Raymond James Energy GroupRaymond James Energy Group

Marshall.Adkins@RaymondJames.comMarshall.Adkins@RaymondJames.comJim.Rollyson@RaymondJames.comJim.Rollyson@RaymondJames.com

John.Tasdemir@RaymondJames.comJohn.Tasdemir@RaymondJames.comDarren.Horowitz@RaymondJames.comDarren.Horowitz@RaymondJames.com

Raymond James Oilservice GroupRaymond James Oilservice Group(800) 945-6275 (800) 945-6275

How Do You Solve an Oil How Do You Solve an Oil “Addiction”?...“Addiction”?...Higher Prices!Higher Prices!

February 2006

What is Your Time Frame?What is Your Time Frame?

Bearish Short TermBearish Short Term (downgraded group on 1/26/06) (downgraded group on 1/26/06)

– Oil inventories above 5-year highs followed by large inventory Oil inventories above 5-year highs followed by large inventory builds March-May. builds March-May.

– Warm winter has increased natural gas riskWarm winter has increased natural gas risk

– Oil & gas fall until OPEC cutsOil & gas fall until OPEC cuts

Bullish Long TermBullish Long Term– 6 – 18 month outlook bullish for oil 6 – 18 month outlook bullish for oil

– Supply interruption wildcards (Iran) more visibleSupply interruption wildcards (Iran) more visible

– Natural gas “resets” in OctoberNatural gas “resets” in October

2

Why is This a Long-Term Upswing?Why is This a Long-Term Upswing?

Oil supply bubble is goneOil supply bubble is gone

Unprecedented oil demand growth (China transition)Unprecedented oil demand growth (China transition)

Non-OPEC supply growth slowing (next 5 years)Non-OPEC supply growth slowing (next 5 years)

Minimal oil demand destruction with higher prices Minimal oil demand destruction with higher prices

U.S. natural gas supply still fallingU.S. natural gas supply still falling

3

The Oil Bubble is Gone!The Oil Bubble is Gone!

4

Average Excess OPEC Capacity

0

2

4

6

8

10

12

14

16

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

E20

06E

2007

E

OP

EC

Exc

ess

Cap

acit

y(M

Mb

ls/d

ay)

OPEC Excess CapacityNormalized Excess Capacity

Sources: IEA, RJ&A, Bloomberg

Arab Embargo Iran Crisis

Kuwait WarDemand Growth

Oil Consumption Increases Fastest Oil Consumption Increases Fastest During Early IndustrializationDuring Early Industrialization

5

Oil Consumption and Industrialization

0

5

10

15

20

25

30

35

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pe

r C

ap

ita

(B

arr

els

pe

r y

ea

r)

USA China India

Japan South Korea

USA

Japan

South Korea

China

India

Source: BP Statistical Review of World Energy; Respective Census Bureaus; Marc Faber Limited, RJ&A Estimates

Russian Oil Production Russian Oil Production GrowthGrowth Slowing Slowing

6

Russian Oil Production Growth (Year-Over-Year)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1998 1999 2000 2001 2002 2003 2004 2005E 2006E

Mil

lio

n b

arre

ls p

er d

ay

Source: IEA, RJ&A Estimates

?

?

Russian Oil Production Growth SlowingRussian Oil Production Growth Slowing

7

Russian Oil Production Growth Slowing

8.4

8.6

8.8

9

9.2

9.4

9.6

9.8

Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05

Pro

du

ctio

n (

MM

bp

d)

Source: IEA

Yukos-driven declines

Mature Areas Must Drill DeeperMature Areas Must Drill Deeper

8

Average U.S. Well Depth

4,000

4,500

5,000

5,500

6,000

6,50019

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05Y

TD

Wel

l Dep

th (

in f

t.)

Source: EIA

40%

Searching For Smaller ReservesSearching For Smaller Reserves

9

Mean GOM Field Discovery Size

0.00

0.05

0.10

0.15

0.20

0.2519

47

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

Fiel

d S

ize

(BB

OE

)

Source: Minerals Management Service.

