Oil and Gas Oil Services chapter. Global Gambits The Right Moves for Right Now. See jpmorgansavant.com for gobal sector valuation tools

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1 December 8, 2005 Global Gambits The Right Moves for Right Now Oil and Gas Oil Services chapter See jpmorgansavant.com for gobal sector valuation tools The following is a chapter from Global Gambits The Right Moves for Right Now, dated December 8, This chapter is presented for convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is available on MorganMarkets.

2 Oil and Gas Oil Services & Equipment Unprecedented Visibility Global Sector Coordinator Michael K. LaMotte (1-214) J.P. Morgan Securities Inc. Full sector coverage details on page 155 Key Drivers We believe unconventional gas development is reshaping the North American services market. The visibility of demand for rigs and services in the US land market is unprecedented, and evidenced by: (1) record E&P cash flow; (2) superior economics of tight gas, shale gas, and coalbedmethane; and (3) newbuild commitments by operators that now stretch up to three years. Highly mobile rigs and fracturing services provide the highest value add in unconventional plays. Internationally, the Middle East should be the main engine of upstream spending growth in We expect drilling and completion expenditures in the Middle East to grow almost 50% next year, led by the 100% increase in Saudi Arabia s rig count. Importantly, one-third to half of the incremental expenditures in the kingdom is earmarked for exploration and/or natural gas both of which are highly service-intensive. Exploration is accelerating, and deepwater is benefitting disproportionately. The combination of record cash flows (which tend to loosen discretionary budgets), and limited access to new reserves in the Middle East and Russia, are forcing the majors and larger independents to look for reserves in known basins. Of all these, deepwater as the least mature still holds the most promise for discoveries of meaningful sizes. Labor is the governor of growth this time, not capital or equipment, in our view. Though some investors are worried about the pace of investment in new rigs and equipment, growth in services is being tempered by the ability to train new crews. In our view, this is one of the best arguments for a more protracted cycle. Our Non-Consensus Views We like the combination of growth and returns. Investors are still nervous about increased capital spending by oil services companies, and as a result, some management teams are concerned their stocks will be punished if they try to grow. However, over-emphasizing returns is almost as bad as ignoring them, in our view; rather, we would argue that longerterm value creation is achieved when a company strikes a balance between growth and returns. In our view, companies that find that balance (e.g., SLB, NE, BJS, and NBR) will outperform in We believe the size of the Middle East opportunity is still under-appreciated. Drilling and completion expenditures in Saudi Arabia alone are expected to be in excess of US$7 billion next year, which is about where spending was in the whole of the North Sea in 05. Although rig count growth is quite visible (because of the oft-quoted statistic of Saudi s rig count doubling), few investors realize that the services content per rig should increase by almost 50% due to the combination of better services pricing and greater technology content. Consequently, we do not believe this projected growth is in the stocks. Cash is becoming a significant factor in driller valuations. Investors are increasingly concerned about the per rig value of drilling contractors (offshore and land), as the enterprise value of most now exceeds estimated replacement costs. However, we believe that replacement cost analysis cannot, and does not, capture the excess cash being generated by long-term contracts priced at day rates that generate an excess return, or the going concern value (the labor, HSE track record, etc.) of the company. On a cash basis, we still see value in select drillers. 153

