u.s. independent oil & gas sector: 2010 valuation trends

U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production. Drawing from a sample of over 85 publicly traded U.S. based E&P firms, profiles were developed to gauge and assess trends in the sector between 2007 and 2009. The paper first establishes the over-arching trends in the U.S. E&P sector, discusses the key valuation drivers and then applies the analysis to establish a framework to estimate key valuation metrics for 2010.

2010

Marcus Wolters

1/1/2010

DISCLAIMER

The information and opinions in this report were prepared by Marcus

Wolters. The information herein is believed to be accurate and reliable

and has been obtained exclusively from public sources believed to be

reliable. The author makes no representation as to the accuracy or

completeness of such information.

The material contained in this report is for information purposes only

and is not an offer or solicitation with respect to the sale or purchase of

any security.

© 2009 Marcus Wolters. All Rights Reserved

U.S. Based E&P Companies

Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.

Key Sector Trends: Q1 ’07 through Q3 ‘09 ....................................................................................................................................... 3

Market Capitalization Peaked in mid-2008 .................................................................................................................................. 3

Long-term Debt Grew Through 2008 ........................................................................................................................................... 3

Average Price Received Collapsed Rapidly Post Q2 ‘08 ............................................................................................................... 3

Reserves Re-valued at Lower Benchmark Prices at YE 2008 ........................................................................................................ 4

Market Cap and Enterprise Value Trend by Sub-Groups .................................................................................................................. 4

Production Groups ....................................................................................................................................................................... 4

Commodity Focus ........................................................................................................................................................................ 4

Enterprise Value, Market Cap and Book Capitalization ............................................................................................................... 5

Enterprise Value to EBITDA ............................................................................................................................................................... 5

U.S. E&P Sector Overview ............................................................................................................................................................ 5

Key Valuation Considerations for 2010 ........................................................................................................................................ 5

Revenue Structure .................................................................................................................................................................. 5

Debt versus Reserves .............................................................................................................................................................. 5

Return Measures ..................................................................................................................................................................... 6

Drilling and Production ........................................................................................................................................................... 6

Benchmark Commodity Price Drivers ..................................................................................................................................... 6

WTI versus Henry Hub ............................................................................................................................................................. 6

New SEC Reserve Reporting Standards ................................................................................................................................... 7

Production Group Comparison of EV to EBITDA .......................................................................................................................... 7

Market Capitalization to Production ................................................................................................................................................. 8

U.S. E&P Sector Overview ............................................................................................................................................................ 8

Market Cap and Production Size .................................................................................................................................................. 8

Why Fundamentals Matter ............................................................................................................................................................... 9

What are the Objectives of Fundamentals Analysis? ................................................................................................................... 9

Mitigate the Price Effect and Focus on the Drivers ...................................................................................................................... 9

Identify the Key Drivers ................................................................................................................................................................ 9

Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals .............................................................. 10

Translation into Other Metrics................................................................................................................................................... 10

How Fundamental E&P Drivers Translate into Market Valuations ............................................................................................ 11

Market Cap versus Daily Production ..................................................................................................................................... 11

Enterprise Value to EBITDA ................................................................................................................................................... 11


U.S. Based E&P Companies

Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.

Price to CFPS (Trailing Twelve Months) ................................................................................................................................. 11

Two Scenarios for 2010 .................................................................................................................................................................. 12

Assessing the Value of Market Cap to Production ..................................................................................................................... 12

2010 Prices Rise, Cost Pressures ................................................................................................................................................ 12

2010 Prices Weaken, Costs Ease ................................................................................................................................................ 12

2010 Valuation Ranges - Production Groupings. ....................................................................................................................... 13

Final Comments ......................................................................................................................................................................... 13

Data Summary ................................................................................................................................................................................ 14

Data Collection and Management ............................................................................................................................................. 14

Companies Surveyed .................................................................................................................................................................. 15

Financial and Production Summary, Q1 ’07 – Q3 ‘09 ................................................................................................................. 16

Financial Recap...................................................................................................................................................................... 16

Production and Average Price Recap .................................................................................................................................... 16

Brief Glossary ............................................................................................................................................................................. 17

Author’s Bio .................................................................................................................................................................................... 18

Notes .............................................................................................................................................................................................. 19


$46$49 $49

$59$62

$74$72

$57

$36$39 $41

$30

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$70

$80

Q1

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Q3

'09

U.S. E&P Sector Average Price Received

($US per BOE)

Inlcudes realized hedging gains/losses

$0

$20

$40

$60

$80

$100

$120

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U.S. E&P Sector Long-term Debt

($US Billions)

$0

$100

$200

$300

$400

$500

$600

Q1

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U.S. E&P Sector

Market Cap and Enterprise Value($US Billions)

-$285 Billion+$250 Billion

Market Cap

Net Debt

U.S. Based E&P Companies Valuation Trends 2007 – 2009: A Brief Assessment of Market Cap, EV, EBITDA and Production.

The behavior in crude oil and natural gas prices from the start of 2007 through 2009 provided a unique opportunity to see not

only how the markets responded during the economic turmoil but also to assess the impact on the E&P firm and provide a

landscape for 2010. From the events of 2008 we were reminded the importance of placing E&P fundamentals firmly ahead of

commodity price projections in assessing the future health of the sector. The high commodity price environment in the first

half 2008 brought with it a whole new set of profitability and growth expectations and those optimistic outlooks needed to be

looked at in more realistic terms since then.

Key Sector Trends: Q1 ’07 through Q3 ‘09

Market Capitalization Peaked in mid-2008

Nothing particularly good came from the rapid rise in commodity

prices through the middle of 2008. Driven by the toxic combination of

the credit crisis, the global economic downturn and the collapse of a

fundamentally mispriced crude oil and natural gas market, the

aggregate market value of the U.S. E&P sector had cratered by the

spring of 2009i. By Q1 ’09, in the span of nine months, $300 Billion of

market capitalization ($285 Billion in Enterprise Value) was carved out

of the sector, more than any value created since the start of 2007.

