Jonathan D. Wolff, CFA Director, Exploration & Production (212) 891-5064 [email protected] Lisa King Jeff Burke, CFA Associate Analyst (212) 891-5047

Jonathan D. Wolff, CFADirector, Exploration & Production

(212) [email protected]

Lisa King Jeff Burke, CFAAssociate Analyst Associate Analyst

(212) 891-5047 (212) 891-5052 [email protected] [email protected]

E N E R G Y E Q U I T Y R E S E A R C H

WACHOVIA CAPITAL MARKETS, LLCSeptember 10, 2003

E&P Outlook: Are Investors Ready for $4.00 Gas?

OVERVIEW

WACHOVIA SECURITIES ENERGY EQUITY RESEARCH Pg. 3

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*

* Assumes $22 per barrel oil price

Source: Company data, Bloomberg and Wachovia Capital Markets, LLC

$0.75

$0.85

$0.95

$1.05

$1.15

$1.25

$1.35

$1.45

$1.55

$1.65

$1.75

$2.00 $2.20 $2.40 $2.60 $2.80 $3.00 $3.20 $3.40 $3.60 $3.80 $4.00Implied Natural Gas Price ($/Mcf)

Unit

Asse

t Val

ue ($

/Mcf

e)

Current Median E&P Valuation($1.38/Mcfe, $3.60/Mcf gas)

Historical Peak Median E&P Valuation($1.50/Mcfe, $3.95/Mcf gas)

[In June 2003]


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


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


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

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



Near-Month NYMEX Natural Gas Price ($/MMBtu)

Source: Bloomberg

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

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

Volatility remains a key feature of natural gas markets, albeit at higher absolute price levels


Wachovia Capital Markets, LLC Commodity Price Outlook

2002 2003 2004Forecast Q1 A Q2 A Q3 A Q4 A FY A Q1 A Q2 A Q3 E Q4 E FY E FY EWTI Oil Price ($/bbl) $21.64 $26.29 $28.28 $28.25 $26.17 $34.03 $28.96 $28.00 $28.00 $29.75 $24.00Spot Natural Gas Price ($/MMBtu) $2.33 $3.14 $2.97 $3.97 $3.10 $6.40 $5.35 $4.75 $4.25 $5.20 $4.00

Source: Bloomberg and Wachovia Capital Markets, LLC estimates


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

Source: eVs

54.0

56.0

58.0

60.0

62.0

64.0

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

Deliverability (Bcf/d) Production (Bcf/d)



NYMEX Natural Gas Prices (Monthly Averages)

Source: Bloomberg

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

01/9

5

01/9

6

01/9

7

01/9

8

01/9

9

01/0

0

01/0

1

01/0

2

01/0

3

01/0

4

01/0

5

01/0

6

01/0

7

Actual Historical ($/MMBtu) Futures Forecast ($/MMBtu)

3-Year Average(2004-2006):

$4.87 per MMBtu

Futures curve robust, prompting producers to hedge more aggressively



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)

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

34%

19%

53%

0%

10%

20%

30%

40%

50%

60%

Swaps Collars Total

$3.90Per MMBtu

Average Price

$3.46-$5.13Per MMBtu

Average Price

20%17%

37%

0%

10%

20%

30%

40%

50%

60%

Swaps Collars Total

$25.55Per Barrel Average

Price

$23.24-$27.89Per Barrel Average

Price



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)

Source: Energy Information Administration

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

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

Week Of Refill Season

5-Year Average 2003



Despite large early season deficit, we are now tracking towards more normal storage levels

Total U.S. Working Gas In Storage (Bcf)


0

500

1,000

1,500

2,000

2,500

3,000

3,500

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52Calendar Week

200320005-Yr Avg200120021999



Despite fears in April, we have essentially corrected the gas storage problem

Working Gas In Storage (Tcf) - End Of Period: 2002-2003E Versus Normal

Source: Energy Information Administration, American Gas Association and Wachovia Capital Markets, LLC estimates

2.90

1.42

2.31

3.15

2.42

0.68

1.66

3.04

2.27

0.97

1.72

3.06

2.54

1.19

2.01

2.663.06

2.54

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Q4 2001 Q1 2002 Q2 2002 10/31/02 Q4 2002 Q1 2003 Q2 2003 10/31/03E Q4 2003E2002-2003E 5-Year Average

