A&D Market Update Presented to MOGA Adrian Goodisman Managing Director May 18, 2006

A&D Market Update

Presented to

MOGA

Adrian GoodismanManaging Director

May 18, 2006

2

Agenda

Scotia Waterous is pleased to have the opportunity to present its thoughts on the national acquisition and divestiture market.

• Scotia Waterous Introduction

• U.S. A&D Market Update

• Onshore Case Study

Scotia Waterous Introduction

4

• Leading Upstream Focused M&A Firm in the World

Global offices: Houston, Denver, Calgary, London, Buenos Aires, Singapore

• Unrivalled Market Intelligence

Conducting 50+ mandates per year globally

Selling over $500 million/month in oil and gas transactions

Proprietary databases on global transactions and oil and gas companies

• Most Comprehensive Technical Capabilities and Broadest Relationships

75 + staff world wide

Engineers, Geologists, Geophysicists and Investment Banking backgrounds

Advised 23 of the 25 largest oil and gas companies in the world over past 18 months, as well as many smaller private and public companies

Access to senior management on several continents

• In 2005 Scotiabank, through its Investment Banking subsidiary Scotia Capital, acquired Waterous & Co. to create a full-service upstream M&A firm.

Scotia Waterous combines the engineering and geoscience technical knowledge of Waterous with the capital markets knowledge and financing capability of Scotia Capital

Full service M&A advisory services covering technical analysis of assets, financial analysis, financing, and execution strategy

• Scotiabank Quick Facts

Canada’s most international bank and second largest bank

Maintained energy lending office in Houston since 1962

Currently banking over 30 U.S. E&P clients

Summary Scotia Waterous Introduction

5

Scotia Waterous Worldwide Activity

• Since January 2005, Scotia Waterous has offered over $20 billion globally in oil and gas companies and assets, including over $11 billion in North America.

Global A&D Trends

6

Recent U.S. Advisory Mandates

May 2005

Exclusive Financial Advisor

Advised on divestiture to

Pecos Production Company

$200,500,000

for

June 2005


Advised on corporate sale toEverlast Energy LLC

Undisclosedfor

ConstellationEnergy

October 2005


Advised on South Texasdivestiture to

Kerr-McGee Corporation

$163,000,000

The Houston Exploration Company

October 2005


Advised on divestiture to

Permian and Mid-Continent

Kerr-McGee Corporation

$104,000,000

Encore Acquisition Company

Scotia Waterous Introduction

J u ly 2 0 0 5

Tra n sa ctio n A d v iso r

A d v ised o n d iv estitu re toE x x o n M o b il C o rp o ra tio n

$ 2 1 5 ,0 0 0 ,0 0 0

fo r

M a y 2 0 0 5

Tra n sa ctio n A d v iso r

A d v ised o n d iv estitu re to

E x x o n M o b il C o rp o ra tio n

$ 9 7 2 ,0 0 0 ,0 0 0

fo r

• Since January 2005, Scotia Waterous has advised on approximately $4.0 billion in oil and gas assets in the United States.

C u rren t

E x clu siv e F in a n cia l A d v iso r

A d v isin g o n W illisto n B a sina sset d iv estitu re

3 ,5 0 0 b o e /d

CamWest Par t ner s I I , LLC

J a n u a ry 2 0 0 6

E x clu siv e F in a n c ia l A d v iso r

A d v ised o n d iv estitu re o f E a st Tex a s & M ississip p i a sse ts to

To ta l E & P U S A , In c .

$ 3 0 0 ,0 0 0 ,0 0 0

F o r

C u rren t


A d v isin g o n d iv estitu reo f P erm ia n a ssets

3 1 5 b o e /d

F eb ru a ry 2 0 0 6


A d v ised o n d iv estitu re o fP erm ia n B a sin a ssets

8 5 0 b o e /d

C h i E n erg y, In c .

F eb ru a ry 2 0 0 6


A d v ised o n sw a p p in g S o u th Tex a s a sse tsf

o r G u lf o f M ex ico d eep w a ter a sse ts fro m

To ta l E & P U S A , In c .

