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Becca Followill Houston February 11, 2009

Research Update. What is Changing in the Midstream Industry?. Becca Followill Houston February 11, 2009. *Disclaimers on page 37 of this document. Energy Snapshot. Where are we? (February 6, 2009) Current 2008 (% ) YTD ’09 (%) Majors (XOI) 975 - 37% 0%

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Becca Followill Houston February 11, 2009

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  1. Research Update What is Changing in the Midstream Industry? Becca Followill Houston February 11, 2009 *Disclaimers on page 37 of this document.

  2. Energy Snapshot • Where are we? • (February 6, 2009) • Current2008 (%) YTD ’09 (%) • Majors (XOI) 975-37% 0% • E&P (S&P 1500 Oil & Gas) 386 -38% +5% • Oil Service (OSX) 138 -60% +14% • MLPs (AMZ) 202 -41% +15% • S&P 500 869 -38% -4% • Crude Oil $40/bbl -54% -10% • Natural Gas $4.77/mcf -25% -15% • Gulf Coast Frac Spreads $1.79/mmbtu-98% 100+% • Opinion: • Oil price incredibly volatile but ultimately tied to global demand • Natural gas: supply problem and demand problem • Natural gas catalyst is on the way…rig count falling • Risks: • Oil – U.S./international demand weaken further • Gas – E&P companies don’t drop enough rigs • Gas – Demand stays weak (economy risk) 2 2 2 2

  3. Energy Snapshot: The Bad News

  4. Crude Oil… Off 70+% from July Highs 4 4 4 4

  5. U.S. Inventory Levels… Full!!! 5 5 5 5

  6. Natural Gas… Off 60+% from July Highs 6 6 6 6

  7. U.S. Gas Production… Still on the Rise Source: EIA/DOE

  8. Gas Storage… Filling!!! 8 8 8 8

  9. Energy Snapshot: The Good News

  10. Frac Spreads… Coming off Recent Lows 10 10 10 10

  11. Petrochemical Demand… Rebounding… A Little 11 11 11 11

  12. Baltic Dry Index… Finding a Bottom 12 12 12 12

  13. Rig Count… Market is Correcting 13 13 13 13

  14. How Does Supply Correct?

  15. Onshore Supply Growth ~42% (400) rigs activity decline in 2001 impacted supply growth in 2002: 2000 42.8 bcf/day 2001 43.9 bcf/day 2002 43.6 bcf/day 6% onshore supply growth with ~flat rig count from early 2006 – early 2008. Recent decline is due to Gustav/Ike related impacts. Onshore supply growing 10% y/y in 2008. A B C B C A Source: Baker Hughes, EIA, TPH Estimates 15

  16. Shale Plays Improving Mix 16 16 16 16

  17. Implications for Rig Count Aug ’08 1,543 rigs Current 1,046 rigs 17 17 17

  18. Rig Count Cuts on Way in Marginal U.S. Plays 18 18 18 18

  19. Rig Count Changes by Well Path Source: RigData, Tudor Pickering Holt 19 19 19

  20. Demand Issues

  21. Oil Demand is THE Cycle Killer 21 21 21 21

  22. Industrial Demand Components • Uncertain economic outlook creates uncertainty when forecasting natural gas demand as industrial sector accounts for ~30% of total US gas consumed. • Weak automotive, chemical and steel outlook will likely result in lower industrial demand in 2009. • US industrial sector accounts for 20% of total electricity output. Weakness in the industrial sector will have spill-over impact into US power sector which will have an even greater natural gas demand impact. 22

  23. Natural Gas – Power Generation US GDP and Total Power Generation Load US natural gas demand driven by electricity sector expansion and growth 23 23 23 23 23 23

  24. Weak Electricity Demand 24 24

  25. Midstream Issues • New administration – new rules, new agenda 25 25

  26. Obama Land • Economy and jobs creation center stage • It’s a green, green world • Tougher labor and environmental regulations • Coal/Oil Out, Renewables In, Gas a necessary fossil fuel • CO2 legislation – 2nd half of term issue 26 26

  27. Midstream Issues • New administration – new rules, new agenda • Heavily constrained capital markets = higher cost of capital 27 27

  28. Challenging Capital Markets 28 28 28

  29. Midstream Issues • New administration – new rules, new agenda • Heavily constrained capital markets = higher cost of capital • Working off the excess 29 29

  30. Gas Processing Capacity • We see only modest gas processing capacity additions 2008-2010, increasing L-48 capacity by 7%. • However, this is in a market where ethane and other NGL demand is weak, so incremental capacity matters. Source: Oil and Gas Journal 2008, Company Press Releases, Tudor, Pickering, Holt

