Energy Capital: Energy Capital: Will Wall Street Be There For Energy Will Wall Street Be There For Energy

Financings Next Year? Financings Next Year? Raymond James Energy GroupRaymond James Energy Group

Marshall Adkins

Marshall.Adkins@RaymondJames.comMarshall.Adkins@RaymondJames.comRaymond James Oilservice GroupRaymond James Oilservice Group(800) 945-6275 (800) 945-6275 June 2004

Will “The Street” Be There? Will “The Street” Be There?

2003 was the biggest equity offering year in two decades2003 was the biggest equity offering year in two decades

The equity window is still openThe equity window is still open

M&A activity (mostly sales by majors) is driving capital demandM&A activity (mostly sales by majors) is driving capital demand

Oil & gas prices will dictate future capital availabilityOil & gas prices will dictate future capital availability

2

E&P High Yield Offerings Driven by Rates E&P High Yield Offerings Driven by Rates

3

E&P High Yield Offerings vs 10-Yr Treasury

-

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004YTD

Cap

ital R

aise

d ($

MM

)

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Inte

rest

Rat

e

Deals

10-Yr. Treasury Rate

2003 Record For E&P Equity Offerings2003 Record For E&P Equity Offerings

4

E&P Equity Offerings

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004YTD

Capi

tal R

aise

d ($

MM

)

-

5

10

15

20

25

30

35

Com

plet

ed O

fferin

gs

Capital Raised

Deals

2003 E&P Equity Offering 2003 E&P Equity Offering Performance Has Been Excellent Performance Has Been Excellent

5

2.5%

33.1%

9.9%5.5%

41.4%

86.3%92.7%

26.5%

36.9% 35.9%

57.0%

120.7%

64.8%

-0.5%

17.9%

33.1%

49.3%

29.4%

66.8%

-1.2%

-7.5%

15.7%

46.9%

30.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

XTO PXP DNR CRZO CHK DNR WRC KCS WLL EAC EPL FST BEXP TBI KWK NFX XTO EPL DNR SWN CHK THX APA FST

Ticker

% C

hang

e fro

m O

ffer P

rice

Average Change: 37.2%

E&P Equity Capital Raised vs. E&P Equity Capital Raised vs. Average Natural Gas Prices Average Natural Gas Prices

6

E&P Equity Capital Raised vs. Average Gas Prices

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004YTD

Tota

l Pro

ceed

s ($

MM

)

$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5$5.0$5.5$6.0

Pri

ce

Capital Raised

Average Gas Prices

E&P Equity Capital Raised vs. E&P Equity Capital Raised vs. Average Oil Prices Average Oil Prices

7

E&P Equity Capital Raised vs. Average Oil Prices

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004YTD

Tota

l Pro

ceed

s ($

MM

)

$10

$15

$20

$25

$30

$35

$40

Pri

ce

Capital Raised

Average Oil Prices

Energy Prices Will Drive Wall Energy Prices Will Drive Wall Street Capital AvailabilityStreet Capital Availability

Long-term secular up-trend is intactLong-term secular up-trend is intact

Look for a late summer gas price squeeze Look for a late summer gas price squeeze

Oil fundamentals are solidOil fundamentals are solid

– More upside than downside More upside than downside

Is this a 1970’s re-run? Is this a 1970’s re-run?

8

We Are In A Long-Term Secular UpswingWe Are In A Long-Term Secular Upswing(Higher Highs, Higher Lows)(Higher Highs, Higher Lows)

9

OSX Historical Performance

0

20

40

60

80

100

120

140

160

Jan-

95M

ay-9

5S

ep-9

5Ja

n-96

May

-96

Sep

-96

Jan-

97M

ay-9

7S

ep-9

7Ja

n-98

May

-98

Sep

-98

Jan-

99M

ay-9

9S

ep-9

9Ja

n-00

May

-00

Sep

-00

Jan-

01M

ay-0

1S

ep-0

1Ja

n-02

May

-02

Sep

-02

Jan-

03M

ay-0

3S

ep-0

3Ja

n-04

Ind

ex

Source: Bloomberg

Trough 1 Trough 2

Peak 1 Peak 2

Trough 3

456% Return

199% Return

U.S. Rig Fleet Size Shows U.S. Rig Fleet Size Shows Long-Term Secular MovesLong-Term Secular Moves

10

Rig Fleet vs. CPI Adjusted S&P 500

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Rig

s

25

50

75

100

125

150

175

200

225

250

275

S&

P 5

00

Rig Fleet S&P 500Source: Reed Hycalog, U.S. Dept. of Labor, RJ&A.

