Royalty Review 0815 BMO (00000002)

Alberta Oil & Gas Review
September 10, 2015
Randy Ollenberger
403-515-1502
BMO Nesbitt Burns Inc.

randy.ollenberger@bmo.com
Royalty Review: Alberta Needs a Hand, Not a Hammer
Jared Dziuba, CFA
Associate: Matthew Murphy
The Alberta NDP government has appointed a panel to review the Provinces
royalty system and plans to release recommendations by year-end 2015. Our
assessment of the competitiveness of the Alberta oil and gas industry suggests
that the industry is not positioned to bear the burden of higher royalties and/or
environmental charges at current commodity price levels. Indeed, based on
the relatively weaker competitive position of the Alberta industry, a reduction
in charges may be warranted to incentivize activity, at least in the short term.
The rapid development of shale oil and gas in the United States has
dramatically reshaped the North American oil and gas market and has left
Alberta in a precarious competitive position, in our opinion. Albertas
unconventional resource opportunity is relatively small scale and the industry
is burdened with a higher cost structure and greater distance to market than
most competing jurisdictions. This has translated to lower returns on capital
employed (ROCE) in Alberta compared to the United States and other
provinces. For example, the median ROCE for Alberta natural gas and tight
oil producers is only 2% compared to 8% and 11% for U.S. peers,
respectively. Albertas returns on capital have been sub-4% since 2011, which
is similar to B.C. but well below ~11% in Saskatchewan and 9% offshore east
coast. It is also noteworthy that the Canadian oil and gas industry generated
the lowest ROCE of any major industry in Canada in 2013 when crude oil
prices were over $100/bbl. Albertas current royalty system and rates are
arguably high considering the low level of underlying returns on capital
compared to competing jurisdictions.
The relatively poor economic returns generated by Alberta producers has had
a negative impact on investment in the province and has generally translated
to lower equity valuations for Canadian oil and gas producers. Albertas
conventional producers trade at a median 2016E EV/EBITDA multiple of
6.8x versus the U.S. peer median of 8.5x. On the basis of current production,
Alberta producers trade at an enterprise value of approximately $35,000 per
flowing boe compared to nearly $50,000 per boe/d for U.S. producers. Oil
sands focused companies have generated returns on capital that are similar to
U.S. tight oil companies and trade at similar or higher valuation multiples.
However, in our view the valuation premium should be larger due to the
significantly longer reserve life and minimal production decline.
403-515-3672
BMO Nesbitt Burns Inc.

jared.dziuba@bmo.com
403-515-1571
Summary
The rapid development of shale oil and gas in
the United States over the last several years has
left the Alberta oil and gas industry in a
precarious competitive position, in our view,
due to the relatively smaller scale resource,
distance to market and higher cost structure.
Given the current commodity price backdrop
and low profitability of the Alberta oil and gas
industry, investors are right to be concerned
about the potential for higher royalty rates.
Albertas current royalty and fiscal system is
arguably high considering the low level of
underlying returns on capital compared to
competing jurisdictions. Returns on capital in
Alberta are below 4% compared to roughly
11% in Saskatchewan and 9% offshore east
coast, while recycle ratios are only 0.6x versus
1.2x in Saskatchewan and 1.7x offshore.
Albertas economic returns are also weak
relative to its primary U.S. competition.
Not surprisingly, lower profitability has
translated to lower valuation multiples for
Alberta oil and gas companies. Albertas
conventional producers trade at a median
2016E EV/EBITDA multiple of 6.8x versus
the U.S. peer median of 8.5x. On current
production, Alberta producers trade at an
enterprise value of approximately $35,000 per
flowing boe compared to nearly $50,000 per
boe/d for U.S. producers.
We continue to recommend a cautious
investment posture given the prospect on
ongoing volatility in commodity prices.
This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under
FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 24 to 25.
Sector Comment
Dj Vu All Over Again

The Alberta government has appointed an expert panel to review the Provinces royalty system,
with plans to release recommendations by year-end 2015. We have completed a review of our
own and the conclusions are not pretty. The advancement of shale oil and gas technology has
dramatically reshaped the North American oil and gas industry and has left Alberta in a
precarious position, in our opinion, due to its relatively smaller resource opportunity, distance
to markets and higher cost structure in comparison to many U.S. plays as well as those in the
neighbouring provinces of Saskatchewan and British Columbia. Given the current commodity
price backdrop, what Alberta producers may require is a royalty incentive scheme, not a higher
fiscal burden.
History Lesson
The royalty regime in Alberta is more than seven decades old and change is not new. The
Province gained resource ownership in 1930 with the Natural Resources Transfer Act and
initially enacted a flat royalty rate at 5%. With rising commodity prices, the royalty was
progressively increased to 25% by 1972. Price sensitivity features were introduced to counter
commodity price fluctuations through the 19701980 period and in 1993 distinction was made
between market values for heavy and light oil. In 1997, a separate Oil Sands Royalty
Regulation came into effect. The most recent major overhaul, top of mind for most investors,
was proposed in early 2007 and the New Royalty Framework (NRF) was set for January 1,
2009. This program would be tweaked several times before reaching its current manifestation
as the government responded to a dramatic reduction in investment by industry and the global
economic crisis.
Figure 1: Albertas Royalty Framework History
1930/01:
ABgains
resource
ownership;
Royalties
at5%flat
rate
1941:Flexible
oilroyalty
option;Flat
12.5%or5
15%
production
based
1951:Royalty
ratesbased
on
production,
rangingfrom
5%to16.67%
1974:
Price
sensitive
royalty
rates
1993:Increased
pricesensitivity,
priceinflation
indexing.
Separatevintage
forheavy/light
oil
1997:
Generic
oilsands
royalty
regime
2007:New
Royalty
Framework
(NRF)
announced
2009:NRF/ 2011:New
well/project
Bitumen
based
valuation
methodology Royaltyrates
(BMV)
implemented
EvolutionofroyaltiesinAlberta
1935/6:Flat
1943:Gas
rateroyaltyat royalty
10%;NGLs
increased
atflexiblerate to15%
1962:Gas
royalty
increased
to16.67%
1978:Low
productivi
tyfeature
forgas
royalty
1980:
Incentive
programs
2002:NGLs
royalties
linkedto
royalty
curves
2010:
2008:
Transitional Royalty
framework
royalties
competitiven
essreview
2015:
New
Royalty
review
Source: BMO Capital Markets, Company Reports
In February 2007, the Alberta conservative government appointed a panel to review Albertas
royalty and tax regime to address concerns that the Province was not getting its fair share of
oil and gas revenues. This review provided for the first major overhaul of Albertas royalty
system since 1997. The panel recommended significant changes that would increase royalty
payments by up to 20% with the government take increasing to 64% from 47% in the oil sands,
49% from 44% for conventional crude oil, and to 63% from 58% for natural gas. The Canadian
Page 2 September 10, 2015
Sector Comment
oil and gas industry strongly criticized the report due to flawed data and lack of consideration
for how industry activity influenced broader economic prosperity. Several major companies
stated that they would significantly reduce investment in the Province if the reports
recommendations were implemented. In October, 2007, the New Royalty Framework (NRF)
was introduced after considering the Panels recommendations. Broadly viewed as a
questionable compromise, the NRF included both higher royalty rates and more sensitivity to
commodity prices. Oil sands programs were tempered but the rules proposed for conventional
oil and gas were largely adopted and were punitive to high productivity oil wells, a potential
driver of growth:
Conventional crude oil royalties moved to a sliding-scale system based on both oil
prices and production rates, ranging from 3050% and capped at C$120/bbl oil
compared to the previous max rate of 35% at $30/bbl;
Natural gas royalties would also be tied to prices and production, with rates ranging 5
50% from 535% previously, with the price cap of $17.28/Mcf;
Oil sands royalties would also be linked to crude oil prices and retain pre- and postpayout tiers to incentivize investment. Rates range from 19% on pre-payout and 25
40% post-payout, based on oil prices of C$55120/bbl.
The global economic crisis in 2008 caused a major slowdown in oil and gas activity before the
NRF became effective in January 2009. In response, Alberta introduced transitional rates to
spur investment all wells drilled between 2009 and 2013 to a depth of 1,0003,500 metres
could opt for transitional rates effective until January 1, 2014. The peak rate for natural gas was
reset to ~30% from 50% under the NRF. The programs impact on conventional oil,
particularly high rate wells, was slightly less compelling with maximum royalty rates
unchanged at 50%, although transitional rates were 1015% lower within certain commodity
price and production ranges. The Alberta government estimated that the transitional rates could
potentially reduce royalties collected by $172 million in 2009 and $512 million in 2013.
Alberta performed an industry competitiveness review in 2010 before the NRF rates came back
into effect and subsequently made minor changes to the royalty system to come into effect in
early 2011. Normalized royalty rates applied to natural gas wells would decrease to 536%
from 550% based on the 2009 framework, while post-payout royalties for conventional oil
decreased to 040% from 050%. Minor changes were also made to the Natural Gas Deep
Drilling Program. Oil sands royalties were maintained from the prior framework, with Tier 1
and Tier 2 royalties of 19% and 2540%, respectively for oil prices of C$55120/bbl. 1
The Costs of Uncertainty

