Canadian Oil

1
Canadian Oil Gas Industry

• Analysis Recommendations
• Featuring
• Suncor, Talisman EnCana

2
Presenters Topics

• Linda Holmes Industry Overview
• Eric Song Suncor Energy
• Daniel Lee EnCana
• Tolek Strukoff Talisman Energy

3
Industry Overview Agenda

• Industry Synopsis
• Economic summary
• Crude Oil Highlights
• Natural Gas Highlights
• SWOT
• Industry Forecasts

4
Industry Synopsis
2001 Canada's primary energy production 39
natural gas 25 oil 20 hydropower 11
coal 5 nuclear power

• 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

5
Industry Synopsis

• Oil Gas is the largest industry in the world
• Tends to parallel boom bust in economy
• Recession less products, less commutingless
  energy use.
• Demand reasonably stable (except recession)
• Supply can experience shocks
• OPEC meetings
• Net exporter of energy
• 2001 31 of energy production exported

6
Canada and the Upstream Oil Gas Sector

• 3rd largest producer of natural gas
• 9th largest producer of crude oil
• 6 of Canadas GDP
• Grown more than 250 since 1990
• Overhead 6 years of stats

7
Economic Highlights

• 2002 Canadas 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)

8
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 years
  forecasts

9
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
• gt100 Billion in exploration development
• Overhead
• International Petroleum Supply Demand
• Base Case
• Provided by Energy Information Association

10
Situational Analysis

• OIL worlds largest source of energy
• NATURAL GAS role increasing
• US gas supply lt 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

11
Energy (Cdn) Production Trends
2001 Canada's primary energy production 39
natural gas 25 oil 20 hydropower 11
coal 5 nuclear power
12
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

13
Crude Oil Highlightscontd

• Alberta
• Leading oil producing region
• Conventional oil reserves are declining
• Huge oil sands deposits
• Trends
• Projects shifting focus to eastern northern
  provinces

14
OIL Production Consumption
15
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

16
Natural Gas

• Issues
• Technology development (lower costs)
• Gaining access to resources
• Regulatory restrictions (timeliness)
• New sources
• Coalbed methane gas
• Coalbed potential industry for Canada

17
Natural Gas Exploration Projects

• Mackenzie Delta
• Gauge potential reserves
• Challenges
• Temperature down to 33 degrees
• Cost 30 MM/well
• 60 times more than in AB
• Politics NWT Federal govt
• Potential
• Increased capacity

18
Gas Production Consumption
19
Natural Gas in Canada (2001)
20
Strengths

• Size of the market
• Size of the industry
• Alberta Oil Sands
• One of the largest sectors in Cdn economy
• Increasing economies of the less industrial
  provinces
• Huge undeveloped energy, including major natural
  gas deposits in offshore areas

21
Weaknesses

• Limited natural gas reserves (TCF)

22
Natural Gas Productive Capacity
23
Weaknesses Contd

• Higher costs for major supply basins than others

24
Opportunities

• Developing world
• US supply lt US demand
• Exploration pipeline projects in Yukon NWT
• Oil sands (bitumen)

25
Oil Production Forecast
26
Power of Suppliers within Industry

• Dominated by a few powerful companies
• Large capital investment required
• Discourages smaller investors
• Proximity to largest energy market
• Technological Developments
• 3-D seismic steam assisted gravity drainage

27
Threats

• Capital investment more internationally mobile
• Goal projects that offer
• Best potential ROI
• Least geological, ecological, political risk
• High development costs
• High natural gas prices
• Growing environmental concerns
• Kyoto requirements

28
Threat of New Entrants into Industry

• Barriers to Entry HIGH
• High fixed costs
• Pumping trucks gt 1MM
• Specialized Skills
• To operate equipment determine drilling
  decisions
• Cash on hand
• Need ample to compete
• Scarcity of resources
• Government restriction or legislation

29
Regulatory Approval Timeline
30
Reserve Comparison
31
Availability of Substitutes

• Alternative Fuels
• Coal, solar, wind, hydro, nuclear
• Uses of Oil
• Plastics other materials
• Specialized Services
• Seismic drilling or directional drilling can
  better withstand

32
Competitive Rivalry

• Slow Industry growth rates
• Since 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

33
Price History 10 Year
Parallel Dips 1998
CRUDE OIL (sweet)
Opposite Moves 2000 -2002
NATURAL GAS
34
Price History 5 Year
Market Crash
35
Price History Year-to-Date
36
Summary Canadian Oil Gas Stats
37
(No Transcript)
38
Company Background

• Integrated energy company
• Strategically focused on developing one of the
  worlds largest petroleum resource basins
  Canadas Athabasca oil sands
• Ticker symbol SU (both TSX and NYSE)
• Stock price 28.80 (TSX)
• Market capitalization US9.95 Billion
• 3400 employees

39
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

40
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)

41
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 companys net debt
• Continue to build the foundation for the next
  stages of its growth strategy

42
Locations of Operations
43
Pipeline Network Oil Sands Production
44
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 cant be reached by
  traditional ways
• suitable for staged growth
• more environmental friendly
• reduce costs of recovery

