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RESEARCH

8 February 2010

GLOBAL ENERGY OUTLOOK


COMMODITY, CREDIT AND EQUITY VIEWS

Barclays Capital 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.
This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/qualified as
equity research analysts with FINRA.
FOR ANALYST CERTIFICATION(S), PLEASE SEE PAGE 68.
FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 68.
FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 70.
Barclays Capital | Global Energy Outlook

GLOBAL ENERGY OUTLOOK

In this report we present our energy research analysts’ views on commodities, credit and
equities. Three consistent themes stand out:

1. Crude oil, coal and carbon pricing are expected to strengthen on a 12-24 month
horizon; natural gas and US power prices may take longer to recover.

2. A preference for crude oil and upstream biased investments, relative to natural gas and
downstream oil. We see price support for crude in 2010 and even more so in 2011 as
demand recovers, inventories return to balance and new supply slows. We like the
commodity and oil biased E&P investments in credit and equities.

3. A clear negative view on downstream oil profitability, and investments sensitive to oil
product margins. We expect refining capacity additions to exceed demand growth at
least until 2012. We are negative on independent refiners in credit and equities.

In commodities, we are structurally positive on energy. In the long run, we see demand
growth outstripping supply, and expect prices to rise faster than inflation. Historically,
energy commodities have outperformed energy credit and energy equities, and we expect
that relationship to continue.

In credit, our preferred investments broadly mirror our commodities views. In high grade,
we are Overweight oil services and Underweight refiners. In high yield, we recommend E&P
and pipelines. High grade pipelines are trading with little spread differentiation, and strong
returns in 2009 suggest difficulty in outperforming in 2010. In high yield coal, we expect the
sector to underperform the broader high yield index in 2010, given the current tight
spreads, although we see some opportunities for outperformance: for example, at 335bp,
the discount between MEE 5y CDS and BTU 5y CDS is too wide, and we therefore
recommend selling MEE protection. In US utilities, the best opportunities are among the BBB
regulated and electric utilities; in Europe, we are Underweight the utilities group.

Energy equities have underperformed the underlying commodities in the long run, but have
outperformed the main equity indices, and we expect that pattern to continue. We currently
recommend a more defensive equity investment stance, following the strong
outperformance of high beta names such as oil services in the last 12 months. We are
Overweight the US Majors, ExxonMobil and Chevron, and in Europe we are Overweight Eni.
In US E&P, we recommend the oil biased Apache, Canadian Natural Resources and
Talisman. We are also positive on coal names and recommend Peabody. In oil services, we
see the start of a new capital spending cycle, but also expect a better future entry point into
the shares given their strong recent performance. We remain cautious on US power as our
proprietary Barclays Power Margin Index indicates a deterioration in future electric utility
earnings. Our least preferred sub-sector is the independent refiners, in both the US and
Europe, given the bleak outlook we see for refining margins.

Our research analysts’ views on each asset-class and on individual sectors are summarised
in the following pages. Our detailed research reports are available on Barclays Capital Live.

8 February 2010 1
Barclays Capital | Global Energy Outlook

RESEARCH CONTACTS
Commodities
Gayle Berry Suki Cooper James Crandell Helima Croft
Commodities Research Commodities Research Commodities Research Commodities Research
+44 (0)20 3134 1596 +44 (0)20 7773 1090 +1 212 412 2079 +1 212 526 0764
gayle.berry@barcap.com suki.cooper@barcap.com james.crandell@barcap.com helima.croft@barcap.com

Paul Horsnell Costanza Jacazio Natalya Naqvi Kevin Norrish


Commodities Research Commodities Research Commodities Research Commodities Research
+44 (0)20 7773 1145 +1 212 526 2161 +44 (0)20 7773 0639 +44 (0)20 7773 0369
paul.horsnell@barcap.com costanza.jacazio@barcap.com natalya.naqvi@barcap.com kevin.norrish@barcap.com

Biliana Pehlivanova Amrita Sen Trevor Sikorski Nicholas Snowdon


Commodities Research Commodities Research Commodities Research Commodities Research
+1 212 526 2492 +44 (0)20 3134 2266 +44 (0)20 3134 0160 +44 (0)20 3134 2267
biliana.pehlivanova@barcap.com amrita.sen@barcap.com trevor.sikorski@barcap.com nicholas.snowdon@barcap.com

Sudakshina Unnikrishnan Quitterie Valette Yingxi Yu Michael Zenker


Commodities Research Commodities Research Commodities Research Commodities Research
+44 (0)20 7773 3797 +44 (0)20 3134 2686 +65 6308 3294 +1 415 765 4743
sudakshina.unnikrishnan@barcap.com quitterie.valette@barcap.com yingxi.yu@barcap.com michael.zenker@barcap.com

Credit
Jim Asselstine Neil Beddall Laurence Jollon Harry Mateer
US Electric Utilities (HG) Utilities US Metals, Mining & Chemicals (HY) Energy & Basic Industries (HG)
+1 212 412 5638 +44 20 7773 9879 +1 212 412 7901 +1 212 412 7903
james.asselstine@barcap.com neil.beddall@barcap.com laurence.jollon@barcap.com harry.mateer@barcap.com

Gary Stromberg
Co-Head of US High Yield Research
+1 212 412 7608
gary.stromberg@barcap.com

Equities
Paul Cheng James D. Crandell Thomas Driscoll Daniel Ford
US Integrated Oil and Refiners US Oil Services & Drilling US Exploration & Production US Power & Utilities
+1 212 526 1884 +1 212 526 4865 +1 212 526 3557 +1 212 526 0836
paul.cheng@barcap.com jim.crandell@barcap.com thomas.driscoll@barcap.com dan.ford@barcap.com

Richard Gross, II Lucy Haskins Rahim Karim Gregg Orrill


US MLPs and Natural Gas European Integrated Oil European Integrated Oil US Power
+1 212 526 3134 + 44 20 3134 6694 +44 20 3134 1853 +1 212 526 0865
richard.gross@barcap.com lucy.haskins@barcap.com rahim.karim@barcap.com gregg.orrill@barcap.com

Mick Pickup Lydia Rainforth Jeffrey W. Robertson Peter D. Ward


European Oil Services & Drilling European Independent Refiners US Exploration & Production US Coal
+44 20 3134 6695 +44 20 3134 6669 +1 214 720 9401 +1 212 526 4016
mick.pickup@barcap.com lydia.rainforth@barcap.com Jeffrey.robertson@barcap.com pete.ward@barcap.com

James C. West Tim Whittaker


US Oil Services & Drilling Head of European Equities Research
+1 212 526 8796 +44 20 3134 6696
james.west1@barcap.com tim.whittaker@barcap.com

8 February 2010 2
Barclays Capital | Global Energy Outlook

CONTENTS

Summary of Energy Themes 4

COMMODITIES
Oil - Bridge of sighs 8

Natural Gas - Snow blind 12

Global LNG - Wind of change 14

Coal - The patient is getting better 16

Power - Twilight 18

Carbon - This is a low 20

Geopolitics - Year of living dangerously 22

CREDIT
US High Grade Energy - Value is elusive in 2010 26

US High Yield Energy - Financial leverage to decline in 2010 27

US High Grade Pipelines - As the beta trade winds down, credit selection takes over 28

US High Yield Coal - Expect coal credits to underperform 29

US High Grade Electric Utilities - Stable outlook for 2010 30

European High Grade Utilities - Stable 2010 as demand recovers 31

EQUITIES
US Integrated Oil - Risk/Reward shifts in favor of Super Majors 34

Europe Integrated Oil - The challenge of differentiation 36

US Independent Refiners - Bottom may be close, but the “Dark Age” continues 38

Europe Independent Refiners - Limited value in European refining 40

US Oil & Gas: E&P (Large-Cap & Mid-Cap) - Favor oil-orientated producers 42

US Oil Services & Drilling - At an inflection point 44

Europe Oil Services & Drilling - Fair, but not normal 47

US Natural Gas - Gas markets in transition 50

US Power - After the gold rush 52

US Coal - Poised for an eventual strong recovery 56

Equity Valuation Table 58

Valuation Methodology and Risks 63

8 February 2010 3
Barclays Capital | Global Energy Outlook

SUMMARY OF ENERGY THEMES


INVESTMENT VIEW KEY RECOMMENDATIONS
Commodities
Oil 2010 is likely to be a transition year between the demand-side We expect the price of WTI to average $85/bbl this year and
weakness of 2009 and supply-side tightness in 2011. Nigeria’s $97/bbl in 2011 versus an average of just $62/bbl in 2009.
internal politics, Iran’s nuclear programme and the Iraqi
parliamentary election increase price uncertainty.
Natural Gas US natural gas supply is expected to be down 0.9 Bcf/d in Our forecast for 2010 Henry Hub is $5.25/MMBtu.
2010. Lower power sector demand overwhelms any recovery
led gains and overall is expected to fall 0.8 Bcf/d in 2010.
LNG As liquefaction trains come online in 2010, production growth The expected oversupply should pressure spot LNG prices
should be 4.5-5.5 Bcf/d. around the world to again trade closely together in 2010.
The global recovery should allow LNG demand outside of the With forward price differentials favoring US ports, Atlantic basin
US and Europe to grow at around 2.5-2.7 Bcf/d. This still spot cargoes are increasingly likely to sail west.
leaves roughly 2 Bcf/d to be absorbed by the US and Europe.
Coal Strong Asian demand, as well as a lack of improvement in We are positive on coal, forecasting averages of $90/t, $84/t
infrastructural problems leading to supply bottlenecks will and $90/t for API 2, API 4 and Newcastle prices in 2010, against
support upside momentum. $71/t, $66/t and $72/t for 2009.
Power - US As the US economy recovers and temperatures regain bite we Forward power prices will depend on fuel prices as well as the
forecast demand growth of 3.5%. extent of demand recovery in 2010.
We project that coal-fired output will be up 10.3% from 2009 Market heat rate curves show backwardation in the front, but
and gas generation will fall 6% in 2010. contango in later years, suggesting expectations of further
loosening giving way to eventual tightening
Carbon We expect the market to be long EUAs out to 2012 and 2013 Our price forecasts for Q1 10 is 12.0 €/t while H2 10 prices
being the first year that is net short. Hedging of 2013 positions forecast is 15 €/t. Prices are expected to increase to18 €/t in
should become a more significant in H2 10. 2011 and 24 €/t in 2012.
Credit
US High Grade We expect the independent E&P sector to perform in line with We are Overweight the oil field service sector and Underweight
Energy the market and the integrated sector to lag the broader index. refiners.
Market Weight We believe oil services activity levels have bottomed and Buy Nexen cash (OW); Sell Suncor CDS (OW), as we like their
service-intensive shale activity will remain robust. leverage to oil prices.
US High Yield 2010 should see increased M&A activity, and continued new We are Overweight E&P and pipelines, while Market Weight
Energy issue supply. services and refining. We are Market Weight independent E&P
and Underweight integrateds.
Overweight We estimate that debt/EBITDA likely peaked in 2009 at 4.0x,
and forecast a decline to 3.3x this year. We recommend Hilcorp (OW), Petrohawk (OW), SandRidge
(OW) and Targa Resources Partners (OW).
US High Grade Strong results in 2009 may mean pipelines will have difficulty Midcontinent Express Pipeline has good relative value. We
Pipelines outperforming in 2010. expect regulatory approvals to improve leverage metrics.
Market Weight The sector is trading with little spread differentiation. Boardwalk Pipeline Partners is trading 15-20bp too cheaply.
Buy Energy Transfer Partners, which should get back to a stable
outlook from S&P.
US High Yield We expect coal credits to underperform the broader high Sell Peabody Energy bonds, buy BB rated credits, e.g. Arch Coal.
Coal yield market in 2010 as any improvements are already Sell MEE 5y CDS. The current 335bp differential relative to BTU
reflected by current spreads.
Underweight is too wide.
US High Grade The best opportunities for outperformance can be found Buy Baltimore Gas & Electric Unsecured Notes 5.9% 2016 and
Utilities among the BBB regulated utilities and electric utility Jersey Central P&L (OW) Unsecured Notes 7.35% 2019.
companies. Both have low business risk and supportive regulation, offering
Market Weight
attractive relative value at +155bp each.
European High We believe there is limited opportunity for outperformance Veolia (OW) has good relative value and is well placed to benefit
Grade Utilities versus the BCI from an economic recovery, having implemented measures to
We expect financial performance to be stable due to the high improve credit metrics.
Underweight
levels of forward sales and effective hedging. National Grid (OW) has good relative value, with c.95% of its
revenues being regulated and being well diversified
geographically.

8 February 2010 4
Barclays Capital | Global Energy Outlook

Equities

US Integrated Oil We remain positive on the medium term oil outlook, however, ExxonMobil (1-OW) trades at 11.2x our 2010 EPS estimate,
the uncertainty has increased. compared with the S&P consensus P/E of 14.3x.
1-Positive
Until there is more data to establish a clear consensus view on Chevron (1-OW) shares are currently trading at 5.6x on
the pace of recovery and OPEC supply, the risk/reward trade- EV/2010 EBIDA, versus the group average of 6.6x. Chevron also
off now favours the Majors vs the smaller integrateds. has the potential for exceptional production growth.
European We prefer upstream biased companies. Downstream drag on Eni (1-OW) is under-valued, our sum-of-the-parts analysis
Integrated Oil corporate profitability may inhibit growth investment plans. implies 45% upside potential.
2-Neutral Although we continue to model lower costs for 2010, from
2011 onwards we see inflationary pressures returning.
US Independent Any margin uptick will be very modest over the next several Valero (1-OW) is our choice for short-term trading given its
Refiners years. Our global refining industry stance is 3-Negative. geographic diversity and relatively inexpensive valuation.
3-Negative The Gulf Coast could outperform the Rockies/Mid-Continent Sunoco (2-EW) currently offers the cheapest valuation among
heavy oil refiners over the next 1-2 years. the refiners. The shares could be attractive for the long term.
European Nearly 7mb/d of new capacity will be added by 2012 yet oil We re-iterate our 3-Negative stance on European refiners. Our
Independent product demand on our forecasts will be around 2007 levels. 3-Underweights are Petroplus and PKN Orlen.
Refiners With a positive medium term outlook on oil prices, a $10/bl Our 1-Overweights are Saras, GALP, Hellenic Petroleum and
3-Negative increase would reduce the realized refining margin by $0.5/bl. Motor Oil: these are the most complex and flexible refiners and
will continue to generate positive cash flows.
US Exploration & We forecast that production from the five biggest shales Apache trades at a 19% discount to peers on 2011E debt-
Production may be around 50% of total U.S. natural gas production adjusted cash flow vs. a historical discount of 8%.
by the end of 2012. Canadian Natural Resources has a strong long-term record,
2-Neutral
The oil price will have a dominant effect on E&P share leverage to Canadian oil sands, and a cheap multiple.
performance, instead of unhedged gas, which only accounts Talisman should perform well as the shift away from low-return
for 15% of revenue.
areas towards high-return areas becomes apparent.
US Oil Services & We believe land rig demand domestically will improve sharply We emphasize stocks with differentiated international growth
Drilling in 1H10, adding pressure to natural gas prices. prospects, deepwater and subsea exposure, and those geared
Internationally, we expect 2010 will mark the beginning of a towards an increase in exploration activity.
2-Neutral
long up-cycle in exploration and production spending. Our favourites among the large-caps are Weatherford,
Schlumberger, Transocean, Noble, Cameron and Tidewater. In
In the nearer term we are worried the group may be in for a
the small-to-mid caps, our top picks are ION Geophysical, Core
pause, given the OSX has increased 100% since December
2008 versus the S&P 500’s increase of just 35%. Labs, Dril-Quip and Dresser-Rand.

European Oil European service companies face deterioration in earnings as Tecnicas Reunidas (1-OW) is trading at a 50% discount to its
Services & Drilling the lack of work over 2009 hits. However, the first signs of a 2006-08A PE average, yet has seen earnings upgrades and has
next up cycle are becoming apparent. increased backlog by 50%.
2-Neutral
The prospect of a spending upturn has mostly been priced in, Wood Group (1-OW) is trading at 15x 2010F PE versus a sector
and until backlogs begin to move ,we remain 2-Neutral. average of 16x yet 2000-2008 31% pa earnings growth is
expected to continue in the medium-term.
US Natural Gas The competitive advantage of using light feedstocks is The three crucial trends affecting comparative results are
creating record and rapidly expanding demand for NGL. production costs, NGL exposure and MLP structure.
2-Neutral
The E&P oriented diversified gas stocks trade at abnormal Given the above themes we recommend El Paso, ONEOK,
discounts to the pure plays. Questar and Spectra Energy.
US Power Our analysis suggests the group has another 12% of relative We are 2-Neutral on US Power and recommend AES Corp.
underperformance in the first three quarters of 2010 before a We like AES for its: 1) contracted project backlog which adds
2-Neutral
slow but lengthy period of outperformance.
$0.22/share through 2011; 2) $2B of free cash flow in 2012
The Barclays Power Margin Index (BPMI) indicates a (25% to equity); 3) upside to EPS driven by weak US$ versus
deterioration in future earnings. This is reinforced by the Brazil/Euro currencies 4) partnership with China Investment
ratio of Open EBITDA to forecast EBITDA being less than one. Corp., which is buying 15% of AES
US Coal We believe that higher coal prices and strong financial We feel that U.S. coal equities still remain attractively valued
1 performance for equities in 2010 will be a result of improved despite the recent bullish run. In particular Peabody has strong
1-Positive
domestic demand, stronger Atlantic exports and a gradual exposure to both the attractive Powder River Basin and the
reduction of inventories – this should materialize H2 10. robust Asian market.

1
Credit Rating System (for a full definition, please see pages 68-69): Sector view is for the wider US Metals & Mining sector
Sector Weighting: Overweight, Market Weight, Underweight Credit Rating: OW, MW, UW
Equity Rating System (for a full definition, please see page 71):
Sector view: 1-Positive, 2-Neutral, 3-Negative Stock Rating: 1-OW, 2-EW, 3-UW

8 February 2010 5
Barclays Capital | Global Energy Outlook

8 February 2010 6
Barclays Capital | Global Energy Outlook

COMMODITIES

8 February 2010 7
Barclays Capital | Global Energy Outlook

OIL

Bridge of sighs
Costanza Jacazio „ In our view, 2010 is likely to be a bridging year, acting as a transition between the
+1 212 526 2161 demand-side weakness of 2009 and supply side tightness in 2011.
costanza.jacazio@barcap.com
„ We expect OECD demand to stabilize and head for its first year of growth since 2005,
and non-OECD demand growth to become more broad-based.
Amrita Sen
+44 (0) 20 3134 2266 „ We expect non-OPEC output to revert to negative growth in 2010, as last year’s large
amrita.sen@barcap.com upswing in Russian and US production will fades.

Oil prices set to strengthen


In our view, 2010 will see a series of continuities being rolled out into every sphere of oil
demand and supply, making it somewhat of a bridge between the demand-side weakness of
2009 and the supply-side tightness likely to re-appear in 2011. Our oil price forecast reflects
this fundamental view. We expect the price of WTI to average $85/bbl in 2010, marking a
large $23 increase from the average of 2009, but still some way off the $99.7/bbl registered in
2008. We believe price gains will be skewed towards H2 09 and expect the upward
momentum to continue in 2011, when we forecast the price of WTI to average $97/bbl. On
the demand front, we expect the recovery that started in spring 2009 to continue into 2010.
After an initial phase of patchy demand improvement, we forecast the recovery in oil demand
to become more evenly spread across regions and products. 2009 has been characterized by a
strong dichotomy in performance. At a regional level, non-OECD demand rebounded strongly
from the lows in early 2009, while, on a product basis, gasoline demand greatly outperformed
the rest of the barrel. Into 2010, we expect these divergences to start to close as the recovery
becomes more broad based. We expect global oil demand to grow slightly below trend, rising
by 0.98 mb/d, virtually entirely due to higher non-OECD demand (+0.95mb/d).

Emerging market Asia, led by China, has assumed central stage in the demand recovery that
started in 2009. Chinese oil demand increased by 0.33 mb/d last year, accounting for 60% of
total incremental consumption across the non-OECD. Demand soared in H2 09, with the y/y
pace of growth exceeding 1 mb/d (~15%) from September onwards, the fastest since the peak
of Chinese oil demand shock in 2004. The demand impetus, alongside a massive expansion in
the domestic refinery system, has fed into much higher crude oil import levels. Chinese crude oil
imports have not fallen below 4 mb/d since May and averaged 4.4 mb/d in H2 09, culminating

Figure 1: WTI forward prices Figure 2: Refined product prices ($/b)


105 Far forward oil prices (Dec-17, $bbl) June 2010 Gasoline crack
30
June 2010 heating oil crack
100
25
95
20
90
15
85
10
80

75 5

70 0
Nov-08 Apr-09 Aug-09 Dec-09 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09
Source: NYMEX, Barclays Capital Source: Mimic, Barclays Capital

8 February 2010 8
Barclays Capital | Global Energy Outlook

at 5 mb/d in December, roughly 800 thousand b/d above 2008 levels. The impressive swing that
Chinese oil demand underwent over 2009 was a major turning point in the market, with respect
to sentiment and fundamental developments, especially for a market that even at mid-year an
outright contraction was treated as a very possible outcome. For 2010, in line with our positive
outlook for the overall pace of the Chinese economy (IMF: +9.0%; BarCap: +9.6%), we expect
Chinese oil demand to continue to grow robustly and remain the single largest contributor to
global oil demand growth. We forecast growth to average 0.38 mb/d, at the higher end of
consensus estimates, which range between +0.31 mb/d (IEA) and +0.4 mb/d (EIA).

The recovery in non-OECD demand has not been confined to China alone. Other smaller Asian
economies have also seen consumption pick up strongly in H2 09, while in the Middle East,
soaring Saudi consumption in the summer, due to high power demand and constrained
natural gas supplies, kept demand from the region growing fairly robustly. Crucially, the three
pillars of non-OECD oil demand growth – China, India, and the Middle East – have weathered
the 2009 downturn extremely well. Cumulative incremental demand from these three regions
averaged 0.68 mb/d last year, a deceleration of just 0.22 mb/d relative to the pace of growth
registered in 2008. Undoubtedly, in the absence of such supportive demand dynamics, prices
could have fallen much lower. Even within the non-OECD, countries other than China, India
and the Middle East recorded a small demand decline last year (0.12 mb/d), adding to the
sharp demand contraction across the OECD. Moving into 2010, we expect these marked inter-
and intraregional differences to soften and other non-OECD countries to account for virtually
all the additional growth from the developing world compared with 2009.

While non-OECD oil demand recovered strongly throughout 2009, the improvement in OECD
consumption was far more modest. OECD demand is on track to decline by 2.1 mb/d in 2009,
the largest contraction since 1981. The latest OECD demand reading available (October 2009)
still places the y/y scale of demand decline for the month in excess of 2 mb/d, indicating that
the region has yet to enter a phase of decisive, concerted demand amelioration. While
progress has been slow, signs of improvement can nonetheless be detected. The drag from
Japan on global oil demand growth is decreasing sharply. After falling by almost 700 thousand
b/d in Q1, Japanese oil demand has showed progressively narrower y/y declines, with the fall
for Q4 through November just 158 thousand b/d. In 2010, we expect the y/y pace of
contraction to stabilise and average 0.13 mb/d. This would be a major improvement relative
to the 0.51 mb/d fall we forecast for 2009. Much of that amelioration stems from the removal
of the unfavourable y/y base effects on fuel oil and direct crude oil burning that increased last
year due to the return of a significant tranche of nuclear capacity. In the US, moderate signs of
demand improvement emerged over the summer. The macroeconomic backdrop for 2010
remains supportive, in our view; we forecast US oil demand to increase by 0.15 mb/d, with

Figure 3: Chinese oil demand growth Figure 4: Non-OECD vs OECD oil demand growth
1500 y/y change in Chinese apparent oil demand (kb/d) 3 y/y change in oil demand, mb/d

2
1000
1

500 0

-1
0 -2

-3
-500 OECD
-4 Non-OECD Asia
Other non-OECD
-1000 -5
Nov-03 Nov-05 Nov-07 Nov-09 Feb-08 Sep-08 Apr-09 Nov-09
Source: China Customs Statistics, Barclays Capital Source: EIA, Barclays Capital
8 February 2010 9
Barclays Capital | Global Energy Outlook

some upside risk to this projection. This recovery notwithstanding, US demand will likely
remain well below pre-crisis levels, and we expect it to average 0.55 mb/d below 2008 levels.
Contrary to Japan and the US, in Europe the oil demand recovery has yet to begin. Indeed,
Europe stands out as one of the few regions in which demand declines actually look softer in
the rearview mirror than the more recent data suggest. European demand fell by almost 1
mb/d in Q3 09, the largest y/y drop for any quarter since the onset of the crisis, with this
extreme weakness having continued into October. The abnormal path followed by German
heating oil consumer stocks – heavily front-loaded in the first part of the year – has helped
accentuate this weakening profile across quarters. Yet even allowing for such effects,
European demand has, at best, remained in a bottoming phase. We expect a turning point to
be reached relatively quickly, however, with the advent of cold weather and a steady
improvement in the macroeconomic backdrop making their way into the data. Thus, we
forecast European oil demand to decline by a modest 0.13 mb/d in 2010.

Overall, we project OECD demand to remain flat in 2010, with higher North American
consumption offsetting small declines in Europe and Japan. In our view, risks to this forecast
are skewed to the upside; indeed, we see the scale of the recovery in OECD demand as
providing the most likely source of upside surprise to our global balances through 2010.
Alongside that, the composition of growth across various products will also be crucially
important in setting sentiment and prices. 2009 has been characterised by a stark contrast
between strong gasoline and weak distillates demand, but this divergence, in our view, is set
to fade in 2010. The latest data releases showcase the first signs of a global recovery in
diesel demand. After lagging the acceleration in other products, China’s diesel demand
growth has decidedly turned the corner since September. Moreover, encouraging signs
have also emerged within the OECD. A blast of cold weather in December has helped prop
up distillates demand in Europe and the US. As a result, the pace of erosion of the distillates
inventory overhang has accelerated substantially. In the US alone, more than a third (13.5
mb) of the existing surplus above the 5-year average has been burnt off since the end of
November. And while data are not yet available, the severity of the winter so far in Europe
and Asia makes us believe that the burning off of global distillate surplus is taking place at
an accelerated pace. This rapid progress towards normalisation has been a clearly positive
factor for sentiment but has thus far been highly dependent on favourable weather
patterns. The key question, therefore, remains what will happen once the prolonged cold
snap in key consuming areas dissipates. We believe that economic effects will take over
from weather effects in continuing the erosion of the distillates surplus. Barclays Capital
economic forecasts and projections for good inventory dynamics in the US underpin this
view. Our economists expect final goods inventories to reach a tipping point in late Q1 10.
After a severe period of destocking in H1 09, the pace of decline in wholesale inventories
slowed substantially in the latter part of the year. This swing has indeed been significant,
with the $160bn decline in Q2 09 projected to less than halve in Q4 09; however, smaller
declines have yet to turn into sequential increases. When this transition occurs, trucking
mileages should start rising significantly, ensuring sequential growth in middle distillates at
some point in the early part of 2010. In our view, distillates demand is the part of the
demand barrel geared to benefit the most from the recovery path this year, which should
provide some upside price potential to the relative price of distillates, particularly in H2 10.

Similarly, on the supply side, we expect some of the most pronounced discontinuities caused
by the global economic crisis to taper off over the course of 2010. For OPEC liquids, 2009
showed the largest annual contraction since 1982. OPEC-12 crude output averaged 28.6
mb/d last year, 2.66 mb/d below 2008. From its peak hit in August 2008 to its bottom in
February 2009, the contraction in OPEC output reached almost 4 mb/d. While production has
drifted higher thereafter (with estimates for December 2009 placing it at about 29 mb/d), it is
still almost 3 mb/d below pre-crisis levels. The substantial supply-side pressure OPEC is
continuing to exert while immediate price targets have already been achieved is a testament to

8 February 2010 10
Barclays Capital | Global Energy Outlook

its commitment to defend what it has so painfully gained over the year. Thus, with the oil
balance on the path of normalisation, the $70/bbl level that OPEC’s policymakers have
signalled as the floor to their desired price range at this stage of the cycle will be very hard to
break, in our view. Where the ceiling of that desired range might lie, however, is much less
clear. So far, the producing group has alluded to $80/bbl as the upper end of its comfortable
range. However, with the recovery consolidating, demand data improving and prices pushing
beyond that threshold, we suspect OPEC will gradually relax this ceiling and their price
aspirations will move higher as the year progress. OPEC’s degree of acceptance of any
development in upside momentum will be a crucial price setter in 2010, as neither the
recovery in demand nor the weakness in non-OPEC supplies appears strong enough to drive
the market on their own accord. By sitting on a substantial amount of spare production
capacity, key OPEC producers have the ability to curb upside momentum, should they wish to
do so. Overall, we expect any adjustment in policy to be gradual and take the form of subtle
changes in tone, rather than any dramatic shifts in targets. Improving demand and weakening
non-OPEC supplies should leave OPEC with some leeway for further output rises through the
year without putting at risk the rebalancing of the market currently underway.

OPEC’s supply-side management in 2010 is set to benefit from non-OPEC’s actual and
projected weakness. From the uniformly downbeat non-OPEC output performance of 2008,
2009 proved more of a mix bag, with pockets of weakness coexisting with pockets of
strength. Against a backdrop of continued widespread structural weakness, some areas of
upside surprise emerged. Particularly, the return to positive production growth in Russia,
following a dismal performance in 2008, and the strong bounce back in US production (up
0.43 mb/d y/y) after the hurricane-affected year of 2008 offered some breathing room to an
otherwise faltering supply side. Non-OPEC production growth in 2009 totalled a modest 0.22
mb/d, suggesting a significant degree of continuity with the scale of weakness in recent years,
rather than heralding the beginning of a new phase of strength. Ahead, we believe the
prospects for non-OPEC supplies are set to deteriorate. The likelihood of last year’s strong
production performance from Russia and the US being repeated this year is small, in our view.
In the US, positive y/y effects should fade and potentially revert. Although a bunch of new
projects are scheduled to come on stream in 2010, gross capacity additions are set to fall
short of 2008 and 2009 levels. Similarly, we expect Russian production growth to subside in
2010. Fewer new projects are scheduled to commence production, whereas the better
investment climate that developed in 2009 due to tax incentives might not hold as the
government’s budget concerns diminish with higher and stabilising oil prices.