The political uncertainty created by the various royalty reviews and changes since 2007 has had
a meaningful impact on the competitiveness of Alberta oil and gas industry and has negatively
impacted Albertas reputation as a safe place to invest, in our opinion. Albertas oil and gas
industry responded to the uncertainties of the royalty review process over the 20072009 period
by reducing activity; Albertas rig utilization fell from approximately 60% in 2006 to 40% in
2007 and metres drilled decreased from 22,000 to 16,000 metres despite relatively strong
pricing environments for both crude oil and natural gas (Chart 1). Corresponding investment
decreased 21% in 2007 to $18 billion and remained at a depressed level through 2008,
1
A summary of Albertas current drilling incentives and credits are outlined in the Appendix.
Sector Comment
representing a cumulative loss of investment of nearly $10 billion leading up to the global
financial crisis. The combination of several reactive fixes to the royalty system along higher
oil prices eventually drove investment back to pre-2007 levels (Chart 2).
Chart 1: Alberta Drilling Activity (# Wells and Metres Drilled)
000s Wells
Chart 2: Alberta Capital Spending Conventional Oil & Gas (C$ Billion)
000 Metres
18
30
16
25
$30
$25
14
12
20
10
$20
15
$15
10
$10
$5
$0
8
6
4
2
0
Crude Oil
Natural Gas
Bitumen
Exploration Drilling
Metres Drilled
Source: CAPP, BMO Capital Markets
Development Drilling
Field Equipment
Many of the investment dollars displaced from Alberta were immediately redeployed in
adjacent jurisdictions including British Columbia and Saskatchewan given their proximity and
geological connection to many prolific Alberta plays (ex Montney, Horn River, Viking,
Bakken, conventional heavy oil, etc.). Total capital expenditure in B.C. and Saskatchewan
increased roughly 4060% through 2008, while drilling-specific capital fell by only half the
amount as in Alberta during the 2009 downturn a reflection of how relative economics shifted
in response to the royalty changes (Charts 34). It took modifications to the royalty system in
2010 to attract capital back to Alberta.
Chart 3: Year-Over-Year Change in Total Capital Expenditure
Chart 4: Year-Over-Year Change in Drilling Capital
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
-20%
-20%
-40%
-40%
-60%
-60%
Alberta
Saskatchewan
British Columbia
Alberta
Saskatchewan
British Columbia
Natural gas drilling decreased 31% in 2007 in response to the royalty review process despite
relatively strong AECO gas prices in the $67/mcf range (Chart 5), while conventional crude
Sector Comment
oil activity declined 35% despite an increase in crude oil prices from $70/bbl to $80/bbl (Chart
6). We note that oil sands growth spending did not decline materially in 2007, as the long leadtime nature of development makes near-term construction activity less reactive, developers did
place longer-term project planning on hold.
Chart 5: Alberta Gas Drilling Activity vs. Gas Price (# Wells)
14,000
Chart 6: Alberta Crude Oil Drilling Activity vs. Oil Price (# Wells)
$10.00
6,000
$120
5,000
$100
4,000
$80
3,000
$60
2,000
$40
1,000
$20
$9.00
12,000
$8.00
10,000
$7.00
$6.00
8,000
$5.00
6,000
$4.00
$3.00
4,000
$2.00
2,000
$1.00
$0.00
NaturalGas
AECO
$0
CrudeOil
Bitumen
CdnPar(C$)
Lessons Learned?
In June 2015, the Province announced a formal review of the existing royalty framework by an
expert panel led by Dave Mowat, President and CEO of ATB Financial. The panel is expected
to submit its report and recommendations to the Province by the end of 2015. While the market
has broadly expressed concern over the royalty review process, we believe some encouraging
developments have emerged recently, in contrast to the 2007 process. Importantly, the
governments appointed panel represents a good mix of relevant members that understand the
economics and challenges of industry, as well as the possible unintended impacts of policy
changes. The other members of the panel are Peter Tertzakian, Chief Energy Economist and
Managing Director of ARC Financial, and Leona Hanson, Mayor of the Town of Beaverlodge,
Alberta, in the heart of the provinces small town oil and gas. The Alberta Energy Minister
has also acknowledged the challenges currently facing industry, and clarified that any changes
to the royalty program, if any, would not be enacted until 2017. Furthermore, it was suggested
that the review would focus specifically on how royalty rates adjust to the upside in oil prices,
so as not to unduly harm the industry during the bottom of the cycle.
Canadas Industry Needs All the Help It Can Get

The emergence of shale oil and gas and technological breakthrough in hydraulic fracturing has
dramatically changed the dynamics of North American supply and relative economics. From a
high level perspective, the relative resource scale in these emerging plays between the U.S. and
Canada already has Alberta at a major disadvantage. The incredible growth and scale of U.S.
shale oil and gas resource potential dwarfs that of Canada and Alberta (Charts 78). In
response, investment dollars have flowed toward the U.S. and away from Western Canada in
Sector Comment
recent years as investors chase companies with better opportunities for growth and stronger
economics. Not surprisingly, this has contributed to lagging tight oil and gas resource
development in Western Canada relative to the U.S. (see also our September 2014 research
report, Keeping It Tight Emerging Opportunities in Canadian Tight Oil). We suspect that
the weaker commodity price outlook could further hamper opportunities for advancement in the
basin and divert additional focus toward U.S. producers, particularly in the event of further
regulatory upset or uncertainty.
Chart 7: North America Tight Oil Recoverable Resource (Billion Bbls)
70
Chart 8: North America Shale Gas Recoverable Resource (Bcf)