11 7 M M cfe /d

S h ell E x p lo ra tio n & P ro d u ctio n

D ecem b er 2 0 0 5


A d v ised o n R o ck iesd iv estitu re to

K err-M cG ee C o rp o ra tio n

3 ,1 0 0 b o e /d

H ilco rp E n erg y C o m p a n y

C u rren t


A d v isin g o n A rk L a Texa sset d iv estitu re

1 ,2 0 0 b o e /d

M a y 2 00 6


A d v ised o n co rp o ra te sa le to

C H 4 E n erg y, L L C

$ 8 2 ,0 0 0 ,0 0 0

F o r

A p ril 2 0 0 6


A d v ised o n d iv estitu re o fG u lf o f M ex ico S h e lf a sse ts

3 3 B cfe

U.S. A&D Market Update

8

Commodity Price and Capital

NYMEX Henry Hub1

NYMEX WTI

$3.00

$6.00

$9.00

$12.00

$15.00

$18.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Start of 4Q/05 Start of 1Q/05

Start of 2Q/06 Current Strip

Months Forward

NY

MEX

Hen

ry H

ub

N

atu

ral G

as (

$/M

MB

tu)

Current StripMay 8, 2006

$45.00

$55.00

$65.00

$75.00

$85.00

$95.00

1 3 5 7 9 11 13 15 17 19 21 23

NY

MEX

WTI

Cru

de O

il

($/b

bl)

Months Forward

Start of 4Q/05 Start of 1Q/05

Start of 2Q/06 Current Strip

Current StripMay 8, 2006

Excess Cash Flow 2005

44%

7%4%26%

19%

Op Costs

G&A

Int. Exp.Int. Exp.

CapexCapex

Excess CFExcess CF

Cash Flow Leverage

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005

Net

Deb

t/EB

ITD

A (

x) Majors

Large Cap

Mid CapMid Cap

Small CapSmall Cap

Note: (1) Natural gas futures have been “smoothed” to mitigate the impact of seasonality.Source: Scotia Waterous, Bloomberg.

• Strong commodity prices, especially oil, have resulted in substantial cash flow, creating additional buying power for most E&P companies.


9

Cash Flow vs. Asset Supply

Cash Flow vs. Asset Supply

$0

$10

$20

$30

$40

$50

$60

1999 2000 2001 2002 2003 2004 2005

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

($ B

illion

s)

Average Yearly Spot

Cash Flow

Asset SupplyAsset Supply

NY

MEX

Hen

ry H

ub

($/M

MB

tu)

Note: (1) Cash flow figures represent public independents.Source: Scotia Waterous, Bloomberg.

• While asset supply has increased over the past few years, it is not nearly enough to satisfy demand generated by the rapid increase in industry cash flow.


10

U.S. Quarterly Transaction Trends

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

$6,000

$6,500

2Q

00

3Q

00

4Q

00

1Q

01

2Q

01

3Q

01

4Q

01

1Q

02

2Q

02

3Q

02

4Q

02

1Q

03

2Q

03

3Q

03

4Q

03

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

0

20

40

60

80

100

120

140

160

U.S. Asset Transactions 2000-2006

Transaction Value – Gas

Transaction Value – Oil

Transaction Value – Undisclosed

Transactions (#)

Tra

nsacti

on

Valu

e (

$M

M)

Tra

nsacti

on

s (

#)


Source: Scotia Waterous, J.S. Herold.

• Recent transaction supply value increased due to select large scale divestitures. The number of transactions fluctuates due to a mixture of factors, including high commodity prices, corporate growth targets and retention of bottom tier assets.

2-year Quarterly Average ~$4,000MM

4-year Quarterly Average ~$1,500MM

11

Supply/Demand Imbalance – Buyer Profile

U.S. Market Segmentation by Asset Value

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Majors Large Caps Mid Caps Small Caps Pipelines Privates

Hunt Petr.MeritCelero

ApacheXTO

2002 2003 2004 2005 YTD 2006

(1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.

• Traditionally, Large Caps have been the dominant buyers. However, W&T’s $1.34 billion acquisition of Kerr-McGee’s Gulf of Mexico assets have made Mid Caps a close second in YTD 2006.

