WACHOVIA CAPITAL MARKETS, LLC
ENERGY EQUITY RESEARCH
September 10, 2003
E&P Outlook: Are Investors Ready for $4.00 Gas?
Jonathan D. Wolff, CFA
Director, Exploration & Production
(212) 891-5064
jon.wolff@wachovia.com
Lisa King
Associate Analyst
(212) 891-5047
lisa.king@wachovia.com
Jeff Burke, CFA
Associate Analyst
(212) 891-5052
jeffrey.burke@wachovia.com
OVERVIEW
OVERVIEW
 E&Ps are currently discounting $3.55 per Mcf natural gas
(assuming $22 per barrel oil case)
Unit Asset Values Versus Implied Natural Gas Price*
$1.75
Unit Asset Value ($/Mcfe)
$1.65
Current Median E&P Valuation
($1.38/Mcfe, $3.60/Mcf gas)
$1.55
$1.45
$1.35
$1.25
$1.15
Historical Peak Median E&P Valuation
($1.50/Mcfe, $3.95/Mcf gas)
[In June 2003]
$1.05
$0.95
$0.85
$0.75
$2.00
$2.20
$2.40
$2.60 $2.80 $3.00 $3.20 $3.40
Implied Natural Gas Price ($/Mcf)
$3.60
$3.80
$4.00
* Assumes $22 per barrel oil price
Source: Company data, Bloomberg and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 3
OVERVIEW
Natural Gas Outlook


Prices likely to retreat into the lower $4.00’s per MMBtu in Q4
2003 and moderate to $3.75-$4.00 per MMBtu as crude eases in
H2 2004
Gas prices to sustain higher prices because the cost of finding
and producing the commodity is rising inexorably
Oil Markets

Crude likely to sustain strength (above $25 per barrel) until
inventories reach greater comfort levels (H2 2004)

See normalized levels more in the $22-$23 per barrel range as
ample spare capacity exists
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 4
OVERVIEW
Rising Cost Structures

The cost of finding and producing North American natural gas is
rising out of control

Why? Smaller wells, deeper drilling, tighter reservoirs

Service costs not elevated (30%-40% below peak)

Break-even for new gas (10% rate of return) is about $3.75 per Mcf
Valuation



Investors are rewarding companies that achieve lower costs with
higher valuations
It’s not about growth, its about efficient reinvestment and free cash
flow
It’s about margins, not just growth
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 5
OVERVIEW
What are the answers to the gas supply and cost problem?

1) Continued falling industrial demand

2) An improved ability to fuel switch

3) The Rocky Mountain region

4) LNG imports
Are investors ready for $4.00 per MMBtu gas?


Yes, the “top line” story could sustain $4.00 per MMBtu gas for the
next 2-3 years
However, investors not willing to give credit to companies facing
rising costs and with no organic growth
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 6
NORTH AMERICAN NATURAL GAS
NORTH AMERICAN NATURAL GAS
CONCLUSIONS:
 Gas storage trends bearish, end of refill season expected above 3.0 Tcf
comfort level
 So why are gas prices still above $4.50 per MMBtu?
1) LDCs competing away marginal users, still putting pressure on market
2) Market concerned about medium-term supply trends
3) Natural gas cost pressure elevated
4) Crude prices remain strong
 Gas prices are now a call on winter given reasonable supply
 We expect prices to retrace to the low $4.00’s but stay above $4.00 until
crude moderates in H2 2004
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 8
NORTH AMERICAN NATURAL GAS
 Volatility remains a key feature of natural gas markets, albeit at higher
absolute price levels
Near-Month NYMEX Natural Gas Price ($/MMBtu)
$10.00
$9.00
$8.00
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
4/90
4/91
4/92
4/93
4/94
4/95
4/96
4/97
4/98
4/99
4/00
4/01
4/02
4/03
Source: Bloomberg
Wachovia Capital Markets, LLC Commodity Price Outlook
Forecast
WTI Oil Price ($/bbl)
Spot Natural Gas Price ($/MMBtu)
Q1 A
$21.64
$2.33
Q2 A
$26.29
$3.14
2002
Q3 A
$28.28
$2.97
Q4 A