1000
900
60
800
50
700
600
40
500
30
400
300
20
200
10
100
0
0
2010
Permian
2011
EagleFord
2012
Bakken
2013
AustinChalk
Source: EIA, BMO Capital Markets, Company Reports
USTightOil Alberta/Canada
Niobrara/Rockies
Buda
TMS
GulfCoast
MidCon
USTightOil
Appalachia/East
WestCoast
Alberta/OtherCanada
RockyMountain Southwest
Alberta
B.C./Other
Source: EIA, BMO Capital Markets, Company Reports
Although there are pockets of strength within the basin (high quality producers), we believe that
Alberta oil and gas producers on average are already not competitive with their major North
American peers from an economics perspective, particularly U.S. tight oil/gas producers
because of their superior resource scale and improving well economics. As noted, investment
dollars have already been displaced toward U.S. producers in recent years as demonstrated by
the countrys immense contribution to North American crude oil and natural gas production
growth since 2010 (Charts 910). The U.S. has added crude oil production of roughly 5 million
b/d since 2011, making up 88% of North Americas growth over that time frame and
representing an annual growth rate of 12%. In contrast, Canada has contributed growth of just
0.6 million b/d or 4% CAGR from the oil sands while conventional oil has declined by 1%.
Similarly, the U.S. accounts for nearly all of North Americas natural gas production growth
since 2010, adding 18 bcf/d while Albertas production has slipped by 5 bcf/d, or 6%, annually.
Sector Comment
Chart 9: North America Oil Production by Region (Million b/d)
Chart 10: North America Natural Gas Production by Region (Bcf/d)
18.0
100
16.0
90
14.0
4%CAGR
80
6%CAGR
70
12.0
+5%CAGR
+12%CAGR
60
10.0
50
8.0
40
6.0
30
4.0
20
2.0
0.0
2010
10
2011
2012
U.S.Oil&Liquids
2013
AlbertaOil&Liquids
2014
2015
0
2010
OtherCanada
Source: EIA, NEB, BMO Capital Markets
2011
2012
U.S.GasProduction
2013
Alberta
2014
2015
OtherCanada
Source: EIA, NEB, BMO Capital Markets
Based on findings from our 2014 Global Cost Study, implied supply costs for Canadian tight oil
producers are above that of major competing U.S. peers. We believe this will become even more
apparent in corporate results in the coming years as the oil price downturn and relative
advancement in operations lead to a widening spread between development costs in the two
regions, as represented by our model supply cost estimates in Chart 11. In the Permian, median
supply cost estimates of only $52/bbl have been implied by recent drilling results in the Delaware
Basin. Development of the Marcellus and Utica gas plays in the U.S. are also dramatically altering
North American gas supply economics and we believe are serious threats to Western Canadian
gas producers. We currently estimate gas supply costs of only $2.503/mcfe compared to average
Canadian gas supply costs of roughly $5/mcf. Midstream infrastructure additions could bring
more than 16 bcf/d of additional gas supply from the eastern U.S. to western regions in the
coming years and will play head-on competition with Alberta (Chart 12).
Chart 11: Implied Crude Oil Supply Costs by Region (US$/boe, Brent)
Chart 12: Implied Natural Gas Supply Costs by Region (US$/mcfe)
$140.00
$7.00
$120.00
$6.00
$100.00
$5.00
$80.00
$4.00
$60.00
$3.00
$40.00
$2.00
$20.00
$1.00
$0.00
$0.00
GlobalGas
1Year
3YearAverage
ModelSupplyCostRange
Source: BMO Capital Markets 2014 Global Cost Study, Company Reports
Notes: Supply costs represented on a Brent oil equivalent basis
Canada
1Year
NorthAmerica
U.S.Shale
3YearAverage
Source: BMO Capital Markets 2014 Global Cost Study, Company Reports
Marcellus/Utica
ModelRange
Sector Comment
Albertas royalty rates had declined from a peak of roughly 17% in 2005 to 12% in 2013, which
is partly a reflection of lower commodity prices and weakening economics in the basin.
Compared to other competing Canadian jurisdictions Albertas average royalty rates have in
fact risen and notably decoupled from British Columbia since 2010, even though cash flows,
returns on capital, and recycle ratios have deteriorated in similar fashion for both Provinces, as
illustrated in Charts 1315.
Chart 13: Royalty Rate History by Province (% Gross Revenue)
35%
30%
25%
20%
15%
10%
5%
0%
AlbertaConventional
EastCoastOffshore
Saskatchewan
ABOilSands
BritishColumbia
We highlight the widening gap in economic returns and funding efficiency for Alberta (and
B.C.) producers compared to other Canadian jurisdictions in Charts 1415. Albertas cash flow
as a percent of cumulative capital (our proxy here for ROCE) has been sub-4% since 2011,
comparable to B.C. but well below ~11% in Saskatchewan and 9% offshore the east coast.
Recycle ratios, which reflect a more current measure of capital cost coverage have similarly
declined, with Albertas industry generating cash flow of only 0.6x capital costs over the past
three years (0.5x for non-oil sands production), compared to healthy recycle ratios of 1.2x in
Saskatchewan and 1.7x offshore. Oil sands producers do generate apparently solid cash
recoveries on vintage capital investment (much of which was installed in the 60s and 70s) as
suggested in Chart 14; however, returns on new investment are significantly lower as illustrated
by the declining industry recycle ratio in Chart 15.
Sector Comment
Chart 14: Estimated Cash Flow Returns on Capital
Chart 15: Cash Flow Recycle Ratio by Province
20%
3.5x
18%
3.0x
16%
2.5x
14%
12%
2.0x
10%
1.5x
8%
6%
1.0x
4%
0.5x
2%
0.0x
0%
AlbertaConventional
Saskatchewan
EastCoastOffshore
ABOilSands
BritishColumbia
AlbertaConventional
Saskatchewan
EastCoastOffshore
ABOilSands
BritishColumbia

Note: recycle ratio calculated as annual cash flow over capital spending

Note: reflects estimated cash flow over cumulative, undepreciated capital, as a proxy for comparable
returns; does not consider depreciation, amortization or other corporate non-cash charges.
We believe that royalty rates should generally be correlated with underlying economics in order
to properly promote industry competitiveness. This relationship is generally apparent when
comparing average royalty rates to the returns and recycle ratios noted above and is illustrated
in Chart 16. This would suggest that Albertas royalty rates, which are higher than B.C. but
lower than Saskatchewan/east coast, are reasonable at best considering relative economics and
arguably could be lower.
Chart 16: Estimated Royalty Rates vs Recycle Ratio by Region
3.0x
U.S.TightOil
2.5x
3-Year Recycle Ratio
U.S.ShaleGas
EastCoast
Offshore
2.0x
CanadaTightOil
1.5x
CanadaGas
Saskatchewan
1.0x
ABOilSands
0.5x
AlbertaAvg
ABConventional
BritishColumbia
0.0x
0%
5%
10%
15%
20%
3-Yr Avg Royalty Rate
25%
30%

Notes: recycle ratio calculated as operating cash flow over investment ex-corporate items; may not compare to corporate level metrics in this report
Canadas oil and gas business, despite media hype and common belief to the contrary, generates
lower returns on capital than nearly any other major industry in Canada. Chart 17 illustrates this
Sector Comment
fact based on Statistics Canada data, which suggests Canadas industry generated ROCE of
only ~1% in 2013 despite US$100/bbl oil prices.
Chart 17: 2013 Returns on Capital Employed Top 20 Canadian Industries by Total Revenue
30%
25%
20%
15%
10%
5%
0%
Source: Statistics Canada, BMO Capital Markets
In a recent comment entitled Back to Basics: Returns Matter, we discussed in detail how
industry returns on capital in general have declined since 2006 and that only select jurisdictions
and companies have been able to generate adequate returns for investors. Independent U.S.
producers are improving returns while other global producers including Canadian companies
are losing ground (Chart 18). We expect returns for our coverage group to decrease to nil in
2015E/2016E and only 1.5% in 2017E assuming moderate cost improvements and only 24%
with more significant cost reductions.
Chart 18: Three-Year Average ROCE by Peer Group
Chart 19: Forecast ROCE vs. 20% Cost Reduction Scenario
30%
7%
25%
6%
20%
5%
15%
4%
10%
3%
5%
2%
0%
1%
-5%
0%
Integrated/Majors
Cdn Small Cap
Cdn Seniors
US Small Cap
US Seniors
Global Average
2014
2015E
Group Median
2016E
20% Cost Reduction