45
Oil Sands
46
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

47
Natural Gas
48
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

49
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

50
Energy Marketing and Refining
51
Reserve Estimate
52
Income/Investment Structure
53
Five-Year Highlights
54
Balance Sheet
55
Income Statement
56
Cash Flow Statement
57
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

58
Stock Price Performance
59
Suncor vs. Oil Index (U.S.)
60
Suncor vs. SP 500
61
Valuation - Benchmark
Valuation Ratios Company Industry Sector SP 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


62
Valuation - Benchmark
Financial Strength Company Industry Sector SP 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

63
Valuation - Trend
64
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)

65
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

66
Growth Strategy - Illustration
67
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 Sunocos Ontario retail network
• Five-year 100 million plan to develop renewable
  energy for the future

68
Fundamental Analysis Moderate Buy

• Strong sales and EPS growth
• High profitability compared to industry and SP
  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

69
Technical Analysis Signals of Caution
70
Recommendation HOLD!!!
71
(No Transcript)
72
EnCana Background

• Explores, produces, and markets natural gas,
  crude oil, and natural gas liquids
• Created by a merger in April 2002
• Alberta Energy (AEC)
• PanCanadian Energy (PCE)
• Market Capitalization US21 Billion

73
EnCana Enterprise Value
74
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

75
EnCana Four Pillars of Value Creation

• High-quality assets
• Solid credible reserves
• Strong financial management
• Sound corporate governance

76
EnCana Business Segments

• Upstream
• Onshore North America
• Offshore International Operations
• Offshore New Ventures Exploration
• Midstream Marketing

77
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

78
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 America
• East Coast of Canada
• Gulf of Mexico
• U.K. Central North Sea

79
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

80
EnCana Midstream Marketing

• Enhances value of core upstream operations
• Gas storage
• Natural gas liquids extraction
• Power generation

81
EnCana Worldwide Exploration
82
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

83
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 EnCanas strategic realignment to focus
  on its large portfolio of higher return growth
  assets.

84
EnCana Segmented Income
85
EnCana Upstream Results
86
EnCana Income Statement
(in CADmillions) First 9 Months First 9 Months Annual Data Annual Data Annual Data
Prior to Merger 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
87
EnCana Balance Sheet
(in CADmillions) 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
88
EnCana Cash Flow Statement
First Nine Months First Nine Months Annual Data Annual Data Annual Data
(in CADmillions) Prior to Merger 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
89
EnCana Benchmarks
Financial Strength Company Industry Sector SP 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
90
EnCana Benchmarks
Valuation Ratios Company Industry Sector SP 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
91
EnCana Stock Information

• Ticker Symbol ECA
• Stock Price US35.93
• 52 Week High US39.63
• 52 Week Low US26.75
• of Shares Outstanding 465 Million

92
EnCana Stock Performance
93
EnCana Stock vs. Oil Gas
94
EnCana Stock vs. SP 500
95
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

96
EnCana Valuation

• Net Asset Value (NAV) Method
• US43.00 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 US35.93 11/20/2003

97
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!

98
(No Transcript)
99
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.

100
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)

101
Management Team

• SIX out of the EIGHT executive positions are held
  by former BP employees
• Recent executive succession has been internal

102
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

103
Operating Business Units

• Domestic and international natural gas and
  liquids exploration and production operations
• Upstream hydrocarbon

104
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

105
New York Acquisition

• Late in 2002 and early 2003, Talismans
  wholly-owned subsidiary, Fortuna Energy Inc.,
  acquired natural gas properties, production and
  facilities in upstate New York for US309
  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.

106
North Sea

• Commercial hub operations
• Low risk development, adjacent exploration
  opportunities, secondary recovery and 3rd party
  tariff receipts
• Production was up 15 over 2001.

107
SE Asia

• Poised for significant growth
• Developing large gas reserves and sales
  opportunities Indonesia
• PM-3 commercial agreement Malaysia/Vietnam
• Offshore block acquisitions Vietnam

108
Latin America and Caribbean

• New high impact development projects
  Trinidad/Columbia
• First production 2005

109
Africa and Middle East

• Non-operational interests Algeria
• New exploration acreage in proven offshore basin
  Qatar

110
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

111
Gain on Sudan
112
(No Transcript)
113
(No Transcript)
114
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

115
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

116
(No Transcript)
117
(No Transcript)
118
(No Transcript)
119
(No Transcript)
120
(No Transcript)
121
Share Capital

• Ticker Symbol TLM
• Market Cap 6.35 Billion
• Current Stock Price 49.59
• 52-Week Range 34.12 - 51.30

122
5 Year Trend
123
Talisman vs. Oil Gas
124
Talisman vs. SP 500
125
Valuation
Valuation Ratios Company Industry Sector SP 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



126
Valuation
Financial Strength Company Industry Sector SP 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

127
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)

128
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.

129
Recommendation

• Strong sales and EPS growth
• High profitability compared to industry and SP
  500
• High return ratios (ROE, ROA, ROI)
• Strong recent track record in increasing
  production
• BUY