Lloyd Byrne presentation

M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H

Lloyd Byrne (212) 761.8343 / [email protected]

Woodrow Wilson Center Cross-Border Forum on Energy Issues

“Wall Street’s Perspective on North America and Unconventional Resources?”October 17, 2005 Morgan Stanley does and seeks to do business

with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800-624-2063 to request a copy of this research.

2Lloyd Byrne (212) 761-8343 / [email protected]


October 17, 2005

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

N.A. Oil Consumption

N.A. Oil Production

(Mbbls/d)

? = 4,903

? = 12,397

Source: BP Statistical

North American Crude Oil Consumption / Production (Mbbls/d)

North America increasingly reliant on rest of world to meet demand.

~5 MM B/D Differential




October 17, 2005

5,000

15,000

25,000

35,000

45,000

55,000

65,000

75,000

85,000

Global Oil Consumption

Non-OPEC Oil Production

(Mbbls/d)

? = 18,197

? = 33,424

Source: BP Statistical

Global Oil Consumption (Mbbls/d)

While rest of world increasingly reliant on OPEC to do the same.





October 17, 2005

Source: MEES, J. LaHerrere, Oil & Gas Journal

Number of Large Oil Discoveries Steadily Declining

0

200

400

600

800

1000

pre-1950's 1950's 1960's 1970's 1980's 1990's 2000’s

Num

ber

of D

isco

veri

es

50-99 MMBOE 100-199 200-499 500-999 > 1,000 MMBOE

0

200

400

600

800

1000

pre-1950's 1950's 1960's 1970's 1980's 1990's 2000’s

Num

ber

of D

isco

veri

es

50-99 MMBOE 100-199 200-499 500-999 > 1,000 MMBOE

However, rest of world increasingly reliant on smaller discoveries



October 17, 2005

$12

$22

$32

$42

$52

$62

$72

M1

M3

M5

M7

M9

M11

M13

M15

M17

M19

M21

M23

M25

M27

M29

M31

M33

M35

M37

M39

M41

M43

M45

M47

M49

M51

M53

M55

M57

M59

$/bbl

Jan-99 Jan-00 Jan-04 Jan-05 Today

Shape and duration of forward commodity markets (i.e. the value of long-lived commodities).

January 1999

January 2000

January 2004

January 2005

Source: Morgan Stanley Equity Research, FactSet; M = month (graph represents 60 months) Note: Most recent strip prices as of October 3, 2005.

Crude Oil 5-Year Forward Curves ($/bbl) – Much Further Today

5 Year Strip = $40.39/bbl




Today = $62.79/bblToday

What has this lead to? What’ the What has this lead to? What’ the biggest change in the market?biggest change in the market?



October 17, 2005

Our PerspectiveOur Perspective

As such, Wall Street has not been as worried about long term oil prices, as it has been about which

companies can “best reinvest free cash flow” and capture margin in an opportunity-constrained world.



October 17, 2005

Conventional

Target characteristic: Structural or stratigraphic traps (i.e. single target). Well-defined gas/water contact.

Target reservoir rocks are porous AND permeable.

Permeability & natural reservoir pressure sufficient to lift oil/gas to surface.

High initial flow rates followed by steep production declines, shorter tails (short R/P, high NPV). Water output rises over time.

Relative risk: Higher exploration risk / lower development risk.

Upfront imaging important for well location.

Repeatable? Must identify similar traps in other areas. A CORE MARKET QUESTION.

Unconventional

Target characteristic: Formation extends across broad area (i.e., large areal/vertical extent).

Reservoir rocks: typically homogeneous with sufficient porosity but low permeability.

Artificial stimulation (fracturing) required to produce oil/gas.

Lower relative initial flow rates, steep initial declines that flatten to produce long tail (long R/P, lower relative NPV). Little or no water is produced.

Relative risk: Lower exploration risk / higher development risk.

Upfront/ongoing imaging important to identify variations across the formation (critical to completion technique).

High degree of repeatability. Expansive formation yields multi-year inventory that provides (typically) predictable results (reserve size, flow rate, cost) and shallower decline rates.

With this backdrop, market’s focus has been on large, unconventional resources.



October 17, 2005

Companies included: APA, APC, BR, DVN, EOG, KMG, NBL, PPP, PXD, XTO, CHK, FST.Source: Company data, Morgan Stanley Research e = Morgan Stanley Research estimates

All Sources F&D, 1 Yr. Avg.

This focus and higher prices have coincided with conventional cost structures rising.