$28.25
$3.97
FY A
$26.17
$3.10
Q1 A
$34.03
$6.40
Q2 A
$28.96
$5.35
2003
Q3 E
$28.00
$4.75
Q4 E
$28.00
$4.25
FY E
$29.75
$5.20
2004
FY E
$24.00
$4.00
Source: Bloomberg and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 9
NORTH AMERICAN NATURAL GAS
 The deliverability bubble has evaporated
 Gas is a “just in time” commodity which has become expensive and highly volatile
U.S. Natural Gas Deliverability Versus Production
Deliverability (Bcf/d)
64.0
Production (Bcf/d)
62.0
60.0
58.0
56.0
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
54.0
Source: eVs
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 10
NORTH AMERICAN NATURAL GAS
 Futures curve robust, prompting producers to hedge more aggressively
NYMEX Natural Gas Prices (Monthly Averages)
Actual Historical ($/MMBtu)
$10.00
Futures Forecast ($/MMBtu)
3-Year Average
(2004-2006):
$4.87 per MMBtu
$8.00
$6.00
$4.00
$2.00
01/07
01/06
01/05
01/04
01/03
01/02
01/01
01/00
01/99
01/98
01/97
01/96
01/95
$0.00
Source: Bloomberg
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 11
NORTH AMERICAN NATURAL GAS
 To combat volatility and take advantage of available returns, E&Ps are hedging
more systematically
 We believe this reflects more disciplined management decision-making
E&Ps 2003E Average Hedge Positions
Natural Gas (% Of FY 2003 N. Amer. Production)
Oil (% Of FY 2003 Worldwide Oil Production)
60%
60%
50%
40%
$3.90
Per MMBtu
Average
Price
$3.46-$5.13
Per MMBtu
Average
Price
53%
50%
$25.55
Per Barrel
Average
Price
$23.24-$27.89
Per Barrel
Average
Price
37%
40%
34%
30%
30%
19%
20%
20%
10%
10%
0%
0%
Swaps
Collars
Total
20%
Swaps
17%
Collars
Total
Footnotes (for both graphs):
Hedging positions are taken from company press releases and SEC filings as reported.
Calculated hedging percentages are in some cases based on annualized production rates from the most recent quarter.
Hedges are generally NYMEX equivalent and exclude the effect of basis differentials.
Source (for both graphs): Company data and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 12
NORTH AMERICAN NATURAL GAS
 Natural gas prices have fallen 28% from June highs… Why?
 Refills have been running at elevated levels (2.1 Bcf/d above normal) on
sharp losses in demand due to high natural gas prices and a mild summer
Refill Season Injections (Bcf/d)
20.0
5-Year Average
2003
15.0
10.0
5.0
0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
-5.0
-10.0
Week Of Refill Season
Source: Energy Information Administration
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 13
NORTH AMERICAN NATURAL GAS
 Despite large early season deficit, we are now tracking towards more
normal storage levels
Total U.S. Working Gas In Storage (Bcf)
3,500
3,000
2,500
2,000
2003
2000
5-Yr Avg
2001
2002
1999
1,500
1,000
500
0
1
4
7
10
13
16
19
22 25 28
Calendar Week
31
34
37
40
43
46
49
52
Source: Energy Information Administration
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 14
NORTH AMERICAN NATURAL GAS
 Despite fears in April, we have essentially corrected the gas storage problem
Working Gas In Storage (Tcf) - End Of Period: 2002-2003E Versus Normal
5.00
4.50
43% Below 17% Below
Normal
Normal
1% Below
Normal
5% Above
Normal
4.00
3.50
3.00
2.50
3.06
3.04
3.153.06
2.90
2.31
2.27
2.00
2.54
2.42
1.42
1.19
0.97
1.00
2.54
2.01
1.66
1.72
1.50
2.66
0.68
0.50
Q4 2001
Q1 2002
Q2 2002
10/31/02 Q4 2002 Q1 2003
2002-2003E 5-Year Average
Q2 2003 10/31/03E Q4 2003E
Source: Energy Information Administration, American Gas Association and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 15
NORTH AMERICAN NATURAL GAS
 Industrial demand in free fall, being marginalized by high prices
 Agricultural chemicals making slow exit from U.S.
