Changewave Research: Natural Gas & Oil

ChangeWave Research: Natural Gas & Oil

ChangeWave Research Report:

Natural Gas & Oil Industry Trends

Slower Growth Rates Seen for 2007

Overview

Our most recent Corporate Sales survey (9/7/06; n=2,639) showed the Natural Gas & Oil sector experiencing a third quarter decline in both sales and capital budgets.

To follow-up, we conducted an October 4-9, 2006 survey to look at key industry trends and to evaluate the impact of declining energy prices. A total of 268 members participated, including 131 who work directly in the industry.

Bottom Line: The survey results point to slower capital budget growth rates within the Natural Gas and Oil industry for 2007, including overall spending on Production and Exploration.

While the industry resource shortages seen in our May 2006 survey are still prevalent, their severity appears to be subsiding. In particular, the demand levels for Drilling Equipment and Drilling Services have declined, at least partially because of pricing. Professional Personnel, however, is as much in demand now as it was in May – and continues to show the greatest shortages.

The recent decline of Natural Gas prices has brought about a decline in industry price assumptions for next year. And the decline of Oil prices has caused a similar decline in industry price assumptions.

(A) Company Trends

· Slower Capital Budget Growth Rates. Regarding their own company, 70% of natural gas and oil industry respondents say their overall capital budget will increase over the next 12 months – a significant 16-pt drop since May 2006.

· A Dip in Production Investment. Less than two-thirds of industry respondents (63%) engaged in onshore production report their company will invest more over the next 12 months – a 19-pt drop from the previous survey. Among those engaged in offshore production, a total of 69% say there’ll be more investment in the next 12 months – down 13-pts.

· …And in Exploration Investment. Similar declines are occurring on the exploration end, with the percentage of respondents saying their company will invest more in onshore exploration over the next 12 months (63%) down 13-pts, and the percentage saying they’ll invest more in offshore exploration (62%) down 16-pts.

· Impact of Prices for Drilling Services. Twenty-eight percent of industry respondents (28%) engaged in exploration report that the price of drilling services has caused a decrease in their company's exploration drilling – up from 19% in May 2006.

(B) Natural Gas

· Natural Gas Price Assumptions. The recent decline of Natural Gas prices has brought about a decline in industry price assumptions for next year. The Consensus Estimate for Natural Gas prices for 2007 is $6.37, down from $6.98 five months ago (May 2006). Similarly, the Consensus Estimate for 2008 is $6.95, down from $7.28.

· 2007 vs. 2006 – A Comparison. Not surprisingly, by a 38% to 16% margin, industry respondents say their Natural Gas price assumptions for 2007 are lower than for 2006. And more than half (54%) of those reporting lower price assumptions say it will have a negative impact on their drilling exploration program

· Viability of Natural Gas Drilling Plays. At a price of $7.00, respondents estimate that 77% of their Natural Gas drilling plays are economically viable. But as the price declines, so does the percentage deemed viable. At a price of $6.00, only 65% of Natural Drilling plays are considered viable. At $5.00, only 55% are considered viable.

· Oil Price Assumptions for 2007… The decline of Oil prices has caused a decline in industry price assumptions, with the current estimate for 2007 at $54.42, down from $56.95. Similarly, the estimate for prices for 2008 is $55.88, down from $57.99.

· 2007 vs. 2006 – A Comparison. Similar to Natural Gas, by a 27% to 17% margin, industry respondents report that their Crude Oil price assumptions for 2007 are lower than they were in 2006. Among those whose price assumption is lower, 37% say it will have a negative impact on their drilling exploration program.

Summary of Key Findings

The ChangeWave Alliance is a group of 9,500 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

www.ChangeWave.com

Table of Contents

Summary of Key Findings 2

The Findings 4

(A) Overall Industry Trends 4

(B) Company Trends 5

(D) Other Industry Trends 13

ChangeWave Research Methodology 15

About ChangeWave Research 16

I. The Findings

Introduction

During the week of October 4 – 9, 2006 we surveyed ChangeWave Alliance members working in or knowledgeable about the Natural Gas and Oil industry. The survey focused on current industry trends, including the impact of declining energy prices. A total of 268 members participated, including 131 who work directly in the industry.