3 Oil Services & Equipment: Top Picks Company Key Financials Rationale and Catalysts Schlumberger Ltd. Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: SLB US / SLB E 2006E Exchange: NYSE P/E (Calendar) Price (Local): US$ E 2006E Mkt Cap (US$): 57.5 bn Although SLB is the largest company in the sector, we expect it to be one of the fastest top-line growers in 2006 due to the combination of: (1) continued strong pricing in the North American pumping market; (2) its dominant market share and technology leadership in the Middle East; and (3) its increased penetration of emerging markets like Russia and China. Incremental margins should continue to be greater than expected due to: (1) strength in pricing; (2) improved asset turnover in high-growth markets like the Middle East; (3) the more full deployment of the greatest technology rollout in more than a decade; and (4) increased contribution from pay for performance" contracts, whereby SLB earns bonuses for delivering wells faster/more production, and/or greater reserves. Analyst: Michael K. LaMotte EV/EBITDA (Calendar) Although the stock looks relatively more expensive on 2006E, it is in line with the group on 2007E valuation metrics Phone: (1-214) E 2006E and well below its cash flow-driven valuation. We believe increased focus on the company s significant free cash flow michael.lamotte@jpmorgan.com generation will allow the stock to continue to outperform. Noble Corp. Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: NE US / NE E 2006E Exchange: NYSE P/E (Calendar) Price (Local): US$ E 2006E Mkt Cap (US$): 10.2 bn NE strikes the right balance between relative upside to consensus estimates and relative valuation, in our view. Upside to 2007E EPS (we are 12% above the Street) should come from higher dayrates on its Mexican and Qatari jackups, as well as its Gulf of Mexico floaters. And at 6.1x 2007E EBITDA, NE trades at only a modest premium to the peer average multiple of 5.7x times. We believe the company strikes the right balance between returns and growth. Whereas NE is already well known for its industry-leading ROIC, few investors have realized that it is providing more asset growth (without compromising returns) than any other driller with the construction of two jackups and two deepwater floaters. In addition, we believe NE will soon announce the upgrade of its two Bingo hulls, effectively extending asset growth into '09. Analyst: Michael K. LaMotte EV/EBITDA (Calendar) Because of its asset growth, NE s capex is expected to be 50% higher than the peer average. However, its Phone: (1-214) E 2006E price/excess cash ratio of 19% is only modestly lower than the peer average of 22%, which means that investors have michael.lamotte@jpmorgan.com not yet priced in the growth these assets should provide. Technip Recommendation: Overweight Fiscal EPS (Local): Year-end December Ticker: TEC FP / TECF.PA E 2006E Ticker ADR: TKP Exchange: PSE P/E (Calendar) Price (Local): E 2006E Mkt Cap (US$): 5.5 bn Analyst: Gordon M. Gray EV/EBITDA (Calendar) Phone: (44-20) E 2006E gordon.m.gray@jpmorgan.com Source: Company data, Datastream, JPMorgan estimates, JPMorgan SaVanT. Prices as of November 22, Technip remains our top pick among the European oil services stocks. The company has a strong exposure to the growth and margin improvement in deepwater through its subsea and facilities businesses. However, revenue growth should be even stronger from its onshore businesses. Key areas of competitive advantage here are: (1) its joint venture with Chiyoda, which has brought recent world-scale wins in LNG construction; (2) good exposure to the burgeoning Canadian oil sands business through its contract win on CNQ's Horizon upgrader; and (3) superior exposure to the sharp rise in Middle East spending, not just in LNG but also in gas gathering, steamcracker construction, and potentially gas-to-liquids The surge in new orders has already taken Technip s backlog to 11 billion by end-3q05, more than 60% higher than at year-end 2004 ( 6.8 billion). We see 11% p.a. growth in revenues over the period , and 90% growth in income over the period. This strength of growth should take relative valuations to attractive levels by , with a 2007E EV/CF of around 9x. 154

4 JPMorgan Global Oil and Gas Team Research Equity Research Credit Research Exploration and Production Integrated Oils Downstream Gas Oil Services Gordon Gray Shannon Nome, Coordinator Gordon Gray, Coordinator Michael LaMotte, Coordinator Global Sector Americas Americas Americas Americas Americas Coordinator United States Shannon Nome Philips Johnston, CFA Scott Arndt Rodney C. Clayton Latin America Bidzina Bejuashvili United States Jennifer C. Rowland Daniel Vetter Katherine Lucas United States Michael LaMotte Kevin Pollard David Smith Latin America Bidzina Bejuashvili United States Latin America EMEA EMEA EMEA EMEA Pan Europe Gordon Gray Mark Hume Lee Platek Tao Ly Pan Europe Gordon Gray Mark Hume Lee Platek Tao Ly CEEMEA CEEMEA Bidzina Bejuashvili CEEMEA Bidzina Bejuashvili James C. Gibbons (HG/HY- Energy, Natural Gas Pipelines) Robin Levine (HG-Energy, Natural Gas Pipelines) Xin Liu (HY-Energy) William W Perry Douglas Krehbiel Asia Pacific Asia Pacific Asia Pacific Asia Pacific Asia Pacific Pan Asia Pacific Pan Asia Pacific Pan Asia Pacific China Frank Li Australia, New Zealand Allison Bellows Tiernan Australia China Mark Greenwood Ryan Martyn China HongKong Thomas Wong, CFA China Singapore Winnifred Heap Ex-Japan Asia Allison Bellows Tiernan Japan Rie Kajiyama Indonesia Ami Tantri South Korea Apurva Choudhary Thailand Sukit Chawalitakul Thailand Sukit Chawalitakul See page 193 for team member contact details. Thailand Sukit Chawalitakul 155

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