U.S Natural Gas Industrial Demand (Bcf/d)
30.0
25.0
20.0
Mar-03
May-02
Jul-01
Sep-00
Nov-99
Jan-99
Mar-98
May-97
Jul-96
Sep-95
Nov-94
Jan-94
Mar-93
May-92
Jul-91
Sep-90
Nov-89
Jan-89
15.0
Source: Energy Information Administration
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 16
NORTH AMERICAN NATURAL GAS
 Natural gas currently at small $0.28 premium to residual fuel
Natural Gas Versus Residual Fuel
New York City Gate Natural Gas Price ($/MMBtu)
Low Sulfur (0.3%) Residual Fuel Price ($/MMBtu)
$25.00
Current
$0.28
MMBtu
Premium
$21.00
$17.00
$13.00
$9.00
$5.00
1/4/00
2/9/00
3/16/00
4/20/00
5/26/00
7/5/00
8/9/00
9/14/00
10/19/00
11/27/00
1/3/01
2/8/01
3/16/01
4/23/01
5/29/01
7/3/01
8/8/01
9/13/01
10/18/01
11/26/01
1/3/02
2/8/02
3/18/02
4/23/02
5/29/2002
7/3/02
8/9/02
9/16/02
10/21/02
11/25/02
1/3/03
2/10/03
3/18/03
4/25/03
6/3/03
7/10/03
8/19/03
$1.00
Source: Bloomberg
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 17
NORTH AMERICAN NATURAL GAS
 The ability to switch has been diminished so it takes longer to correct the imbalance
Industrial Demand And Fuel Switchable Demand (Bcf/d)
30.0
Total Industrial Demand (Bcf/d)
Fuel Switchable Industrial Demand (Bcf/d)
20.0
10.0
34%
26%
7%
0.0
1983
1993
2003E
Source: eVs
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 18
NORTH AMERICAN NATURAL GAS
 The natural gas rig count has moved up sharply from the trough, but at a
more measured rate
Natural Gas Rig Count (rigs)
1,200
1,000
800
600
400
200
0
Jan.
88
Jan.
89
Jan.
90
Jan.
91
Jan.
92
Jan.
93
Jan.
94
Jan.
95
Jan.
96
Jan.
97
Jan.
98
Jan.
99
Jan.
00
Jan.
01
Jan.
02
Jan.
03
Source: Baker Hughes, Inc.
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 19
NORTH AMERICAN NATURAL GAS
 Despite sharp drilling increase, production has failed to respond
U.S. Average Daily Natural Gas Production (Bcf/d)
55.0
54.0
53.0
52.0
51.0
50.0
49.0
Q403E
Q303E
Q203E
Q103E
Q402E
Q302
Q202
Q102
Q401
Q301
Q201
Q101
Q400
Q300
Q200
Q100
Q499
Q399
Q299
Q199
48.0
Source: Company data and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 20
NORTH AMERICAN NATURAL GAS
Estimated Rigs Needed To Replace Production (number of rigs)
1,000
854
800
697
600
400
327
425
370
559
545
519
1997
1998
1999
379
200
0
1993
1994
1995
1996
2000
2001
Source: Energy Information Administration and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 21
NORTH AMERICAN NATURAL GAS
 Secular decline in reserves and production per well
U.S. Natural Gas Well Efficiency
Discovery Size Per Well (Bcf)
1.6
Incremental Production Per Well (MMcf/d)
1.6
1.2
1.2
0.8
0.8
0.4
0.4
0.0
0.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: Energy Information Administration and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 22
WORLD OIL MARKET
WORLD OIL MARKET
 Oil markets are poised to stay tight until H2 2004
 Inventories are well below normal (52 days supply versus 56 normal)
on Iraqi production delays, ongoing trouble in Venezuela and Nigeria
 Economics of producing oil do not support long-term prices in the high
$20’s per barrel, in our view
 Over the medium-term, oil markets should regress to the lower $20 per
barrel range
 OPEC stand-off with Russia, given market share fears
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 24
WORLD OIL MARKET
 Oil has been buoyed by slow Iraq recovery, continued OPEC discipline
 World inventories likely below normal until H1 2004
NYMEX Oil Prices (Monthly Averages)
Actual Historical ($/bbl)
$50.00
Futures Forecast ($/bbl)
3-Year Average
(2004-2006):
$25.66 per barrel
$40.00
$30.00
$20.00
$10.00
01/06
01/05
01/04
01/03
01/02
01/01
01/00
01/99
01/98
01/97
01/96
01/95
$0.00
Source: Bloomberg
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 25
WORLD OIL MARKET
 Oil markets remain tight at 52 days supply, below historical 56 day norm
WTI Oil Price Vs. OECD Stock Cover
OECD Stock Cover (Days Supply)
Stabilization Level
WTI Oil Price ($/bbl)
$40.00
60.0
Q403E
Q303E
Q203
Q103
Q402
Q302
Q202
Q102
Q401
Q301
Q201
Q101
Q400
Q300
Q200
Q100
Q499
$0.00
Q399
40.0
Q299
$10.00
Q199
45.0
Q498
$20.00
Q398
50.0
Q298
$30.00
Q198
55.0
Q497
Days Supply
Markets Remain Tight
Source: International Energy Agency and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 26
WORLD OIL MARKET
Oil Production: Iraq
3.5
3.0
MMb/d
2.5
2.3
2.5 2.5
2.5 2.4 2.3
2.0
1.2
1.5
2.8
2.5 2.5
1.9
1.8 1.6 1.8
1.5
1.4
1.0
0.6
0.5
0.2
0.9
0.3
Capacity
July 2003
June 2003
May 2003
Apr 2003
Mar 2003
Feb 2003
Jan 2003
Dec 2002
Nov 2002
Oct 2002
Sep 2002
Aug 2002
Jul 2002
Jun 2002
May 2002
Apr 2002
Mar 2002
Feb 2002
Jan 2002
0.0
Oil Production: OPEC-10 Plus Iraq
40.0
31.8
MMb/d
30.0 25.3 25.0 25.5
25.9 26.5 26.5 24.8 25.7 27.3 27.2 26.2 26.8 26.3 26.7
23.8 24.7 24.6 25.3 25.0
20.0
10.0
Capacity
July 2003
June 2003
May 2003
Apr 2003
Mar 2003
Feb 2003
Jan 2003
Dec 2002
Nov 2002
Oct 2002
Sep 2002
Aug 2002
Jul 2002
Jun 2002
May 2002
Apr 2002
Mar 2002
Feb 2002
Jan 2002
0.0
Source (for both charts): International Energy Agency
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 27
E&PS: RISING COST STRUCTURES
E&PS: RISING COST STRUCTURES
CONCLUSIONS:
 The natural gas “top-line” story is strong, but margins are what really matter
and they are tough to come by
 Rapid rises in costs of both finding and producing gas are pressuring
economics
 Cost rises not highly related to service costs, which have been under control.