Long-term Debt Grew Through 2008

The E&P sector added over $30 Billion in debt before the economic

crisis took over in late 2008. The long-term debt level has hit a

plateau since then. E&P firms could have used the high cash flow

period to pay down some debt and set themselves up for a more

sober pricing environment with a healthier capital structure – but now

some are ill-positioned with weaker profiles and operating in a low

price environment. Due to the combination of frozen credit and the

E&P sector leery of adding debt in the low-price period, many firms

kept their exploration and development programs in-line with cash

flow throughout 2009. Appetite for credit, from both sides of

equation, has recovered through 2009 - for the E&P sector in general,

increasing commodity prices through 2009 has been the incentive.

Average Price Received Collapsed Rapidly Post Q2 ‘08

The U.S. E&P sector is heavily weighted towards natural gas

production – roughly two-thirds of production is natural gas. The

average price received by the E&P firm ($US per BOE) was cut in half

by Q2 ’09, and is recovering. But because of the high gas weighting,

this needs to be examined a bit closer. While crude oil prices plunged

mid-year 2008 and since recovered somewhat, natural gas prices have

not and the historical relationship between the two is broken. One of

the reasons is that natural gas supply dynamics have changed

dramatically over the past 2-3 years with the advent of

unconventional resource development.


-50%

0%

50%

100%

150%

200%

250%

Q1

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Q2

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Q3

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Q4

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Q1

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U.S. E&P Sector Market Cap Growth/Decline since January 2007

Oil Focus versus Gas Focus

Oil Focus

Gas Focus

Reserves Re-valued at Lower Benchmark Prices at YE 2008

At the end of 2008, E&P companies revalued their proved reserves

(for SEC reporting) using much lower commodity prices than in 2007,

the result being a significant reduction in the PV of reserves and

record impairment charges on the income statement. Based on our

sample of 90 U.S.–based E&P firms, the sector’s SEC PV10

Standardized Measure was reduced in aggregate by over $125 Billion

between ’07 and ‘08. And notwithstanding the issues surrounding the

use of the SEC PV10 as it is determined today and the inherent

conservatism in evaluating proved reserves, this was a strong

indicator that the underlying asset value had fundamentally changed.

At the same time, the sector took reserve and asset impairment

charges of over $40 Billion in 2008, which dwarfed any previous years’

impairment charges.

Market Cap and Enterprise Value Trend by Sub-Groups

Production Groups

To make better sense of the U.S. E&P landscape, the sector is split (or stratified) into production sub-groupsii, and this helps

show the characteristics of asset size - an important function in E&P analysis. Not one single E&P in our universe avoided the

affects from the downturn in product prices. As the table below suggests, larger producers (Intermediate and up) are back to

where they started in 2007. The average market value of Junior producers is far less now than what it was at the start of 2007.

Table 1: Production profile and Market Cap by Production Group

Production Group E&P

Count in

Analysis

Avg Daily

Production

(MBOE)

% Gas Average

Market Cap

Q1 ‘07

Average

Market Cap

Q2 ‘08

Average

Market Cap

Q3 ‘09

Junior 40 4.1 65% $323.0 Million $598.0 $259.0

Intermediate 34 34.4 68% $1.9 Billion $4.4 $2.4

Senior 7 108.0 65% $5.2 Billion $10.3 $6.5

Super Independent 6 477.0 67% $21.2 Billion $39.9 $25.0

Commodity Focus

Isolating crude producers and comparing them with gas producers

provides another aspect into how commodity price patterns affect

market value. This is particularly useful in sensitivity analysis under

various price environments.iii

The figure to the right compares 10 E&P’s with a high crude

production focus (75% of production, on average) versus 10 E&P’s

with a high gas focus (95% of production). The market value of oil-

focused E&P’s doubled in eighteen months only to lose that and more

in the next seven.

5.3 4.8

5.6

7.4

3.6

4.9

2.0

20

02

20

03

20

04

20

05

20

06

20

07

20

08

U.S. E&P Sector SEC PV10 Value per BOE Reserves

Proved Developed Reserves


0.00

1.00

2.00

3.00

4.00

5.00

6.00

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U.S. E&P Sector Enterprise Value as a % of Market Capitalization

Junior

Intermediate

Senior Super Independent

25%

30%

35%

40%

45%

50%

55%

60%

65%

Q1

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U.S. E&P Sector Debt to Capitalization (%) by Production Group

Junior

Intermediate

Senior

Super Independent

Enterprise Value, Market Cap and Book Capitalization

An intuitive way to see how Enterprise Value diverges from Market

Cap is to divide one into the other: the EV to MC measure, which

averaged 1.3 from Q1 ’07 to Q2 ’08, grew to 2.8 by Q2 ’09, implying

that debt comprised a much larger share of total Enterprise Value.

The figure to the right shows that as the production size increased,

market cap was less and less affected.

But it is no coincidence smaller producers experienced the largest divergence. It can be shown historically that the variance in share price risk/return of smaller producers is much wider than larger production groups to begin with. And since 2007, smaller producers added debt at a much faster rate than larger producers, causing wide mismatches in capital structure. In the span of just over 2 ½ years the average debt to cap increased from 35% at Q1 ’07 to 58% at Q2 ’09, and this served to make the impact of the fall in share price even more pronounced.

The question remains: how long will it take for this highly-leveraged

sector to return to normal? It is clear the credit risk profile for the

entire sector has already been in decline even prior to 2007, but the

negative price shock that occurred so swiftly in 2008 (the brunt of it in

six months) only compounded the problem. Moving into 2010, the

capital structure of the E&P sector has fundamentally shifted; this will

take a significant amount of time to correct itself.

Enterprise Value to EBITDA

U.S. E&P Sector Overview

From 2002 through 2007 the average EV to EBITDA multiple for the

U.S. E&P sector ranged between 5.5 and 12.5, averaging 8.9 Times.

This “norm” so to speak has been broken both on the upside and the

downside beginning in 2008. Corresponding with the trend in crude

oil prices, the metric peaked in Q2 ’08 but rapidly collapsed to lows

not seen this decade.

Even with a crude oil price recovery (WTI has more than doubled

since Q1 ’09) this widely used metric will have a difficult time in 2010

stabilizing within bounds that once were considered appropriate.

There are a number of solid reasons for that, as described below.

Key Valuation Considerations for 2010

Revenue Structure: Gas prices will likely remain flat, demand will be

stable, and the E&P sector is heavily weighted to natural gas

production. In the short-term, inventory levels moving into winter

are at record levels and per-capita usage is down slightly. For the

long-term, unless there is a more serious initiative to move

structurally away from coal-fired electricity generation to natural gas

fired generation, demand growth will be mitigated.

