Jeffrey W. RobertsonSenior Vice President, Lehman BrothersExploration & Production Equity Research

IPAA 2005 Annual Meeting

October 26, 2005

Lehman Brothers 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.Customers of Lehman Brothers 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.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decisions.PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 18

Commodities PricesCommodity prices have reached record highs in the past few months

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LA Onshore Wellhead Spot Gas ($/MMBtu) WTI Crude Oil Postings ($/bbl)

Crude Oil and Natural Gas Prices

________________Source: Gas Price--Natural Gas Week; Oil Postings--Koch Oil.

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Domestic Natural Gas ProductionU.S. natural gas production declined approximately 6% from 1998 to 2004

52.1 51.6 52.4 53.7 51.9 51.4 48.8

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U.S. Production 1998-2004

________________Notes: 1998-2002 data is from the EIA, data 2003-onwards is Lehman Brothers estimates. Previously, we had estimated 1999-onwards. Excluding the impact of Ivan, we estimate U.S. production was down about 4.25-4.5% in 2004, versus the 5% decline shown above.Source: EIA, DOE: Office of Fossil Energy, and Lehman Brothers estimates.

Bcfe/d

6%

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Creating Value for ShareholdersIs value creation any easier in today’s high commodity price environment?

First, how should value creation be measured? Growth in assets

– Reserves & production

• Cash flow Absolute or per share growth?

– We believe per share should matter most to equity owner

Equity owner benefits if reserves and production per sharegrow faster than the balance sheet.

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Working Rigs and Gas PricesDrilling activity follows commodity price. But, do higher activity levels translate into faster value creation?

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Working Gas Rigs vs. Composite Spot Wellhead Gas

________________Source: Rigs--Baker Hughes; Gas Price--Natural Gas Week

Working Gas RigsComposite Spot Wellhead Gas ($/MMBtu)

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Production GrowthHigher prices have not necessarily meant faster per-share growth rates.

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Avg. Production Per Share Growth Rates Avg. Commodity Prices ($/BOE)

Production Per Share Growth Rates vs. Avg. Commodity Prices

________________Sources: Company reports and Lehman Brothers estimates.

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Reserve GrowthReserve per share growth looks better. More undeveloped reserve bookings?

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Avg. Reserve Per Share Growth Rates Avg. Commodity Prices ($/BOE)

Reserve Per Share Growth Rate vs. Avg. Commodity Prices

________________Sources: Company reports and Lehman Brothers estimates.

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Growth Rates vs. Stock ReturnsThere is a notable correlation between debt-adjusted growth rates in reserves, production and cash flow versus stock price returns

R2 = 64%

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________________Note: For details on calculation methodology of per share growth rates and individual company footnotes please refer to our main report titled “What Drives E&P Share Prices?” dated June 8, 2004.Source: Company reports and Lehman Brothers estimates. Note: Stock Price Appreciation has been calculated for the period from Jan. 1999 to December 2003.

Debt Adjusted 5 year CAGR of Reserves, Production and Cash Flow per Share

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Cost of Doing Business is Going UpRising costs are raising the price needed to generate reasonable returns

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US Drilling Only F&D Costs 10.38 8.93 8.93 9.08 7.63 Add Nominal 5% to Develop PUDs (a) 0.52 0.45 0.45 0.45 0.38 Total Capital Outlay 10.89 9.38 9.38 9.54 8.01 Required Cash Flow (b) 19.30 16.61 16.61 16.90 14.19 Add: Average Cash Costs (c) 9.00 8.00 6.75 6.75 6.25 Add: Average Differential vs Benchmarks (d) 5.50 4.75 3.00 3.75 3.75 Required Benchmark Price per BOE 33.80 29.36 26.36 27.40 24.19

Required Benchmark Price to earn 10% Pre-Tax Rate of Return (e)

WTI - $/bbl 37.86 32.89 29.53 30.68 27.10

Henry Hub - $/MMBtu 5.41 4.70 4.22 4.38 3.87

Weighted Average Price/boe at 75% gas 33.80 29.36 26.36 27.40 24.19

________________1. Assume 5% drilling F&D costs to develop proven undeveloped reserves.2. Assume 10% pretax return for six years.3. Rounded average cash costs of APC, APA, BR, and EOG.4. Differential vs. commodity prices.5. Commodity prices assuming 75% gas and 25% oil mix. Assume Henry Hub gas price per MMBtu is one seventh WTI price per bbl.Sources: Company reports and Lehman Brothers estimates.

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Current IssuesE&P share prices are being buffeted by a number of conflicting issues

Commodity price volatility

– Supply/demand concerns Upward cost pressure

– Are economics deteriorating? Finding new opportunities in a competitive market place

– Build or buy? Tale of two sisters—Katrina & Rita

Main question seems to be what should the long-term priceused for valuation be and where is the market now?

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Recent Commodity Price VolatilityEquity prices are moving with near-term commodity price

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Natural Gas 12-Month Strip Prices XNG Returns Indexed to 2000

Natural Gas 12-Month Strip Prices vs. % Returns on AMEX Natural Gas Index (XNG)

________________Source: Bloomberg.

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Production Revenue ↑ 52%

Profitability MarginsRising commodity prices have outpaced cash cost increases… so far

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Cash Costs 2Q01 – 2Q05$ / Mcfe

________________Source: Company financial statements and Lehman Brothers estimates.

Cash Cost ↑ 50%

Production Revenue 2Q01 – 2Q05$ / Mcfe

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Acquisition vs. Finding & Development CostsFrom 2000 to 2004, finding and development costs per Mcfe of proved reserves outpaced the costs of acquiring the same reserves through transactions

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1.60 1.60 1.571.73 1.64 1.58

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Acquisition Costs Finding & Development Costs

Reserve Acquisition Costs vs. Finding and Development Costs

________________Source: Lehman Brothers estimates and John S. Herold, Inc. report.

$ / Mcfe of Proved Reserves

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Key Investor Themes

Unconventional gas

– Shale, coalbed methane, tight gas sands

– Risk—What if one doesn’t work? Consolidation

– Corporate vs. property

– Capture drilling opportunities Capital allocation Is it really different this time?

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Long Lived Assets In Vogue

Inventory…

– Acreage is king

• Sample investor math:

Step 1: acreage ÷ spacing = well locations

Step 2: well locations × reserves/well × ownership = reserve potential

Step 3: valuing the potential is trickier

• Valuation considerations

- Risk, timing, capital

Expectations of a longer commodity price cycle have put spotlight on long-lived asset bases

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Commodities Price SensitivityEstimated free cash flow for our Mid-cap universe varies depending on realized oil and gas price expectations

(1,401)

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2,1153,446

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Estimated 2006 Free Cash Flow1

________________1) Free cash flow estimates are totals for ATPG, BBG, CHK, CRK, DNR, FST, KWK, PXP, SFY, SGY, THX, WLL, WTI, XEC, and XTO.Source: Lehman Brothers estimates.

Oil Price

($/bbl)35.00 40.00 45.00 52.50 55.00 60.00 65.00

Gas Price

($/MMBtu)5.00 6.00 6.50 7.00 8.00 9.00 10.00

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Actual vs. Implied Commodity PricesWe estimate company share prices are discounting oil and gas prices which are significantly below current actual levels

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Actual Commodity Prices vs. Implied Commodity Prices

________________Note: Price is an average of WTI oil and Henry Hub natural gas prices.Source: Lehman Brothers estimates and Reuters.

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Not To Be Forgotten…

This is still a hard business!

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Disclosures

I, Jeffrey W. Robertson hereby certify with respect to each security or issuer that we cover and covered herein (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

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