Today’s Small-Cap. Producers- Bigger, Stronger, Faster Brad L. Beago, CFA – - (713) Eitan Bernstein,CFA – Important disclosures are on last page. Calyon Securities (USA) Inc. February 7, 2005

OGIS Small Cap Conference 2 Key Takeaways:  Impact of High Commodity Prices on Independent Oil & Gas Producers – expanded margins have resulted in record cash flows, stronger balance sheets, record CAPEX and more growth  Valuations Remain Attractive: We estimate that E&P Stocks on average are impounding long-term commodity prices of around $32/bbl and $5.25/mcf, well below futures prices.  The Industry Remains Highly Dynamic – Survivorship study of 21 producers with 12/31/98 market cap of $500MM or less

OGIS Small Cap Conference 3 Industry Snapshot  Independent oil & gas producers are in the midst of an unprecedented cycle: High commodity prices have resulted in record margins, record levels of drilling and record M&A valuations Stocks have reacted positively to strong fundamentals Equity valuations reflect around $32/bbl and $5.25/mcf prices – This is just above our downside commodity price case Independents are now larger and better capitalized than ever – Expect more M&A and consolidation, more mature property divestitures by the Majors, IPOs, and new entrants funded by private equity.

OGIS Small Cap Conference 4 Record Crude Oil Prices Source: Factset. Futures strip currently averages over $47/bbl vs. $26.46/bbl ’00-’03 average and ~$19/bbl average during the 1990’s. Widest spread ever between futures and analyst consensus ($37/bbl for ’05). Are $40/bbl-plus oil prices sustainable? Nymex 12-Month Crude Oil Strip (1/00-1/05)

OGIS Small Cap Conference 5 Record North American Natural Gas Prices Source: Factset. Nymex 12-Month Natural Gas Strip (1/00-1/05) 12-Month NYMEX Futures currently average $6.61/Mcf vs. $4.24/Mcf ‘00-’03 average and $2.04/Mcf average during the 1990’s. Supplies may be once again increasing but less than projected demand growth Industry is chasing higher cost plays so the economics have shifted up

OGIS Small Cap Conference 6 Industry EBITDA Has Risen With Commodity Prices Source: Factset, Company reports, and Calyon Securities (USA) estimates. High Commodity Prices Have Impacted the Bottom Line E&P Universe 2004E total EBITDA is $22 billion vs. $11 billion in Strong commodity prices obviously benefiting EBITDA (0.79 Correlation). However, producers also adding value through operations.

OGIS Small Cap Conference 7 Margins Reached Record Levels in 2004 – ‘O5 Looking Good Source: Company Reports and Calyon Securities (USA) estimates. Includes: APA, APC, DVN, EOG, NFX, NBL and XTO.

OGIS Small Cap Conference 8 Margins Still Strong Even Assuming Lower Commodity Prices Source: Company Reports and Calyon Securities (USA) estimates. Includes: APA, APC, DVN, EOG, NFX, NBL and XTO.

OGIS Small Cap Conference 9 E&P Valuation Update

OGIS Small Cap Conference 10 Performance: Commodities vs. Equities Source: Factset and Bloomberg. Commodity vs. Equity Stock Performance (1/00-1/05) Universe includes: APA, APC, CRK, DNR, DVN, EOG, NBL, NFX, POG, PQUE, PXD, REM, RRC, VPI and XTO. E&P stock price performance has exceeded commodity price increases. It should, given producers’ earnings and cash flow growth Correlation – Highest ever measured. Implication for investors is to go with strong companies as core positions and look for unrecognized opportunities – we recommend multi-regional exposure.

OGIS Small Cap Conference 11 NAVs Indicate the Market is Skeptical of Current Prices Source: Company Reports, Factset and Calyon Securities (USA) estimates. Based on our NAV estimates, it appears E&P stock prices are currently impounding long term pricing of around $32/bbl and $5.25/mcf.

OGIS Small Cap Conference 12 Current Group Trading Multiples Source: Company Reports, Factset and Calyon Securities (USA) estimates. Current trading multiples are within historical trading ranges. Future commodity price assumptions are the key.

