SRO REQUIRED DISCLOSURES

• References to "Bernstein" relate to Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, collectively.

• Bernstein analysts are compensated based on aggregate contributions to the research franchise as measured by account penetration, productivity and proactivity of investment ideas. No analysts are compensated based on performance in, or contributions to, generating investment banking revenues.

• Bernstein rates stocks based on forecasts of relative performance for the next 6-12 months versus the S&P 500 for stocks listed on the U.S. and Canadian exchanges, versus the MSCI Pan Europe Index for stocks listed on the European exchanges (except for Russian companies), versus the MSCI Emerging Markets Index for Russian companies and stocks listed on emerging markets exchanges outside of the Asia Pacific region, and versus the MSCI Asia Pacific ex-Japan Index for stocks listed on the Asian (ex-Japan) exchanges - unless otherwise specified. We have three categories of ratings:

Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.

Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.

Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.

Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

• As of 04/12/2010, Bernstein's ratings were distributed as follows: Outperform - 47.5% (0.9% banking clients) ; Market-Perform - 46.0% (1.0% banking clients); Underperform - 6.5% (0.0% banking clients); Not Rated - 0.0% (0.0% banking clients). The numbers in parentheses represent the percentage of companies in each category to whom Bernstein provided investment banking services within the last twelve (12) months.

• Neil Beveridge maintains a long position in BP PLC (BP).

• Benjamin Dell maintains a long position in BP PLC (BP).

• A member of Neil McMahon's household maintains a long position in BP PLC (BP).

• Mr. Wynne maintains a long position in Duke Energy Corp. (DUK).

• Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies BP / BP PLC, BP/.LN / BP PLC, CVX / ChevronTexaco Corp, COP / ConocoPhillips, MRO / Marathon Oil Corp, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC, VLO / Valero Energy Corp, ESV / ENSCO International Inc, NBR / Nabors Industries Ltd, NE / Noble Corp, PTEN / Patterson-UTI Energy Inc, RDC / Rowan Cos Inc, SLB / Schlumberger Ltd, RIG / Transocean Inc, DVN / Devon Energy Corp, NFX / Newfield Exploration Co, TLW.LN / Tullow Oil PLC, STO.AU / Santos Ltd, WPL.AU / Woodside Petroleum Ltd.

• Bernstein currently makes a market in the following companies PTEN / Patterson-UTI Energy Inc.

• The following companies are or during the past twelve (12) months were clients of Bernstein, which provided non-investment banking-securities related services and received compensation for such services BG/.LN / BG Group PLC, BP / BP PLC, BP/.LN / BP PLC, CVX / ChevronTexaco Corp, XOM / Exxon Mobil Corp, TOT / Total SA, FP.FP / TotalFinaElf SA, VLO / Valero Energy Corp, AEP / American Electric Power Co Inc, D / Dominion Resources Inc, DUK / Duke Energy Corp, EXC / Exelon Corp, FE / FirstEnergy Corp, PCG / PG&E Corp, BHI / Baker Hughes Inc, HAL / Halliburton Co, SLB / Schlumberger Ltd, RIG / Transocean Inc, APC / Anadarko Petroleum Corp, DVN / Devon Energy Corp, MUR / Murphy Oil Corp.

• An affiliate of Bernstein received compensation for non-investment banking-securities related services from the following companies CVX / ChevronTexaco Corp, COP / ConocoPhillips, XOM / Exxon Mobil Corp, AEP / American Electric Power Co Inc, D / Dominion Resources Inc, DUK / Duke Energy Corp, EIX / Edison International, FE / FirstEnergy Corp, PCG / PG&E Corp, HAL / Halliburton Co, SLB / Schlumberger Ltd, DVN / Devon Energy Corp, OXY / Occidental Petroleum Corp.

