Rating Methodology October 2005 Contact

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Global Independent Exploration and Production (E&P) Industry

Summary The purpose of this methodology is to provide investors and other interested parties with a clear understanding of how Moody’s assigns ratings to issuers and their obligations in the global independent exploration and production (E&P) sector. For the purpose of this methodology, we define E&P companies as those engaged in exploring for, acquiring, developing and producing oil and natural gas assets. Our goal is to help the market understand the qualitative and quantitative factors we consider most important for this sector and how they map to rating outcomes. Readers should be able to use this report to gauge a company’s ratings within two notches. This methodology is not an exhaustive treatment of all the factors reflected in Moody’s ratings of the E&P sector, but should enable the reader to understand the key considerations, operating metrics and financial ratios used by Moody’s in determining ratings in this sector. Moody’s analysis of E&P companies focuses on four primary rating factors: 1. Reserves and Production Characteristics 2. Re-investment Risk 3. Operating and Capital Efficiency 4. Leverage and Cash Flow Coverage Moody’s also reviews significant non-E&P operations as these provide additional business risk, cash flow diversification, and possible support for a company’s leverage. We also review other factors that are common across all industries, such as liquidity, corporate governance, political risk, event risk and public vs. private ownership1. We believe that this methodology will enable the reader to gain insight into Moody’s rating criteria. However, our rating process involves a degree of judgment that from time to time will cause a rating outcome to fall outside the expected range of outcomes based on strict application of the factors presented herein. In these situations, we explain the differences and rationale in our credit opinions and company-specific analyses.

1.

Please refer to Moody’s Special Comment “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005).

Industry Overview ABOUT THE RATED UNIVERSE Moody’s rates 53 publicly traded independent E&P companies with total rated debt of approximately $70 billion as well as several private companies. The companies discussed in this report are shown in the following table.

Independent Exploration And Production Industry - Rated Companies Company

Senior Unsecured or Corporate Family Rating

Outlook

Domicile

Production (Mboe/d)

A2 3 (A2)* 4 (A2)* A3 A3 A3 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa3 Baa3 Ba1 Ba2 Ba2 5 (Ba2)* Ba2 Ba2 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1 B1 B1 B2 B2 B2 B2 B3 B3 B3 Caa1 Caa1 Caa1

Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Negative Stable RUR Down Stable Stable Stable Stable Stable Stable Stable Stable RUR Up Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Stable Developing Stable Positive Negative Stable Negative Stable Stable Stable Stable Negative Developing Stable Stable

UK China Thailand US US US US Canada US US Canada Australia US Canada Canada Canada US Canada US US US US US Argentina US US US US US US US US US US US US Canada Canada US US Indonesia US US US US Canada US US US Canada US US US

458 382 154 470 480 530 425 456 235 129 367 154 640 766 264 180 165 323 183 217 359 216 123 170 66 106 27 75 78 30 27 45 54 361 29 41 34 21 18 11 90 38 48 26 34 18 16 7 68 17 8 22 8

BG Energy CNOOC PTT Exploration & Production Apache Burlington Occidental Anadarko Canadian Natural EOG Murphy Talisman Woodside Devon EnCana Husky Nexen Noble PetroCanada Pioneer XTO Energy Amerada Hess Chesapeake Newfield Petrobras Energia Plains E&P Pogo Southwestern Vintage Cimarex Denbury Encore Acquisition Forest Houston Exploration Kerr-McGee Swift Whiting Baytex Compton Comstock EXCO Resources PT Medco Energi Range Stone Clayton Williams Energy Partners HET KCS Energy Delta El Paso Production Paramount Belden & Blake Petrohawk PetroQuest Energy *

2

Numerical rating reflects baseline credit assessment per Moody's Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating or Foreign Currency rating in cases where there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005)

Moody’s Rating Methodology

Most of the rated companies are in North America and the majority of these are U.S. based. This reflects the private (i.e., non-government) ownership of oil and natural gas reserves in North America and relatively low barriers to entry. Outside of North America, almost all of the world’s oil and gas resources are owned or controlled by stateowned national oil companies. This geographic concentration in North America also reflects consolidation in the E&P industry, particularly in Europe, over the past quarter century. Overall, we rate ten E&P companies in Canada, four in Asia, one in Latin America, one in Europe and the remaining 37 are in the U.S. The weighted average rating, by amount of rated debt, is Baa3, while the average rating by number of issuers is Ba2. There are no Moody’s-rated E&P companies in the Aa or Aaa category. Ratings tend to be in the single A category and lower, with concentrations in Baa and below. The following chart shows the distribution of ratings among these 53 E&P companies.

Global E&P Ratings 10

Number of issuers

8 6 4 2 0 A1

A2

A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3

B1

B2

B3 Caa1

INDUSTRY CHARACTERISTICS The global oil and natural gas industry explores for underground hydrocarbon reservoirs, develops these resources by drilling wells and produces oil and gas through these wells. • Produced natural gas is gathered and processed, separating the gas (methane) from natural gas liquids (NGL’s – ethane, propane, butane and natural gasolines); liquids are fractionated into their component parts; and the gas and the fractionated liquids are stored, transported and marketed. • Oil is transported to refineries, where it is converted to products that include gasoline, diesel, heating oil and jet fuel. These products are marketed to wholesale and retail customers. Exploration and production are considered the “upstream” portion of the industry, and companies that conduct these activities are the focus of this methodology.2 We note that there are essentially two strategies of reserves replacement, which are important in understanding and assessing the risks an E&P company is taking. The first strategy, commonly referred to as organic or drill bit reserves replacement, involves finding new sources of oil and gas. This includes some combination of exploration, which is typically higher risk, exploitation of previously discovered reservoirs, which is lower risk, and improved recovery, which includes supplemental recovery methods such as waterflooding, with a risk level in between exploration and exploitation. The second strategy of reserves replacement, commonly called acquire and exploit, involves buying properties from another company or buying an entire company. Acquiring reserves includes a wide range of risks depending on the maturity of the acquired assets along the spectrum of a reservoir’s life cycle.

2.

The remaining activities are part of the “midstream” sector (gathering, processing, fractionating, transportation and storage) and the “downstream” sector (refining and marketing). Refining and marketing companies are discussed in a companion methodology, Global Refining and Marketing Industry, October 2005. Companies that conduct all of these activities (vertically integrated) are discussed in a third methodology, Global Integrated Oi & Gas Industry, October 2005.

Moody’s Rating Methodology

3

Finite Assets with Commodity Price Risk Our credit assessment of companies in the E&P industry is shaped by the fact that these companies’ assets are finite depleting resources subject to unpredictable commodity prices. As when rating other companies, Moody’s evaluates historical operating and financial performance, cash flow, debt service coverage and leverage. However, while financial results and ratios are important to credit ratings, an E&P company’s future prospects are not entirely or directly captured in its reported financial statements. Oil and natural gas assets are finite resources that deplete and decline over time. To be successful and remain in business, an E&P company must reinvest substantial capital each year to find new reserves and replace production. Furthermore, the oil and gas industry is a commodity business, where producers are price takers who cannot control commodity prices. To better assess a company’s future performance we evaluate a variety of oil and natural gas reserves related measures. Reserves data are provided in supplemental disclosures and petroleum engineering reports. Companies that file with the U.S. Securities and Exchange Commission (SEC) comply with its guidelines for reporting reserves. FAS 69 requires annual disclosure of certain information regarding total proved and proved developed reserves as well as the costs incurred in reserves replacement activities. We also focus on cost structure and operating efficiency, which are factors that companies can better control. The combination of depleting assets, technical challenges and unpredictable commodity prices require that E&P companies maintain appropriate capital structures and avoid high financial leverage.

CURRENT INDUSTRY TRENDS AND RISK FACTORS High Oil and Natural Gas Prices Currently, oil and natural gas prices are at their highest levels since the oil shocks of the 1970’s. Our expectation is that they will remain at high levels for the foreseeable future based on continued growth in demand, particularly from Asia, combined with a relatively small cushion of spare production capacity within OPEC. Prices are further supported by relatively tight refining capacity around the world, particularly for the conversion of heavier crudes. (Please see sidebar for a discussion of how we factor prices into our methodology). The sharp rise in oil and gas prices has led to a windfall increase in earnings and cash flow for independent E&P companies. As a result, most companies are showing robust credit metrics, with reduced financial leverage and a buildup of cash on their balance sheets. The excess cash flow requires management to make decisions as how to best deal with the surplus. Many are returning cash to their shareholders through increased dividends and more aggressive stock repurchase programs.

Rising Cost Structures The fundamental driver behind the current record oil and gas prices is the increasing difficulty and expense associated with replacing oil and gas reserves around the globe. As a result, finding and development (F&D) costs are rising, and with them, the value of oil and gas properties. The prices paid for property acquisitions have risen sharply in the past several years, with typical transactions now exceeding $10 per barrel of oil equivalent (boe) reserve added, up from $6-7 per boe in 2000. At the same time, operating costs are rising, driven by higher energy related expenses and oilfield services costs. The net result: despite higher oil and gas prices, the projected return on investment – as measured by the leveraged full-cycle ratio – has not increased meaningfully for the sector as a whole. Furthermore, rising cost structures create the risk that an unforeseen reversal of high energy prices will result in reduced financial flexibility for some companies, particularly those that have relied on debt to fund expansion.