  31. Changing Dynamics: Ethylene & Propylene • Currently, the U.S. has the most ethylene and propylene processing capacity in the world, at 22% and 27%, respectively. China is second, with 8% of both ethylene and propylene capacity. • Prior to the financial meltdown, there was mounting concern that a massive amount of planned new international ethylene and propylene capacity would flood the market, eventually resulting in the U.S. becoming a net importer, thus backing off demand for domestic NGLs. • The vast majority of the adds are in the Middle East, where they’ll use cheap gas to make NGLs to feed the new petrochemical plants. • Given the economic slowdown, we are now assuming that only the plants currently under construction will be built. In total, these add 15% to existing capacity, or 3.5%/yr growth – not helpful in a weak economy, but not the onerous 39% addition if everything was built. Source: ICIS Plants & Projects Database, Company Press Releases, Tudor, Pickering, Holt

  32. 10-17-08 Propylene prices hit 3-yr low 10-18-08 Naphtha prices in Asia drop by 50% since early August 10-24-08 India’s largest petrochem major to have halved PP run rates 10-27-08 Weak demand compels Formosa to extend crack shutdown indefinitely 11-3-08 Equistar Idles Olefin Plant in Texas 11-11-08 Ineos plans shutdown of 2 polypropylene units in Texas 11-26-08 UK’s BPI to Close Northeast England Facility 11-28-08 German Petrochem Sector to Face Difficult times Ahead 12-6-08 DuPont to Eliminate 2,500 Employees in Western Europe, US 12-9-08 Dow to Cut 11% of work force, Shutter 20 plants 12-11-08 Dow Set to Re-evaluate Scope of Proposed Oman Project 12-12-08 Japanese Ethylene production falls to 12-yr lows 12-25-08 China's largest ethylene producer expects to suffer major loss in 2008 12-29-08 Kuwait calls off Dow Chemical’s US $17.4B JV 12-31-08 Work on Qatar-based multi-billion petrochem complex stalled 1-5-09 LyondellBasell’s Chocolate Bayou C2-C3 facility shuttered indefinitely 1-6-09 Ethylene and propylene prices strengthen in Asia 1-6-09 Taiwan's Formosa puts 700,000 tpa cracker off stream due to demand 1-8-09 LyondellBasell’s US operations file Chapter 11 1-14-09 Sunoco to shutter polypropylene plant in Bayport 1-16-09 Equistar plans to restart La Porte olefin unit 1-19-09 Asian benzene plants hike run rates on demand recovery 1-20-09 BASF cautions of potential cuts in production and jobs 1-20-09 Rohm & Haas to shutter plants and cut 900 jobs 1-21-09 Sunoco to permanently down the shutters at PP plant in Texas 1-24-09 Huntsman to lay off 9% of total workforce; shut UK-based TiO2 plant 1-29-09 LyondellBasell announces €100/ton increase in PE prices in Europe 1-29-09 Equistar Chemicals plans restart of La Porte olefins unit by end of month 1-31-09 INEOS NOVA announces up polystyrene prices in Europe Midstream – Diary of a Cycle 32 32

  33. Midstream Issues • New administration – new rules, new agenda • Heavily constrained capital markets = higher cost of capital • Working off the excess • Declining cost structure 33 33

  34. Declining Cost Structure 34 34 34

  35. Midstream Issues • New administration – new rules, new agenda • Heavily constrained capital markets = higher cost of capital • Working off the excess • Declining cost structure • Changing ownership landscape 35 35

  36. Changing Ownership Landscape • MLPs – traditional midstream players • But troubled: • 13% average MLP yield • 18% average Midstream MLP yield • 5 MLPs announced distribution cuts this quarter • 14 Midstream/Pipeline MLPs’ distributions will be flat 36 36

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  38. Tudor, Pickering, Holt & Co., LLC is an integrated energy investment and merchant banking boutique, providing high quality advice and services to institutional and corporate clients. Through the company’s broker-dealer, Tudor, Pickering, Holt & Co. Securities, Inc., the company offers securities and investment banking services to the energy community. The firm, headquartered in Houston, Texas, was formed through the 2007 combination of Tudor Capital and Pickering Energy Partners, Inc. and today has approximately 70 employees. Pickering Energy Partners was founded in 2004 and has quickly grown to be one of the most highly regarded equity research, sales and trading firms covering the upstream, midstream and oilfield service sectors. This expertise was complemented by the addition of Tudor´s investment banking team, which provides focused advisory and financing services to its clients. Contact Us Houston (Research, Sales and Trading): 713-333-2960 Houston (Investment Banking): 713-333-7100 Denver (Sales): 303-300-1902 Denver (Investment Banking): 303-300-1905 www.TudorPickering.com 38 38

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