New-Builds

Rig Fleet Attrition & Bull Market Begin

S&P 500

Drilling Success Rates Are UpDrilling Success Rates Are Up

11

U.S. Total Drilling Success Rate

60%

65%

70%

75%

80%

85%

90%

95%

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: EIA

New Drilling Techniques Are Here To StayNew Drilling Techniques Are Here To Stay

12

Directional and Horizontal Rigs % of Total Rigs

20%

24%

28%

32%

36%

40%

Jan-

94

Jul-9

4

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Source: Baker Hughes.

New Areas Are Now AccessibleNew Areas Are Now Accessible

13

Percent of Gulf of Mexico Wells Drilled in the Deepwater

0%

5%

10%

15%

20%

25%

30%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

YT

D

Deepwater > 600 feetSource: Minerals Management Service.

But, We Are Drilling DeeperBut, We Are Drilling Deeper

14

Average U.S. Well Depth

4,000

4,500

5,000

5,500

6,000

6,50019

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

04

Wel

l Dep

th (

in f

t.)

Source: EIA

40%

Searching For Smaller ReservesSearching For Smaller Reserves

15

Mean GOM Field Discovery Size

0.00

0.05

0.10

0.15

0.20

0.2519

47

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

Fiel

d S

ize

(BB

OE

)

Source: Minerals Management Service.

Which is Driving Decline Rates HigherWhich is Driving Decline Rates Higher

16

U.S. Natural Gas Production History Indicates 28% 2003 Decline Rate

15%

17%

19%

21%

23%

25%

27%

29%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

E

2002

E

2003

EPro

duct

ion

Dec

line

Rat

e of

Bas

e

Source: EOG Resources* Includes Data supplied by the P etroleum Information Corporation

How Will More Rigs Affect Production?How Will More Rigs Affect Production?

17

U.S. Oil Rigs vs. "Lower 48" Oil Production

0

500

1,000

1,500

2,000

2,500

3,000

3,50019

70

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

Source: DOE

Rig

s

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

MB

bls

Pe

r D

ay

Oil Rigs Oil Production

Oil Rigs

"Lower 48" Oil Production

Today’s U.S. Gas Production Is Today’s U.S. Gas Production Is Replay Of 1970’s Oil ProductionReplay Of 1970’s Oil Production

18

200

300

400

500

600

700

800

900

1,000

1,100

12/9

6

5/97

10/9

7

3/98

8/98

1/99

6/99

11/9

9

4/00

9/00

2/01

7/01

12/0

1

5/02

10/0

2

3/03

8/03

1/04

6/04

E

Rig

s

48.0

49.0

50.0

51.0

52.0

53.0

54.0

Bcf

/d

U.S. Gas Rig CountU.S. Company-Reported Production (12 MMA)EIA Reported Production (12 MMA)

U.S. Gas Rig Count vs. Reported Gas Production Forecast

EIA Reported Production

U.S. Gas Rigs

Source: EIA, BHI, RJ&A Est. Note: U.S. Gas Production incorporates a 6-month lag

U.S. Company-Reported Production

Recently Revised Down

Q1 Natural Gas Production Still DownQ1 Natural Gas Production Still Down

19

U.S. Natural Gas Production (MMcf/d)Category 1Q:04 4Q:03 1Q:03Majors & Gas Utilities 12,414 12,545 13,666

Estimated Sequential Change -1.0%Estimated Y-Y Change -9.2%

Independents 13,501 13,507 13,390 Estimated Sequential Change 0.0%Estimated Y-Y Change 0.8%

