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 Association

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

AlbertaLeading oil producing regionConventional oil reserves are

decliningHuge oil sands deposits

TrendsProjects 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 resourcesRegulatory restrictions (timeliness)

New sources:Coalbed & methane gasCoalbed: potential industry for Canada

Natural Gas Exploration Projects Mackenzie Delta

Gauge potential reserves Challenges

Temperature: down to –33 degreesCost: $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: 17.4 billion cubic feet per day

Prices: $4.40 (US$/MM btu)

Exports: 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

economyIncreasing economies of the less industrial

provincesHuge 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 companiesLarge 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 mobileGoal: 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 resourcesGovernment 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 ServicesSeismic drilling or directional drilling

can better withstand

Competitive Rivalry

Slow Industry growth ratesSince 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 ~ 1998CRUDE OIL (sweet)CRUDE OIL (sweet)

NATURAL GASNATURAL GAS

Opposite Moves ~ 2000 -2002

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) 2.2 2.4 2.7

Natural Gas (tcf/yr) 6.4 6.4 6.4

Exports      

Crude Oil (mmbl/d) 1.4 1.4 1.7

Natural Gas (tcf/yr) 3.7 3.8 3.8

Wells Drilled (Canada) 18,300 15,000 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: use horizontal wells to reach

deep oil sands deposits, heat it and bring the bitumen to the surface for processing

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 Company Industry Sector S&P 500

P/E 13.05 12.42 15.63 25.40

Beta 0.15 0.42 0.55 1.00

Price to Book 3.51 2.51 2.49 4.27

Dividend Yield 0.67 3.05 2.75 2.05

Div. – 5 yr growth 0.00 3.03 4.11 6.33

Sales – 5 yr growth 17.89 4.01 9.34 9.71

EPS – 5 yr growth 22.78 -8.15 -2.16 10.58

Valuation - BenchmarkFinancial Strength Company Industry Sector S&P 500

Quick Ratio 0.62 0.77 0.95 1.29

Debt to Equity 0.57 0.23 0.51 0.97

Interest Coverage 37.40 19.43 10.53 13.02

Profitability

Gross Margin 69.03 31.07 34.76 46.96

Operating Margin 28.43 9.95 10.95 18.04

Net Profit Margin 16.91 5.94 5.68 11.85

Management

ROI 12.74 12.79 8.75 9.57

ROA 11.59 9.94 7.00 6.10

ROE 32.63 21.19 16.21 17.85

Inventory Turnover 6.68 19.48 17.95 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 2002Alberta 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

UpstreamOnshore North AmericaOffshore & International OperationsOffshore & 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 AmericaEast Coast of CanadaGulf of MexicoU.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 storageNatural gas liquids extractionPower 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

EnCana: Upstream Results

EnCana: Income Statement

(in CAD$millions) First 9 Months Annual Data

Prior to Merger

2003 2002 2002 2001 2000

Net Revenue $10,378 $6,388 $10,011 $4,894 $4,366

Expenses $7,447 $5,287 $8,148 $3,009 $2,733

Net Earnings $2,418 $729 $1,225 $1,254 $1,000

Basic EPS $5.69 $1.99 $2.92 $5.02 $4.02

Diluted EPS $5.60 $1.96 $2.87 $4.90 $3.95

EnCana: Balance Sheet

(in CAD$millions) As of Sept 2003 Prior to Merger

2003 2002 2001

Assets

Current Assets $2,676 $4,289 $1,673

LT Assets $27,536 $27,033 $9,127

Total Assets $30,212 $31,322 $10,800

Liabilities & S/H Equity

Current Liabilities $2,222 $3,879 $1,640

LT Liabilities $13,037 $13,649 $5,181

S/H Equity $14,953 $13,794 $3,979

Total Liabilities & S/H Equity $30,212 $31,322 $10,800

EnCana: Cash Flow Statement

First Nine Months Annual Data

(in CAD$millions) Prior to Merger

2003 2002 2002 2001 2000

Operating Activities $4,834 $1,590 $2,571 $2,774 $2,229

Investing Activities ($ 3,279.00) ($ 3,349.00) ($ 4,062.00) ($ 1,697.00) ($ 2,321.00)

Financing Activities ($ 1,381.00) $ 1,218.00 $ 747.00 ($ 330.00) $ 158.00

Cash Change $ 152.00 ($ 548.00) ($ 751.00) $ 766.00 $ 65.00

EnCana: Benchmarks

Financial Strength Company Industry Sector S&P 500

Quick Ratio (MRQ) 0.73 0.87 0.95 1.29

Debt to Equity (MRQ) 0.48 0.89 0.51 0.97

Interest Coverage (TTM) 9.28 7.36 10.58 13.05

Profitability Ratios (%)

Gross Margin (TTM) 66.37 56.78 37.49 47.12

Operating Margin (TTM) 26.11 25.91 14.07 19.1

Net Profit Margin (TTM) 20.65 15.07 8.01 12.68

Management Effectiveness (%)

Return On Investment (TTM) 10.34 7.52 8.77 9.62

Return On Assets (TTM) 9.39 6.42 7 6.13

Return On Equity (TTM) 20.14 16.74 16.29 17.89

Inventory Turnover (TTM) 7.17 18.37 17.83 9.92

EnCana: Benchmarks

Valuation Ratios Company Industry Sector S&P 500

P/E Ratio (TTM) 7.98 14.2 15.36 24.98

Beta -0.28 0.52 0.55 1

Price to Book (MRQ) 1.51 2.1 2.43 4.21

Dividend Yield 0.86 2.17 2.81 2.08

Price to Cash Flow (TTM) 3.89 6.48 8.65 17.37

EPS - 5 Yr. Growth Rate 15.85 14.14 -2.18 10.51

Sales - 5 Yr. Growth Rate 25.17 18.65 9.47 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

Company Industry Sector S&P 500

P/E 8.14 14.53 15.63 25.40

Beta 0.33 0.52 0.55 1.00

Price to Book

1.88 2.13 2.49 4.27

Dividend Yield

1.16 2.13 2.75 2.05

Sales – 5 yr growth

25.50 18.70 9.34 9.71

EPS – 5 yr growth

60.26 14.18 -2.16 10.58

Valuation:Financial Strength

Company Industry Sector S&P 500

Quick Ratio 0.79 0.87 0.95 1.29

Debt to Equity 0.47 0.86 0.46 0.65

Interest Coverage 8.81 7.39 10.53 13.02

Profitability

Gross Margin 75.51 56.90 37.50 47.15

Operating Margin 24.34 25.58 13.97 18.99

Net Profit Margin 23.41 14.94 8.00 12.67

Management

ROA 9.53 6.47 7.00 6.10

ROE 24.72 16.51 16.21 17.85

Inventory Turnover

9.01 18.43 17.95 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