Notes: 20% cost reduction scenario assumes forward strip pricing
2017E
Sector Comment
Comparing Supply Costs, Returns and Resulting Valuations

We believe that Alberta producers generally are at a disadvantage relative to their peers based
on returns and supply costs, which has translated to lower valuations. With the exception of the
oil sands, which is less comparable to the conventional oil and gas business, Albertas oil and
gas producers trade at a median 2016E EV/EBITDA multiple of 6.8x versus the U.S. peer
median of 8.5x (Chart 20).
Chart 20: Alberta Producers - 2016E EV/EBITDA vs. ROCE
10x
Chart 21: Historical Average Forward EV/EBITDA Multiples

12x
U.S.Gas
11x
9x
10x
2016EEV/EBITDA
U.S.Average
8x
7x
ABGas
6x
9x
OilSands
AlbertaExOil
Sands
8x
U.S.TightOil
AlbertaAverage
7x
ABTightOil
6x
International
5x
5x
4x
4x
0.0%
2.0%
4.0%
6.0%
ROCE
8.0%
10.0%
Source: Company reports, BMO Capital Markets, Bloomberg
12.0%
OilSands
ABConventional
USAvg.
Source: BMO Capital Markets, Bloomberg
Alberta producers tend to have higher supply costs on average as shown in Chart 22. We
estimate average supply costs of $106/boe for Alberta conventional production, which is in line
with the U.S. average and below international operations; however, key growth areas, tight oil
and shale gas, are higher in Alberta than comparable U.S. peers, especially for natural gas.
Higher finding and development costs (F&D) are partly to blame, as shown in Chart 23.
Chart 22: Alberta Producers Average Supply Costs (US$/boe)
$150.00
Chart 23: Alberta Producers F&D Costs (US$/boe)

$40.00
$135.00
$35.00
$120.00
$105.00
$30.00
$90.00
$25.00
$75.00
$20.00
$60.00
$15.00
$45.00
$30.00
$10.00
$15.00
$5.00
$0.00
$0.00
SupplyCost
Source: Company reports, BMO Capital Markets
3YrSupplyCost
Sector Comment
Net price realizations are also lower compared to global peers, reflecting quality and
transportation differentials due lower crude quality (heavy grades) and market access
challenges. Given both lower pricing and higher costs, Alberta producers generate lower
average recycle ratios.
Chart 24: Alberta Producers Realized Pricing (US$/ boe)
Chart 25: Alberta Producers Average Recycle Ratios

3.0x
$90.00
$80.00
2.5x
$70.00
$60.00
2.0x
$50.00
1.5x
$40.00
$30.00
1.0x
$20.00
0.5x
$10.00
$0.00
0.0x
Charts 2627 outline relative valuation metrics on production and reserves and highlight that
there tends to be a valuation discount for Alberta producers to reflect the lower cash flow and
returns per unit. Alberta conventional producers trade at a median 2016E EV/Production of
~$35,000/boe/d compared to nearly $50,000/boe/d for U.S. and international peers. While Oil
sands producers fetch decent valuations on production given the industrys cash flow generating
ability, the abundant reserves garner a heavily discounted valuation to reflect the high cost of
future development and deteriorating returns.
Chart 26: 2016E EV/Production Metrics (US$/boe/d)
Chart 27: EV/Net Proved Reserves (US$/boe)
$80,000
$14.00
$70,000
$12.00
$60,000
$10.00
$50,000
$8.00
$40,000
$30,000
$20,000
$6.00
$4.00
$10,000
$2.00
$0
$0.00
Sector Comment
Alberta Shale Gas

Alberta gas producers earn noticeably below-average returns as compared to U.S. peers in the
competing Marcellus, Utica, Rockies, and ArkLaTex plays, which has translated to lower
average valuations as illustrated by forward EV/EBITDA in Charts 2829. We estimate Alberta
gas producers generated median returns on capital of only 1.8% in 2014, well below 11%
generated by competing U.S. gas producers. Valuation multiples have trended noticeably higher
for U.S. versus Canadian gas producers in recent years to reflect this.
Chart 28: Competing Gas Producers 2016E EV/EBITDA vs. ROCE
18x
16x
AB Median: 1.8%
10x
ECR
RRC
14x
9x
2016EEV/EBITDA
EQT
12x
RICE
8x
REXX
10x
AR
TOU
POU
8x
TET
6x
LRE
NVA
4x
PEY
7x
QEP
XCO SWN
GST
BIR
VII
AAV
BXE
PDCE
DEE
6x
UPL
5x
2x
0x
30%
11x
U.S. Median: 11.0%
COG
MRD
Chart 29: Gas Producers Historical Forward EV/EBITDA
4x
20%
10%
0%
ROCE
10%

Note: Alberta producers highlighted by pink markers
20%
30%
ABAvg.
USAvg.
Chart 30 illustrates that Albertas gas production has average supply costs slightly above U.S.
peers, including highlighting prolific competing plays like the Marcellus where supply costs
continue to improve. Much of this cost variance is driven by higher F&D costs in regions aside
from the Rockies.
Chart 30: Gas Producers Supply Costs (US$/mcfe)
$6.00
Chart 31: Gas Producers F&D Cost (US$/mcfe)

$1.60
$1.40
$5.00
$1.20
$4.00
$1.00
$3.00
$0.80
$2.00
$0.60
$0.40
$1.00
$0.20
$0.00
$0.00
SupplyCost
3YrSupplyCost
Sector Comment
Alberta gas producers on average have achieved higher realized pricing for natural gas, partly
as a result of a strong domestic market for natural gas liquids; however, higher costs still drive
lower average cash flow relative to capital costs as reflects in lower recycle ratios (Chart 33).
Chart 32: Gas Producers Realized Pricing (US$/mcfe)
Chart 33: Gas Producers Recycle Ratio (US$/mcfe)
$5.00
5.0x
$4.50
4.5x
$4.00
4.0x
$3.50
3.5x
$3.00
3.0x
$2.50
2.5x
$2.00
2.0x
$1.50
1.5x
$1.00
1.0x
$0.50
0.5x
$0.00
0.0x
As a result of weaker economics, Alberta gas producers trade at a discounted valuation to U.S.
competitors, reflecting $5,900/mcfe/d of production and $1.35/mcfe of proved reserves
compared to ~$6500/mcfe/d and $1.50/mcfe for U.S. peers.
Chart 34: Gas Producers 2016E EV/Production (US$/mcfe/d)
Chart 35: Gas Producers EV/Net Proved Reserves (US$/mcfe)
$12,000
$3.00
$10,000
$2.50
$8,000
$2.00
$6,000
$1.50
$4,000
$1.00
$2,000
$0.50
$0
$0.00
Table 1 provides economic and valuation comparables for natural gas producers in Alberta and
the U.S. by major producing region.
Sector Comment
Table 1: Natural Gas Producers Alberta Focused vs. U.S.
Ticker
Montney-Focus:
Advantage
Birchcliff*
Delphi*
Seven Generations
Nuvista
Trilogy
Deep Basin/Other:
Bellatrix*
Long Run*
Paramount
Peyto
Tourmaline
Alberta Median
Marcellus/Utica:
Range
EQT
Cabot
REXX
Eclipse
Antero
RICE
Southwestern
Gastar
PDC Energy
Marcellus/Utica
Rockies
Ultra
QEP
Rockies
ArkLaTex
Memorial
Exco
ArkLaTex
U.S. Median
Implied Supply Cost

