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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
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0
100
200
300
400
500
600
700
800
Oil Price
Rig Count
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0
100
200
300
400
500
600
700
800
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
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0
200
400
600
800
1000
1200
Gas Price
Rig Count
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
0
200
400
600
800
1000
1200
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
$5.00
$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??”
0
200
400
600
800
1000
1200
1400
1989
1992
1995
1998
2001
2004
0
200
400
600
800
1000
1200
1400
1989
1992
1995
1998
2001
2004
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