LOE & Transportation, $/BOE

Companies included: APA, APC, BR, DVN, EOG, KMG, XTO, FST, NBL, PPP, PXD, NFX, BBG, CHK, ECA.Source: Company data, Morgan Stanley Research E = Morgan Stanley Research estimates

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

e

2006

e

Worldwide United States

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

E

20

06

E



October 17, 2005

Total Operating Costs include: cash costs as defined as operating, SG&A, accretion expense, taxes other than income taxes, and DD&A. In the case of SU, we also add in the cost of bitumen imported from 3rd parties, and In-Situ startup costs.Source: Company Data, Morgan Stanley Research

SU’s Oil Sand Economics Surpassing Conventional E&P

$4

$6

$8

$10

$12

$14

$16

$18

$20

To

tal O

pe

rati

ng

Co

sts

$/b

bl.

Oil Sands Conventional E&P

And in fact, costs at Suncor’s Millennium are now not only competitive, but advantaged.



October 17, 2005

Source: Company Data, Morgan Stanley Research

Oil Sands Returns Competitive and Are Improving

…With returns providing core investment attraction.

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

21.0%

1997 1998 1999 2000 2001 2002 2003 2004

Oil Sands Convetional E&P

RO

CE



October 17, 2005

Question is; controlling costs going forward.

Source: Company Data, Morgan Stanley Equity Research

Capital Cost Comparison

Total Cost Production Cap. Cost IRR @Integrated Projects C$ (bn) mbpd per mbpd $28 WTISuncor - Millenium 3.4 110,000 30,909 20%Athabasca Phase -1 5.7 155,000 36,477Integrated PetroCanada 3.7 85,000 43,588Long Lake Phase - 1 3.2 60,000 52,503 18%Horizon Phase -1 6.8 110,000 62,130 15%Athabasca Phase - 2 7.3 100,000 73,000 12%Syncrude Phase - 3 8.3 105,000 79,047 11%



October 17, 2005

Attractive returns on invested capital.

50+ year reserve lives.

Favorable financial & political environment

and

Potential for technological advances to improve returns, given process and reserve life, provides option value. (Coke gasification, mobile crushers, potential sand removal at mine face, in situ downhole efficiencies, OPTI process, etc.)

ConclusionsConclusions



October 17, 2005

Last Question?

Putting it all together,does consolidation make sense?

If majors can’t find oil, won’t they just buy it? Especially with billions of

‘warehoused’ dollars earning 1-2%?



October 17, 2005

Last question? Why not consolidation?

Source: Morgan Stanley Research, Company Data

The trends also raise eyebrows. Are average returns sustainable?

Integrated Oils F&D (Worldwide, Organic, $/BOE, Simple Avg.)

$0

$2

$4

$6

$8

$10

$12

1997 1998 1999 2000 2001 2002 2003 2004



October 17, 2005

Source: Company Data, Morgan Stanley ResearchNote: RRR = Reserve Replacement Ratio


Organic RRR has consistently fallen . . .

. . . driven by falling revisions – not exploration.

Global Reserve Replacement (ex. A/D) Revisions as % of Additions (Global Integrated)

Source: Company Data, Morgan Stanley Research

0%

40%

80%

120%

160%

200%

1997 1998 1999 2000 2001 2002 2003 2004

-10%

-2%

6%

14%

22%

30%

1997 1998 1999 2000 2001 2002 2003 2004



October 17, 2005

Source: Company Data, FactSet.

This in turn adds to US consolidation, which has been significant…(Dark shades – existing companies; Light shades – consolidated since 1997)

$0.0

$4.0

$8.0

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$16.0

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$36.0

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October 17, 2005

Source: Company Data, FactSet

…And is likely to continue, in our view. (Dark shades – existing companies; Light shades – consolidated since 1997)

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October 17, 2005

ModelWare Description

ModelWare is a proprietary framework for financial analysis created by Morgan Stanley Research. This new framework rests on the principles of comparability, transparency, and flexibility, and aims to provide investors with better tools to view the anticipated performance of an enterprise. The result of an 18-month global effort, ModelWare harmonizes the underlying data and calculations in Morgan Stanley models with a broad set of consistently defined financial metrics. Our analysts have populated the database with over 2.5 million data points, based on an extensive taxonomy of more than 3,500 unique metrics and more than 400 Morgan Stanley calculations. The ModelWare framework will also have the flexibility to allow analysts and investors to add or change data elements, even quickly customize their own analytical approach.