43% BelowNormal

17% BelowNormal

1% BelowNormal

5% Above Normal



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)


15.0

20.0

25.0

30.0

Jan-

89

Nov-

89

Sep-

90

Jul-9

1

May

-92

Mar

-93

Jan-

94

Nov-

94

Sep-

95

Jul-9

6

May

-97

Mar

-98

Jan-

99

Nov-

99

Sep-

00

Jul-0

1

May

-02

Mar

-03



Natural gas currently at small $0.28 premium to residual fuel


Natural Gas Versus Residual Fuel

Source: Bloomberg

$1.00

$5.00

$9.00

$13.00

$17.00

$21.00

$25.00

1/4/

002/

9/00

3/16

/00

4/20

/00

5/26

/00

7/5/

008/

9/00

9/14

/00

10/1

9/00

11/2

7/00

1/3/

012/

8/01

3/16

/01

4/23

/01

5/29

/01

7/3/

018/

8/01

9/13

/01

10/1

8/01

11/2

6/01

1/3/

022/

8/02

3/18

/02

4/23

/02

5/29

/200

27/

3/02

8/9/

029/

16/0

210

/21/

0211

/25/

021/

3/03

2/10

/03

3/18

/03

4/25

/03

6/3/

037/

10/0

38/

19/0

3

New York City Gate Natural Gas Price ($/MMBtu) Low Sulfur (0.3%) Residual Fuel Price ($/MMBtu)

Current$0.28

MMBtuPremium


The ability to switch has been diminished so it takes longer to correct the imbalance


Industrial Demand And Fuel Switchable Demand (Bcf/d)

Source: eVs

7%

26%34%

0.0

10.0

20.0

30.0

1983 1993 2003E

Total Industrial Demand (Bcf/d) Fuel Switchable Industrial Demand (Bcf/d)


The natural gas rig count has moved up sharply from the trough, but at a more measured rate

Natural Gas Rig Count (rigs)

Source: Baker Hughes, Inc.

0

200

400

600

800

1,000

1,200

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



Despite sharp drilling increase, production has failed to respond

U.S. Average Daily Natural Gas Production (Bcf/d)

Source: Company data and Wachovia Capital Markets, LLC estimates

48.0

49.0

50.0

51.0

52.0

53.0

54.0

55.0

Q19

9

Q29

9

Q39

9

Q49

9

Q10

0

Q20

0

Q30

0

Q40

0

Q10

1

Q20

1

Q30

1

Q40

1

Q10

2

Q20

2

Q30

2

Q40

2E

Q10

3E

Q20

3E

Q30

3E

Q40

3E



Estimated Rigs Needed To Replace Production (number of rigs)

Source: Energy Information Administration and Wachovia Capital Markets, LLC estimates

327370

425379

559 545 519

697

854

0

200

400

600

800

1,000

1993 1994 1995 1996 1997 1998 1999 2000 2001



U.S. Natural Gas Well Efficiency


0.0

0.4

0.8

1.2

1.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 20010.0

0.4

0.8

1.2

1.6Discovery Size Per Well (Bcf) Incremental Production Per Well (MMcf/d)

Secular decline in reserves and production per well


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

WORLD OIL MARKET


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)

Source: Bloomberg

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

01/9

5

01/9

6

01/9

7

01/9

8

01/9

9

01/0

0

01/0

1

01/0

2

01/0

3

01/0

4

01/0

5

01/0

6

Actual Historical ($/bbl) Futures Forecast ($/bbl)

3-Year Average(2004-2006):

$25.66 per barrel


Oil markets remain tight at 52 days supply, below historical 56 day norm

WORLD OIL MARKET

WTI Oil Price Vs. OECD Stock Cover

Source: International Energy Agency and Wachovia Capital Markets, LLC estimates

40.0

45.0

50.0

55.0

60.0

Q49

7

Q19

8

Q29

8

Q39

8

Q49

8

Q19

9

Q29

9

Q39

9

Q49

9

Q10

0

Q20

0

Q30

0

Q40

0

Q10

1

Q20

1

Q30

1

Q40

1

Q10

2

Q20

2

Q30

2

Q40

2

Q10

3

Q20

3

Q30

3E

Q40

3E

Day

s Su

pply

$0.00

$10.00

$20.00

$30.00

$40.00OECD Stock Cover (Days Supply) Stabilization Level WTI Oil Price ($/bbl)

