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RSEG EAGLEFORD SHALE UPDATE Alert

AUTHORS Manuj Nikhanj, CFA, FRM Vice President 403.294.6494 [email protected] Trevor Sloan, B.A. Vice President, Finance 403.294.6498 [email protected]

19 9 8 2008

THURSDAY, SEPTEMBER 10, 2009

EAGLEFORD SHALE: MORE COMPANIES JOINING THE PARTY

FOCUS Eagleford Shale well performance and activity update METHODOLOGY · Reviewed public data on recent wells. · Examined company news releases, presentations and regulatory filings. · Talked to producers, consultants and land agents active in the Texas play. KEY POINTS BP (BP), Williams Companies (WMB), Royal Dutch Shell (RDS), Exxon Mobil (XOM), Bill Barrett (BBG), Forest Oil (FST) and Chesapeake Energy (CHK) are all window-shopping or actively leasing in the Eagleford.

Southwest

COMPANIES MENTIONED IN THIS REPORT: Public Ticker Anadarko Petroleum (NYSE: APC) Apache (NYSE: APA) BP (NYSE: BP) Bill Barrett (NYSE: BBG) Cabot Oil & Gas (NYSE: COG) Chesapeake Energy (NYSE: CHK) ConocoPhillips (NYSE: COP) EOG Resources (NYSE: EOG) El Paso (NYSE: EP) Exxon Mobil (NYSE: XOM) Forest Oil (NYSE: FST) Murphy Oil (NYSE: MUR) Petrohawk Energy (NYSE: HK) Pioneer Natural Resources (NYSE: PXD) Rosetta Resources (NASDAQ: ROSE) Royal Dutch Shell (NYSE: RDS) Southwestern Energy (NYSE: SWN) St. Mary Land (NYSE: SM) Swift Energy (NYSE: SFY) TXCO Resources (OTC: TXCOQ) Williams Companies (NYSE: WMB) XTO Energy (NYSE: XTO) Private Common Resources GeoSouthern Resources

Some notable new wells in the Eagleford's southwest region since our last update include a test by Common Resources (Southwestern Energy's (SWN) and Cabot Oil & Gas' (COG) partner in the Haynesville) that offsets Petrohawk (HK) acreage. Privately owned Common's well had a rate of 4.7 MMcf/d of gas and 474 bbl/d of condensate on a 24/64-inch choke. HK's test rates in La Salle County, continue to impress, with the latest few in the 6-13 MMcfe/d range. HK is moving from 10- to 12-stage fracture stimulations to 15-18 stages. The wells for which we have completion information show increasing proppant volumes as well. St. Mary Land & Exploration (SM) drilled and completed two follow-up wells in Webb County, which will be about 1,000 feet deeper than its first well, the Briscoe G 1H. The Briscoe had a true vertical depth (TVD) of about 7,500 feet and tested at 4.4 MMcf/d plus ~190 bbl/d of condensate on a 48/64 choke, but the rate declined to 2.2 MMcfe/d in the second month of production. The Eagleford where HK is drilling is found about 3,000 feet deeper than at Briscoe. Compared to HK, SM will likely see lower rates because of the shallower depths but also lower well costs. El Paso (EP) spudded a well in southern La Salle while Murphy Oil (MUR) has one drilling in McMullen. MUR currently holds six Eagleford permits, spread over Karnes, La Salle and McMullen counties. We've heard Anadarko Petroleum (APC) is constructing a 12-tank oil battery offsetting its recent Briscoe Cochina East Ranch #1H on the La Salle/Dimmit county line.

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Important Information: Please see last page of this report for all disclaimer/ disclosure information.

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Ross Smith Energy Group - RSEG Alert

Consistent with comments made in HK's 2Q09 conference call, the company is leasing updip in the Eagleford's oil window in Zavala County. This would be a low-cost call option on oil if HK can make it work as acreage costs should be significantly lower than in the derisked, higher productivity gas window. In addition, CHK has taken some leases in the oily area and is getting active in the trend. When analyzing exposure to the Eagleford, investors should be sure to differentiate between the oily and gassy areas as they are very different plays. On trend gassy acreage along HK's position is now going upwards of $2,000/acre. Along with expected results from Rosetta Resources (ROSE), SM and Swift Energy's (SFY) farm-out, expect more news flow soon from this part of the play.