Total Respondents (n = 268)

Industry Respondents (n = 131)

(A) Overall Industry Trends

(1A) Question Asked: Which of the following gas & oil industry resources – if any – are currently exhibiting signs of a buildup (i.e. surplus)? (Check All That Apply)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Drilling Equipment / 16% / 13%
Drilling Services / 16% / 13%
Seismic Services / 10% / 6%
Drilling Personnel / 8% / 7%
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 8% / 10%
Don't Know / 40% / 44%
Other / 12% / 14%

(1B) Question Asked: And which of the following gas & oil industry resources - if any - are currently exhibiting signs of a shortage (i.e. in short supply)? (Check All That Apply)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 60% / 63%
Drilling Personnel / 53% / 66%
Drilling Equipment / 40% / 61%
Drilling Services / 40% / 57%
Seismic Services / 18% / 25%
Don't Know / 15% / 11%
Other / 8% / 6%

Net Difference Score: Natural Gas & Oil Industry Resources – Buildup vs. Shortage (Current Survey October 2006)

Resource Buildup / Resource Shortage / Net
Difference
Score
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 8% / 60% / -52
Drilling Personnel / 8% / 53% / -45
Drilling Services / 16% / 40% / -24
Drilling Equipment / 16% / 40% / -24
Seismic Services / 10% / 18% / -8

Change in Net Difference Score – Buildup vs. Shortage of Industry Resources: Current Survey (October 2006) vs. Previous Survey (May 2006)

Resource Buildup vs.
Resource Shortage / Net Difference Score
Current
Survey
Oct ‘06 / Net Difference Score Previous
Survey
May ‘06 / Change in Net
Difference
Score
Drilling Equipment / -24 / -48 / +24
Drilling Services / -24 / -44 / +20
Drilling Personnel / -45 / -59 / +14
Seismic Services / -8 / -19 / +11
Professional Personnel (e.g., Geologists,
Geophysicists, etc.) / -52 / -53 / +1

Industry Resources. While the resource shortages identified in our May 2006 survey are still prevalent, the severity appears to be subsiding. In particular, the demand levels for Drilling Equipment and Drilling Services have declined. Professional Personnel, on the other hand, is as much in demand currently as it was back in May, and remains the industry category experiencing the greatest shortage.

(B) Company Trends

(2) Question Asked: With regard to your own company's overall Capital Budget – do you think you'll see an increase in your overall Capital Budget, a decrease, or will your overall Capital Budget remain the same over the next 12 months vs. the previous 12 months?

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Increase in Capital Budget Over Next 12 Months / 70% / 86%
Decrease in Capital Budget Over Next 12 Months / 5% / 2%
Remain the Same / 22% / 10%
Don't Know / 2% / 2%

Slower Capital Budget Growth Rates. Regarding their own company, 70% of natural gas and oil industry respondents say their overall capital budget will increase over the next 12 months – a significant 16-pt drop since May 2006.

(i) Production

These next few questions were only asked of those respondents whose company engages in Onshore and/or Offshore Production (n = 96)

(3A) Question Asked: We want a glimpse into your company's production investment over the next 12 months. Do you think you'll invest more in production over the next 12 months, less in production, or the same amount in production over the next 12 months as you did over the previous 12 months?

Onshore Production (n=92)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
More Production Investment Over The Next 12 Months / 63% / 82%
Less Production Investment Over The Next 12 Months / 5% / 1%
Same Amount / 23% / 10%
Don't Know / 4% / 2%
Not Applicable / 4% / 4%

Offshore Production (n=62)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
More Production Investment Over The Next 12 Months / 69% / 82%
Less Production Investment Over The Next 12 Months / 6% / 0%
Same Amount / 10% / 6%
Don't Know / 6% / 6%
Not Applicable / 8% / 6%

A Dip in Production Investment. Sixty-three percent of industry respondents (63%) engaged in onshore production report their company will invest more over the next 12 months – a 19-pt drop from previously.