Markets Remain Tight


WORLD OIL MARKET

Oil Production: Iraq

Oil Production: OPEC-10 Plus Iraq

Source (for both charts): International Energy Agency

2.32.5 2.5

1.21.6

1.81.5

1.9

2.5 2.4 2.32.5 2.5

1.4

0.2 0.30.6

0.9

2.8

1.8

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

2002

Feb

2002

Mar

200

2

Apr 2

002

May

200

2

Jun

2002

Jul 2

002

Aug

2002

Sep

2002

Oct

200

2

Nov

2002

Dec

2002

Jan

2003

Feb

2003

Mar

200

3

Apr 2

003

May

200

3

June

200

3

July

2003

Capa

city

MM

b/d

25.3 25.0 25.5 23.8 25.0 25.9 26.5 26.5 24.8 25.7 27.3 27.2 26.2 26.8 26.3 26.7

31.8

25.324.624.7

0.0

10.0

20.0

30.0

40.0

Jan

2002

Feb

2002

Mar

200

2

Apr 2

002

May

200

2

Jun

2002

Jul 2

002

Aug

2002

Sep

2002

Oct

200

2

Nov

2002

Dec

2002

Jan

2003

Feb

2003

Mar

200

3

Apr 2

003

May

200

3

June

200

3

July

2003

Capa

city

MM

b/d

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



Maintenance Capex As A % Of Cash Flow (FY 2002)

Source: Company data (45-company survey)

20%

21%

26%

28%

28%

31%

33%

35%

44%

49%

50%

51%

52%

53%

55%

56%

57%

59%

61%

64%

66%

66%

66%

67%

68%

69%

72%

77%

81%

83%

83%

85%

86%

87%

90%

94%

104%

105%

107%

108%

111%

115%

132%

141%

142%

80%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Average


Incremental cost of bringing new gas to market continues to rise quickly


North American Natural Gas - Total Incremental Cost Structure ($/Mcf)

Source: Company data and Wachovia Capital Markets, LLC

$2.42$2.72

$2.49 $2.47$2.28

$2.71$2.51

$2.76 $2.73$2.93 $3.05

$3.27 $3.26

$0.00

$1.00

$2.00

$3.00

$4.00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003



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)


$2.80$3.14

$2.87 $2.85$2.63

$3.12$2.90

$3.19 $3.15$3.38 $3.52

$3.77 $3.76

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


F&D costs have doubled over the past decade, pressure not easing


North American F&D Costs (Organic, Excluding Revisions)

Source: Company data

$0.78

$0.99$0.89

$1.04$0.97

$1.08 $1.07

$1.28

$0.84

$1.20

$1.39$1.49

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Annual Median ($ per Mcfe) Series Average [$1.08 per Mcfe]


E&P Universe: Operating Costs (Excl. Production Taxes*) Per Boe ($/Mcfe)

* Production taxes are estimated to be 7% of wellhead revenue

Source: Company data

$0.38$0.43

$0.40$0.43

$0.53$0.56

$0.50

$0.56

$0.00

$0.15

$0.30

$0.45

$0.60

$0.75

1997 1998 1999 2000 2001 2002 Q1 2003 Q2 2003

Pressure on operating costs is also significant




Domestic Land Rig Rates ($000's/day)

Domestic Jack-Up Rig Rates ($000's/day)

Source (for both graphs): Company data and Wachovia Capital Markets, LLC

$47.6$51.3

$48.8

$35.5

$24.3 $24.8

$31.8$29.5

$27.5 $28.5

$0.0

$15.0

$30.0

$45.0

$60.0

Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003

$11.4

$13.4$14.5

$12.7

$11.2$10.4 $10.1 $9.8 $9.8

$10.2

$0.0

$4.0

$8.0

$12.0

$16.0

Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003


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)Versus

Last Cycle(Q2 2003 vs

Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2001)

