Oil and Gas Investment to 2010 By Kurt H. Wulff Boston, Massachusetts June 27, 2006
Summary and Recommendation Invest in oil and gas for the long-term Vision of $150 a barrel in 2010 Six-year oil futures at $70 in steady uptrend Stocks priced at about $47 a barrel Opportunities in near-term divergence Natural gas futures at wide gap to oil Two-thirds of stocks off upward trend Corporations buying on pullback
Outline Summary and recommendation Demand Energy geographically Oil and gas geographically Coal geographically Energy by fuel Supply Reserves Points of view Price Oil 1965-2005 Natural gas 1965-2005 Oil to 2010 Oil futures curves Oil futures momentum Divergence Natural gas Oil price lower in stocks Stock price momentum Deals McDep portfolio Mega Cap Producer/Refiner Large Independent Small Independent Income Natural gas pure play Conclusion
Asia Accelerates Energy Demand Global Energy Demand Geographically 80 Million Barrels Oil Equivalent Daily 70 60 50 40 30 20 10 Asia Pacific Europe & Eurasia North America Other Source: BP Statistical Review of World Energy 2006 0 1965 1970 1975 1980 1985 1990 1995 2000 2005
Asia Oil & Gas Share Low Global Oil and Gas Demand Geographically Million Barrels Oil Equivalent Daily 50 45 40 35 30 25 20 15 10 5 Asia Pacific Europe & Eurasia North America Other Source: BP Statistical Review of World Energy 2006 0 1965 1970 1975 1980 1985 1990 1995 2000 2005
Asia Coal Share Too High Coal Share Geographically 70 Coal Percent of Primary Energy 60 50 40 30 20 10 Asia Pacific Europe & Eurasia North America Source: BP Statistical Review of Source: BP Statistical World Review of World Energy 2006 Energy 2006 0 1965 1970 1975 1980 1985 1990 1995 2000 2005
Asia Coal Boom is Unsatisfied Oil and Gas Demand Global Energy Demand by Fuel, 1965-2005 90 Million Barrels Oil Equivalent Daily 80 70 60 50 40 30 20 10 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 Oil Coal Natural Gas Nuclear/Hydro Source: BP Statistical Review of World Source: BP Energy 2006 Statistical Review of World Energy 2006
World Oil and Gas Reserves Billion Barrels Equivalent Natural Gas Oil Total 400 350 300 250 200 150 100 50 0 Russia Saudi Arabia Iran Qatar Iraq
Points of View Peak Oil Twilight in the Desert ExxonMobil Cambridge Energy Bin Laden Chavez Putin Ukraine Bernanke
Oil Price History Pre-1970 price base Crude Oil Price, 1965-1985 $2 International 60 $3 U.S. 50 Pre-2000 price base 40 $20 International $20 U.S. 2010 price vision Dollars Per Barrel 30 20 $150 10 7.5 times $20 base 0 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
Oil Price Overlay Overlay 1965 to 1980 onto 1995 to 2010 400 1970s Scenarios to 2010 350 1995 to 2010 Not 10 Times 1965-1980 1995 to 2010 More than 4 times 1965-1980 Dollars Per Barrel 300 250 200 150 100 10 times 1965-1980 Actual 4 times 1965-1980 CPI Up 4 Times in 30 yrs 50 0 1995 2000 2005 2010
80 70 60 50 40 30 20 10 0 Oil Price in Futures Light, Sweet Crude Oil Futures Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-03 6/22/2006 6/27/2005 6/28/2004 6/25/2003 6/27/2002 Aug-02 Dollars Per Barrel
Oil Futures Momentum Positive Six-Year Commodity Price Meter Indicator of Resource Value Trend Oil 40 week North American Gas 40 wk 12/29/03 3/29/04 6/28/04 9/27/04 12/27/04 3/28/05 6/27/05 9/26/05 12/23/05 3/27/06 80 70 60 50 40 30 20 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Dollars per Barrel Dollars per Million Btu