2014 Average
$/boe
$/mcfe
F&D
Price ROCE Recyc EV/EBITDA
2014
3-Year
2014 3-Year ($/mcfe) ($/mcfe)
% Ratio 2015 2016
EV/Boe
EV/mcfe/d
Proved
2015
2016
2014
AAV
BIR
DEE
VII
NVA
TET
$238.57
$73.52
$74.22
$67.57
$84.67
$74.63
$166.58
$100.99
$88.26
$73.15
$94.73
$94.65
$11.71
$3.86
$5.04
$4.93
$5.22
$4.89
$6.00
$4.12
$4.38
$5.17
$4.46
$4.59
nm
$0.85
$1.17
$0.34
$0.98
$1.62
$3.80
$4.44
$4.34
$4.22
$3.96
$4.77
1.8%
8.4%
0.2%
12.3%
-6.3%
-8.5%
0.9x 10.1x
4.0x 8.5x
1.7x 4.9x
7.5x 15.4x
2.0x 8.9x
2.0x 8.4x
7.1x
6.4x
4.0x
6.5x
5.3x
7.1x
$8,305
$6,009
$3,740
$9,545
$6,246
$6,179
$6,111
$5,402
$3,560
$5,416
$5,297
$7,019
$1.06
$0.84
$0.87
$1.29
$1.27
$1.94
BXE
LRE
POU
PEY
TOU
$90.08
$75.58
$79.95
$56.06
$61.80
$80.14
$78.78
$80.87
$100.08
$85.86
$89.00
$101.08
$6.37
$4.33
$5.55
$3.69
$4.12
$5.27
$4.28
$3.71
$5.30
$4.62
$4.55
$5.01
$2.00
$1.00
$0.65
$1.48
$1.36
$1.35
$4.50
$4.36
$5.20
$4.18
$5.32
$4.39
10.8%
-13.4%
-1.7%
12.0%
10.1%
1.8%
1.5x 8.5x
2.6x 4.5x
2.4x 17.8x
2.4x 10.7x
2.8x 9.8x
2.2x 8.9x
6.2x
4.8x
8.2x
9.4x
8.0x
6.5x
$4,388
$2,859
$8,728
$9,108
$7,079
$6,246
$4,471
$3,291
$6,709
$7,937
$5,361
$5,402
$1.12
$0.90
$1.83
$2.21
$2.43
$1.27
RRC
EQT
COG
REXX
ECR
AR
RICE
SWN
GST
PETD
$61.74
$50.43
$87.69
$93.63
$147.90
$63.70
$64.76
$60.17
$60.35
$123.60
$64.23
$61.15
$47.82
$84.64
$91.95
$223.89
$79.27
$55.92
$92.11
$69.28
$95.49
$81.96
$7.39
$5.00
$3.41
$5.12
$8.59
$5.05
$5.13
$4.68
$4.23
$7.33
$5.08
$5.18
$4.10
$2.96
$4.60
$12.67
$6.02
$5.99
$4.30
$4.28
$4.30
$4.45
$0.60
$0.76
$0.57
$0.60
$1.92
$0.48
$1.38
$1.29
$0.40
$1.40
$0.68
$4.00
$3.12
$3.12
$3.11
$3.51
$4.34
$3.68
$3.71
$4.11
$4.07
$3.69
11.8%
6.6%
9.3%
-2.4%
-7.8%
10.6%
16.8%
11.3%
11.7%
11.7%
10.9%
3.9x
3.5x
2.8x
2.5x
0.4x
4.4x
1.4x
1.4x
7.5x
1.4x
2.6x
11.2x
12.1x
13.4x
9.8x
9.6x
9.6x
10.6x
5.4x
8.5x
6.0x
9.7x
13.6x $6,486
12.0x $7,880
15.1x $6,941
9.9x $4,512
14.7x $4,467
9.4x $7,192
11.7x $6,113
7.0x $2,933
7.0x $8,223
5.2x $10,891
10.8x $6,713
$5,341
$6,853
$7,048
$4,152
$3,211
$6,017
$4,770
$2,668
$7,895
$8,100
$5,679
$0.87
$1.23
$1.53
$0.68
$2.39
$0.84
$2.47
$0.73
$1.09
$1.81
$1.16
UPL
QEP
$53.59
$115.12
$84.36
$77.60
$121.69
$99.65
$2.98
$7.49
$5.23
$3.29
$6.38
$4.84
$0.51
$2.02
$1.26
$4.24
$4.34
$4.29
22.1%
14.6%
18.3%
4.2x
0.7x
2.5x
7.3x
4.2x
5.8x
$5,769
$4,031
$4,900
$5,402
$4,383
$4,893
$0.83
$0.88
$0.86
MRD
XCO
$66.18
$62.21
$64.20
$64.23
$83.25
$110.59
$96.92
$83.95
$4.51
$2.87
$3.69
$5.02
$5.29
$4.48
$4.88
$4.54
$0.62
$0.74
$0.68
$0.68
$3.67
$3.79
$3.73
$3.75
-27.0%
10.6%
-8.2%
11.0%
6.7x 19.3x 15.7x $17,172

2.4x 6.2x 8.6x $4,587
4.5x 12.8x 12.1x $10,879
2.6x 9.6x 9.6x $6,943
$11,261
$4,674
$7,968
$5,841
$3.79
$1.25
$2.52
$1.46
5.4x
7.8x
6.6x
Source: Company Reports, BMO Capital Markets estimates, FirstCall Consensus Estimates
Note: * Valuation metrics for companies not under coverage are based on consensus estimates
Alberta Tight Oil

Similar to shale gas, Alberta tight oil producers earn below-average returns compared to
leading resource plays such as the Bakken, Eagle Ford, Permian, and Niobrara. Median returns
for Alberta companies were only 1.7% in 2014. This has translated into discounted valuations,
with Alberta producers reflecting a median 2016E EV/EBITDA multiple of 6.4x versus 7.2x for
U.S. peers. Historical valuation trends have reversed, and U.S. peers have garnered premium
valuations in recent years as a result of superior resource scale and economics.
Sector Comment
Chart 36: Competing Tight Oil Producers - 2016E EV/EBITDA vs. ROCE
14x
AB Median: 1.7%
Chart 37: Tight Oil Producers Historical Forward EV/EBITDA

10x
U.S. Median: 8.4%
12x
SGY CRK
MTDR
XEC
PXD
10x
2016EEV/EBITDA
CXO
8x
TET
PWT
PVA
6x
LRE
PGF
9x
EGN
LPI
8x
CLR CRZO
NBL
WCP
ARX
CJ OAS
REN BCEI
BXE
NFX
SN
NOG
WLL BNE
SM
AREX EPE
PDCE
7x
6x
4x
5x
RMP
2x
0x
30%
JOY
20%
4x
10%
0%
ROCE
10%
20%
30%
ABAvg.
USAvg.
Alberta tight oil producers have higher average supply costs to major U.S. plays, averaging
$111/boe compared to $100/boe for U.S. peers based on three-year average results. As
mentioned, we expect supply costs for key plays like the Permian to improve materially in
coming years relative to Canadian plays. F&D costs are a primary contributor to the higher
supply costs for Alberta producers.
Chart 38: Tight Oil Producers Supply Costs (US$/boe)
$140.00
Chart 39: Tight Oil Producers F&D Costs (US$/ boe)