E&Ps can’t give service companies more, as margins are too tight
 The winners in the industry will be niche players (i.e. Rockies) and
companies that are willing to make new capital allocations (i.e. oil and
international)
 Companies should make decisions that produce good long-term returns,
rather than chase high cost North American gas projects
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 29
E&PS: RISING COST STRUCTURES
Maintenance Capex As A % Of Cash Flow (FY 2002)
142%
141%
132%
115%
111%
108%
107%
105%
104%
94%
90%
87%
86%
85%
83%
83%
81%
Average
80%
77%
72%
69%
68%
67%
66%
66%
66%
64%
61%
59%
57%
56%
55%
53%
52%
51%
50%
49%
44%
35%
33%
31%
28%
28%
26%
21%
20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Source: Company data (45-company survey)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 30
E&PS: RISING COST STRUCTURES
 Incremental cost of bringing new gas to market continues to rise quickly
North American Natural Gas - Total Incremental Cost Structure ($/Mcf)
$4.00
$3.00
$2.72
$2.42
$2.49 $2.47
$2.71
$2.28
$2.51
$2.76 $2.73
$2.93 $3.05
$3.27 $3.26
$2.00
$1.00
$0.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Company data and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 31
E&PS: RISING COST STRUCTURES
 The gas price needed to generate returns on average new projects is rising
inexorably
North American Natural Gas Break-Even (For 10% Rate Of Return) ($/MMBtu)
$5.00
$4.00
$3.00
$2.80
$3.14
$2.87 $2.85
$3.12
$2.63
$2.90
$3.19 $3.15
$3.38 $3.52
$3.77 $3.76
$2.00
$1.00
$0.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: Company data and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 32
E&PS: RISING COST STRUCTURES
 F&D costs have doubled over the past decade, pressure not easing
North American F&D Costs (Organic, Excluding Revisions)
Annual Median ($ per Mcfe)
$1.80
Series Average [$1.08 per Mcfe]
$1.49
$1.50
$1.39
$1.28
$1.20
$1.04
$0.99
$0.90
$1.08
$1.20
$1.07
$0.97
$0.89
$0.84
$0.78
$0.60
$0.30
$0.00
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: Company data
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 33
E&PS: RISING COST STRUCTURES
 Pressure on operating costs is also significant
E&P Universe: Operating Costs (Excl. Production Taxes*) Per Boe ($/Mcfe)
$0.75
$0.60
$0.45
$0.53
$0.43
$0.38
$0.40
$0.56
$0.56
$0.50
$0.43
$0.30
$0.15
$0.00
1997
1998
1999
2000
2001
2002
Q1 2003 Q2 2003
* Production taxes are estimated to be 7% of wellhead revenue
Source: Company data
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 34
E&PS: RISING COST STRUCTURES
Domestic Land Rig Rates ($000's/day)
$16.0
$14.5
$13.4
$12.0
$12.7
$11.4
$11.2
$10.4
$10.1
$9.8
$9.8
$10.2
$8.0
$4.0
$0.0
Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003
Domestic Jack-Up Rig Rates ($000's/day)
$60.0
$51.3
$47.6
$48.8
$45.0
$35.5
$31.8
$30.0
$24.3
$24.8
$29.5
$27.5
$28.5
$15.0
$0.0
Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003
Source (for both graphs): Company data and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 35
E&PS: RISING COST STRUCTURES
 Assuming rig costs return to levels seen last peak (Q3 2001), the breakeven gas
price rises to $3.90-3.95 per MMBtu
Historical Rig Rates ($/day)
Q1 2001
Q2 2001
Q3 2001
Q4 2001
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Driller #1
Driller #2
Driller #3
Driller #4
$11,100
$9,929
$11,297
$13,154
$14,300
$10,956
$12,815
$15,420
$15,600
$12,033
$14,021
$16,386
$12,700
$10,704
$13,371
$14,192
$10,700
$9,663
$11,914
$12,386
$10,300
$9,078
$10,610
$11,501
$9,600
$8,601
$10,503
$11,602
$9,500
$8,527
$9,991
$11,316
$9,800
$8,544
$9,255
$11,433
$10,600
$9,240
$9,438
$11,683
Average Land Rig Rates
$11,370
$13,373
$14,510
$12,742
$11,166
$10,372
$10,077
$9,834
$9,758
$10,240
Driller #1
Driller #2
Driller #3
$49,151
$58,300
$35,400
$53,061
$61,100
$39,800
$50,701
$58,000
$37,700
$30,041
$45,900
$30,600
$21,481
$29,300
$22,200
$22,864
$30,600