How Will More Rigs Affect Production?How Will More Rigs Affect Production?

10

Total U.S. Rigs vs. "Lower 48" Oil Production

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,50019

70

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

Source: DOE

Tota

l Rig

s

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

MB

bls

Per

Day

Total Rig Count Oil Production

Total Rigs

"Lower 48" Oil Production

Why Were We Worried About 2Q Oil?Why Were We Worried About 2Q Oil?(RJ Q3 2005 Model)(RJ Q3 2005 Model)

11

Total U.S. Petroleum Inventories As of Sept. 2005

600

620

640

660

680

700

720

740

760

780

800Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

To

tal U

.S. P

etr

ole

um

Inv

en

tori

es

(M

MB

bls

)

5 Yr Range 2005A 2005E 2006ESource: EIA, RJ&A

Q2 2006 Problem

2005 Actual

RJ 2006 Estimate

RJ 2005 Estimate

Why Are We More Worried Today?Why Are We More Worried Today?

12

Total U.S. Petroleum Inventories Actual vs. Estimates

580

600

620

640

660

680

700

720

740

760

780W

ee

k 1

We

ek

4

We

ek

7

We

ek

10

We

ek

13

We

ek

16

We

ek

19

We

ek

22

We

ek

25

We

ek

28

We

ek

31

We

ek

34

We

ek

37

We

ek

40

We

ek

43

We

ek

46

We

ek

49

We

ek

52

To

tal U

.S. P

etr

ole

um

Inv

en

tori

es

(M

MB

bls

)

5 Yr Range 2005A 2006A 2005E 2006ESource: EIA, RJ&A Estimates

2005 Actual

2006 Estimate (original)Current Inventory Level

RJ 2005 Estimate

Why the 2Q Oil Problem?Why the 2Q Oil Problem?(Demand Falls in 2Q)(Demand Falls in 2Q)

13

Oil Demand Seasonality

77.077.578.078.579.079.580.080.581.081.582.0

Q1 Q2 Q3 Q4

MM

bb

ls/d

ay

5 Year Average Global Oil Demand

1.8 MMbbl/day Typical Demand Drop

Source: IEA

OPEC Must Cut!OPEC Must Cut!

14

Total U.S. Petroleum Inventories

600

620

640

660

680

700

720

740

760

780

800

Jan

Fe

b

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Se

p

Oct

No

v

De

c

To

tal U

.S. P

etr

ole

um

Inv

en

tori

es

(M

MB

bls

)

5 Yr Range 2005 Actual 2006 Actual 2006 E

Source: API.

Source: EIA, RJ&A Estimates

20052006 E

Current Inventory Level

How Low Could Oil Go?How Low Could Oil Go?(OPEC Will Defend (OPEC Will Defend ±±$50 Oil Prices)$50 Oil Prices)

15

Rising Saudi infrastructure costsRising Saudi infrastructure costs

Higher shipping costsHigher shipping costs

Widening differential for poor quality crudesWidening differential for poor quality crudes

Devaluation of the U.S. $ Devaluation of the U.S. $

– Less OPEC purchasing powerLess OPEC purchasing power

• Cheaper international oil pricesCheaper international oil prices

OPEC wants highest price w/o demand destructionOPEC wants highest price w/o demand destruction

Discounts on Heavy Oil Have WidenedDiscounts on Heavy Oil Have Widened

16

Discount From WTI Price for Maya (Heavy) Crude

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Oct

-05

Pri

ce p

er B

arre

l

Source: Bloomberg

Light/Heavy Spread

Historic Average Spread = ~$5

Dollar Devaluation Raises OPEC TargetDollar Devaluation Raises OPEC Target

17

Dollar / Euro Exchange Rate vs. WTI Crude Oil Price

0.8

0.9

1

1.1

1.2

1.3

1.4

Jan

-02

Ma

r-0

2

Jun

-02

Se

p-0

2

De

c-0

2

Fe

b-0

3

Ma

y-0

3

Au

g-0

3

No

v-0

3

Jan

-04

Ap

r-0

4

Jul-

04

Oct

-04

De

c-0

4

Ma

r-0

5

Jun

-05

Se

p-0

5

US

D /

EU

R

USD / EUR Exchange Rate Linear (USD / EUR Exchange Rate)Source: OANDA.com, Reuters