The projected fall in non-OPEC supply in 2010 should facilitate OPEC’s market management,
aided by the prospect for a significant acceleration in the degree of non-OPEC supply
weakness from 2011 onwards. As a potential phase of severe supply-side tightness draws
closer, its effect on sentiment and prompt prices will likely increase. In this context, there is a
limit to how low prices can go, irrespective of how slowly short-term oil market balances re-
adjust. The projected tightness of the medium term is acting as a key bullish factor in the oil
market, propping up short-term prices and reducing the need for OPEC to engineer a much
faster and painful rebalancing of the market. Hence, after the rollercoaster of the past two
years, 2010 is shaping up as a year characterised by much gentler dynamics in fundamentals
and prices. Demand dislocations should progressively correct, the inventory surplus should be
eroded and OPEC output restrictions ease. In such circumstances, extreme price events look
unlikely. We expect prices to remain prone to some volatility but within a relatively constrained
range, as periods of economic optimism alternate with seldom, but remnants, of economic
pessimism. With the potential of fundamentally-led extreme price upside at a minimum, we
believe geopolitical developments are the most likely source of upside price risk in 2010, as a
series of situations involving key oil producing countries remains unresolved and subject to
possible escalation as the year progresses.

8 February 2010 11
Barclays Capital | Global Energy Outlook

NATURAL GAS

Snow blind
Michael Zenker „ A steep expected drop in US supply and recovery-led demand growth have supported
+1 415 274 5488 a recent bullish undercurrent in the North American gas market.
michael.zenker@barcap.com
„ We see incrementally more supply against a stagnant demand outlook in latter H2 2010.

„ We expect Henry Hub prompt-month prices to average $5.25, up somewhat from our
fall 2009 estimate of $5.05.

„ Excluding weather, the wide range of potential US LNG imports and the uncertainty
over the displacement of coal by gas in 2010 could also swing the market.

Balances for 2010 remain fairly loose


The North American gas market continues to price higher in the forward curve in expectation
of a steep drop in US supply (as a result of a lower rig count) and growth in demand (owing to
the economic recovery). Added to this, several weeks of cold weather have helped spark a
bullish undercurrent in the market, as it is slicing away a chunk of the storage overhang that
characterized the start of winter. While snow and cold weather are understandably boosting
market hopes in the near term, we see the risk of becoming distracted by demand and losing
focus on the supply side of the equation.

Producers cut drilling to restore market balance, but production is resilient


The expectation of a supply pullback is not misplaced. Producers have heroically slashed
drilling, but, as it turns out, have not cut activity enough, given that demand will slip in 2010.
US natural gas supply is expected to continue to fall through H1 10, a product of 2009’s low
rig count, before it plateaus and then grows modestly at the end of 2010. The recent snowy,
cold weather and price rally could blind producers, prompting an even faster rebound in
drilling. We expect 2010 to register a full 2.1 Bcf/d supply drop from 2009 levels. LNG import
growth of 1.9 Bcf/d over 2009 levels mostly offsets the US decline, but a continued slide in
Canadian production and exports causes total US supply to slip 0.9 Bcf/d in 2010.

Muted power demand to offset other demand sectors


Producers’ actions to rein in supply and thereby reset the market would be successful if
demand would cooperate and had the market not entered 2010 with such a large overhang of
inventory. Aggregate US natural gas demand is expected to fall for a second straight year in
2010. The power sector is the culprit, as the aggressive displacement of coal in 2009 wanes in
2010. The resultant drop in power sector demand for gas overwhelms gains in residential,
commercial and industrial consumption, even when factoring in a cold January 2010. US
demand is expected to fall 0.8 Bcf/d in 2010 after dropping 0.5 Bcf/d in 2009. Demand has
essentially been flat the past 10 years.

Prices starting strongly, but fading through the year


Balances for 2010 remain fairly loose, given our supply outlook. We estimate that the market
will finish the winter of 2009-10 with 1.74 Tcf of gas in storage, which, while not an all-time
record, is nonetheless excess storage. Despite the potential that cold weather could eat away
at the storage surplus, our balance suggests the market will return to strong storage injections

8 February 2010 12
Barclays Capital | Global Energy Outlook

after the current winter. The cold weather is offset in our balances by stronger supply. End-of-
October storage inventory is expected to reach 3.94 Tcf, another record. While this inventory
is not expected to overly spook the market, it nonetheless again removes much of the winter
price upside. More importantly, when the market realizes that supply is trending higher by late
2010, bearish sentiment will be expressed out on the curve, since it would mean supply is
again outpacing demand. This could prompt another round of drilling cuts.

We believe cold weather will support prices in Q1 10 and, as a result, have raised our
price view for the quarter to $5.50 (from $5.20). This could blind the market to what lies
ahead. Owing to a view that higher coal prices will raise the gas-coal switching floor in
Q2 10 and Q3 10, we have raised our price view for those quarters to $5.00 (from
$4.75). Our fourth quarter estimate is strongly influenced by our October storage
estimate of 3.97 Tcf. We believe this will hold Q4 10 prices in check at $5.50
(unchanged). This results in our forecast for 2010 prices of $5.25.

Don’t be distracted by demand


We believe demand will fail to play a role in helping revive prices in 2010, even with cold
weather in January. This is counterintuitive, given that we expect the US and Canadian
economies to recover. The drop in 2010 US gas demand is driven by an expected reversal of
coal’s displacement by gas in 2009, which will push 2010 power sector demand low enough
to offset the gains in the other sectors. And the dilemma for the gas industry is that a recovery
of gas prices in 2010 would only exacerbate the situation by further trimming gas-coal
switching, which would eventually halt the upward movement of gas prices.

In 2009, we dismissed concerns that the US would be flooded with LNG, but we do not brush
aside that argument in 2010. Global LNG supply is almost certain to outpace global LNG demand
in 2010, creating an unusually large amount of spot LNG (please refer to the Global LNG section
of this report). The real question is where the surplus LNG will land. Neither the US nor Europe
appear to be short of gas at this point, so spot trade will head to the market with favorable prices.
That is, the trans-Atlantic spread, not absolute prices, will drive the destination of spot cargoes.

While higher levels of US gas production and/or LNG imports are self-correcting in that they
will ultimately weigh on US prices, potentially flipping the trans-Atlantic price advantage back
to Europe, timing is important. The US market is expected to remain supported through
winter, mainly on weather risk. Not until the market shifts its attention to the US injection
season will the impact of supply become a focus for the market, in our view.

Figure 1: US Lower-48 natural gas supply/demand balances and price


Annual average y/y change
2006 2007 2008 2009E 2010E 2007 2008 2009E 2010E
Supply – Total (Bcf/d) 59.12 61.61 62.84 64.04 63.15 2.49 1.23 1.20 -0.89
US L-48 Supply 49.47 51.10 54.57 56.50 54.42 1.63 3.46 1.93 -2.07
Canadian Exports to US, net 8.90 9.05 8.19 7.08 6.28 0.15 -0.85 -1.12 -0.80
US Imports of LNG 1.60 2.11 0.96 1.26 3.18 0.51 -1.15 0.30 1.92
Exports to Mexico 0.85 0.65 0.88 0.80 0.73 -0.20 0.23 -0.08 -0.07
Demand – Total (Bcf/d) 59.49 63.30 63.42 62.87 62.06 3.81 0.12 -0.54 -0.82
Residential & Commercial 19.83 21.35 21.87 21.99 22.02 1.52 0.52 0.12 0.04
Industrial 17.86 18.17 18.09 16.79 17.62 0.32 -0.08 -1.30 0.83
Power 17.01 18.71 18.18 18.73 17.14 1.71 -0.53 0.55 -1.60
Other 4.80 5.06 5.27 5.36 5.28 0.27 0.21 0.09 -0.08
Storage Inventories (Tcf)
End of March 1.69 1.60 1.25 1.66 1.74 -0.09 -0.36 0.41 0.08
End of October 3.45 3.57 3.40 3.81 3.94 0.11 -0.17 0.41 0.13
Natural gas price ($/MMBtu) $6.98 $7.12 $8.90 $4.16 $5.25
Source: EIA, Barclays Capital

8 February 2010 13
Barclays Capital | Global Energy Outlook

GLOBAL LNG

Wind of change
Biliana Pehlivanova „ Europe absorbed the bulk of excess spot LNG cargoes in 2009 while maintaining a
+1 212 526 2492 small price premium to the US.
biliana.pehlivanova@barcap.com
„ LNG demand should follow the global recovery, but supply is set to spike.

„ An extended cold spell could offset any oversupply and reset regional price
differences.

„ Forward price differentials suggest the US is likely to absorb excess volumes in 2010.

Global gas prices are converging


In 2009, weak demand in Asia coincided with growing supply globally to push a large number
of LNG cargoes into the Atlantic Basin. Market watchers in the US worried that US shores would
be flooded with LNG, exacerbating conditions in a market still working off oversupply. But
Europe absorbed the bulk of the excess (Figure 1), as the continent rejected pipeline gas and
took record LNG volumes, all the while maintaining a small but surprisingly durable price
premium to the US. As a result of the global LNG glut, natural gas prices in Europe, the
Americas and Asia converged, representing perhaps the tightest connection of global gas
prices ever.

The global glut occurred despite underperforming supply. Global liquefaction capacity added a
record 5.8 Bcf/d in nameplate capacity in 2009, but much of this came on line in the second
half of the year. Start-up troubles delayed the ramp-up of production from several of the new
trains, and lost production from existing facilities offset much of the new additions.
Consequently, global LNG supply rose by roughly 1 Bcf/d y/y – a substantial increase, yet well
below what the market was expecting.

Weather forecasting
For 2010, the rapid growth of LNG supply is more certain. The liquefaction trains that started in
2009 are gaining speed. If all produce at capacity and 2010 plant additions come on line as
planned, global LNG supply would grow by more than 6.0 Bcf/d y/y this year, a staggering 25%
jump. However, given the history of chronic delays and liquefaction plant glitches, this estimate
is likely too high. A more reasonable assumption for incremental LNG production growth in
2010 is 4.5-5.5 Bcf/d, in our view. Still, this would be a large jump that the global market would
be challenged to absorb.

In contrast to 2009, global LNG demand should grow this year. Green shoots have blossomed in
many markets, and the global economy is on pace for a healthy recovery in 2010. Yet once again,
the magnitude of the expected expansion in supply threatens to flood the world with LNG
volumes well in excess of the potential increase in demand. Assuming a strong, but not full,
recovery of Asian demand and taking into account new re-gasification facilities coming on line in
capacity-constrained markets, LNG takes in the Pacific Basin and the Middle East could grow by 2
Bcf/d this year, following a 0.5 Bcf/d y/y drop in 2009. South American and Mexican consumers
could contribute a further 0.5-0.7 Bcf/d y/y growth in global demand. Against an estimated 5
Bcf/d y/y increase of global LNG supply next year, this would leave more than 2 Bcf/d of LNG
looking for a home in the US and European markets in 2010.

8 February 2010 14
Barclays Capital | Global Energy Outlook

Forward price differentials suggest that


spot Atlantic Basin LNG should flow to the US for most of 2010
Last year, most excess spot LNG sailed to Europe. In 2010, winds of change might shift the
course of Atlantic Basin spot LNG sharply west—at least, that is what current forward prices
suggest. On a prompt-month basis, Henry Hub has maintained a premium to UK’s NBP for
the past month, and the premium is carrying over across the forward curve for nine months
of 2010, beginning at the prompt February contract. The northeast markets of the US offer
even better economics than the Gulf Coast relative to NBP, on both a prompt and a forward
basis. With price differentials favoring US ports, Atlantic basin spot cargoes are increasingly
likely to sail west.

Weather is a key risk to the global gas market


Weather could significantly alter the outlook for global gas (and LNG) markets this year, as
North America, Europe and parts of Asia have all been unusually cold. Most global LNG
consumption is in the northern hemisphere and is, therefore, exposed to the risk of cold
weather in many markets simultaneously. In Europe, UK demand jumped to record daily levels
in January, pushing deliverability infrastructure to its edge and causing shortages in some
cases. China has been struggling to meet the heating load in its northern provinces, as the
country has been hit by an extended period of extreme cold. This cold weather event has
already helped reduce the inventory surplus around the world, although not yet enough to
ensure a balanced market. The cold could prove to be transient, but a continuation of below-
normal temperatures across the globe over the course of the northern hemisphere winter
could have a substantial effect on balances, potentially alleviating much of the oversupply and
resetting regional balances and price differentials. With a good part of the winter still ahead,
weather patterns will be a key variable to watch over the next two months.

LNG is evolving into a dynamic and increasingly nimble marketplace. With spot cargoes now
frequent and given the growing number of market participants seeking to arbitrage regional
price differentials, LNG is connecting the geographically fragmented gas world. In this context,
global gas prices are likely to maintain their newly acquired regional link. With the colder-than-
normal winter weather recently, Asian markets are again leading in spot LNG prices, albeit
with a relatively small premium to the Atlantic Basin. Weather has the potential to clean up
global LNG balances, but short of a major extended cold weather event, the ramp-up of
liquefaction plants and the moderation of heating load as the winter wanes should pressure
spot LNG prices around the world to again trade closely in 2010.

Figure 1: Y/y change in LNG imports by region, Bcf/d

5 US Latin America Europe Asia


4

3
2

1
0

-1
-2

-3
Feb-08

Apr-08
Mar-08

May-08
Jun-08

Aug-08

Nov-08
Dec-08
Jul-08

Sep-08
Oct-08

Jan-09
Feb-09

Apr-09
Mar-09

May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09

Source: Waterborne, Barclays Capital

8 February 2010 15
Barclays Capital | Global Energy Outlook

COAL

The patient is getting better


Amrita Sen „ We are positive on the outlook for coal, forecasting averages of $90/t, $84/t and
+44 (0) 20 3134 2266 $90/t for API 2, API 4 and Newcastle prices, respectively, in 2010.
amrita.sen@barcap.com
„ A broad-based recovery in Asia with continued Chinese and Indian import strength
for Pacific Coal would support upside momentum.
Yingxi Yu
+65 6308 3294 „ There has not been much improvement in infrastructural problems at key exporting
yingxi.yu@barcap.com countries, causing supply bottlenecks to re-emerge as a major theme.

Market set to strengthen


In 2009, the market was being driven by weak demand in the Atlantic basin, which was
driven by the effect of the deep economic recession across the basin and displacement in
power by gas markets deep in oversupply. The reduction in demand led to a build-up in coal
inventories on both sides of the Atlantic. Coal prices in the weak Atlantic basin were saved
from deeper reductions by a Pacific coal basin dominated by the remarkable strength in
Chinese and Indian imports. In 2010, we expect more of the same from China and India, which
will likely remain key positive influences on the market. Against expectations for an improving
macro backdrop, we look for a broader-based recovery in demand from other parts of Asia
and, to a lesser extent, the West.

In our view, there are a number of sources of upside. First, supply bottlenecks remain in key
exporting nations such as South Africa and Australia. Rail problems and port congestion
issues have not been resolved, and the recent downturn has been characterised by a lack of
investment in infrastructure to address these problems. As a result, should coal import
demand rise strongly, the export capacity is likely to falter yet again, much like a repeat of
what happened in early 2008. Second, there could well be stronger-than-expected Indian and
Chinese imports. Despite the strength in Chinese coal demand, we expect coal imports to ease
about 2% y/y, as we see a resolution to the deadlock between producers and utilities that
characterised much of 2009. We forecast Indian imports to rise 20% y/y, even after factoring
in that their ambitious capacity addition plans may not always come to fruition. Nonetheless,
both countries continue to grow extremely strongly, with coal as their preferred fossil fuel for
power generation. As a result, their import requirements could surprise to the upside. The
third factor is disappointments in Indonesian exports. Despite strong growth in production,
uncertainties remain regarding the new mining law. The Indonesian government is expected
to release four implementation regulations in that will hopefully clarify certain clauses in the
mining law and reduce regulatory uncertainty. However, controversial parts of the law remain.
The final source of upside risk is coal gaining back a larger share of demand relative to gas in
power generation in the US and partly in Europe. The very weak gas market in 2009 led to coal
demand falling about 10% y/y on both sides of the Atlantic. With higher gas prices compared
with domestic coal prices (contracts agreed on 2009 levels) in the US, we expect coal to regain
some of its lost market share this year, though to a lesser extent in Europe, as forward gas
prices remain well in the money.

By region, we expect Newcastle to continue to outperform API 4 mainly due to strong Asian
demand and API4 to continue to battle high European stockpiles despite buoyant Indian
demand. That said, more competitively priced Richards Bay coal compared with Newcastle
has drawn Chinese buying into South Africa recently, thereby squeezing the differential

8 February 2010 16
Barclays Capital | Global Energy Outlook

between the two to $5/t by late 2009, from almost $15/t in late November. With China
looking to exploit any arbitrage opportunity that arises, the spread between the two prices
is likely to remain tight, though with Newcastle prices at a premium to API-4. Across the
forward curve, we see strength at the front as bringing about curve flattening, which could
present a risk to the release of stockpiles back into the market. We forecast averages of
$90/t, $84/t and $90/t for the API 2, API 4 and Newcastle, respectively, in 2010.

Much of the impetus for this latest price rally has been weather-related. We see cold
weather in China as a key driver of the strength in API 4 and Newcastle coal. A jump in
China’s power needs is imposing tremendous stress on its supply system, reflected in falling
stocks at power generators across the country; in some cases, shortages have already led to
power rationing. Domestic prices have gone from strength to strength. In early January,
Qinhuangdao (QHD) FOB prices surged above $112/t, and delivered prices in Guangzhou
moved closer towards $130/t, encouraging interest in overseas coal not just in Australia
and Indonesia but also in South Africa. At the same time, a cold snap in the Atlantic is
driving up power demand and gas prices, improving the relative attractiveness of burning
coal. While weather remains the greatest upside risk to our baseline forecasts, other
fundamental factors turned constructive over the course of 2009. The agreement of an
$85/t term price between Tokyo Electric Power and Xstrata (versus a buyer’s target of
$75/t) is telling of underlying concerns about tight supplies beyond the very short term, a
striking contrast with market sentiment this time last year.

Thus, for 2010, we continue to view coal markets constructively and, in our view, despite
being one of worst performing commodities in 2009, prices are set to increase strongly,
with an average increase of 15-20% annually. China remains the key to our global balances,
and with the expectation of a slow but steady recovery in Europe, the supply bottlenecks
that plagued the coal market in early 2008 could well re-emerge this year, given the lack of
investment in export infrastructure to increase flexibility and capacity. The wild movements
in prices at the beginning of this year already serve as a testament to these risks.

Figure 1: Barclays Capital coal supply and demand balance and price forecasts
Mt 2003 2004 2005 2006 2007 2008 2009E 2010F
Japan 107 118 120 119 126 131 114 114
China 7 10 16 31 41 31 82 88
India 13 15 24 29 35 36 49 59
Europe 167 160 156 169 163 161 144 140
Others 193 217 153 231 250 259 246 265
Total imports 487 521 469 578 616 618 635 665
y/y change (%) 6.9% -9.9% 23.2% 6.6% 0.3% 2.7% 4.8%
Indonesia 88 105 129 183 195 200 215 224
Australia 103 107 107 111 112 125 140 151
China 73 74 61 54 45 36 18 21
Russia 0 0 68 76 74 70 80 74
South Africa 70 67 74 67 67 68 67 70
USA 3 3 19 20 24 21 20 23
Colombia 44 51 55 58 65 69 65 67
Others 8 18 32 41 46 40 37 37
Total Exports 389 426 545 611 627 629 642 668
y/y change (%) 9.5% 27.8% 12.2% 2.7% 0.2% 2.1% 4.0%
Global trade balance -98 -94 76 33 11 11 7 3
API 2 (US$/t) 44 72 61 63 87 144 71 90
API 4 (US$/t) 31 54 47 50 62 120 66 84
Newcastle (US$/t) 27 53 47 49 66 128 72 90
Source: McCloskeys, Ecowin, Barclays Capital

8 February 2010 17
Barclays Capital | Global Energy Outlook

POWER
Twilight
James Crandell „ Power consumption growth is likely to follow a rebound in the economy in 2010 after
+1 212 412 2079 two consecutive years of demand losses.
james.crandell@barcap.com „ New supply is knocking at the door, primarily via more renewables capacity.
„ Expectations for future power prices have largely moved with gas prices.
„ A longer-term contango for heat rates suggests a recovery in power prices, though it
may lie beyond 2010-11.

Demand shrinks, supply grows


A one-two knockout punch took out power demand in 2009, and any recovery will not be
immediate. The economic recession officially began in December 2007 but became more
harrowing in late 2008, severely constraining power usage. On top of this, extreme temperatures
were largely absent, particularly for the summer, adding another layer of demand weakness. In
aggregate, power consumption fell 3.6% in 2009 versus 2008. Weather contributed about 0.6%
of this drop, leaving 3.0% that, in our view, is related to economic weakness.

The past year was one for the record books for power consumption. Average growth had
been 2.4% from 1973 to 2007, and there had been just three years of annual contraction –
1974, 1982, and 2001 – which correspond to major economic downturns. It is the only
recession to have seen consumption fall for two consecutive years, and it showed the
largest annual contraction – at 3.6% – since data collection began. As a consequence,
demand for US power is back to 2004-05 levels.

At an end-use level, the pullback in electricity consumption was steepest in the industrial
sector. The magnitude of the recent pullback exceeded the dips in previous recessions,
specifically those of the early 1980s and in 2001. What also separates the recent recession is
the weakness in residential and commercial power use, previously demand stalwarts. In 2009
(through October), residential consumption was down 0.9%, commercial usage was down
2.4%, and industrial demand was down a striking 11.6% (Figure 1).

In aggregate, 2010 should show a partial uptick as the economy recovers and temperatures
regain their bite, versus 2009’s moderation. It may take several years to reach the 2007
peak, but our forecast for super-normal growth next year (owing to a hastened industrial
recovery and normal growth in residential and commercial) of 3.5% should support prices.

With a few years of demand growth lost in the contraction of 2008-09, the market may
have hoped for a supply contraction to match. Unfortunately, this is a near impossibility in
power markets. With new build uneconomic given the price environment (low forwards),
growth in supply may seem surprising. Coal and wind additions are the most meaningful,
with the former a result of plants under way before the recession and the latter due to
increasing renewables mandates. Coal capacity could grow almost 16 GW in the next four
years, about half of which arrives in gas-dominated regions. Further wind build is more
uncertain. Though we expect similar nameplate growth in wind resources as in coal, these
will operate at a lower capacity factor, and still, there is much risk to future growth in wind.

Pushing and shoving amongst generation fuels


As the top-line in power generation has shrunk, the various fuels in the stack have entered
into competition for share. Total generation shows a 4.4% aggregate decline versus 2008

8 February 2010 18
Barclays Capital | Global Energy Outlook

(through September). Virtually all of the total demand loss has been borne by coal-fired
generation. Although petroleum and solar were down about in 2009, the magnitude of the
drop in GWh terms is very small. That wind and natural gas-fired generation were net
winners last year explains why coal generation fell by more than aggregate generation.

Our research has highlighted the high level of coal/gas displacement in the power sector (see
Natural Gas Weekly Kaleidoscope: How will coal surprise in 2010? 1 December 2009). While
low natural gas prices are primarily responsible, changing load profiles and higher contract
coal prices also played a role in the displacement. We estimate that displacement has been on
the order of 20,000 aMW (or 3.0 Bcf/d at a 7.5 MMBtu/MWh heat rate). Next year, we believe
natural gas prices will need to compete with coal for part of the year (about $5.00/MMBtu for
gas), saving gas inventories from becoming too bloated. As a result, we expect a partial
reversal of the relationship between the two fuels in 2010. We project that coal will reclaim
some share, up 10.3% in output from 2009. Natural gas, the marginal fuel in many regions, is
the clear loser, and we forecast gas generation will fall 6% in 2010 (Figure 2).

Prices have rallied with gas


Power prices tend to follow broad moves in the fuels that serve the generation stack,
particularly natural gas, as it is frequently on the margin in most regional power markets.
Gas and coal prices have risen recently, helping power prices to gain footing as well.

Looking at the heat rate (the ratio of power prices to gas prices) is often more instructive
than focusing on power prices. Heat rates were stronger for much of 2009, a result of
operations and maintenance costs claiming a greater share as natural gas prices plunged
and the shift in output between coal and gas-fired units. As gas prices rallied for much of
Q4 09, power prices remained a laggard, and heat rates fell. The ups and downs resulted in
heat rates that were little changed from pre-recession 2008 levels.

While it is true that forward power prices have moved in tandem with forward natural gas
prices, particularly for regions in which gas is on the margin, it is important to note the
differentiation. In most regions, the curve is upward sloping, suggesting that the market is
pricing in a recovery, or tightening, of the power market. Interestingly, the majority of these
curves are backwardated in the front. While this could simply reflect selling pressure on
power at the front of the curve, it also likely depicts oversupply and a period of fundamental
looseness for power, until higher power prices (relative to gas) are realized. As discussed
above, the pace of demand recovery will be essential for the recovery of the power markets.

Figure 1: Annual growth in end-use consumption Figure 2: Annual % change in generation

10.0% Residential Commercial 40%


Industrial Total
30%
5.0%
20%
0.0% 10%
0%
-5.0%
-10%
-10.0% -20%
Wind
Hydro
Nuclear

Solar
Petroleum
Coal

Natural

Total
W,W, & G
Gas

-15.0%

-20.0%
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09
2009 through September 2010E
Source: EIA, Barclays Capital Source: EIA, Barclays Capital

8 February 2010 19
Barclays Capital | Global Energy Outlook

CARBON

This is a low
Trevor Sikorski „ Out to 2012, the market is long EUAs by some 224 Mt, and 2013 is a net short of 170 Mt.
+44 (0) 20 313 40160
„ We expect 2010 to trade similar to 2009, but some better price support in the latter
trevor.sikorski@barcap.com
half of the year.

„ We look for prices to average about 15 €/t over the second half of 2010.

„ Average EUA prices should continue to increase in 2011 and 2012, rising to 18 €/t in
2011 and 24 €/t in 2012 as 2013 short positions are increasingly priced in.

Market remains long


2009 was a hard year all around, with difficult economic conditions matched by a challenging
political environment in which to advance climate change policy. The carbon market fared
moderately well – it recovered from a very weak Q1 09 to trade largely within 13-15 €/t for the
remainder of the year. The Dec 09 contract traded at an average price of €13.37, a 40% reduction
on the average 2008 price (22.35 €/t), reflecting the sustained effect that the economic recession
has had on prices. We are forecasting that industrial output across the EU-27 will be 15% down
y/y, although this hides some of the big y/y reductions in some sub-sectors such as steel, which
had a 37% fall in output y/y over the first 10 months of the year. Such industrial length has
weighed heavily on the carbon markets all year.

For the power sector, 2009 was a year of low emissions. EU-27 power demand was down an
estimated 8.5% y/y. Within that, thermal generation also fell, given better hydro and wind
availability in most regions, with the exception of the Nordic countries, which actually had a fall
in hydro. In the thermal generation sector, the very weak gas market led the Dec 09 NBP
contract to shed 50% of its value over the year, and, as a result, gas generation remained in the
money for most of the year. The weak gas market was driven by low European demand and a
counter-cyclical increase in supply due to a significant increase in LNG regasification capacity in
the UK. Consequently, gas generation tended to be used more than coal in terms of y/y
reductions, providing a further reduction in European emissions.

The curtailment in economic activity and the falls in power sector emissions have shifted
market expectations to persistent length. As the year closes, we expect 2009 to be 129 Mt long
(with allocations exceeding emissions) and the phase to be 224 Mt long. The fact that the
expected annual and phase length did not completely collapse the market was testament to the
importance of utility hedging patterns against some reluctance from industrials to sell. In terms
of utilities, the fact that they remain short of allowances in aggregate and that they hedge a
number of years in advance means that the buy side of the market has been fairly good this
year. On the sell side, the reluctance of industrials to sell at lower prices has been driven by
expectations of post-2012 shorts, the ability to bank surplus allowances and an improvement in
underlying credit markets. Given these combined factors, prices remained fairly rangebound
during the year with few excursions outside of 13-15 €/t. When prices started to fall below that
level, the sell side started to evaporate, and when they rose, it helped to bring some more of
that industrial length into the market.

The market outlook: Weakness in Q1 but then better


While the economic outlook has shown signs of moderate improvement in the EU, economic
activity in 2010 will still likely be down on 2008 levels, recovering only about 1.6% against a 2009
8 February 2010 20
Barclays Capital | Global Energy Outlook

contraction of 3.9%. Given this, our forecast for the phase sees a long market out to 2012, with
the competing factor of an improvement in economic outlook being more than offset by bigger-
than-expected reductions from the power sector. We are forecasting that:

„ Out to 2012, the market is long EUAs by some 224 Mt – a slight reduction from our
previous report (238 Mt). 2013 is a net short of 170 Mt. The estimates of market
balance for the phase are sensitive to the levels of economic growth assumed and the
speed of recovery in Europe during the coming three years. Our estimates are for a very
moderate pace of recovery over the coming years.

„ Although emissions begin to increase in 2010, due to moderate economic growth, the
relatively low level of industrial output will keep this in check. The net long position in
the market increases in that year due to the increase assumed in the cap, with more NER
being allocated to new power sector installations.