$21,000
$30,542
$42,000
$23,000
$31,379
$35,300
$21,900
$27,793
$34,700
$20,100
$27,798
$39,400
$18,200
Average Jack-ups Rig Rates
$47,617
$51,320
$48,800
$35,514
$24,327
$24,821
$31,847
$29,526
$27,531
$28,466
Versus
Last Cycle
(Q2 2003 vs
Q3 2001)
Land Rigs
-29%
Jack-ups
-42%
Weighted Average Rig Rates
2/3 Land Drilling, 1/3 Offshore
-33%
Source: Company data and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 36
E&PS: VALUATION
E&PS: VALUATION
CONCLUSIONS:
 Investors are focused on free cash flow and efficient reinvestment, not growth
 Investors find companies facing rising costs and no growth unsavory
 Reinvestment risk is priced into most E&P equities
 Correlation is strong between valuation and cost structure, F&D and recycle ratio
‒ Total Cost Structure: Top quartile 3-year average total cost structure companies
valued at 5.1x EV/EBITDA versus 4.6x for bottom quartile (11% premium)
‒ F&D Costs: Top quartile 3-year average all-in F&D cost companies valued at
5.8x versus 4.1x for bottom quartile (41% premium)
‒ Recycle Ratio: Top quartile recycle ratio companies valued at 6.8x versus 4.1x
for bottom quartile (66% premium)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 38
E&PS: VALUATION
 M&A values above E&P trading values
E&Ps EV/Boe Versus North American Deal Prices
Quarterly Average North American M&A Prices ($/boe)
EV/BOE (E&Ps)
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
06/20/03
04/04/03
01/17/03
11/01/02
08/16/02
05/31/02
03/15/02
12/31/01
10/19/01
08/03/01
05/18/01
03/02/01
12/15/00
09/29/00
7/14/00
4/28/00
2/11/00
11/26/99
9/10/99
6/25/99
4/09/99
1/22/99
11/06/98
8/21/98
6/05/98
3/20/98
1/02/98
$0.00
Includes APA, APC, BR, DVN, EOG and UCL
Source: J.S. Herold, company data and FactSet
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 39
E&PS: VALUATION
 Lower normalized valuations reflects reinvestment risk and likely lower
natural gas prices post-2005
E&Ps: Enterprise Value To EBITDA (Median Annual EV To EBITDA)
Annual Median (x)
Series Average [6.8x]
10.0x
9.2x
8.0x
7.4x 7.4x 7.4x
6.8x 6.7x
6.3x
7.2x
6.7x
6.1x
6.0x
5.2x
6.0x
4.8x
4.5x
5.2x
4.0x
2.0x
2005E
2004E
2003E
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0.0x
2003E and 2004E EBITDA based on consensus First Call CFPS estimates plus LQA interest expense
2005E based on Wachovia normalized commodity price case ($22/bbl oil and $3.50/MMBtu gas)
Source: Company data, Bloomberg, First Call and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 40
E&PS: VALUATION
 Investors are rewarding companies that generate low finding costs
Share Price Performance Since 12/31/00*
(%)
Scatterplot: 3-Yr Average F&D Costs Versus Share Price Performance
200%
150%
100%
50%
0%
-50%
-100%
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
3-Yr Average All-In F&D Cost** ($/Mcf)
$3.00
*Share prices as of 8/26/03, ** Average of 2000, 2001 and 2002 F&D costs
Source: Company data and Bloomberg (includes 44-company E&P universe)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 41
E&PS: VALUATION
 Low F&D translates to higher valuations
Scatterplot: 3-Yr F&D Cost Versus EV/EBITDA
10.0x
Rockies Players
2003E EV/EBITDA (x)
8.0x
6.0x
4.0x
2.0x
Gulf Coast Players
0.0x
$0.50
$1.00
$1.50
$2.00
3-Yr Average F&D Cost ($/boe)
$2.50
*Share prices as of 8/26/03
Source: Company data and Bloomberg (includes 44-company E&P universe)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 42
E&PS: VALUATION
 Those who can recycle cash into reserves growth are also receiving better multiples
Scatterplot: Recycle Ratio Versus EV/EBITDA
2003E EV/EBITDA (x)
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
1.0x
2.0x
3.0x
4.0x
Recycle Ratio (x)
5.0x
6.0x
Recycle Ratio=3-Year Average Cash Flow Per Boe Divided By 3-Year Average F&D
Source: Company data and Bloomberg (includes 44-company E&P universe)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 43
WHAT ARE THE ANSWERS?