Central

Related RSEG Research RSEG Alert: Eagleford Shale "A Bird's Eye View of the Eagleford" June 5, 2009 RSEG Alert: Eagleford Shale "Something More in the Eagleford" June 17, 2009 www.rseg.com

We have peak calendar-month production data on Pioneer Natural Resources' (PXD) Friedrichs 1H in DeWitt County, which had a botched completion. It produced only 570 Mcfe/d in its second month (June) and was down to 350 Mcfe/d in July. PXD reported an initial flow rate of 3.7 MMcfe/d. PXD is drilling its second Eagleford horizontal well, this one in Live Oak, about 57 miles southwest of the Friedrichs #1. FST and PXD are reportedly leasing in this area at $1,500/acre. GeoSouthern Resources drilled the Migura 1 horizontal in DeWitt County, which tested at 789 Mcf/d of gas and 129 bbl/d of condensate. XTO Energy (XTO) applied for a new Eagleford field designation in southeast Atascosa County, in its Fashing field. The vertical discovery well had a condensate yield of 147 bbl/ MMcf, which is even higher than the yields seen out of APC/TXCO Resources (TXCOQ) wells in southern Dimmit. EOG Resources (EOG) is drilling a second horizontal well offset the Milton Unit 1. The company continues to lease in the area and is moving updip into Wilson and Gonzales counties. EOG applied for a new field designation called the "Golden Eagle" (second and third preferences are "Osprey" and "Eagle's Claw"). ConocoPhillips (COP) drilled two wells in northern Live Oak County, which we are keeping an eye on. There is no information available at this time.

Northeast

Apache (APA) drilled its first gas-directed Eagleford horizontal in Brazos County. Results were unimpressive ­ the well's peak calendar-month rate was 260 Mcf/d, and it had cumulative production of only 19.5 MMcf after four months.

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Ross Smith Energy Group - RSEG Alert

McLennan Limestone Freestone Leon Falls Houston

Legend

SW Eagleford HZ Oil Well Performance - Calendar-Month Rates

800

Trend Continues

Oil Wells Gas Wells Permits

Trinity

Drilling Austin Chalk oil trend

APC - SAN PEDRO RANCH 1H

700

APC - BRISCOE-CATARINA WEST 1H

Bell Madison

APC - BRISCOE CATARINA RANC 1H

APA expects 150,000 boe EUR in the oil window per HZ Robertson well

ESPADA - CHAPARROSA "A" 1H

600

TXCO - GLASS RANCH A 15053

CORNERSTONE - CHITTIM 151 2H

OIL Y

500

EXPRESS - OIL REYES 1 658893

Milam

Walker Brazos

XYZ

RATE vs.TIME

TXCO - CAGE-WEST A 135H UNIT 653785

APA gas-directed HZ 4-month Cum. Prod. ­ 19.5 MMcfe

Estimated Operator Leasehold

5.5 Bcf (900 Mboe) Curve

boe/d

PR ES

300

SU RE

400

Williamson

Grimes Burleson

200

ER

APA gas window areas

Eagleford Depth 1,000 ft. 16,000 ft.

100

Travis Lee Washington PA

LO W

0

AL LO W

,E

ne

r

s ve

t,

E

P VE

A

EAGLEFORD SHALE

Source: HPDI, RSEG

Month of production

Bastrop Hays

SH

0

6

12

18

24

Comal

COP Hooks #1 3-Month cum prod. ­ 170 MMcfe Currently shut-in OLD Caldwell 1977 TDC vertical produced 150,000 boe

Fayette

AP

C

Eagleford Exposure Company COP APC HK Net Acreage 300,000 172,500 156,000 PXD SM SFY ROSE TXCO APA/Enervest/EVEP EOG MUR 310,000 210,000 82,000 28,000 312,900 400,000 ??? 100,000

We have defined an outline of the play, based on the top of the shale located at depths of 9,000-16,000 feet, across West Waller Texas. The grey shading is where the Austin Chalk, which is Austin partially sourced by the Eagleford, produces oil. In our opinion, where you find Austin Chalk oil, you are likely in the oil window for the Eagleford.