Debt versus Reserves: From 2004 the relationship between debt and

reserves has been deteriorating. While Debt per BOE reserves has

0.0

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6.0

8.0

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20

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U.S. E&P Sector

Enterprise Value to EBITDA Multiple

Quarterly Multiples based onTrailing Twelve Months (TTM) EBITDA

4.6

5.6 5.5 5.4

7.0

3.8

7.4

4.6

8.5

2.0

Debt to PDR SEC PV10 to debt

2004

2005

2006

2007

2008

U.S. E&P Sector Debt to Proved Developed Reserves, PV10 to Debt


been increasing, the actual value of the reserves has been decreasing (see figure on previous page). This will almost necessarily

place capital structure and strategic limitations on future earnings potential.

Corporate Netbacks and Returns: In 2008, the Corporate Netback

margin (Average Price Received minus all pre-tax cash costs) was cut

in half in the span of one quarter and has marginally recovered since

then. For 2009 the margin will likely exit the year at roughly 40%,

which is still much lower than the average of 56% in prior years. This

will take time to recover, especially in light of the commodity price

outlooks that might prevail for 2010. The production and ad valorem

tax component of operating costs will be significantly lower as the

taxes are a function of the price received.

Return Measures: Return on Equity (along with P/E and other return-

related metrics) became un-measurable in 2008 and not much better

in 2009. Net earnings in 2008 were extremely poor for the year and 2009 results, although stronger than 2008, are lower than

in years past. Over 40 E&P’s reported losses in 2008 and the aggregate sector net income was $1.29 Billion. This was due in

large part by the size of asset impairment charges that were taken. By comparison the exact same set of E&P firms reported

net income of $18.9 Billion in 2007. The expectation for the sector in 2010 is that key return, profitability and netback metrics

will not likely return to the levels seen in ’02-’07, and valuation metrics will also continue to be lower.

Drilling and Production: Operating costs on a BOE basis in 2009 are lower than in 2008, some of this driven by lower Production

Taxes due to low commodity prices. This is a plus. But this will likely not compensate for the stagnant and low natural gas

prices which will suppress netbacks. Drilling costs have been lower as well from 2007-2008, which strengthens the F&D cost

and enhances the recycle ratios. Drilling activity, however, will not likely recover to ‘07 – ‘08 levels and reserve and production

growth will be limited.

Benchmark Commodity Price Drivers: The factors that determine the price of a barrel of crude have drifted further beyond

supply/demand fundamentals. For example, with crude hovering at about $US 70 per Barrel, the discussion is not so much

these days about supply/demand fundamentals but rather how playing WTI against the U.S. exchange rate will affect price and

exchange rates.

Until there is clearer understanding of the price drivers, from a fundamental standpoint we cannot forecast the price of WTI

with any great confidence solely on the basis of supply/demand. And there have been recent events to indicate that WTI might

be losing its power while still being the key North American benchmark price. For example, Saudi Aramco recently announced

it will use the Argus Sour Crude Index for its U.S. deliveries over WTI as it better reflects the crude characteristics. In addition,

Gulf Coast pricing/volumes are more liquid and transparent. Kuwait has followed in the same footsteps. Moreover, WTI prices

will continue to be distorted from time to time against other crude prices and remain volatile in the near-term because of local

distortions and the actual trading point – Cushing, Oklahoma – is land locked.

WTI versus Henry Hub: The relationship between oil prices and natural

gas prices continues to diverge and weaken (see right). Before 2005

the relationship between WTI and Henry Hub was fairly predictable:

natural gas prices would move roughly in tandem with oil prices. Since

then a number of factors have transformed the nature of the North

American natural gas market, and oil prices no longer have the same

drawing power:

1. Continental gas supply has increased with the development of

unconventional resources. LNG and Northern gas (Alaska,

MacKenzie Valley) supplies, which were once considered the

solution to the dwindling continental supply base, have really

52%54%

57% 57% 57%55% 53%

62%60%

47%

32%

40%38%

20

02

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20

04

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20

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U.S. E&P Sector

Corporate Netback as a percent of Average Price Received

Source: Bloomberg

0

5

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15

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25

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99

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09

Henry Hub

WTI

U.S. E&P SectorWTI versus Henry Hub, 1999 - 2009

($US per MMBtu Basis)

1 Barrel = 5.825 MMBtu Data Source: Bloomberg


been pushed out of main consideration.

2. For 2010, gas- in- storage volumes are at record levels. Unless the winter heating season is consistently colder (much

colder), winter season prices will be suppressed.

3. Fuel switching capabilities: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices

closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between

natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward

trend with crude oil prices but with considerable independent movement.

New SEC Reserve Reporting Standards: From www.sec.gov: On June 26th

, 2008 the SEC announced that it has proposed revised

oil and gas company reporting requirements to help provide investors with a more accurate and useful picture of the oil and

gas reserves that a company holds. The new reporting standards become effective January 1, 2010. The rule proposal reflects

the significant changes that have taken place in the oil and gas industry since the adoption of the original reporting

requirements more than 25 years ago. The proposed rule changes incorporate improved technologies and alternative

extraction methods, and enable oil and gas companies to provide investors with additional information about their reserves.

The more that precise, first-hand information from oil and gas companies is available to investors and the marketplace, the less

that the marketplace is forced to rely solely upon information provided by speculators.

The enhanced reporting standards will add a broader aspect of valuation with respect to reserves on a standardized basis.

Some the key changes include:

Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves.

Allowing previously excluded resources, such as oil sands, to be classified as oil and gas reserves. Currently these resources are considered to be mining reserves.

Requiring companies to report the independence and qualifications of a preparer or auditor, based on current Society of Petroleum Engineers criteria.

Requiring the filing of reports for companies that rely on a third party to prepare reserves estimates or conduct a reserves audit.

Requiring companies to report oil and gas reserves using an average price based upon the prior 12-month period-rather than year-end prices, to maximize the comparability of reserve estimates among companies and mitigate the distortion of the estimates that arises when using a single pricing date.

In addition to the SEC working paper there are several very good opinion papers on the proposed reserve reporting standards.