WHAT ARE THE ANSWERS?
U.S. NATURAL GAS MARKETS WILL BALANCE FROM 4 FACTORS:
 1) Continued industrial demand destruction (chemicals exit)
 2) Increasing ability for fuel switching
 3) Rockies growth
 4) Growth in LNG
 5) Other long-term solutions?
– i) Frontier pipelines (Alaska, Northern Canada)
– ii) Shifts in energy policies (i.e. coal, greater access)
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 45
WHAT ARE THE ANSWERS?
 Rockies producers have posted leading growth profiles, low reserve replacement costs
3-Yr Production Per Share CAGR (%) [2000-2002]
40.0%
30.0%
CAGR (%)
3-Yr Reserves Per Share CAGR (%) [1999-2002]
Group Average [19.1%]
40.0%
30.3%
30.0%
25.4%
20.0%
Group Average [16.0%]
27.0%
19.5%
20.0%
15.1%
13.3%
CAGR (%)
19.2%
11.5%
10.0%
8.8%
10.0%
0.0%
5.4%
0.0%
E&P#1
E&P#2
E&P#3
E&P#4
E&P#5
E&P#1
E&P#2
E&P#4
Source: Company data and Wachovia Capital Markets, LLC
Source: Company data and Wachovia Capital Markets, LLC
3-Year Average All-In F&D Cost ($/Mcfe) [2000-2002]
Stock Price Performance Comparison (%)
$1.50
F&D Cost ($ per Mcfe)
Group Average [$0.76 per Mcfe]
$1.20
$1.25
150.0%
3-Yr Performance
(9/5/00-9/5/03):
E&P#3
E&P#5
1-Yr Performance
(9/5/02-9/5/03):
$1.24
100.0%
$1.00
+83.7%
$0.75
$0.50
$0.38
$0.46
50.0%
$0.53
+31.9%
+26.2%
+8.5%
$0.25
0.0%
$0.00
E&P#4*
E&P#2
E&P#1
E&P#5
E&P#3
Rockies
Producers*
Rest Of E&P
Universe
Rockies
Producers*
* For E&P#4, 2001 figure has been adjusted to exclude revisions
For comparison purposes, S&P 500 was -32.2% on 3-yr basis and +16.2% on 1-yr basis.
Source: Company data and Wachovia Capital Markets, LLC
* Includes EVG, POG, TBI and WGR. Source: Bloomberg
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Rest Of E&P
Universe
Pg. 46
WHAT ARE THE ANSWERS?
 Most reserve additions and production gains in recent years have come from key
Rockies states. In 2001, about 75% of U.S. reserves growth and 60% of U.S.
production growth came from the Rockies
2001 Reserve Adds/(Declines) For Key States (Tcf)
2001 Reserve Adds/(Declines) For Key States (%)
8.0
6.0
20.0%
20.1%
13.9%
15.0%
4.0
2.2
2.1
2.0
10.0%
8.1%
1.4
0.6
0.3
0.3
0.0
6.2%
3.4%
5.0%
0.1
(0.1)
1.1%
-1.0%
New Mexico
Oklahoma
0.5%
Louisiana
New Mexico
Texas
Oklahoma
Federal
Offshore
1.3%
Total U.S.
1.9%
Texas
2.5%
Federal
Offshore
Louisiana
2.9%
Total U.S.