Political Risk Tight supply/demand conditions result not only in record high oil and gas prices but they also tend to increase global political risk for the independent producers operating within those countries. When producing countries, many in the developing world, perceive greater value to their properties they may push for an increased share of the windfall. In some cases, governments may curtail access to future properties or deny access altogether. Countries with large and growing energy needs (e.g., China and India) may undertake strategic decisions to acquire properties and thus become formidable competitors. In the extreme case that a physical shortage develops, the specter of nationalism and expropriation could impact the credit dynamics of the industry.

4

Moody’s Rating Methodology

Event Risk Event risk is the risk that an unforeseen or unquantifiable event will occur that will result in a rating change beyond the scope that would be reasonably expected. Event risk remains high for the oil and gas industry. The driver of today’s high oil and natural gas prices – specifically the relative lack of low-cost re-investment opportunities – creates the question of what to do with the excess cash being generated. We expect stock repurchases to be a core activity for most companies in the near term, but companies that cannot grow production at a level to satisfy the stock market will come under pressure to undertake large stock repurchases or recapitalizations that affect their credit profiles negatively. Some independent E&P companies will be tempted to engage in or increase their overseas expansions, where they will take on political risk. Moreover, if oil and gas prices retreat to more moderate levels, we could see a wave of consolidation as companies feel pressure to maintain their returns.

KEY RATING ISSUES INTO THE NEXT DECADE Sustainability of High Oil and Gas Prices The oil and gas industry is currently experiencing record commodity prices, which are leading to strong, often record, earnings and cash flow. Oil doubled in price between the end of 2003 and August 2005, while natural gas, which began rising before oil, increased from the mid-single digits (U.S.$ per million Btu) to the high single digits. More significantly, the entire forward price curve (as opposed simply to near term prices) has moved up, with oil and gas prices remaining high through the end of the decade. Historically, oil and gas prices have been cyclical, rising and falling with economic activity as well as shifting supply and demand. In spite of these cycles, prices have tended to revert to mean levels over time. At question is whether we are observing a cyclical high (in which case prices will return to historical averages), or whether there has been a structural change in the price level. As noted, we are currently evaluating companies using somewhat higher prices than we have historically used; however, it is not clear whether higher prices have improved the industry’s fundamental credit quality.

Incorporating Commodity Price Risk In analyzing the E&P industry, Moody’s looks to maintain some consistency of ratings during periods of both high and low oil and gas prices. Therefore, we need to take into account commodity price volatility and incorporate an expected range of oil and gas price fluctuations. We do not, however, seek to forecast energy prices precisely. Rather, our price assumptions are derived through: an examination of macroeconomic trends, including oil and gas supply and demand factors; discussions with issuers and market participants across the full spectrum of the industry; and our own element of pragmatism and conservatism. Our current price assumptions are as follows: Oil: Using West Texas Intermediate (WTI) as the benchmark, we expect that for the next twelve months oil will average in the high U.S. $40’s per barrel range. Over the medium term (a three year view), we expect that oil will average in the low U.S. $30’s range. Our stress test case uses the low U.S. $20’s range. North American Natural Gas: Using Henry Hub as the benchmark, we expect that for the next twelve months North American natural gas will average in the U.S. $5-$7 per million Btu range. Over the medium term (a three year view), we expect that it will average in the U.S. $4-$6 range. Our stress test case uses the U.S. $3-$3.50 range. Our price assumptions are used to help us project a company’s earnings, cash flow and base level capital spending over the medium term. We ask companies to give us their plan using our base case assumptions. They are free to use other assumptions as well, but if they do not use our price deck we will sensitize their numbers. We look at the one year projection to help us analyze a company’s liquidity, which we incorporate into our Liquidity Risk Assessments (LRA) for investment grade companies and into our Speculative Grade Liquidity Ratings (SGL) for noninvestment grade companies. We use the stress test analysis to examine whether companies can remain profitable at the stressed price levels, what levels of cash flow they can be expected to generate, and whether they would be able to reinvest sufficient capital to replace and/or grow production.

Ability to Replace Reserves and Grow Production E&P companies are finding it increasingly challenging to replace their reserves and grow production, especially organically or through the drill bit. The oil and gas industry, particularly in North America, is becoming more mature, with virtually all major onshore basins and the Gulf of Mexico shelf in decline. As conventional oil and gas opportunities become scarcer, companies are drilling in ever deeper water offshore, conducting more exploration and development operations internationally, and putting more focus on unconventional natural gas reservoirs and oil sands, which introduces geologic, technology and execution risk. In response, more E&P companies are acquiring oil and gas assets, as well as entire companies, rather than exploring for and developing reserves.

Moody’s Rating Methodology

5

Also challenging reserves replacement is restricted access to many prospective drilling areas, including much of the U.S. offshore and parts of Alaska. Internationally, most potential oil and gas acreage is controlled by national oil companies. As a result of North America’s maturity and limited access to drilling opportunities, competition among E&P companies has intensified. Independent E&P companies are competing with the major integrated oil companies as well as with national oil companies, both of which tend to be larger and better capitalized. Companies with less durable portfolios of oil and gas assets will be challenged to replace reserves, grow production and maintain their ratings.

Increasing Costs As commodity prices increase, companies’ cost structures, both capital and operating, have come under considerable pressure. Capital costs are rising because of acquisitions, many at historically high prices. In addition, capital costs have been rising because of increased competition among producers for drilling rigs, workover and completion rigs, and other oilfield services. As noted, E&P companies, challenged to replace production, are drilling in ever deeper waters, drilling deeper and longer wells, often horizontally, and employing more technically complex completion techniques, all of which are increasing capital costs. In addition to higher capital expenses, higher commodity prices are also having a direct impact on cash operating costs, including production and severance taxes, electricity, gas compression and supplemental recovery such as thermal and carbon dioxide flooding. If there is significant softening in commodity prices, companies with higher cost structures will be challenged and their ratings could be pressured.

Industry Consolidation We expect to see continued consolidation in the industry following a number of transactions in which larger independents bought smaller E&P companies focused on Rocky Mountain natural gas. We also anticipate more acquisitions of independent E&P companies by major integrated oil companies. A potential emerging theme is one in which small- to mid-cap independents combine to build scale. Along with the usual merger challenges of management, culture and integration, these companies face difficult valuation issues. As noted, companies have generally been paying historically high prices often leading to increased leverage. Event risk around such acquisitions will be a ratings consideration as well.

About This Methodology Moody’s rating methodology for independent E&P companies includes the following steps:

1. IDENTIFICATION OF KEY RATING FACTORS Moody’s has identified four key rating factors for our analysis of E&P companies: 1. Reserves and Production Characteristics 2. Re-investment Risk 3. Operating and Capital Efficiency 4. Leverage and Cash Flow Coverage These four broad categories capture the fundamental issues we evaluate in assigning our ratings. We discuss why each rating factor is important in our assessment, as well as the issues and challenges associated with that factor. Later in this report, we discuss other rating considerations including non-E&P businesses, liquidity, and political risk that – while important – do not carry as much weight as the key factors. The four key rating factors are ordered to reflect how we typically think about E&P companies. We start with a description of the company in terms of scale, areas of operations and diversification (Reserves and Production Characteristics); followed by analysis of how well a company replaces its reserves and how economically and efficiently it manages its capital spending (Re-investment Risk); then turn to the company’s cost structure and its returns on investment (Operating and Capital Efficiency); and finally we look at how a company is capitalized, the debt burden that must be supported by its oil and gas reserves, and how well its post-maintenance capex cash flow covers its debt obligations (Leverage and Cash Flow Coverage).

2. MEASUREMENT OF THE FOUR KEY RATING FACTORS Within each rating factor we present the specific metrics and ratios that we use to quantify that factor. There are a total of 11 metrics among these four rating factors. These metrics are based primarily on oil and natural gas reserves data provided in supplemental disclosures to companies’ financial statements. Because many of these metrics are 6

Moody’s Rating Methodology

industry specific, we explain where we obtain the data, how we measure the metric and discuss issues around measurement criteria. In addition, we discuss other metrics and ratios that we evaluate as part of the ratings process but do not explicitly map in the methodology.

3. MAPPING TO THE KEY RATING FACTORS For each of the 11 measurement criteria, we describe appropriate ranges for Moody’s broad rating categories (i.e., Aa, A, Baa, Ba, B and Caa). As an example, for total production, one of our Reserves and Production Characteristics metrics, we identify the range that is consistent with a Baa rating versus a Ba rating and so forth. Although there are no E&P companies rated Aa, a number of companies display characteristics consistent with this rating level.

4. THE RATING METHODOLOGY APPLIED: COMPANY MAPPING FOR EACH FACTOR We rate each E&P issuer for its performance on each of the 11 metrics. We also show how these mapped ratings compare to an issuer’s actual senior unsecured rating for investment grade companies or its corporate family rating for non-investment grade companies. Within each rating factor, we identify positive and negative outliers for each metric in a table. Outliers are defined as instances in which a company’s performance on a particular metric differs from the issuer’s actual rating by at least one rating category (i.e. whole letter rating). Positive outliers are those companies whose performance on a given metric is higher than its actual rating. Negative outliers are those for which performance is lower than the actual rating. For each rating factor, we discuss themes that explain why an individual issuer’s metrics might be higher or lower than its actual rating. The final rating is ultimately a composite of all of the mapped factors and other considerations discussed herein.