Dollar is down 34% since Jan 2002

USD/EUR

OPEC Production Cuts Support Oil PricesOPEC Production Cuts Support Oil Prices

18

OPEC Quota Changes

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

Sep

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

WT

I fr

on

t-m

on

th o

il p

rice

($/

Bb

l)

20

25

30

35

40

45

50

55

60

65

70

75

Quota Cuts

Source: Bloomberg

WTI Oil Price

(Higher Lows)

$26.93

$32.83

$42.53

We Are Modeling a Q2 Pullback in OilWe Are Modeling a Q2 Pullback in Oil

19

Oil Price Forecast

$50

$52

$54

$56

$58

$60

$62

$64

Q1 06E Q2 06E Q3 06E Q4 06ESource: RJ&A Estimates

$59.25 Average Price

Where Could We Be Wrong?Where Could We Be Wrong?

20

OPEC Global Over/Under Supply

500

2,500

4,500

6,500

8,500

10,500

Sa

ud

i Ara

bia

Ira

n

Ve

ne

zue

la

Ira

q

Nig

eri

a

U.A

.E.

Ku

wa

it

Lib

ya

Ind

on

esi

a

Alg

eri

a

Qa

tar

Es

tim

ate

d P

rod

uc

tio

n (

'00

0 B

/da

y)

Excess Capacity

Estimated Second Quarter 2005 Production

Source:: Bloomberg, RJ&A Estimates

Iran Has Changed the Game! Iran Has Changed the Game!

21

Iran has re-opened nuclear effortsIran has re-opened nuclear efforts

– New leader not backing downNew leader not backing down

U.S. & Israel will U.S. & Israel will NOTNOT let Iran get nuclear weapons let Iran get nuclear weapons

Iran’s 3.9 million Bpd is at riskIran’s 3.9 million Bpd is at risk

Situation should come to a head in 6 - 18 monthsSituation should come to a head in 6 - 18 months

What are the Odds? What are the Odds?

22

PossibilityPossibility

ProbabilityProbability

Iran backs down voluntarilyIran backs down voluntarily 20% 20%

UN issues sanctions & actsUN issues sanctions & acts 20% 20%

US/NATO send air strikesUS/NATO send air strikes 20% 20%

Israel actsIsrael acts 20% 20%

Something else happens??? Something else happens??? 20% 20%

Oil Will Drive Gas PricesOil Will Drive Gas Prices(Within a +/- 6:1 Ratio With Crude)(Within a +/- 6:1 Ratio With Crude)

23

Heating Oil/Residual Fuel Prices vs. Natural Gas Prices

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

8/1/

2003

9/1/

2003

10/1

/200

3

11/1

/200

3

12/1

/200

3

1/1/

2004

2/1/

2004

3/1/

2004

4/1/

2004

5/1/

2004

6/1/

2004

7/1/

2004

8/1/

2004

9/1/

2004

10/1

/200

4

11/1

/200

4

12/1

/200

4

1/1/

2005

2/1/

2005

3/1/

2005

4/1/

2005

5/1/

2005

6/1/

2005

7/1/

2005

8/1/

2005

9/1/

2005

10/1

/200

5

11/1

/200

5

12/1

/200

5

1/1/

2006

2/1/

2006

$/M

mb

tu

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

Residual FuelHeating OilNatural Gas

(1) Henry Hub natural gas incl. trans. cost(2) New York 1% residual fuel (converted @6.3 Mmbtu/barrel).(3) New York #2 heating oil (converted @5.8 Mmbtu/barrel).Source: Bloomberg.