$30.00
$120.00
$25.00
$100.00
$20.00
$80.00
$60.00
$15.00
$40.00
$10.00
$20.00
$5.00
$0.00
$0.00
SupplyCost
3YearSupplyCost
Alberta oil producers tend to receive lower value for their product sales because of quality and
transportation cost differentials, which puts them at an economic disadvantage to competing
U.S. peers. Chart 41 illustrates how Alberta tight oil producers on average generate lower cash
flows relative to capital costs compared to most competing plays.
Sector Comment
Chart 40: Tight Oil Producers Realized Pricing (US$/ boe)
$90.00
Chart 41: Tight Oil Producers Recycle Ratio

3.0x
$80.00
2.5x
$70.00
$60.00
2.0x
$50.00
1.5x
$40.00
$30.00
1.0x
$20.00
0.5x
$10.00
$0.00
0.0x
On average, Alberta oil producers trade at a discount relative to U.S. peers on 2016E flowing
barrel and 2014 net proved reserves as a reflection of the relative economics (Charts 4243).
Chart 42: Tight Oil Producers 2016E EV/Production (US$/boe/d)
Chart 43: Tight Oil Producers EV/Net Proved Reserves (US$/boe)
$80,000
$14.00
$70,000
$12.00
$60,000
$10.00
$50,000
$8.00
$40,000
$6.00
$30,000
$4.00
$20,000
$10,000
$2.00
$0
$0.00
Table 2 provides economic and valuation comparables for Alberta-focused light oil producers
and competing U.S. producers by region.
Sector Comment
Table 2: Tight Oil Focused Producers Alberta vs. U.S.
Alberta Producers:
Cardium Focus:
Bonterra
Pennwest
Whitecap*
Deep Basin/Other:
Arc Resources
Cardinal*
Journey*
Long Run*
Pengrowth
RMP*
Surge*
ers Alberta Median
Bakken:
Whiting
Oasis
Northern*
Continental
Bakken
Permian:
Approach*
Concho
Laredo
Pioneer
Cimarex
Resolute*
Energen
Permian
Eagle Ford:
Carrizo
Comstock
SM
EP Energy
Matador
Penn Virginia*
Sanchez
Newfield
Eagle Ford
Niobrara:
Noble
PDC
Bonanza Creek
Carrizo
Niobrara
U.S. Median
Ticker
Supply Cost ($/boe)

2014
3-Year
F&D
$/boe
Price
$/boe
ROCE Recyc
% Ratio
EV/EBITDA
2015 2016
EV/boe/d
EV/Boe
2015
2016
2014
BNE
PWT
WCP
$69.16
$75.95
$93.65
$64.89
$94.23
$104.04
$16.27
$14.78
$27.56
$80.35
$86.22
$77.93
4.7%
-16.5%
19.1%
3.9x
2.2x
1.8x
8.3x
6.5x
7.9x
6.3x
6.5x
7.3x
$60,803
$29,277
$90,705
$60,297
$31,063
$83,605
$12.39
$7.00
$23.62
ARX
CJ
JOY
LRE
PGF
RMP
SGY
$120.54
$106.41
$87.40
$75.58
$131.69
$88.09
$104.23
$106.03
$121.80
$134.56
$94.62
$80.87
$126.84
$112.84
$118.39
$111.21
$47.52
$23.40
$21.78
$17.36
$38.02
$41.64
$26.67
$27.53
$77.63
$67.79
$72.23
$76.09
$67.02
$80.92
$67.11
$76.86
8.8%
10.2%
-24.2%
-13.4%
-9.8%
10.6%
-1.4%
1.7%
1.3x
1.5x
1.8x
2.6x
0.6x
0.7x
1.6x
1.7x
8.5x
5.9x
2.6x
4.5x
5.5x
3.1x
9.5x
6.2x
7.9x
7.3x
1.9x
4.8x
5.0x
3.2x
10.1x
6.4x
$58,612
$43,856
$14,435
$17,153
$35,600
$24,175
$71,459
$39,728
$56,564
$42,003
$13,984
$19,745
$34,111
$22,230
$82,157
$38,057
$17.64
$15.31
$5.19
$5.42
$8.15
$11.33
$17.18
$11.86
WLL
OAS
NOG
CLR
$100.39
$96.16
$104.95
$107.39
$95.93
$105.18
$99.04
$108.82
$95.78
$98.70
$17.74
$23.49
$26.53
$21.04
$21.69
$77.72
$82.73
$79.13
$80.63
$79.88
1.6%
14.1%
13.0%
11.3%
7.8%
2.8x
2.1x
2.0x
3.7x
2.5x
5.7x
4.3x
4.2x
9.4x
5.0x
6.6x
7.2x
6.1x
8.7x
6.9x
$47,789
$76,105
$69,968
$76,518
$73,036
$53,932
$78,010
$70,842
$75,655
$73,249
$10.02
$13.82
$11.25
$12.84
$12.05
AREX
CXO
LPI
PXD
XEC
REN
EGN
$100.84
$105.24
$171.69
$112.02
$78.42
$84.45
$136.92
$104.40
$116.87
$110.07
$121.90
$124.61
$90.25
$144.28
$138.20
$112.67
$14.32
$24.00
$29.79
$29.06
$18.05
$8.65
$41.92
$24.49
$61.60
$83.18
$83.07
$62.02
$62.68
$83.49
$82.48
$82.48
6.4%
8.1%
12.0%
10.9%
10.1%
0.4%
13.3%
9.9%
3.1x
2.5x
1.4x
1.2x
2.5x
3.1x
0.9x
2.5x
4.4x
8.8x
6.8x
11.6x
13.2x
5.5x
6.1x
6.8x
5.8x $37,882
9.3x $105,468
9.3x $95,628
10.9x $93,499
11.6x $64,884
7.0x $56,529
9.6x $74,564
9.3x $74,564
$42,091
$101,746
$108,590
$84,525
$57,733
$65,527
$62,050
$65,527
$3.89
$23.59
$13.02
$23.45
$20.05
$9.83
$12.59
$13.02
CRZO $93.58
CRK $150.49
SM
$91.36
EPE $110.86
MTDR $42.30
PVA
$96.74
SN
$92.89
NFX
$92.48
$91.34
$111.16
$136.22
$88.00
$103.04
$41.34
$116.67
$124.71
$107.05
$92.49
$20.83
$63.10
$19.77
$28.13
$7.67
$27.12
$21.23
$20.66
$26.43
$81.32
$92.01
$60.02
$86.71
$87.35
$79.04
$69.88
$64.09
$80.18
11.9%
-0.8%
18.9%
11.4%
10.9%
-18.9%
0.2%
9.0%
7.2%
2.0x
1.1x
1.7x
3.1x
8.6x
0.0x
2.2x
1.7x
1.9x
9.8x
8.3x
4.2x
4.0x
8.9x
5.0x
5.4x
6.4x
5.9x
8.5x
10.4x
5.7x
5.6x
11.5x
6.1x
6.6x
6.3x
6.5x
$86,188
$39,546
$27,473
$58,134
$72,081
$66,757
$32,106
$50,261
$54,197
$85,061
$38,462
$30,050
$58,469
$69,068
$80,542
$32,419
$46,899
$52,684
$20.10
$11.99
$8.83
$9.98
$26.49
$12.74
$11.70
$11.53
$11.85
NBL $201.39
PETD $123.60
BCEI $145.77
CRZO $93.58
$119.78
$106.59
$130.65
$95.49
$127.93
$111.16
$102.30
$100.64
$68.95
$23.65
$41.49
$20.83
$27.29
$25.51
$76.73
$68.62
$81.21
$81.32
$78.97
$80.63
9.4%
11.7%
3.7%
11.9%
8.5%
8.4%
0.9x
1.4x
1.2x
2.0x
1.3x
2.4x
7.4x
6.0x
4.4x
9.8x
6.7x
6.1x
8.1x
5.2x
6.9x
8.5x
7.5x
7.2x
$50,329
$65,344
$40,918
$86,188
$57,837
$65,344
$45,248
$48,599
$39,714
$85,061
$46,924
$62,050
$12.19
$10.69
$12.74
$20.10
$12.47
$12.59
Oil Sands
Oil Sands producers have generated median returns roughly in line with competing U.S. tight
oil producers in recent years. This said, it is important to recognize that the oil sands industry is
dominated by large cap, integrated oil companies that generate outsized returns from the
downstream refining business that supplement upstream results. Small pure-play oil sands
producers, like Connacher (not included here) have in contrast reported losses on capital in
Sector Comment
recent years. The group has historically traded at a slight discount to U.S. tight oil producers,
with the notable exception of 2015, as low oil prices have been much more impactful on
earnings and cash flow to oil sands producers than conventional peers.
Chart 44: Oil Sands/U.S. Tight Oil 2016E EV/EBITDA vs. ROCE
12x
XEC MTDR
Chart 45: Oil Sands / U.S. Tight Oil Historical Forward EV/EBITDA
AB Median: 8.7%
U.S. Median: 8.4%
11x
PXD
CRK
2016EEV/EBITDA
LPI
CXO
9x
11x
10x
IMO
10x
12x
EGN
9x
CLR
CRZO
NBL
8x
8x
CNQ
REN
SN
6x
COS
BCEI
7x
CVE
NFX
WLL
7x
OAS
6x
NOG
SU
SM
EPE
AREX
5x
5x
PDCE
4x
4x
5%
0%
5%
10%
15%
20%
ABAvg.
ROCE
USAvg.
Implied supply costs to oil sands producers have also been higher than U.S. tight oil plays,
despite materially lower upfront F&D costs.
Chart 46: Oil Sands / U.S. Tight Oil Supply Costs (US$/boe)
$140.00
Chart 47: Oil Sands / U.S. Tight Oil F&D Costs (US$/ boe)
$30.00
$120.00
$25.00
$100.00
$20.00
$80.00
$15.00
$60.00
$40.00
$10.00
$20.00
$5.00
$0.00
$0.00
SupplyCost
3YrSupplyCost
Oil sands F&D costs tend to be materially lower than competing projects due to the large
resource scale; however, the long-lead nature of oil sands projects, pricing discounts and higher
operating costs generally offset this on bottom line results as indicated by a lower average
recycle ratio (Charts 4849).
Sector Comment
Chart 48: Oil Sands Realized Pricing vs. U.S. (US$/ boe)
$90.00
Chart 49: Oil Sands Recycle Ratio vs. U.S. Peers