Exploration and Production Industry - Mapping Grid Rating Factors and Sub-factors

Aaa

Aa

A

Baa

Ba

B

Caa

Sub-factor Weighting

Factor 1: Reserves & Production Characteristics (36% weighting) Production (Million boe/yr)

> 1,000

400 - 1,000

200 - 400

50 - 200

20 - 50

10 - 20

< 10

10%

Proved Developed Reserves (Million boe)

> 8,000

4,000 - 8,000

1,500 - 4,000

300 - 1,500

100 - 300

20 - 100

< 20

10%

Total Proved Reserves (Million boe)

> 10,000

5,000 - 10,000

2,000 - 5,000

500 - 2,000

100 - 500

30 - 100

< 30

Diversification

High

Medium

8%

Low

8%

Factor 2: Re-investment Risk (16% weighting) 3-year all-sources F&D ($/boe)

< $5

$5 - $6

$6 - $8

$8 - $10

$10 - $12

$12 - $15

> $15

8%

3-year drillbit F&D costs including revisions ($/boe)

< $4

$4 - $5

$5 - $7

$7 - $9

$9 - $11

$11 - $14

> $14

8%

Factor 3: Operating & Capital Efficiency (18% weighting) Full-cycle cost ($/boe)

< $10

$10 - $12

$12 - $16

$16 - $20

$20 - $25

$25 - $30

> $30

9%

Leveraged full-cycle ratio

> 6x

4x - 6x

3x - 4x

2x - 3x

1.5x - 2.5x

1x - 2x

< 1x

9%

Factor 4: Leverage & Cash Flow Coverage (30% weighting) Debt / PD boe reserves

< $1.0

$1 - $2

$2 - $3

$3 - $5

$5 - $6

$6 - $8

> $8

10%

(Debt + Future Development Capex) / Total Reserves

< $1.0

$1 - $2.50

$2.50 - $4

$4 - $6

$6 - $8

$8 - $10

> $10

10%

(Retained Cash Flow Sustaining Capex) / Debt

>100%

80% - 100%

50% - 80%

30% - 50%

10% - 30%

0% - 10%

< 0%

10%

Moody’s Rating Methodology

7

The Four Key Rating Factors FACTOR 1: RESERVES AND PRODUCTION CHARACTERISTICS Why it Matters The most valuable assets an E&P company has are its oil and natural gas reserves. Proved reserves represent a store of value that can be quantified and compared across companies. Proved developed (PD) reserves are critically important because they are the source of oil and gas production and cash flow. Proved undeveloped (PUD) reserves require capital spending in order to convert them to PD reserves.3 Reserves and production are a better measure of size than financial metrics such as assets, revenue and cash flow, which are affected by accounting differences and directly linked to changes in commodity prices. The Reserves and Production Characteristics rating factor provides a snapshot of an E&P company’s oil and gas asset portfolio at a point in time. Size, as measured by reserves and production volumes, is important and it is clear from our ratings that higher rated companies tend to be larger than lower rated companies. Larger companies typically have greater resources, liquidity and economies of scale that enable them to withstand shocks or downturns better than smaller firms. In the E&P industry, these shocks include weaker commodity prices, higher differentials to benchmark prices (which lower realized prices), greater than expected geologic risk, increased costs from oilfield services companies during times of tight capacity, weather, or limited access to midstream gas services and downstream processing. Size is often correlated with geographic diversification, which in turn implies a certain degree of cash flow durability. Larger E&P companies tend to be in a broader range of geographic areas and geologic basins, which provide some protection from the types of aforementioned shocks.

Positive Rating Indicators • • • • •

Increasing production volumes and lower volatility of production Generally increasing total proved reserves and PD reserves A higher percentage of PD reserves relative to total proved reserves Greater diversification among geologic basins, geographic areas and political regimes Higher percentage of reserves and production in OECD countries

Measurement Criteria • • • •

Production (million boe per year) Proved Developed Reserves (million boe) Total Proved Reserves (million boe) Diversification (High, Medium, Low)

Notes on Measurement Criteria While knowing a company’s reserves at a point in time or its production for a particular quarter is important, we are more interested in the company’s reserves and production trends over a multi-year period. We discuss this in more detail in our discussion of the Re-investment Risk factor, but for now we wish to emphasize that we evaluate companies dynamically rather than statically. To this end, we look at the overall trend in reserves and production (whether both are generally increasing or decreasing and the reasons why). Reserves: The greatest challenge when measuring reserves lies in the fact that companies are required only to disclose their reserves once per year. Intra-year changes in reserves are more challenging to determine as companies are not required to disclose this data. As we get further through the year, the prior year-end reserves volumes become increasingly more stale. For significant acquisitions or divestitures, we add or deduct volumes disclosed by E&P companies in a press release to the prior year-end reserves volumes for a pro forma intra-year reserves number. A further challenge is to balance the reserves information provided with the appropriate context and understanding of its subjectivity and limitations4. The term “proved reserves” implies something that is known with certainty, 3. 4.

8

Reserves are estimated by petroleum engineers, who are either employees of the company or outside independent petroleum engineers (IPE), a process that is generally conducted annually. FAS 69 disclosures were intended to supplement the financial statements and are not audited by the company’s independent accountants. Some E&P companies hire independent petroleum engineers to prepare, review or audit the proved reserves estimated volumes and related disclosures, either voluntarily or to meet the requirements of creditors or other stakeholders. Utilization of IPEs tends to be higher with smaller E&P companies.

Moody’s Rating Methodology

when in fact proved reserves cannot be measured directly. Moody’s attempts to strike an appropriate balance by qualitatively considering the company’s policies and procedures for developing its proved reserves estimates, including the degree of use of independent petroleum engineers, and the critical assumptions and estimates made by management. FAS 69 does not require disclosure of how long the PUD reserves have been on the books or when the company expects to develop these reserves, both of which would be meaningful disclosures.5 Production: The FAS 69 disclosure provides an annual production figure for oil and natural gas. During the year, production volumes are reported quarterly, which are used to calculate last-twelve-months (LTM) production volumes. Production is measured more accurately than reserves volumes as they underpin sales data. Industry and regulatory standards define how volumes of oil and natural gas are measured, which also provides a greater degree of reliability and transparency. In addition to the overall trend, we consider the volatility of a company’s production. Oil and gas production translates directly into revenue so production volatility implies cash flow volatility, which is important to creditors. Lower production volatility means greater consistency and durability of the company’s cash flow. Note on Net versus Gross for Production and Reserves Calculations: The U.S. convention is to report reserves and production after royalties are paid, or net, whereas the Canadian convention is to report gross reserves volumes, which are before royalties are paid. Because reserves and production volumes associated with royalties do not affect an E&P company’s financial performance, we believe it is more appropriate to calculate our metrics using net volumes. We therefore ask companies that do not report net volumes to provide this information to us for our analysis. Diversification: Our diversification measurement typically includes an assessment of geologic basin concentration, number of different basins (a measure of geographic diversification), percentage of oil versus natural gas, onshore versus offshore, and number of wells. For companies with international operations, we look at potential country concentrations to assess political risk, including operations in OECD versus non-OECD countries. Comment on Integration of the Reserve Life Index: 6 RLI is an important analytic metric that, conceptually, measures how quickly a company’s reserves are running off, and presents a picture of the challenge a company faces in replacing its production. We focus primarily on PD reserves to develop a PD RLI. The production volume used in the calculation is typically a LTM value although we also look at the most recent quarterly production on an annualized basis to view the leading edge reserve life. While we analyze companies’ reserve lives, we do not map this as a metric because of the narrow range of its effectiveness. A RLI of below 4-5 years is extremely short and implies very little margin of error for the company, given the rapid reserve runoff, whereas a RLI of beyond 8-10 years quickly reaches the point of diminishing returns in terms of credit value. Longer reserve lives may indicate that reserves are overbooked (the numerator – reserves – is too large) or underdeveloped (the denominator – production – is too small).

Factor Mapping: Reserves & Production Characteristics Production (Million boe/yr) Proved Developed Reserves (Million boe) Total Proved Reserves (Million boe) Diversification

5. 6.

Aaa > 1,000 > 8,000 > 10,000

Aa 400 - 1,000 4,000 - 8,000 5,000 - 10,000 High

A 200 - 400 1,500 - 4,000 2,000 - 5,000

Baa 50 - 200 300 - 1,500 500 - 2,000

Ba 20 - 50 100 - 300 100 - 500

Medium

B 10 - 20 20 - 100 30 - 100

Caa < 10 < 20 < 30

Low

For more information, please see our discussion of reserves issues in the Oil & Gas Exploration and Production Industry Financial Reporting Assessment (September 2004). The reserve life index or reserves to production ratio (RLI or R/P) is defined as reserves divided by annual production. The units are in years and this metric represents how long it theoretically would take a company to produce its reserves if it continued to produce at the current rate.