Residual Fuel

Natural Gas

Heating Oil

Warm Weather has Destroyed Warm Weather has Destroyed ++ 400 Bcf. 400 Bcf. of Winter Gas Demand (vs. normal)of Winter Gas Demand (vs. normal)

24

Total Degree Days - 2005/6, 2004/5 and Normal

0

50

100

150

200

250

300

Nov-05 Dec-05 Jan-06 Feb-06 Mar-06

2005/6 Normal 2004/5

Source: NOAA

Est. for2/25/06

Where Will Winter Storage End?Where Will Winter Storage End?

25

2004/2005 Withdrawals 2,044 Bcf(Year-Over-Year Changes)U.S. Supply (Net flat) 0 Bcf

Net Hurricane Impact (+1.3 Bcf/day) +200 BcfWeather (7% warmer vs. last year - 1.3 Bcf/day) -200 BcfPrice-induced Demand Destruction/Switching (- 2 Bcf/day) -300 BcfGas Imports/Exports 0 Bcf2005/06 Withdrawals 1,744 Bcf

Beginning Storage 3,289 Bcf

Ending Storage (Theoretical) 1,545 Bcf

Winter 2005/2006 Ending Storage?

What Will This Mean For The Summer?What Will This Mean For The Summer?

26

RJ est.

2005 injections 1,980 Bcf

Summer weather impact (2005 ~ 11% warmer vs. normal) 100 BcfNet hurricane impact in 2005 100 Bcf

Net supply change (flat) 0 Bcf

Price-induced Demand Gains/Switching (1 Bcf/day) (215 Bcf)Total 2006 Injections 1,965 Bcf

2005/06E Winter Ending Storage 1,545 Bcf

2006 Summer Ending Storage (10/31/06) 3,510 Bcf

Summer 2006 Ending Storage?

Y-O

-Y C

hang

es

Long Term, U.S. Gas Will Be Linked to OilLong Term, U.S. Gas Will Be Linked to Oil

27

Near term, gas trades 8:1 with crudeNear term, gas trades 8:1 with crude

Weather drives short-term movesWeather drives short-term moves

Falling supply will ultimately drive prices higherFalling supply will ultimately drive prices higher

RJ estimate: 2006 = $9.31/McfRJ estimate: 2006 = $9.31/Mcf 2007 = $10.00/Mcf2007 = $10.00/Mcf

Could $50 oil mean $6.00 gas?Could $50 oil mean $6.00 gas?

ConclusionConclusion

28

Near-term oil & gas price riskNear-term oil & gas price risk

Longer-term bullish secular move is still intactLonger-term bullish secular move is still intact

Oil should see higher highs and Oil should see higher highs and higher lowshigher lows

Gas trades 8:1 through summerGas trades 8:1 through summer

Supply interruption wildcards more visableSupply interruption wildcards more visable

DisclaimerDisclaimer

Important Investor Disclosures. Stock Ratings: Within our four-tiered rating system, Strong Buy means that the stock is expected to appreciate and produce

a total return of at least 15% and outperform the S&P 500 over the next six months; Outperform means the stock is expected to appreciate and outperform the S&P 500 over the next 12 months; Market Perform means the stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities; and Underperform means the stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

Out of approximately 519 stocks in the Raymond James coverage universe, 52% have Strong Buy or Outperform ratings, 35% are rated Market Perform and 12% are rated Underperform. Within those rating categories, 25% of the Strong Buy- or Outperform-rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 17% of the Market Perform-rated companies are or have been clients and 9% of the Underperform-rated companies are or have been clients.

Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including the analyst’s success in rating stocks versus an industry index, support effectiveness to the retail and institutional sales forces, traders, and investment bankers, institutional research votes, as well as overall productivity and revenue generated in covered stocks.

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RJA or its officers, employees, or affiliates may (1) currently own shares, options, rights or warrants and/or (2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report's conclusions. 

Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at www.rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see www.rjf.com for office locations) or by sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716.

Additional information is available on request. This document may not be reprinted without permission.

29