Investing in Oil and Gas - Strategies through the Oil Price Cycle

Investing in Oil & Gas 2009: Cycles & Strategies Krista Walter Macquarie Funds Group

Disclaimer This presentation has been prepared by Macquarie Investment Management Limited (Australian Business Number 66 002 867 003 Australian Financial Services Licence 237492) (“MIML”) solely for informational purposes. It is directed at persons with a high degree of knowledge of financial The information in this presentation is not, and should not be construed as, an advertisement, an invitation, an offer, a solicitation of an offer or a recommendation to participate in any investment strategy or take any other action, including to buy or sell any product or security or offer any banking or financial service or facility by any member of the Macquarie Group. This presentation has been prepared without taking into account any person’s objectives, financial situation or needs. Recipients should not construe the contents of this presentation as legal, tax, investment or other advice. This document does not contain all the information necessary to fully evaluate any investment program, and reliance should not be placed on the contents of this document. Any decision with respect to any investment program referred to herein should be made based solely upon appropriate due diligence by the prospective investor. Future results are impossible to predict. This presentation may contain opinions, estimates and other forward-looking statements which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Past performance information shown herein is not indicative of future results. No representation or warranty, express or implied, is made as to the suitability, accuracy or completeness of the information, opinions and conclusions contained in this presentation. In preparing this presentation, reliance has been placed, without independent verification, on the accuracy and completeness of all information available from external sources. To the maximum extent permitted by law, no member of the Macquarie Group nor its directors, employees or agents accept any liability for any loss arising from the use of this presentation, its contents or otherwise arising in connection with it. MIML is not an authorised deposit-taking institution for the purposes of the Banking Act (Commonwealth of Australia) 1959, and MIML's obligations do not represent deposits or other liabilities of Macquarie Bank Limited. Macquarie Bank Limited does not guarantee or otherwise provide assurance in respect of the obligations of MIML. 2

Identifying an Oil Investment Timing of the Oil Cycle Exploration v. Development v. Production mix Comparables Individual Company Evaluation •Corporate Governance •Production profile •Management •Cash Position / Financing •Fiscal Regime •Market 3

ASX Oil Stocks have been correlated to the oil price AUD AUD AUD WTI TAPIS Brent WPL STO OSH AWE BPT ROC TAP NXS CVN WTI TAPIS Brent WTI 1.00 AUD WTI 0.97 1.00 TAPIS 0.99 0.96 1.00 AUD Tapis 0.96 0.98 0.97 1.00 Brent 0.99 0.96 1.00 0.96 1.00 A forecast of the oil price cycle is crucial AUD Brent 0.97 0.99 0.97 0.99 0.97 1.00 WPL 0.88 0.89 0.90 0.91 0.90 0.92 1.00 STO 0.80 0.81 0.81 0.83 0.81 0.83 0.87 1.00 OSH 0.76 0.80 0.79 0.84 0.79 0.84 0.92 0.94 1.00 AWE 0.80 0.77 0.83 0.82 0.83 0.82 0.92 0.77 0.82 1.00 BPT 0.61 0.63 0.65 0.68 0.65 0.68 0.85 0.58 0.73 0.88 1.00 ROC 0.21 0.19 0.23 0.22 0.23 0.22 0.36 -0.02 0.12 0.48 0.70 1.00 TAP 0.12 0.09 0.10 0.07 0.11 0.07 0.06 -0.10 -0.07 0.00 0.14 0.53 1.00 NXS 0.77 0.69 0.78 0.71 0.79 0.72 0.81 0.63 0.65 0.84 0.74 0.42 0.04 1.00 CVN 0.78 0.73 0.79 0.74 0.79 0.74 0.75 0.78 0.75 0.70 0.47 -0.10 -0.20 0.74 1.00 200 80 Oil Prices vs WPL 70 160 60 AUD WTI 120 50 40 US WTI 80 30 AUD Brent 20 AUD Tapis 40 10 WPL 0 0 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 4

When does this relationship break down? An understanding of why this relationship is maintained and when it breaks down is fundamental to making investment decisions Oil Price v WPL WPL (LHS) TAPIS AUD WTI USD WTI 80 160 70 Agrees key terms with Pluto LNG 140 60 customers and approves 120 Stybarrow Development ═> Growth 50 100 40 80 30 60 20 Factoring in a higher long term oil price relative to 40 using spot price in the valuation. Recognition of 10 20 growth projects 0 0 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Source: IRESS 5