Moody’s Rating Methodology

9

Company Mapping: Reserves & Production Characteristics Company BG Energy CNOOC PTT Exploration & Production Apache Burlington Occidental Anadarko Canadian Natural EOG Murphy Talisman Woodside Devon EnCana Husky Nexen Noble PetroCanada Pioneer XTO Energy Amerada Hess Chesapeake Newfield Petrobras Energia Plains E&P Pogo Southwestern Vintage Cimarex Denbury Encore Acquisition Forest Houston Exploration Kerr-McGee Swift Whiting Baytex Compton Comstock EXCO Resources PT Medco Energi Range Stone Clayton Williams Energy Partners HET KCS Energy Delta El Paso Production Paramount Belden & Blake Petrohawk PetroQuest Energy

Senior Unsecured or Corporate Family Rating A2 3 (A2)* 4 (A2)* A3 A3 A3 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa3 Baa3 Ba1 Ba2 Ba2 5 (Ba2)* Ba2 Ba2 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1 B1 B1 B2 B2 B2 B2 B3 B3 B3 Caa1 Caa1 Caa1

* Reflects Moody's Methodology for Government Related Issuers Positive Outlier Negative Outlier

10

Moody’s Rating Methodology

Outlook Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Negative Stable RUR Down Stable Stable Stable Stable Stable Stable Stable Stable RUR Up Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Stable Developing Stable Positive Negative Stable Negative RUR Down Stable Stable Stable Negative Developing Stable Stable

Annual Production Baa Baa Ba Baa Baa A Baa Baa Baa Baa Baa Baa A A Baa Baa Baa Baa Baa Baa Baa Baa Ba Baa Ba Ba B Ba Ba Caa B Ba B Baa B B B Caa Caa Caa Ba B B Caa Caa B Caa Caa Ba Caa Caa Caa Caa

Proved Developed Reserves Baa Baa Baa Baa Baa A Baa Baa Baa Baa Baa Ba A Baa Baa Baa Baa Baa Baa Baa Baa Baa Ba Baa Ba Ba B Ba Ba Ba Ba Ba B Baa B Ba B B B Ba Ba Ba Ba B B B B Caa Ba B B B Caa

Total Proved Reserves A A Baa Baa A A A Baa Baa Baa Baa Baa A Baa Baa Baa Baa Baa Baa Baa Baa Baa Ba Baa Ba Ba Ba Ba Ba Ba Ba Ba Ba Baa Ba Ba B B Ba Ba Ba Ba Ba B B B B B Ba Caa B B Caa

Reserves Diversification A B B A A A Baa Baa Baa Ba A B A A Ba Ba Baa Baa Ba Ba Baa Ba Ba Baa Ba Ba Ba Ba Ba B B B B Ba B Ba B B B B Caa B B B B B B Caa Caa Caa Caa B Caa

Observations Positive outliers in this rating factor typically include larger companies whose ratings are often restrained by re-investment risk and high leverage. Devon has A characteristics for this rating factor, but is rated in the Baa category reflecting weakness in 3-year drill bit F&D and to a lesser extent leverage. Amerada Hess, Chesapeake and Kerr-McGee, which despite Baa characteristics for this rating factor are rated in the Ba category. Both Amerada Hess and KerrMcGee are “fallen angels,” – i.e. companies that had investment grade ratings but have since been downgraded to noninvestment grade because of poor operating performance and high leverage. Chesapeake is growing rapidly by acquisitions using leverage, which also introduces event risk and financial risk. Negative outliers include some larger companies such as CNOOC and Apache, which have Baa characteristics for this rating factor despite actual ratings in the A category. Apache has A characteristics while CNOOC has Aa characteristics in each of the other rating factors, which support their ratings. Within non-investment grade companies, some of the Ba rated companies, such as Southwestern and Swift, have B characteristics for this factor. This is a result of these companies being smaller yet strong in the areas of re-investment risk, and operating and capital efficiency.

FACTOR 2: RE-INVESTMENT RISK Why it Matters Reserves replacement is the most fundamental challenge an E&P company faces. Because E&P companies produce their assets to generate cash flow, they are in effect slowly liquidating over time. For example, a company with an eight year reserve life index produces 1% of its reserves each month on average. To sustain the company and service debt in future years, oil and gas that is produced must be replaced with newly discovered or purchased reserves. We often describe E&P as a portfolio management business and we evaluate companies’ oil and gas assets to assess portfolio durability. The key issue is whether a company has constructed a portfolio of assets that it can replicate consistently year after year. Reserves replacement is a significant challenge for all E&P companies but as companies move higher in the rating scale, particularly into the investment grade ratings, the bar of consistent reserves replacement is set increasingly higher. We note that effective portfolio management involves a certain degree of pruning by selling smaller interests or areas that are no longer core as well. The Re-investment Risk rating factor addresses portfolio durability and sustainability by focusing attention on the consistency and repeatability of a company’s reserves replacement as well as on whether a company replaces its production economically. An E&P company that consistently replaces the oil and gas it produces with fresh reserves – and that does so at economic rates of return – will be more likely to survive economic, industry and commodity cycles and be able to service its debt over long periods of time. Note that we evaluate reserves replacement as part of our analysis, but we do not map it as a separate metric for reasons that are discussed in more detail below. However, a company’s reserves replacement performance is reflected in its finding and development costs, which are mapped as part of this rating factor.

Positive Rating Indicators • • • •

Consistent reserves replacement in excess of 100% each year Successful execution of the company’s stated reserves replacement strategy Lower all-sources F&D costs and lower organic F&D costs For acquisitions, paying a price per boe that is less than historical F&D costs

Measurement Criteria • •

Three-year all-sources F&D costs ($/boe) Three-year drill bit F&D costs, including revisions ($/boe)

Moody’s Rating Methodology

11

Notes on Measurement Criteria Overview of Finding and Development Costs: Our analysis includes a review of all-sources reserves replacement. This includes extensions and discoveries (E&D), acquisitions and revisions. We subsequently deconstruct the allsources into its components of organic replacement (which includes E&D and revisions), and acquisitions. We also evaluate the individual components to better understand the sources of the reserves changes, particularly the reserves revisions.7 We measure reserves replacement as the ratio of reserves added in the numerator divided by annual production in the denominator and express the result as the percentage of production replaced. Both organic reserves replacement and acquisitions include particular risks, but our mapping incorporates a slight bias in favor of organic replacement. Companies developing their own properties are often perceived as being better able to “control their destiny” as opposed to depending on the acquisitions market at any given time. Acquisitions also introduce a level of event risk, which is reflected in the price paid for reserves, the company’s cost structure and returns on investment, as well as how the company finances the acquisition (including the proportion of debt vs. equity). Ultimately, whatever reserves replacement strategy a company follows, the most important issue is how consistently the company executes its strategy to create a durable oil and gas portfolio. Reserves Replacement Issues: We assess a company’s reserves replacement in terms of how well new reserves fit geographically and geologically with the rest of its portfolio, the proportion of developed and undeveloped reserves, and the value of the new reserves. • Geographic Fit: Some companies hold large legacy land or field positions in a particular basin that provides economies of scale and greater technical knowledge. Adding reserves in the same area plays to these advantages, whereas adding reserves in an entirely new area increases operating, technical and competitive risks. • Proportion of Developed Reserves: Because developed reserves have more value to debt holders than undeveloped reserves, replacing production with PUD reserves, as with a large offshore discovery that will not come on production for several years, is not viewed as favorably as replacing reserves while maintaining or increasing the overall proportion of PD reserves. • Reserves Value: Fields have different values, determined by factors such as reserve life, realized prices and operating costs. For example, replacing light sweet oil production with heavier or more sour oil reserves is less valuable than finding reserves of a similar or higher quality. Three-Year F&D Costs: Our analysis focuses on how economically a company accomplishes its reserves replacement strategy through its F&D costs. F&D costs are a measure of efficiency as well as representative of the company’s investment in its reserves. We measure F&D costs by dividing the capital spent to replace reserves in the numerator by the reserves added in the denominator and expressing the result in terms of dollars per boe. We focus our measurement on three-year reserves replacement and F&D costs, which recognizes that the reserves replacement process typically spans multiple years from the time capital is spent for the initial work until reserves are proved, as well as follow-up exploitation and development. A three-year time frame averages out some of the lumpiness of larger projects yielding proved reserves. We also consider one-year values of both all-sources and organic F&D costs to get a sense of a company’s more recent performance. This ensures that performance two or three years ago does not unduly benefit or impair the company’s metrics. The issues discussed for reserves replacement performance find parallels in the review of F&D costs. Again, we start with all-sources F&D costs. This incorporates all capital spent in replacing production and is the most comprehensive measure. We also break down all-sources F&D costs into its organic and acquisition components. This provides a comparison of the capital spent for organic and acquisition activities compared to the results, namely reserves added, of this capital spending. For all-sources F&D costs, the numerator includes all capital spent from the cost incurred disclosure plus goodwill recorded as a result of corporate E&P acquisitions. The denominator includes reserves added through E&D, plus reserves purchased, plus or minus revisions. For drill bit F&D costs, the numerator includes exploration and development capital, while the denominator includes reserves added through E&D plus or minus revisions. Finally, because our ratings are meant to be forward looking we make pro forma adjustments to historical values to reflect activity since the latest year end, including significant acquisitions or divestitures, or updated information that better reflects the company’s expected future performance. Annual Disclosure: As discussed, companies only issue a FAS 69 disclosure once a year. In addition, the costs incurred are only disclosed annually. Therefore, the best estimate of reserves replacement and F&D costs is immediately after a company files its annual report. As the year goes on, this data becomes more stale particularly as companies complete acquisitions and divestitures, as well as normal drilling and development activity. 7.

12

Revisions can be performance related if the reservoir produces better or worse than expected, price related if changes in commodity prices result in a different economic limit, or the result of remedial operations performed by the company. Because revisions can be both positive and negative, it is important to understand the constituent parts rather than just the composite total.

