Changewave Research: Natural Gas & Oil

ChangeWave Research: Natural Gas & Oil

ChangeWave Research Report:

Natural Gas & Oil Survey

Industry Still Looks Strong Even as Resource Shortages Escalate

Overview

During the week of May 2-8, 2006 we surveyed ChangeWave Alliance members who work in or are knowledgeable about the Natural Gas and Oil industry. The focus was on current industry trends, and a total of 243 members participated – including 126 who work directly in the industry.

Bottom Line: With larger capital budgets and growing investment in exploration and production, the Natural Gas and Oil industry looks strong going forward. Nonetheless, escalating resource shortages remain a serious problem.

Industry respondents continue to report shortages in Drilling Equipment, Drilling Personnel, Professional Personnel and Seismic Services – and the shortages appear to be getting worse. Moreover, the lack of resource availability is hurting industry production and exploration to a greater extent than we have seen previously.

At the Company Level: An overwhelming 86% of respondents say their capital budget will increase over the next year compared to the previous 12 months – a 9-point jump since August 2005.

On another positive note, production investment is up – with 82% of respondents saying their company will invest more in onshore and offshore production over the next 12 months. While impressive, this investment increase is tempered by growing resource shortages – three-in-four respondents (76%) report the lack of availability of resources is causing a decrease in industry production. And 28% of respondents from companies engaged in production say they won’t be able to spend a portion of their approved capital budget because of resource shortages – 4-pts more than in August 2005.

In terms of exploration, we find similar trends – with better than three-in-four saying their company will invest more in onshore and offshore exploration over the next 12 months – up from August 2005. However, at the industry level, 71% say resource shortages are causing a decrease in exploration –10-pts more than previously. And another 19% report the cost of drilling services has caused a decrease in their company’s exploration drilling.

Natural Gas and Oil Prices: Not surprisingly, 2006 and 2007 price assumptions for natural gas and oil are notably higher compared to our August 2005 survey.

Currently, 29% say their company’s 2006 natural gas price assumption is more than $7.00 – a 16-point increase. Regarding oil, one-third (33%) say their company’s 2006 price assumption is greater than $55 – a huge increase from previously.

Similar trends are seen in the 2007 price assumptions for both natural gas and oil.

Other Key Findings:

· Outstanding Debt in 2006. While 38% say their company will reduce its outstanding debt in 2006, this is 13-pts less than in August 2005. On the other hand, 15% say their company will increase its debt in 2006, up 2-pts from previously.

· Hedging Strategy. The consensus estimate among respondents whose companies engage in production is that 15.5% of their projected budget for the next 12 months will be hedged – a 4-point increase from our August 2005 survey consensus estimate.

· Next 12 Months vs. Last 12 Months. Seven percent (7%) say their hedging strategy over the next 12 months will be more than the previous 12 months, and 3% say less. This compares with 14% more and 4% less in our August 2005 survey.

· Rise in Day Rates for Deepwater Drilling. More than three-in-five respondents (61%) think day rates for deepwater drilling services will increase over the next 12 months, with 31% saying rates will Increase Significantly.

Summary of Key Findings

The ChangeWave Alliance is a group of 7,500 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

www.ChangeWave.com

Table of Contents

Summary of Key Findings 2

The Findings 4

(A) Overall Industry Trends 4

(B) Company Trends 7

(D) Other Questions 15

ChangeWave Research Methodology 18

About ChangeWave Research 19

I. The Findings

Introduction

Total Respondents (n = 243)

Respondents Working Directly in the Natural Gas & Oil Industry (n=126)

(A) Overall Industry Trends

(1) Question Asked: Looking at your industry over the next 12 months, do you think companies will be drilling Deeper Wells, About the Same Depth, or Shallower Wells than they did over the previous 12 months? (n=126)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05 / Previous
Survey
Nov ‘04
Significantly Deeper Wells / 14% / 14% / 10%
Moderately Deeper Wells / 48% / 54% / 40%
About the Same Depth / 27% / 21% / 27%
Shallower Wells / 1% / 0% / 0%
Don't Know / 7% / 2% / 17%
Not Applicable/No Answer / 2% / 9% / 7%

*Note: In the previous Aug ‘05 survey, the question asked “Across your industry in 2006, do you think companies will be drilling Deeper Wells than they did in 2005, About the Same Depth, or Shallower Wells than in 2005?”

Well Drilling. While 62% of industry respondents think companies will be drilling deeper wells over the next 12 months – we note this is 6-pts less than in our previous survey.

(2A) Question Asked: Which of the following gas & oil industry resources - if any - are currently exhibiting signs of a buildup (i.e. surplus)? (Check All That Apply) (n=126)

Resource Buildup / Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
Drilling Services / 13% / 14%
Drilling Equipment / 13% / 19%
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 10% / 16%
Drilling Personnel / 7% / 14%
Seismic Services / 6% / 11%
Don't Know / 44% / 33%
Other / 14% / 25%

(2B) Question Asked: And which of the following gas & oil industry resources - if any - are currently exhibiting signs of a shortage (i.e. in short supply)? (Check All That Apply) (n=126)

Resource Shortage / Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
Drilling Personnel / 66% / 56%
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 63% / 54%
Drilling Equipment / 61% / 47%
Drilling Services / 57% / 54%
Seismic Services / 25% / 16%
Don't Know / 11% / 18%
Other / 6% / 9%

Net Difference Score Natural Gas & Oil Industry Resources - Buildup vs. Shortage (Current Survey May 2006)

ResourceBuildup / Resource Shortage / Net
Difference
Score
Drilling Personnel / 7% / 66% / -59
Professional Personnel (e.g., Geologists, Geophysicists, etc.) / 10% / 63% / -53
Drilling Equipment / 13% / 61% / -48
Drilling Services / 13% / 57% / -44
Seismic Services / 6% / 25% / -19