Land Rigs

Driller #1 $11,100 $14,300 $15,600 $12,700 $10,700 $10,300 $9,600 $9,500 $9,800 $10,600Driller #2 $9,929 $10,956 $12,033 $10,704 $9,663 $9,078 $8,601 $8,527 $8,544 $9,240Driller #3 $11,297 $12,815 $14,021 $13,371 $11,914 $10,610 $10,503 $9,991 $9,255 $9,438Driller #4 $13,154 $15,420 $16,386 $14,192 $12,386 $11,501 $11,602 $11,316 $11,433 $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 -29%

Jack-ups

Driller #1 $49,151 $53,061 $50,701 $30,041 $21,481 $22,864 $30,542 $31,379 $27,793 $27,798Driller #2 $58,300 $61,100 $58,000 $45,900 $29,300 $30,600 $42,000 $35,300 $34,700 $39,400Driller #3 $35,400 $39,800 $37,700 $30,600 $22,200 $21,000 $23,000 $21,900 $20,100 $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 -42%

Weighted Average Rig Rates

2/3 Land Drilling, 1/3 Offshore -33%


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)

E&PS: VALUATION


M&A values above E&P trading values

E&PS: VALUATION

E&Ps EV/Boe Versus North American Deal Prices

Includes APA, APC, BR, DVN, EOG and UCL

Source: J.S. Herold, company data and FactSet

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

1/02

/98

3/20

/98

6/05

/98

8/21

/98

11/0

6/98

1/22

/99

4/09

/99

6/25

/99

9/10

/99

11/2

6/99

2/11

/00

4/28

/00

7/14

/00

09/2

9/00

12/1

5/00

03/0

2/01

05/1

8/01

08/0

3/01

10/1

9/01

12/3

1/01

03/1

5/02

05/3

1/02

08/1

6/02

11/0

1/02

01/1

7/03

04/0

4/03

06/2

0/03

Quarterly Average North American M&A Prices ($/boe) EV/BOE (E&Ps)


Lower normalized valuations reflects reinvestment risk and likely lower natural gas prices post-2005

E&PS: VALUATION

E&Ps: Enterprise Value To EBITDA (Median Annual EV To EBITDA)

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

6.8x 6.7x7.4x 7.4x 7.4x

6.3x6.7x

7.2x

4.5x5.2x

6.1x

4.8x5.2x

6.0x

9.2x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x19

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

E

2004

E

2005

E

Annual Median (x) Series Average [6.8x]


Investors are rewarding companies that generate low finding costs

E&PS: VALUATION

Scatterplot: 3-Yr Average F&D Costs Versus Share Price Performance

*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)

-100%

-50%

0%

50%

100%

150%

200%

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.003-Yr Average All-In F&D Cost** ($/Mcf)

Shar

e Pr

ice

Perf

orm

ance

Sin

ce 1

2/31

/00*

(%

)


Low F&D translates to higher valuations

E&PS: VALUATION

Scatterplot: 3-Yr F&D Cost Versus EV/EBITDA

*Share prices as of 8/26/03


0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

$0.50 $1.00 $1.50 $2.00 $2.503-Yr Average F&D Cost ($/boe)

2003

E EV

/EB

ITD

A (x

)

Rockies Players

Gulf Coast Players


Those who can recycle cash into reserves growth are also receiving better multiples

E&PS: VALUATION

Scatterplot: Recycle Ratio Versus EV/EBITDA

Recycle Ratio=3-Year Average Cash Flow Per Boe Divided By 3-Year Average F&D


2.0x

4.0x

6.0x

8.0x

10.0x

0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0xRecycle Ratio (x)

2003

E EV

/EB

ITD

A (x

)

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)


3-Yr Production Per Share CAGR (%) [2000-2002] 3-Yr Reserves Per Share CAGR (%) [1999-2002]

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 (%)

* 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

30.3%

25.4%

13.3%15.1%

11.5%

0.0%

10.0%

20.0%

30.0%

40.0%

E&P#1 E&P#2 E&P#3 E&P#4 E&P#5

CAGR (%) Group Average [19.1%]

+26.2%+31.9%

+8.5%

+83.7%

0.0%

50.0%

100.0%

150.0%

RockiesProducers*

Rest Of E&PUniverse

RockiesProducers*

Rest Of E&PUniverse

$0.38$0.46

$0.53

$1.20 $1.24

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

E&P#4* E&P#2 E&P#1 E&P#5 E&P#3

F&D Cost ($ per Mcfe) Group Average [$0.76 per Mcfe]

