Canadian Oil & Gas Industry

Analysis & Recommendations Featuring : Suncor, Talisman & EnCana

Presenters & Topics

 Linda Holmes: Industry Overview  Eric Song: Suncor Energy  Daniel Lee: EnCana  Tolek Strukoff: Talisman Energy

Industry Overview Agenda

 Industry Synopsis  Economic summary  Crude Oil Highlights  Natural Gas Highlights  SWOT  Industry Forecasts

Industry Synopsis…

 Sub-sector of Energy  Oil & Gas Industry encompasses  Petroleum exploration (upstream)  Refining (midstream)  Distribution & Sale to consumers (downstream)  Products / Benefits  Synthetics/ Pharmaceuticals/ Plastics  Transportation / Heat / Employment  Everyone uses energy  Demand virtually endless

2001: Canada's primary energy production : ~39% natural gas ~25% oil ~20% hydropower ~11% coal ~5% nuclear power

Industry Synopsis

 Oil & Gas is the largest industry in the world  Tends to parallel boom & bust in economy  Recession: less products, less commuting…less energy use.

 Demand: reasonably stable (except recession)  Supply: can experience shocks  OPEC meetings  Net exporter of energy  2001: 31% of energy production exported

Canada and the Upstream Oil & Gas Sector

 3rd largest producer of natural gas  9th largest producer of crude oil  6% of Canada’s GDP  Grown more than 250% since 1990  Overhead: 6 years of stats

Economic Highlights…

 2002: Canada’s real GDP grew ~3.3%  Compared to 1.5% in 2001  Signals economic recovery  Canadian economy influenced by US economy  Largest trading partner  ~85% Cdn exports to US (2002)

Economic Growth Forecast (Canada)

 Lowered for 2003  Continued weak US growth  Strengthening of Cdn dollar  SARS outbreak   Canadian beef export ban (Mad Cow ) Still growing but slower than last year’s forecasts

Situational Analysis

 Demand looks positive (CAPP)  Increasing with economic growth  OPEC estimates demand will grow  From ~75MM bbl/d to more than 100MM bbl/d by 2020  Investment needed to support this demand • >$100 Billion in exploration & development  Overhead:  International Petroleum Supply & Demand • • Base Case Provided by Energy Information

Situational Analysis …

 OIL: world’s largest source of energy  NATURAL GAS: role increasing  US gas supply < US gas demand • Analysts estimate this will continue well into 2025  World Market : • Demand forecasted to double by 2030 (~4.8TCM/yr) • Reserves increasingly remote from major markets

Energy (Cdn) Production Trends

2001: Canada's primary energy production : ~39% natural gas ~25% oil ~20% hydropower ~11% coal ~5% nuclear power

Crude Oil Highlights ~ Canada

 Reserves:  180 billion barrels (2003) • • Alberta Oil sands (174.8) Conventional (5.2)  Production 2002  Average 2.9MM bbl/d  Consumption 2002  Average 2.0MM bbl/d  Exports  1.5MM bbl/d crude to US

Crude Oil Highlights…cont’d

 Alberta  Leading oil producing region  Conventional oil reserves are declining  Huge oil sands deposits  Trends  Projects shifting focus to eastern & northern provinces

OIL: Production & Consumption

Natural Gas Outlook

 Demand increasing  Canada is the lead supplier to US  Mackenzie Delta has potential for piping to south  Resources are limited  Shift in focus from WCSB to BC, Atlantic & Artic  New Sources:  liquefied natural gas & coalbed methane

Natural Gas …

 Issues:  Technology development (lower costs)  Gaining access to resources  Regulatory restrictions (timeliness)  New sources:  Coalbed & methane gas  Coalbed: potential industry for Canada

Natural Gas Exploration Projects

 Mackenzie Delta  Gauge potential reserves  Challenges  Temperature: down to –33 degrees  Cost: $30 MM/well • 60 times more than in AB  Politics: NWT & Federal gov’t  Potential:  Increased capacity

Gas: Production & Consumption

Natural Gas in Canada (2001)