What makes the ModelWare architecture distinctive lies in the separation of data from calculations. Its transparency will permit users to see every component of every calculation, to choose elements or recombine them as they wish without laborious adjustments or recalculations. When choices must be made in defining standard or industry-specific measures, ModelWare defaults to economic logic, rather than favoring one accounting rule over another. This discipline facilitates comparability across sectors and regions. Underlying the ModelWare data is a new set of systems that check the internal consistency of forecast data in each of our analyst’s models.

ModelWare EPS illustrates the approach taken. It represents ModelWare net income divided by average fully diluted shares outstanding. ModelWare net income sums net operating profit after tax (NOPAT), net financial income or expense (NFE), and other income or expense. ModelWare adjusts reported net income to improve comparability across companies, sectors, and regions. These adjustments include the following: We exclude goodwill amortization and items deemed by analysts to be “one-time” events; we capitalize operating leases where their use is significant (e.g., in transportation and retail); and we convert inventory to FIFO accounting when LIFO costing is used. For more information on these adjustments and others, as well as additional background, please see “Morgan Stanley ModelWare (ver. 1.0): A Road Map for Investors,” by Trevor Harris and team, August 2, 2004.



October 17, 2005

Analyst Certification and Important Disclosures

Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Lloyd Byrne.

Important US Regulatory Disclosures on Subject CompaniesThe information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley").As of August 31, 2005, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Canadian Natural Res Ltd., Chesapeake Energy, EOG Resources, Nexen Inc., Noble Energy, Suncor, Talisman Energy Inc, XTO Energy Inc..Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Suncor.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Apache Corp., Bill Barrett Corporation, Burlington Resources, Chesapeake Energy, Devon Energy, EnCana Corporation, EOG Resources, Kerr McGee Corp., Newfield Exploration, Noble Energy, Plains Exploration & Production Co., Suncor, XTO Energy Inc..In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Anadarko Petroleum Corp., Apache Corp., Bill Barrett Corporation, Burlington Resources, Canadian Natural Res Ltd., Chesapeake Energy, Devon Energy, EnCana Corporation, EOG Resources, Forest Oil, Kerr McGee Corp., Newfield Exploration, Nexen Inc., Noble Energy, Pioneer Natural Resources, Plains Exploration & Production Co., Pogo Producing, Suncor, Talisman Energy Inc, XTO Energy Inc..Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Anadarko Petroleum Corp., Apache Corp., Burlington Resources, Canadian Natural Res Ltd., Chesapeake Energy, Devon Energy, EnCana Corporation, EOG Resources, Kerr McGee Corp., Newfield Exploration, Noble Energy, Pioneer Natural Resources, Plains Exploration & Production Co., Suncor, Talisman Energy Inc, XTO Energy Inc..Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following companies covered in this report: Anadarko Petroleum Corp., Apache Corp., Bill Barrett Corporation, Burlington Resources, Canadian Natural Res Ltd., Chesapeake Energy, Devon Energy, EnCana Corporation, EOG Resources, Forest Oil, Kerr McGee Corp., Newfield Exploration, Nexen Inc., Noble Energy, Pioneer Natural Resources, Plains Exploration & Production Co., Pogo Producing, Suncor, Talisman Energy Inc, XTO Energy Inc..Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following companies covered in this report: Anadarko Petroleum Corp., Apache Corp., Burlington Resources, Canadian Natural Res Ltd., Chesapeake Energy, Devon Energy, EnCana Corporation, EOG Resources, Forest Oil, Kerr McGee Corp., Newfield Exploration, Nexen Inc., Noble Energy, Pioneer Natural Resources, Plains Exploration & Production Co., Suncor, Talisman Energy Inc, XTO Energy Inc..The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.An employee or director of Morgan Stanley & Co. Incorporated and/or Morgan Stanley DW Inc. is a director of Burlington Resources, Chesapeake Energy.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.



October 17, 2005

Disclaimers

Global Stock Ratings Distribution(as of September 30, 2005)

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.ANALYST STOCK RATINGSOverweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.ANALYST INDUSTRY VIEWSAttractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over the next 12-18 months.In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the next 12-18 months.Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the next 12-18 months.Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count% of Total

IBC

% of Rating

Category

Overweight/Buy 712

35%

273 39% 38%

Equal-weight/Hold 925 322 46% 35%

Underweight/Sell 394 19% 98 14% 25%

Total 2,031 693



October 17, 2005

Other Disclosures

Other Important DisclosuresFor a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.

This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons.

Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the equity securities of companies covered in its research reports on a principal basis.

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With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits.

(continued on next page)



October 17, 2005

Other Disclosures

Other Important Disclosures (continued)The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.

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Lloyd Byrne presentation