3.0x
$80.00
2.5x
$70.00
$60.00
2.0x
$50.00
1.5x
$40.00
$30.00
1.0x
$20.00
0.5x
$10.00
$0.00
0.0x
Oil sands producers trade at a premium valuation to average U.S. peers on production given the
industrys very low decline rate; however, reserves values are heavily discounted due to higher
future costs and deteriorating economics.
Chart 50: Oil Sands 2016E EV/Production (US$/boe/d)
$80,000
Chart 51: Tight Oil Producers EV/Net Proved Reserves (US$/boe)

$14.00
$70,000
$12.00
$60,000
$10.00
$50,000
$8.00
$40,000
$6.00
$30,000
$20,000
$4.00
$10,000
$2.00
$0
$0.00
Table 1 provides economic and valuation comparables for Alberta focused light oil producers
and competing U.S. producers by region.
Sector Comment
Table 3: Oil Sands vs. U.S. Tight Oil Producers
CAD
Cenovus
Canadian Oil Sands
Connacher*
Suncor
MEG
Imperial
Canadian Natural
Oil Sands
Bakken
Permian
Eagle Ford
Niobrara
U.S. Median
Ticker
CVE
COS
CLL
SU
MEG
IMO
CNQ
Supply Cost ($/boe)

2014
3-Year
$109.70 $111.98
$95.29
$92.59
$104.28 $101.97
$112.24 $115.65
$126.37
$90.12
$84.30 $112.32
$99.18 $110.11
$104.28 $110.11
$95.93
$98.70
$104.40 $112.67
$91.34
$92.49
$119.78 $102.30
$106.59 $100.64
F&D
$/boe
$16.90
$15.30
$6.74
$27.50
$23.04
$10.34
$15.13
$15.30
$21.69
$24.49
$26.43
$27.29
$25.51
Price ROCE Recyc

$/boe
% Ratio
$72.09
8.7%
2.3x
$95.20
7.6%
2.2x
$65.04 -10.1%
2.1x
$97.04
7.0%
1.6x
$58.96 10.7%
1.3x
$84.19 12.9%
3.8x
$69.18 10.0%
2.9x
$72.09
8.7%
2.2x
$79.88
7.8%
2.5x
$82.48
9.9%
2.5x
$80.18
7.2%
1.9x
$78.97
8.5%
1.3x
$80.63
8.4%
2.4x
EV/EBITDA
EV/boe/d
2015 2016
2015
2016
7.6x
7.4x $61,563
$58,397
62.5x
7.3x $49,660
$43,087
na
na
na
na
6.9x
5.9x $87,771
$87,679
R
R
R
R
15.1x 10.0x $105,941
$96,368
12.7x
7.8x $48,257
$47,847
12.7x
7.4x $61,563
$58,397
5.0x
6.9x $73,036
$73,249
6.8x
9.3x $74,564
$65,527
5.9x
6.5x $54,197
$52,684
6.7x
7.5x $57,837
$46,924
6.1x
7.2x $65,344
$62,050
EV/Boe
2014
$7.22
$6.70
na
$11.01
R
$10.60
$7.52
$7.52
$12.05
$13.02
$11.85
$12.47
$12.59
Conclusion
Our conclusion is that oil and gas investors and Alberta focussed companies are right to be
concerned about the potential for higher royalty rates and environmental charges. The Alberta
industry has generally delivered weaker investment returns than competing jurisdictions under
the current royalty scheme. Any changes that lead to higher royalties could further weaken the
competitive position of Alberta focussed companies and make it increasingly difficult to attract
capital. We continue to recommend that investors remain cautious on the oil and gas space
overall and focus on companies that have strong balance sheets and the capability to deliver
growth in economic value within cash flow.
Sector Comment
Appendix A: Alberta Gas and Oil Royalty Credits