• In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from BG/.LN / BG Group PLC, BP / BP PLC, BP/.LN / BP PLC, CVX / ChevronTexaco Corp, COP / ConocoPhillips, E / ENI SpA, ENI.IM / ENI SpA, XOM / Exxon Mobil Corp, MRO / Marathon Oil Corp, RDS/A / Royal Dutch Shell PLC, RDS/B / Royal Dutch Shell PLC, RDSA.LN / Royal Dutch Shell PLC, RDSA.NA / Royal Dutch Shell PLC, RDSB.LN / Royal Dutch Shell PLC, RDSB.NA / Royal Dutch Shell PLC, STO / Statoil ASA, STL.NO / Statoil ASA, SUN / Sunoco Inc, TSO / Tesoro Corp, TOT / Total SA, FP.FP / TotalFinaElf SA, VLO / Valero Energy Corp, AEP / American Electric Power Co Inc, D / Dominion Resources Inc, DUK / Duke Energy Corp, EIX / Edison International, EXC / Exelon Corp, FE / FirstEnergy Corp, PCG / PG&E Corp, BHI / Baker Hughes Inc, DO / Diamond Offshore Drilling Inc, ESV / ENSCO International Inc, HAL / Halliburton Co, NBR / Nabors Industries Ltd, NE / Noble Corp, PTEN / Patterson-UTI Energy Inc, RDC / Rowan Cos Inc, SLB / Schlumberger Ltd, RIG / Transocean Inc, WFT / Weatherford International Ltd, APC / Anadarko Petroleum Corp, APA / Apache Corp, CNQ / Canadian Natural Resources Ltd, CNQ.CN / Canadian Natural Resources Ltd, CHK / Chesapeake Energy Corp, DVN / Devon Energy Corp, ECA / EnCana Corp, ECA.CN / EnCana Corp, EOG / EOG Resources Inc, MUR / Murphy Oil Corp, NFX / Newfield Exploration Co, OXY / Occidental Petroleum Corp, TLM / Talisman Energy Inc, TLM.CN / Talisman Energy Inc, XTO / XTO Energy Inc, CNE.LN / Cairn Energy PLC, TLW.LN / Tullow Oil PLC, PMO.LN / Premier Oil PLC, GALP.PL / Galp Energia SGPS SA, NVTK.LI / NovaTek OAO, OGZD.LI / Gazprom OAO, LKOD.LI / LUKOIL, ROSN.LI / Rosneft Oil Co, SGGD.LI / Surgutneftegaz, HK / PetroHawk Energy Corp, RRC / Range Resources Corp, SWN / Southwestern Energy Co, UPL / Ultra Petroleum Corp, 386.HK / China Petroleum & Chemical Corp, 857.HK / PetroChina Co Ltd, 883.HK / CNOOC Ltd, CEO / CNOOC Ltd, SNP / China Petroleum & Chemical Corp, PTR /

PetroChina Co Ltd, ONGC.IN / Oil & Natural Gas Corp Ltd, RIL.IN / Reliance Industries Ltd, OSH.AU / Oil Search Ltd, STO.AU / Santos Ltd, WPL.AU / Woodside Petroleum Ltd, FTO / Frontier Oil Corp, MOH.GA / Motor Oil Hellas Corinth Refineries SA, SRS.IM / Saras SpA.

• This research publication covers six or more companies. For price chart disclosures, please visit www.bernsteinresearch.com, you can also write to either: Sanford C. Bernstein & Co. LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105 or Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, London W1J 8SB, United Kingdom; or Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.