Whiting

Tra

nsacti

on

s b

y C

om

pan

y C

ate

gory

as %

of

Tota

l Tra

nsacti

on

Valu

e


Chesapeake/UndisclosedMarubeni/Pioneer

W&T/Kerr-McGee

LCX Acq’nTXOK

Black StoneOxyStatoil

XTOApache

Burlington

12

Supply/Demand Imbalance – Seller Profile

U.S. Market Segmentation by Asset Value

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Majors Large Cap Mid Cap Small Cap Pipelines Privates

Tra

nsacti

on

s b

y C

om

pan

y C

ate

gory

as %

of

Tota

l Tra

nsacti

on

Valu

e

Anadarko

PioneerDevonEnCana

Kerr-McGee

(1) Market capitalization categories: Small Cap ($0-$1000 MM); Mid Cap ($1000-$5,000 MM); Large Cap (>$5,000 MM). Source: Scotia Waterous.

• Large caps became the leading sellers in 2005 and YTD 2006, when both Pioneer and Kerr-McGee divested their Gulf of Mexico assets. Privates came second during the same periods.

ExxonMobilAmerada

TotalShell

ExxonMobilChevron

2002 2003 2004 2005 YTD 2006

Marubeni/PioneerW&T/Kerr-McGee

AnschutzCelero

Winwell

SG InterestsLLOG

CrownQuest

Chesapeake/Undisclosed


13

Proved Reserve Valuations 2Q 2005 – 1Q 2006

(1) Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1.Source: Scotia Waterous

$1.64/Mcfe

$2.44/Mcfe

$1.85/Mcfe

$1.94/Mcfe

$1.53/Mcfe

$1.49/Mcfe

$1.42/Mcfe

$2.92/Mcfe

$1.99/Mcfe


14

Production Valuations 2Q 2005 – 1Q 2006

(1) Based on weighted average of transaction results for asset transactions from 2Q 2005 to 1Q 2006. Liquids converted at 6:1.Source: Scotia Waterous

$13,230 Mcfe/d

$9,228 Mcfe/d

$10,929 Mcfe/d

$5,923 Mcfe/d$7,132 Mcfe/d

$11,052 Mcfe/d

$9,501 Mcfe/d

$8,045 Mcfe/d

$4,573 Mcfe/d


15

Selling Earlier in the Cycle – Overview

Selling within the Asset Life Cycle

0% 30% 50% 70% 100%

% of Asset Developed

Pro

du

cti

on

/Valu

e

DevelopmentPlan

PotentialDownsideSell or Grow

Decision PointToday

Sell or GrowDecision Point1-2 Years Ago


Source: Scotia Waterous

• In response to buyers’ eagerness to acquire assets with significant “running room,” sellers have started bringing their assets to market much earlier.

Kerr-McGee Case Study

17

Summary

• The marketing process (October 2005) for the Kerr-McGee Asset Divestiture Program brought in a number of aggressive buyers willing to pay substantial value for unexploited upside

• Offering characteristics ~ 7,345 boe/d (~ 56% oil)

~ 40,800 Mboe (~ 49% oil)

• Bidder profile Interest from a wide variety of domestic producers including mid-caps, small-caps, pipeline, privates,

private equity, and international firms

• Transaction parameters(1) Approximate overall sales price $400MM

$52,553/boe/d

$9.46/boe

(1) Reserve and production figures based on Kerr-McGee internal estimates


18

Offering Highlights

• The Kerr-McGee divestiture presented an opportunity to acquire 5 unique packages including Permian Basin, Mid-Continent, South Texas, Rockies, and the Gulf Coast.


19

Participation Profile – Overall Offering

Overview of Process

Bidders - New Entrants vs. Existing Producers

CAs by Size Category

Bidders - Public vs. Private

Scotia Waterous generated significant interest in the offering, receiving over 120 CAs from a mix of companies including, pipelines, internationals, and Canadian trusts

0

60

120

180

240

300

Intro.Letters

IMs CAs Data RoomVisits

0

5

10

15

20

25

30

35

New Entrants Existing

0

4

8

12

Large-Cap Mid-Cap Small-Cap Pipeline Private Intl./ Other

0

5

10

15

20

25

30

35

40

Public Private

901,018

Source: Scotia Waterous


20

Asset Overview - Permian Area

Permian Area Overview

• Kerr-McGee’s West Texas assets contain legacy Permian Basin fields with classic long life waterfloods with potential for CO2 tertiary floods in the future