Alberta Natural Gas Royalty Programs
Key incentives to the existing natural gas royalty program in Alberta include the Horizontal
New Well Royalty Rate, Natural Gas Deep Drilling Program (NGDDP) and the Shale Gas New
Wells program. For new horizontal wells, the royalty rate is a maximum of 5% for all products
for the first 12 production months subject to a 500 Mmcfe volume cap. The NGDDP was
introduced in 2009 to encourage drilling of deeper and higher-cost natural gas wells. The
NGDDP applies to the wells spud or deepened on or after May 1, 2010 with total vertical depth
of 2,000+ metres. For a qualified NGDDP well, the royalty rate is 5% for a period of five years
after the drilling date subject to a value cap of $8 million for development wells and $10 million
for exploration wells. If a well qualifies for a 5% royalty rate outside of the scope of the
NGDDP, the 5% rate is applied first, and the NGDDP benefits are applied following the
expiration of the 5% rate to a maximum of five years from drill date.
The Shale Gas New Wells program applies a royalty of up to 5% for 36 producing months with
no volume cap on shale gas wells drilled on or after May 1, 2010. Similarly, wells commencing
production on or after May 1, 2010 may adopt the Coalbed Methane New Wells program,
receiving a royalty rate of up to 5% for 36 producing months with a volume cap of 750 Mmcfe.
Additional programs include the Otherwise Flared Solution Gas Royalty Waiver Program
(OFSG), wherein a royalty may be waived on solution gas and gas by-products that are
uneconomic to conserve, and the Innovative Energy Technologies Program.
Conventional Crude Oil Royalty Programs
Effective January 2011, the royalty rate range for existing conventional oil wells was reset
lower to 040% from 050% in the original 2009 framework. A New Well Royalty Rate was
implemented whereby new oil wells and some wells recommencing production are subject to a
maximum 5% royalty rate for all products for 12 production months with a cap of 50 Mboe.
Similar to natural gas, the Horizontal Oil Royalty Rate program stipulates that horizontal oil
wells spud on or after May 2010 are subject to a maximum 5% rate for all products until time or
volume limits are reached (as shown in Figure 2).
Figure 2: Horizontal Oil Royalty Rate Program Thresholds
MeasuredDepth(metres)
Lessthan2,500
2,500upto3,000
3,000upto3,500
3,500upto4,000
4,000upto4,500
Morethan4,500
Maximumeligibility(months)
18
24
30
36
42
48
Volumecap(Boe)
50,000
60,000
70,000
80,000
90,000
1,00,000
Other royalty programs include the Deep Oil Exploration Well Program, and Enhanced
Recovery of Oil Royalty Reduction. The Deep Oil program provides a royalty holiday of up to
$1 million per well on wildcat and deep pool exploration tests with vertical depths of 2,000+
metres. Under the program, royalties are not payable on oil produced for the first 12 months,
until the cumulative value of the payable royalty equals $1 million or five years from the
finished drilling date. The Enhanced Recovery of Oil Royalty Reduction program provides for
sharing with the Crown the incremental costs of enhanced oil recovery via a reduction in
Sector Comment
royalties on incremental, tertiary recovery production. Similar to the natural gas framework,
crude oil pilot and demonstration projects approved under the Innovative Energy Technologies
Program are eligible to receive royalty adjustments.
Sector Comment
IMPORTANT DISCLOSURES
Analyst's Certification
I, Randy Ollenberger / Jared Dziuba, CFA, hereby certify that the views expressed in this report accurately reflect my personal views about the subject
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Distribution of Ratings (June 30, 2015)

Rating
BMOCM US
BMOCM US
BMOCM US
BMOCM
BMOCM
Starmine
Category
BMO Rating
Universe*
IB Clients**
IB Clients***
Universe****
IB Clients*****
Universe
Buy
Outperform
42.0%
21.9%
53.3%
41.9%
54.3%
54.6%
Hold
Market Perform
53.5%
14.4%
44.8%
53.3%
44.4%
40.0%
Sell
Underperform
4.4%
7.4%
1.9%
4.7%
1.3%
5.4%
*
Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.
**
Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking services as
percentage within ratings category.
***
Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking
services as percentage of Investment Banking clients.
**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.
***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking services as
percentage of Investment Banking clients.
Rating and Sector Key (as of April 5, 2013):
We use the following ratings system definitions:
OP = Outperform - Forecast to outperform the analysts coverage universe on a total return basis
Mkt = Market Perform - Forecast to perform roughly in line with the analysts coverage universe on a total return basis
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(S) = speculative investment;
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BMO Capital Markets' seven Top 15 lists guide investors to our best ideas according to different objectives (CDN Large Cap, CDN Small Cap, US
Large Cap, US Small cap, Income, CDN Quant, and US Quant have replaced the Top Pick rating).
Prior BMO Capital Markets Ratings System (January 4, 2010April 4, 2013):
http://researchglobal.bmocapitalmarkets.com/documents/2013/prior_rating_system.pdf
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in
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Sector Comment
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Alberta Oil & Gas Review

September 10, 2015

BMO Nesbitt Burns Inc.

Royalty Review: Alberta Needs a Hand, Not a Hammer

Jared Dziuba, CFA

Associate: Matthew Murphy

BMO Nesbitt Burns Inc.

Dj Vu All Over Again

Source: BMO Capital Markets, Company Reports

Page 2 September 10, 2015

The Costs of Uncertainty

Page 3 September 10, 2015

Source: CAPP, BMO Capital Markets

Source: CAPP, BMO Capital Markets

Chart 4: Year-Over-Year Change in Drilling Capital

Source: CAPP, BMO Capital Markets

Source: CAPP, BMO Capital Markets

Page 4 September 10, 2015

Source: CAPP, BMO Capital Markets

Source: CAPP, BMO Capital Markets

Canadas Industry Needs All the Help It Can Get

Page 5 September 10, 2015

Chart 8: North America Shale Gas Recoverable Resource (Bcf)

Source: EIA, BMO Capital Markets, Company Reports

Source: EIA, BMO Capital Markets, Company Reports

Page 6 September 10, 2015

Chart 10: North America Natural Gas Production by Region (Bcf/d)

Source: EIA, NEB, BMO Capital Markets

Source: EIA, NEB, BMO Capital Markets

Chart 12: Implied Natural Gas Supply Costs by Region (US$/mcfe)

Page 7 September 10, 2015

Source: CAPP, BMO Capital Markets

Page 8 September 10, 2015

Chart 15: Cash Flow Recycle Ratio by Province

Source: CAPP, BMO Capital Markets

Source: CAPP, BMO Capital Markets

3-Year Recycle Ratio

Source: CAPP, BMO Capital Markets

Page 9 September 10, 2015

Source: Statistics Canada, BMO Capital Markets

Chart 19: Forecast ROCE vs. 20% Cost Reduction Scenario

Source: BMO Capital Markets, Company Reports

Page 10 September 10, 2015

Source: BMO Capital Markets, Company Reports

Comparing Supply Costs, Returns and Resulting Valuations

Chart 21: Historical Average Forward EV/EBITDA Multiples

Source: Company reports, BMO Capital Markets, Bloomberg

Source: BMO Capital Markets, Bloomberg

Chart 23: Alberta Producers F&D Costs (US$/boe)

Source: Company reports, BMO Capital Markets

Page 11 September 10, 2015

Source: Company reports, BMO Capital Markets

Chart 25: Alberta Producers Average Recycle Ratios

Source: Company reports, BMO Capital Markets

Source: Company reports, BMO Capital Markets

Chart 27: EV/Net Proved Reserves (US$/boe)

Source: Company reports, BMO Capital Markets, Bloomberg

Page 12 September 10, 2015

Source: Company reports, BMO Capital Markets, Bloomberg

Alberta Shale Gas

U.S. Median: 11.0%

Chart 29: Gas Producers Historical Forward EV/EBITDA

Source: Company reports, BMO Capital Markets, Bloomberg

Source: BMO Capital Markets, Bloomberg