Similarly, 69% of respondents whose companies engage in offshore production report there will be more investment over the next 12 months – down 13-pts.

(3B) Question Asked: Let's focus on your company's hedging strategy. Over the next 12 months, what percentage of your projected production will be hedged? (n=96)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Less than 10% / 23% / 29%
11-25% / 5% / 6%
26-50% / 6% / 7%
51-75% / 6% / 1%
76-100% / 0% / 1%
Don't Know / 35% / 40%
Not Applicable / 24% / 15%

*Note: In the previous Aug '05 survey, the question asked “What percentage of your projected 2006 production will be hedged?”

Consensus Estimate – Current Survey (October 2006) = 20.3%

Consensus Estimate – Previous Survey (May 2006) = 15.2%

Hedging Strategy. Among respondents engaged in production, the consensus estimate is that 20.3% of their production for the next 12 months will be hedged – a 5-point increase since May.

(ii) Exploration

These next few questions were only asked of respondents whose company engages in Onshore and/or Offshore Exploration (n = 85)

(4A) Question Asked: And what about your company's exploration investment over the next 12 months? Do you think you'll invest more in exploration over the next 12 months, less in exploration, or the same amount in exploration over the next 12 months as you did over the previous 12 months?

Onshore Exploration (n=84)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
More Exploration Investment Over The Next 12 Months / 63% / 76%
Less Exploration Investment Over The Next 12 Months / 8% / 2%
Same Amount / 20% / 11%
Don't Know / 5% / 6%
Not Applicable / 3% / 5%

(ii) Offshore Exploration (n=56)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
More Exploration Investment in Over The Next 12 Months / 62% / 78%
Less Exploration Investment in Over The Next 12 Months / 4% / 4%
Same Amount / 21% / 10%
Don't Know / 5% / 6%
Not Applicable / 7% / 1%

A Dip in Exploration Investment. Three-in-five industry respondents (63%) engaged in onshore exploration say their company will invest more over the next 12 months – a 13-pt decline since May 2006. Similarly, 62% of respondents engaged in offshore exploration say there will be more investment over the next 12 months – representing a 16-pt drop.

(4B) Question Asked: During 2006, what effect – if any – have prices for drilling services been having on your company's exploration drilling? (n=85)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Caused a Significant Decrease in Exploration Drilling / 7% / 3%
Caused a Slight Decrease in Exploration Drilling / 21% / 16%
No Effect / 52% / 47%
Caused a Slight Increase in Exploration Drilling / 4% / 6%
Caused a Significant Increase in Exploration Drilling / 4% / 4%
Don't Know / 13% / 24%

Impact of Prices for Drilling Services. Twenty-eight percent of industry respondents (28%) engaged in exploration report that the price of drilling services has caused a decrease in their company's exploration drilling. This compares to 19% in May 2006.

(4C) Question Asked: During 2006, has your company postponed or cancelled any exploration drilling due to the cost of drilling services? (n=85)

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Yes / 14% / 11%
No / 67% / 61%
Don't Know / 19% / 28%

Postponed or Cancelled Exploration Drilling. A total of 14% say their company has postponed or cancelled exploration drilling due to the price of drilling services – 3-pts more than our previous survey in May.

These next few questions were asked of those respondents who work in the Natural Gas and/or Oil industry (n = 131)

Natural Gas

(5) Question Asked: What price assumption is your company using for its Natural Gas projections in 2007?

Current
Survey
Oct ‘06 / Previous
Survey
May ‘06
Lower than $5.00 / 5% / 2%
$5.00-$6.00 / 20% / 6%
$6.00-$7.00 / 27% / 24%
$7.00-$8.00 / 15% / 21%
$8.00-$9.00 / 3% / 6%
Above $9.00 / 0% / 2%
Don't Know / 16% / 24%
Not Applicable / 14% / 15%

*Note: In the May survey, the question asked about price assumptions for 2006

Consensus Estimate – Current Survey (Oct 2006) = $6.37

Consensus Estimate – Previous Survey (May 2006) = $6.98

(5A) Question Asked: And what price assumption is your company using for its Natural Gas projections in 2008?