Natural Gas Diverges Oil/Natural Gas Futures Ratio 12/28/2001 4/28/2002 8/28/2002 12/28/2002 4/28/2003 8/28/2003 12/28/2003 4/28/2004 8/28/2004 12/28/2004 4/28/2005 8/28/2005 12/28/2005 4/28/2006 Crude Oil Price/Natural Gas Price, 1965-1985 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 4.00 5.00 6.00 7.00 8.00 Million Btus Per Barrel 4 8 12 16 20 24 28 32 36 40 Source: McDep, BP 2006, Energy Information Administration 9.00 Source: McDep, New York Mercantile Exchange 10.00 Six-Year One-Year Million Btus Per Barrel
Oil Price in Stocks Diverges Estimate Present Value at long-term real oil price of $60 a barrel; natural gas, $10 a mmbtu; oil refining, $10 a barrel crack; 7% a year real return. Median McDep Ratio (Market Cap and Debt to Present Value) about 0.78 Stocks priced for $47 oil (60 times 0.78)
Stock Price Momentum Mixed Ratio to Ratio to 200 Day 52-W eek Average High Gazprom OGZPY 1.16 0.72 Canadian Oil Sands Trust COSW F 1.12 0.84 PetroChina PTR 1.08 0.82 Encana ECA 1.05 0.84 Lukoil LUKOY 1.01 0.73 Chevron CVX 0.99 0.89 XTO Energy XTO 0.98 0.85 C o n o co P h illip s C O P 0.9 7 0.8 4 Anadarko APA 0.92 0.79 Devon Energy DVN 0.91 0.79 San Juan Basin Royalty Trust SJT 0.88 0.71 Encore Acquisition EAC 0.78 0.63 Source: Bloom berg as of June 25, 2006
Divergence Sets Up Deals ConocoPhillips/Burlington Resources 4.6 times cash flow, $36 billion Shell Canada/Blackrock 35 times cash flow, $2 billion Energy Partners/Stone Energy 3 times cash flow, $2 billion Anadarko/Kerr-McGee/Western Gas 8 times cash flow, $21 billion 9 times cash flow, $5 billion
Mega Cap Energy Companies Portfolio Equity Weight McDep Symbol (%) Ratio Mega Cap BP plc BP 2.8 0.86 Total S.A. TOT 2.8 0.81 Royal Dutch Shell plc RDS-A 3.0 0.78 Exxon Mobil Corporation XOM 3.2 0.76 ConocoPhillips COP 4.7 0.72 Chevron Corporation CVX 5.7 0.70 Gazprom OGZPY 9.8 0.70
Producer/Refiners Portfolio Equity Weight McDep Symbol (%) Ratio Producer/Refiners - Large Cap and Mid Cap Petro-Canada PCZ 1.4 0.92 Marathon Oil Corporation MRO 1.4 0.91 Imperial Oil Limited IMO 1.5 0.91 Norsk Hydro ASA NHY 1.4 0.86 Suncor Energy SU 1.5 0.79 PetroChina Company Ltd. PTR 3.2 0.73 Lukoil Oil Company LUKOY 6.6 0.65
Large Independent Producers Portfolio Equity Weight McDep Symbol (%) Ratio Independent Natural Gas and Oil - Large Cap and Mid Ca Encana Corporation ECA 2.9 0.93 XTO Energy Inc. XTO 2.7 0.82 CNOOC Limited CEO 3.4 0.78 Anadarko Petroleum Corp. APC 1.4 0.77 Occidental Petroleum Corp. OXY 2.9 0.73 EOG Resources EOG 6.4 0.71 Devon Energy Corporation DVN 5.5 0.60
Small Independent Producers Portfolio Equity Weight McDep Symbol (%) Ratio Independent Natural Gas and Oil - Small Cap Berry Petroleum Company BRY 1.3 0.81 Energy Partners Ltd. EPL 0.7 0.79 Cimarex Energy Company XEC 2.9 0.61 Encore Acquisition Company EAC 2.3 0.56
Energy Income Stocks Portfolio Equity Weight McDep Symbol (%) Ratio Income Penn West Energy Trust (US$) PWE 6.0 1.07 San Juan Basin Royalty Trust SJT 6.8 0.92 Canadian Oil Sands Trust (US$) COSWF 6.0 0.84 Portfolio Composite (Five Groups) 100 0.75
Natural Gas Pure Play Commodity Price and San Juan Basin Stock Market Price (indexed to oil at $38 a barrel in 1980) 250 200 Dollars Per Barrel 150 100 50 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 SJT/Supron Natural Gas Oil
Conclusion Oil cycle is long Peak price appears years away Volatility renews opportunity Sound, long-term oil and gas investments likely to be rewarding, in our opinion