12-Month Rating History as of 04/15/2010

Ticker Rating Changes

386.HK M (IC) 06/29/09 857.HK O (IC) 06/29/09

883.HK O (IC) 06/29/09

AEP M (IC) 01/15/03

APA O (RC) 03/26/08 APC O (RC) 05/07/08

BG/.LN O (IC) 01/22/09

BHI O (RC) 10/01/09 M (RC) 12/16/08

BP M (RC) 03/03/09 BP/.LN M (RC) 03/03/09

CEO O (IC) 06/29/09

CHK O (RC) 02/19/09

CNE.LN O (IC) 01/22/09 CNQ M (RC) 10/06/05

CNQ.CN M (RC) 10/06/05

COP M (RC) 02/16/10 O (RC) 06/23/09 M (RC) 09/05/07

CVX O (RC) 02/16/10 M (RC) 05/23/07 D M (RC) 09/04/07

DO U (IC) 05/16/06

DUK M (RC) 08/05/04

DVN O (RC) 10/13/08 E O (RC) 11/21/08

ECA O (RC) 10/13/08

ECA.CN O (RC) 10/13/08

EIX M (RC) 10/08/09 O (IC) 11/11/04 ENI.IM O (RC) 11/21/08

EOG O (RC) 08/26/08

ESV M (RC) 02/19/09

EXC M (RC) 02/05/10 O (RC) 01/12/05 FE O (RC) 08/05/09 M (RC) 12/23/08

FP.FP M (RC) 02/16/10 O (IC) 05/30/03

FTO O (IC) 03/22/10

GALP.PL M (IC) 01/22/09 HAL O (RC) 11/12/07

HK M (RC) 02/08/10 O (IC) 05/21/09

LKOD.LI U (IC) 01/15/09 MOH.GA O (IC) 03/22/10

MRO O (RC) 02/16/10 M (RC) 05/13/09 O (RC) 01/29/08

MUR M (RC) 05/02/08

NBR O (RC) 09/07/07 NE M (RC) 02/19/09

NFX O (RC) 05/15/07

NVTK.LI O (IC) 01/15/09

OGZD.LI O (RC) 07/16/09 M (IC) 01/15/09 ONGC.IN M (RC) 11/17/09 U (IC) 06/29/09

OSH.AU O (IC) 06/29/09

OXY U (RC) 02/19/09

PCG O (RC) 03/22/07 PMO.LN O (RC) 02/19/10 M (IC) 01/22/09

PTEN O (RC) 09/07/07

PTR O (IC) 06/29/09

RDC M (RC) 02/19/09 RDS/A O (RC) 02/16/10 M (RC) 03/16/09

RDS/B O (RC) 02/16/10 M (RC) 03/16/09

RDSA.LN O (RC) 02/16/10 M (RC) 03/16/09

RDSA.NA O (RC) 02/16/10 M (RC) 03/16/09 RDSB.LN O (RC) 02/16/10 M (RC) 03/16/09

RDSB.NA O (RC) 02/16/10 M (RC) 03/16/09

RIG O (RC) 02/19/09

RIL.IN O (IC) 06/29/09 ROSN.LI U (IC) 01/15/09

RRC O (IC) 05/21/09

SGGD.LI U (IC) 01/15/09

SLB M (IC) 09/19/07 SNP M (IC) 06/29/09

SRS.IM M (IC) 03/22/10

STL.NO M (IC) 01/22/09

STO M (IC) 01/22/09 STO.AU M (RC) 04/09/10 O (IC) 06/29/09

SUN M (RC) 07/18/08

SWN O (IC) 05/21/09

TLM O (RC) 02/19/09 TLM.CN O (RC) 02/19/09

TLW.LN O (IC) 01/22/09

TOT M (RC) 02/16/10 O (IC) 05/30/03

TSO M (RC) 07/18/08 UPL M (IC) 05/21/09

VLO M (RC) 03/22/10 O (RC) 01/29/08

WFT M (RC) 12/16/08

WPL.AU O (RC) 11/17/09 M (IC) 06/29/09 XOM M (RC) 02/19/09

XTO O (RC) 03/26/08

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

OTHER DISCLOSURES

A price movement of a security which may be temporary will not necessarily trigger a recommendation change. Bernstein will advise as and when coverage of securities commences and ceases. Bernstein has no policy or standard as to the frequency of any updates or changes to its coverage policies. Although the definition and application of these methods are based on generally accepted industry practices and models, please note that there is a range of reasonable variations within these models. The application of models typically depends on forecasts of a range of economic variables, which may include, but not limited to, interest rates, exchange rates, earnings, cash flows and risk factors that are subject to uncertainty and also may change over time. Any valuation is dependent upon the subjective opinion of the analysts carrying out this valuation.

This document may not be passed on to any person in the United Kingdom (i) who is a retail client (ii) unless that person or entity qualifies as an authorised person or exempt person within the meaning of section 19 of the UK Financial Services and Markets Act 2000 (the "Act"), or qualifies as a person to whom the financial promotion restriction imposed by the Act does not apply by virtue of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or is a person classified as an "professional client" for the purposes of the Conduct of Business Rules of the Financial Services Authority.

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One or more of the officers, directors, or employees of Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, and/or their affiliates may at any time hold, increase or decrease positions in securities of any company mentioned herein.

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Bernstein and/or its affiliates do and seek to do business with companies covered in its research publications. As a result, investors should be aware that Bernstein and/or its affiliates may have a conflict of interest that could affect the objectivity of this publication. Investors should consider this publication as only a single factor in making their investment decisions.

This publication has been published and distributed in accordance with Bernstein's policy for management of conflicts of interest in investment research, a copy of which is available from Sanford C. Bernstein & Co., LLC, Director of Compliance, 1345 Avenue of the Americas, New York, N.Y. 10105, Sanford C. Bernstein Limited, Director of Compliance, Devonshire House, One Mayfair Place, LondonW1J 8SB, United Kingdom, or Sanford C. Bernstein, a unit of AllianceBernstein Hong Kong Limited, Director of Compliance, Suite 3401, 34th Floor, One IFC, One Harbour View Street, Central, Hong Kong.

CERTIFICATIONS

• I/(we), Neil Beveridge, Ph.D., Oswald Clint, Ph.D., ACA, Ben P. Dell, Scott Gruber, CFA, Neil McMahon, Ph.D., Hugh Wynne, Senior Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views in this publication.

Approved By: CDK

Copyright 2010, Sanford C. Bernstein & Co., LLC, Sanford C. Bernstein Limited, and AllianceBernstein Hong Kong Limited, subsidiaries of AllianceBernstein L.P. ~ 1345 Avenue of the Americas ~ NY, NY 10105 ~ 212/756-4400. All rights reserved.

This publication is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Bernstein or any of their subsidiaries or affiliates to any registration or licensing requirement within such jurisdiction. This publication is based upon public sources we believe to be reliable, but no representation is made by us that the publication is accurate or complete. We do not undertake to advise you of any change in the reported information or in the opinions herein. This publication was prepared and issued by Bernstein for distribution to eligible counterparties or professional clients. This publication is not an offer to buy or sell any security, and it does not constitute investment, legal or tax advice. The investments referred to herein may not be suitable for you. Investors must make their own investment decisions in consultation with their professional advisors in light of their specific circumstances. The value of investments may fluctuate, and investments that are denominated in foreign currencies may fluctuate in value as a result of exposure to exchange rate movements. Information about past performance of an investment is not necessarily a guide to, indicator of, or assurance of, future performance.

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