Figure 1: EU ETS phase 2 supply and demand balance


Phase 1 2008 2009 2010 2011 2012 Phase 2

EUA Allocation (cap) 2107 2003 2065 2083 2099 2490 10741
Emissions 2071 2119 1937 1988 2037 2437 10517
Emissions – cap -36 116 -129 -96 -62 -54 -224
Note: phase 1 = annual average, 2007 emissions = 2165 Mt. Source: CITL, Barclays Capital

The Q1 10 price story is now one of industrial length versus utility buying, driven by the much
colder-than-expected start to the new year. We continue to expect some industrial selling finally
manifesting itself in Q1 10, although even here there are two opposing dynamics. One, the credit
position of the industrials has improved drastically, while order books are having modest
improvement (still down on last year). The underlying conservative nature of the smaller industrial
participants, and the free nature of the EUAs that are often maintained on the balance sheet at zero
value, may lead to “passive banking” and may conspire to keep this length off the market. This
would be price sensitive and we would think any price movements up towards the 15 €/t area
would be met with some additional industrial volumes coming for sale. Two, the industrials
certainly have more length, with industrial output some 17% down on last year, and while credit is
much better, it is still not where it was before the financial crisis of last September. As such, in a bad
year for underlying business performance, the ability to boost bottom lines and profitability will
likely still be there to stimulate some selling.

The big issue here is whether long industrials look at any weakness in current prices (sub-14 €/t)
and decide that they may be too low to tempt them to cash in current volumes – to de-hedge, in
effect. If there is a real concern that cashing in today at the low is going to mean having to buy more
at much higher prices in a few years’ time, the keeping off the market of the significant length we still
think is out there could provide better price support than we have been expecting.

The cold start to 2010 is the other factor that should provide price support. The cold weather
increases power demand for any space heating done through electrical heaters, increasing the
need for thermal generation, and has a strong effect on the price of gas, making coal more
competitive and increasing the emissions levels from the total level of thermal generation. Both of
these bring the utilities into the buy side and should help provide some greater price support to
absorb some of the industrial length.

Given these competing features, our price forecast for Q1 10 is 12.0 €/t, while for H2 10 it is 15 €/t.

8 February 2010 21
Barclays Capital | Global Energy Outlook

GEOPOLITICS

Year of living dangerously


Helima Croft „ The internal politics of Nigeria continue to cause concern and present a significant risk
+1 212 526 0764 for the oil market.
helima.croft@barcap.com
„ The stand-off over Iran’s nuclear programme looks as if it will heat up in 2010, with some
of the starker options still under discussion.

„ Iraqi parliamentary elections could have some important implications for oil output in the
region.

Three key risks


Nigeria remains, in our view, the biggest near-term supply disruption risk. Militia violence in the
restive Niger Delta has reduced its output by nearly one-third since 2007, but a recent presidential
amnesty plan and development initiative for the oil region had raised some hopes that there could be
an incremental return of some lost production. In October, most of the major militia groups agreed
to a temporary cease fire. However, President Yar A’dua’s severe health problems, which have kept
him out of the country since November and produced a political vacuum in the capital, effectively
halted progress on the peace process, and there has been an uptick in attacks on the country’s oil
infrastructure since late December. In addition, under the terms of the constitution, Vice President
Goodluck Jonathan, who hails from the Niger Delta, would automatically assume the presidency if
Yar A’dua could not continue in office. This development, however, would violate the unwritten
agreement that the presidency must rotate between the Christian south and the Muslim north and
that, therefore, a northerner must occupy the office until 2015. Any attempt to prevent Jonathan
from becoming president would likely outrage the residents of the Niger Delta, which produces
nearly all the wealth for the country and has never held the presidency, and could turn what has
been a low level insurgency into a much broader armed conflict. Finally, violence could increase in
the Niger Delta as preparations for the 2011 elections commence. In the 2003 and 2007 election
cycles, powerful politicians in the oil region armed local militia members to intimidate their political
rivals and prevent people from voting. Attacks on the nation’s energy infrastructure increased
dramatically in the period leading up to the polls. There is nothing so far to suggest the link between
armed militancy and Nigerian electoral politics has been broken; thus, we expect a significant rise in
attacks again by H2 10 at the latest as the campaign begins to kick into high gear. There are already
media reports of weapons shipments arriving in the country, sparking fears that election-related
violence could commence earlier this time around.

The stand-off over Iran’s nuclear program could heat up in 2010 and raise fresh fears about a
potential military confrontation that could threaten the security of the Strait of Hormuz and Gulf
energy suppliers. The US and its European allies are preparing to impose punitive sanctions on Iran
following Tehran’s failure to meet President Obama’s end-of-December deadline for progress in the
nuclear negotiations. The White House is likely to focus initially on targeting dozens of Iranian
Revolutionary Guard (IRGC) front companies. The guards’ role in the Iranian economy has expanded
dramatically during President Ahmadinejad’s tenure in office. In September, the IRGC bought a
controlling stake in the Telecommunication Company of Iran, and members of the infamous security
organization acquired large interests in oil and gas fields, airports, health clinics and engineering and
construction firms.

The US Congress is also moving ahead with its own sanctions legislation. In December, the House of
Representatives passed legislation that authorizes President Obama to impose sanctions on
companies that supply Iran with gasoline, assist in the construction of refineries in the country and

8 February 2010 22
Barclays Capital | Global Energy Outlook

provide the insurance and shipping services that enable Iran to import refined petroleum products.
The Israeli government is working closely with the US Congress to shape the legislation. At a lunch at
Barclays Capital last month, Moshe Yaalon, Israel’s Vice Prime Minister and Minister for Strategic
Affairs, said he was “very optimistic” that tough economic sanctions could change the Iranian
regime’s behaviour, given the unprecedented domestic opposition it is facing in the wake of the
disputed June elections. In late December, thousands of demonstrators again took to the streets of
Tehran and other cities to demand the ousting of the government. The government’s inability to
quash the protest movement has led some leading Iran analysts to suggest the country may be
witnessing a nascent velvet revolution similar to that which swept communist regimes from power
in Eastern Europe in 1989.

Despite the rising domestic discontent in Iran, sanctions may still not alter the regime’s nuclear
calculus. Even if Congressional legislation forces European and Indian companies to stop
supplying refined petroleum products, Iran will still be able to obtain the products from the spot
market in the Gulf. While this will undoubtedly be more expensive and increase the pain in a
country with double-digit inflation and unemployment, it might not be as effective as US
lawmakers would hope. Iran already appears to be stockpiling gasoline in anticipation of new
sanctions. Its January gasoline imports are expected to jump 23% from the previous month. If
sanctions do not force the Iranian government to change course, the Obama Administration
will likely face pressure at the end of 2010 to opt either for a containment strategy – similar to
the one the US pursued in relation to the USSR in the cold war – or to pursue a military strike
against the nuclear facilities. Obama's senior military advisors have publicly stated on numerous
occasions that a military strike would likely only set the Iranian nuclear program back two to
three years and could cause additional unrest in the Middle East.

Iraq is facing an important transition year in 2010, with parliamentary elections scheduled for March
and the US preparing to withdraw all combat troops by the end of August. Both events could have
important implications for the government’s ambitious efforts to triple oil output by the middle of
the next decade. The Maliki government held two oil licensing rounds in 2009 and is close to
concluding service contracts with international oil companies to develop nearly a dozen fields,
including the giant Rumalia, Majnoon and West Qurna fields. However, the 7 March elections could
lead to a shift in the government’s energy policies if Maliki does not prevail. In October, the head of
the parliamentary oil committee warned that a new government could revise or even cancel the
contracts, insisting that “there are no guarantees for the oil companies that the new government will
follow the same path in dealing with them”. Prime Minister Maliki pulled out of the ruling United Iraqi
Alliance in September, citing a desire to build a more broad-based political movement. His State of
Law coalition, which includes several Sunni parties, will now face the Iraqi National Alliance, which
includes some of the most prominent Shiite political parties such as the Islamic Supreme Council of
Iraq (ISCI) and Moqtada al-Sadr’s Sadrist Trend party. It should be noted that ISCI has a different oil
policy than Maliki and has called for greater regional autonomy for the South and more oil revenue
to remain in the region.

Senior US commanders in Iraq have warned that the months following the polls could be particularly
tense as the various parties engage in protracted horse-trading to form a new government. It also is
unclear when the oil laws – which cover issues such as revenue allocation; contract terms; foreign
access to the fields; and the role of local, regional and the central government in setting oil policy –
will be passed. Kurdish members of parliament are currently blocking the legislation to force the
government to recognize the legality of the two dozen oil contracts signed by the Kurdistan regional
government and to secure a favourable resolution to the Kirkuk impasse. Finally, despite the steady
decline in violence since the peak of the civil war, a series of car bomb attacks in December and
January targeted government institutions in central Baghdad, similar to the coordinated bombings
there in August and October. Therefore, the security situation remains fragile and could imperil
investment in the country.

8 February 2010 23
Barclays Capital | Global Energy Outlook

8 February 2010 24
Barclays Capital | Global Energy Outlook

CREDIT

8 February 2010 25
Barclays Capital | Global Energy Outlook

US HIGH GRADE ENERGY

Value is elusive in 2010


Harry Mateer „ Oil field service and refining remain the cheapest sub-sectors, but we think only oil
+1 212 412 7903 field service is poised to outperform.
harry.mateer@barcap.com
„ Both the independent E&P and integrated sectors are rich versus U.S. corporates.
Stefanie Leshaw Chachra
+1 212 412 7902 Summary of investment view
stefanie.leshaw-
The overall energy category is trading rich to its 10y average differential relative to the U.S.
chachra@barcap.com
Corporate Index but cheap to its 10y average differential to the broad industrials bucket. In
2009, it outperformed the U.S. Credit Index by 721bp, with sub-sector results versus U.S.
Credit as follows: 1,188bp for independent E&P; 258bp for integrateds; 920bp for oil field
service; and 1,554bp for refining.

Oil field service and refining remain the cheapest sub-sectors, but we think only oil field
service is poised to outperform. Although the North American oil services industry appears
to be working through a trough that is likely to persist for much of 2010, we believe activity
levels have bottomed and service-intensive shale activity will remain robust. For refining,
wide spreads may offer room for outperformance in early 2010, but we remain
Underweight, given our long-term bearish call on the sector and our view that 2010
consensus estimates remain too high. The refining industry is still interesting from a trading
standpoint, but we recommend that buy-and-hold, long-term investors avoid it. We are
Overweight the oil field service sector and Underweight the refining category.

Both the independent E&P and integrated sectors are rich versus U.S. corporates. In light of
our strategy team’s view that financial spreads will continue to normalize in 2010, we
expect the independent E&P sector to perform in line with the market and the integrated
sector to again lag the broader index. Within the independent E&P and integrated buckets,
we prefer companies with leverage to oil rather than natural gas, given the challenging
supply/demand dynamics of the latter. We are Market Weight the independent E&P sector
and Underweight the integrated category.

Investment recommendations
„ Buy Nexen cash (OW); Sell Suncor CDS (OW). Although execution issues at Nexen’s
Long Lake will remain a concern in 2010, we find the company well positioned, given its
leverage to oil prices. We think SUCN’s asset divestiture program will keep it out of the
primary market in 2010.

„ In oil field services, Weatherford International Ltd (WFT) (NR) has attractive relative
value. We believe current spreads are pricing in downgrades at both Moody’s and
Standard & Poor’s (a reasonable assumption, in our view) and leverage should improve
after 1Q10.

8 February 2010 26
Barclays Capital | Global Energy Outlook

US HIGH YIELD ENERGY

Financial leverage to decline in 2010


Gary Stromberg „ High yield energy spreads are trading cheap to their 10y average.
+1 212 412 7608
„ We believe sector themes in 2010 will resemble 2009: higher average commodity
gary.stromberg@barcap.com
prices, oil prices outperforming natural gas, lower unit costs, an uptick in M&A
activity, and continued new issue supply.
Chris Gault
+1 212 412 7601
chris.gault@barcap.com Summary of investment view
High yield energy spreads are trading cheap to their 10y average. At a current spread of
about 620bp, the high yield energy index is trading ~80bp wide of its 10y average. Perhaps
more important, energy spreads are now 70bp through the overall high yield market, the
cheapest in relative terms since July 2007, and tighter than the past 10y average of about
150bp. From a fundamental perspective, Barclays Capital commodity analysts believe oil
and natural gas prices will average $85/bbl and $5.25/mmbtu in 2010. As a result, we
maintain our constructive view on the sector, with Overweight recommendations on the
E&P and pipeline subsectors, and Market Weight recommendations on the oilfield service
and refining sub-sectors.

We believe sector themes in 2010 will resemble 2009: higher average commodity prices, oil
prices outperforming natural gas, lower unit costs, an uptick in M&A activity, and continued
new issue supply. One notable difference is financial leverage: we estimate that debt/EBITDA
for our peer group of 30 energy companies likely peaked in 2009 at 4.0x, and we forecast a
decline to roughly 3.3x in 2010. Our Overweight recommendations are: Hilcorp Energy,
Petrohawk Energy, SandRidge Energy, and Targa Resources Partners. In loans, we favor
Dresser second-lien term loans and Venoco second-lien term loans. We continue to believe
the two high yield oilsands producers (Connacher Oil and Opti Canada) have the greatest
relative operating leverage to oil prices.

Investment recommendations
„ Hilcorp Energy (OW): We continue to like Hilcorp’s bonds given its exposure to oil
prices, good hedging profile, declining y/y leverage trends, and strong
management/operations team.

„ Petrohawk Energy (OW): Organic production growth of 40%+ in 2010 is likely to be


among the best in the peer group, and we believe $1bn in planned assets sales will help
deleverage the company’s balance sheet.

„ SandRidge Energy (OW): We believe the start-up of the company’s Century Plant in
mid-2010 should help SandRidge meet its goal of reaching 500 mmcfe/d in production
in 2012.

„ Targa Resources Partners (OW): Net leverage of 3.1x is the lowest in the peer group,
and we anticipate continued equity financing for potential larger drop-downs or
acquisitions, as per management.

8 February 2010 27
Barclays Capital | Global Energy Outlook

US HIGH GRADE PIPELINES

As the beta trade winds down, credit selection


takes over
Harry Mateer „ Following strong results in 2009, pipelines will likely have difficulty outperforming
+1 212 412 7903 the market in 2010.
harry.mateer@barcap.com
„ In general, the investment grade pipeline sector is trading with little spread
differentiation between credits.
Stefanie Leshaw Chachra
+1 212 412 7902
stefanie.leshaw- Summary of investment view
chachra@barcap.com
The pipeline sector is trading rich to its 10y differential relative to the U.S. Corporate Index
and in line with its 10y differential relative to the independent E&P sector. In 2009, it
outperformed the U.S. Credit Index by 1,768bp.

Following strong results in 2009, pipelines will likely have difficulty outperforming the
market in 2010. Given the significant number of investment grade companies that are
structured as master limited partnerships (MLPs), which generate persistent free cash flow
deficits when growing and make frequent use of the capital markets, the sector was a prime
candidate to benefit from the thawing capital markets in 2009. In 2010, however, we expect
M&A activity to pick up as multi-year organic spending projects wind down. Furthermore,
although direct commodity price exposure across the sector is typically limited (there are
exceptions), weak natural gas prices would have negative implications for pipeline volumes
and basis differentials. Entering 2010, we are Market Weight pipelines.

In general, the investment grade pipeline sector is trading with little spread differentiation
between credits. We prefer pipeline opcos (especially interstate natural gas pipelines),
diversified companies (operating risk spread across different aspects of the hydrocarbon
value chain) and MLPs that are expected to wind down from multi-year spending programs.

Investment recommendations
„ Midcontinent Express Pipeline LLC (NR) has good relative value. MCEXPP is attractively
valued relative to comps and the credit quality of its shippers. We expect regulatory
approvals in late 2009 and 2010 to drive improved leverage metrics.

„ Boardwalk Pipeline Partners, LP (NR) is cheap. Despite having one of the lowest-risk
business mixes in the high grade MLP category, in addition to a strong GP and decreasing
capital spending requirements, we think BWP is trading 15-20bp cheap to fair value.

„ Buy Energy Transfer Partners, L.P. (OW). Although ETP’s intrastate business will remain
under pressure due to lower natural gas prices and compressed basis differentials, we
expect ETP to succeed in flipping Standard & Poor’s negative outlook back to stable by
mid-2010 with a combination of successful project execution and equity offerings.

8 February 2010 28
Barclays Capital | Global Energy Outlook

US HIGH YIELD COAL

Expect coal credits to underperform in 2010


Laurence Jollon „ Strong Pacific Basin fundamentals should lead to a recovery in the U.S. metallurgical
+1 212 412 7901 coal market, with U.S. thermal coal more closely tied to electricity consumption.
laurence.jollon@barcap.com
„ Despite improving fundamentals, we expect coal credits to underperform the
market in 2010 given tight spreads.
Brian Chavarria
+1 212 412 7686
brian.chavarria@barcap.com Summary of investment view
A robust Pacific Basin coal market should eventually lead to a gradual recovery in the U.S.
coal market, initially led by metallurgical coal. The Pacific Basin market improved
significantly in 2H09, led by Chinese and Indian net imports of both thermal and
metallurgical coal. We believe demand in the Pacific market will initially lead to improved
pricing in the Atlantic market for metallurgical coal, potentially later resulting in rising
thermal coal pricing. That said, increased U.S. electricity consumption and ongoing
producer discipline will need to occur in order to work down historically high inventories.

We expect coal credits to underperform the broader high yield market in 2010. High yield
coal credits compose approximately 60% of the metals and mining sector. While we believe
the metals and mining sector will perform in line with the market in 2010, we expect coal to
underperform, offset by outperformance from the higher-beta aluminium/steel credits. The
majority of the coal credits are BB rated, currently trading in the 5.5-7.5% yield context.
While we expect the U.S. coal market to improve gradually in 2010 as electricity
consumption increases and inventories decline, we believe current spread levels already
reflect this improvement. We see few catalysts for spreads to tighten further, especially
given the low likelihood, in our opinion, of any meaningful upgrades by the rating agencies.

Investment recommendations
„ “Barbell” approach—sell Peabody Energy (BTU) bonds, reach for yield among other
BB rated credits, and own International Coal Group (ICOUS). We believe there are few
catalysts to send BTU spreads tighter given current levels; therefore, we expect the BTU
notes to underperform an improving market in 2010. Accordingly, we recommend
selling BTU bonds and buying “yieldier” BB rated coal credits, such as Arch Coal (ACI),
Drummond Company (DRUMCO), or Massey Energy (MEE). In each case, we think the
swap allows investors to take out several points and pick up 100-150bp of yield, moving
into another BB rated coal credit with solid fundamentals. We also recommend owning
the ICOUS 10.25% unsecured notes due 2014 (10.5% yield), which we think are trading
cheap relative to James River Coal (JRCC) and Murray Energy (MURREN).

„ Sell MEE 5y CDS. We believe MEE’s credit fundamentals will remain strong over the next
few years, with free cash flow approximating 15% of total debt and net leverage
expected to remain at 1.0-1.5x. We think the best approach to going long the credit is
selling 5y CDS, given that it is trading 335bp wide of BTU 5y CDS (we think the
relationship should approximate 150bp). While we acknowledge that MEE CDS levels
are affected, in part, by index technicals (MEE CDS is a constituent of HY CDX 8-13,
while BTU CDS is not), we think the current 335bp differential relative to BTU is too
wide, especially given that it has been as tight as 75bp in the past four years.

8 February 2010 29
Barclays Capital | Global Energy Outlook

US HIGH GRADE ELECTRIC UTILITIES

Stable outlook for 2010


Jim Asselstine „ We see moderately improving electricity sales and continued low fuel prices as
+1 212 412 5638 providing modest benefits for the regulated utilities; unregulated generators should
james.asselstine@barcap.com continue to face headwinds owing to weak market conditions.

„ Moderate capital expenditure reductions and some pre-financing activity last year
Timothy Tay, CFA
will reduce likely new debt issuance this year by 10-15%.
+1 212 412 5548
timothy.tay@barcap.com „ We expect most regulatory jurisdictions and the rating agencies to remain
constructive this year.

Summary of investment view


We have a Market Weight rating on the utility sector. Spreads have returned to pre-crisis
levels, limiting further upside potential in the near term. In addition, we expect the
benefits of gradually improving business conditions to be largely offset by the spread
pressure of a continuing robust new issue calendar and the regulatory uncertainty
stemming from the utilities’ ongoing need to recover costs and capital expenditures in a
period of economic stress.

The agencies remain constructive on the sector, with most rating outlooks stable. Credit
metrics have also remained stable, with rate increases and cost reductions offsetting the
negative effects of the recession. With most companies predicting flat to modest sales
growth in 2010, we expect business conditions to improve in late 2010 to 2011.

We have a preference for debt at the regulated utility operating company level, because of
the low business risk and strong asset protection characteristics of these business units.
Although we continue to regard many of the A rated regulated utilities as stable core
holdings, we think the best opportunities for outperformance can be found among the BBB
rated regulated utilities and electric utility holding companies.

Investment recommendations
„ Buy Baltimore Gas & Electric (CEG) Unsecured Notes 5.9% 2016 (OW). With low
business risk, an improving regulatory environment in Maryland, and deleveraging at the
parent company Constellation Energy, this regulated electric distribution company
offers attractive relative value at +155bp, in our view.

„ Buy Jersey Central P&L (FE) Unsecured Notes 7.35% 2019 (OW). With low business
risk, supportive regulation in New Jersey, solid credit metrics, strong asset protection,
and a protective limitation on liens covenant, the unsecured debt of JCP&L offers
attractive relative value at +155 bp.

8 February 2010 30
Barclays Capital | Global Energy Outlook

EUROPE HIGH GRADE UTILITIES

Stable 2010 as demand recovers


Neil Beddall „ European HG Utilities continue to trade at tight levels compared with cyclicals and
+44 (0) 20 7773 9879 financials, being close to all time tights.
neil.beddall@barcap.com
„ We believe 2010 sector themes will remain broadly unchanged to 2009.

„ We estimate New Issuance in 2010 at €50bn, down c.50% on 2009 issuance.

Summary of investment view


No fundamental credit concerns, but we are Underweight as spreads are close to all time
tights. Despite the sector’s defensive qualities, we believe there is limited opportunity for
outperformance versus the BarCap Credit Index and have an Underweight
recommendation. However, we have no fundamental credit concerns with the sector,
believing most utilities have weathered the economic downturn well, returning stable y/y
results despite lower industrial demand and falling energy prices, which have been
mitigated by high levels of forward sales, effective hedging and the stability of regulated
activities, which account for 35-40% of group EBITDA for a vertically integrated utility.

Further large scale consolidation will not be seen. We do not envisage large-scale M&A in
the sector, although smaller acquisitions, asset swaps and investments will likely continue,
together with an increased interest in regulated networks. Capex will probably remain at
high levels to ensure security of supply, the development of renewable generation assets
and the connection of new generation plants to the grids. We expect most utilities to
continue with their strategies of focusing on core competencies, disposing non-core
activities, optimising cash flow and containing capex.

Stable results expected for 2010: Despite limited guidance for 2010, we expect financial
performance to be stable compared with 2009 due to the high levels of forward sales and
hedging undertaken, with evidence of demand stabilisation potentially leading to limited
demand growth in 2H10.

Investment recommendations
„ Veolia (OW) has good relative value. Veolia is well placed to benefit from an economic
recovery and has implemented measures to improve credit metrics through focusing on
being cash flow positive through cutting capex and disposing non core assets

„ National Grid (OW) has good relative value. With c.95% of its revenues being
regulated and operations split 50/50 between the UK and US, NG is well diversified.
Although considered shareholder friendly, short term M&A is not anticipated due to
ongoing Rate Case applications in the US. Pre-funding of its borrowing needs for
2010/11 should be supportive for spreads.

„ United Utilities Plc (UW) is vulnerable to spread widening. We believe CDS and US$
bonds at UU Plc remain vulnerable to further spread widening. Despite being rated 2-3
notches lower than National Grid and Veolia, CDS trades at similar levels and should be
c.15bp wider. UU’s Finance Director will leave the company in May 2010 with the search
for his replacement ongoing, which could result in a change in the financial profile.

8 February 2010 31
Barclays Capital | Global Energy Outlook

8 February 2010 32
Barclays Capital | Global Energy Outlook

EQUITIES

8 February 2010 33
Barclays Capital | Global Energy Outlook

US INTEGRATED OIL

Risk/reward shifts in favor of Super Majors


Paul Y. Cheng, CFA „ We remain positive on the medium-term oil outlook, but risk has increased.
+1 212 526 1884
„ Near-term (1H10) risk/reward has shifted in favor of the Super Majors.
paul.cheng@barcap.com
BCI, New York „ ExxonMobil and Chevron look set to outperform over the next several months.

Sector View Super Majors begin to look attractive again


1-POSITIVE
Since February 2009, our medium-term oil price outlook has been bullish, and we forecast
oil could substantially exceed $100 per barrel by 2011-12. Accordingly, we had
KEY OVERWEIGHTS:
recommended overweighting the high-beta oil producers such as Suncor Energy, Petrobras
Exxon Mobil Corp. (preferred shares), and Hess in light of the market’s extreme bearish stance early last year.
Ticker (We upgraded Suncor to 1-OW in mid-February 2009 and upgraded Hess to 1-OW in the
XOM summer after its sharp correction following the announcement of the dry hole in its high-
Price Target profile Brazilian BM-S-22 block.) Based on our analysis of our proprietary major oil & gas
US$ 92.00 project database, we estimated that the global major oil development start-up run rate
Price (04 Feb 2010) would drop significantly from last year’s robust level of more than 6 million b/d (mmb/d) to
US$ 64.72 a yearly average of approximately 2.5 mmb/d between 2010 and 2012. In light of this weak
Potential Upside/Downside
production outlook, we predicted that the market could face a visible supply shock by 2011-
42%
12, absent an extended global recession through 2012 or an improved political environment
Chevron Corporation in Nigeria or Iraq, allowing a sharp ramp-up in production from existing field operations.
Ticker
One year later, we are reiterating our bullish medium-term oil price outlook, while
CVX
highlighting that we now believe the global oil market will likely remain range-bound
Price Target
between $65 and $85 per barrel over the near term (first half of 2010). Although many
US$ 96.00
economists seem to agree that the global economy may have bottomed in the second or
Price (04 Feb 2010)
third quarter of 2009, many also believe the recovery has been greatly helped by the
US$ 71.37
Potential Upside/Downside
unprecedented simultaneous stimulus programs from governments across the globe. The
35% latest announcements from the Chinese government serve as a reminder to the market that
sooner rather than later, countries will begin to gradually reduce their extraordinarily large
support from the marketplace, and the resulting impact on the economy remains a big
question mark for investors. At present, there is also no strong consensus view regarding
the future OPEC supply and utilization rate in light of the fluid political environments in Iraq,
Iran, and Nigeria. In our opinion, oil prices will be unlikely to break out from their recent
narrow trading range until sufficient incremental data have emerged to allow the market to
settle into a clearer consensus view on the pace of the global economic recovery and the
OPEC supply and utilization rate which have been two of the key drivers for oil prices in the
last decade. We expect that this consolidation process may take more than six months to
complete. Combined with the consideration that the majority of energy investors have
adopted a high oil beta strategy and have significantly under-owned the Super Majors, we
think the risk/reward ratio has shifted in favor of increasing the portfolio weighting of the
Super Majors over the next several months until the dust settles. We suggest deploying
incremental new cash to ExxonMobil and Chevron in the near term, with somewhat less
aggressive accumulation of our current core higher beta holdings, Hess, Suncor Energy, and
Petrobras preferred shares.

8 February 2010 34
Barclays Capital | Global Energy Outlook

ExxonMobil and Chevron stand out from the group


Among our 1-Overweight names, we suggest deploying incremental new cash to our
favorites, ExxonMobil (XOM) and Chevron (CVX), with somewhat less aggressive
accumulation of our current core higher beta holdings, Hess Corp. (HES), Suncor Energy
(SU), and Petroleo Brasileiro S.A. (Petrobras) preferred shares (PBRA).

ExxonMobil – Start of a new production growth cycle


ExxonMobil is our current top pick and we believe the stock could significantly outperform
over the next six months. Our 12-month price target is $92 per share based on an $80 per
barrel long-term oil price deck assumption.

We believe 3Q09 marked the start of a new production growth cycle for ExxonMobil. We
estimate that the company could increase output close to 3% this year and 2.7% annually
between 2009 and 2013. Our estimate does not incorporate the effect of the pending XTO
Energy acquisition (given that Barclays Capital is the advisor to XTO Energy in this
transaction). In 2006, the only year that ExxonMobil achieved visible production growth in
the last decade, the stock was up 36%, a strong outperformance relative to the market and
its peers (XLE up 17% and S&P up 14%). In addition, although we believe the shares will
likely underperform other high-beta oil shares in a rapidly rising oil price environment, XOM
should outperform the general market and its peers based on our current base assumption
of a range-bound market in the next several months. In terms of valuation, XOM also
appears inexpensive following its marked underperformance since early 2009, particularly
after mid-December (XOM down 8% compared with XLE up 2% and SPX down 1%). Based
on our 2010 oil price assumption of $80/barrel, we estimate XOM now trades at 10.9x our
2010 EPS estimate, compared with the S&P consensus P/E of 13.9x. Historically, XOM has
traded in line with the broad market forward P/E, except at the extreme ends of the
commodity price cycle. XOM also appears to be inexpensive compared with other
integrated oil shares. On the basis of our EV/2010 EBIDA estimate, XOM now trades at 7.2x
compared with the group’s average multiple of 6.4x. Historically, it has traded at a premium
of roughly 2.0x.