Moody’s Rating Methodology

Comment on Reserves Replacement: We evaluate reserves replacement as part of our analysis, but we do not map it explicitly in this methodology for several reasons. While reserves replacement is vitally important for E&P companies, as discussed earlier, it is essentially a binary metric as E&P companies must replace at least 100% of their production. Replacing 200% or 300% is not necessarily two or three times better than replacing 100% as there are potentially diminishing returns. Conversely, replacing only 50% is not half as good as 100%; it is actually much worse. Acquisitions have the potential to skew this metric in that companies, particularly smaller ones, can acquire reserves relatively easily. They would therefore look better on a reserves replacement metric, but may not be adding value with the acquisition. Larger companies could be penalized by a simple reserves replacement percentage metric as they are challenged to replace even 100% of their production. For example, the average Baa1 E&P company produces on the order of 150 million boe annually. Replacing this much production is equivalent to creating a typical Ba3 E&P company. Stated another way, a Baa1 company replacing 100% of its production is roughly the same as a Ba3 company doubling in size in a year. Reserves replacement performance is impounded in F&D costs already in that if a company is not successful finding oil and gas, its F&D costs will be higher because the denominator will be smaller for a given amount of capital spent. Finally, reserves replacement and F&D costs only consider reserves additions. It is possible for a company to add more reserves than it produces, thus having greater than 100% reserves replacement. However, if the company also sells reserves during the year, its total reserves year over year could be lower. Therefore, it is important to link trends in total reserves and production, as discussed in the first rating factor, with re-investment performance from the second rating factor to get a more complete picture of a company’s oil and gas portfolio durability.

Factor Mapping: Re-investment Risk Aaa

Aa

A

Baa

Ba

B

Caa

3-year all-sources F&D ($/boe)

< $5

$5 - $6

$6 - $8

$8 - $10

$10 - $12

$12 - $15

> $15

3-year drillbit F&D costs including revisions ($/boe)

< $4

$4 - $5

$5 - $7

$7 - $9

$9 - $11

$11 - $14

> $14

Moody’s Rating Methodology

13

Company Mapping: Re-investment Risk Company BG Energy CNOOC PTT Exploration & Production Apache Burlington Occidental Anadarko Canadian Natural EOG Murphy Talisman Woodside Devon EnCana Husky Nexen Noble PetroCanada Pioneer XTO Energy Amerada Hess Chesapeake Newfield Petrobras Energia Plains E&P Pogo Southwestern Vintage Cimarex Denbury Encore Acquisition Forest Houston Exploration Kerr-McGee Swift Whiting Baytex Compton Comstock EXCO Resources PT Medco Energi Range Stone Clayton Williams Energy Partners HET KCS Energy Delta El Paso Production Paramount Belden & Blake Petrohawk PetroQuest Energy

Senior Unsecured or Corporate Family Rating A2 3 (A2)* 4 (A2)* A3 A3 A3 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa3 Baa3 Ba1 Ba2 Ba2 5 (Ba2)* Ba2 Ba2 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1 B1 B1 B2 B2 B2 B2 B3 B3 B3 Caa1 Caa1 Caa1

* Reflects Moody's Methodology for Government Related Issuers Positive Outlier Negative Outlier

14

Moody’s Rating Methodology

Outlook Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Negative Stable RUR Down Stable Stable Stable Stable Stable Stable Stable Stable RUR Up Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Stable Developing Stable Positive Negative Stable Negative RUR Down Stable Stable Stable Negative Developing Stable Stable

3-year All-Sources F&D Aaa Aa Aaa A A Aa A Baa A Ba Baa A Baa Baa B Ba Baa Ba Baa A B Ba B Ba Baa B A B Caa A Baa B B B Baa Baa Caa B Ba A Aaa A Caa Ba B Ba Baa Ba B Caa Caa B Caa

3-year Drillbit F&D Costs Including Revisions Aa A Aa A Baa A Baa Baa Baa Ba Ba Aa Ba Ba B Ba Baa Caa Ba Aa B Baa B B Baa B Baa Caa Caa Baa Ba B B B Ba Ba Caa B Caa Baa Aaa Baa Caa B B Ba Baa B B Caa Caa Baa Caa

Observations Positive outliers in the Re-investment Risk rating factor include several larger companies such as BG Energy and XTO, which have A or Aa characteristics for this rating factor, putting them one or two rating letters higher than their actual ratings. Non-investment grade positive outliers include Chesapeake, Denbury, Plains and Range. Each of these companies has been quite successful replacing its reserves at competitive costs, both organically and all-sources. Their ratings are restrained, however, by other factors, principally scale (reserves and production) and leverage or because of event risk associated with acquisitions. Negative outliers include larger companies whose model outcome is dragged down by poor performance that has persisted across the three-year average F&D costs assessments; and companies that have invested capital in large projects but which have not booked reserves. The latter include Murphy in deepwater Malaysia. Several companies’ year-end 2004 reserves were negatively affected by anomalously high heavy oil differentials. Some companies, such as Forest, Kerr-McGee, Newfield and Pogo, are in the midst of a multi-year portfolio restructuring, the results of which are either uncertain or have not shown up in their costs and reserves additions. Companies such as Devon, Petro-Canada and Whiting were negative outliers only for drill bit F&D costs, not allsources. This reflects acquisitions that lowered overall F&D costs and mitigated weaker organic F&D costs. There were more outliers, both positive and negative, for this rating factor than for any of the other three. In part, this reflects the three-year nature of these metrics in that good or poor performance tends to persist. It is difficult for a company to materially change its three-year F&D costs in any single year. This also reflects the dynamic industry environment as higher commodity prices have led to increased capital costs. F&D costs rose substantially in 2004 over 2003, driven primarily by higher acquisition costs but also by greater oilfield services costs. As a result, companies with less durable portfolios of oil and gas assets either acquired other companies or assets in a high price environment or were simply unable to keep up with the rising costs. The net effect is that positive outlier companies’ ratings were pulled down by other factors or negative outlier companies’ ratings were mitigated by strength in other areas.

FACTOR 3: OPERATING AND CAPITAL EFFICIENCY Why it Matters As noted, E&P companies are in a commodity business wherein no single company controls the price of the product it sells. To achieve competitive margins, companies must control their cash operating costs, in addition to the capital costs discussed in the previous rating factor. Furthermore, E&P companies are highly capital intensive, constantly reinvesting capital and raising external debt and equity capital. Companies must show sufficient returns on investment to capital providers relative to the risk they are asking investors to take. The Operating and Capital Efficiency rating factor measures an E&P company’s cost structure through the fullcycle costs metric. Full-cycle costs include cash operating and financing costs on a per boe produced basis plus threeyear all-sources F&D costs discussed previously. The combination of cash and replacement costs approximates a company’s breakeven cost. Full-cycle costs capture a company’s operating efficiency, as reflected in its lease operating expenses (LOE) and general and administrative (G&A) burden, which represents a different skill set from its ability to find and develop oil and gas reserves. For the marginal boe of production, full-cycle costs represent the average cash cost to produce that boe plus the amount of capital that the company will need to spend to replace that boe, assuming that historical F&D costs are a good predictor of future F&D costs. This rating factor also provides a proxy for return on invested capital using the leveraged full-cycle ratio, which is a measure of cash on cash return. The leveraged full-cycle ratio reflects the productivity of reinvested capital on a boe basis, comparing the cash generated by a boe of production relative to the capital required, in terms of F&D costs, to replace that boe. Accordingly, this is an important measure that indicates whether a company is competitive relative to its peers. The leveraged full-cycle ratio is an important comprehensive metric that combines oil and gas portfolio construction decisions, as reflected in the company’s realized price, its cash cost structure efficiency, and its re-investment risk as shown by its finding and development costs.

Positive Rating Indicators • •

Full-cycle costs that are lower than $20 per boe, in the current price environment Leveraged full-cycle ratios greater than 2x, and even higher in a robust commodity price environment

Moody’s Rating Methodology

15

Measurement Criteria • •

Full-cycle costs per boe Leveraged full-cycle ratio, using three-year all-sources F&D costs

Notes on Measurement Criteria Full-Cycle Costs: Full-cycle costs include cash costs plus three-year all-sources F&D costs. Cash costs include lease operating expense, transportation expense, G&A expense and interest expense. For G&A and interest expense, we add back capitalized amounts to the cash portion of these expenses, while taking out the capitalized amounts from the calculation of F&D costs. For companies with hybrid securities, including preferred stock, that are allocated between debt and equity, the interest component associated with the “debt” portion is added to interest expense per Moody’s standard adjustments for hybrid securities.8 Each of these expenses is divided by production in that period to arrive a cost per boe produced. Some E&P companies have significant other businesses such as refining and marketing, midstream natural gas, chemicals or natural gas distribution. In these cases we allocate a portion of the expenses to the non-E&P businesses as appropriate. Leveraged Full-Cycle Ratio: The leveraged full-cycle ratio is the cash margin generated per boe of production divided by three-year all-sources F&D costs (see sidebar for a more detailed description). Cash margin per boe is the realized price per boe minus cash costs per boe described earlier. For realized prices, we strip out non-E&P revenue but include hedging gains or losses. Realized prices also reflect the quality of the commodity produced and transportation or basis differentials. The leveraged full-cycle ratio calculation is shown in greater detail in the following box.

Calculating The Leveraged Full-cycle Ratio Realized price per boe production (reflects basis differentials, transportation and hedging) • Minus: • Minus: • Minus:

Operating costs per boe production Total G&A expense per boe production (including capitalized portion) Total interest expense per boe production (including capitalized portion)

Equals: Pre-capex cash margin per boe production • Divided by: Three-year average all-sources F&D costs Equals: Leveraged full-cycle ratio As noted, because our ratings are intended to be forward looking we adjust a company’s cash operating costs or G&A if its historical costs are not representative. In addition, if a company has made a significant acquisition or materially changed its capital structure – particularly if it has taken on additional debt – we make appropriate pro forma adjustments.

Factor Mapping: Operating & Capital Efficiency Full-cycle cost ($/boe) Leveraged full-cycle ratio

8.

16

Aaa < $10

Aa $10 - $12

A $12 - $16

Baa $16 - $20

Ba $20 - $25

B $25 - $30

Caa > $30

> 6x

4x - 6x

3x - 4x

2x - 3x

1.5x - 2.5x

1x - 2x

< 1x

Please refer to Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations – Part I (July 2005).