Reserves at Year End: 60.1 trillion cubic feet Production: Prices: Exports: 17.4 billion cubic feet per day $4.40 (US$/MM btu) 10.6 billion cubic feet per day

Strengths

 Size of the market  Size of the industry  Alberta Oil Sands  One of the largest sectors in Cdn economy  Increasing economies of the less industrial provinces  Huge undeveloped energy, including major natural gas deposits in offshore areas

Weaknesses

 Limited natural gas reserves (TCF)

Natural Gas Productive Capacity

Weaknesses Cont’d

 Higher costs for major supply basins than others

Opportunities

 Developing world  US supply < US demand  Exploration & pipeline projects in Yukon & NWT  Oil sands (bitumen)

Oil Production Forecast

Power of Suppliers within Industry

 Dominated by a few powerful companies  Large capital investment required • Discourages smaller investors  Proximity to largest energy market  Technological Developments  3-D seismic & steam –assisted gravity drainage

Threats

 Capital investment more internationally mobile  Goal: projects that offer • • Best potential ROI Least geological, ecological, & political risk  High development costs  High natural gas prices  Growing environmental concerns  Kyoto requirements

Threat of New Entrants into Industry

 Barriers to Entry ~ HIGH  High fixed costs • Pumping trucks > $1MM  Specialized Skills • To operate equipment & determine drilling decisions  Cash on hand • Need ample $$ to compete  Scarcity of resources  Government restriction or legislation

Regulatory Approval Timeline

Reserve Comparison

Availability of Substitutes

 Alternative Fuels:  Coal, solar, wind, hydro, nuclear  Uses of Oil:  Plastics & other materials  Specialized Services  Seismic drilling or directional drilling can better withstand

Competitive Rivalry

 Slow Industry growth rates  Since 1990 Cdn oil production has climbed 42% & natural gas 76%  High costs for major supply basins  Capital tends toward projects with higher ROI & lower risk

Price History: 10 Year

Parallel Dips ~ 1998 CRUDE OIL (sweet) Opposite Moves ~ 2000 -2002 NATURAL GAS

Price History: 5 Year

Market Crash

Price History: Year-to-Date

Summary: Canadian Oil & Gas Stats…

Canadian Oil & Gas Overview Source CAPP,April 2003 2001 2002 2003F Production Crude Oil (mmbl/d) Natural Gas (tcf/yr) Exports Crude Oil (mmbl/d) Natural Gas (tcf/yr) Wells Drilled (Canada) 2.2

6.4

1.4

3.7

18,300 2.4

6.4

1.4

3.8

15,000 2.7

6.4

1.7

3.8

17,000

Company Background

 Integrated energy company  Strategically focused on developing one of the world ’ s largest petroleum resource basins – Canada ’ s Athabasca oil sands  Ticker symbol: SU (both TSX and NYSE)  Stock price: $28.80 (TSX)  Market capitalization: US$9.95 Billion  3400 employees

Management Team

     

Rick George,

President and Chief Executive Officer – 23 years of experience at Suncor, 13 years as CEO

Steve Williams,

Executive Vice President, Oil Sands - over 20 years of international energy industry experience

Ken Alley

, Senior Vice President and Chief Financial Officer - 19 years of experience at Suncor

Dave Byler,

Executive Vice President, Natural Gas and Renewable Energy – 24 years of experience at Suncor

Tom Ryley,

Executive Vice President, Energy Marketing and Refining – 20 years of experience at Suncor

Mike Ashar,

Executive Vice President, Refining and Marketing U.S.A – 16 years of experience at Suncor, came from Petro-Canada

Main Business Units

 Oil Sands (core business segment)    Natural Gas and Renewable Energy Energy Marketing and Refining – Canada (under the brand name “Sunoco”) Energy Marketing and Refining – U.S.A. (acquired in 2003)

Strategic Priorities of Value Creation

 Reduce oil sands operating costs (by economies of scale with additional production)   Increase production from existing oil sands assets Reduce the company ’ s net debt  Continue to build the foundation for the next stages of its growth strategy