Drivers of Oil Price Demand/Supply Speculative Investment Flows GDP USD Strength OPEC Excess Production Capacity/ Refinery Efficiency Inventory Marginal Cost Curve Political risk (major interruption risk) 160 Crude Oil Price 140 120 Political risk Speculative 100 (major interruption risk) Investment OPEC Excess Flows 80 Production Capacity/ Inventory 60 40 20 0 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 4Q 2008 Nominal ($) Real ($) Source: BP Statistical Review 6

(%Δ GDP – 2%) = %Δ in global oil demand Macquarie estimates Global Demand to decline 1.4% this year, while World GDP expected to decline by 0.5%*, with non-OECD countries distorting the equation 2 10% R =0.79 Forecast 5% Growth 0% World GDP Growth World Oil Consumption Growth -5% 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: BP Statistical Review , Datastream , Macquarie Estim ates * Source IMF 7

Other Drivers Spare Capacity and Inventory Levels also affect the oil price, with gasoline demand providing support now during times of high inventory levels and high spare capacity Days of Crude Supply in the Gasoline Stocks are now very OECD are now well above the 5 low compared to the average year average due to strong demand OECD crude days supply OECD gasoline days supply 22 32 21 30 20 Days 28 Days 19 26 18 17 24 16 22 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min-Max Range 2008 2007 2009 Source: International Energy Agency 8

Before stock picking, near term macro investment criteria must be examined qçé=çÑ=`óÅäÉ Top of Cycle Low Cost/bbl High Leverage to Oil Producers Price Producers Strong pipeline Cash for acquisitions Service Companies pa s es (High Beta) m ice ni GET OUT !! Co erv aç S ï äÉ å=` óÅ =` óÅä ré Up É Cy cl e Global Integrated Companies tÉ=^êÉ=eÉêÉ 9

Stock Drivers Producers can be expected to have performance more closely correlated to the oil price. Explorers have catalysts that need to be monitored individually 350 Producers or Explorers? Explorer Portfolio 300 Producer Portfolio WTI (USD) 250 200 150 100 50 0 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Source: IRESS, Macquarie 10

Case Study: ROC Oil Company Not Highly Correlated to Oil Price WTI v ROC Declining Production; Lack of Exploration Success; High debt levels relative to peers; Expensive aquisition 4.5 First Production; Exploration 160 Success; Increase of Proven and 4 140 Probable Reserves (2P) 3.5 120 3 100 2.5 80 2 60 1.5 1 40 0.5 ROC Looks better on a comps basis 20 WTI (USD) 0 0 Jun-08 Jun-07 Jun-06 Jun-05 Jun-04 Dec-08 Dec-07 Dec-06 Sep-08 Mar-09 Dec-05 Sep-07 Mar-08 Dec-04 Sep-06 Mar-07 Sep-05 Mar-06 Sep-04 Mar-05 Mar-04 Source: IRESS 11

Global Valuation Comparables The Majors (E&P) > EV/DACF, EV/EBITDAX Dividend and FCF Yield > P/E Discounted Cash Flow > EV/2P Sum of the parts or NAV USD EV/2P BOE WPL ROC TAP AWE CVN STO BPT AOE OSH* M PO 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 * OSH 2P includes gas reserves that will be booked for PNG LNG upon FID Source: Company Reports, Macquarie 12

Is Cash King? In a down cycle, cash is critical and EV/2P comparisons don’t tell the whole story. A high cash flow per BOE is desirable CF / Production v. EV / 2P 35 AWE 30 OSH* CF (USD) / MMBOE 25 Production TAP WPL 20 ROC 15 CVN STO 10 BPT AOE 5 0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 EV (USD) / 2P (MMboe) * OSH 2P includes gas reserves that will be booked for PNG LNG upon FID Source: Company Reports, Macquarie 13

AWE Oil Price v AWE 5 fåîÉëíçêë=bñáí 180 4.5 160 4 `~ëáåç=cáêëí=d~ë=mêçÇìÅíáçåX=cáêëí= 140 çáä=`äáÑÑ=eÉ~ÇX=eÉåêó= 3.5 aÉîÉäçéãÉåí 120 3 100 2.5 80 2 60 1.5 1 iççâë=ÖççÇ=çå=`~ëÜ=cäçïX= 40 AWE bñéäçê~íáçå=píê~íÉÖóX= 20 0.5 TAPIS (AUD) píêçåÖ=_~ä~åÅÉ=pÜÉÉí 0 0 7 p- 8 p- 6 p- 5 p- 4 Ju -08 9 Ju -07 Ju -06 Ju -05 Ju -04 ec 8 ec 7 M - 07 M - 08 ec 6 M - 06 ec 5 M - 05 ec 4 M - 04 Se n-0 Se n-0 Se n-0 Se n-0 Se n-0 -0 D 0 D p-0 D 0 D 0 D 0 ar ar ar ar ar ar M 14