Production Group Comparison of EV to EBITDA

Assessing the EV/EBITDA in smaller parts shows unique characteristics based on production size. Historically, Junior producers

have had valuations roughly twice that of the largest producers, and this relationship held through the market upswing,

downswing and now in the current more stable period:

Table 2: Enterprise Value to EBITDA: Trend by Production Group

Production Group 2002 – 2007

Average

Q2 ’08 (Peak) Q1 ’09 (Low) Q3 ’09 (Current)

Junior 12.1 14.3 5.2 9.5

Intermediate 8.1 11.5 3.8 9.1

Senior 6.1 10.1 3.8 9.4

Super Independent 5.8 7.7 3.4 7.2


$0

$40,000

$80,000

$120,000

$160,000

20

02

20

03

20

04

20

05

20

06

20

07

Q1

'08

Q2

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'08

Q1

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Q2

'09

Q3

'09

U.S. E&P Sector

Market Cap per BOE Daily Production$US per Daily BOE

Market Capitalization to Production

U.S. E&P Sector Overview

It took only nine months (July 2008 – March 2009) for the average

Market Cap per BOEQ to slip to levels not seen since 2003. The metric

has started to recover mid-2009, but perhaps for the wrong reasons:

is the WTI outlook propping up E&P valuations? If so, then there

might well be a correction come Q1 earnings season should gas prices

remain stagnant - the more important price marker for the E&P sector

is always natural gas. It was argued previously that the WTI/Henry

Hub relationship is has weakened in this era, so it is harder to explain

the increase in the multiple when natural gas prices are far less

robust.

Operating costs and production taxes are lower in 2009 than in 2008,

which increase EPS, and this in turn helps explain some of the increase

in share price and market cap. Along with the collapse in commodity

prices came a related drop in costs – drilling, chemicals, wireline,

seismic etc.

Another factor that explains the increase in value is the renewed

appetite and ability to add debt. Much of the E&D exploration activity

in 2009 was done on a cash flow basis only and this appear to be

easing up. The outlook for growth is enhanced as appropriate

leveraging can be put into E&D activities again.

Market Cap and Production Size

The relationship between production size and market capitalization holds under this metric as well, but the share prices of

Junior producers was hit much harder between the peak of ’08 and the floor of ’09, depressing the values much more than

larger producers. The breadth of valuation in this current period shows, at least on the surface, much less distinction between

the production groups.

Table 3: Market Capitalization per Daily BOE Production: Trend by Production Group ($US per BOE)

Production Group

2002 – 2007

Average Q2 ’08 (Peak) Q1 ’09 (Low) Q3 ’09 (Current)

Junior $74,000 $145,500 $28,000 $54,000

Intermediate 63,700 118,700 31,400 56,530

Senior 39,850 96,300 31,250 52,450

Super Independent 41,670 87,900 33,400 48,920

12.30 12.80 12.90 13.30 14.00 15.40 15.90 15.60

11.60 11.10 11.80

Q1

'07

Q2

'07

Q3

'07

Q4

'07

Q1

'08

Q2

'08

Q3

'08

Q4

'08

Q1

'09

Q2

'09

Q3

'09

U.S. E&P Sector Operating Cost per BOE Trend, E&P Sector

($US per BOE)

Lease Operating + Production and Ad Valorem Taxes


Why Fundamentals Matter

What are the Objectives of Fundamentals Analysis?

The objective is to develop a range of expectations, establish norms and identify qualities/deficiencies from each E&P firm

that will:

Either insulate from or expose the firm to market downturns, or

Provide for or take away from the ability to take advantage of opportunities in market upswings, and

Establish a framework of the U.S. E&P landscape to do deeper company specific analysis.

In and by itself, this level of analysis is not sufficient to make a particular “call” on a single E&P. Fundamentals provide the

strong backbone to do comparative assessments and gauge trends in the E&P sector: It sets the framework.

Mitigate the Price Effect and Focus on the Drivers

Gauging E&P performance is especially challenging when oil & gas prices are strong. Lots of companies look good when

revenues are strong and that is when analysis slants towards an optimistic view based more on price outlooks and less on

fundamentals. But when commodity prices fall, it is valuable to see which of the E&P firms held up and were in a better

position to take advantage of an upswing in prices.

The reality is that oil & gas prices are highly cyclical, have been for many years, and analysis has to be addressed with this idea

in mind. It must be emphasized the E&P sector and its firms are rather at the mercy of the market when it comes to oil & gas

prices – factors that are driven more by economic and geo-political events and largely out of the firm’s control. And most short-

term and long-term decisions E&P firms make will take a commodity price view into consideration. But wouldn’t it make sense

to assess the E&P sector and its companies less on terms of prices and more on the workings of the firm?

What was needed were methods and analysis that stripped out the revenue factor and examined the underlying drivers that

dictate how E&P firms react to price environments. The P5 Index and its counterpart the L5 Index was developed using

selected key drivers based on the principle that assessing the parts of a company’s operations – reserves management,

operations and capital management – together can provide strong indicators of total performanceiv

.

Identify the Key Drivers

The first step was to identify key metrics that would capture a broad range of E&P business. Each of the six metrics listed below

brings in a unique financial and operational aspect of the firm:

Table 4: Key Performance Drivers

Key Metric The metric reflects:

3 Year Reserve Replacement Cost

($US per BOE)

Reserve management performance. The three-year measure is used as it

captures the reserve development life-cycle better than a one-year

measure.

Lease Operating Expenses – 1 Year

($US per BOE)

Oil & Gas production efficiency.

Long-term Debt to Proven Reserves ($US per BOE)

The prudent use of debt to build reserves.

SEC PV10 Value to Total Debt The future value of reserves compared against the current debt levels.

BOE Production Growth – 1 Year The effectiveness of the firm to increase production levels.

Production Replacement – 1 Year The effectiveness of the firm to grow reserves in tandem with

producing them.