Locations of Operations

Pipeline Network – Oil Sands Production

Oil Sands

     Mines and upgrades crude oil Operations are located near Fort McMurray, Alberta Oil sands production: 205,800 barrels per day Vision: 550,000 barrels per day in 2010 ~ 2012

Firebag In-situ Oil Sands Project:

deep oil sands deposits, heat it and bring the bitumen to the surface for processing use horizontal wells to reach Advantages of in-situ technology: recover large reserves that can’t be reached by traditional ways suitable for staged growth more environmental friendly reduce costs of recovery

Oil Sands

Natural Gas and Renewable Energy

 Explores for and produces natural gas  3 locations in Western Canada  Internally to power its Oil Sands facilities and Sarnia Refinery  Externally to supply markets throughout North America

Natural Gas

Energy Marketing and Refining – Canada

 Refines crude oil and markets finished petroleum products  Customers are located primarily in Ontario and Quebec  Retail customers in Ontario under the Sunoco brand (over 500 retail sites)  Sales agreements in Ontario  Refinery in Sarnia, Ontario

Energy Marketing and Refining – U.S.A.

 On July 31, 2003 Suncor acquired ConocoPhillips ’ Denver, Colorado refinery, retail stations and associated storage, pipeline and distribution facilities  Flexibility to move crude and products to the Denver refinery or other customers  Provides increased control of its oil products from production straight through to the consumer

Energy Marketing and Refining

Reserve Estimate

Income/Investment Structure

Five-Year Highlights

Balance Sheet

Income Statement

Cash Flow Statement

Stock Price Summary

     Stock price: $28.80

Change: -$0.10 (-0.35%) Volume: 1,118,900 52-week high: $29.25

52-week low: $22.76

Stock Price Performance

Suncor vs. Oil Index (U.S.)

Suncor vs. S&P 500

Valuation - Benchmark Valuation Ratios

P/E Beta Price to Book Dividend Yield Div. – 5 yr growth Sales – 5 yr growth EPS – 5 yr growth

Company

13.05

0.15

3.51

0.67

0.00

17.89

22.78

Industry

12.42

0.42

2.51

3.05

3.03

4.01

-8.15

Sector

15.63

0.55

2.49

2.75

4.11

9.34

-2.16

S&P 500

25.40

1.00

4.27

2.05

6.33

9.71

10.58

Valuation - Benchmark Financial Strength

Quick Ratio Debt to Equity Interest Coverage

Profitability

Gross Margin Operating Margin Net Profit Margin ROI

Management

ROA ROE Inventory Turnover

Company

0.62

0.57

37.40

69.03

28.43

16.91

12.74

11.59

32.63

6.68

Industry

0.77

0.23

19.43

31.07

9.95

5.94

12.79

9.94

21.19

19.48

Sector

0.95

0.51

10.53

S&P 500

1.29

0.97

13.02

34.76

10.95

5.68

8.75

7.00

16.21

17.95

46.96

18.04

11.85

9.57

6.10

17.85

9.96

Valuation - Trend

Valuation Model

   Net Asset Value (NAV): market value of assets net of liabilities divided by the shares outstanding

$28.50

price target based on a 22% premium to estimated NAV under base case price scenario (Gordon Gee, RBC Capital Markets) Current stock price:

$28.80

(TSX)

Growth Strategy

    Developing oil sands large resource base through mining and in-situ technology Expanding oil sands facilities to increase the production of crude oil Controlling costs through economies of scale and management of engineering, procurement and construction Developing new marketing and refining opportunities that further integrate upstream and downstream businesses

Growth Strategy - Illustration

Future Plans and Investments

   $496 million on oil sands growth projects: to support Firebag In-situ Oil Sands Project $145 million on projects related to Sarnia refinery and Sunoco’s Ontario retail network Five-year $100 million plan to develop renewable energy for the future

Fundamental Analysis – Moderate Buy

     Strong sales and EPS growth High profitability compared to industry and S&P 500 Relatively high return ratios (ROE, ROA, ROI) Expansion strategy is supported by its in-situ technology Increasing presence in the U.S. markets by the acquisition  Concerns: low inventory turnover low Beta (?) higher P/E and price to book compared to industry rapid expansion strategy can be risky

Technical Analysis – Signals of Caution

Recommendation – HOLD!!!