Guadalupe

Colorado

Uplift results in gas condensate production at shallow depths in the Maverick Basin EOG Leasing?

Gonzales Lavaca

EOG Milton #1 Test ­ 112 bbl/d 131 Mcf/d 9,200 bbl produced Bexar before test

Moving south, the shale dips very steeply and moves into the gas window. In the Maverick Basin, there is a localized tectonic uplift that puts the gas window at shallower depths. Highlighted on the map are operator well results as well as anecdotal information we have heard.

Y OIL

Wilson

EOG

The Eagleford is a highly calcareous shale with up to 60% Wharton carbonate content. Its high carbonate and low clay composition should make the Eagleford easy to fracture, but this mineralogy makes it unique among established shale plays.

Maverick Jackson

8,000

C

HIT

TIM

12 15

H

XT

A EC

CH

O

A AP

O RR

SA

"A

"1

H

APC / TX

M /

Karnes Victoria

COP

7,000

Common Resources Test 4.7 MMcf/d & 474 bbl/d

Dewitt

G EO

RE SU

WLL

SW Eagleford HZ Gas Well Performance - Calendar-Month Rates

CO /S

PXD Friedrichs #1 3.7 MMcfe/d test 570 Mcfe/d peak CM

Zavala

S PRE ER OW WL O Atascosa Frio ALL SH

Peak-calendar rate 4.8 MMcfe/d

U

NIT

SANCHEZ

PX

Y

HIGH PRESSURE OILY

HK

DO RA M

H H2 H1 NC NC RA A O OR DR DR PE E N NP SA SA DO NN

BR

IS

CO

H H2 1 H N C CH RA N A RA RIN A TA RIN E W E CA ATA A C IN CO E AR R IS CO B R IS AT B E-C

Dimmit

MUR HK

McMullen

Live Oak

3,000

Mcf/d

EOG Tully C Garner peak-calendar rate 2.3 MMcfe/d

H H1 L1 EL 1 TS

SF

GL H -H

1 ST

AW

Y

S AS

TXCO

H

D

CA

GE

-W

T ES

A

5H 13

COP

Goliad

6,000

RA KV

NC 1 ILL H

H

A1

H 24

RE

YE

S1

R MU HK

PXD

COP 2 EF wells down

5,000

RATE vs. TIME

P

XD

XTO new EF field designation Bee

APC - SAN PEDRO RANCH 2 APC - BRISCOE CATARINA RANCH 2H HK - DORA MARTIN 1716 1H HK - HENDERSON CENIZO 874 1-H HK - BROWN-TRUSTS 1H -HAWKVILL HK - DORA MARTIN 1H HK - STS 1 HK - DONNELL 1 HK- STS PALMERT 944 1H PXD - FRIEDRICHS 1 SM - BRISCOE "G" 1H 5.5 Bcf (900 Mboe) Curve 4,000 HK Average

SF

RO

2nd PXD hz

SFY

D

G E"

H "1

S 1 1H RU 16 17 1H 4 1-H N-T TIN 1H 87 OW A R TIN IZO BR STS 1 A R EN M NC RA SO R DO HK Salle ELa ND HE COMMON

SE

ROSE EP

PX

BR

CO SM IS

2,000

SFY

1,000

RO

MUR Initial hz

SM

SE

0 0

Source: HPDI, RSEG

SM 5.7 MMcfe/d 7-day test

Webb

P

EP Initial HZ

HK disclosed average IPs ­ 8.9 MMcfe/d

6

12 Month of Production

RSEG PROSPECTIVE FAIRWAY

ROSE hz CO rumoured rate 4.8 MMcf/d, still cleaning up

Leasing Activity between $250 - $2,000/acre

18

24

Miles

SM followups

HIGH PRESSURE GASSY

0 15 30 60

EAGLEFORD SHALE ACTIVITY MAP SEPTEMBER 2009

Trevor Sloan Vice President, Finance P: 403.294.6498 [email protected] David J. Howard, P Eng. . Senior Analyst, Engineering P: 403-213-6551 [email protected] Kerry Gregory Manager, Technical Research P: 403.294.6890 [email protected]