Comparing Firms with Strong Fundamentals versus Firms with Weak Fundamentals

Taking the tops and bottoms and then comparing them gives us the range of quality that we can assess for the whole E&P

sector. The table below shows the differences between the five “best” E&P firms and the five “poorest”:

Table 5: Comparing Performance Metrics (YE 2008 Results)

Key Metric Strong Fundamentals (P5) Poor Fundamentals (L5)

3 Year Reserve Replacement Cost $12.55 $42.19

Lease Operating Expenses – 1 Year $7.47 $14.59

Long-term Debt to Proven Reserves (Times) 1.74x 8.72x

SEC PV10 Value to Total Debt 5.36x 1.17x

BOE Production Growth – 1 Year 32% -13%

Production Replacement – 1 Year 398% 150%

Translation into Other Metrics

To illustrate how the key input driver results translate into other metrics, selected key ratios are tabled belowv. Operations

metrics are calculated on the quarterly average between Q1 ’07 and Q3 ’09. Debt Related metrics are calculated as at Q3 ’09.

Returns and margins are the annual average of year end 2006-2008.

Table 6: Other Metrics and Performance Drivers

Functional Area Metric Strong Fundamentals (P5) Poor Fundamentals (L5)

Operations ($US per BOE)

Lease Operating & Taxes $6.20 $13.00

General & Admin 3.10 3.40

Interest & Pref Dividends 1.50 4.30

Recycle Ratio 3.32x 1.13x

Debt Related

Debt to Capitalization 30% 60%

Debt to EBITDA (TTM) 0.90x 1.70x

EBITDA Interest Coverage 35.4x 14.7x

Returns & Margins

EBITDA Margin 66% 71%

Profit Margin 29% -5%

Return on Equity 19% -9%

Return on Capital Employed 15% -5%

Return on Assets 10% -3%


How Fundamental E&P Drivers Translate into Market Valuations

The translation from corporate and operating performance into market valuation is a fairly intuitive exercise: strong underlying

health will translate into stronger valuation. But the ability to identify and assess individual E&P’s across the whole sector

(+100 publicly traded, many more private) presented a whole different challenge.

Market Cap versus Daily Production: Not a single U.S. E&P was left

unaffected when crude prices collapsed in mid-2008. Regardless of

performance ranking, market values fell by the same magnitude

across the board.

The E&P sector bottomed in the first quarter of 2009. Based on the

sample of 84 U.S.-based E&P’s, the average Market Cap per Daily BOE

was $34,000 in Q1 ‘09. Corresponding with increasing crude prices,

the metric increased to $66,000 per BOEQ by the third quarter, which

could be used as the starting point for these valuations moving into

2010. The value will be slightly higher for Q4 2009 as share price

continue to recover.

At Q3 ’09, companies with strong performance metrics averaged just

over $90,000 per BOEQ. E&P’s with the poorest performance metrics

averaged $29,600 per BOEQ.

Enterprise Value to EBITDA: Very similar behaviors are seen when

assessing EV against cash earnings (EBITDA). On a trailing twelve

month basis (TTM) the total E&P sector averaged 12.5 EV to EBITDA at

Q2 ’08 (commodity price peak) and fell to 4.4 by Q1 ’09. Setting the

framework for2010, the U.S. E&P sector will exit 2009 at roughly 10x

EV to EBITDA.

E&P’s with strong performance metrics peaked at 19.2x and at Q3 ’09,

EV to EBITDA averaged 13.1x. The value exit-2009 will be slightly

higher as share prices continue to increase.

At the peak of the cycle, EV to EBITDA for the E&P’s with weaker

fundamentals was 4.0x and recovered to 5.4x by Q3 2009.

Price to CFPS (Trailing Twelve Months): Especially over in the past

eighteen months, looking at Price to Cash Flow instead of Price to

Earnings has been more effective at establishing a 2010 perspective.

Corresponding with the other two metrics, the trend has been very

similar, but with a twist: with the anticipation of sustained high

commodity prices in mid-2008, there was less distinction between

fundamentally stronger E&P’s than fundamentally weaker ones from

at that point in time. But when commodity prices collapsed through

the end of 2008, value collapse with a far greater magnitude than

what really should have - that is, were share prices valued correctly in

the first place at Q2 ’08.

$0

$50,000

$100,000

$150,000

$200,000

Strong Fundamentals Weak Fundamentals

U.S. E&P SectorPerformance Group Comparison

Market Cap per BOEQ - 2007 through 2009

Q1 '07 Q3 '09

0.0

5.0

10.0

15.0

20.0

25.0


Q1 '08

Q2 '08

Q3 '08

Q4 '08

Q1 '09

Q2 '09

Q3 '09


Enterprise Value to EBITDA - 2008 and 2009

0.0

2.0

4.0

6.0

8.0


Q1 '08

Q2 '08

Q3 '08

Q4 '08

Q1 '09

Q2 '09

Q3 '09


Price to Cash Flow per Share - 2008 and 2009


Two Scenarios for 2010

Assessing the Value of Market Cap to Production

The sensible objective of sensitivity analysis is to provide the user with perspectives of possible outcomes without over-

specifying the inputs, and at the same time choosing metrics that capture a broad range of ideas. Sensitivities were done on

Market Capitalization using relationships between Cash Flow per Share, revenue/expense drivers and the average price

received for crude oil and natural gas. The result for each E&P was then tied back to daily production to calculate the metric.

The sensitivities were assessed using production groups as the back drop.

Four key factors were considered:

1. The variables that drive the sensitivity must be highly relevant to the problem. This sounds intuitive, but sometimes

the choice of variable misses the business case. For these tests, three variables were used: oil price, natural gas price

and lease operating costs.

2. The range for each variable should be within a “possible outcome” for the time frame considered.

3. The starting data must reflect the most recent results. In these three cases, Q3 ’09 results are the starting point.

4. The results could be assessed from different viewpoints – for this paper, Production Groups were examined.

2010 Prices Rise, Cost Pressures

Changes: Oil Prices increased by 50%, natural gas prices increase

50%, operating expenses increase 20%

Result: Market Cap per BOEQ rises ~60% on average. Growth in

smaller producers is stronger than larger producers.

This is not unrealistic. Based on the sample, on average, the price

received for natural gas in Q3 was $4.34 per Mcf and the average

price for crude oil was $63.74 per Barrel. A 50% increase over the

year would result in natural gas at $6.50 and crude oil at $95.50.

This could be a situation that would reflect the U.S. economy

regaining momentum and increasing demand for energy: air travel on

the increase, miles driven increasing –overall demand for refined

products increasing. Natural gas prices would increase at the same

rate with normal seasonality, keeping the WTI/Henry Hub ratio steady.