Change in Net Difference Score – Buildup vs. Shortage of Industry Resources: Current Survey (May 2006) vs. Previous Survey (August 2005)

Resource Buildup vs.
Resource Shortage / Net Difference Score
Current
Survey
May ‘06 / Net Difference Score Previous
Survey
Aug ‘05 / Change in Net
Difference
Score
Drilling Equipment / -48 / -28 / -20
Drilling Personnel / -59 / -42 / -17
Professional Personnel (e.g., Geologists,
Geophysicists, etc.) / -53 / -38 / -15
Seismic Services / -19 / -5 / -14
Drilling Services / -44 / -40 / -4

Industry Resource Shortages. The survey results show escalating shortages in Drilling Equipment (Change in Net Difference Score = -20), Drilling Personnel (-17), Professional Personnel (e.g., Geologists, Geophysicists) (-15) and Seismic Services (-14).

We note that Seismic Services experienced the biggest percentage increase since the previous survey in terms of respondents reporting a shortage.

(3) Question Asked: Which of the following best describes what you think about day rates for deepwater drilling services over the next 12 months? (n=126)

Day Rates for Deepwater Drilling Services will Increase Significantly Over the Next 12 Months / 31%
Day Rates for Deepwater Drilling Services will Increase Slightly Over the Next 12 Months / 30%
Day Rates for Deepwater Drilling Services will Remain the Same Over the Next 12 Months / 3%
Day Rates for Deepwater Drilling Services will Decrease Slightly Over the Next 12 Months / 1%
Day Rates for Deepwater Drilling Services will Decrease Significantly Over the Next 12 Months / 0%
Don't Know / 27%
Not Applicable / 8%

Rise in Day Rates for Deepwater Drilling. More than three-in-five respondents (61%) think day rates for deepwater drilling services will increase over the next 12 months, with 31% saying rates will Increase Significantly.

(4A) Question Asked: Is a lack of availability of gas & oil industry resources (such as drilling services, personnel, etc.) affecting overall industry production? (n=126)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
Lack of Availability of Resources is Causing a Significant Decrease in Industry Production / 13% / 9%
Lack of Availability of Resources is Causing a Slight Decrease in Industry Production / 63% / 54%
Lack of Availability of Resources is Not Causing a Decrease in Industry Production / 13% / 23%
Don't Know / 9% / 12%
Not Applicable / 2% / 2%

(4B) Question Asked: What about exploration? Is a lack of availability of gas & oil industry resources (such as drilling services, personnel, etc.) affecting overall industry exploration? (n=126)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
Lack of Availability of Resources is Causing a Significant Decrease in Industry Exploration / 18% / 14%
Lack of Availability of Resources is Causing a Slight Decrease in Industry Exploration / 53% / 47%
Lack of Availability of Resources is Not Causing a Decrease in Industry Exploration / 12% / 18%
Don't Know / 14% / 21%
Not Applicable / 2% / 0%

Lack of Resources Hurting Production & Exploration. Three-in-four respondents (76%) report the lack of availability of resources is causing a decrease in overall industry production, 13-pts more than in August 2005.

Another 71% say resources shortages are causing a decrease in exploration, 10-pts more than previously.

(B) Company Trends

(5) Question Asked: With regard to your own company's overall Capital Budget – do you think you'll see an increase in your overall Capital Budget, a decrease, or will your overall Capital Budget remain the same over the next 12 months vs. the previous 12 months?* (n=126)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05 / Previous
Survey
Nov ‘04
Increase in Capital Budget Over Next 12 Months / 86% / 77% / 73%
Decrease in Capital Budget Over Next 12 Months / 2% / 2% / 0%
Remain the Same / 10% / 18% / 13%
Don't Know / 2% / 2% / 7%

*Note: In the previous survey, the question asked “With regard to your own company’s overall Capital Budget – do you think you’ll see an increase in your overall Capital Budget, a decrease, or will your overall Capital Budget remain the same for 2006 vs. 2005?”

Jump in Capital Budgets. Looking at their own company, 86% of respondents working in the natural gas and oil industry say their overall capital budget will increase over the next year compared to the previous 12 months. This is a 9-point jump since August 2005.

(5A) Question Asked: If your Capital Budget is increasing, where is the increase primarily being allocated? Is it going more to developmental drilling (i.e., lower risk) or exploration drilling (i.e., higher risk)? (n=94)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
Developmental Drilling (i.e. lower risk) / 32% / 32%
Exploration Drilling (i.e. higher risk) / 23% / 19%
Both / 24% / 35%
Other / 20% / 14%

Drilling Expenditures. Among respondents whose companies are increasing their capital budgets, 32% say the increase is being allocated to Developmental Drilling, while 23% say it is going toward Exploration Drilling and 24% towards both.

A sample of Alliance member responses can be found in Appendix A.

(6) Question Asked: What percentage of your approved capital budget for the next 12 months will you NOT be able to spend due to service, personnel and/or equipment shortages? (n=95)

Current
Survey
May ‘06 / Previous
Survey
Aug ‘05
We Will be Spending All our Approved Capital Budget for the next 12 months / 42% / 52%
1-5% Will Not be Spent / 12% / 9%
6-10% Will Not be Spent / 8% / 11%
11-20% Will Not be Spent / 5% / 2%
20-30% Will Not be Spent / 2% / 2%
Greater than 30% Will Not be Spent / 1% / 0%
Don't Know / 24% / 16%
Not Applicable/No Answer / 5% / 7%

Resource Shortages Cause Rise in Unspent Capital Budgets. Twenty-eight percent of respondents (28%) from companies engaged in production say they won’t be able to spend a portion of their approved capital budget because of resource shortages – 4-pts more than in August 2005.