EnCana: Background

 Explores, produces, and markets natural gas, crude oil, and natural gas liquids  Created by a merger in April 2002  Alberta Energy (AEC)  PanCanadian Energy (PCE)  Market Capitalization: US$21 Billion

EnCana: Enterprise Value

EnCana: Management Team

 Gwyn Morgan, President & CEO  Randy Eresman, Executive Vice-President & COO  John Watson, Executive Vice-President and CFO  Roger Biemans, President, EnCana Oil & Gas (USA) Inc.

 Gerry Macey, President, International New Ventures Exploration  Bill Oliver, President, Midstream & Marketing

EnCana: Four Pillars of Value Creation

 High-quality assets  Solid credible reserves  Strong financial management  Sound corporate governance

EnCana: Business Segments

 Upstream  Onshore North America  Offshore & International Operations  Offshore & New Ventures Exploration  Midstream & Marketing

EnCana: Onshore North America

    Exploration, development and production in gas & oil on-land More than 17 million net acres of undeveloped land Compete through: large, concentrated land blocks; high working interests; low operating costs; low royalties and well-developed infrastructure Geographically operating in:  Plains of Alberta and Saskatchewan    Foothills of Western Alberta and Northeast B.C.

Canadian Oilsands region Rocky Mountain states of the USA

EnCana: Offshore & International Operations

 Develop reserves, and establish new production operations  Enhance value through acquisitions and ongoing asset portfolio upgrades  Four regional productions in:  Latin America  East Coast of Canada  Gulf of Mexico  U.K. Central North Sea

   

EnCana: Offshore & New Ventures Exploration

High-quality, focused offshore exploration program and turning new discoveries into operating facilities at the earliest possible date Drilling team must be able to handle unique requirements Includes exploration activity in:   The Canadian East Coast: Deep Panuke The Gulf of Mexico: Tahiti, Sturgis   The U.K. central North Sea: Buzzard, Farragon Africa, Australia, Latin America Currently seeking out new opportunities in:  Mackenzie Delta, Alaska, Brazil, North Africa, the Middle East, and off the west coast of Canada

EnCana: Midstream & Marketing

 Enhances value of core upstream operations  Gas storage  Natural gas liquids extraction  Power generation

EnCana: Worldwide Exploration

EnCana: Acquisitions

   Ecuador   Start-up of the OCP Pipeline (spans 500km) Currently producing 96,000 barrels of oil per day Cutbank Ridge   Acquired 500,000 net acres of prospective natural gas development lands Estimated to ultimately recover more than 4TCF U.K.

  Acquired an additional 14% in both the Scott and Telford fields Expected production of 20,000 barrels of oil equivalent per day

EnCana: Divestitures

  Syncrude  Divested syncrude project interests for $1.5 billion in cash considerations  No gain or loss on sale Midstream – Pipelines  Sold interests in the Cold Lake Pipeline System and Express Pipeline System for total considerations of $1.6 billion   After-tax gain on sale of $263 million Part of EnCana’s strategic realignment to focus on its large portfolio of higher return growth assets.

EnCana: Segmented Income

2003 Segmented Income 2002 Segmented Income

Upstream: Produced Gas & NGLs Upstream: Crude Oil Upstream: Non-Producing Marketing: Gas Marketing: Crude Oil & NGL Midstream

EnCana: Upstream Results

EnCana: Income Statement

(in CAD$millions) Net Revenue Expenses Net Earnings

First 9 Months Annual Data

Prior to Merger

2003 $10,378 $7,447 $2,418 2002 $6,388 $5,287 $729 2002 $10,011 $8,148 $1,225 2001 $4,894 $3,009 $1,254 2000 $4,366 $2,733 $1,000 Basic EPS Diluted EPS $5.69

$5.60

$1.99

$1.96

$2.92

$2.87

$5.02

$4.90

$4.02

$3.95

(in CAD$millions)