Total 25,915 26,052 27,057 Estimated Sequential Change -0.5%Estimated Y-Y Change -4.2%

Source: Company reports, JS Herold (all numbers pro forma for acquisitions and divestitures)

The Gas Market Is Working!The Gas Market Is Working!(Approaching 4 Bcf/day less gas vs. last year)(Approaching 4 Bcf/day less gas vs. last year)

20

Weather-Adjusted YOY Supply/Demand Change

(6.0)

(4.0)

(2.0)

0.0

2.0

4.0

6.0

3-Ja

n

24-J

an

14-F

eb

7-M

ar

28-M

ar

18-A

pr

9-M

ay

30-M

ay

20-J

un

11-J

ul

1-A

ug

22-A

ug

12-S

ep

3-O

ct

24-O

ct

14-N

ov

5-D

ec

26-D

ec

16-J

an

6-F

eb

27-F

eb

19-M

ar

9-A

pr

30-A

pr

Y-O

-Y W

ithd

raw

al D

iffer

entia

l

4 Week Moving Avg

Source: EIA, RJ&A.

LO

OS

ER

TIG

HT

ER

Y-O

-Y G

as S

up

ply

/Dem

and

Ch

ang

e

Reduced Demand

Increasing Demand

What Happens This Summer?What Happens This Summer?

2003 Injections2003 Injections 2,450 Bcf2,450 Bcf

- Supply - Supply DownDown 2% (1 Bcf/day) 2% (1 Bcf/day) - 215 Bcf - 215 Bcf

- Economy/Ind. Demand (1 Bcf/day) - 215 Bcf- Economy/Ind. Demand (1 Bcf/day) - 215 Bcf

- Weather* ??? (Normal)- Weather* ??? (Normal) 0 Bcf 0 Bcf

- Fuel Switching ???- Fuel Switching ??? 0 Bcf 0 Bcf

- Electric Consumption ???- Electric Consumption ??? 0 Bcf 0 Bcf2004 Injections 2004 Injections 2,020 Bcf2,020 Bcf April Beginning Storage April Beginning Storage 1,000 Bcf1,000 BcfOctober Ending StorageOctober Ending Storage 3,020 Bcf 3,020 Bcf

* Weather impact: +/- 1/2 Bcf/day per 1% change in temperature* Weather impact: +/- 1/2 Bcf/day per 1% change in temperature

21

U.S. Gas ConclusionU.S. Gas Conclusion

22

Falling supply will continue to drive prices higherFalling supply will continue to drive prices higher

Look for a mid-summer squeezeLook for a mid-summer squeeze

Oil prices will set gas price rangeOil prices will set gas price range

– Divide oil price by 5 ½ for the midpointDivide oil price by 5 ½ for the midpoint

– Gas prices should fluctuate $1/Mcf around the midpointGas prices should fluctuate $1/Mcf around the midpoint

RJ estimate: 2004 ~ $5.92/Mcf RJ estimate: 2004 ~ $5.92/Mcf 2005 ~ $6.00/Mcf2005 ~ $6.00/Mcf

These estimates will probably prove too lowThese estimates will probably prove too low

Oil Market Continues To Tighten, Big WildcardsOil Market Continues To Tighten, Big Wildcards

23

Oil Inventories suggest low $30 oil pricesOil Inventories suggest low $30 oil prices

Nigeria/Venezuela/OPEC/Middle East wild cardsNigeria/Venezuela/OPEC/Middle East wild cards

Missing Barrels: Part 2Missing Barrels: Part 2

– Larger oil demand (China, Global Economy)Larger oil demand (China, Global Economy)

– Smaller oil supply (Venezuela, Russia)Smaller oil supply (Venezuela, Russia)

Dollar weakening is having an impact Dollar weakening is having an impact

OPEC resolve is stronger at sub $30 oilOPEC resolve is stronger at sub $30 oil

Our Oil Model Suggests Low $30 Oil PricesOur Oil Model Suggests Low $30 Oil Prices