Moody’s Rating Methodology

Company Mapping: Operating & Capital Efficiency Senior Unsecured or Corporate Family Rating A2 3 (A2)* 4 (A2)* A3 A3 A3 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa3 Baa3 Ba1 Ba2 Ba2 5 (Ba2)* Ba2 Ba2 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1 B1 B1 B2 B2 B2 B2 B3 B3 B3 Caa1 Caa1 Caa1

Company BG Energy CNOOC PTT Exploration & Production Apache Burlington Occidental Anadarko Canadian Natural EOG Murphy Talisman Woodside Devon EnCana Husky Nexen Noble PetroCanada Pioneer XTO Energy Amerada Hess Chesapeake Newfield Petrobras Energia Plains E&P Pogo Southwestern Vintage Cimarex Denbury Encore Acquisition Forest Houston Exploration Kerr-McGee Swift Whiting Baytex Compton Comstock EXCO Resources PT Medco Energi Range Stone Clayton Williams Energy Partners HET KCS Energy Delta El Paso Production Paramount Belden & Blake Petrohawk PetroQuest Energy

Outlook Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Negative Stable RUR Down Stable Stable Stable Stable Stable Stable Stable Stable RUR Up Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Stable Developing Stable Positive Negative Stable Negative RUR Down Stable Stable Stable Negative Developing Stable Stable

Full-Cycle Cost A Aa Aaa A Baa Baa Baa Baa A Ba Ba Aa Baa Baa Ba Ba Baa Baa Ba Baa B Ba Ba Ba Baa Ba A Ba B Caa Ba B Ba Ba Ba B Caa B Ba B A Ba Caa B B Ba Baa B B Caa Caa Caa Ba

Leveraged FullCycle Ratio A A Aa A A Aa Baa Baa Baa Baa Ba Aa Baa Baa Ba Baa Baa Baa Baa Baa B Baa Baa Caa Ba Ba Aa Caa B A Ba B B B Baa Baa Caa B Baa Baa Baa Ba Ba Ba Ba Ba Baa B B Ba Caa B Ba

* Reflects Moody's Methodology for Government Related Issuers Positive Outlier Negative Outlier

Moody’s Rating Methodology

17

Observations Companies that were positive outliers in the Operating and Capital Efficiency rating factor (both the full-cycle cost and leveraged full-cycle ratio metrics) were also, with just a few exceptions, positive outliers in the three-year F&D costs metric. This is logical because three-year all-sources F&D costs is the denominator in the leveraged full-cycle ratio. The reverse was not necessarily true, in that a number of companies that had superior F&D costs did not have better full-cycle costs or leveraged full-cycle ratios, as these two metrics provide additional information. Specifically, full-cycle costs include cash operating costs. The leveraged full-cycle ratio adds information about a company’s commodity mix, differentials, hedging and cash cost structure that are reflected in its cash margin in the numerator of this metric. Similarly, companies that were negative outliers for this rating factor were almost universally negative outliers for three-year F&D costs for the same reasons as those cited above.

FACTOR 4: LEVERAGE AND CASH FLOW COVERAGE Why it Matters The first three rating factors cover various aspects of business risk, including asset value and durability, cost structure and margins, and returns on investment. Financial risk, or how a company is capitalized, is also important, particularly in light of the fact that the industry is cyclical and subject to the vagaries of commodity prices. The Leverage and Cash Flow Coverage rating factor measures financial risk by comparing a company’s debt to the assets that support its debt and by analyzing post-capex cash flow in relation to its debt.

Positive Rating Indicators • • •

Debt to PD reserves lower than $5 per boe, in the current price environment Debt plus future capital to total proved reserves of no more than about $1 per boe higher than the company’s debt to PD reserves Lower F&D costs will result in lower sustaining capex and thus improve this metric

Measurement Criteria • • •

Debt to proved developed reserves Debt plus future development capital and abandonment costs divided by total proved reserves Retained cash flow less sustaining capex divided by debt

Notes on Measurement Criteria Debt to Reserves Measures: As discussed, oil and gas reserves are a store of value for an E&P company. Our analysis focuses on proved developed reserves as these are the company’s cash-generating assets. Debt to proved developed reserves is therefore an intuitive measure in units of dollars per boe that can be compared to oil and gas prices and to a company’s full-cycle costs. Both debt and PD reserves are point-in-time measures, as opposed to debt to cash flow measures that compare a balance sheet value to a flow measurement. We do not use a debt to total proved reserves metric. We believe this approach distorts leverage as it does not account for the capital that is required to bring PUD reserves on production and generating cash flow. We do recognize the value of PUD reserves, but look at debt plus the future development capital, including final abandonment costs, divided by total proved reserves. Companies with a larger percentage of PUD reserves or with reserves that require significant future capex (such as in deepwater offshore), will have potentially higher leverage with this metric than they would using the debt to PD measure. The conceptual basis for comparing debt to reserves is similar to a “loan to value” measure. This is also analogous to the process banks use when calculating a borrowing base, which is typically done for smaller, non-investment grade companies. Through the borrowing base process, banks calculate the debt capacity that a given quantity of reserves will support. As E&P companies grow, they move from borrowing base credit facilities to corporate facilities, but the general principle remains that an E&P company’s leverage or debt capacity should be related to its underlying cashgenerating assets.

18

Moody’s Rating Methodology

Cash Flow Coverage: In addition to Why Traditional Measures Don’t Apply comparing debt to asset value, we also compare debt to the cash flow supporting the Traditional measures of leverage and debt service in credit analysis (debt to debt. Cash flow as a percentage of debt is a total capitalization, debt to cash flow or EBITDA, and interest coverage) are common metric that Moody’s has used for not highly predictive for E&P companies for a number of reasons. An E&P many years. Because E&P requires capital company’s capitalization reflects the capital that has been spent to acquire spending to maintain production, we use and develop oil and gas reserves, but the balance sheet does not reflect the retained cash flow less sustaining capex, fair value of these reserves. Different accounting methods, such as the divided by debt. Sustaining capex, or mainte- successful efforts method (which expenses exploration costs) and the fullnance capex, is the amount of capital a com- cost method (which capitalizes these costs), result in different balance sheet presentations for what is economically the same asset. In addition, pany would need to spend to replace 100% of some acquisitive companies have large goodwill balances that skew its current production. Most E&P compatraditional metrics. Debt to capitalization measures respond too slowly to nies, particularly smaller ones, spend much changes in commodity prices and operating performance to be useful in more than sustaining capex to grow; however, this industry. this metric compares cash flow after what is essentially maintenance capex to the comEBITDA is a pre-capex measure of cash flow that does not reflect the pany’s debt. capital intensive nature of E&P and the reinvestment necessary to sustain Retained cash flow is funds from opera- the company. EBITDA is strongly influenced by commodity prices so shorttions, or cash flow from operations before term cyclical changes have a disproportionate effect on these metrics changes in working capital, less dividends. when a company’s fundamental credit profile has not changed. EBITDA Again, sustaining capex is the capital required also is skewed by an E&P company’s choice of full-cost or successful efforts accounting. The fundamental assumption in using debt to EBITDA is to replace 100% of production and is the that it is expected to represent durable cash flow. Because the depleting product of production volume times threenature of E&P assets requires constant reinvestment, using EBITDA at a year all-sources F&D costs. The relevant point in time is not an appropriate assumption for durable cash flow. production volume is generally the last twelve months production, but if this is not indicative because of acquisitions, divestitures or other activities we will often annualize the most recent quarter’s production. Debt Adjustments: Each of these three metrics uses the company’s total debt. For E&P companies with other substantial businesses such as refining and marketing, midstream natural gas, chemicals or natural gas distribution, we allocate a portion of the debt to these other businesses and then calculate the standalone E&P leverage. Moody’s adjusts balance sheet debt for off-balance sheet items such as operating leases and unfunded pension liabilities, and the debt component of hybrid securities, including preferred stock, in accordance with Moody’s standard adjustments. For E&P companies, we adjust for transactions that represent foregone capital spending. For example, leasing of an offshore spar or capacity payments that support pipeline construction would be capitalized, particularly where the infrastructure is financed and repayment relies on these capacity payments. We normally do not include obligations that are akin to operating costs (such as drilling rig commitments). As noted, for companies with non-E&P businesses, we allocate a portion of the debt to these other businesses to determine the debt supported by the E&P business. Future development costs are shown in the company’s FAS 69 disclosure in the Standardized Measure of Discounted Future Net Cash Flows calculation. For non-U.S. companies, future development costs are based on the company’s reserve development plans. Some Limitations: Leverage metrics such as debt to PD reserves or debt to total reserves have some limitations in that all “boe’s” are not created equal in terms of value. Ideally this would be captured in the leverage metrics. Among the differences to consider is reserve life as, all other things being equal, a longer reserve life is better for debt holders than a shorter one. In terms of leverage, an eight-year reserve life better approximates most companies’ average debt maturity than a four-year reserve life. Another consideration is cash margin generated per boe. Higher margins are clearly better. As part of our leverage analysis and ratings process, we look past the mechanical calculation of debt to reserves to understand the value of the reserves as well.