2010 Prices Weaken, Costs Ease

Changes: Oil Prices decrease by 20%, natural gas prices decrease

20%, operating expenses decrease 5%

Result: Market Cap per BOEQ decreases ~27% on average. Impact on

smaller producers is stronger than larger producers.

Reflects possible “double dip” fall in commodity prices. Costs would

ease primarily as sliding scale production taxes would decrease. This

scenario would capture a lower bound of valuations based on price

and cost sensitivities.

A 20% drop in crude prices would roughly equate to $51.00 per barrel

for the year. A 20% drop in natural gas prices would equate to roughly

$3.50 per Mcf.

76,500

54,100 50,000

44,800

54,300

39,100 37,000 34,900

Junior Intermediate Senior Super Independent

Base Case

Scenario

U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE

2010 Price Collapse, Operating Costs Ease

$USD per Daily BOE Production

76,500

54,100 50,000

44,800

104,000

76,200 69,200

59,500

Junior Intermediate Senior Super Independent

Base Case

Scenario

U.S. E&P Sector - Sensitivity Analysis Market Cap per Daily BOE

2010 Price Spike, Moderate Cost Pressures

$USD per Daily BOE Production


2010 Valuation Range Possibilities - Production Groupings.

The table below details the ranges of three metrics based on the two scenarios, arranged by production groups. EV to EBITDA is approximated based on an historical relationship between the two ratios. See endnote ii for a table of production ranges for each group. Metrics for Q3 2009 are calculated on actual results.

Table 7: Market Cap to Daily BOE Production: 2010 Outlook by Production Group

Production Group Q3 2009 (Actual) 2010 High Price Case 2010 Low Price Case

Junior $54,000 per BOEQ $104,000 per BOEQ $54,300 per BOEQ

Intermediate 56,530 76,200 39,100

Senior 52,450 69,200 37,000

Super Independent 48,920 59,500 34,900

Table 8: Enterprise Value to EBITDA: 2010 Outlook by Production Group


Junior 9.5x 11.3x 8.2x

Intermediate 9.1 8.8 5.4

Senior 9.4 8.2 5.2

Super Independent 7.2 7.3 5.0

Table 9: Average Market Capitalization ($USD) Outlook by Production Group


Junior $258 Million $370 $167

Intermediate $2.4 Billion 3.2 1.6

Senior $6.5 Billion 8.6 4.6

Super Independent $25.1 Billion 30.6 17.9

Final Comments

The U.S. E&P sector has clearly come off its early 2009 lows and the outlook for 2010 appears to be more robust. But several

questions will remain on the table which will affect valuations. For example:

Will the continental gas oversupply subside? In the short term, the main factor will be weather related and if North

America will experience a colder than normal temperatures in winter and/or the summer season will be warmer.

How will new government/environmental policies translate into reduced energy consumption? This is a longer-term

consideration, but valuations will be effected nonetheless.

Will the credit markets continue to ease?


Data Management

Define sources

CollectionVerification

and validation

MetricsFinancial measures

Operational measures

Trend calculations

Define the Characteristics

of the Firm

Producer Group

Commodity Focus

Growth Mode

Performance Measurement

Reserve management

Operating efficiency

Capital structure

Data Conversion

Convert to functional

forms

ReportingMarket

MeasuresCredit

BenchmarksPeer Analysis

Data Summary

Data Collection and Management

Aggregating & developing the proper information for the U.S. Independent industry requires, first and foremost, a strong

understanding of what factors comprise the sector – the companies, the resource landscape and cost considerations, and oil &

gas economics.

The methodologies developed for this analysis can be loosely

described in six steps as shown in the figure to the right. Each

phase has its own set of objectives and one “process” leads into

the other. For instance, calculating key metrics would be

impossible without effective data management; failure in

designing a proper data structure would make research

cumbersome, time-consuming and ultimately ineffective. So

there is no single analytical function in this process that

outweighs another in terms of importance. The challenge is to

be able to design analysis with an industry-wide perspective and

at the same time maintaining the unique characteristics of each

company. There are over 100 publicly traded U.S. E&P

companies with a meaningful market capitalization – daily

production ranges from less than 100 BOE to over 600,000 BOE.

Each company has a unique capital structure, a unique

production profile (oil versus gas) and every single E&P is active

in different degrees in producing regions and formations.

The primary goal in building this information backbone is not simply to be able to construct a data system that compares any

company to any other company (there are scores of free internet services that do just that), but rather to be able to position a

company or sub-group within the U.S. E&P sector in a proper perspective.

The system used to gather, calculate and stratify the data from the various was developed using a combination of Microsoft

Access, Microsoft Excel and Visual Basic 6.0. Data has been compiled and processed for U.S. based E&P firms annually since

2002, and quarterly information has been processed since Q1 2007.

Effective analysis is impossible without a foundation of reliable information, and this requires a rigorous approach to

identifying, arranging and processing data. Data was collected and validated in groups with respect to how the data fits

categorically. It is essential that the data collection system is efficient as the data and information is the backbone to our

research. In terms of data sources and requirements, the table below shows where the data is sourced from and how the data

is categorized:

Category Data Requirement Sources

Reserves Reserve Reconciliations, Daily Production, PV10

Values, BOE & McfE conversions

SEC 10-k, SEC 10ksb, SEC 10-Q

Operations Drilling, Land Positions, Operating Oil & Gas Wells,

Employees


Financial Balance Sheet, Income Statement, Statement of

Cash Flows, Oil & Gas Capital Expenditures, Debt

Maturities, Shares Outstanding


Other Share Prices, Company Activity, Industry Activity Company websites, newswires, The EIA, E&P

associations.