Utah
Wyoming
Oklahoma
New Mexico
Federal
Offshore
Utah
Louisiana
Texas
Colorado
Wyoming
2.9%
Source: Energy Information Administration
Source: Energy Information Administration
2001 Production Increase/(Decrease) For Key States (Tcf)
2001 Production Increase/(Decrease) For Key States (%)
0.6
0.5%
-5.0%
Total U.S.
(2.0)
3.4%
0.0%
Colorado
6.0
25.0%
36.0%
0.6
0.5
30.0%
0.4
24.0%
0.3
27.4%
20.2%
16.2%
18.0%
0.2
0.2
0.1
12.0%
0.1
0.1
0.1
0.1
0.0
0.0
6.0%
0.0
Source: Energy Information Administration
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Colorado
Wyoming
Utah
Oklahoma
New Mexico
Louisiana
Utah
Texas
Colorado
Federal
Offshore
Wyoming
0.0%
Total U.S.
0.0
Source: Energy Information Administration
Pg. 47
WHAT ARE THE ANSWERS?
 Traditional sources of incremental supply like the GOM and the Mid-Continent
continue to mature. GOM reserves are flat versus 1992, while Mid-Continent
reserves have fallen 20%.
Gulf Of Mexico (GOM) Natural Gas Reserves (Tcf)
Gulf Of Mexico (GOM) Natural Gas Production (Bcf/d)
18.0
35.0
30.0
27.1
26.5
27.6
28.2
28.2
15.0
28.5
26.9
26.1
26.9
27.1
13.8
12.5
12.7
13.1
12.8
1992
1993
1994
1995
14.3
13.6
13.7
13.4
13.8
1998
1999
2000
2001
5.4
5.3
2000
2001
12.0
25.0
9.0
20.0
6.0
15.0
3.0
10.0
0.0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
1996
1997
Source: Energy Information Administration
Source: Energy Information Administration
Mid-Continent (KS And OK) Natural Gas Reserves (Tcf)
Mid-Continent (KS And OK) Natural Gas Production (Bcf/d)
35.0
10.0
30.0
8.0
7.3
7.5
7.3
6.9
6.3
25.0
23.6
22.6
22.6
6.0
22.0
20.8
20.4
20.0
20.0
18.3
19.0
18.7
2.0
10.0
0.0
1993
1994
1995
1996
1997
Source: Energy Information Administration
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
1998
1999
2000
2001
6.1
4.9
4.0
15.0
1992
6.0
1992
1993
1994
1995
1996
1997
1998
1999
Source: Energy Information Administration
Pg. 48
WHAT ARE THE ANSWERS?
Wyoming Supply Growth (MMcf/d)
1998
8,000
2002
2007E
6,000
4,000
2,000
0
Greater Green
River Basin
Wind River
Basin
Powder River
Basin
Total
Source: Robert O. Reid, Ph. D., eVs
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 49
WHAT ARE THE ANSWERS?
Rockies Gas Balance (Bcf/d)
Export Capacity (Bcf/d)
Export Requirements (Bcf/d)
Adjusted For Storage (Bcf/d)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
01-03
09-02
05-02
01-02
09-01
05-01
01-01
09-00
05-00
01-00
09-99
05-99
01-99
1.5
Source: eVs
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 50
WHAT ARE THE ANSWERS?
Rockies Differential (CIG Versus Henry Hub) ($/MMBtu)
$1.00
$0.00
-$1.00
-$2.00
-$3.00
1/4/00
3/2/00
4/28/00
6/26/00
8/23/00
10/19/00
12/18/00
2/15/01
4/16/01
6/12/01
8/8/01
10/4/01
12/3/01
2/1/02
4/2/02
5/29/2002
7/26/02
9/23/02
11/18/02
1/17/03
3/18/03
5/19/03
7/17/03
-$4.00
Source: Bloomberg
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 51
WHAT ARE THE ANSWERS?
Northern
Rockies Pipelines
KMI (Pony Express)
TransColorado
Northwest
CIG
Trailblazer
Kern
WNG
Powder River
Basin
Big Horn
Basin
Wind River
Basin
CASPER
Green River
Basin
DJ
Basin
Export
Capacity
(MMcf/d)
410
500
475
355
850
860
180
3,630
Expansion Projects
West:
Kern (Q2 ’03)
Ruby (EPG)
East:
Cheyenne Plains (2005) 540
Advantage (KMI)
320
Bison (NBP)
300
2,810
DENVER
Paradox
Basin
Piceance
Basin
San Juan
Basin
900
750
Source: Tom Brown, Inc.
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 52
WHAT ARE THE ANSWERS?