Factor Mapping: Leverage & Cash Flow Coverage Debt / PD boe reserves

Aaa < $1.0

Aa $1 - $2

A $2 - $3

Baa $3 - $5

Ba $5 - $6

B $6 - $8

Caa > $8

(Debt + Future Development Capex) / Total Reserves

< $1.0

$1 - $2.50

$2.50 - $4

$4 - $6

$6 - $8

$8 - $10

> $10

(Retained Cash Flow - Sustaining Capex) / Debt

>100%

80 - 100%

50 - 80%

30 - 50%

10 - 30%

0 - 10%

< 0%

Moody’s Rating Methodology

19

Company Mapping: Leverage & Cash Flow Coverage Company BG Energy CNOOC PTT Exploration & Production Apache Burlington Occidental Anadarko Canadian Natural EOG Murphy Talisman Woodside Devon EnCana Husky Nexen Noble PetroCanada Pioneer XTO Energy Amerada Hess Chesapeake Newfield Petrobras Energia Plains E&P Pogo Southwestern Vintage Cimarex Denbury Encore Acquisition Forest Houston Exploration Kerr-McGee Swift Whiting Baytex Compton Comstock EXCO Resources PT Medco Energi Range Stone Clayton Williams Energy Partners HET KCS Energy Delta El Paso Production Paramount Belden & Blake Petrohawk PetroQuest Energy

Senior Unsecured or Corporate Family Rating A2 3 (A2)* 4 (A2)* A3 A3 A3 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa2 Baa2 Baa2 Baa2 Baa2 Baa2 Baa3 Baa3 Ba1 Ba2 Ba2 5 (Ba2)* Ba2 Ba2 Ba2 Ba2 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 B1 B1 B1 B1 B1 B1 B1 B2 B2 B2 B2 B3 B3 B3 Caa1 Caa1 Caa1

* Reflects Moody's Methodology for Government Related Issuers Positive Outlier Negative Outlier

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Moody’s Rating Methodology

Outlook Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Negative Stable RUR Down Stable Stable Stable Stable Stable Stable Stable Stable RUR Up Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Stable Developing Stable Positive Negative Stable Negative RUR Down Stable Stable Stable Negative Developing Stable Stable

Debt / PD Reserves Baa Aa Aa A A A A A Aa A A Baa Baa Ba A Ba Baa A Ba Baa B B Baa Baa Baa Ba Baa A A Baa Baa Ba Baa Ba Baa Ba Ba Ba Ba B B Baa Baa Baa Baa Ba B Caa B Caa B Caa Baa

(Debt + Future Development Capex) / Total Reserves Baa Baa A A A A A Baa A Baa Baa Baa Baa Ba A Ba A A Ba Baa Ba B Ba Baa Baa Ba A A Baa Baa Baa Ba Ba Ba Ba Ba Ba Baa Ba B Caa Ba Ba Ba B Baa Ba Ba B Caa B B Ba

(Retained Cash Flow Sustaining Capex) / Debt Ba Baa Baa A Baa A Baa Baa A A Baa Ba Baa Baa Ba Ba Baa Baa Ba Baa Caa Ba Baa Caa Ba Ba B Caa A A Ba B A Ba Ba Ba Caa Ba Ba Ba B Ba Ba Baa Ba Caa Baa B B Ba Caa B Caa

Observations Positive outliers in the Leverage and Cash Flow Coverage rating factor generally reflected conservatively capitalized companies across the rating spectrum. Many of the Baa1 rated companies had debt to PD reserves and debt plus future capital to total proved reserves metrics in the A category, signaling low leverage on reserves. Similarly, the stronger Ba and B rated companies tended to have reserves leverage metrics more consistent with one or two rating levels higher. These were offset principally by smaller scale (reserves and production) or weaker re-investment risk. There were few reserves leverage negative outliers in this area, reflecting the generally conservative capital structures of this group of companies. Two notable exceptions are EnCana and Nexen, rated Baa2 but with model outcomes in the Ba range. In both cases, the low model outcome reflects leveraged acquisitions and both companies are expected to reduce leverage to levels consistent with their ratings through asset sales and operating cash flow. There were more negative outliers using the cash flow coverage metric (retained cash flow less sustaining capex, divided by debt). In almost all cases wherein a company was a negative outlier on cash flow coverage, it was also a negative outlier on F&D costs. This is expected because the formula uses sustaining capex, which incorporates three-year all-sources F&D costs.

Other Considerations Non-E&P Businesses As noted earlier, a number of E&P companies have significant other businesses such as refining and marketing, midstream natural gas, chemicals and natural gas distribution. We generally view these other businesses as supporting the credit quality and, by extension, the rating of the standalone E&P business. These other businesses are typically complementary natural extensions of E&P and provide a degree of business risk and cash flow diversification. We account for the value of these other operations through the diversification metric and through attributing some portion of the company’s debt, interest expense and G&A expense to these businesses. The leverage metrics are recalculated using the remaining debt to determine E&P-only leverage. Full-cycle costs are reduced and the cash margin used in the leveraged full-cycle ratio is increased by the amount of costs allocated to the non-E&P business. In addition to the benefits, we also evaluate the liabilities associated with these businesses, especially environmental liabilities from refineries and chemical plants.

Liquidity E&P companies are typically paid once per month for the oil and natural gas they sell but expenses occur throughout the month. Companies also make lumpy payments during the year such as semi-annual interest expense. Many E&P companies hedge their commodity price exposure, which potentially creates the need to post collateral or letters of credit. For these and other reasons, we analyze a company’s sources of liquidity, including cash on its balance sheet, short-term liquid investments, and committed bank credit facilities, to ensure it will be able to meet its obligations.

Political Risk As the industry has matured, particularly in North America and Europe, companies have increased their operations in regions with greater political risk, including the Middle East, North Africa (including the recent reopening of Libya), West Africa, Latin America and Russia. As part of our analysis, we evaluate the locations of existing operations, as well as new areas under consideration and review companies’ plans for mitigating the political risk associated with them. Other aspects of political risk include drilling in environmentally sensitive areas and liquefied natural gas (LNG) development projects.

Business Risk & Quality of Earnings Certain rated companies’ cash flow is supported by long-term take-or-pay contracts. Examples include Woodside and PTTEP in Asia, which have substantial gas reserves dedicated to domestic or international (through LNG) users. The price of the underlying product in these examples exhibits a relatively lower degree of volatility. This is because it is only partly linked to oil prices (domestic gas) or it incorporates caps/floors (e.g., LNG) to limit downside risk while providing upside earnings potential. These companies have lower business risk profiles than typical E&Ps (other things being equal).

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OTHER CONSIDERATIONS SPECIFIC TO SPECULATIVE-GRADE COMPANIES Sequential Quarterly Performance With a few exceptions, there is very little seasonality in E&P. When evaluating a particular quarter of a year, companies typically provide a comparison with the same quarter in the prior year. A more relevant measure, however, is the immediately preceding quarter. We look at sequential quarterly production for all E&P companies but this is more important for non-investment grade companies. These companies are generally much smaller and, if they also have a shorter reserve life, can deteriorate more quickly. In addition, investment grade companies, because of their size, often develop larger projects such as offshore fields. These can lead to lumpy production additions that may skew sequential quarterly comparisons. Conversely, when a large field undergoes a maintenance turnaround (such as in the North Sea), production during the quarter may decline, although the fundamental credit quality does not change.

Company Growth Targets, Acquisitions and Event Risk Non-investment grade companies are smaller and younger, and tend to be growing more quickly, particularly through acquisitions. All acquisitions entail a degree of event risk that includes integration of the assets, changes in the company’s cost structure and financing of the transaction. Non-investment grade companies generally don’t have the scale to absorb a bad acquisition or a lengthy integration process, which also adds to the risk. Some high yield companies have a stated growth or acquisition strategy that is rewarded by the equity market as long as the company executes its strategy successfully. However, from a fixed income perspective, aggressive growth targets, particularly involving serial acquisitions, introduce an additional level of volatility and uncertainty that is often incorporated into a company’s rating.

Access to Equity Markets High yield companies often spend more on capex than their operating cash flow, with the deficit funded by the capital markets. On the other hand, investment grade companies generally keep capital spending within cash flow and rarely access the equity markets. A corollary to growth and acquisitions as discussed above is the need to access the equity capital markets to fund this growth. As a result, access to the equity markets is critically important to many noninvestment grade companies’ growth strategies. Our evaluation of E&P companies – particularly high yield companies – includes consideration of their ability and willingness to access the equity markets.

Management/CEO Most E&P companies were founded by entrepreneurs who have grown the company and are often still employed by it. While there are some investment grade E&P companies run by members of a founding family, this is more typical of high yield companies. In addition, the force of the CEO’s personality is felt more strongly in a smaller company. While management is important in all companies, the CEO’s and senior management’s strategy, vision and risk tolerance is a consideration in our ratings process, especially for high yield companies.

Final Considerations The table in the Appendix summarizes the 11 mapped metrics among the four key rating factors for each of the E&P companies we rate. The table highlights indicated ratings that are at least one letter rating category higher or lower than the company’s actual senior unsecured or corporate family rating. As noted in the discussion of the individual rating factors, there is a natural interrelationship, both direct and indirect, among a number of the metrics. Larger companies often have legacy asset positions in larger fields wherein they benefit from economies of scale and may maintain greater buying power with drilling contractors or oilfield services companies. This provides an advantage in cost structure, in both capital and cash operating costs. Larger companies also typically generate free cash flow (cash flow from operations less capex and dividends), which enables them to build up their equity and reduce their leverage. As noted, there is a direct linkage between three-year all-sources F&D costs and several other metrics. F&D costs are a component of full-cycle costs and the denominator in the leveraged full-cycle ratio. F&D costs also affect cash flow coverage through the calculation of sustaining capex.