• 1Q 2005 net sales of 809 BOE/day

• 1Q 2005 cash flow of $2 MM

• Located in Andrews, Howard, and Cochran Counties, Texas

• Legacy West Texas production San Andres waterfloods in Levelland and

Slaughter Fields

Queen waterfloods in McFarland Field

Devonian production in Hutex Field

Wolfcamp production in Nolley Field

• Upside potential: Optimization of waterflood operations

Conversion of waterflood to WAG CO2 floods in San Andres waterflood units

Installation of surfactant flood in Nolley


21

Asset Overview - Mid-Continent Area

Mid-Continent Area Overview

• Kerr-McGee’s Mid-Continent assets in Anadarko Basin contain three long-life waterflood units with predictable and stable production decline rates.

• 1Q 2005 net sales of 615 BOE/day All properties Kerr-McGee operated

• 1Q 2005 cash flow of $1.5 MM

• Located in Canadian, Woods, and Grady Counties, Oklahoma

• Properties include: Oakdale Field – Cottage Grove sand

waterflood

Calumet Field – Redfork sand waterflood

Rush Springs SW – Medrano sand waterflood

• Upside potential: Improved recovery factors in waterfloods

Expansion of waterflood areas


22

Permian & Anadarko Basins Transaction Parameters

• In October 2005, Encore Acquisition Company announced the acquisition of Permian Basin and Anadarko Basin assets for $104 MM

• Combined TP reserves of 6.2 MMboe(1)

• Cash Flow(2)

2005A/F: 7.3 (x)

• Production(1)

$80,000/boe/d

• TP Unit Value(1)

$16.77/boe

(1) Based on EAC press release(2) Based on Kerr-McGee internal estimates


23

Asset Overview - South Texas

South Texas Overview

• Kerr-McGee’s South Texas Properties make up the majority of the production and value of the Offering

• Estimated net sales of 10 MMcfe/day(1)

33% of Offering production

• Estimated TP reserves of 88 Bcfe (75% gas)(1)

• 1Q 2005 cash flow of $6.5 MM

• Located in Hidalgo, Kleberg, Webb and Starr Counties, Texas All Kerr-McGee operated properties

• Complex, highly faulted structural and stratigraphic traps Rincon – Frio and Vicksburg production

TCB – Frio and Vicksburg production

San Carlos - Frio production

Vaquillas Ranch – Lobo production

• Multiple drilling and recompletion locations identified

Notes: 1. Based on Houston Exploration Company press release


24

South Texas Transaction Parameters

• Houston Exploration Company (THX) announced the acquisition of South Texas assets for $163MM

• Cash Flow(1)

2005A/F: 5.3 (x)

• Production(2)

$16,270/Mcfe/d

• TP Unit Value(2)

$1.85/Mcfe

(1) Based on Kerr-McGee internal estimates(2) Based on THX press release


25

Conclusions

Scotia Waterous was pleased to have had the opportunity to present its thoughts on the national and global acquisition and divestiture market.

• Supply is being driven by sellers believing they can achieve high valuations as well as portfolio clean-ups

Majors are/will still be selling assets (e.g. Chevron, ConocoPhillips)

Corporate consolidates will continue and lead to non-core asset sales (e.g. Petrohawk)

Privates and Private equity backed companies will continue to turn their assets

• Demand is being driven by well financed buyers that lack organic growth, as well as an abundance of cash in the market place

Many buyers stock prices are high providing an attractive currency to use in acquisitions

Private equity looking to invest in the upstream is abundant

New money is looking to do invest in the upstream industry

• Record oil prices, along with an aggressive long term outlook for gas prices, along with record available private equity, along with limited supply in the industry, will continue to lead to record prices being paid for assets/companies???

• International companies (e.g. Canadian Royalty Trusts, Asians) are increasingly taking a more active interest in U.S. assets/companies

Global A&D Trends

26

Documents

A&D Market Update Presented to MOGA Adrian Goodisman Managing Director May 18, 2006