 Start-up of Cove Point could add another 300-500 Mcf/d as early as September 2003
U.S. LNG Imports* (MMcf/d)
1,750
1,500 1,500
1,500
1,250
1,089
1,000
1,000
928
750
500
780
755
669
637 636
503
560
556 552
558
705
454
298
250
262 263
305
646
750
565
563
540
510
687
353
178
6/03E
5/03E
4/03
3/03
2/03
1/03
12/02
11/01
10/02
9/02
8/02
7/02
6/02
5/02
4/02
3/02
2/02
1/02
12/01
11/01
10/01
9/01
8/01
7/01
6/01
5/01
4/01
3/01
2/01
1/01
0
* Includes Algeria, Australia, Nigeria, Qatar, Trinidad and United Arab Emirates
Source: Energy Information Administration and Wachovia Capital Markets, LLC estimates
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 53
WHAT ARE THE ANSWERS?
U.S. LNG Import Facilities
Everett (440 MMcf/d)
Cove Point (1,000 MMcf/d)
Elba Island (446 MMcf/d)
9/2005 Expansion (360 MMcf/d)
Lake Charles (630 MMcf/d)
1/2006 Expansion (570 MMcf/d)
Other Worldwide
Spot Supply
(Including Algeria,
Nigeria, Oman, Qatar)
LNG Exports
Trinidad Train 1
(270 MMcf/d, 20-yr contract)
Trinidad Trains 2 and 3
(380 MMcf/d, 20-yr contract beginning 2004)
Trinidad Trains 2 and 3
(380 MMcf/d, through 2003)
Trinidad Train 4
(beginning late 2005)
Future Supply From Africa
Nigeria
(350 MMcf/d, 20-yr contract beginning 2005)
Trinidad
Future Supply
From Africa
Egypt Train 2
(150 MMcf/d beginning 2006)
Bioko Island - Equatorial Guinea
(450 MMcf/d, 15-yr contract beginning 2007)
Source: Company data and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 54
WHAT ARE THE ANSWERS?
Proposed LNG Terminals/Facilities
Name
Location
Owner
Altamira
Rosarito
Freeport
Ocean City
Freeport
Port Pelican
Saint John
Long Beach Harbor
Tijuana
Ensenada
Crystal
Main Pass (Offshore)
XOM/Sabine Pass
Baja
Hackberry
Grand Cayman
Baja
Weaver's Cove
Tractabel Mexico
Access NE Energy
Cabrillo Port
Tampa
Sabine Pass
Corpus Christi
Liberty
Humboldt Bay
Somerset
Corpus Christi
Mexico
Baja CA/Mexico
Bahamas
Bahamas
Texas
Gulf Of Mexico
New Brunswick
California
Baja, Mexico
Baja, Mexico
California
Gulf of Mexico
Louisiana
Calif./Mexico
Louisiana
Bahamas
Mexico
Massachusetts
Mexico
Nova Scotia
California- Offshore
Florida
Texas
Texas
Louisiana
California
Massachusetts
Texas
Shell
ConocoPhillips
El Paso
AES
Cheniere
ChevronTexaco
Irving Oil
Mitsubishi
Marathon
Sempra
Crystal Energy
McMoran
ExxonMobil
ChevronTexaco
Sempra
Tractabel
Shell
Poten
Tractabel
Access NE Energy
BHP
BP
Cheniere
Cheniere
HNG Storage
Calpine
Somerset LNG
Exxon-Mobil
Total
Capacity
(Mcf/d)
Projected
Start Date
500
610
NA
850
1,500
800
500
700
1,000
1,000
600
1,500
1,000
750
1,500
832
1,000
400
NA
500
800
550
2,000
2,000
NA
NA
400
1,000
2004
2005
2005
2006
2006
2006
2006
2006
2006
2006
2006
2006
2006
2007
2007
2007
2007
2007
2007
2007
2008
NA
NA
NA
NA
NA
NA
NA
22,292
Source: Energy Information Administration and Wachovia Capital Markets, LLC
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 55
WHAT ARE THE ANSWERS?
 Q2 LNG imports averaged 1.5 Bcf/d, double Q1 levels and 86% above
Q2 of last year
 Q2 LNG supply represented only 2.5% of US gas supply, but with over
20 proposals for new facilities, this could increase to 15% or more by the
end of the decade
 Additionally, all existing terminals have expansions planned. Total
capacity for the four facilities would increase from 2.3 Bcf/d to 3.9 Bcf/d
(6% of total supply) by the first half of 2006
 Permitting still an obstacle: Environmental concerns may yet stifle the
siting of some facilities. Offshore regassification terminals are only one
of a number of resolutions the industry has formulated as a response
WACHOVIA SECURITIES ENERGY EQUITY RESEARCH
Pg. 56
WACHOVIA CAPITAL MARKETS, LLC
ENERGY EQUITY RESEARCH
Additional Information Available Upon Request
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