Chevron – Strong upstream momentum


We believe Chevron represents a solid long-term investment among the large oil majors
owing to its strong upstream pipeline. CVX could also outperform the energy sector in the
near term under a range-bound oil price environment, in our opinion. Our 12-month price
target is $96 per share based on an $80 per barrel long-term oil price deck assumption.

We expect Chevron will continue to report a strong reserve replacement ratio (RRR) in 2011
and 2012, which could help support the stock. We think that a robust RRR is a precondition
for potential rising future production. Moreover, we believe that the new CEO and
Chairman, Mr. John Watson, will undertake aggressive cost reduction and efficiency
improvement measurements, particularly in Chevron’s downstream organization, which
should help the company’s financial performance over the next 6-18 months. Finally, based
on Mr. Watson’s comments, we think that the risk of Chevron making a large acquisition
over the next 12 months appears to be low. We maintain our 1-OW rating, given its limited
M&A risk, strong long-term project pipeline, potential upside to its production guidance,
and inexpensive valuation. The shares are currently trading at 5.4x on EV/2010 EBIDA, a
discount to the group’s average of 6.4x, which we believe is unjustified. In our view, CVX
offers one of the strongest production growth and operation improvement opportunities
among the Super Majors.

8 February 2010 35
Barclays Capital | Global Energy Outlook

EUROPE INTEGRATED OIL

The challenge of differentiation


Lucy Haskins „ Top-line growth has driven best shareholder returns in past decade.
+44 134 6694
„ Eni (1-OW) is under-valued on our analysis, which implies 45% upside potential.
lucy.haskins@barcap.com
Barclays Capital, London „ Eni is our key Overweight in the European Integrated Oil sector

Rahim Karim
+44 20 3134 1853 A better year ahead but challenges remain for the decade
rahim.karim@barcap.com 2010 looks as if it will be significantly better year for earnings and cash flows than 2009.
Barclays Capital, London Although above-ground inventories are high, we believe OPEC production restraint will keep
oil prices at $80/bl this year, 30% higher than the 2009 average. We expect downstream
profitability to remain under pressure with a multi-year downturn in refining as new, low
cost capacity comes onstream. One of the tensions facing the integrated companies in 2010
is that the downstream drag on corporate profitability may inhibit the growth investment
Sector View
plans that might make sense in this more robust oil price environment. Although we
2-NEUTRAL
continue to model lower costs for 2010, from 2011 we see inflationary pressures returning
KEY OVERWEIGHTS: and we have costs rising in line with our rising oil price assumptions.

Eni Dollar earnings to rise 44% in 2010: We estimate that the Euro integrated companies will
Ticker have seen full year 2009 dollar earnings fall 53% on average. The company we expect to
ENI.MI deliver the best earnings momentum this year is Shell with estimated EPS up 63%. In part
Price Target this reflects the sharper than average fall in 2009 profits: almost a quarter of the earnings
EUR 26.00 recovery we expect for Shell is represented by lower pension charges.
Price (04 Feb 2010)
EUR 16.52 Cost reduction still a focus: The oil companies have worked hard in 2009 to reduce costs,
Potential Upside/Downside the majority of which seem to have been made in the downstream segment. BP is currently
57% targeting US$4bn of cost savings. Royal Dutch Shell has claimed US$3.5bn at the nine-
month 2009 stage. Total was targeting a US$1/bl saving on operating performance. What
may become clear during 2010 is the extent to which the cost savings that have been
achieved can be sustained in a flatter exchange rate environment, and with the higher own
energy costs we would expect given our higher oil price assumption. Cost reduction
initiatives have given an impression that company managements are back in the driving
seat, although looking back over the past decade it would appear that most cost trends are
generic and it is difficult for companies to sustain a competitive edge.

Production growth continues to be a challenge. The companies from which we expect the
biggest production increases in 2010 are BG, Total and OMV. After 4% growth from BP in
2009, we anticipate a 0.4% decline in 2010. This highlights the difficulties the bigger caps
face in consistently growing production – 2009 was a good year for BP, 2010 will be a good
year for Total and 2011 for Shell, on our forecasts.

Dividends safer in 2010: The capex picture looks slightly mixed for 2010. We expect BP and
Total spend to be similar to 2009 levels. Shell has already signalled that its 2010 spend will
be US$28bn – down US$3bn on the US$31bn planned for 2009. Even with this lower spend
we still see Shell paying its dividend out of debt in 2010, together with BG, Repsol and
Statoil. However, payout ratios for the group look much more supportive than in 2009 at
c.45% versus 65% in 2009.

8 February 2010 36
Barclays Capital | Global Energy Outlook

Spot the difference


Differentiation is the challenge we see facing the integrated oil companies as we enter a
new decade. Our analysis show that of the factors within a company’s control, volume
growth and portfolio mix are the main drivers of long-term shareholder returns. The larger
companies have struggled to distinguish themselves in these areas, and this is reflected in
some of the most compressed valuations on record. The European integrated oil sector
stands on a prospective PE of just under 11X: historically it has traded at an average 20%
discount to the wider market. We rate the European integrated oil sector 2-Neutral with Eni
our key 1-Overweight.

Eni – Compelling value, again


We see Eni’s integrated gas business model as a competitive advantage. The relatively
stable cash flows from this business allow the group to gear up its balance sheet and
acquire upstream assets. At the turn of the century the group bought British Borneo and
LASMO. Over the 2007-08 period a further 837mn boe of proven reserves have been
acquired at an average cost of US$13.5/bl. Eni can also offer customer and pipeline access
in exchange for NOC resources and this has already provided an edge with partners such as
Gazprom. Eni’s stock is currently standing on a 25% cash flow multiple discount to its peers;
it offers a 5.6% dividend yield even post last summer’s cut, and on our estimates a 2010
free cash flow yield of 7.5%, the highest of the group. Our sum-of-the-parts price target of
EUR26/share implies 45% potential upside from the current share price and the stock is our
key 1-Overweight in the sector.

8 February 2010 37
Barclays Capital | Global Energy Outlook

US INDEPENDENT REFINERS

Bottom may be close, but the “Dark Age” continues


Paul Y. Cheng, CFA „ We do not see a secular downturn but the road to recovery could be long and bumpy.
+1 212 526 1884
„ The 2009/2010 seasonal trade may have limited upside.
paul.cheng@barcap.com
BCI, New York „ We expect gasoline crack to outperform diesel margin over the next several years.

Sector View A negative long-term outlook for refiners


3-NEGATIVE The past two-and-a-half years have been a painful ride for the U.S. refining industry and its
investors. The velocity and the severity of this abrupt downturn clearly caught the market
KEY OVERWEIGHT:
by surprise as the “Golden Age of Refining” just seemingly faded away without a trace.
Valero Energy Although we think refiners may have already reached their lows in this down cycle (trading
Ticker at approximately 25% of our current estimate of the U.S. Greenfield replacement cost
VLO compared with 23% of the then estimated U.S. Greenfield replacement value at the trough
Price Target of the previous cyclical low in 1999), we believe potential upside is limited and the group
US$ 21.00 will likely continue to underperform both the broad market and other energy subsectors
Price (04 Feb 2010) over the next several years. We maintain our 3-Negative sector rating.
US$ 18.11
Potential Upside/Downside We expect that the global refining utilization rate will remain depressed, around 82%
16% between 2010 and 2011. As a result, we think any margin uptick will be very modest over
the next several years. We estimate that the global refining industry needs a utilization rate
of 85% or more to achieve strong sustainable pricing power, and 83% or more before
improvement in the refinery run rate translates into a more visible margin improvement
trend. On a relative basis, we expect gasoline crack to outperform diesel margins, and thus
we think that the U.S. refiners could outperform the European and Asian refiners, while
the long-dated gasoline contracts are likely to outperform the corresponding gasoil/heating
oil contracts.

Using year-end 2009 as the base line, we think the sector will mostly be stuck in a narrow
trading range of +/- 15%–20% over the next 12 months or longer. For long-only accounts,
we do not believe a buy-and-hold strategy will yield a meaningful return in 2010, and
suggest adopting an aggressive short-term trading strategy based on the direction of the
U.S. light product inventory trend. Historically, refining stocks have followed their
underlying margin trend with a two- to four-week lag, while the margin trend has typically
moved in the opposite direction to light product inventory levels (versus their seasonally
adjusted five-year average) with another two- to four-week lag.

For long/short accounts, we believe the U.S. refiners could perform better than the
European and the Asian refiners over the next 2-3 years. In addition, we think that the U.S.
Gulf Coast heavy oil refiners could perform better than the Rockies/Mid-Continent heavy oil
refiners over the next 1-2 years. Finally, the California refining market could rank among
the weakest U.S. markets over the next several months, in our view.

8 February 2010 38
Barclays Capital | Global Energy Outlook

Prefer U.S. to European refiners


We suggest buying the August 2010 gasoline contract while shorting the corresponding
heating oil or gasoil contracts. We prefer Valero (VLO; 1-Overweight) and Sunoco (SUN; 2-
Equal Weight) and would recommend shorting the European or Asian refiners (our
European Refiners analyst has a 3-Negative sector rating). Finally, we believe Alon USA
(ALJ; 3-Underweight), Frontier Oil (FTO; 2-Equal Weight), and Tesoro (TSO; 2-Equal Weight)
may underperform relative to Valero and Sunoco over the next several months.

Valero Energy – The most geographically diversified U.S. refiner


Among the U.S. refiners, we like Valero’s refining operations’ geographically diversified
reach, relatively inexpensive valuation, better share liquidity (VLO is by far the most liquid
stock among refiners, in our opinion), and respectable balance sheet. We think the stock’s
relative performance could also benefit from the potential sale of two of its refineries, Aruba
and Delaware City, which were previously shut down, as well as the recent slight uptick in
the light/heavy differentials. Nevertheless, for buy-and-hold accounts, we currently do not
recommend the purchase of any refiners (our sector rating is 3-Negative).

Sunoco – The most inexpensive refiner on a sum-of-the-parts analysis


Based on our sum-of-the-parts analysis, Sunoco currently offers the cheapest valuation
among the refiners. We estimate that its current share price implies a negative value for its
refining assets. Although what is considered fair value for Sunoco’s refineries is open to
debate, we do not believe these assets should be worth less than zero even though the
operator has been losing significant levels of cash in recent quarters (as well as in the
foreseeable quarters, in our opinion). As a result, despite the lack of visible near-term
catalysts and our 2-Equal Weight rating on the stock, we think the shares could be
attractive to investors with a longer-term investment horizon. Within the independent
refiners group, the stock should be among those with the least downside risk from here, in
our view, in light of the company’s significant underlying asset value from its large non-
refining holdings.

Figure 1: Global Refinery Utilization Rate Forecast, 2008 – 2011E


(million b/d unless otherwise noted)
2008 2009E 2010E 2011E

Start of the Year Capacity 87.8 88.6 90.7 91.5


+ Estimate Capacity Addition from Major Projects 0.9 2.6 1.8 1.1
- Estimate Permanent Capacity Shut Down (0.0) (0.5) (1.0) (0.5)
End of the Year Capacity 88.6 90.7 91.5 92.1
Average Capacity of the Year 88.2 89.7 91.1 91.8
Average Throughput Estimate 75.2 73.5 74.5 75.3
Utilization Rate (%)
– Based On Average Capacity 85.2% 82.0% 81.8% 82.0%
– Based On Start of the Year Capacity 85.6% 83.0% 82.1% 82.3%
– Based On End of the Year Capacity 84.8% 81.1% 81.4% 81.8%
Source: Barclays Capital, BP Statistical Review of World Energy, company data

8 February 2010 39
Barclays Capital | Global Energy Outlook

EUROPE INDEPENDENT REFINERS

Limited value in European refining


Lydia Rainforth „ Negative stance on European refiners.
+44 (0)20 3134 6669
„ Complex refiners better positioned than simple.
lydia.rainforth@barcap.com
Barclays Capital, London „ Capacity is coming.

Sector View Refiners face many difficulties in 2010


3-NEGATIVE We expect global refining capacity additions to be above oil demand growth in the next
three years and so we see a continued weak outlook for the refining industry. Excluding the
KEY OVERWEIGHTS:
emerging market refiners, share prices have started to reflect this, with the three most liquid
Saras SpA European refiners underperforming the wider FTSE Euro300 by 22% in 2009. The group
Ticker stands on over twice the market P/E multiple and, on average, still offers no upside to our
SRS.MI price targets. As a result, our sector view on the European Independent Refining sector
Price Target remains 3-Negative. The European group is trading at $903/complex barrel compared to
EUR 2.40 the US average of $398. Whilst some premium is justified to reflect the quality of the assets
Price (04 Feb 2010) in Europe, this differential appears extreme to us and we have a preference for the US over
EUR 2.02 European refiners.
Potential Upside/Downside
19% We continue to see a number of challenges for the refining industry and companies within
it. Our key highlights are:
Galp Energia
Ticker „ Significant capacity additions: Our global refining database suggests nearly 7mb/d of
GALP.LS new capacity will be added by 2012 (8% of existing capacity), yet oil product demand
Price Target on our forecasts will still be around 2007 levels. We foresee continued downward
EUR 13.50 pressure on refining margins throughout that period. Our 2009 margin assumption is
Price (04 Feb 2010) half that of 2008, and we expect a further fall in 2010.
EUR 11.12
Potential Upside/Downside „ Inventories need to be worked off: Near-term, the industry faces high distillate
21% inventories and a higher oil price means higher energy costs. Part of the problem in the
distillate market has been the contango available which has encouraged storage, but
Hellenic Petroleum SA
demand has failed to return. On the latest available data, distillate demand in the OECD
Ticker
YTD was down almost 8%. Until the distillate overhang is removed we do not expect a
HEPr.AT
recovery in margins. A further challenge the industry faces near term is the impact of a
Price Target
higher cost of crude. Refineries typically use 5% of the crude that is processed to
EUR 8.80
provide energy. A $10/bl increase in the crude oil price would reduce the realized
Price (04 Feb 2010)
margin by $0.5/bl.
EUR 8.51
Potential Upside/Downside „ Negative free cash flow, lower dividends: Despite weaker margins, we expect earnings
3% for the European refining companies to be higher in aggregate than in 2009. Almost all
Motor Oil SA are investing heavily in new capacity, and some have faced operational issues in 2009.
Ticker We still forecast negative free cash flow for the group in 2010 but several projects come
MORr.AT on stream, providing volume and higher conversion capacity to offset margin weakness.
Price Target Motor Oil, Cepsa, Grupa Lotos, ORL, Saras, Petroplus are all beneficiaries of this effect.
EUR 11.00 This is shown by the EPS momentum chart on the opposite page. Dividends were cut by
Price (04 Feb 2010) several companies in 2008, and we expect further cuts for the 2009 financial year. We
EUR 9.90 see limited balance sheet risk for the group, with most not requiring refinancing until
Potential Upside/Downside 2012+.
11%
8 February 2010 40
Barclays Capital | Global Energy Outlook

Complexity is a positive
„ Our least preferred stocks are Petroplus and PKN Orlen: Petroplus' marginal capacity
leaves it as the refiner of last resort in our view. This operational gearing is great in an
upturn but very painful in the sustained downturn we expect in the coming years. We
rate Petroplus 3-Underweight with a CHF17/share price target. PKN continues to face
balance sheet challenges

„ Preferred stocks – Saras, GALP, Hellenic Petroleum, Motor Oil: Despite our negative
view on the sector, we recognise that the most complex, flexible and efficient refineries
will continue to generate positive cash flows. Our preferred portfolio represents a
combination of discount valuation, asset quality and flexibility, a clear strategic focus
and strong balance sheet. In essence, quality counts. Our top picks are Saras, GALP and
Motor Oil. Our key 3-Underweights are PKN Orlen, Petroplus, Neste Oil and Grupa Lotos.

8 February 2010 41
Barclays Capital | Global Energy Outlook

US OIL & GAS: E&P (LARGE-CAP & MID-CAP)

Favor oil-oriented producers


Thomas R. Driscoll, CFA „ We are bearish on near- and long-term natural gas prices but believe most E&P
+1 212 526 3557 shares will likely follow crude oil prices in 2010.
thomas.driscoll@barcap.com
„ The biggest gas shales will become a significant source of U.S. natural gas
BCI, New York
production — roughly 50% by 2012, by our estimates.
Jeffrey W. Robertson „ Our stock recommendations are based on the discount between oil-orientated and
+1 214 720 9401 gas-orientated producers.
jeffrey.robertsonl@barcap.com
BCI, New York
Oil prices are still the key driver for E&P
We believe that near-term risk to North American natural gas prices is to the downside with
Sector View – Large Caps
a sub-$5/MMBtu long-term midcycle price scenario looking possible. We expect that E&P
2-NEUTRAL
share prices over the next 12 months, however, are more likely to follow oil rather than
KEY OVERWEIGHTS: natural gas prices. Although the E&P group appears fairly valued overall, we highlight the
relative discount of oil-levered producers to gas-oriented names.
Apache Corp.
Ticker
APA
Near-term risk to North American natural gas prices to the downside
Price Target Our full-year 2010 Henry Hub natural gas price forecast is $5/MMBtu and we believe a
US$ 135.00 repeat of sub-$3/MMBtu gas is a realistic possibility in 2010. We believe production in the
Price (04 Feb 2010) United States may have bottomed in September, and continue to expect end-of-winter
US$ 98.88 storage levels to exceed record levels despite the extra 200-400 bcf draw caused by
Potential Upside/Downside unseasonably cold weather. In addition, natural gas demand will likely fall in 2010 as
37% reversal of the economics of burning gas versus coal in the power sector could cost gas
producers as much as 6% of U.S. demand.
Canadian Natural Resources
Ticker
CNQ Gas shale plays are a game changer
Price Target New/evolving drilling technologies have transformed gas markets. Previously inaccessible
CAD 93.00 shale gas deposits have driven supply upward and costs downward. We estimate that full-
Price (04 Feb 2010) cycle drilling costs could be $4.50 or less in the Fayetteville, core Barnett, and Marcellus
CAD 70.02 shales. Although these three fields will not supply all of the gas needed to offset annual
Potential Upside/Downside declines of approximately 14 bcfpd, they should go a long way to meeting incremental
33% demand. We forecast that production from just the five biggest shale plays (incl.
Haynesville and Woodford) will grow to around 50% of total U.S. natural gas production by
Talisman Energy
Ticker
the end of 2012, up from less than 15% two years ago.
TLM
Price Target E&P shares may follow crude oil prices in 2010
CAD 24.00 Although we are bearish on natural gas prices, we believe most E&P shares prices may
Price (04 Feb 2010) follow crude oil prices in 2010. Unhedged 2010 North American natural gas revenues
CAD 18.02 represent only 15% of estimated 2010 revenues; therefore, we would expect the price of oil
Potential Upside/Downside to have a much larger effect on shares’ performance than natural gas price expectations.
33%

8 February 2010 42
Barclays Capital | Global Energy Outlook

EOG Resources Oil-levered producers trade at a relative discount


Ticker
Although the large-cap E&P group appears fairly valued overall, we highlight the relative
EOG
discount of oil-oriented producers to gas-oriented producers.
Price Target
US$ 127.00
Favor oil-levered names
Price (04 Feb 2010)
US$ 92.90 Our highest conviction 1-Overweight stocks are Apache (APA), Canadian Natural Resources
Potential Upside/Downside (CNQ), and Talisman Energy (TLM). APA trades at 19% discount to peers on 2011E debt-
37% adjusted cash flow vs. a historical (5-year average) discount of 8%. We expect APA to
outperform peers in 2010 as the company continues to exploit its diverse oil-levered asset
base and makes further progress in delineating its unconventional North American gas
Sector View – Mid-Caps position. CNQ has a strong long-term record, leverage to Canadian oil sands, and an
1-POSITIVE inexpensive multiple which we believe should boost the shares in 2010. Horizon oil sands
ramp to over 100 mboepd and potential announcements of the next step toward reaching
Petrohawk Energy
eventual oil-sands volumes of 500 mboepd should support the stock. TLM is in the early
Ticker
days of a strategic shift — 2009 results were encouraging. We expect the shares to perform
HK
well as the results of the shift in spending away from mature, low-return areas toward high-
Price Target
return areas becomes apparent.
US$ 33.00
Price (04 Feb 2010)
US$ 22.09 Top natural gas picks
Potential Upside/Downside Our favorite natural gas name at the moment is EOG Resources (EOG). Although the
49% company is viewed as a natural gas producer, we estimate that natural gas will contribute
only 46%/43% of estimated revenues in 2010/11. We believe revenue growth will be
differentiated as a result of continued strong shift to higher-value liquids. EOG shares trade
at 5.8x our 2011E debt-adjusted cash flow — a 3% discount to peers vs. a historical 10%
premium.

Among the mid-cap names, Petrohawk Energy (HK) has large positions in both the
Haynesville and Eagle Ford Shale plays. In the Haynesville, Petrohawk controls 345,000 net
acres, much of it in the established core. During 2010, testing of the Bossier shale, which
overlies the Haynesville, could add to the reserve potential of the play. In the Eagle Ford
shale, Petrohawk owns 225,000 acres in the gas/condensate part of the field and another
89,000 acres that may be in an oiler part of the play. We believe drilling results this year
could significantly de-risk the company’s acreage and add to the asset value potential.

8 February 2010 43
Barclays Capital | Global Energy Outlook

US OIL SERVICES & DRILLING

At an inflection point
James D. Crandell „ We expect a recovery in global E&P spending led by NOCs to occur in 2010.
+1 212 526 4865
james.crandell1@barcap.com
„ A spike in domestic drilling activity in 1H10 could spell trouble for natural gas prices.
BCI, New York „ Many stocks appear fairly valued; we recommend a selective approach to investing.

James C. West Significant overcapacity in services offsets the E&P recovery


+1 212 526 8796
james.west1@barcap.com We expect global exploration and production spending to rebound in 2010, following a
BCI, New York significant decline in North American activity in early 2009, and a more gradual softening
internationally throughout the year. We believe demand domestically is poised to improve
sharply in the first half of 2010, adding pressure to natural gas prices and possibly setting
Sector View
the stage for a rig count decline later in the year. Internationally, the fourth quarter of 2009
2-NEUTRAL
will likely mark the bottom in activity levels and we expect demand to steadily improve
KEY OVERWEIGHTS: throughout 2010. This year is likely to mark the resumption of a long upcycle in
international E&P spending.
Weatherford International
Ticker
North America – A strong start to 2010
WFT
Price Target In North America, the results of our recently released E&P spending survey forecast a 14%
US$ 22.00 rise in domestic capital expenditures in 2010, compared with a 37% decline in 2009. The
Price (04 Feb 2010) Baker Hughes rig count has risen by 344 rigs since bottoming in mid-June, driven by a spike
US$ 15.29 in oil-directed activity (up 244 rigs from the bottom), and we expect demand to surge
Potential Upside/Downside higher through the middle of 2010. We believe as many as 125-150 gas rigs could be added
44% to the market during the first half of the year, and possibly another 100 oil-directed rigs as
well. This is likely to have a negative impact on natural gas prices as production responds to
Schlumberger Ltd.
the higher rig count. We are also concerned about the large number of drilled but not
Ticker
completed wells, shut-in gas production, and the threat of increased LNG imports.
SLB
Price Target Despite the surge in domestic activity expected in 1H10, pricing for the majority of business
US$ 75.00 lines is likely to remain depressed owing to significant overcapacity in the market. The
Price (04 Feb 2010) exception to this will likely be horizontal drilling and pressure pumping activity in shale
US$ 62.50 plays. We believe shale plays are likely to become increasingly important during 2010 and
Potential Upside/Downside increased production from these wells has significantly lowered the market clearing rig
20% count to 800–1,000 rigs, vs. a peak of 1,600 in 2008. Consequently, demand for vertical
Transocean Ltd. wells and drilling in the shallow-water Gulf of Mexico is likely to remain challenged.
Ticker
RIG
Price Target
US$ 108.00
Price (04 Feb 2010)
US$ 83.34
Potential Upside/Downside
30%

8 February 2010 44
Barclays Capital | Global Energy Outlook

Figure 1: U.S. Horizontal Rig Count


Noble Corp.
Ticker Number of Active Rigs
NE
700
Price Target
US$ 50.00 600
Price (04 Feb 2010) 500
US$ 40.15 400
Potential Upside/Downside
300
25%
200
Cameron International
Ticker 100

CAM 0
Price Target '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
US$ 46.00 Monthly Data
Price (04 Feb 2010)
Source: Baker Hughes, Barclays Capital
US$ 37.88
Potential Upside/Downside
21% International – The beginning of a long recovery
For the international markets, we believe 2010 will mark the beginning of a long upcycle in
Tidewater Inc.
Ticker
exploration and production spending. International spending levels likely bottomed during
TDW the fourth quarter of 2009 and activity levels look set to improve by 10%-12% in 2010. We
Price Target
expect the majority of the pickup in activity to be driven by the national oil companies
US$ 55.00 (NOCs) and for spending increases to be skewed toward Russia, Southeast Asia, the Middle
Price (04 Feb 2010)
East, North Africa, and Brazil. Although pricing pressure is likely to abate with the increase in
US$ 44.83 demand, margins for the major oil service companies will likely remain under pressure
Potential Upside/Downside through at least the first half of the year as a result of lower pricing for contracts
23% renegotiated during 2009.

ION Geophysical Corp. In contrast to North America, our bullish view on international activity levels is primarily
Ticker driven by a positive long-term stance on oil prices. In our opinion, the global oil markets
IO remain supply constrained, and accelerating decline rates and the depletion of the existing
Price Target resource base argue for elevated prices. Over the intermediate term, we believe oil prices
US$ 8.00 will remain above levels needed to encourage drilling activity and, barring any major
Price (04 Feb 2010) economic event, the price of oil is likely to move steadily higher over the next several years.
US$ 4.80
Potential Upside/Downside Figure 2: Oil Prices vs. International E&P Capital Expenditures
67%
350,000 $120

Core Laboratories
300,000
$100
Ticker
CLB
Int'l E&P CAPEX ($ mil)

250,000
Average Oil Price (WTI)

$80
Price Target
200,000
US$ 136.00 $60
150,000
Price (04 Feb 2010)
$40
US$ 116.60 100,000
Potential Upside/Downside
$20
50,000
17%
0 $0
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Int'l E&P CAPEX Average Oil Price

Source: EIA, Barclays Capital estimates

8 February 2010 45
Barclays Capital | Global Energy Outlook

Dril-Quip Inc. Invest in companies geared to the international E&P upturn


Ticker
Given our diverging outlooks for the international and North American markets, we
DRQ
recommend a selective approach to investing with an emphasis on stocks with
Price Target
differentiated international growth prospects, deepwater and subsea exposure, and
US$ 66.00
companies that are geared toward an increase in exploration activity. Oil service P/E
Price (04 Feb 2010)
multiples have rebounded strongly from recent lows and many stocks are trading at or
US$ 51.13
above our price targets. The OSX has increased 100% from the December 2008 low, versus
Potential Upside/Downside
the S&P 500, which is up 35%. As a result, we believe the group is due for a pause and,
29%
possibly, a correction. Our favorite (1-Overweight rated) stocks at current prices among the
Dresser-Rand Group Inc. large-cap oil service and drillers are Weatherford International (WFT), Schlumberger (SLB),
Ticker Transocean (RIG), Noble Corp. (NE) Cameron International (CAM), and Tidewater (TDW). In
DRC the small-to-mid cap area, our top picks are ION Geophysical (IO), Core Laboratories (CLB),
Price Target Dril-Quip (DRQ), and Dresser-Rand (DRC).
US$ 38.00
Price (04 Feb 2010)
US$ 29.95
Potential Upside/Downside
27%

8 February 2010 46
Barclays Capital | Global Energy Outlook

EUROPE OIL SERVICES & DRILLING

Fair, but not normal


Mick Pickup „ Capital spending increases likely to result in contract awards in 2H 10…
+44 203 134 6695
„ ..but big oil hesitant about spending
mick.pickup@barcap.com
Barclays Capital, London „ Valuations fair, but the sector is not yet at its historic market premium

Sector View Share prices are leading the upturn


2-NEUTRAL The expected increase in global exploration and spending in 2010 is a positive sign for
European Oil Services and signals a change in sentiment toward future exploration and
KEY OVERWEIGHTS:
development of resources. However, our coverage universe is principally aligned to the
Tecnicas Reunidas spending of the larger international and national oil companies, for whom we see the lowest
Ticker increase in spending. This hesitancy is likely to persist in the first half of the year as the
TRE.MC companies continue to strive to reduce costs, largely because the benefits of the oil price
Price Target rise in 2009 was absorbed by an ever deteriorating downstream environment. This has led
EUR 50.00 to a disconnect in the sector: shares are beginning to anticipate the forthcoming upturn in
Price (04 Feb 2010) activity and indeed on DCF-based analysis are close to fair value, but as yet we have no
EUR 40.02 evidence of the arrival of the next cycle. The companies in our coverage universe still face
Potential Upside/Downside
the prospect of a deterioration in earnings in 2010 as the lag of earnings to the environment
25% takes hold, but the share prices reflect the enthusiasm for the next cycle. At some stage
Wood Group however, the large capitalisation oil companies will become comfortable with the
Ticker commodity environment; demand increases will improve the downstream environment and
WG.L capital will become available for spending. We believe that this is likely to materialise in part
Price Target in 2H10 and at that stage, since DCF-based evaluations have historically been materially
GBP 4.10 lower than share prices in the sector, we would expect to see multiple expansion towards
Price (04 Feb 2010) the historic market premium that the sector has traded on (45% from the current 25%).
GBP 3.43 Valuation in the sector is fair, on a DCF basis, but not normal on multiples.
Potential Upside/Downside
20%
Figure 1: European Oil Services PE multiples versus the market

30 120%

25 100%

20 80%

15 60%

10 40%
x

5 20%

0 0%

(5) (20)%

(10) (40)%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F

Sector PE - Ave Sector PE - High 10yr ave. premium PE Premium - High

Source: Company data, Barclays Capital

8 February 2010 47
Barclays Capital | Global Energy Outlook

2-Neutral sector view


Our view on the sector is balanced as we start 2010. The potential for a new and protracted
up-cycle is present but with shares up by 145% from their 2009 lows, we believe a large
portion of this is already factored into prices. 2009’s share price performance was driven by
the commodity price and the wider market, with little in the way of fundamental news for
the sector, except perhaps that the bottom of the cycle was less onerous than we had
originally feared, as oil prices supported higher than expected activity. In 2010, we see less
scope for oil price appreciation to be a factor and therefore, until the environment for new
awards materialises, and we begin to see positive backlog and earnings revisions in turn
catalysing multiple expansion, the sector remains vulnerable. In particular we see it as
susceptible to lower earnings expectations for 2011F and, more importantly, wider market
corrections. As a result, whilst we are positive on the longer-term outlook and that spending
will continue to grow, we are nervous that in the shorter-term expectations are high and
further moves and remain 2-Neutral.