EnCana: Balance Sheet

Assets Current Assets LT Assets Total Assets

As of Sept 2003

2003 $2,676 $27,536 $30,212 2002 $4,289 $27,033 $31,322

Prior to Merger

2001 $1,673 $9,127 $10,800 Liabilities & S/H Equity Current Liabilities LT Liabilities S/H Equity Total Liabilities & S/H Equity $2,222 $13,037 $14,953 $30,212 $3,879 $13,649 $13,794 $31,322 $1,640 $5,181 $3,979 $10,800

EnCana: Cash Flow Statement

(in CAD$millions) Operating Activities Investing Activities Financing Activities Cash Change First Nine Months 2003 $4,834 ($ 3,279.00) ($ 1,381.00) $ 152.00 2002 $1,590 2002 $2,571 ($ 3,349.00) ($ 4,062.00) $ 1,218.00 $ 747.00 ($ 548.00) ($ 751.00) Annual Data 2001

Prior to Merger

2000 $2,774 $2,229 ($ 1,697.00) ($ 330.00) $ 766.00 ($ 2,321.00) $ 158.00 $ 65.00

EnCana: Benchmarks

Financial Strength

Quick Ratio (MRQ) Debt to Equity (MRQ) Interest Coverage (TTM)

Profitability Ratios (%)

Gross Margin (TTM) Operating Margin (TTM) Net Profit Margin (TTM)

Management Effectiveness (%)

Return On Investment (TTM) Return On Assets (TTM) Return On Equity (TTM) Inventory Turnover (TTM)

Company

0.73

0.48

9.28

Industry

0.87

0.89

7.36

Sector

0.95

0.51

10.58

S&P 500

1.29

0.97

13.05

66.37

26.11

20.65

10.34

9.39

20.14

7.17

56.78

25.91

15.07

7.52

6.42

16.74

18.37

37.49

14.07

8.01

8.77

7 16.29

17.83

47.12

19.1

12.68

9.62

6.13

17.89

9.92

EnCana: Benchmarks

Valuation Ratios

P/E Ratio (TTM) Beta Price to Book (MRQ) Dividend Yield Price to Cash Flow (TTM) EPS - 5 Yr. Growth Rate Sales - 5 Yr. Growth Rate

Company

7.98

-0.28

1.51

0.86

3.89

15.85

25.17

Industry

14.2

0.52

2.1

2.17

6.48

14.14

18.65

Sector

15.36

0.55

2.43

2.81

8.65

-2.18

9.47

S&P 500

24.98

1 4.21

2.08

17.37

10.51

9.69

EnCana: Stock Information

 Ticker Symbol: ECA  Stock Price: US$35.93

 52 Week High: US$39.63

 52 Week Low: US$26.75

 # of Shares Outstanding: 465 Million

EnCana: Stock Performance

EnCana: Stock vs. Oil & Gas

EnCana: Stock vs. S&P 500

EnCana: Growth Strategies

 Growing natural gas production, gas storage capacity, and crude oil production.

 Building oil growth platforms in the U.K. central North Sea and Gulf of Mexico  Continue efforts to expand its medium and long-term growth prospects through new ventures exploration

EnCana: Valuation

 Net Asset Value (NAV) Method  US$43.00 Price Target  29% premium on estimated NAV under a base case price scenario  1% discount to estimated NAV on NYMEX futures and a debt-adjusted 2003E P/CF  Current Price US$35.93 [11/20/2003]

EnCana: Recommendations

 Current operations are desirable, as EPS and ROE is better than the industry  Bought back some common shares  Have sufficient cash flow to carry out its growth prospects  Integrity in reserve estimates  Recommendation:

BUY!

Company Background

 First 10 years: Grown from a small Canadian company with a market cap of about $500 million to an $11 billion international company with an extremely successful track record.

Company Background

 Exploration and production: Upstream hydrocarbon business  Primarily focused on discovery and acquisition of new reserves  Formally British Petroleum Canada (Talisman: 10 years old)

Management Team •SIX out of the EIGHT executive positions are held by former BP employees •Recent executive succession has been internal

BOD Member Highlights



Al L. Flood

: Former CIBC BOD Member and Executive Committee Chair 

Dale G. Parker

: Former President and CEO WCB B.C.