27.0%

19.5% 19.2%

8.8%

5.4%

0.0%

10.0%

20.0%

30.0%

40.0%

E&P#1 E&P#2 E&P#4 E&P#3 E&P#5

CAGR (%) Group Average [16.0%]

3-Yr Performance (9/5/00-9/5/03):

1-Yr Performance (9/5/02-9/5/03):

Rockies producers have posted leading growth profiles, low reserve replacement costs



2001 Reserve Adds/(Declines) For Key States (Tcf) 2001 Reserve Adds/(Declines) For Key States (%)

Source: Energy Information Administration Source: Energy Information Administration

2001 Production Increase/(Decrease) For Key States (Tcf) 2001 Production Increase/(Decrease) For Key States (%)


6.0

2.2 2.11.4

0.6 0.3 0.3 0.1

(0.1)

(2.0)

0.0

2.0

4.0

6.0

8.0

Tota

l U.S

.

Wyo

min

g

Col

orad

o

Texa

s

Loui

sian

a

Uta

h

Fede

ral

Offs

hore

New

Mex

ico

Okl

ahom

a

20.1%

13.9%

8.1%6.2%

3.4% 3.4%1.1% 0.5%

-1.0%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Col

orad

o

Wyo

min

g

Uta

h

Loui

sian

a

Texa

s

Tota

l U.S

.

Fede

ral

Offs

hore

New

Mex

ico

Okl

ahom

a

0.2

0.1 0.1

0.1 0.10.0 0.0 0.0

0.6

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Tota

l U.S

.

Wyo

min

g

Fede

ral

Offs

hore

Col

orad

o

Texa

s

Uta

h

Loui

sian

a

New

Mex

ico

Okl

ahom

a

27.4%

20.2%

16.2%

2.9% 2.9% 2.5% 1.9% 1.3% 0.5%0.0%

6.0%

12.0%

18.0%

24.0%

30.0%

36.0%

Uta

h

Wyo

min

g

Col

orad

o

Tota

l U.S

.

Fede

ral

Offs

hore

Loui

sian

a

New

Mex

ico

Texa

s

Okl

ahom

a

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



Gulf Of Mexico (GOM) Natural Gas Reserves (Tcf) Gulf Of Mexico (GOM) Natural Gas Production (Bcf/d)


Mid-Continent (KS And OK) Natural Gas Reserves (Tcf) Mid-Continent (KS And OK) Natural Gas Production (Bcf/d)


12.5 12.7 13.1 12.813.8 14.3

13.6 13.7 13.4 13.8

0.0

3.0

6.0

9.0

12.0

15.0

18.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

27.1 26.527.6 28.2 28.2 28.5

26.926.1

26.9 27.1

10.0

15.0

20.0

25.0

30.0

35.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

7.3 7.5 7.36.9

6.3 6.0 6.1

4.95.4 5.3

0.0

2.0

4.0

6.0

8.0

10.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

23.622.6 22.6 22.0

20.8 20.4 20.018.3 19.0 18.7

10.0

15.0

20.0

25.0

30.0

35.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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%.



Wyoming Supply Growth (MMcf/d)

Source: Robert O. Reid, Ph. D., eVs

0

2,000

4,000

6,000

8,000

Greater GreenRiver Basin

Wind RiverBasin

Powder RiverBasin

Total

1998 2002 2007E



Rockies Gas Balance (Bcf/d)

Source: eVs

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

01-9

9

05-9

9

09-9

9

01-0

0

05-0

0

09-0

0

01-0

1

05-0

1

09-0

1

01-0

2

05-0

2

09-0

2

01-0

3

Export Capacity (Bcf/d) Export Requirements (Bcf/d) Adjusted For Storage (Bcf/d)



Rockies Differential (CIG Versus Henry Hub) ($/MMBtu)

Source: Bloomberg

-$4.00

-$3.00

-$2.00

-$1.00

$0.00

$1.001/

4/00

3/2/

004/

28/0

06/

26/0

08/

23/0

010

/19/

0012

/18/

002/

15/0

14/

16/0

16/

12/0

18/

8/01

10/4

/01

12/3

/01

2/1/

024/

2/02

5/29

/200

27/

26/0

29/

23/0

211

/18/

021/

17/0

33/

18/0

35/

19/0

37/

17/0

3



Source: Tom Brown, Inc.

