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IPAA/TIPRO September Lunch Dan Pickering September 13, 2006 The Pause That Refreshes

IPAA/TIPRO September Lunch Dan Pickering September 13, 2006 The Pause That Refreshes

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IPAA/TIPRO September Lunch

Dan PickeringSeptember 13, 2006

The Pause That Refreshes

2

Agenda

Commodities

E&P Industry

Stocks

3

Who Is Pickering Energy Partners?

Houston-based Energy Research 24 Employees Clients Are:

Institutional Investors Companies Seeking Capital

Wall Street via the Galleria

4

Overview

Oil Stays Strong Gas Worse Before Better U.S. Activity Hiccup Cycle Has Legs Into 2008 E&P Consolidation Continues Service Cost Moderation Stocks Volatile But Cheap

5

We Are In A Boom

Year 1 2 3 4 5 6 7 8 9

U.S. Rigcount

0%

50%

100%

150%

200%

250%

300%

350%

400%

1

1973 - 1981

1999 - Current

6

Viva la Crude!

NYMEX Futures, Crude Oil

0

10

20

30

40

50

60

70

80

90

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

Oil

Pri

ce, $

/bb

l

12 Month Strip

7

Oil Thoughts/Outlook

Scarce, But Not Peak

Demand Is Key Factor

Demand Reacts To Price

Recent Correction Not Armageddon

$60/bbl Feels Realistic

8

OPEC Excess Capacity

0

5

10

15

20

1970 1975 1980 1985 1990 1995 2000 2005

OPEC

Exc

ess

Cap

acity,

mm

bpd

0

10

20

30

40

50

60

Oil P

rices (Delivered

US

), $/bbl

OPEC Excess Capacity

Nominal Oil Prices

9

Demand Is THE Cycle Killer

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Glo

bal

Dem

and - A

nnual

% C

han

ge

0

10

20

30

40

50

60

70

Cru

de O

il Price $

Demand

Oil PricesCurrent oil prices

10

No Website For Cheap Milk Or Whiskey!

Consumers Care About Oil Price

Wal-Mart, Starbucks, Detroit Blame Gasoline

U.S. Mogas Demand Only +0.8% In 2006

Asia More Resilient, But Not Impervious

Watch Demand!

11

NYMEX Futures…Natural Gas

0

2

4

6

8

10

12

14

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Nat

Gas

Pri

ce, $

/mcf

12 Month Strip

12

Gas Thoughts/Outlook

Storage At Record Levels

Supply Growing

Price Volatility

Pain Before Gain

Treadmill Running Fast

13

Storage Levels High

0

1,000

2,000

3,000

4,000

1-J an 2-Apr 2-J ul 1-Oct 1-J an

Work

ing G

as, b

cf

Normal

2006

Storage Capacity - 3,500 bcf

14

Supply/Demand Out Of Kilter

(300)

(250)

(200)

(150)

(100)

(50)

0

50

100

150

(300) (250) (200) (150) (100) (50) 0 50 100 150

Predicted Storage Change, bcf

Act

ual S

tora

ge C

hang

e, b

cf

Since 2005 Hurricanes

Base Correlation

Bearish

Bullish

Last week…back on normal trend line

HOT!

15

The Futures Can Lie

-50%

-25%

0%

25%

50%

Jan-95

Jan-97

Jan-99

Jan-01

Jan-03

Jan-05

Jan-07

% D

iffer

nec

e N

YM

EX

12

mo S

trip

and A

ctual StripToo High

(Strip Too Low)

Strip accurate to ±10% only 30% of the time over the past 10 years.

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The Treadmill Churns

27,3972001

2003

2000

20021997

19981999

19961995

2004

-

200

400

600

800

1,000

1,200

5,000 10,000 15,000 20,000 25,000 30,000

Gas Wells Drilled

Pro

duct

ion, m

cf/d

ay/w

ell

2005

Diminishing Productivity Per Well

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Not All Wells Are Equal

$- $2 $4 $6 $8 $10

Deep Shelf

GOM Shelf

Piceance

Mid Continent

Woodford

East Texas

Fayetteville

Barnett (Tier 1)

Appalachia

Pinedale

Breakeven Gas Price, $/mcf

Average Well

Marginal Well: Average WellCost+30% Reserves -30%

18

E&P Industry Issues

Resource Plays

Service Availability

Consolidation

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Resource Plays

“If You Don’t Have One….Get One!”

Technology Driving New Areas

Learning Curves Are Big

Not Immune To Gas Prices

Revenge Of The Nerds!

20

Rising Prices, Rising CostsAvg. Dayrate for NBR Land Rigs

0

5,000

10,000

15,000

20,000

25,000

2000

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q04

1Q06

2Q06

$/da

y

21

Relief Is On The Way

350 New Rigs By YE 2007

Pressure Pumping Horsepower +25%

Coiled Tubing +20%

2006 Oil Service Capex +60% y/y

22

Asset Transactions

Acquisition F&D Costs ($/Mcfe)

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

2001 2002 2003 2004 2005E 2006E

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Basin Specific Deals

2006 M&A $/proved mcfe

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Overall TX (non-Barnett)

Barnett GOM Rockies

$/m

cfe

24

Public Values Look Intriguing

$2.20

$2.65 $2.70

Asset Deals Large Cap E&PStocks

Mid Cap E&PStocks

Small Cap E&PStocks

$3+

Va

lua

tion

, $

/mcf

25

Consolidation

APC Deal Opened Eyes

Assets vs. Companies

Natural Gas Sentiment Could Create Lull

Too Early For Majors

One Big Deal Topples Dominoes

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Conclusions

Volatile Commodities

Fickle Wall Street

Big Cash Flows

Nothing Goes Straight Up

Still In An Upcycle

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www.pickeringenergy.com

Pickering Energy Partners, Inc. is a leading institutional brokerage firm focusing on energy-sector research for institutional investors. The Company, a NASD broker-dealer, develops investment ideas for our clients by actively covering the E&P and oil service

industries, while monitoring energy subsectors such as coal, nuclear, tankers and alternative energy.

In addition to research activities, Pickering Energy has executed share repurchases and helped energy companies raise equity capital via co-manager and syndicate positions in numerous energy offerings including CPX, HERO, WARR, BAS, XCO.

Our research is provided to institutional clients via published reports, concise emails, and through direct interaction with our highly rated analysts and unique, specialized sales force.

Established in February 2004, Pickering Energy Partners has 24 employees working from our main Houston office and two satellite offices in Denver, Colorado and New Orleans, Louisiana.

Contact UsHouston: 713-333-2960Denver: 303-300-1902

New Orleans: 504-371-5563