Roland Priddle

: Former Chairman of the National Energy Board of Canada 

Lawrence G. Tapp

: Dean of the Richard Ivey School of Business of the University of Western Ontario

Operating Business Units:

 Domestic and international natural gas and liquids exploration and production operations  Upstream hydrocarbon

North America

 ¾ of production occurs in Canada, 60% of which comes from the north sea  Large natural gas operations  New properties in Canadian Foothills and New York State

New York Acquisition

 Late in 2002 and early 2003, Talisman’s wholly owned subsidiary, Fortuna Energy Inc., acquired natural gas properties, production and facilities in upstate New York for US$309 million.  Growing new core gas area with low operating costs, 138 bcf of proved gas reserves, production of 60-70 mmcf/d and over 50 drilling locations.

North Sea:

 Commercial hub operations  Low risk development, adjacent exploration opportunities, secondary recovery and 3rd party tariff receipts  Production was up 15% over 2001.

SE Asia:

 Poised for significant growth  Developing large gas reserves and sales opportunities; Indonesia  PM-3 commercial agreement: Malaysia/Vietnam  Offshore block acquisitions: Vietnam

Latin America and Caribbean:

 New high impact development projects: Trinidad/Columbia  First production 2005

Africa and Middle East:

 Non-operational interests: Algeria  New exploration acreage in proven offshore basin: Qatar

Sudan Impact and Controversy:

 Shareholders grew tired of controversy stemming from the long standing conflict in the country  Sold Sudan interest: US $758 million  CEO expressed that Talisman felt these operations were financially beneficial to the company and to the people of Sudan

Gain on Sudan:

Growth Strategy:

 Continue to develop large North American gas business, while at the same time growing and adding to its international operations  Growth via exploration and acquisition  10 year average: 13% production per share increase compounded annually  2002 Record: 6% increase in production to 445,000 boe/d

Growth Strategy:

 Continue on past three years: replaced 184% of production at and average development cost of $7.66/boe  Target: 5-10% growth in production per share 

Shareholder Value Creation:

 Repurchased 5.8 million shares in 2002  Create value for SH with proceeds from Sudan sale

Share Capital

•Ticker Symbol: TLM •Market Cap: $6.35 Billion •Current Stock Price: $49.59

•52-Week Range: $34.12 - $51.30

5 Year Trend:

Talisman vs. Oil & Gas

Talisman vs. S&P 500

Valuation:

Valuation Ratios

P/E Beta Price to Book Dividend Yield Sales – 5 yr growth EPS – 5 yr growth

Company Industry

8.14

0.33

1.88

1.16

25.50

60.26

14.53

0.52

2.13

2.13

18.70

14.18

Sector

15.63

0.55

2.49

2.75

9.34

-2.16

S&P 500

25.40

1.00

4.27

2.05

9.71

10.58

Valuation:

Financial Strength

Quick Ratio Debt to Equity Interest Coverage

Profitability

Gross Margin Operating Margin Net Profit Margin

Management

ROA ROE Inventory Turnover

Company

0.79

0.47

8.81

75.51

24.34

23.41

9.53

24.72

9.01

Industry

0.87

0.86

7.39

56.90

25.58

14.94

6.47

16.51

18.43

Sector

0.95

0.46

10.53

37.50

13.97

8.00

7.00

16.21

17.95

S&P 500

1.29

0.65

13.02

47.15

18.99

12.67

6.10

17.85

9.96

Valuation:

 Net Asset Value (NAV): market value of assets net of liabilities divided by the shares outstanding  $74.50 price target based on a 14% premium to estimated NAV under base case price scenario (Gordon Gee, RBC Capital Markets)  Current stock price: $50.18 (TSX)

Recent Developments

 Banc of America Securities downgraded the energy company to "neutral" from "buy," saying the ratings change is driven by a recent rise in the stock price and not a change in the operational outlook for the company.

Recommendation:

 Strong sales and EPS growth  High profitability compared to industry and S&P 500  High return ratios (ROE, ROA, ROI)  Strong recent track record in increasing production 

BUY