Companies Surveyed

Drawing from a sample of just over 95 publicly traded U.S. based E&P companies the final analysis was based on 84 firms. The

main factors that reduced the sample to 84 firms were data quality issues: very small E&P firms with small market

capitalizations or firms that had listing requirement issues were taken out of the sample:

Junior Producers Intermediate Producers

Abraxas Petroleum Corp. (AXAS) Atlas Energy Resources, LLC (ATN) Adams Resources & Energy, Inc. (AE) ATP Oil & Gas Corporation (ATPG)

American Oil & Gas Inc. (AEZ) Berry Petroleum Company (BRY)

Approach Resources Inc. (AREX) Bill Barrett Corporation (BBG)

Arena Resources, Inc. (ARD) BreitBurn Energy Partners L.P. (BBEP) Brigham Exploration Co. (BEXP) Cabot Oil & Gas Corporation (COG)

Callon Petroleum Company (CPE) Clayton Williams Energy (CWEI)

Cano Petroleum, Inc. (CFW) CNX Gas Corporation (CXG)

Carrizo Oil & Gas (CRZO) Comstock Resources (CRK) Contango Oil & Gas Company (MCF) Concho Resources Inc. (CXO)

Delta Petroleum (DPTR) Continental Resources, Inc. (CLR)

Double Eagle Petroleum Co. (DBLE) Denbury Resources Inc. (DNR)

Dune Energy, Inc. (DNE) Encore Acquisition Co. (EAC) Edge Petroleum Corp. (EPEX) Energy XXI (Bermuda) Limited (EXXI)

EV Energy Partners, L.P. (EVEP) Exco Resources (XCO)

Evolution Petroleum Corporation (EPM) Linn Energy, LLC (LINE)

Fieldpoint Petroleum Corporation (FPP) Mariner Energy, Inc. (ME) Gasco Energy, Inc. (GSX) McMoRan Exploration Co. (MMR)

Gastar Exploration Limited (USA) (GST) Penn Virginia Corporation (PVA)

GeoMet, Inc. (GMET) Petrohawk Energy Corporation (HK)

GeoResources, Inc. (GEOI) Petroleum Development Corporation (PETD) GMX Resources Inc. (GMXR) PetroQuest Energy (PQ)

Goodrich Petroleum Corp. (GDP) Quicksilver Resources Inc (KWK)

Gulfport Energy Corp. (GPOR) Range Resources Corp. (RRC)

Kodiak Oil & Gas Corp. (KOG) Rosetta Resources Inc. (ROSE) Legacy Reserves LP (LGCY) SandRidge Energy Inc. (SD)

Magnum Hunter Resources Corporation (MHR) St. Mary Land & Exploration Co. (SM)

Meridian Resource Corp. (TMR) Stone Energy Corporation (SGY)

NGAS Resources, Inc. (NGAS) Swift Energy Company (SFY) Parallel Petroleum Corporation (PLLL) Ultra Petroleum Corp. (UPL)

PrimeEnergy Corporation (PNRG) Unit Corporation (UNT)

RAM Energy Resources, Inc. (RAME) Venoco, Inc. (VQ)

Rex Energy Corporation (REXX) W&T Offshore, Inc. (WTI) Royale Energy, Inc. (ROYL) Whiting Petroleum Corporation (WLL)

TXCO Resources Inc. (TXCO)

Vanguard Natural Resources, LLC (VNR)

Warren Resources (WRES)

Senior Producers Super Independent Producers

Cimarex Energy Co. (XEC) Anadarko Petroleum Corporation (APC)

Forest Oil Corporation (FST) Apache Corporation (APA) Newfield Exploration Co. (NFX) Chesapeake Energy Corporation (CHK)

Noble Energy (NBL) Devon Energy Corporation (DVN)

Pioneer Natural Resources (PXD) EOG Resources (EOG)

Plains Exploration & Production Company (PXP) XTO Energy Inc. (XTO) Southwestern Energy Company (SWN)


Financial and Production Summary, Q1 ’07 – Q3 ‘09

Financial Recap

Based on the sample of 84 companies:

Cumulative operating and net income was wiped out in two quarters, Q4 ’08 and Q1 ‘09

Asset impairment charges exceeded $40 Billion at year-end 2008 and continued through the first quarter 2009.

$US Millions 2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Total Revenues 18,254 22,165 21,867 27,587 24,895 25,825 45,294 22,642 18,466 17,997 20,328 Total Expenses 12,648 13,514 13,828 15,112 16,325 18,496 20,430 53,110 49,163 16,207 15,571 Operating Inc 5,606 8,651 8,039 12,476 8,570 7,328 24,864 -30,468 -30,697 1,790 4,756 Depreciation 5,259 6,558 6,031 5,293 6,484 6,743 9,317 54,914 40,360 6,717 6,336 EBITDA 10,865 15,210 14,070 17,769 15,046 14,072 34,181 24,442 9,663 8,507 11,092 Interest Exp 1,156 1,214 1,227 1,525 1,247 1,077 1,210 1,397 1,190 1,325 1,301 Net Income 2,568 4,797 4,117 7,519 3,786 813 19,125 -22,838 -20,732 -237 2,532 Total Assets 115,268 125,421 132,253 141,783 144,785 143,973 179,655 161,053 143,979 145,954 150,430 Total Equity 273,619 289,194 302,745 322,928 338,450 364,401 390,304 360,741 328,072 328,820 330,064 Total Debt 79,060 82,045 86,448 85,613 88,161 89,671 97,882 104,737 101,178 104,251 98,505

Production and Average Price Recap

Crude Oil & NGL’s expressed in $US per Bbl. NGL volumes converted at 1.5x

Natural Gas expressed in $US per Mcf

BOE values converted at 1 Bbl = 6 Mcf, McfE values converted at 6 Bbl = 1 Mcf

Average Price Received

2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Crude & NGL's 52.54 59.13 67.20 76.50 85.37 101.81 101.02 71.17 43.06 56.23 63.74 Natural Gas 6.75 6.88 6.24 7.18 8.06 9.74 9.18 7.10 5.16 4.56 4.34 $US per BOE 46.44 49.08 49.21 59.41 62.37 74.39 71.97 56.85 36.08 39.17 40.78 $US per McfE 7.74 8.18 8.20 9.90 10.40 12.40 11.99 9.48 6.01 6.53 6.80

Average Daily Gas Production by Production Group (MMcf per Day)

2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Junior 13.0 14.6 15.6 16.5 16.8 18.4 17.6 18.5 19.5 18.8 18.7 Intermediate 110.4 122.0 126.2 133.8 140.0 145.1 143.4 151.0 158.7 157.9 156.2 Senior 323.0 357.6 387.0 404.0 416.7 429.7 445.1 460.7 476.5 475.0 468.8 Super Ind. 1,723.1 1,728.0 1,773.9 1,853.5 1,913.8 1,908.9 1,963.0 2,032.6 2,103.7 2,166.7 2,138.7