24

WTI Front-Month Contract Price vs. Total Petroleum Inventories590

610

630

650

670

690

710

730

1/7/

2000

3/17

/200

0

5/26

/200

0

8/4/

2000

10/1

3/20

00

12/2

2/20

00

3/2/

2001

5/11

/200

1

7/20

/200

1

9/28

/200

1

12/7

/200

1

2/15

/200

2

4/26

/200

2

7/5/

2002

9/13

/200

2

11/2

2/20

02

1/31

/200

3

4/11

/200

3

6/20

/200

3

8/29

/200

3

11/7

/200

3

1/16

/200

4

3/26

/200

4

To

tal

Pet

role

um

In

ven

tori

es (

MM

Bb

ls)

$16

$18

$20

$22

$24

$26

$28

$30

$32

$34

$36

$38

$40

$42

WT

I P

rice

s ($

/Bb

l)

Total Pet. Inventory (Inverted)*

Oil Price

Sources: Reuters, DOE, RJ&A Estimates.

Inverted Oil

Inventories

Chinese Oil Demand Is Going Insane!Chinese Oil Demand Is Going Insane!

25

Chinese Oil Demand Growth (Year-Over-Year)

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1999 2000 2001 2002 2003 2004E Feb-04

Mill

ion

bar

rels

per

day

Source: IEA, RJ&A Estimates

4 Year Average = .23

Russian Oil Production Growth SlowsRussian Oil Production Growth Slows

26

Russian Oil Production Growth (Year-Over-Year)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1998 1999 2000 2001 2002 2003 2004E 2005E 2006E

Mill

ion

bar

rels

per

day

Source: IEA, RJ&A Estimates

OPEC Excess Capacity Is Tightening!OPEC Excess Capacity Is Tightening!

27

Average Excess OPEC Capacity

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

E

Ex

ce

ss

OP

EC

Ca

pa

cit

y (

mm

bo

pd

)

Sources: IEA, RJ&A, Bloomberg

No Room For Error No Room For Error

28

OPEC Global Over/Under Supply

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Est

imat

ed P

rod

uct

ion

('0

00 B

/day

)

Estimated Additional Capacity

Estimated March Production

Source:: Blomberg, RJ&A

Oil ConclusionOil Conclusion IEA miss-calculations have confused the market

Implied oil demand growth is huge!

Russian supply growth should slow in 2005

Oil markets should tighten in late 2004

When will we hit the wall?

OPEC wants $30+ oil prices

RJ estimates: 2004 ~ $34.36/Bbl 2005 ~ $33.00/Bbl

29

ConclusionConclusion

30

2003 was an outstanding year for energy equity 2003 was an outstanding year for energy equity

offeringsofferings

““Window” is open for energy equity dealsWindow” is open for energy equity deals

Strong oil and gas fundamentals should allow Strong oil and gas fundamentals should allow

energy access to Wall Street’s capitalenergy access to Wall Street’s capital

DisclaimerDisclaimer

Important Investor Disclosures. Stock Ratings: Within our four-tiered rating system, Strong Buy means that the stock is expected to appreciate and produce

a total return of at least 15% and outperform the S&P 500 over the next six months; Outperform means the stock is expected to appreciate and outperform the S&P 500 over the next 12 months; Market Perform means the stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities; and Underperform means the stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

Out of approximately 519 stocks in the Raymond James coverage universe, 52% have Strong Buy or Outperform ratings, 35% are rated Market Perform and 12% are rated Underperform. Within those rating categories, 25% of the Strong Buy- or Outperform-rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 17% of the Market Perform-rated companies are or have been clients and 9% of the Underperform-rated companies are or have been clients.

Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including the analyst’s success in rating stocks versus an industry index, support effectiveness to the retail and institutional sales forces, traders, and investment bankers, institutional research votes, as well as overall productivity and revenue generated in covered stocks.

Raymond James Relationships: Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years.

RJA or its officers, employees, or affiliates may (1) currently own shares, options, rights or warrants and/or (2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report's conclusions. 

Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at www.rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see www.rjf.com for office locations) or by sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716.

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31