OGIS Small Cap Conference 13 E&P Survivorship Study – Circle of Life

OGIS Small Cap Conference 14 Industry Analysis: The Circle of Life Source: Company Reports.  Analyzed 44 producers from our 1998 Finding Cost Study 25 survive today 15 were acquired or merged 4 went into bankruptcy – their assets merged or purchased All bankruptcies were associated with heavy HY Debt loads during 1998 oil price meltdown Carl Icahn recently announced a deal to do a $650 million recapitalization of three ailing companies (2-TTXG and NEG from our original 44) and merge them into another producer.  21 Producers with 12/31/98 Market Cap of $500MM or less 6 were acquired 15 still independent: total market cap has increased at a 50% CAGR Market cap grew from $1.5 billion to $16.7 billion today – 11x  A new crop of small caps are emerging Record private equity transactions targeting previous managements of acquired companies Accelerated IPO activity – three currently – BBG, W&T, BDE

OGIS Small Cap Conference 15 Small-Cap Survivors: Impressive Reserve Growth (BBOE) Source: Company Reports. From , these 15 “survivors” total proved reserves increased from 1.1 billion boe to over 2.4 Bboe – a 12% CAGR. These companies are still primarily domestic and 75% natural gas. Growth split evenly between M&A and drill-bit. Companies with “acquisition/exploitation” strategies have generated the highest returns with the lowest risk profiles. Examples include XTO, DVN and APA.

OGIS Small Cap Conference 16 Small-Cap Survivors: Impressive Production Growth (BBOE) Source: Company Reports. From , these 15 “survivors” total production increased from 129 MMBOE to over 209 MMBOE – an 8% CAGR.

OGIS Small Cap Conference 17 Survivors: Strong Cash Flow Growth (CFFO $B) Source: Company Reports. Increasing production along with increasing commodity prices have boosted cash flow generated by the group – a 17.5% CAGR. Operating cash flow up 3x for these 15 producers 2004 CFFO likely to be up another 20%+ Companies continue to invest virtually all of cash flow and more into upstream – This distinguishes the independents.

OGIS Small Cap Conference 18 Survivors: Increasing Costs Incurred Source: Company Reports. Total investment as measured by “costs incurred” increased by a 12% CAGR over the entire period. From , the group invested a total, including cash and non-cash, of approx. $23.5 billion for exploration, development and acquisitions. This compares to combined CFFO of $15.7 billion – the remainder represents equity and debt. Independents are expected to continue to invest more than their cash flow.

OGIS Small Cap Conference 19 Rising Finding Costs are Not Squeezing Margins($/boe) Source: Company Reports and Factset. Finding costs for the group have increased at a 9% CAGR from This increase in costs is significantly lower than growth in cash flow. Over the entire period, these companies found 3.2 Bboe, at a cost of $23.5 billion, implying an all-in average finding cost of $7.30/boe.

OGIS Small Cap Conference 20 Important Disclosures I, Brad L. Beago, hereby certify that the views expressed in this research report accurately reflect my own personal views about the securities and/or the issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. THE FOLLOWING DISCLOSURES pertain to symbols that may be located on the first page of this report or throughout the body of this report: † The member or its affiliates managed and/or participated in a public offering of the subject company’s securities or received compensation for investment banking services from the subject company in the past 12 months. ‡ The member expects to receive or intends to seek compensation for investment banking services from the subject company in the next three months. * Calyon Securities (USA) Inc. receives or has received compensation from the company for non-investment banking services (i.e., brokerage services) in the past 12 Calyon Securities (USA) Inc., or our affiliates, owns 1% or more of this security. ^ The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from the company for non-investment banking products/services in the past 12 months. (m) The member makes a market in the securities of the company. Rating Recommendations (based on anticipated returns over a 12-month period): BUY, above 20%; ADD, 10%-20%; NEUTRAL, 0%-10%; REDUCE, negative return, but by less than 20%; SELL, negative return of more than 20%. OVERALL RATING DISTRIBUTION for Calyon Securities (USA) Inc., Equity Universe: BUY - 54%, HOLD - 40%, SELL - 6%. Data as of Sept. 30, INVESTMENT BANKING CLIENTS as a % of rating category: BUY – 27%, HOLD – 20%, SELL – 0%. Data for 12-month period ending Sept. 30, VALUATION METHODOLOGY for price target for [COMPANY NAME]: RISKS TO TARGET INCLUDE: FOR A HISTORY of the recommendations and price targets for companies mentioned in this report, please write to: Calyon Securities (USA) Inc., Compliance Department, 1301 Avenue of the Americas, 37 th Floor, New York, New York CALYON SECURITIES (USA) INC. POLICY: Analysts may not receive compensation from the companies they cover. Neither analysts nor members of their households may have a financial interest in, or be an officer, director or advisory board member of, companies covered by the analyst. ADDITIONAL INFORMATION on the securities mentioned herein is available upon request. DISCLAIMER: The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to any change in our views. This is not a solicitation or any offer to buy or sell. We, our affiliates, and any officer director or stockholder, or any member of their families may have a position in, and may from time to time purchase or sell any of the above mentioned or related securities. This material has been prepared for and by Calyon Securities (USA) Inc. © 2005 Calyon Securities (USA) Inc. All rights reserved.