Raymond James Energy Group Raymond James Oilservice Group (800) How Do You Solve an Oil “Addiction”?... Higher Prices! February 2006

What is Your Time Frame?  Bearish Short Term (downgraded group on 1/26/06) –Oil inventories above 5-year highs followed by large inventory builds March-May. –Warm winter has increased natural gas risk –Oil & gas fall until OPEC cuts  Bullish Long Term –6 – 18 month outlook bullish for oil –Supply interruption wildcards (Iran) more visible –Natural gas “resets” in October 2

Why is This a Long-Term Upswing?  Oil supply bubble is gone  Unprecedented oil demand growth (China transition)  Non-OPEC supply growth slowing (next 5 years)  Minimal oil demand destruction with higher prices  U.S. natural gas supply still falling 3

The Oil Bubble is Gone! 4

Oil Consumption Increases Fastest During Early Industrialization 5

Russian Oil Production Growth Slowing 6

7

Mature Areas Must Drill Deeper 8

Searching For Smaller Reserves 9

How Will More Rigs Affect Production? 10

Why Were We Worried About 2Q Oil? (RJ Q Model) 11

Why Are We More Worried Today? 12

Why the 2Q Oil Problem? (Demand Falls in 2Q) 13

OPEC Must Cut! 14

How Low Could Oil Go? (OPEC Will Defend ±$50 Oil Prices) 15  Rising Saudi infrastructure costs  Higher shipping costs  Widening differential for poor quality crudes  Devaluation of the U.S. $ – Less OPEC purchasing power Cheaper international oil pricesCheaper international oil prices  OPEC wants highest price w/o demand destruction

Discounts on Heavy Oil Have Widened 16

Dollar Devaluation Raises OPEC Target 17

OPEC Production Cuts Support Oil Prices 18

We Are Modeling a Q2 Pullback in Oil 19

Where Could We Be Wrong? 20

Iran Has Changed the Game! 21  Iran has re-opened nuclear efforts – New leader not backing down  U.S. & Israel will NOT let Iran get nuclear weapons  Iran’s 3.9 million Bpd is at risk  Situation should come to a head in months

What are the Odds? 22 PossibilityProbability Iran backs down voluntarily 20% UN issues sanctions & acts 20% US/NATO send air strikes 20% Israel acts 20% Something else happens??? 20%

Oil Will Drive Gas Prices (Within a +/- 6:1 Ratio With Crude) 23

Warm Weather has Destroyed Bcf. of Winter Gas Demand (vs. normal) 24

Where Will Winter Storage End? 25

What Will This Mean For The Summer? 26

Long Term, U.S. Gas Will Be Linked to Oil 27  Near term, gas trades 8:1 with crude  Weather drives short-term moves  Falling supply will ultimately drive prices higher  RJ estimate: 2006 = $9.31/Mcf2007 = $10.00/Mcf  Could $50 oil mean $6.00 gas?

Conclusion 28  Near-term oil & gas price risk  Longer-term bullish secular move is still intact  Oil should see higher highs and higher lows  Gas trades 8:1 through summer  Supply interruption wildcards more visable

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