Average Daily crude Oil & NGL Production by Production Group (‘000 Barrels per Day)

2007 2008 2009 Q1 '07 Q2 '07 Q3 '07 Q4 '07 Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Junior 1.1 1.2 1.3 1.4 1.6 1.7 1.6 1.7 1.8 1.9 1.7 Intermediate 9.6 10.6 10.8 11.2 11.5 12.1 11.4 11.8 12.1 12.5 12.1 Senior 35.1 36.0 36.4 38.8 40.8 40.9 40.4 39.8 39.2 39.8 40.2 Super Ind. 154.1 160.6 153.9 155.9 156.3 145.9 145.8 154.2 162.8 175.7 165.5


Brief Glossary

The contents and expressions used in this report are written at a fairly advanced level. In order to avoid possible confusion,

tabled below is a list of some terms that have been used by themselves and used interchangeably throughout the report:

BOE: Barrel of Oil Equivalency: 1 Barrel = 6 Mcf Natural Gas

BOEQ: Daily Oil & Gas Production in Barrel of Oil Equivalent (BOE) Terms

McfE: Mcf Natural Gas Equivalency: 1 Barrel Oil = 1/6th

Mcf Natural Gas

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

Market Capitalization, Market Cap or MC: Share Price x # Shares Outstanding

Enterprise Value or EV: Market Capitalization + Total Long-term Debt – Cash & Cash Equivalents

3 Year Reserve Replacement Cost: ∑ Oil & Gas Capital Expenditures Most Recent 3 Years l

∑ Extensions, Discoveries, Acquisitions and Improved Recoveries, 3 Years

Note: Reserve Replacement Costs are also calculated with Revisions – but due to the high fluctuation in Revisions

reporting over the past few years, it was felt the RRC without revision was the appropriate metric to use.

Operating Netback ($US per BOE): Average Price Received – Lease Operating Expenses – Production, Ad Valorem Taxes

Recycle Ratio: m Operating Netback m

3 Year Reserve Replacement Cost


Author’s Bio

Marcus Wolters

Over fifteen years of oil & gas and energy analysis experience:

o Summer Intern Positions:

1991: Amoco Canada Production Company

1992: Research Assistant, University of Calgary, Department of International Finance

1993: Crestar Energy Inc.

o Career Positions:

Ziff Energy Group (1994-1997)

Royal Bank of Canada, Global Energy Group (1997 – 2001)

Enbridge Pipelines Inc. (2001-present)

o Current position: Senior Advisor, Commodities Forecasting Group, Enbridge Pipelines Inc.

Areas of specialization:

o Oil & Gas fundamentals

o Credit risk assessment

o Production analysis and forecasting

o Statistical analysis and corporate benchmarking

o Economic modeling

o Database design

Education:

o University of Calgary, Finance (1988-1992)

o University of Western Ontario, Statistics (1992-1993)

Contact Information:

o Email: [email protected]

o LinkedIn Profile: http://ca.linkedin.com/in/marcwolters

mailto:[email protected]


Notes

i The U.S. universe comprises 84 publicly traded American based E&P’s. For the full detailed list, please see the section “Companies Surveyed.” Throughout the report, outliers and extreme values were removed from the analysis where it was deemed appropriate. Unless otherwise stated, all analysis was developed in-house. All data was obtained from its original source: the United States Securities and Exchange Commission (www.sec.gov). Share prices obtained from Yahoo! Finance. Presentations, news releases, outlooks and other relevant operational information obtained from company websites. Institutional ownership data obtained from Thomson-Reuters. ii The sample of 84 U.S. E&P firms was divided into four production sub-groups: Junior, Intermediate, Senior and Super

Independent. This widely accepted approach is very useful in examining many aspects of the E&P sector, from financial analysis to operations. The production sizes are tabled below:

Production Group Range of Daily Production

Junior 0 - 15,000 BOE Intermediate 15,000 - 75,000 BOE Senior 75,000 – 250,000 BOE Super Independent Greater than 250,000 BOE

iii The “Oil 10” and “Gas 10” E&P companies were determined by ranking the universe of 84 publicly traded E&P companies on

the basis of oil production and gas production, not revenue weighted and indifferent to the size of the firm or any performance considerations: Oil Focus Companies % Oil Gas Focus Companies % Gas

Arena Resources, Inc. ARD 83% Atlas Energy Resources, LLC ATN 97%

Continental Resources, Inc. CLR 74% Cabot Oil & Gas Corporation COG 95%

Evolution Petroleum Corporation EPM 55% CNX Gas Corporation CXG 100%

Fieldpoint Petroleum Corporation FPP 65% Double Eagle Petroleum Co. DBLE 98%

Gulfport Energy Corp. GPOR 93% Gastar Exploration Limited (USA) GST 100%

Legacy Reserves LP LGCY 73% GeoMet, Inc. GMET 100%

Magnum Hunter Resources Corporation MHR 74% Goodrich Petroleum Corp. GDP 97%

Rex Energy Corporation REXX 73% PrimeEnergy Corporation PNRG 65%

TXCO Resources Inc. TXCO 65% Southwestern Energy Company SWN 100%

Whiting Petroleum Corporation WLL 77% Ultra Petroleum Corp. UPL 96%

iv

Performance measurement: Junior producers are not included in these types of performance assessments. The 2008 “P5” and “L5” E&P firms are tabled below:

P5 – Strong Fundamentals Group L5 – Weak Fundamentals Group

CNX Gas Corporation CXG ATP Oil & Gas Corporation ATPG

EOG Resources EOG Clayton Williams Energy CWEI

Range Resources Corp. RRC Stone Energy Corporation SGY

Southwestern Energy Company SWN Swift Energy Company SFY

Ultra Petroleum Corp. UPL W&T Offshore, Inc. WTI

v Key industry measures are assessed from first principles through to valuation measures: Input Metrics look at the drivers of

what defines the E&P sector: the efficient management of oil & gas resources and the efficient exploitation of reserves. Corporate Metrics provide guidance as to how the sector (as well as the individual company) manages its capital, asset and manpower requirements to give working strength to the reserve base. Output Metrics provide the tools which place a value on the individual company and the sector - trend analysis becomes an essential component in market valuations, returns and margins.

u.s. independent oil & gas sector: 2010 valuation trends

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