Source: HPDI, RSEG

Contacts:

Manuj Nikhanj, CFA, FRM Vice President P: 403.294.6494 [email protected]

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Ross Smith Energy Group - RSEG Alert

About Ross Smith Energy Group Ross Smith Energy Group is a collaborative effort of over 30 in-house professionals and over 150 of the top specialists in the oil and gas industry worldwide. This makes Ross Smith Energy Group the leading energy (exploration and production company) research firm in North America. Assignments are provided to experts who provide a technical, unbiased perspective with the sole objective of helping professional investors make informed decisions. Clients include pension plans, mutual funds, private portfolio managers, hedge funds, arb funds, energy companies, governments, and individuals. Our goal is to provide confidence to clients by employing a rigorous, grass roots research procedure. We call this unique approach The Consensus Challenge ProcessTM. The confirmation of an existing view or identification of an area where the opinion of the expert differs from consensus has proved to be invaluable to our clients. © 2009 Ross Smith Energy Group Ltd. (RSEG). The material presented in this report is provided for information purposes only and is not to be used or considered as a recommendation to buy, hold or sell any securities or other financial instruments. Information contained herein has been compiled by RSEG and prepared from various public and industry sources that we believe to be reliable, but no representation or warranty, expressed or implied is made by RSEG, its affiliates or any other person as to the accuracy or completeness of the information. Such information is provided with the expectation that it will be read as part of a mosaic of analysis and should not be relied upon on a stand-alone basis. Past performance should not be taken as an indication or guarantee of future performance, and we make no representation or warranty regarding future performance. The opinions expressed in this report reflect the judgment of RSEG as of the date of this report and are subject to change without notice. This report is not an offer to sell or a solicitation of an offer to buy any securities. The offer and sale of securities are regulated generally in various jurisdictions, particularly the manner in which securities may be offered and sold to residents of a particular country or jurisdiction. Securities discussed in this report may not be eligible for sale in some jurisdictions. To the full extent provided by law, neither RSEG nor any of its affiliates, nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No RSEG directors, officers or employees are on the Board of Directors of a covered company and no one at a covered company is on the Board of Directors of RSEG. RSEG does not invest in any securities. One or more of its directors, officers, employees or consultants of RSEG may at times be invested in the securities of a company that is the subject of a report. Manuj Nikhanj has a financial interest in the subject company (CHK, HK, SWN) in the form of shares. The views expressed in this report accurately reflect the research analysts personal views about the subject securities. RSEG analysts are compensated from overall firm revenue only and are not compensated to express any view about an issuer or from proceeds derived from any particular transaction between RSEG or any of its affiliates or issuer. Within the last twelve months neither RSEG nor any of its affiliates received compensation from the subject company for any products or services. From time to time RSEG may publish a report on petroleum and natural gas shale formations, such as the Marcellus Shale located in the Appalachian basin. RSEG or its affiliates, their respective directors, officers, employees may directly or indirectly have an economic interest in these locations and does have economic interest in the Marcellus Shale. About Instinet © 2009, Instinet Incorporated and its subsidiaries. All rights reserved. INSTINET is a registered trademark in the United States, and other countries throughout the world. Instinet, LLC is a member of SIPC. This report is provided for informational purposes only. It does not take into account the particular investment objectives, financial situation, or needs of any individual or entity. Under no circumstances is it to be used or considered as an offer to purchase or sell any security, or as a solicitation or recommendation for any such purchase or sale. 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