Engineering our favoured play


Given our 2-Neutral view, predicated on potentially over inflated up cycle optimism, our
recommendations are based on visibility. Those businesses that fared well in backlog terms
through 2009 remain, in our view, the appropriate place to invest in 2010. Those that
suffered and are trading on anticipation of a rebound appear to us to be over priced.

Buy onshore construction – Tecnicas Reunidas our favoured exposure


Whilst major International Oil Companies slowed down spending in 2009, the National Oil
Companies took the opportunity of a more competitive bidding environment to progress its
major plans. Not surprisingly, this was not in oil developments, but the downstream gas and
refining projects that are part of in particular the Middle Eastern countries plans. As a result,
all three of our pure play onshore construction companies (PFC LN, TRE SM and MT IM)
should report backlogs that expanded in 2009, with a record group backlog:revenue
coverage of over two years and with Petrofac leading the way, its backlog up by 160%. Our
preferred play is Tecnicas Reunidas, which although it will report backlog just up, has
subsequently won two projects that give it an end-January backlog that is up by 30% at
over EUR 6bn. At just 13.2x 2010F PE, the stock is trading at a 50% discount to its 2006-
08A PE average, despite seeing earnings upgrades in 2009 and entering the year with
record visibility. More important, however, is the quality that we perceive in its backlog. Of
its EUR4bn contract awards in 2009, only EUR600mn was in the current hot spot of Abu
Dhabi, and the remainder of its wins in the Middle East was in the Jubail refining project, a
core skill for Tecnicas. Further, its last two project awards for the Talara refinery (Peru) and
Izmit refinery (Turkey) faced significantly less competition than in the Middle East and were
won on a reduced risk open book contract style. As a result we believe that Tecnicas
Reunidas has the lowest risk backlog in our coverage universe and hence its 15% earnings
discount to the sector is unjustified.

Buy the laggards Wood Group our favoured exposure


Wood Group lagged in 2009, up by 64% versus a sector average of 104% and Petrofac, its
UK peer, up 201%. We believe that the reason for the underperformance, was largely Wood
Group’s exposure to the US gas market which, through oversupply, saw weak prices and
low activity levels. However, this business only represents 10% of Wood Group profitability
and the market has stabilised and is beginning to show signs of recovery. Further, its two
other business have bottomed. Its engineering unit largely performs design work and

8 February 2010 48
Barclays Capital | Global Energy Outlook

currently more attention in the industry is focussed on already existing plans. This should
turn as we enter a new cycle. The Gas Turbines division is also seeing stronger demand as
operators are using the low gas prices to run existing units hard. This should lead to more
maintenance work. As a result Wood Group has gone from a historic premium to the sector
of 100-200bp and is now trading on 15x 2010F PE versus a European sector average of 16x.
The historic premium we attributed to its lower than average risk business model and
average 2000-2008 31% pa earnings growth (24% if the 20% fall in 2009 is included) a
level of earnings growth we expect to continue in the medium-term.

Early cycle plays overvalued – seismic and offshore construction


underweight. Exposure via convertibles offers protection
We believe that there are two schools of thought regarding what industry is early cycle in oil
services. One view is that seismic activity will be the first beneficiary of increase spending;
the other that the first thing in a new cycle is the development work that was abruptly put
on hold as the old cycle collapsed. Hence, as we believe that the reversal of backlog declines
will catalyse the next leg of performance for the sector, investors should be exposed to
whichever side of the argument they believe – small independents will begin to explore and
the majors need to find new resources – seismic (GA FP PGS NO); or the key moving part is
that the majors will sanction projects – offshore construction (ACY NO SUB NO). However,
whilst both arguments have merit, and we would veer towards the offshore construction
exposure, we believe that the share price performance of company’s in both sectors have
overreacted relative to the sector and do not give fundamental worries.

In seismic, no pricing increases have been seen yet and although activity levels have been
confirmed for H1 10 these will be at the low margins of late 2009, which in some cases is
0% at the operating level. As we move through 2010 more activity should arise, but we see
new vessels entering the market, such that the year-end 2010 world fleet is bigger than that
in 2008 and is still growing. Whilst it is true that the companies are uniquely geared to
pricing increase, we feel that the increasing number of vessel will inhibit pricing recovery
and hence the up-turn will commence later than expected.

In the offshore construction universe, the stocks have been supported by encouraging
exploration success in Brazil and the Gulf of Mexico. Coupled with deferred projects in West
Africa we should see new awards in 2010. However, with few awards in 2008, let alone
2009, earnings do not yet factor in the downturn and any new contract awards will not
result in vessel utilisation until 2012. Hence we face a potential utilisation lull and with it
aggressive bidding for projects that could hamper any earnings recovery.

Given that we are firm believers in the longer-term up-cycle for the sector, but hesitant
shorter term a potential avenue for equity investing is the convertible bonds outstanding in
the sector. Several oil service convertible bonds embed a 3-5yr call option on the sector.
These include Acergy 2.25% Oct 2013, PGS 2.7% Dec 2012 and Subsea 7 3.5% 2014 Oct
2014 (Subsea 7 also has shorter-dated instrument). The Subsea 7 convertible is the most
equity-sensitive, as its share prices is within 10% of its conversion price. The Acergy
convertible has some but lower equity sensitivity, as its share price would need to rise by
more than 50% to reach the conversion price. The PGS convertible has minimal equity
sensitivity as its share price must more than triple to attain the conversion price. However,
its yield to maturity is greatest, at 7.1%, versus Acergy 2.0% and Subsea 7 0.9%.

8 February 2010 49
Barclays Capital | Global Energy Outlook

US NATURAL GAS

Gas markets in transition


Richard Gross, II „ We are seeing a shift to a demand-constrained environment.
+1 212 526 3143
„ Widening of the oil/gas ratio and collapse of the gas basis is sustainable, in our view.
richard.gross@barcap.com
BCI, New York „ Infrastructure ownership should continue to migrate into MLPs.

Sector View Clear divide between the best and the worst
2-NEUTRAL
We expect three trends to dominate comparative results and, hence, relative performance
for companies in the diversified natural gas group. Given: 1) large-scale shifts in the source
KEY OVERWEIGHTS:
of production, 2) the increasingly competitive landscape for pipeline construction, and 3)
El Paso Corp. the shortage of NGL infrastructure, we believe the sector’s fortunes divide readily into
Ticker winners and losers.
EP
Price Target
Production value driver: low-cost, visible inventory
US$ 13.00
Price (04 Feb 2010)
Best-positioned producers have high-quality, low-cost, multi-year development inventories
US$ 9.89 where scale of operations and ability to move down the learning curve can offset the
Potential Upside/Downside inevitable return of oilfield service inflation. Furthermore, with corresponding gathering and
31% pipeline access to markets increasingly being borne by producers, strategies need to be in
place to minimize these costs. Investors have missed the sharp improvement in Rockies
ONEOK Inc. production economics that is tied to a sizeable reduction in west-to-east location
Ticker
differentials.
OKE
Price Target
NGL exposure a distinct positive
US$ 50.00
Price (04 Feb 2010) Widening of the oil/gas ratio has significantly improved the outlook for the NGL markets.
US$ 41.38 Operators are aggressively drilling for wet gas. Sprayberry/Wolfberry, Granite Wash, Eagle
Potential Upside/Downside Ford shale, DJ basin, Marcellus shale, Bakken shale, the Barnett combo area, and numerous
21% other plays are contributing to a surge in NGL supply which is outstripping current
infrastructure. The competitive advantage of using light feedstocks is creating record and
Questar Corp.
rapidly expanding demand for NGL output.
Ticker
STR
MLP structure creates uplift in value
Price Target
US$ 51.00 MLPs create an uplift of 30%-35% in valuation based on after-tax cash flows with
Price (04 Feb 2010) confirmation in the trading multiples between C-Corps and MLPs. Lower WACCs provide
US$ 40.75 sizeable competitive advantage to building new pipelines. MLPs have consistently
Potential Upside/Downside dominated new construction where last mile barriers are not an issue, capturing the bulk of
25% the build-out of the Rockies, Barnett shale, Fayetteville shale, Haynesville shale, and
Woodford shale, and are the likely beneficiaries of the emergence of the Eagle Ford shale.
Spectra Energy Corp.
MLPs dominate the NGL value chain.
Ticker
SE
Price Target Diversified gas stocks are trading at a discount
US$ 24.00
While the pure E&P names trade near fair value based on historical cash flow metrics, the
Price (04 Feb 2010)
E&P-oriented diversified gas stocks trade at abnormal discounts to the pure plays. Our
US$ 20.93
recommendations take advantage of this discount as well as the three themes noted above.
Potential Upside/Downside
15%

8 February 2010 50
Barclays Capital | Global Energy Outlook

High quality E&P at a discount


El Paso’s E&P operations have gone through a remarkable transition. Through shedding
assets and redeploying funds, operations have gone from being high cost with a limited
drilling inventory to a company in the bottom quartile of both operating and finding costs
with a long-dated inventory with the current driver being the Haynesville shale. Pipeline
operations are at the tail end of a major expansion program where capital consumption is at
the inflection point to turn to free cash generation. An MLP has been created to eventually
house the pipeline assets, creating long-term value accretion in half of the company’s asset
base. At current prices the E&P company can be created at 2x cash flow.

Questar looks well positioned to grow production volumes 15%-20%. Anchor assets
include the lowest cost position on the Pinedale anticline along with drilling inventories in
the sweet spots of the Haynesville, Bakken, and Woodford (Anadarko) shales, and the
Granite Wash play of western Oklahoma. The latter three plays have high liquids content in
their output, adding to the economics. Questar’s Pinedale position has been enhanced
markedly by the sharp reduction in Rockies basis. Midstream assets grow in conjunction
with rapid expansion of production. Regulated operations provide free cash and strengthen
credit. At current prices Questar’s E&P assets are selling for under 4x cash flow.

NGL exposure with downside yield protection


ONEOK (OKE), through ownership of the GP and 45% of the LP units of ONEOK Partners
(OKS), is a central player in the NGL value chain. OKS has a dominant position in the
collection and transportation of NGLs from the Rockies through the Mid-Continent and is a
major owner of storage and fractionation. Recent expansion of facilities places OKS in the
enviable position of being able to substantially grow volumes for minimal capital
expenditure. Through the GP, OKE receives a leveraged cut in the expanding cash flows.
OKE sports a healthy 3.7% yield and generates about $150mm in free cash per year.
Management has adeptly bought in shares and rapidly grown the dividend to support the
shares’ long-term value.

Spectra’s eastern pipes are the gateway for all of the major eastern and midcontinent shales
to access the domestic market’s highest value end markets. Western Canadian gathering
and transportation assets are the primary outlet for the Montney and Horn River shales.
SE’s Ontario gas distribution territory grows at 2x the North American average, has
incentive rates, and offers high-value, negotiated rate storage to the U.S. Northeast.
Principal NGL exposure is through SE’s 50% ownership in DCP Midstream which operates
the largest array of processing plants in the US with outlet production that is 2x the next
largest competitor. We estimate that this geographic footprint will support more than $1bn
in annual growth capital, driving earnings expansion in the 8% area for the foreseeable
future. Coupled with the current 4.5% yield, SE provides a compelling risk/reward story.

Figure 1: Valuation Metrics (4 Feb 2010)


Yield as of Price / Earnings Free Cash Flow Yield (1) EV / EBITDA

Symbol 2/4/10 2009e 2010e 2011e 2009e 2010e 2011e 2009e 2010e 2011e

EP 0.4% 8.8x 12.5x 8.6x 9.0% 5.6% 8.4% 5.8x 7.3x 6.1x
OKE 4.3% 14.5x 14.5x 13.1x 11.7% 8.6% 9.3% 7.4x 9.5x 9.0x
STR 1.3% 15.2x 18.9x 15.5x 7.8% 8.1% 9.6% 6.4x 5.9x 5.2x
SE 4.8% 17.5x 13.8x 11.8x 6.8% 9.3% 10.3% 11.0x 9.2x 8.5x
(1) EBITDA - Maintenance Capital / Enterprise Value
Source: Company filings, Barclays Capital estimates

8 February 2010 51
Barclays Capital | Global Energy Outlook

US POWER

After the gold rush


Daniel Ford, CFA „ Although the underperformance in the current bear market for power makes a
+1 212 526 0836 contrarian stance alluring, we believe a positive stance is premature.
dan.ford@barcap.com
„ We find at least three factors supporting our view:
BCI, New York
„ The duration of the current downturn is still a full year short of the last;
Gregg Orrill
+1 212 526 0865 „ The correlation between still-growing reserve margins and stock performance calls
gregg.orrill@barcap.com for an additional 12% underperformance; and
BCI, New York
„ The Barclays Capital Power Margin Index (BPMI) forecasts similar performance and
downside in forecasts.

Sector View „ Potential risks to our view are new environmental regulations from the
2-NEUTRAL Environmental Protection Agency (EPA) in 2Q10 and a faster-than-expected
economic recovery.
KEY OVERWEIGHTS:
„ Our top pick is AES Corp. (AES), which is a global infrastructure and free cash flow
Constellation Energy
Ticker
story with little exposure to the U.S. power markets.
CEG
Price Target Too early to go positive
US$ 39.00
Power has been in a bear market since year-end 2007. Although the underperformance of
Price (04 Feb 2010)
the group has been impressive (down 23% vs the S&P 500) making a contrarian stance
US$ 32.75
Potential Upside/Downside alluring, our year-end review of the fundamentals and comparison to the last power
19% downturn in 2001 leads us to conclude that it is too early. In light of this conclusion, we
recommend AES, a power stock that has only modest exposure to the electric commodity
AES Corp. markets.
Ticker
In the next few sections, we review the factors that pushed us to conclude that an
AES
overweight in power may be premature.
Price Target
US$ 16.00
Price (04 Feb 2010) Duration too short
US$ 11.84 We reviewed the duration of the last bear market for power stocks which began in 2001 for
Potential Upside/Downside clues on how long it might take to resolve the current downturn. We find the current
35% experience very analogous to the 2001 downturn as it shares three factors: 1) oversupply
(high reserve margins), 2) high credit costs (CDS spreads), and 3) low natural gas prices.
Figure 1 maps this bear market, which began in January 2008, to the 2001 version.
Unfortunately, at the two-year anniversary, we are still a full year short of the duration of
underperformance seen in the previous downturn.

8 February 2010 52
Barclays Capital | Global Energy Outlook

Figure 1: Power vs. S&P Relative Performance

15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
1 91 181 271 361 451 541 631 721 811 901 991
Trading Days Into Cycle
2001-2005 Power Relative Performance 2008 to Date Power Relative Performance
Source: FactSet, Barclays Capital estimates

Reserve margin outlook a challenge


We also looked at national reserve margins as a predictive tool. Reserve margins represent
the amount of electric capacity in excess of non-coincident peak load in the United States.
We found that a strong inverse correlation exists between the relative performance of
power stocks versus the market and 18-month forward reserve margins. This may prove
useful as several organizations, including Barclays Capital, forecast five-year forward reserve
margin estimates. The details around our current reserve margin estimates can be found in
“Are We There Yet?” published September 11, 2009. Figure 2 graphs the relationship
between our base case reserve margin forecast and predicted relative performance of
Power versus the S&P 500.

Figure 2: Reserve Margin vs. Relative Power Performance (Base Case)


Relative Performance of Power

160% 30%

National Reserve Margin


140%
25%
120%
20%
100%
80% 15%
60%
10%
40%
5%
20%
0% 0%
4Q99 2Q01 4Q02 2Q04 4Q05 2Q07 4Q08 2Q10E 4Q11E 2Q13E

Relative Performance of Power National Reserve Margins


Source: SNL Financial, Energy Information Administration, Bureau of Economic Analysis, Barclays Capital

The Figure suggests that the group has another 12% relative underperformance in the first
three quarters of 2010 before bottoming and commencing a slow but lengthy period of
outperformance. Of course, the U.S. power market is not one market, but a collection of
several regional markets. Some of these markets, notably the Middle Atlantic, New England,
and Houston Ship Channel have more constructive reserve margin forecasts than the
country. Two of our recommended power stocks, Entergy (ETR; 1-Overweight) and Public
Service Enterprise Group (PEG; 1-Overweight), serve these “tighter markets.”

8 February 2010 53
Barclays Capital | Global Energy Outlook

Barclays Capital Power Margin Index points to further negative revision


In the fall 2009 report, “Are We There Yet?” we introduced the Barclays Capital Power
Margin Index (BPMI). The BPMI uses the current forward curve for Power, Natural Gas, and
Coal to assess the one-year-forward three-year strip gross margin opportunity for merchant
power. The index is a strong leading indicator of the prospects for power stock prices one
quarter forward. Assuming no change in the forwards over the next three months, the
BPMI predicts a 12% fall in the prices of power stocks. This would be consistent with the
normal seasonality of power stocks as we head out of peak winter demand into the spring
shoulder months.

Figure 3: Barclays Capital Power Margin Index (BPMI)

225
200
Indexed Values

175
150
125
100
75
50
Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09
Power Stocks Index Barclays Power Margin Index

Source: Bloomberg, FactSet, Barclays Capital

Furthermore, as the BPMI assesses future gross margin opportunities for power companies
on an unhedged basis, the index also suggests a bias for deterioration or backwardation in
future earnings. This observation is reinforced by another tool we use to determine
whether to be bullish on power stocks, namely the ratio of open EBITDA to forecast EBITDA.
When this ratio is below 1, as it is currently, future earnings are likely below current, and
vice versa. To become bullish this ratio would need to exceed 1, indicating a tightening
market with improving fundamentals.

Risks to our stance: Restrictive environmental policy and/or stronger-than-


forecast economic recovery
In our view, there are two ways to hasten the end of the current bear market for power
stocks: shrink supply or grow demand faster than expectations. This year should be an
interesting one in that the Environmental Protection Agency has before it several regulatory
decisions that could force the shutdown of older coal plants and shrink supply. In addition,
with an economic recovery expected in 2010, but consensus forecasts calling for a slow
expansion, there may be room for upside surprise in demand.

The EPA will make decisions regarding the future regulation of acid rain (SO2), smog (NOx),
Mercury emissions, Ash storage, and, potentially, CO2 in 2010. A strict set of rules could
cause early shutdown of coal plants that are older and less efficient but that would need to
make significant pollution control investments to be kept on line. We estimate that 8% of
U.S. supply is fourth quartile coal plants built on average in 1960 and having efficiency 45%
worse than a new plant. Of these, 81% are not outfitted with significant pollution control

8 February 2010 54
Barclays Capital | Global Energy Outlook

equipment. If we were to assume that these plants were required to shut between now and
2015, our reserve margin forecast would change and predict a stronger rebound in power
stocks as shown in Figure 4. Of course, this would be an outcome that would favor nuclear,
renewable, and gas-fired gencos disproportionately to coal-fired companies.

The GDP growth forecast in our reserve margin forecast is 3.5% in 2010, 3.1% in 2011, and
2.5% to 3% thereafter. Should we see a more robust recovery, power markets could
improve more rapidly than our base case. On the optimistic side, if we mimic the recovery
following the recession at the beginning of the 1980s with 7% GDP growth in 2010, 4% in
2011 and 2012 before returning to trend, the bear market could be one quarter from over.
The graph of this outcome is below.

Global power pick: AES Corp. (AES; 1-Overweight)


We like AES for its: 1) contracted project backlog which adds $0.22 per share through 2011;
2) $2 billion of free cash flow in 2012 (25% to equity); 3) upside to EPS driven by a weak
U.S. dollar versus Brazil/Euro currencies (10% move adds $0.09 per share); and 4)
partnership with China Investment Corp., which is buying 15% of AES and entering a 35%
wind development joint venture. As a result, CIC can also act as a lender, which accelerates
potential growth. Our price target of $16 offers approximately 24% potential upside from
recent levels. Our earnings estimates for 2009, 2010, and 2011 are $1.08, $1.11, and $1.27
per share, respectively.

U.S. power: Constellation Energy (CEG; 1-Overweight)


Our price target for CEG is $39 and the stock trades at 11x 2011 core EPS of $3.05 with an
extra $1B in cash to deploy that is assumed to earn 25 bp in guidance. Positives are: 1) A
strengthened balance sheet at 60%+ equity on a rating agency basis; 2) Nuclear profile at
50% of production and EDF as a joint-venture partner; 3) Positive leverage to potential EPA
rules; 4) Supply business focus which works well in low commodity environments; and 5)
Potential upcoming catalysts with 2011 EPS guidance on the 4Q09 call on February 22 and
an analyst meeting on March 29. Our EPS estimates are: $3.27 for 2009, $3.28 for 2010,
$3.55 for 2011, and $3.57 for 2012.

Figure 4: Reserve Margin vs. Relative Power Performance Figure 5: Reserve Margin vs. Relative Power Performance
(EPA Case) (1980s Recovery Model)
Relative Performance of
National Reserve Margin

National Reserve Margin

160% 30% 160% 30%


Relative Performance of

140% 25% 140% 25%


120% 120%
100% 20% 100% 20%
Power
Power

80% 15% 80% 15%


60% 10% 60% 10%
40% 40%
20% 5% 20% 5%
0% 0% 0% 0%
4Q99 3Q02 2Q05 1Q08 4Q10E 3Q13E 4Q99 3Q02 2Q05 1Q08 4Q10E 3Q13E

Relative Performance of Power


Relative Performance of Power
National Reserve Margins
National Reserve Margins

Source. SNL Financial, Energy Information Administration, Bureau of Economic Source. SNL Financial, Energy Information Administration, Bureau of Economic
Analysis, Barclays Capital Analysis, Barclays Capital

8 February 2010 55
Barclays Capital | Global Energy Outlook

US COAL

Poised for an eventual strong recovery


Peter D. Ward, CFA „ Last year was a difficult one for coal demand with the weak global economy and
1.212.526.4016 competition from very low natural gas prices. We do not expect these trends to
pete.ward@barcap.com continue in 2010 — economic growth should increase baseload demand for power,
BCI, New York and we expect natural gas prices to return to more normalized levels. In our opinion,
skepticism surrounding the long-term viability of coal-fired generation in the United
States is overblown.

„ Although we find attraction in all the coal equities in our universe, we continue to
favor producers with exposure to the Powder River Basin (PRB), as we continue to
believe PRB coal is relatively underpriced in the market, based on its cost advantages
over other types of coal and its significant cost advantage over natural gas.

Sector View Expect supply-demand deficit in 2010


1-POSITIVE
We believe higher coal prices and strong financial performance for coal equities in 2010 will
*Sector view is for the wider
US Metals & Mining sector
come as a result of improved domestic demand, stronger Atlantic exports, and a gradual
reduction of inventories. While the Pacific market has been fairly tight, a material rebound
KEY OVERWEIGHTS: in U.S. exports depends upon tighter conditions in the Atlantic market. With European
economic growth still stagnant, that could take some time. Because approximately 94% of
Peabody Energy
coal produced in the United States is used to generate domestic electricity, a recovery in
Ticker
coal-fired generation is the key to stimulating domestic coal demand. U.S. coal-fired
BTU
electricity generation declined in 2009 largely as a result of reduced power demand and
Price Target
from natural gas switching. Power consumption, which is largely a function of economic
US$ 58.00
growth, is likely to rebound as the U.S. economy recovers and industrial production
Price (04 Feb 2010)
rebounds. We believe modest competition from natural gas will reverse.
US$ 41.10
Potential Upside/Downside Outside the United States, the seeds for a strong thermal recovery are already well under
41% way. Chinese imports of coal are up 218% Y/Y through December 2009 at over 122M
Arch Coal tonnes. For perspective, China was a net exporter of more than 80M tonnes of coal in 2003.
Ticker The size of the global seaborne market is about 800M tonnes per year. China’s burgeoning
ACI electricity grid relies on coal for more than 80% of its generation capabilities. Yet, internal
Price Target supply constraints — including a government mandate to shut down thousands of small,
US$ 40.00 unsafe mines, together with ongoing transportation bottlenecks — have made imports
Price (04 Feb 2010) increasingly attractive. If this tightness continues, U.S. producers may ultimately benefit as
US$ 20.88 well, particularly as key exporting nations such as Australia, Indonesia, and South Africa
Potential Upside/Downside face export supply constraints of their own. An already tight metallurgical coal market has
92% led to several high-profile shipments of met coal from the United States to Asia. A similar
tightening in the seaborne thermal market could lead to export opportunities for U.S.
Alpha Natural Resources
thermal producers as well in the Atlantic Basin.
Ticker
ANR Increased discipline on the part of U.S. coal producers is likely to continue into 2010 as very
Price Target high priced legacy contracts continue to expire and force further closures of high cost
US$ 50.00 Appalachian mines. Preliminary data indicate that coal inventories declined substantially in
Price (04 Feb 2010) December following a bitter cold snap across the eastern United States. This drawdown,
US$ 39.69 coupled with decreased production levels by U.S. producers, should bring inventories
Potential Upside/Downside further down from their historical highs to more normalized levels.
26%

8 February 2010 56
Barclays Capital | Global Energy Outlook

Of course, there are several potential risks to our thesis:

„ China's massive import jump, which supported international pricing over much of 2009,
could slow and/or reverse. In our opinion, this concern is likely to be mitigated by
Chinese coal consumption in the coming years likely being buoyed by an aggressive
expansion of the country’s electric grid, which is expected to remain largely coal-fired
for the foreseeable future. Unless China is able to overcome myriad internal supply
constraints, the likelihood of it becoming a net exporter as it was in past years seems
very low.

„ A weakening in the U.S. economy could once again depress power demand and natural
gas prices. Even in this bearish scenario, it is doubtful that fuel switching from coal to
natural gas would accelerate beyond levels experienced in 2009 given coal’s low-cost
profile and position as the primary source of base-load power generation in the United
States.

„ Environmental regulations aimed at reducing fossil-fuel burn are frequently cited by


skeptics as a serious headwind to coal-fired generation. Such concerns are largely
overblown, in our view, given the ongoing inability of Congress to pass such legislation.
But, even if this were to happen, we believe coal’s economic advantage is so powerful
that the potential impact of such legislation would likely be marginal at best.

Despite the bull run, valuations remain attractive


As noted above, current fundamentals, though still somewhat weak, are starting to
improve. We believe the upside for coal pricing (and earnings performance for the sector)
will establish itself as we move further into 2010, allowing for the market forces of increased
demand, increased exports, and reduced inventories to materialize.

In recent months, U.S. coal equities have experienced a dramatic run upward with the
strong rebound in the Asian metallurgical market, as U.S. met coal producers enjoyed a
significant increase in export opportunities. Nonetheless, we believe U.S. coal equities
remain attractively valued, and that these equities are discounting a material amount of
skepticism that is unjustified.

Although all of the companies in our coverage group are leveraged to a strong recovery in
U.S. thermal demand, and, in our view, are attractively valued, we continue to prefer coal
equities with PRB exposure such as Peabody Energy (BTU), Arch Coal (ACI), and Alpha
Natural Resources (ANR), all rated 1-Overweight. Moreover, Peabody, in addition to its
strong PRB production platform, is the only equity within our coverage group with direct
exposure to the robust Asian market through its operations in Australia. We believe that
Appalachian producers are at a disadvantage given the region’s ongoing labor and
regulatory hurdles, which threaten to drive costs up and squeeze margins relative to other
producers. We believe ultimately strong U.S. net exports will benefit all U.S. producers
through a tighter U.S. market.