Framework for Investment GOLD W TI (USD) AUD v USD (RHS) 160 1 $50-$100 Oil 140 0.9 120 100 0.8 •Explorers/Developers •High Cost Producers 80 0.7 Bull (upcycle) 60 0.6 40 20 0.5 •Service Companies 0 0.4 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 $40-$60 Oil extended •Strong Cash Position Base (range trade) cycle •Low Cost Producers $30 oil and extended •Global Integrated Bear case global recession Companies Chart Source: IRESS 15

Appendix

OPEC Supply and Demand Balance 35,000 30,000 25,000 20,000 120.0 15,000 10,000 100.0 5,000 80.0 - Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Saudi Arabia Iran Iraq UAE Kuwait Qatar Angola Nigeria Libya Algeria Ecuador Indonesia Venezuela 60.0 40.0 160 40 140 35 20.0 120 Inventory (MMbbl) 30 100 25 US$/bbl 0.0 80 20 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e 2013e 60 15 Non-Opec OPEC Crude OPEC NGL World Demand 40 10 20 5 0 5 0 Se 5 M 6 Se 6 M 7 Se 7 M 8 Se 8 09 05 06 07 08 -0 -0 0 -0 0 -0 0 -0 n- n- n- n- p- p- p- p- ay ay ay ay n Ja Ja Ja Ja Ja M Cushing Inventory WTI Brent Tapis Source: US Department of Energy, Citigroup 17

China Demand vs. GDP CHINA - Oil Consumption vs GDP Growth GSJBW China GDP Growth China Oil Consumption Growth Forecas ts 20% 15% % Growth 10% 5% 0% -5% -10% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: BP Statis tical Review, Datas tream , Goldm an Sachs Res earch Es tim ates North World Oil America Oil Europe Europe Oil China Oil World GDP Consumption NAFTA GDP Consumptio GDP Consumption China GDP Consumption WTI Price % Change Year Growth Growth Growth n Growth Growth Growth Growth Growth (US$/bbl) in oil price 2004 4.9% 3.6% 3.6% 3.5% 2.6% 0.6% 10.1% 16.7% 41.5 33.5% 2005 4.3% 1.5% 3.1% 0.5% 2.3% 0.8% 10.4% 3.1% 56.6 36.4% 2006 5.0% 1.1% 3.1% -0.5% 3.2% -0.1% 11.6% 7.8% 66.0 16.7% 2007 4.9% 1.2% 2.3% 0.5% 2.8% -3.0% 11.9% 4.3% 72.2 9.4% 2008 2.9% -0.5% 1.1% -4.7% 0.9% -0.7% 9.0% 5.3% 99.6 38.0% 2009 -1.4% -1.4% -3.1% -2.9% -3.2% -2.6% 6.0% 0.8% 46.7 -53.1% 2010 2.8% 0.9% 1.2% 0.8% 1.0% -0.7% 9.0% 3.8% 70.0 49.9% Source: Datastream 18

Europe Demand vs. GDP OLD EUROPE - Oil Consumption vs GDP Growth GSJBW 15% Forecasts Europe GDP Growth Europe Oil Consumption Growth 10% 5% % Growth 0% -5% -10% 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: BP Statistical Review, Datastream, Goldman Sachs Research Estimates 19

North America Demand vs. GDP NORT H AM ERICA - Oil Consumption vs GDP Growth 10% NAFTA GDP Growth North America Oil Consumption Growth GSJBW Forecasts 8% 6% 4% % Growth 2% 0% -2% -4% -6% -8% 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source: BP Statistical Review, Datastream, Goldman Sachs Research Estimates 20

Additional Metrics when Analysing Companies EV / EBITDAX (USD) OSH* WPL STO BPT AWE CVN TAP ROC 0 2 4 6 8 10 Reserves Life (yrs) WPL STO BPT TAP OSH CVN AWE ROC 0 5 10 15 20 25 Life (yrs ) Source: Company Reports, Macquarie 21

Investing in Oil and Gas - Strategies through the Oil Price Cycle

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