October 26th, 2004October 26th, 2004

75th Annual Meeting Independent Producers Association of

America

75th Annual Meeting Independent Producers Association of

AmericaJames K. Wicklund

Managing Director – Energy Research

Banc of America Securities LLC

James K. Wicklund

Managing Director – Energy Research

Banc of America Securities LLC

October 26th, 2004October 26th, 2004

Wall Street’s Perspective on Natural GasWall Street’s Perspective on Natural Gas

Little faith, lots of optimism and no loyalty at all

Roller coasters are a lot of fun until the dizziness hits

Price, Price, Price – Don’t get confused by details

Little faith, lots of optimism and no loyalty at all

Roller coasters are a lot of fun until the dizziness hits

Price, Price, Price – Don’t get confused by details

October 26th, 2004October 26th, 2004

“In the future, it is unlikely that the world will ever again let itself become as

dependent on one source of fuel as it once did on Arab oil.”

“In the future, it is unlikely that the world will ever again let itself become as

dependent on one source of fuel as it once did on Arab oil.”

Conservatism as Heresy”

J.J. Ray 1974

Conservatism as Heresy”

J.J. Ray 1974

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

US Oil Drilling vs PriceUS Oil Drilling vs Price

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

1990

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0

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Oil Price

Rig Count

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

1990

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0

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Oil Price

Rig Count

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

US Gas Drilling vs PriceUS Gas Drilling vs Price

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

1990

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Gas Price

Rig Count

$0.00

$2.00

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$6.00

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$12.00

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Gas Price

Rig Count

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

Returns Drive ActivityReturns Drive Activity

-60%

-40%

-20%

0%

20%

40%

60%

80%

1Q94

3Q94

1Q95

3Q95

1Q96

3Q96

1Q97

3Q97

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

-10%

-5%

0%

5%

10%

15%

20%

Y-Y Rig Delta

ROA

-60%

-40%

-20%

0%

20%

40%

60%

80%

1Q94

3Q94

1Q95

3Q95

1Q96

3Q96

1Q97

3Q97

1Q98

3Q98

1Q99

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

-10%

-5%

0%

5%

10%

15%

20%

Y-Y Rig Delta

ROA

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

Mature Basins Change EconomicsMature Basins Change Economics• Previously, commodity price drove returns with little

impact from other variables

• In a return focused industry, activity can slow without a demand drop

• No industry allocates capital based on revenues

• No industry allocates capital on the basis of “greater good”

• Previously, commodity price drove returns with little impact from other variables

• In a return focused industry, activity can slow without a demand drop

• No industry allocates capital based on revenues

• No industry allocates capital on the basis of “greater good”

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

Momentum Drives EPSMomentum Drives EPS

-60%

-40%

-20%

0%

20%

40%

60%

80%

1Q 9

5

3Q 9

5

1Q 9

6

3Q 9

6

1Q 9

7

3Q 9

7

1Q 9

8

3Q 9

8

1Q 9

9

3Q 9

9

1Q 0

0

3Q 0

0

1Q 0

1

3Q 0

1

1Q 0

2

3Q 0

2

1Q 0

3

3Q 0

3E

1Q 0

4E

3Q 0

4E

$0.00

$1.00

$2.00

$3.00

$4.00

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$6.00

$7.00

$8.00

$9.00

Rig Count Momentum

EPS

-60%

-40%

-20%

0%

20%

40%

60%

80%

1Q 9

5

3Q 9

5

1Q 9

6

3Q 9

6

1Q 9

7

3Q 9

7

1Q 9

8

3Q 9

8

1Q 9

9

3Q 9

9

1Q 0

0

3Q 0

0

1Q 0

1

3Q 0

1

1Q 0

2

3Q 0

2

1Q 0

3

3Q 0

3E

1Q 0

4E

3Q 0

4E

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Rig Count Momentum

EPS

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

Future of the US IndustryFuture of the US Industry• High levels of sustained activity – low volatility

• Operators focused on returns, NOT growth

• Cash Cow – dividend yield

• “Wal-Mart” model

Investors pay a lower multiple opposed to historical “hyper-cyclical growth”

• High levels of sustained activity – low volatility

• Operators focused on returns, NOT growth

• Cash Cow – dividend yield

• “Wal-Mart” model

Investors pay a lower multiple opposed to historical “hyper-cyclical growth”

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

“It’s Different this Time??”“It’s Different this Time??”

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IPAA 75IPAA 75thth Annual Meeting Annual Meeting

Fear, Greed & FearFear, Greed & Fear• Investors are afraid not to be invested in the stocks

• They won’t trust it but will play it till it doesn’t work anymore, with no loyalty except to profits

• “It’s different this time” is always right, and always wrong and never enough of either

• Service companies are afraid to add capacity

• E&P companies are afraid to sign term contracts but want the party to last as long as possible

• The commodity price is always going to go up, until its not any more

• Investors are afraid not to be invested in the stocks

• They won’t trust it but will play it till it doesn’t work anymore, with no loyalty except to profits

• “It’s different this time” is always right, and always wrong and never enough of either

• Service companies are afraid to add capacity

• E&P companies are afraid to sign term contracts but want the party to last as long as possible

• The commodity price is always going to go up, until its not any more

IPAA 75IPAA 75thth Annual Meeting Annual Meeting

SummarySummary• The “secular” trend of natural gas is toward higher

drilling levels, higher prices and higher consumption

• LNG will supplant demand but won’t change the economics for a generation to come

• Nothing in the oil business is linear and neither are economics keeping the business cyclical

• Investors will always bend and rationalize reality towards the idea of “secular growth”

• Every three year flirtations may look more like a dating relationship but marriage is out of the question

• The “secular” trend of natural gas is toward higher drilling levels, higher prices and higher consumption

• LNG will supplant demand but won’t change the economics for a generation to come

• Nothing in the oil business is linear and neither are economics keeping the business cyclical

• Investors will always bend and rationalize reality towards the idea of “secular growth”

• Every three year flirtations may look more like a dating relationship but marriage is out of the question