8 February 2010 57
Barclays Capital | Global Energy Outlook

EQUITY VALUATION TABLE - INTEGRATED OILS AND REFINERS


Equities Price Rating Target Potential, % Region EV/EBITDA, x EV/EBIDA, x Price/Earnings, x FCF yield, % Dividend BarCap Consensus Difference,
(04 Feb) Price yield, % EPS 2010F EPS 2010F %
2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2010F
Integrated Oil
BG Group 1,149 2-EW/2-Neu 1,365 19 Europe 7.3 6.4 5.5 9.9 8.9 7.8 17.2 14.8 12.5 (0.6) 0.6 1.7 1.3 77.6 77.9 0
BP 565.1 2-EW/2-Neu 685 21 Europe 9.3 6.9 6.2 7.0 6.0 5.3 11.6 8.6 7.6 3.2 7.2 9.0 5.8 65.4 68.1 4
Chevron 71.37 1-OW/1-Pos 96 35 US 5.0 3.4 3.1 7.4 5.4 4.9 15.1 8.6 7.2 0.2 2.9 4.3 3.8 8.30 7.51 (10)
ConocoPhillips 48.16 2-EW/1-Pos 55 14 US 4.8 3.6 3.0 6.8 5.3 4.4 13.0 7.8 6.2 (2.0) 7.2 9.5 4.2 6.15 5.88 (4)
Eni 16.52 1-OW/2-Neu 26 57 Europe - - - 5.0 4.5 3.9 12.2 9.0 7.4 4.0 8.0 11.3 6.1 1.83 1.89 4
Exxon Mobil 64.72 1-OW/1-Pos 92 42 US 6.1 4.5 3.9 9.5 7.2 6.2 16.2 10.9 8.7 3.4 6.8 9.0 2.6 5.95 5.79 (3)
Hess 57.32 1-OW/1-Pos 73 27 US (25.2) 4.0 3.4 7.3 5.8 5.1 25.1 12.6 9.6 (5.2) 0.5 1.1 0.7 4.55 4.13 (9)
Marathon Oil 28.86 2 - EW/1-Pos 34 18 US 5.2 3.5 3.0 7.0 5.5 4.8 17.8 8.7 7.0 (4.5) (1.3) 2.4 3.3 3.30 3.42 4
Murphy Oil 50.38 2 - EW/1-Pos 65 29 US 5.5 3.7 3.2 7.1 5.0 4.3 16.4 8.8 6.8 (1.5) (0.3) 0.6 2.0 5.75 4.50 (22)
OMV 29.27 3-UW/2-Neu 34 16 Europe - - - 6.0 5.2 4.6 12.7 10.1 7.8 (0.2) 4.3 6.2 3.1 2.90 3.95 36
Petrobras 38.83 2 - EW/1-Pos 51 31 US 7.1 5.9 5.2 9.6 8.1 7.1 11.8 9.8 8.2 (3.4) (4.9) (2.7) 2.5 3.95 3.98 1
Petrobras 34.25 1 - OW/1-Pos 50 46 US 6.4 5.4 4.7 8.7 7.4 6.4 10.4 8.7 7.2 (3.9) (5.6) (3.1) 2.9 3.95 3.98 1
Repsol YPF 16.45 2-EW/2-Neu 22 34 Europe - - - 6.3 5.7 5.0 16.0 11.2 8.0 2.2 2.7 6.5 5.2 1.46 1.74 19
Royal Dutch Shell A 1,738 3-UW/2-Neu 2,000 15 Europe - - - 7.8 6.0 4.9 15.4 9.6 7.2 (4.7) 1.8 5.0 5.6 2.86 3.02 5
Royal Dutch Shell B 1,666 3-UW/2-Neu 2,000 20 Europe - - - 7.5 5.8 4.8 14.8 9.2 6.9 (5.0) 1.8 5.2 5.9 2.86 3.02 5
StatoilHydro 132.0 2-EW/2-Neu 175 33 Europe - - - 5.7 5.4 4.7 12.4 10.3 8.3 (1.8) 2.0 4.1 3.9 12.8 14.3 11
Suncor Energy C$31.71 1 - OW/1-Pos C$42 32 US 17.5 7.7 5.6 8.4 8.4 6.3 77.1 15.9 10.1 (4.4) 3.2 6.4 1.3 C$2.00 C$2.08 4
Total 41.57 2-EW/2-Neu 54 30 Europe - - - 6.9 5.7 5.1 12.0 8.8 8.0 0.8 5.2 6.6 5.8 4.72 4.51 (4)
Total 41.57 2-EW/2-Neu 54 30 Europe - - - 6.8 5.6 5.1 12.6 9.0 8.1 0.9 5.6 6.9 5.8 4.72 4.51 (4)
Average 29 4.5 5.0 4.2 7.4 6.1 5.3 17.9 10.1 8.0 (1.2) 2.5 4.7 3.8 2

Independent Refiners
Alon USA 6.91 3- UW/3-Neg 7 1 US 21.1 43.0 24.3 17.6 24.6 19.8 (4.5) (4.1) (4.8) 37.1 (21.0) (11.6) 2.3 (1.60) (1.11) (67)
CEPSA 21.81 3-UW/3-Neg 22 1 Europe - - - 8.3 8.9 8.2 20.9 22.9 16.7 (8.4) (7.8) (0.1) 3.7 0.95 1.61 69
Delek 6.90 2 - EW/3-Neg 8 16 US 11.3 8.7 9.1 11.9 9.4 9.8 (23.0) (69.0) (69.0) (8.0) (3.7) 2.1 2.2 0.05 0.33 (462)
ERG 9.73 2-EW/3-Neg 11 8 Europe - - - 14.4 7.9 6.5 (31.5) 24.3 13.1 (15.2) 3.4 7.3 4.1 0.40 0.47 17
Frontier Oil 12.56 2 - EW/3-Neg 13 4 US 89.3 11.0 6.6 38.3 12.5 8.5 (25.1) 83.7 17.9 (15.0) (3.1) 2.7 1.9 0.15 0.81 461
Galp 11.12 1-OW/3-Neg 14 21 Europe - - - 17.4 13.5 12.1 32.3 20.5 18.0 (1.9) (0.2) 0.9 1.8 0.54 0.54 0
Hellenic Petroleum 8.51 1-OW/3-Neg 9 3 Europe - - - 9.8 10.0 8.7 12.1 15.3 10.6 (5.5) (6.7) (3.6) 3.5 0.56 0.64 16
Lotos Group 26.70 3-UW/3-Neg 28 5 Europe - - - 7.1 10.5 7.0 4.7 9.0 4.3 (35.6) (44.2) 2.9 0.0 2.98 2.42 (19)
MOL 17,600 2-EW/3-Neg 15,500 (12) Europe - - - 10.0 7.4 5.7 15.6 11.4 7.4 (2.2) 0.8 4.7 2.6 1,546 1,855 20
Motor Oil 9.90 1-OW/3-Neg 11 11 Europe - - - 12.1 10.0 7.9 13.8 10.9 8.3 1.3 3.2 10.7 5.1 0.91 1.15 27
Neste 11.00 2-EW/3-Neg 12 5 Europe - - - 11.8 13.7 10.9 38.5 31.4 15.0 (26.8) (19.2) (3.5) 1.4 0.35 0.66 88
ORL 192.0 2-EW/3-Neg 205 7 Europe - - - 12.0 9.8 8.1 8.3 10.9 7.6 1.2 2.1 6.3 6.9 0.18 0.19 10
Petroplus 18.06 3-UW/3-Neg 17 (6) Europe - - - 18.1 8.5 5.8 (4.7) (197.7) 9.6 (20.8) (4.0) 7.7 0.0 (0.09) 0.62 (776)
PKN Orlen 32.80 3-UW/3-Neg 23 (30) Europe - - - 6.0 7.2 6.6 17.6 134.1 50.7 (1.2) (5.3) (0.9) 0.0 0.24 2.70 1,002
Saras 2.02 1-OW/3-Neg 2 19 Europe - - - 14.9 7.3 5.8 (73.1) 14.9 9.9 (6.8) 8.8 12.2 5.0 0.14 0.16 21
Sunoco 25.67 2 - EW/3-Neg 30 17 US 9.0 7.1 6.5 9.5 8.2 7.8 (78.3) 32.1 19.7 (11.7) (4.0) (4.6) 4.7 0.80 1.66 124
Tesoro Petroleum 11.91 2 - EW/3-Neg 13 9 US 7.4 7.7 5.0 7.3 7.7 5.7 (17.0) (18.3) 29.8 13.0 (15.8) (4.5) 1.7 (0.65) 0.35 (126)
Valero 18.11 1-OW/3-Neg 21 16 US 11.9 6.7 5.3 11.4 7.7 6.5 (31.0) 32.9 14.5 (8.3) 10.0 1.7 3.3 0.55 1.07 77
Average 5 25.0 14.0 9.5 13.2 10.3 8.4 (6.9) 9.2 10.0 (6.4) (5.9) 1.7 2.8 27

For full company reports mentioned in our equity valuation tables, including valuation methodology and risks, please go to our Global Equity Research portal on Barclays Capital Live.
Barclays Capital Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.

Equity Rating System (for a full definition, please see page 71):
Stock Rating: 1-OW, 2-EW, 3-UW Sector view: 1-Pos=1-Positive, 2-Neu=2-Neutral, 3-Neg=3-Negative

8 February 2010 58
Barclays Capital | Global Energy Outlook

EQUITY VALUATION TABLE - EXPLORATION & PRODUCTION


Equities Price Rating Target Potential, % Region EV/EBITDAX, x EV/PICF, x Price/Earnings, x FCF yield, % Dividend BarCap Consensus Difference,
(04 Feb) Price yield, % EPS 2010F EPS 2010F %
2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2010F
Exploration & Production
Large Caps:
Anadarko Petroleum 62.79 2-EW/2-Neu 81 29 US 7.3 5.8 5.2 7.5 7.0 6.0 - 54.6 35.9 15.7 17.0 - 0.6 1.15 1.74 51
Apache Corporation 98.88 1-OW/2-Neu 135 37 US 6.3 4.5 5.1 7.4 5.4 4.6 18.0 10.8 10.2 14.8 19.7 - 0.6 9.15 10.04 10
Canadian Natural Resources 70.17 1-OW/2-Neu 93 33 US 7.2 6.1 5.1 7.5 6.4 5.4 13.6 12.3 10.9 16.0 18.9 - 0.6 5.70 5.54 (3)
Cenovus Energy 24.26 2-EW/2-Neu 27 11 US 6.0 7.5 6.8 6.9 7.8 7.4 20.2 15.2 12.8 15.9 14.2 15.3 - 1.60 - -
Devon Energy 66.86 2-EW/2-Neu 77 15 US 8.3 5.9 5.5 9.0 6.7 6.1 18.3 12.6 12.7 13.0 17.7 15.7 1.0 5.30 6.35 20
EnCana Corporation 30.74 2-EW/2-Neu 37 20 US 3.4 7.0 6.6 5.9 7.6 6.8 8.0 51.2 55.9 30.9 16.1 17.6 - 0.60 1.54 157
EOG Resources 92.90 1-OW/2-Neu 127 37 US 7.6 7.0 5.4 8.0 7.2 5.6 31.5 26.2 15.9 13.8 15.0 19.8 0.6 3.55 3.93 11
Newfield Exploration 49.29 1-OW/2-Neu 60 22 US 5.2 5.3 4.9 5.6 6.2 5.5 9.8 10.4 9.9 23.1 23.1 24.4 0.7 4.75 4.73 (0)
Nexen Inc. 23.58 1-OW/2-Neu 29 23 US 5.5 4.7 4.0 6.4 5.5 4.7 18.9 12.4 10.7 16.1 23.5 - 0.8 1.90 1.99 5
Noble Energy 72.71 1-OW/2-Neu 84 16 US 8.3 6.3 6.1 9.8 7.0 6.8 21.7 18.0 15.3 11.4 15.5 - 1.0 4.05 3.97 (2)
Occidental Petroleum 76.44 1-OW/2-Neu 94 23 US 7.4 5.2 4.2 9.3 7.3 6.0 20.2 12.5 9.9 10.8 13.7 - 1.7 6.10 3.01 (51)
Pioneer Natural Resources 44.12 2-EW/2-Neu 54 22 US 9.2 5.9 5.1 9.4 6.6 5.4 - 24.5 22.6 15.6 22.7 - 0.4 1.80 1.77 (2)
Range Resources 46.25 2-EW/2-Neu 56 21 US 12.6 14.8 11.5 13.0 15.6 11.6 51.4 - - 8.9 - - 0.3 0.05 0.89 1,680
Southwestern Energy 41.88 1-OW/2-Neu 58 38 US 12.4 9.8 8.3 12.2 10.4 8.4 28.9 25.4 20.9 9.6 11.0 13.3 0.1 1.65 2.34 42
Talisman Energy 18.07 1-OW/2-Neu 24 33 US 4.4 4.8 4.7 5.1 5.2 4.9 24.1 51.6 40.2 21.9 21.0 - 1.2 0.35 0.70 100
Ultra Petroleum 46.59 2-EW/2-Neu 57 22 US 12.9 9.9 8.6 13.4 10.5 8.9 26.6 20.7 16.1 8.5 10.7 - 0.0 2.25 2.62 16
Average (ex. RRC SWN UPL) 25 6.6 5.8 5.3 7.5 6.6 5.8 18.6 24.0 20.2 16.8 18.3 18.5 0.8 25

Small and Mid Caps:


Bill Barrett Corp. 30.54 2-EW/1-Pos 27 (12) US - 3.7 4.0 - 4.0 - 18.5 29.1 - 32.1 29.1 - 0.0 1.05 1.28 22
Chesapeake Energy 24.18 1-OW/1-Pos 34 41 US - 5.8 5.4 - 7.4 - 9.5 9.7 - 24.2 25.4 - 1.2 2.50 2.58 3
Cimarex Energy 49.41 2-EW/1-Pos 52 5 US - 7.0 5.1 - 5.2 - 22.5 10.7 - 15.6 20.7 - 0.5 4.60 4.63 1
Comstock Resources 37.34 2-EW/1-Pos 40 7 US - 10.9 7.0 - 7.0 - - - - 12.2 15.3 - 0.0 (0.05) 0.76 (1,620)
Concho Resources 44.92 2-EW/1-Pos 40 (11) US - 9.9 7.3 - 7.7 - 33.3 22.5 - 11.1 14.5 - 0.0 2.00 1.89 (6)
Denbury Resources 14.48 RS/1-Pos 23 59 US - - 7.5 - - - - - - - - - 0.0 - 0.62 -
Forest Oil 24.47 1-OW/1-Pos 28 14 US - 5.4 6.0 - 6.0 - 12.9 13.2 - 24.7 20.4 - 0.0 1.85 2.10 14
Penn Virginia 23.55 1-OW/1-Pos 25 6 US - 6.4 4.4 - 4.4 - - - - 28.9 29.1 - 1.0 0.30 0.04 (87)
Petrohawk Energy 22.09 1-OW/1-Pos 33 49 US - 10.6 8.8 - 8.8 - 55.2 40.2 - 10.0 11.5 - 0.0 0.55 0.79 44
Plains Exploration & Production 31.74 1-OW/1-Pos 34 7 US - 5.7 8.2 - 8.8 - 5.8 9.3 - 24.9 12.9 - 0.0 3.40 1.89 (44)
Quicksilver Resources 13.87 1-OW/1-Pos 18 30 US - 7.1 6.7 - 6.7 - 16.3 18.5 - 18.0 19.1 - 0.0 0.75 0.91 21
SandRidge Energy 8.43 1-OW/1-Pos 16 90 US - 7.8 5.8 - 5.8 - 9.9 7.7 - 24.9 24.9 - 0.0 1.10 0.87 (21)
Stone Energy 14.91 2-EW/1-Pos 23 54 US - 2.6 2.8 - 2.8 - 5.8 8.3 - 67.4 56.7 - 0.0 1.80 2.58 43
Swift Energy 25.14 3-UW/1-Pos 21 (16) US - 6.7 5.0 - 5.0 - - 18.6 - 23.9 26.1 - 0.0 1.35 1.70 26
Venoco 12.02 2-EW/1-Pos 11 (8) US - 7.1 5.8 - 5.8 - 34.3 15.0 - 23.7 28.7 - 0.0 0.80 0.64 (20)
W&T Offshore 8.59 2-EW/1-Pos 13 51 US - 3.0 2.1 - 2.2 - - 7.5 - 53.6 67.5 - 1.4 1.15 1.20 4
Whiting Petroleum 65.71 2-EW/1-Pos 70 7 US - 7.6 5.3 - 5.3 - - 17.5 - 16.3 24.0 - 0.0 3.75 4.02 7
Average 22 6.7 5.7 5.8 20.4 16.3 25.7 26.6 - 0.2 (101)
Average for all E&P 23 6.3 5.5 6.2 19.5 20.0 21.7 22.9 - 0.5 (47)

1) EV/EBITDAX is used instead of EV/EBITDA, as EBITDAX is more commonly cited for E&P
2) EV/PICF is used instead of EV/EBIDA, where PICF = Pre-interest Cash Flow = EBITDAX – Cash Income Tax

8 February 2010 59
Barclays Capital | Global Energy Outlook

EQUITY VALUATION TABLE - OIL SERVICES & DRILLING


Equities Price Rating Target Potential, % Region EV/EBITDA, x EV/EBIDA, x Price/Earnings, x FCF yield, % Dividend BarCap Consensus Difference,
(04 Feb) Price yield, % EPS 2010F EPS 2010F %
2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2010F
Oil Services & Equipment
Acergy 96.25 3-UW/2-Neu 77 (20) Europe 7.1 8.1 6.3 8.4 11.0 8.7 16.9 27.9 19.5 11.2 3.9 5.8 1.4 0.58 0.68 18
Aker Solutions 82.20 1-OW/2-Neu 83 1 Europe 6.7 8.0 7.1 7.7 9.9 8.7 9.5 14.3 12.1 9.3 7.4 10.2 2.1 5.74 5.90 3
Baker Hughes 45.22 2-EW/2-Neu 45 (0) US 8.4 7.9 6.7 - - - 23.5 23.2 18.1 10.8 9.7 11.3 1.3 1.95 2.02 4
Basic Energy Services 8.77 2-EW/2-Neu 9 3 US 22.5 9.6 5.9 - - - - - - 14.2 19.6 28.2 - (1.70) (1.49) (12)
BJ Services 20.68 2-EW/2-Neu 19 (8) US 17.1 11.9 7.8 - - - 141.1 48.0 18.8 5.8 7.5 11.0 1.0 0.43 0.46 7
Bristow Group 33.25 2-EW/2-Neu 44 32 US 7.1 6.5 5.7 - - - 10.8 10.8 9.4 21.3 16.7 18.9 - 3.08 3.01 (2)
Cameron International 37.88 1-OW/2-Neu 46 21 US 8.7 9.4 8.1 - - - 16.4 18.1 14.8 7.9 7.4 8.8 - 2.10 2.18 4
CARBO Ceramics 63.21 3-UW/2-Neu 58 (8) US 13.2 12.4 10.3 27.5 25.3 20.7 5.3 5.7 6.8 1.0 2.70 2.67 (1)
CGGVeritas 18.26 3-UW/2-Neu 18 (1) Europe 5.9 6.7 4.7 5.8 6.8 5.6 87.7 98.4 17.2 5.6 5.5 8.6 0.0 0.19 0.37 101
Chart Industries 16.81 1-OW/2-Neu 27 61 US 5.2 8.2 5.2 - - - 9.2 18.7 9.6 13.0 7.8 13.1 - 0.90 0.82 (9)
Core Laboratories 116.6 1-OW/2-Neu 136 17 US 13.3 11.7 10.1 - - - 23.4 20.5 16.7 5.2 5.8 7.0 1.0 5.70 5.34 (6)
Dockwise 175.0 1-OW/2-Neu 360 106 Europe 4.5 5.0 3.6 4.6 5.6 3.9 5.5 8.0 4.9 30.2 19.9 27.9 0.0 3.68 3.70 1
Dresser-Rand Group 29.95 1-OW/2-Neu 38 27 US 6.5 8.0 6.8 - - - 11.2 15.0 12.2 11.0 8.7 10.2 - 2.00 2.03 1
Dril-Quip 51.13 1-OW/2-Neu 66 29 US 11.3 10.2 8.7 - - - 18.6 16.5 14.0 6.2 6.9 8.1 - 3.10 2.97 (4)
Exterran Holdings 19.60 1-OW/2-Neu 28 43 US 6.0 6.7 5.7 - - - 15.3 32.4 16.3 32.4 26.1 30.9 - 0.60 0.37 (39)
FMC Technologies 54.08 2-EW/2-Neu 50 (8) US 11.0 12.4 11.2 - - - 19.1 22.0 19.3 0.1 0.1 0.1 - 2.45 2.51 2
Global Industries 6.52 2-EW/2-Neu 8 23 US 4.2 5.3 4.0 - - - 9.0 14.5 8.7 20.4 15.7 20.5 - 0.45 0.61 36
GulfMark Offshore 24.51 1-OW/2-Neu 39 59 US 5.2 5.0 4.3 - - - 6.5 6.8 5.4 23.8 24.0 27.9 - 3.60 2.74 (24)
Halliburton 28.86 2-EW/2-Neu 31 7 US 9.7 9.3 7.5 - - - 21.6 22.3 16.1 8.1 8.4 10.2 1.2 1.30 1.40 8
Hornbeck Offshore 20.48 1-OW/2-Neu 30 46 US 6.6 5.6 4.6 - - - 8.3 8.9 6.6 24.1 26.3 31.4 - 2.30 2.55 11
ION Geophysical Corporation 4.80 1-OW/2-Neu 8 67 US 8.5 6.5 5.2 - - - - 23.6 10.8 12.3 14.8 19.0 - 0.20 0.11 (46)
Key Energy Services 9.20 2-EW/2-Neu 8 (13) US 13.4 11.3 7.4 - - - - - - 10.2 11.3 15.5 - (0.25) 0.06 (124)
Maire Tecnimont 2.42 1-OW/2-Neu 4 82 Europe 7.6 6.4 3.6 6.1 5.0 3.6 10.1 8.8 7.2 8.4 9.9 12.4 4.6 0.27 0.27 (3)
National Oilwell Varco 42.54 1-OW/2-Neu 49 15 US 5.3 6.2 6.4 - - - 10.8 13.1 13.5 12.0 10.5 10.3 0.0 3.25 3.10 (5)
Oceaneering International 53.46 1-OW/2-Neu 69 29 US 7.6 7.0 6.3 - - - 15.8 15.1 13.4 10.5 11.3 12.5 - 3.55 3.48 (2)
Petrofac 974.5 1-OW/2-Neu 1,100 13 Europe 8.6 5.0 4.5 10.5 6.6 5.9 15.0 10.6 9.9 12.2 10.4 11.0 3.1 1.45 1.34 (8)
PGS 74.75 3-UW/2-Neu 54 (28) Europe 4.4 5.3 3.7 5.7 6.1 5.0 12.0 20.9 9.1 4.3 4.6 2.5 0.0 0.60 0.65 7
Saipem 24.43 2-EW/2-Neu 25 2 Europe 9.4 9.6 7.9 10.3 10.4 8.5 15.0 19.3 15.0 7.2 7.1 9.0 1.7 1.27 1.40 11
SBM Offshore 13.75 1-OW/2-Neu 16 19 Europe 7.5 7.3 6.5 7.4 7.9 7.0 14.0 12.7 12.5 16.3 14.5 17.0 4.7 1.08 1.03 (4)
Schlumberger 62.50 1-OW/2-Neu 75 20 US 11.3 10.8 9.0 - - - 22.4 21.9 16.9 7.7 7.9 9.4 1.3 2.85 2.91 2
SEACOR Holdings 70.80 2-EW/2-Neu 86 21 US 4.1 4.7 4.1 - - - 11.3 12.8 9.4 17.8 18.4 22.7 - 5.55 5.55 0
Smith International 30.35 3-UW/2-Neu 25 (18) US 5.1 9.5 8.1 - - - 35.9 27.7 18.9 16.6 8.2 8.5 1.6 1.10 1.09 (1)
Subsea 7 107.0 3-UW/2-Neu 106 (1) Europe 6.0 8.4 6.6 5.0 6.4 4.9 9.2 16.6 12.4 16.7 7.6 10.2 0.0 1.08 0.97 (10)
Superior Energy Services 20.91 2-EW/2-Neu 29 39 US 5.0 5.3 4.7 - - - 12.7 12.3 8.9 20.5 22.0 25.1 - 1.70 1.61 (5)
Technip 51.57 2-EW/2-Neu 50 (3) Europe 6.1 8.0 6.6 6.5 8.3 6.7 13.1 18.3 14.3 (3.1) 2.7 7.9 2.3 2.82 3.15 12
Tecnicas Reunidas 40.02 1-OW/2-Neu 50 25 Europe 12.2 10.3 8.8 13.1 10.8 8.9 15.2 13.2 11.6 6.1 7.1 8.2 3.8 3.04 2.99 (2)
Tetra Technologies 9.61 2-EW/2-Neu 14 46 US 4.3 3.6 3.4 - - - 13.0 10.1 8.7 29.1 32.8 34.7 - 0.95 0.93 (2)
Tidewater 44.83 1-OW/2-Neu 55 23 US 4.9 6.3 4.9 - - - 7.0 9.9 7.2 20.2 16.1 20.6 2.1 4.53 5.34 18
Trico Marine Services 3.40 2-EW/2-Neu 6 76 US 10.6 6.6 4.9 - - - - (6.8) 13.6 27.1 41.0 64.6 - (0.50) (0.55) 10
Weatherford International 15.29 1-OW/2-Neu 22 44 US 10.5 7.8 6.0 - - - 29.7 18.0 10.9 11.4 14.8 19.4 0.0 0.85 0.75 (12)
Wood Group 343.4 1-OW/2-Neu 410 19 Europe 6.9 7.5 6.4 10.1 10.5 9.1 12.8 15.1 12.7 10.3 7.9 5.9 1.8 0.39 0.37 (3)
Average 22 8.3 7.8 6.3 7.8 8.1 6.6 20.4 19.1 12.8 13.2 12.5 15.7 1.6 (2)

Offshore and Onshore


Diamond Offshore 89.79 1-OW/2-Neu 117 30 US 6.0 5.8 5.4 - - - 9.1 9.1 8.6 13.7 14.3 15.6 8.3 9.90 9.75 (2)
ENSCO International 38.99 2-EW/2-Neu 49 26 US 4.2 5.0 4.3 - - - 7.3 9.4 8.0 17.6 15.0 17.2 0.2 4.15 4.17 0
Helmerich & Payne 40.31 2-EW/2-Neu 42 4 US 6.5 6.8 5.7 - - - 16.0 17.8 13.5 11.9 11.8 13.7 0.4 2.27 2.22 (2)
Hercules Offshore 3.79 3-UW/2-Neu 3 (21) US 7.6 7.5 6.0 - - - - - - 34.1 29.4 35.9 - (0.80) (0.72) (10)
Nabors Industries 22.24 2-EW/2-Neu 22 (1) US 7.0 6.8 5.6 - - - 16.6 23.4 13.9 16.9 16.0 19.3 - 0.95 1.08 14
Noble Corporation 40.15 1-OW/2-Neu 50 25 US 4.2 5.1 5.2 - - - 6.2 7.9 8.4 20.1 17.6 17.2 0.1 5.10 5.46 7
Parker Drilling 4.72 2-EW/2-Neu 7 48 US 5.2 5.2 3.7 - - - 33.0 48.8 11.8 24.5 24.6 33.0 - 0.10 0.21 117
Patterson-UTI Energy 15.51 3-UW/2-Neu 14 (10) US 9.4 7.6 5.8 - - - - - 51.8 10.7 12.3 15.0 1.2 (0.05) (0.07) 55
Pride International 29.55 2-EW/2-Neu 34 15 US 8.2 8.9 5.7 - - - 13.4 14.8 8.4 11.1 9.9 15.2 - 2.00 1.99 (0)
Rowan Companies 21.92 2-EW/2-Neu 24 9 US 4.0 5.2 5.0 - - - 7.3 11.5 11.5 20.6 16.2 17.1 - 1.90 2.15 13
Seahawk Drilling 20.38 2-EW/2-Neu 29 42 US nm 36.4 3.3 - - - - - - 9.4 9.5 20.5 - (2.95) (5.06) 72
Transocean Inc. 83.34 1-OW/2-Neu 108 30 US 5.8 6.0 5.7 - - - 7.0 7.8 7.4 19.5 19.8 21.1 - 10.75 10.44 (3)
Average 16 6.2 8.9 5.1 12.9 16.7 14.3 17.5 16.4 20.1 2.0 21.8