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The table in the Appendix shows the indicated composite rating using the weightings shown below. The weighting factors are designed to ascribe more weight to those metrics that tend to play a more meaningful role in the rating process, including scale and diversification, and leverage, which combine for about two-thirds of the total weight. Key Rating Factor

Weighting

Reserves and Production Characteristics

36%

Re-investment Risk

16%

Operating and Capital Efficiency

18%

Leverage and Cash Flow Coverage Total

30% 100%

Overall, the key rating factors predict a rating that is within two notches of the actual rating for roughly 80% of the E&P companies, a level we believe provides a reasonable degree of accuracy and transparency. A review of the table in the Appendix underscores an important point: a company’s final rating is a composite of a number of variables. While this is obvious, the significance of this point is that companies will have individual metrics that are higher or lower than its actual rating, especially based on historical values. This reflects the reality of credit analysis where some factors provide positive support for the rating while other factors tend to add negative pressure on the rating. The ultimate decision of a rating committee is not a mechanistic weighting of the factors but a thoughtful analysis of what the various metrics are telling us about a company’s expected future performance. In addition to the quantitative measurements described here, we also consider a company’s stated strategy and its execution of that strategy, the quality of its management, risk tolerance, and financial flexibility and liquidity. Finally, we emphasize that Moody’s ratings are forward looking. Although we evaluate historical performance, our ratings are meant to provide a view regarding risk, probability of default and loss given default in the future. As such, we start with historical data, but then make pro forma adjustments to reflect significant changes such as acquisitions, divestitures and capital structure differences to bring the historical numbers up to date. We then forecast a company’s expected near-term performance to arrive at metrics that dynamically reflects where we expect the company is headed. For example, an E&P rating committee in the fall of 2005 would be concerned with how the company would be expected to look at year-end 2005 and into 2006. The use of historical values such as three-year average F&D costs from 2002 to 2004 could potentially understate, possibly to a great extent, the company’s current and expected F&D costs, which are more relevant for ratings purposes.

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Exploration & Production - Outlier Outcome Summary

Moody’s Rating Methodology

Operating & Capital Re-investment Risk Efficiency Leverage & Cash Flow Coverage Senior 3-year Drillbit (Debt + Future (Retained Unsecured Proved Total 3-year AllF&D Costs Leveraged Development Cash Flow or Corporate Annual Pro- Developed Proved Sources Including Full-Cycle Full-Cycle Debt / PD Capex) / Total Sustaining Company Family Rating Outlook duction Reserves Reserves Diversification F&D Revisions Cost Ratio Reserves Reserves Capex) / Debt Baa Baa A A Aaa Aa A A Baa Baa Ba BG Energy A2 Stable CNOOC 3 (A2)* Stable Baa Baa A B Aa A Aa A Aa Baa Baa Ba Baa Baa B Aaa Aa Aaa Aa Aa A Baa PTT E&P 4 (A2)* Stable Apache A3 Stable Baa Baa Baa A A A A A A A A Baa Baa A A A Baa Baa A A A Baa Burlington A3 Stable Occidental A3 Stable A A A A Aa A Baa Aa A A A A Baa A Baa Baa Baa A A Baa Anadarko Baa1 Stable Baa Baa Canadian Natural Baa1 Stable Baa Baa Baa Baa Baa Baa Baa Baa A Baa Baa A Baa A Baa Aa A A EOG Baa1 Stable Baa Baa Baa Baa Murphy Baa1 Negative Baa Baa Baa Ba Ba Ba Ba Baa A Baa A A Baa Ba Ba Ba A Baa Baa Talisman Baa1 Stable Baa Baa Baa Woodside Baa1 Stable Baa Ba Baa B A Aa Aa Aa Baa Baa Ba A A A A Baa Ba Baa Baa Baa Baa Baa Devon Baa2 Stable EnCana Baa2 Stable A Baa Baa A Baa Ba Baa Baa Ba Ba Baa Ba B B Ba Ba A A Ba Husky Baa2 Stable Baa Baa Baa Nexen Baa2 Negative Baa Baa Baa Ba Ba Ba Ba Baa Ba Ba Ba A Baa Noble Baa2 Negative Baa Baa Baa Baa Baa Baa Baa Baa Baa PetroCanada Baa2 Stable Baa Baa Baa Baa Ba Caa Baa Baa A A Baa Ba Baa Ba Ba Baa Ba Ba Ba Pioneer Baa3 RUR Down Baa Baa Baa XTO Energy Baa3 Stable Baa Baa Baa Ba A Aa Baa Baa Baa Baa Baa Baa Baa Baa Baa B B B B B Ba Caa Amerada Hess Ba1 Stable Chesapeake Ba2 Stable Baa Baa Baa Ba Ba Baa Ba Baa B B Ba B B Ba Baa Baa Ba Baa Newfield Ba2 Stable Ba Ba Ba Ba Petrobras Energia 5 (Ba2)* Stable Baa Baa Baa Baa Ba B Ba Caa Baa Baa Caa Baa Baa Baa Ba Baa Baa Ba Plains E&P Ba2 Stable Ba Ba Ba Ba Pogo Ba2 Stable Ba Ba Ba Ba B B Ba Ba Ba Ba Ba B B Ba Ba A Baa A Aa Baa A B Southwestern Ba2 Stable Vintage Ba2 Negative Ba Ba Ba Ba B Caa Ba Caa A A Caa Caa Caa B B A Baa A Cimarex Ba3 Stable Ba Ba Ba Ba Denbury Ba3 Stable Caa Ba Ba B A Baa Caa A Baa Baa A B Ba Ba B Baa Ba Ba Ba Baa Baa Ba Encore Acq. Ba3 Positive Forest Ba3 Negative Ba Ba Ba B B B B B Ba Ba B B B Ba B B B Ba B Baa Ba A Houston Exp. Ba3 Stable Kerr-McGee Ba3 Stable Baa Baa Baa Ba B B Ba B Ba Ba Ba B B Ba B Baa Ba Ba Baa Baa Ba Ba Swift Ba3 Stable Whiting Ba3 Stable B Ba Ba Ba Baa Ba B Baa Ba Ba Ba * Numerical rating reflects baseline credit assessment per Moody's Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating or Foreign Currency rating in cases where there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005). Positive Outlier Reserves & Production Characteristics

Negative Outlier

Indicated Rating A A A A A A Baa Baa A Baa Baa Baa Baa Baa Baa Ba Baa Baa Ba Baa Ba Ba Ba Ba Ba Ba Baa Ba Ba Ba Ba B Ba Ba Ba Ba

Exploration & Production - Outlier Outcome Summary Operating & Capital Re-investment Risk Efficiency Leverage & Cash Flow Coverage Senior 3-year Drillbit (Debt + Future (Retained Unsecured Proved Total 3-year AllF&D Costs Leveraged Development Cash Flow or Corporate Annual Pro- Developed Proved Sources Including Full-Cycle Full-Cycle Debt / PD Capex) / Total Sustaining Company Family Rating Outlook duction Reserves Reserves Diversification F&D Revisions Cost Ratio Reserves Reserves Capex) / Debt Caa Caa Caa Caa Ba Ba Caa Baytex B1 Stable B B B B Compton B1 Stable Caa B B B B B B B Ba Baa Ba Caa B Ba B Ba Caa Ba Baa Ba Ba Ba Comstock B1 Stable EXCO Resources B1 Developing Caa Ba Ba B A Baa B Baa B B Ba Ba Ba Ba Caa Aaa Aaa A Baa B Caa B PT Medco Energi B1 Stable Range B1 Positive B Ba Ba B A Baa Ba Ba Baa Ba Ba Ba Ba B Caa Caa Caa Ba Baa Ba Ba Stone B1 Negative B Clayton Williams B2 Stable Caa B B B Ba B B Ba Baa Ba Baa Caa B B B B B B Ba Baa B Ba Energy Partners B2 Negative HET B2 RUR Down B B B B Ba Ba Ba Ba Ba Baa Caa Caa B B B Baa Baa Baa Baa B Ba Baa KCS Energy B2 Stable Delta B3 Stable Caa Caa B Caa Ba B B B Caa Ba B Ba Ba Ba Caba B B B B B B B El Paso Prod. B3 Stable Paramount B3 Negative Caa B Caa Caa Caa Caa Caa Ba Caa Caa Ba B B Caa Caa Caa Caa Caa B B Caa Belden & Blake Caa1 Developing Caa Petrohawk Caa1 Stable Caa B B B B Baa Caa B Caa B B Ba Ba Baa Ba Caa PetroQuest Energy Caa1 Stable Caa Caa Caa Caa Caa Caa * Numerical rating reflects baseline credit assessment per Moody's Methodology for Government-Related Issuers. Rating in parentheses is Global Local Currency rating or Foreign Currency rating in cases where there is no Global Local Currency Rating. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005). Positive Outlier Reserves & Production Characteristics

Negative Outlier

Indicated Rating B B Ba Ba Ba Ba B Ba B Ba Ba B B Caa Caa B B

Moody’s Rating Methodology 25

Related Research Rating Methodologies: Global Integrated Oil & Gas Industry, October 2005 (94696) Global Refining and Marketing Industry, October 2005 (94695) Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations - Part I, July 2005 (93570) Industry Outlooks: Outlook for the Investment Grade North American Exploration and Production Industry, September 2005 (94356) Asia's Oil & Gas Sector: Stable-to-Positive Rating Outlook as Solid Credit Fundamentals Continue, August 2005 (93919) Financial Reporting Assessments: Oil & Gas Exploration and Production Industry, September 2004 (89040) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

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Moody’s Rating Methodology