Summary and Conclusion. Oil Demand Grows. Oil Production Restrained. Oil Inventories Depleted. Spare Capacity Slim

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1 Evaluating and Acquiring Oil & Gas Companies Summary and Conclusion Kurt H. Wulff McDep Associates New England Energy Growth Conference Prout s Neck, Maine September 25, 2 Oil and gas commodity prices may be stronger and more volatile than commonly expected Petroleum cycle repeating Valuation increasingly sophisticated in the quantitative sense Smart people can still make dumb decisions Sound judgment invaluable Oil Demand Grows Oil Production Restrained million barrels per day Developing Countries Pacific Europe North America Source: Salomon Smith Barney million barrels per day Producing Countries Developing Countries Pacific Europe North America Source: Source: Salomon Salomon Smith Smith Barney Barney Spare Capacity Slim Oil Inventories Depleted Source: Salomon Smith Barney

2 Oil Price Highest Since Last Crisis 24 Oil Only $23 Monthly World Oil Prices, Dollars per Barrel Source: Telescan Sources: EIA, Short-Term Energy Outlook database, August 2. Vulnerable to Shortages Consumer Can Sustain Some Higher Price Spot Oil Prices, New York Harbor.8 cents per gallon gasoline heating oil crude oil 2/3/99 /3/ 2/29/ 3/3/ 4/3/ 5/3/ 6/3/ 7/3/ 8/3/ Natural Gas Demand Overcomes Weather Electric Powers U.S. Natural Gas Demand New economy needs electricity Thermal efficiency breakthrough in electrical generation Power producers long electricity and short natural gas (El Paso Energy) 2

3 U.S. Natural Gas Production Stalls Natural Gas Spare Capacity Low (from presentation by Anadarko Petroleum) Natural Gas Inventories Low Natural Gas Price Bumping Oil Price Ceiling New York Mercantile Exchange Futures, 9/5/ Cash Historical Source: American Gas Association, Natural Gas Intelligence Dollars per million btu W Tex Intermediate Oil/6 Henry Hub Natural Gas Dec-98 Jun-99 Dec-99 Jun- Dec- Jun- Dec- Jun-2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Consumer Can Sustain Some Higher Price Cleaner fuel Alternatives not competitive for electrical generation Old plants can run on residual oil that costs $.8 per gallon or $5.5 per million btu New plants can run on distillate oil that costs $ per gallon or $7 per million btu Economic Conclusion Oil and gas price may be stronger than expected in the coming decade 3

4 Oil and Gas Through the Decades 96s 96s: Growth 97s: Shortage 98s: Balance 99s: Growth 2s: Energy demand strong Monetary inflation subdued Economic boom continues Integrated oil companies do well North American oil and gas producers depressed 97s 98s Shortages develop Oil producing countries assert control Inflation picks up North American producers soar in resource value and stock market value Demand/supply balance restored Inflation subsides Bull market resumes for stocks Integrated oil companies meet takeover pressure Overly aggressive independent producers suffer 96s 99s 97s 2s? Energy demand strong Monetary inflation subdued Economic boom continues Integrated oil companies do well North American oil and gas producers depressed Shortages develop Oil producing countries assert control Inflation picks up North American producers soar in resource value and stock market value 4

5 What Is Different? Valuation Today Cash Flow The world is at relative peace Better government The Second Industrial Revolution is here Resource base more exploited Enterprise Value divided by next four quarters earnings before interest, tax, etc. Wellhead Price Margin Volume Ebitda EV/ ($/mcf) (%) ($/mcf) (bcf) ($mm) Ebitda Dorchester Hugoton, Ltd Hugoton RT (42.5%) Cross Timbers Royalty Trust San Juan Basin Royalty Trust Burlington Resources , Source: Valuation Today Reserves Present value of future cash flow Volume Cap Cash Present Basic Enhanced Total Price Ex Flow Value (bcf) (bcf) (bcf) ($/mcf) ($mm) ($mm) ($mm) Valuation Today - Debt Adjustment Market Cap and Debt to Present Value (McDep) Price Net ($/sh) Market Present 8-Sep Shares Cap Debt Value McDep Symbol 2 (mm) ($mm) ($mm) ($/sh) Ratio Dorchester Hugoton, Ltd. DHULZ Hugoton RT (42.5%) HGT Cross Timbers Royalty Trust CRT Burlington Resources BR ,5 3, San Juan Basin Royalty Trust SJT Source: Valuation Today - Frequent Updates Valuation Trends Projected Distribution 3. Interest and inflation rate Commodity price Volumes Costs Stock prices Next Four Quarters ($/unit) /2/ 2/2/ 3/2/ 4/2/ 5/2/ 6/2/ 7/2/ 8/2/ 5

6 Valuation Trends Present Value Valuation Trends Stock Price dollars per unit dollars/unit /2/ 2/2/ 3/2/ 4/2/ 5/2/ 6/2/ 7/2/ 8/2/ 6. /2/ 2/2/ 3/2/ 4/2/ 5/2/ 6/2/ 7/2/ 8/2/ Valuation Trends McDep Ratio Valuation Today Qualitative Factors.2 McDep Ratio Assets Management Long-Term Credibility.4 /28/ 2/28/ 3/28/ 4/28/ 5/28/ 6/28/ 7/28/ 8/28/ Commitment Some Assets Beat Management in U.S. Independent Oil & Gas Long-term Credibility Total Return Sabine Royalty Trust San Juan Basin Royalty Trust Apache Corp. Permian Basin Royalty Trust Anadarko Petroleum Index of 2 Stocks Percent Per Year Some have it Apache Anadarko Devon Some don t Pennzoil Union Pacific Resources Burlington Resources 6

7 Commitment Annoying moments in the life of an investor Hear management tell how great their company is at a high stock price Then at a later time hear the same management say what a good deal it is to sell company at a lower stock price Non-performers buy high, sell low Who Has Not Performed: Pennzoil Refused $84 a share offered by Union Pacific Resources in 998. Spun off PennzEnergy in 999. Two pieces priced under $ each in the stock market at low point. Sold PennzEnergy to Devon Energy in 2 for stock now worth about $25. Who Has Not Performed: Union Pacific Resources Who Has Not Performed: Burlington Resources Choice Land Grant assets spun off from Union Pacific Railroad in 997 at about $25 a share. Spurned by Pennzoil, bought Norcen Energy for cash in 998. High financial leverage drove stock to single digits in 999. Sold to Anadarko in 2 for stock now worth about $23. Same producing properties as San Juan Basin Royalty Trust. Diversified to Gulf of Mexico without success. Acquired Louisiana Land; diluted stock. Acquired Poco; Canadians dumped BR stock. Sold half of 2 gas in 999 at low price. Burlington Resources (BR)/ San Juan Basin RT (SJT) Recap Current demand/supply balance tight Oil and gas faces several years of better returns similar to the 97s There will still be volatility Some management have credibility while others destroy value Skillful valuation enhances performance 7