750Ruby (EPG)

320Advantage (KMI)

Expansion Projects

3002,810

Bison (NBP)

540Cheyenne Plains (2005)

900Kern (Q2 ’03)

ExportCapacity(MMcf/d)

NorthernRockies Pipelines

1803,630

WNG 860Kern 850Trailblazer 355CIG 475Northwest 500TransColorado 410KMI (Pony Express)

West:

East:

Po w der R iverBasin

D J Basin

San Ju anBas in

Parad oxBas in

G reen RiverBasin

Pic ea nceBas in

Wind RiverBas in

Big HornBas in

C ASPER

DENVER



Start-up of Cove Point could add another 300-500 Mcf/d as early as September 2003


U.S. LNG Imports* (MMcf/d)

* Includes Algeria, Australia, Nigeria, Qatar, Trinidad and United Arab Emirates


503556 552

637 636

755

560

454

558

298

178262 263

305353

510

669 705

540

780

563

928

646565

687750

1,0001,089

1,500 1,500

0

250

500

750

1,000

1,250

1,500

1,750

1/01

2/01

3/01

4/01

5/01

6/01

7/01

8/01

9/01

10/0

1

11/0

1

12/0

1

1/02

2/02

3/02

4/02

5/02

6/02

7/02

8/02

9/02

10/0

2

11/0

1

12/0

2

1/03

2/03

3/03

4/03

5/03

E

6/03

E


Cove Point (1,000 MMcf/d)

Everett (440 MMcf/d)

Elba Island (446 MMcf/d)9/2005 Expansion (360 MMcf/d)

Lake Charles (630 MMcf/d)1/2006 Expansion (570 MMcf/d)

U.S. LNG Import Facilities

Other WorldwideSpot Supply

(Including Algeria,Nigeria, Oman, Qatar)

Future SupplyFrom Africa

Trinidad

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)

Nigeria(350 MMcf/d, 20-yr contract beginning 2005)

Egypt Train 2(150 MMcf/d beginning 2006)

Bioko Island - Equatorial Guinea(450 MMcf/d, 15-yr contract beginning 2007)

Future Supply From Africa

LNG Exports





Proposed LNG Terminals/Facilities

Capacity ProjectedName Location Owner (Mcf/d) Start Date

Altamira Mexico Shell 500 2004Rosarito Baja CA/Mexico ConocoPhillips 610 2005Freeport Bahamas El Paso NA 2005Ocean City Bahamas AES 850 2006Freeport Texas Cheniere 1,500 2006Port Pelican Gulf Of Mexico ChevronTexaco 800 2006Saint John New Brunswick Irving Oil 500 2006Long Beach Harbor California Mitsubishi 700 2006Tijuana Baja, Mexico Marathon 1,000 2006Ensenada Baja, Mexico Sempra 1,000 2006Crystal California Crystal Energy 600 2006Main Pass (Offshore) Gulf of Mexico McMoran 1,500 2006XOM/Sabine Pass Louisiana ExxonMobil 1,000 2006Baja Calif./Mexico ChevronTexaco 750 2007Hackberry Louisiana Sempra 1,500 2007Grand Cayman Bahamas Tractabel 832 2007Baja Mexico Shell 1,000 2007Weaver's Cove Massachusetts Poten 400 2007Tractabel Mexico Mexico Tractabel NA 2007Access NE Energy Nova Scotia Access NE Energy 500 2007Cabrillo Port California- Offshore BHP 800 2008Tampa Florida BP 550 NASabine Pass Texas Cheniere 2,000 NACorpus Christi Texas Cheniere 2,000 NALiberty Louisiana HNG Storage NA NAHumboldt Bay California Calpine NA NASomerset Massachusetts Somerset LNG 400 NACorpus Christi Texas Exxon-Mobil 1,000 NA

Total 22,292

Source: Energy Information Administration and Wachovia Capital Markets, LLC


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


E N E R G Y E Q U I T Y R E S E A R C H

WACHOVIA CAPITAL MARKETS, LLC

Additional Information Available Upon Request

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Documents

Jonathan D. Wolff, CFA Director, Exploration & Production (212) 891-5064 [email protected] Lisa King Jeff Burke, CFA Associate Analyst (212) 891-5047