8 February 2010 60
Barclays Capital | Global Energy Outlook

EQUITY VALUATION TABLE - COAL AND PIPELINES


Equities Price Rating Target Potential, % Region EV/EBITDA, x EV/EBIDA, x Price/Earnings, x FCF yield, % Dividend BarCap Consensus Difference,
(04 Feb) Price yield, % EPS 2010F EPS 2010F %
2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2010F
Coal
Alliance Holdings GP 28.24 1-OW/1-Pos 36 27 US 8.1 7.0 6.5 - - - 14.8 12.3 11.4 6.1 7.0 7.9 6.4 2.29 2.20 (4)
Alliance Resource Partners 39.48 2-EW/1-Pos 45 14 US 5.6 4.8 4.5 - - - 11.1 8.9 8.8 14.1 17.5 18.5 7.9 4.45 3.94 (12)
Alpha Natural Resources 39.69 1-OW/1-Pos 50 26 US 7.8 5.1 3.9 - - - 23.7 13.7 10.1 3.0 6.7 9.6 0.0 2.90 3.25 12
Arch Coal 20.88 1-OW/1-Pos 40 92 US 10.9 7.2 4.9 - - - 53.6 23.3 9.7 6.0 9.3 11.4 1.7 0.90 1.24 38
CONSOL Energy 45.32 2-EW/1-Pos 55 21 US 7.4 7.2 5.4 - - - 15.4 15.1 10.3 0.3 0.1 5.7 0.9 3.00 3.16 5
Massey Energy 39.21 2-EW/1-Pos 28 (29) US 9.0 7.8 5.8 - - - 54.8 34.1 17.4 0.9 5.8 6.6 0.6 1.15 2.29 99
Natural Resource Partners 22.66 1-OW/1-Pos 30 32 US 10.7 8.9 6.8 - - - 19.1 15.7 10.5 9.6 11.4 17.2 9.5 1.45 1.26 (13)
Patriot Coal 14.30 1-OW/1-Pos 22 54 US 12.6 10.9 4.3 - - - - - 31.6 (3.2) 1.3 8.6 0.0 (1.25) (1.04) (16)
Peabody Energy 41.10 1-OW/1-Pos 58 41 US 10.0 7.7 4.8 - - - 21.4 16.1 9.4 6.6 5.3 10.8 0.7 2.55 2.68 5
Penn Virginia GP Holdings 16.44 1-OW/1-Pos 19 13 US 13.4 11.6 9.8 - - - 14.4 13.3 10.7 9.3 10.1 13.9 9.2 1.23 1.25 1
Penn Virginia Resource Partners 21.28 2-EW/1-Pos 17 (22) US 10.3 7.3 6.2 - - - 20.0 10.9 9.7 12.4 17.4 20.4 8.8 1.95 1.42 (27)
Average 24 9.6 7.8 5.7 24.8 16.3 12.7 5.9 8.3 11.9 4.2 8
Pipelines
Refined Products
Buckeye Partners L.P. 55.50 3-UW/1-Pos 48 (14) US 12.0 11.1 9.7 - - - 16.2 15.4 14.3 7.5 7.7 8.1 6.7 3.60 3.75 4
Global Partners LP 24.15 2-EW/2-Neu 23 (5) US 10.9 9.8 8.7 - - - 9.4 9.5 8.6 14.5 14.2 15.2 8.1 2.55 2.63 3
Holly Energy Partners L.P. 41.04 2-EW/2-Neu 40 (3) US 10.9 8.8 7.2 - - - 15.5 16.1 13.3 8.7 9.1 10.4 7.8 2.55 2.83 11
Kinder Morgan Energy Partners 60.17 1-OW/2-Neu 69 15 US 9.8 8.3 7.7 - - - 43.6 28.0 25.0 7.1 7.6 7.7 7.0 2.15 1.90 (11)
Magellan Midstream Partners 41.51 2-EW/2-Neu 41 (1) US 14.3 11.5 10.4 - - - 18.5 14.2 13.0 7.5 7.8 8.5 6.8 2.92 2.52 (14)
Sunoco Logistics Partners L.P. 65.26 2-EW/2-Neu 62 (5) US 8.1 7.8 6.9 - - - 10.1 10.7 9.6 10.8 10.7 11.6 6.7 6.10 5.58 (9)
NuStar Energy L.P. 53.71 2-EW/1-Pos 57 6 US 10.7 9.4 8.2 - - - 16.8 14.1 12.5 9.2 9.7 10.8 7.9 3.80 3.59 (6)
Average (1) 11.0 9.5 8.4 18.6 15.4 13.8 9.3 9.6 10.3 7.3 (3)
Gathering and Processing
Atlas Pipeline Partners L.P. 10.35 2-EW/2-Neu 13 26 US 7.8 9.1 7.4 - - - 5.0 (73.7) 9.7 30.6 21.0 31.6 - (0.14) 0.51 (463)
Copano Energy L.L.C. 22.03 1-OW/2-Neu 20 (9) US 9.4 9.0 9.3 - - - 59.9 48.7 56.7 11.1 11.0 9.9 10.4 0.45 0.76 68
Crosstex Energy L.P. 9.64 2-EW/2-Neu 10 4 US 8.5 8.9 8.5 - - - (1,723) (48.6) 800.1 15.4 14.7 17.4 - (0.20) (0.40) 102
DCP Midstream Partners L.P. 29.20 1-OW/2-Neu 28 (4) US 12.2 12.0 9.8 - - - (51.2) 41.0 24.8 9.0 9.5 9.9 8.2 0.71 1.61 126
Eagle Rock Energy Partners L.P. 5.82 2-EW/2-Neu 6 3 US 6.7 10.2 7.2 - - - (4.4) (95.4) 12.4 38.2 12.2 20.9 1.7 (0.06) 0.15 (346)
Exterran Partners L.P. 22.48 2-EW/2-Neu 23 2 US 9.6 9.2 6.7 - - - 27.7 19.4 14.2 10.5 8.2 10.0 8.2 1.16 1.04 (10)
MarkWest Energy Partners L.P. 28.29 1-OW/2-Neu 25 (12) US 10.3 11.1 9.2 - - - (23.1) 59.9 39.6 10.3 8.4 9.9 9.0 0.47 0.59 25
Regency Energy Partners L.P. 20.61 1-OW/2-Neu 22 4 US 12.8 9.3 7.9 - - - 10.9 64.4 59.6 8.1 9.4 10.4 8.6 0.32 0.69 116
Targa Resources Partners L.P. 22.51 1-OW/2-Neu 25 9 US 9.8 8.2 6.6 - - - 26.8 17.5 13.8 10.6 10.4 11.7 9.2 1.29 1.53 19
Western Gas Partners L.P. 21.47 1-OW/2-Neu 23 7 US 14.8 12.0 8.3 - - - 17.2 13.8 12.8 7.4 8.3 8.8 6.1 1.56 1.32 (15)
Williams Partners L.P. 35.98 RS/2-Neu 30 (17) US 11.2 10.1 12.3 - - - 13.2 13.7 14.3 9.2 8.5 7.9 7.1 2.63 2.57 (2)
Average 1 10.3 9.9 8.5 (149.2) 5.5 96.2 14.6 11.0 13.5 7.6 (35)
Natural Gas & NGL
Boardwalk Pipeline Partners L.P. 29.85 2-EW/2-Neu 32 7 US 17.6 12.5 11.9 - - - 35.2 18.5 17.0 4.8 7.5 8.3 6.6 1.62 1.43 (12)
Duncan Energy Partners L.P. 23.78 2-EW/2-Neu 22 (7) US 11.2 10.8 9.4 - - - 15.3 15.8 13.4 9.1 9.1 9.9 7.5 1.50 1.54 2
El Paso Pipeline Partners L.P. 23.56 1-OW/2-Neu 26 10 US 12.8 10.4 9.3 - - - 15.5 14.0 12.7 7.2 8.0 8.7 6.1 1.68 1.66 (1)
Energy Transfer Partners L.P. 44.33 1-OW/2-Neu 47 6 US 9.4 7.9 6.7 - - - 17.2 15.8 12.9 7.1 8.0 9.7 8.1 2.80 2.80 (0)
Enterprise Products Partners 31.02 1-OW/2-Neu 32 3 US 12.1 9.4 8.4 - - - 20.2 16.8 14.9 7.7 9.0 9.8 7.2 1.85 1.81 (2)
ONEOK Partners L.P. 59.01 1-OW/2-Neu 68 15 US 10.4 9.5 8.4 - - - 16.2 16.1 13.8 8.1 8.0 8.8 7.5 3.67 3.75 2
Spectra Energy Partners L.P. 29.32 1-OW/2-Neu 30 2 US 13.6 11.8 9.8 - - - 16.7 15.6 14.7 7.4 7.8 8.6 5.6 1.89 1.88 (0)
TC PipeLines L.P. 35.49 2-EW/2-Neu 38 7 US 7.8 7.5 7.5 - - - 14.2 14.1 12.7 10.7 10.8 11.6 8.2 2.52 2.37 (6)
Williams Pipeline Partners L.P. 26.98 RS/2-Neu 24 (11) US 7.1 4.6 4.0 - - - 17.4 17.9 16.7 5.4 5.6 6.0 5.0 1.51 1.57 4
Average 4 11.3 9.4 8.4 18.7 16.1 14.3 7.5 8.2 9.1 6.9 (1)
Crude Oil
Enbridge Energy Partners L.P. 50.69 2-EW/2-Neu 48 (5) US 10.8 10.1 9.4 - - - 18.9 18.4 17.1 8.5 9.1 9.5 7.8 2.75 2.99 9
Plains All American Pipeline L.P. 52.25 1-OW/2-Neu 54 3 US 10.3 9.3 8.2 - - - 17.0 16.1 14.1 8.0 8.1 8.7 7.1 3.25 2.95 (9)
Blueknight Energy Partners, L.P. 10.70 3-UW/2-Neu - - US - - 10.2 - - - (38.2) 26.4 14.3 2.0 9.1 12.0 - 0.40 0.31 (23)
Average (1) 10.6 9.7 9.2 (0.7) 20.3 15.2 6.2 8.8 10.1 7.5 (8)
Marine Transportation
K-Sea Transportation Partners 8.91 2-EW/2-Neu 10 12 US 6.8 8.9 7.7 - - - 10.1 (11.4) (40.4) 28.3 14.3 18.2 0.0 (0.78) (0.85) 9
Teekay Offshore Partners L.P. 19.35 2-EW/2-Neu 19 (2) US 7.1 6.7 6.2 - - - 7.5 24.9 18.3 9.3 9.3 9.8 9.3 0.78 1.32 70
Average 5 7.0 7.8 7.0 8.8 6.8 (11.1) 18.8 11.8 14.0 4.7 39

Propane
Amerigas Partners L.P. 40.03 3-UW/2-Neu 36 (10) US 8.2 9.4 9.7 - - - 10.3 13.0 13.7 11.6 9.7 9.4 6.7 3.08 2.72 (12)
Ferrellgas Partners L.P. 21.67 3-UW/2-Neu 20 (8) US 10.7 9.3 8.6 - - - 20.8 22.4 17.3 8.9 10.2 11.6 9.2 0.97 1.05 9
Inergy L.P. 33.95 1-OW/2-Neu 39 15 US 10.6 9.0 7.5 - - - 22.6 41.8 27.3 9.5 9.3 10.1 8.1 0.81 0.79 (3)
Suburban Propane Partners L.P. 44.96 3-UW/2-Neu 46 2 US 9.0 10.3 9.5 - - - 9.1 10.9 9.4 12.3 10.6 11.9 7.4 4.13 3.84 (7)
Average (0) 9.6 9.5 8.8 15.7 22.0 16.9 10.6 10.0 10.7 7.9 (3)
E&P Sector
Encore Energy Partners L.P. 19.48 RS/2-Neu 23 18 US 9.8 10.3 10.0 - - - 12.2 12.6 11.8 13.1 12.6 13.1 11.0 1.55 1.10 (29)
Constellation Energy Partners 4.22 3-UW/2-Neu 3 (41) US 3.5 3.6 3.5 - - - 4.0 4.7 4.2 46.2 41.5 43.8 12.3 0.90 (0.38) (142)
Linn Energy LLC 25.18 1-OW/2-Neu 25 (1) US 8.7 8.5 9.0 - - - 10.3 10.1 12.0 14.5 14.9 13.5 10.0 2.50 2.01 (20)
Average (8) 7.3 7.5 7.5 - - - 8.8 9.1 9.3 24.6 23.0 23.5 11.1 (64)
All Pipelines 6 10.1 9.0 7.8 (20.2) 13.6 30.8 10.6 10.3 12.1 6.7 (9.5)

8 February 2010 61
Barclays Capital | Global Energy Outlook

EQUITY VALUATION TABLE - GAS AND POWER


Equities Price Rating Target Potential, % Region EV/EBITDA, x EV/EBIDA, x Price/Earnings, x FCF yield, % Dividend BarCap Consensus Difference,
(04 Feb) Price yield, % EPS 2010F EPS 2010F %
2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2009A 2010F 2011F 2010F
Gas
E&P Oriented
El Paso 9.89 1-OW/2-Neu 13 31 US 5.8 7.3 6.1 - - - 8.8 12.5 8.6 9.0 5.6 8.4 0.4 0.79 0.89 12
Energen 42.94 2-EW/2-Neu 50 16 US 5.5 4.5 5.0 - - - 11.9 9.6 10.8 12.1 15.2 12.6 1.2 4.47 4.43 (1)
EQT Corp 43.24 1-OW/2-Neu 49 13 US 12.9 9.6 7.5 - - - 29.0 23.3 16.7 5.1 7.1 9.6 2.0 1.86 1.85 (0.4)
MDU Resources 20.39 2-EW/2-Neu 24 18 US 9.8 9.1 7.4 - - - 14.6 13.4 10.3 4.3 4.9 6.9 3.1 1.52 1.50 (2)
National Fuel Gas 47.06 2-EW/2-Neu 52 10 US 12.4 8.4 7.7 - - - 18.1 18.9 17.4 4.7 8.2 8.8 2.8 2.49 2.60 4
Questar 40.75 1-OW/2-Neu 51 25 US 6.4 5.9 5.2 - - - 15.2 18.9 15.5 7.8 8.1 9.6 1.3 2.16 2.30 7
Williams Companies 20.47 1-OW/2-Neu - - US - - - - - - - - - - - - 2.1 - 1.42 -
Average 19 8.8 7.5 6.5 16.2 16.1 13.2 7.1 8.2 9.3 1.9 3

Non E&P Oriented


Enbridge ($Cdn) 47.27 2-EW/2-Neu 47 (1) US 9.4 10.4 9.5 - - - 20.2 18.2 16.0 8.8 7.5 8.3 3.1 2.60 2.60 0.1
Southern Union 22.56 1-OW/2-Neu 26 15 US 8.9 7.6 7.1 - - - 11.9 11.4 10.0 9.0 9.8 10.6 2.7 1.99 1.92 (3)
Spectra Energy 20.93 1-OW/2-Neu 24 15 US 11.0 9.2 8.5 - - - 17.5 13.8 11.8 6.8 9.3 10.3 4.8 1.52 1.48 (3)
Black Hills 26.02 RS/2-Neu - - US - - - - - - - - - - - - 5.5 - - -
Oneok 41.38 1-OW/2-Neu 50 21 US 7.4 9.5 9.0 - - - 14.5 14.5 13.1 11.7 8.6 9.3 4.3 2.85 2.96 4
AGL Resources 35.22 2-EW/2-Neu 39 11 US 8.8 8.4 8.1 - - - 13.7 12.2 11.4 8.4 8.7 9.1 4.9 2.88 2.89 0.3
Atmos Energy 27.36 2-EW/2-Neu 30 10 US 7.3 6.8 6.7 - - - 11.9 12.4 11.7 6.8 7.6 7.8 4.9 2.20 2.19 (0.4)
Average 12 8.8 8.7 8.1 14.9 13.8 12.3 8.6 8.6 9.2 4.3 (0.3)

Distribution Companies
New Jersey Resources 35.11 3-UW/2-Neu 38 8 US 36.2 9.5 9.1 - - - 14.7 13.6 13.3 1.4 9.1 9.3 3.9 2.57 2.57 (0.1)
Nicor 39.46 3-UW/2-Neu 38 (4) US 6.3 6.2 6.3 - - - 14.5 13.5 14.0 8.4 8.7 8.1 4.7 2.93 2.88 (2)
Piedmont Natural Gas 24.89 3-UW/2-Neu 25 0 US 9.4 9.1 9.0 - - - 14.9 15.2 15.6 7.5 7.7 7.8 4.3 1.64 1.61 (2)
Southwest Gas 27.31 3-UW/2-Neu 27 (1) US 5.3 5.1 5.3 - - - 13.6 12.8 12.9 10.0 10.7 10.2 3.5 2.14 2.11 (1)
WGL Holdings 31.73 3-UW/2-Neu 32 1 US 7.3 7.5 7.1 - - - 12.5 14.3 13.3 9.9 9.4 10.1 4.6 2.21 2.27 3
Average 4 11.5 7.5 7.3 13.7 13.4 13.2 7.5 8.8 8.9 4.4 (0.3)

Power
AES Corporation 11.84 1-OW/2-Neu 16 35 US 9.4 8.7 7.8 - - - 11.0 10.7 9.3 (12.3) 6.6 12.8 0.0 1.11 1.14 3
Allegheny Energy 20.49 1-OW/2-Neu 30 46 US 6.8 5.9 5.4 - - - 9.5 9.5 8.1 (2.1) 3.2 2.5 2.9 2.15 2.26 5
Ameren Corp. 24.98 2-EW/2-Neu 21 (16) US 5.9 6.1 5.9 - - - 9.1 10.8 10.3 (0.5) (0.9) (1.5) 6.2 2.31 2.34 1
Calpine Corp. 10.89 2-EW/2-Neu 11 1 US 9.3 10.7 10.1 - - - 43.6 NM - 9.2 5.8 5.2 0.0 0.06 0.30 400
Constellation Energy Corp 32.75 1-OW/2-Neu 39 19 US 5.1 6.6 5.6 - - - 10.0 10.0 9.2 16.5 (4.5) 9.9 2.9 3.28 3.35 2
Covanta Holdings 17.51 2-EW/2-Neu 21 20 US 9.3 8.6 8.5 - - - 23.0 17.9 16.7 (14.2) (2.4) 0.4 0.0 0.98 0.88 (10)
Dominion Resources Inc 36.86 2-EW/2-Neu 33 (10) US 7.8 7.6 7.3 - - - 11.3 11.5 11.1 - 1.5 - 5.0 3.21 3.26 2
Dynegy Inc. 1.58 2-EW/2-Neu 2 11 US 6.0 9.2 8.3 - - - - - - (18.8) (22.7) (2.2) 0.0 (0.33) (0.23) (31)
Edison International 32.50 2-EW/2-Neu 36 11 US 5.7 5.3 5.0 - - - 10.9 9.7 9.7 - (14.3) - 3.8 3.35 3.30 (1)
Entergy Corp 77.11 1-OW/2-Neu 94 22 US 7.3 7.1 6.9 - - - 11.6 11.4 10.7 - 10.3 - 3.9 6.75 6.69 (1)
Exelon 44.75 2-EW/2-Neu 55 23 US 5.9 6.2 6.5 - - - 10.9 12.1 10.7 - 3.3 - 4.5 3.70 3.79 2
FirstEnergy Corp 41.92 2-EW/2-Neu 46 10 US 7.3 7.7 7.3 - - - 12.7 11.5 9.4 (3.4) 1.5 4.4 5.2 3.64 3.59 (1)
FPL Group Inc 48.02 1-OW/2-Neu 57 19 US 8.7 8.7 7.9 - - - 11.9 11.1 10.6 - (16.0) - 3.7 4.34 4.37 1
Mirant Corp 13.15 3-UW/2-Neu 12 (9) US 4.6 6.8 8.0 - - - 5.1 10.4 13.6 10.9 1.3 15.9 0.0 1.26 1.64 30
NRG Energy 22.10 2-EW/2-Neu 26 18 US 6.4 7.5 8.3 - - - 8.2 11.4 14.5 14.1 10.0 11.2 0.0 1.94 2.14 10
Ormat Technologies 33.66 2-EW/2-Neu 38 13 US 15.2 12.9 10.9 - - - 24.0 22.1 18.1 (6.0) (2.5) (2.3) 0.6 1.52 1.47 (3)
PPL Corporation 28.62 2-EW/2-Neu 32 12 US 7.4 6.1 6.4 - - - 16.5 8.7 9.3 - 0.2 - 4.8 3.28 3.32 1
Public Service Entrp Group Inc 29.64 1-OW/2-Neu 36 21 US 6.0 5.8 5.9 - - - 9.5 9.3 9.7 - (0.3) - 4.5 3.18 3.19 0.5
RRI Energy, Inc. 4.56 2-EW/2-Neu 5 10 US 46.3 8.5 5.5 - - - - (41.5) 14.3 (16.7) 9.9 23.5 0.0 (0.11) (0.06) (45)
Average 13 9.5 7.7 7.2 14.0 8.6 11.5 (1.9) (0.5) 6.7 2.5 19

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Barclays Capital | Global Energy Outlook

APPENDIX
Valuation Methodology and Risks for Key Overweights
US Integrated Oil

Exxon Mobil Corp. (XOM)


Valuation Methodology: Our near term (12-month) price target implies a 7.0% ROMC under a mid-cycle market assumption of $80 per barrel
from 2013, representing an equity risk premium of 2.5% based on our current estimated 10-year Treasury yield of 7.0%, or 4.5% after-tax,
compared with our target risk premium of 2.8% for Chevron, 3.2% for Marathon, ConocoPhillips, and Petrobras and 3.5% for Hess and Murphy.
Risks: Our earnings estimates are based on Barclays Capital's current commodity price assumption on oil & gas, refining and marketing margins,
as well as chemical product margins. Thus, results could be subject to changes due to fluctuations in the macro commodity market
environment.
Chevron Corporation (CVX)
Valuation Methodology: Our near term (12 month) price target implies a 7.3% return on market capitalization (ROMC) under a mid-cycle
market assumption of $80 per barrel flat real from 2013, representing an equity risk premium of 2.8% based on our current estimated 10-year
Treasury yield of 7.0%, or 4.5% after-tax, compared to our target risk premium of 2.5% for XOM, 3.2% for ConocoPhillips, Marathon, and
Petrobras, and 3.5% for Murphy and Hess.
Risks: Our earnings estimates are based on Barclays Capital's current commodity price assumption on oil & gas, refining and marketing margins
as well as chemical product margins. Thus, results could be subject to changes due to fluctuations in the macro commodity market
environment.

Europe Integrated Oil

Eni (ENI.MI)
Valuation Methodology: Our price target for Eni's shares is derived using a discounted cash flow methodology, using a 10% discount rate. Our
calculation includes our estimate of value created from future growth based on the company's past and expected future return spread over its
cost of capital. The cash flows in our calculation comprise both dollar and local currencies. Our price target is set in local currency, based on the
dollar exchange rate on the date the target is initially published. Subsequently, the corresponding ADR price target in US dollars will move with
the prevailing exchange rate on a daily basis. If the dollar exchange rate relative to the local currency moves significantly compared with the rate
used when the local currency price target was initially published, we re-calculate and re-publish the local currency price targets using the current
dollar exchange rates. Our price targets are not market linked.
Risks: Our Eni share price target and recommendation depend on our estimates of profitability and cash flow and the rate at which we discount
the cash flows. These estimates in turn are based on assumptions for oil prices and downstream margins. These assumptions depend on the
Barclays Capital European Oil & Gas equity research team's estimates for future energy supply-demand patterns, exchange rates, commodity
prices. All of our estimates are subject to revision and may be materially different from eventual outcomes. In addition the company operates on
a global basis in many regions with sometimes unstable political regimes and changing fiscal terms. The actions of OPEC can also have a
significant influence on the oil market. All estimates assume no marked changes in the current political landscape. Both upstream and
downstream operations are subject to planned and unplanned downtime. Eni has a significant Gas & Power business in Italy, part of which is
regulated and may be subject to regulation changes in future.

US Independent Refiners

Valero Energy (VLO)


Valuation Methodology: Our price target assumes that VLO should trade at $455 per daily b/d of complexity, or 28% of the greenfield
replacement cost of $1,600 per b/d of complexity. At the bottom of the last two cyclical downturns in 2002 and 1999, the company traded at
32% and 27% of the greenfield replacement cost, respectively.
Risks: Our earnings estimates are based on our current commodity price assumption on oil & gas, refining, and marketing margins as well as
chemical product margins. Thus, results could be subject to changes due to fluctuations in the macro commodity market environment.

Europe Independent Refiners

Saras SpA (SRS.MI)


Valuation Methodology: Our price target for Saras's shares is derived using a discounted cash flow methodology, using a 10% discount rate,
with a premium attached based on our analysis of management's ability to reinvest cash flows. The cash flows in our calculation comprise both
dollar and local currencies. Our price target is set in local currency, based on the dollar exchange rate on the date the target is initially published.
If the dollar exchange rate relative to the local currency moves by more than 5% compared to the rate used when the local currency price target
was initially published, we re-calculate and re-publish the local currency price targets using the current dollar exchange rates. Our price targets
are not market-linked.
Risks: Our Saras share price target and recommendation depend on our estimates of profitability and cash flow and the rate at which we
discount the cash flows. These estimates in turn are based on assumptions for oil prices and downstream margins. These assumptions depend

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Barclays Capital | Global Energy Outlook

on the Barclays Capital European Oil & Gas equity research teams estimates for future energy supply-demand patterns, exchange rates,
commodity prices. All of our estimates are subject to revision and may be materially different from eventual outcomes. In addition individual
refineries are subject to crude supply disruptions or operational failures.
Galp Energia (GALP.LS)
Valuation Methodology: Our price target for GALP's shares is derived using a discounted cash flow methodology, using a 12% discount rate for
refining and power generation and 10% for the upstream assets. Our calculation includes our estimate of value created from future growth
based on the company\'s past and expected future return spread over its cost of capital. The cash flows in our DCF calculation comprise both
dollar and local currencies. Our price target is set in local currency.
Risks: Our GALP share price target and recommendation depends upon our estimates of profitability and cash flow and the rate at which we
discount the cash flows. These estimates in turn are based on assumptions for oil prices and downstream margins. These assumptions depend
on the Barclays Capital European Oil & Gas equity research teams estimates for future energy supply-demand patterns, exchange rates,
commodity prices. All of our estimates are subject to revision and may be materially different from eventual outcomes. In addition individual
refineries are subject to crude supply disruptions or operational failures. GALP also faces additional risk to changes in the Brazilian fiscal regime
given its significant upstream exposure there.
Hellenic Petroleum SA (HEPr.AT)
Valuation Methodology: Our price target for Hellenic Petroleum\'s shares is derived using a discounted cash flow methodology, using a 12%
discount rate. Our calculation includes our estimate of value created from future growth based on the companys past and expected future return
spread over its cost of capital. The cash flows in our DCF calculation comprise both dollar and local currencies. Our price target is set in local
currency.
Risks: Our Hellenic Petroleum share price target and recommendation depends upon our estimates of profitability and cash flow and the rate at
which we discount the cash flows. These estimates in turn are based on assumptions for oil prices and downstream margins. These assumptions
depend on the Barclays Capital European Oil & Gas equity research teams estimates for future energy supply-demand patterns, exchange rates,
commodity prices. All of our estimates are subject to revision and may be materially different from eventual outcomes. In addition individual
refineries are subject to crude supply disruptions or operational failures.

US Oil & Gas: E&P (Large Cap & Mid-Cap)

Apache Corp (APA)


Valuation Methodology: Our price target of $135 is derived by applying a 6.5 x multiple on our forward-year (2011) hedge-adjusted pre-interest
cash flow (PICF) estimate of $7,389 million to obtain an implied Enterprise Value (EV). The estimate for forward-year PICF is based on a
benchmark natural gas price forecast of $5.50/MMBtu (HH) and an oil price forecast of $85.00/bbl (WTI). To calculate a target stock market
value, we subtract projected year-end 2010 net debt of $793 million, FAS143 asset retirement obligation of $1,585 million. Our target EV is
based on 2011 PICF before hedging impacts; and our target price treats estimated hedge gains/losses as a financial instrument (i.e. valued at one
times the forecast gains/losses).
Risks: Our price target is derived using a multiple of forward-year ('10) pre-interest cash flow (PICF) estimates. Our estimate for forward-year
PICF is predicated on a benchmark natural gas price forecast of $5.50/MMBtu (at HH) and an oil price forecast of $75/bbl (WTI). Should
commodity prices, production levels, or leverage differ materially from our estimates, our price target would be affected. The company's
production levels are impacted by a variety of factors including drilling success, reservoir performance and future acquisitions. Our target price is
based on a forward-year firm value to de-levered cash flow multiple.
Canadian Natural Resources (CNQ)
Valuation Methodology: Our C$93 price target is derived by applying a 7.0x multiple to forward-year (2011) pre-interest cash flow (PICF)
estimate of C$8,378mm to obtain an implied Enterprise Value (EV). To calculate a target stock market value, we subtract estimated YE2010 net
debt of C$7,013 million and FAS 143 asset retirement obligation of C$1,338 from target EV. Our target EV is based on 2011E PICF before
hedging impacts; and our target price treats estimated hedge gains/losses as a financial instrument (i.e. valued at one times the forecast
gains/losses).
Risks: Our price target is derived using a multiple of forward-year ('11) pre-interest cash flow (PICF) estimates. Our estimate for forward-year
PICF is predicated on a benchmark natural gas price forecast of $5.50/MMBtu (at HH) and an oil price forecast of $85/bbl (WTI). Should
commodity prices, production levels, or leverage differ materially from our estimates, our price target would be affected. The company's
production levels are impacted by a variety of factors including drilling success, reservoir performance and future acquisitions. Our target price is
based on a forward-year firm value to de-levered cash flow multiple.
Talisman Energy (TLM)
Valuation Methodology: Our price target of C$24 is derived by applying a 6.75x multiple on our forward-year ('11) pre-interest cash flow (PICF)
estimate of C$4,629mm to obtain an implied Enterprise Value (EV). To calculate a target stock market value, we subtract estimated YE2010 net
debt of C$4,468million and FA S143 asset retirement obligation of C$2,128 million from target EV. Our target EV is based on 2011PICF before
hedging impacts; and our target price treats estimated hedge gains/losses as a financial instrument (i.e. valued at one times the forecast
gains/losses).
Risks: Our price target is derived using a multiple of forward-year ('11) pre-interest cash flow (PICF) estimates. Our estimate for forward-year
PICF is predicated on a benchmark natural gas price forecast of $5.50/MMBtu (at HH) and an oil price forecast of $85/bbl (WTI). Should
commodity prices, production levels, or leverage differ materially from our estimates, our price target would be affected. The company's
production levels are impacted by a variety of factors including drilling success, reservoir performance and future acquisitions. Our target price is
based on a forward-year firm value to de-levered cash flow multiple.

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EOG Resources (EOG)


Valuation Methodology: Our price target of $127 is derived by applying a 7.50x multiple on our forward-year (2011) hedge-adjusted pre-interest
cash flow (PICF) estimate of $4,714 million to obtain an implied Enterprise Value (EV). The estimate for forward-year PICF is based on a
benchmark natural gas price forecast of $5.50/MMBtu (HH) and an oil price forecast of $85.00/bbl (WTI). To calculate a target stock market
value, we subtract projected year-end 2010 net debt of $2,963 million and FAS143 asset retirement obligation of $343 million. Our target EV is
based on 2011 PICF before hedging impacts; and our target price treats estimated hedge gains/losses as a financial instrument (i.e. valued at one
times the forecast gains/losses).
Risks: Should commodity prices, production levels, or leverage differ materially from our estimates, our price target would be affected. The
company's production levels are impacted by a variety of factors including drilling success, reservoir performance and future acquisitions.
Petrohawk Energy (HK)
Valuation Methodology: Our price target is based on an estimated net asset value that includes year-end 2008 proved reserves and balance
sheet items. Our proved reserve value is based on estimated pretax cash flows using Barclays Capital's price deck and a 10% discount rate. We
have also assigned value for some unbooked reserve potential in the Elm Grove and Terryville fields and Fayetteville and Haynesville shales. Our
Elm Grove valuation is based on a 1.3 Bcf gross type well costing $1.5 million to drill and complete and gives credit for 90% of the company's
acreage position. Our Terryville field valuation is based on a 1.4 Bcf gross type well costing $1.8 million to drill and complete and gives credit for
75% of the company's acreage position. Our Fayetteville Shale valuation is based on a 1.6 Bcf gross type well costing $2.25 million to drill and
complete and gives credit for 80% of the company's acreage position. Our Haynesville Shale valuation is based on a 7.5 Bcf gross type well
costing $8.5 million to drill and complete and gives credit for 65% of the company's acreage position.
Risks: Our NYMEX price deck is $62/bbl for oil and $4.00/MMBtu for gas in 2009 and $75/bbl for oil and $5.50/MMBtu for gas in 2010. Should
commodity prices, production levels, or leverage differ materially from our estimates, our price target would likely be affected. Production levels
may be impacted by a variety of factors including drilling success, reservoir performance, and future acquisitions.

US Oil Services & Drilling

Weatherford International (WFT)


Valuation Methodology: Our 12-month price target of $22 is based on 15.5x our 2011 earnings estimate of $1.40.
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production and international political and economic risks.
Schlumberger Ltd (SLB)
Valuation Methodology: Our 12-month price target of $75 is based on 20.3x our 2011 earnings estimate of $3.70.
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production and international political and economic risks. A prolonged downturn of the information technology industry could have a
negative effect on the outlook for Sema's earnings.
Transocean Ltd. (RIG)
Valuation Methodology: Our 12-month price target of $108 is based on 7x our 2011 EV/EBITDA estimate (Enterprise Value of $45,812 million
and 2011 EBITDA of $6,587 million).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production, and international political and economic risks.
Noble Corp (NE)
Valuation Methodology: Our 12-month price target of $50 is based on 6.5x our 2011 EV/EBITDA estimate (Enterprise Value of $12,895 million
and 2011 EBITDA of $1,977 million).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production, and international political and economic risks.
Cameron International (CAM)
Valuation Methodology: Our $46 price target is based on 18x our 2011 EPS estimate of $2.55.
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production, and international political and economic risks.
Tidewater Inc. (TDW)
Valuation Methodology: Our price target is based on 6.1x calendar-year 2011E EV/EBITDA (EV of $2.8 billion and EBITDA of $461 million).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production and international political and economic risks.

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ION Geophysical Corp. (IO)


Valuation Methodology: Our price target of $8 is based on a sum of the parts valuation. We apply a multiple of 7.5x to EBITDA generated by IO's
legacy business ($144 million) and 10x to minority interest from the company's joint venture with BGP ($13.8 million).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC production, and international and economic events.
Core Laboratories (CLB)
Valuation Methodology: Our price target of $136 is based on 19.5x our 2011 EPS estimate (Market Value of $3,172 million and 2011 EPS of
$7.00).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, gas storage levels, OPEC behavior, increasing non-
OPEC oil production and international political and economic risks.
Dril-Quip Inc. (DRQ)
Valuation Methodology: Our price target is based on 18x 2011E EPS of $3.65.
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, OPEC behavior, increasing non-OPEC oil production,
and other international political and economic risks.
Dresser-Rand Group Inc. (DRC)
Valuation Methodology: Our price target of $38 is based on 15.6x our 2011 EPS estimate (Market Value of $3,127 million and 2011 EPS of
$2.45).
Risks: A material change in commodity prices would alter our earnings outlook and potentially our stance on the entire oil service and drilling
sector. Commodity price changes could be affected by a change in the economic climate, natural gas storage levels, OPEC behavior, increasing
non-OPEC oil production, and international politcal and economy-related risks.

Europe Oil Services & Drilling

Tecnicas Reunidas (TRE.MC)


Valuation Methodology: Our price target for Tecnicas Reunidas has been derived from a DCF-based methodology. We have used our forecasted
cash flows for the 2009-2012F period and thereafter assumed a cyclical growth (15% pa) until a turn in 2014 when revenues fall (10% pa) until
2016. Margins used for 2013-16F period are comparable to those over the 2004-2008 period. Our terminal value is then taken on a (WACC-g)
basis assuming 5% long-term growth. Our discount rate used is 12%, in line with the 12% that we use for the sector.
Risks: All our estimates are based on Barclays Capital European Oil & Gas equity research teams estimates for future energy supply-demand
patterns, exchange rates, commodity prices and the availability of assets within the oils service industry. These estimates are subject to revision
and may be materially different from eventual out comes. In addition workload is executed on a global basis in many regions with unstable
regimes. All estimates assume no marked changes in the current political landscape. For Tecnicas Reunidas specifically, earnings are exposed to
lump-sum contracts, which if executed incorrectly can produce significant negative margins. In addition backlog award can be lumpy and profit
recognition on projects is often in a non-linear fashion. As a result there may be periodic swings in profitability.
Wood Group (WG.L)
Valuation Methodology: Our price target for Wood Group has been derived from a DCF-based methodology. We have used our forecasted cash
flows for the 2009-2012F period and thereafter assumed a cyclical growth (15% pa) until a turn in 2014 when revenues fall (10% pa) until 2016.
Margins used for 2013-16F period are comparable to those over the 2004-2008 period. Our terminal value is then taken on a (WACC-g) basis
assuming 5% long-term growth. Our discount rate used is 11.6%, below the 12% that we use for the sector to account for the defensive
business mix.
Risks: All our estimates are based on Barclays Capital European Oil & Gas equity research teams estimates for future energy supply-demand
patterns, exchange rates, commodity prices and the availability of assets within the oils service industry. These estimates are subject to revision
and may be materially different from eventual out comes. In addition workload is executed on a global basis in many regions with unstable
regimes. All estimates assume no marked changes in the current political landscape. For Wood Group specifically, some contracts are paid on a
pay-for-performance basis. The execution of these projects may materially change profitability. In addition, the Gas Turbines division is exposed
to different drivers to the other businesses, namely the demand for gas derived power in the US and the price of Henry Hub. These may change
rapidly and affect profitability.

US Natural Gas

El Paso Corp. (EP)


Valuation Methodology: Our price target of $13 is based on shares trading at 70% of our NAV analysis using 2011 estimates comprised of an
asset value of $27.502B less net liabilities of $13.664B / 757.5 shares = $18.27 times 70% = $12.79 rounded to $13. Our current NAV is using
normalized commodity decks of $6/Mcf Gas, $80/BBL Oil, 58% NGL/Crude relationship.

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Barclays Capital | Global Energy Outlook

Risks: Estimates are subject to the level, relationship and volatility of oil & gas prices. Weather and economic activity impacts demand for
products and services. Limited foreign activities are exposed to currency fluctuations and political instability. Regulated pipelines are subject to
prudency review of costs and capital investments plus, over time, allowed returns fluctuate with the level of interest rates.
ONEOK Inc. (OKE)
Valuation Methodology: Our price target of $50 is based on shares trading at 85% of our NAV analysis using 2011 estimates comprised of an
asset value of $8.229B less net liabilities of $1.813B / 109.99MM shares = $58.33 times 85% = $49.58 rounded to $50.
Risks: OKE owns 47.7% ownership interest in OKS, and natural gas distribution business, where results are tied to regulatory approvals of current
and future rate relief requests and Energy Services, where results are impacted by natural gas prices, basis differentials and costs of obtaining
storage and pipeline capacity.
Questar Corp. (STR)
Valuation Methodology: Our price target of $51 is based on shares trading at 80% of our NAV analysis using 2011 estimates comprised of an
asset value of $13.340B less net liabilities of $2.234B / 175.8 MM shares = $63.18 times 80% = $50.54 rounded to $50. Our current NAV is using
normalized commodity decks of $6/Mcf Gas, $80/BBL Oil, 58% NGL/Crude relationship.
Risks: Earnings are exposed to natural gas prices especially the value of gas in the Rockies. E&P volume estimates are dependent on timely
access to drilling locations on the Pinedale Anticline. Regulated subsidiaries are dependent of federal and state agencies for approvals of allowed
ROEs, a negative posture could hamper earnings growth.
Spectra Energy Corp. (SE)
Valuation Methodology : Our price target of $24 is predicated on the weighted average of four valuation metrics: 1) 2011e EPS of $1.77 and P/E
multiple of 14.0x, 2) 2011e dividend of $1.04 and yield of 4.5%, 3) EV/EBITDA of 8.0x, and 4) NAV of $26.08. Weightings are 50% dividend yield
and 16.7% for other three methods.
Risks: The risk to our forecast is primarily three items. (1) The level of growth capital and the returns earned on the assumed spending. Given the
high percent of rate base, spending assumptions will be more variable than the returns earned in our forecast. (2) Sensitivity to crude (NGL)
prices is significant. Each dollar swing in crude prices equates to about $15mm in EBIT from net equity barrels generated from field service
operations. Canadian frac spread exposure equates to $12.5mm for every 50 cent /mmbtu change in margin. (3) In aggregate rate base
operations are roughly earning their allowed returns. With nearly $9 billion in rate base, changes in the current return parameters would also
influence results quickly.
Constellation Energy (CEG)
Valuation Methodology: Our $39 price target reflects the average of: $32 for an Integrated Utility average 10.7x 2011 P/E aplied to $2.22, $0.84
for Supply at 9x and NPV for $0.50 of hedge value; $39 for 7.1x 2011 Open EBITDA of $1.44B and 5x Supply EBITDA of $329M, net debt of $4.2B
including hedge NPV and imputed debt of $1.8B, and 197M shares; and $46 for a sum of parts asset-based valuation which includes $13.2B of
enterprise value, $4.2B in net debt and 197M shares.
Risks: Risks to the outlook include wholesale commodity prices, generation development market conditions, the outcome of regulatory
proceedings, rating agency actions including the current Moody's review, interest rates, and access to the capital markets.
AES Corp. (AES)
Valuation Methodology: Our price target of $16 reflects 7.1x Proportional EBITDA $3.27B in 2011 less net debt of $12.6B and 790M shares
which is $13.50, 13.5x 2011 EPS of $1.27 which is $17.25 and a sum of parts which is $15.75.
Risks: As a global power company and electiric utility, AES is exposed to merchant power risk, country risk, currency risk (particularly in South
America), regulatory risk, and counterparty risk. The company's liquidity is currently tight and the outcome of a range of negotiations and
counterparty exposure in the power sector could have damaging effects.

US Coal

Peabody Energy (BTU)


Valuation Methodology: Our price target of $58 is based on a net firm value 7.1x our 2011 EBITDA estimate of $2.35 billion.
Risks: Our price target and estimates on Peabody Energy assume that volumes and realized contract prices continue to gradually rise. Adverse
weather, a weak economy, and/or operational problems are risks to our volume and realized price estimates. Long-term, environmental
regulations represent a risk to the coal industry.
Arch Coal (ACI)
Valuation Methodology: Our $40 12-month target price assumes a firm value in one year of 8.5x our 2011 EBITDA estimate of $935 million.
Risks: Adverse weather, a weak economy, and/or operational problems are risks to our assumptions. Long-term, environmental regulations
represent a risk to the coal industry.
Alpha Natural Resources (ANR)
Valuation Methodology: Our price target of $50 is based on a net firm value in one year 4.9x our 2011 EBITDA estimate of $1.1 billion.
Risks: Adverse weather, a weak economy, a material decline in steel demand, and/or operational problems are risks to our target price. Long-
term, environmental regulations represent a risk to the industry.

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Barclays Capital | Global Energy Outlook

ANALYST(S) CERTIFICATION(S)
With respect to our respective contributions in this report, we, Costanza Jacazio, Amrita Sen, Michael Zenker, Biliana Pehlivanova, Yingxi Yu,
James Crandell, Trevor Sikorski, Helima Croft, Harry Mateer, Stefanie Leshaw Chachra, Gary Stromberg, Chris Gault, Laurence Jollon, Brian
Chavarria, Jim Asselstine, Timothy Tay, CFA, Neil Beddall, Paul Y. Cheng, CFA, Lucy Haskins, Rahim Karim, Lydia Rainforth, Thomas R. Driscoll,
CFA, Jeffrey W. Robertson, James D. Crandell, James C. West, Mick Pickup, Richard Gross, II, Daniel Ford, CFA, Greg Orrill, Peter D. Ward, CFA,
hereby certify that: (1) 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 research 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 research report.

IMPORTANT DISCLOSURES: FIXED INCOME RESEARCH


For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays
Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer at https://ecommerce.barcap.com/research/cgi-
bin/all/disclosuresSearch.pl or call 1-212-526-1072.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
Barclays Capital may have a conflict of interest that could affect the objectivity of this report. Any reference to Barclays Capital includes its
affiliates. Barclays Capital and/or an affiliate thereof (the “firm”) regularly trades, generally deals as principal and generally provides liquidity (as
market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). The firm’s
proprietary trading accounts may have either a long and/or short position in such securities and / or derivative instruments, which may pose a
conflict with the interests of investing customers. Where permitted and subject to appropriate information barrier restrictions, the firm’s fixed
income research analysts regularly interact with its trading desk personnel to determine current prices of fixed income securities. The firm’s fixed
income research analyst(s) receive compensation based on various factors including, but not limited to, the quality of their work, the overall
performance of the firm (including the profitability of the investment banking department), the profitability and revenues of the Fixed Income
Division and the outstanding principal amount and trading value of, the profitability of, and the potential interest of the firms investing clients in
research with respect to, the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays
Capital trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not
represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. Barclays
Capital produces a variety of different types of fixed income research, including fundamental credit analysis, quantitative credit analysis and trade
ideas. Recommendations contained in one type of research may differ from recommendations contained in other types, whether as a result of
differing time horizons, methodologies, or otherwise.
Explanation of the High Grade Sector Weighting System
Overweight: Expected six-month excess return of the sector exceeds the six-month expected excess return of the Barclays Capital U.S. Credit
Index or Pan-European Credit Index, as applicable.
Market Weight: Expected six-month excess return of the sector is in line with the six-month expected excess return of the Barclays Capital U.S.
Credit Index or Pan-European Credit Index, as applicable.
Underweight: Expected six-month excess return of the sector is below the six-month expected excess return of the Barclays Capital U.S. Credit
Index or Pan-European Credit Index, as applicable.
Explanation of the High Grade Research Rating System
The High Grade Research rating system is based on the analyst’s view of the expected excess returns over a six-month period of the issuer’s
index-eligible corporate debt securities to the Barclays Capital U.S. Credit Index, the Pan-European Credit Index or the EM Asia USD High Grade
Credit Index, as applicable.
Overweight: The analyst expects the issuer’s index-eligible corporate bonds to provide positive excess returns relative to the Barclays Capital U.S.
Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months.
Market Weight: The analyst expects the issuer’s index-eligible corporate bonds to provide excess returns in line with the Barclays Capital U.S.
Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months.
Underweight: The analyst expects the issuer’s index-eligible corporate bonds to provide negative excess returns relative to the Barclays Capital
U.S. Credit Index, the Pan-European Credit Index, or the EM Asia USD High Grade Credit Index over the next six months.
Not Rated (NR): An issuer which has not been assigned a formal rating.
Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with
applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger
or strategic transaction involving the company.
Explanation of the High Yield Sector Weighting System
Overweight: Expected six-month total return of the sector exceeds the six-month expected total return of the Barclays Capital U.S. High Yield
2% Issuer Capped Credit Index, or the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, as applicable.
Market Weight: Expected six-month total return of the sector is in line with the six-month expected total return of the Barclays Capital U.S. High
Yield 2% Issuer Capped Credit Index or the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, as applicable.
Underweight: Expected six-month total return of the sector is below the six-month expected total return of the Barclays Capital U.S. High Yield
2% Issuer Capped Credit Index or the Pan-European High Yield 3% Issuer Capped Credit Index excluding Financials, as applicable.

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IMPORTANT DISCLOSURES: FIXED INCOME RESEARCH CONTINUED


Explanation of the High Yield Research Rating System
The High Yield Research team employs a relative return based rating system that, depending on the company under analysis, may be applied to
either some or all of the company’s debt securities, bank loans, or other instruments. Please review the latest report on a company to ascertain
the application of the rating system to that company.
Overweight: The analyst expects the six-month total return of the rated debt security or instrument to exceed the six-month expected total
return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index
excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.

Market Weight: The analyst expects the six-month total return of the rated debt security or instrument to be in line with the six-month expected
total return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index
excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.
Underweight: The analyst expects the six-month total return of the rated debt security or instrument to be below the six-month expected total
return of the Barclays Capital U.S. 2% Issuer Capped High Yield Credit Index, the Pan-European High Yield 3% Issuer Capped Credit Index
excluding Financials, or the EM Asia USD High Yield Corporate Credit Index, as applicable.
Not Rated (NR): An issuer which has not been assigned a formal rating.
Rating Suspended (RS): The rating has been suspended temporarily due to market events that make coverage impracticable or to comply with
applicable regulations and/or firm policies in certain circumstances including where Barclays Capital is acting in an advisory capacity in a merger
or strategic transaction involving the company.

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Barclays Capital | Global Energy Outlook

IMPORTANT DISCLOSURES: EQUITY RESEARCH


For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays
Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to www.lehman.com/disclosures or call 1-212-526-
1072.
The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities.
On September 20, 2008, Barclays Capital acquired Lehman Brothers' North American investment banking, capital markets, and private
investment management businesses. All ratings and price targets prior to this date relate to coverage under Lehman Brothers Inc.
Barclays Capital produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative
analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other
types of research products, whether as a result of differing time horizons, methodologies, or otherwise.
Materially Mentioned Stocks (Ticker, Date, Price)
AES Corp. (AES, 04-Feb-2010, USD 11.84), 1-Overweight/2-Neutral
Alpha Natural Resources (ANR, 04-Feb-2010, USD 39.69), 1-Overweight/1-Positive
Apache Corp. (APA, 04-Feb-2010, USD 98.88), 1-Overweight/2-Neutral
Arch Coal (ACI, 04-Feb-2010, USD 20.88), 1-Overweight/1-Positive
BG Group (BG.L, 04-Feb-2010, GBP 11.49), 1-Overweight/2-Neutral
Cameron International (CAM, 04-Feb-2010, USD 37.88), 1-Overweight/2-Neutral
Canadian Natural Resources (CNQ, 04-Feb-2010, CAD 70.02), 1-Overweight/2-Neutral
Chevron Corporation (CVX, 04-Feb-2010, USD 71.37), 1-Overweight/1-Positive
Constellation Energy (CEG, 04-Feb-2010, USD 32.75), 1-Overweight/2-Neutral
Core Laboratories (CLB, 04-Feb-2010, USD 116.60), 1-Overweight/2-Neutral
Dresser-Rand Group Inc. (DRC, 04-Feb-2010, USD 29.95), 1-Overweight/2-Neutral
Dril-Quip Inc. (DRQ, 04-Feb-2010, USD 51.13), 1-Overweight/2-Neutral
El Paso Corp. (EP, 04-Feb-2010, USD 9.89), 1-Overweight/2-Neutral
Eni (ENI.MI, 04-Feb-2010, EUR 16.52), 1-Overweight/2-Neutral
EOG Resources (EOG, 04-Feb-2010, USD 92.90), 1-Overweight/2-Neutral
Exxon Mobil Corp. (XOM, 04-Feb-2010, USD 64.72), 1-Overweight/1-Positive
Galp Energia (GALP.LS, 04-Feb-2010, EUR 11.12), 1-Overweight/3-Negative
Hellenic Petroleum SA (HEPr.AT, 04-Feb-2010, EUR 8.51), 1-Overweight/3-Negative
ION Geophysical Corp. (IO, 04-Feb-2010, USD 4.80), 1-Overweight/2-Neutral
Motor Oil SA (MORr.AT, 04-Feb-2010, EUR 9.90), 1-Overweight/3-Negative
Noble Corp. (NE, 04-Feb-2010, USD 40.15), 1-Overweight/2-Neutral
ONEOK Inc. (OKE, 04-Feb-2010, USD 41.38), 1-Overweight/2-Neutral
Peabody Energy (BTU, 04-Feb-2010, USD 41.10), 1-Overweight/1-Positive
Petrohawk Energy (HK, 04-Feb-2010, USD 22.09), 1-Overweight/1-Positive
Questar Corp. (STR, 04-Feb-2010, USD 40.75), 1-Overweight/2-Neutral
Saras SpA (SRS.MI, 04-Feb-2010, EUR 2.02), 1-Overweight/3-Negative
Schlumberger Ltd. (SLB, 04-Feb-2010, USD 62.50), 1-Overweight/2-Neutral
Spectra Energy Corp. (SE, 04-Feb-2010, USD 20.93), 1-Overweight/2-Neutral
Talisman Energy (TLM, 04-Feb-2010, CAD 18.02), 1-Overweight/2-Neutral
Tecnicas Reunidas (TRE.MC, 04-Feb-2010, EUR 40.02), 1-Overweight/2-Neutral
Tidewater Inc. (TDW, 04-Feb-2010, USD 44.83), 1-Overweight/2-Neutral
Transocean Ltd. (RIG, 04-Feb-2010, USD 83.34), 1-Overweight/2-Neutral
Valero Energy (VLO, 04-Feb-2010, USD 18.11), 1-Overweight/3-Negative
Weatherford International (WFT, 04-Feb-2010, USD 15.29), 1-Overweight/2-Neutral
Wood Group (WG.L, 04-Feb-2010, GBP 3.43), 1-Overweight/2-Neutral

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IMPORTANT DISCLOSURES: EQUITY RESEARCH CONTINUED


Other Material Conflicts
XOM: Barclays Capital is acting as financial advisor to XTO Energy Inc. on the potential sale of the company to ExxonMobil Corporation. Barclays
Capital also provided a fairness opinion in connection with this potential transaction. The rating, price target and estimates on XTO Energy have
been temporarily suspended due to Barclays Capital's role. The rating, price target and estimates on ExxonMobil do not incorporate this potential
transaction.
EP: El Paso Pipeline Partners LP, a related entity of El Paso Corp., is an investment banking client of Barclays Capital Inc.
Guide to the Barclays Capital Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal Weight or 3-Underweight (see definitions
below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (the “sector
coverage universe”).
In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-
Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors
should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
2-Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-
month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or
to comply with applicable regulations and/or firm policies in certain circumstances including when Barclays Capital is acting in an advisory
capacity in a merger or strategic transaction involving the company.
Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the “sector coverage universe”:

European Independent Refiners


CEPSA (CEP.MC) ERG SpA (ERG.MI) Galp Energia (GALP.LS)
Grupa Lotos SA (LTOS.WA) Hellenic Petroleum SA (HEPr.AT) MOL Magyar Olaj es Gazipari Nyrt. (MOLB.BU)
Motor Oil SA (MORr.AT) Neste Oil (NES1V.HE) Petroplus Holdings (PPHN.VX)
PKN Orlen SA (PKNA.WA) Saras SpA (SRS.MI)
European Integrated Oil
BG Group (BG.L) BP (BP.L) Eni (ENI.MI)
OMV (OMVV.VI) Repsol YPF (REP.MC) Royal Dutch Shell A (RDSa.L)
Royal Dutch Shell B (RDSb.L) Statoil ASA (STL.OL) Total (TOTF.PA)
European Oil Services & Drilling
Acergy (ACY.OL) Aker Solutions (AKSO.OL) CGGVeritas (GEPH.PA)
Dockwise (DOCK.OL) Maire Tecnimont (MTCM.MI) Petrofac (PFC.L)
Petroleum Geo-Services (PGS.OL) Saipem (SPMI.MI) SBM Offshore (SBMO.AS)
Subsea 7 (SUB.OL) Technip (TECF.PA) Tecnicas Reunidas (TRE.MC)
Wood Group (WG.L)
Independent Refiners
Alon USA Energy (ALJ) Delek US Holdings Inc. (DK) Frontier Oil (FTO)
Sunoco, Inc. (SUN) Tesoro Corporation (TSO) Valero Energy (VLO)
Integrated Oil
Chevron Corporation (CVX) ConocoPhillips (COP) Exxon Mobil Corp. (XOM)
Hess Corp. (HES) Marathon Oil Corp. (MRO) Murphy Oil (MUR)
Petroleo Brasileiro S.A. (PBR) Petroleo Brasileiro S.A. (PBRA) Suncor Energy (SU)

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IMPORTANT DISCLOSURES: EQUITY RESEARCH CONTINUED


Natural Gas
AGL Resources Inc. (AGL) Atmos Energy (ATO) El Paso Corp. (EP)
Enbridge Inc. (ENB) Energen Corp. (EGN) EQT Corporation (EQT)
MDU Resources Group (MDU) National Fuel Gas (NFG) New Jersey Resources (NJR)
Nicor Inc. (GAS) ONEOK Inc. (OKE) Piedmont Natural Gas Co. (PNY)
Questar Corp. (STR) Southern Union (SUG) Southwest Gas Corp. (SWX)
Spectra Energy Corp. (SE) WGL Holdings (WGL) Williams Cos. (WMB)
North America Metals & Mining
Agnico-Eagle Mines Ltd. (AEM) Alcoa Inc. (AA) Alliance Holdings GP (AHGP)
Alliance Resource Partners (ARLP) Alpha Natural Resources (ANR) AngloGold Ashanti Ltd. (AU)
Arch Coal (ACI) Barrick Gold (ABX) CONSOL Energy (CNX)
Freeport-McMoRan C&G (FCX) Goldcorp Inc. (GG) Kinross Gold Corp. (KGC)
Massey Energy (MEE) Natural Resource Partners, LP (NRP) Newmont Mining (NEM)
Patriot Coal Corp. (PCX) Peabody Energy (BTU) Penn Virginia GP Holdings LP (PVG)
Penn Virginia Res Partners (PVR)
Oil & Gas: E&P (Mid-Cap)
Bill Barrett Corp. (BBG) Chesapeake Energy (CHK) Cimarex Energy Co. (XEC)
Comstock Resources (CRK) Concho Resources Inc. (CXO) Crimson Exploration Inc. (CXPO)
Denbury Resources (DNR) Forest Oil (FST) Penn Virginia Corp. (PVA)
Petrohawk Energy (HK) Plains Exploration & Production (PXP) Quicksilver Resources Inc. (KWK)
SandRidge Energy Inc. (SD) Stone Energy Corp. (SGY) Swift Energy Company (SFY)
Venoco Inc. (VQ) W&T Offshore (WTI) Whiting Petroleum (WLL)
Oil Services & Drilling
Baker Hughes (BHI) Basic Energy Services (BAS) BJ Services (BJS)
Bristow Group Inc. (BRS) Cameron International (CAM) CARBO Ceramics (CRR)
Chart Industries Inc. (GTLS) Core Laboratories (CLB) Diamond Offshore Drilling (DO)
Dresser-Rand Group Inc. (DRC) Dril-Quip Inc. (DRQ) ENSCO International (ESV)
Exterran Holdings Inc. (EXH) FMC Technologies (FTI) Global Industries, Ltd. (GLBL)
GulfMark Offshore, Inc. (GLF) Halliburton Co. (HAL) Helmerich & Payne Inc. (HP)
Hercules Offshore (HERO) Hornbeck Offshore Services (HOS) ION Geophysical Corp. (IO)
Key Energy Services (KEG) Nabors Industries (NBR) National Oilwell Varco (NOV)
Noble Corp. (NE) Oceaneering International (OII) Parker Drilling (PKD)
Patterson-UTI Energy (PTEN) Pride International (PDE) Rowan Companies (RDC)
Schlumberger Ltd. (SLB) SEACOR Holdings, Inc. (CKH) Seahawk Drilling (HAWK)
Smith International (SII) Superior Energy Services Inc. (SPN) Tetra Technologies Inc. (TTI)
Tidewater Inc. (TDW) Transocean Ltd. (RIG) Trico Marine Services Inc. (TRMA)
Weatherford International (WFT)
Power
AES Corp. (AES) Allegheny Energy Inc. (AYE) Ameren Corp. (AEE)
Calpine Corp. (CPN) Constellation Energy (CEG) Covanta Holding Corp. (CVA)
Dominion Resources (D) Dynegy Inc. (DYN) Edison International (EIX)
Entergy Corp. (ETR) Exelon Corp. (EXC) FirstEnergy Corp. (FE)
FPL Group (FPL) Mirant Corp. (MIR) NRG Energy (NRG)
Ormat Technologies (ORA) PPL Corporation (PPL) Public Service Enterprise Gp (PEG)
RRI Energy, Inc. (RRI)

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IMPORTANT DISCLOSURES: EQUITY RESEARCH CONTINUED


US Oil & Gas: E&P (Large Cap)
Anadarko Petroleum (APC) Apache Corp. (APA) Canadian Natural Resources (CNQ)
Cenovus Energy Inc. (CVE) Devon Energy (DVN) EnCana Corp. (ECA)
EOG Resources (EOG) Newfield Exploration (NFX) Nexen Inc. (NXY)
Noble Energy (NBL) Occidental Petroleum (OXY) Pioneer Natural Resources (PXD)
Range Resources Corp. (RRC) Southwestern Energy Co. (SWN) Talisman Energy (TLM)
Ultra Petroleum Corp. (UPL) XTO Energy (XTO)

Distribution of Ratings:
Barclays Capital Inc. Equity Research has 1446 companies under coverage.
41% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 46% of
companies with this rating are investment banking clients of the Firm.
44% have been assigned a 2-Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 41% of
companies with this rating are investment banking clients of the Firm.
13% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 35% of
companies with this rating are investment banking clients of the Firm.
Barclays Capital offices involved in the production of equity research:
London
Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
New York
Barclays Capital Inc. (BCI, New York)
Tokyo
Barclays Capital Japan Limited (BCJL, Tokyo)
São Paulo
Banco Barclays S.A. (BBSA, São Paulo)
Hong Kong
Barclays Bank PLC, Hong Kong branch (BB, Hong Kong)
Toronto
Barclays Capital Canada Inc. (BCC, Toronto)

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Barclays Capital | Global Energy Outlook

This publication has been prepared by Barclays Capital; the investment banking division of Barclays Bank PLC, and/or one or more of its affiliates
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8 February 2010 74