Exhibit (c)(5)
Project Kernel
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Valuation Discussion Materials
May 5, 2000
================================================================================
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table of Contents
================================================================================
- --------------------------------------------------------------------------------
Section 1 Market Update
- --------------------------------------------------------------------------------
Section 2 Valuation Overview
- --------------------------------------------------------------------------------
Tab A Public Market
- --------------------------------------------------------------------------------
Tab B Private Market
- --------------------------------------------------------------------------------
Tab C Break - Up
- --------------------------------------------------------------------------------
Tab D Discounted Cash Flow
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Section 1
- --------------------------------------------------------------------------------
Market Update
================================================================================
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
Project Kernel
o Kernel has outperformed its peers by 49.4% since BPA-Arco unaffected
- --------------------------------------------------------------------------------
Market Update
- --------------------------------------------------------------------------------
Kernel Relative to Peers(1)
Since March 26, 1999
================================================================================
- --------------------------------------------------------------------------------
Indexed Share price
%
- --------------------------------------------------------------------------------
[Line graph displaying indexed share price of Kernel, Peers(1) and the $71.00
offer price from March 26, 1999 to May 3, 2000. Each of Kernel and Peers was
assigned an indexed price of 100 at March 26, 1999. At May 3, 2000, Kernel had
an indexed share price of 177.8/$79.13 and Peers had an indexed share price of
128.4/$57.13.]
Note
1. Peers include APA, APC, BR, DVN, EOG, KMG, MUR, NBL, OEI, PXD, SFS, UPR
and UCL. Market cap weighted
MORGAN STANLEY DEAN WITTER 2
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Market Update
- --------------------------------------------------------------------------------
Commodity Prices vs. Kernel and Peers(1)
Since December 30, 1994
================================================================================
- --------------------------------------------------------------------------------
Commodity Prices vs. Kernel and Peers(1)
%
- --------------------------------------------------------------------------------
[Line graph showing commodity prices (60/40 Gas/Oil Blended Strip) vs. Kernel
and Peers(1) in percent from December 30, 1994 to May 3, 2000, with each
assigned an indexed percentage of 100 at December 30, 1994.]
Note
1. Peers include APA, APC, BR, DVN, EOG, KMG, MUR, NBL, OEI, PXD, SFS, UPR
and UCL. Market cap weighted
MORGAN STANLEY DEAN WITTER 3
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Section 2
- --------------------------------------------------------------------------------
Valuation Overview
================================================================================
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Summary Valuation Overview
================================================================================
- --------------------------------------------------------------------------------
Equity Value per Share
$
- --------------------------------------------------------------------------------
[Horizontal bar graph showing ranges of equity value per share calculations for
each of: comparable companies ($47-$61); precedent transactions ($51-61); break
up valuation ($34-$43); and discounted cash flow analysis ($45-$60).]
Share Price($) 50 60 70 80
FD Equity Value ($MM)(1) 4,927 5,930 7,033 7,935
FD Agg. Value ($MM)(2) 5,820 6,823 7,926 8,829
Implied Purchase Price (18.1%) ($MM) 959 1,151 1,362 1,534
Implied(3) P/CF (00E) 4.7 5.7 6.7 7.6
P/CF (01E) 4.5 5.4 6.4 7.2
Implied(3) AV/EBITDA (00E) 5.3 6.2 7.2 8.1
AV/EBITDA (01E) 5.1 5.9 6.9 7.7
- --------------------------------------------------------------------------------
Notes
1. Fully diluted assuming 97.689MM basic ordinary shares outstanding and
2.6MM options at a weighted average price of $33.74 as of March 31, 1999
FDAV = FDMV + Net Debt - Investments in Unconsolidated Affiliates
2. Assuming net debt of $935MM and investment in unconsolidated affiliate of
$41MM
3. First Call Mean
MORGAN STANLEY DEAN WITTER 5
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Comparable Companies Valuation
================================================================================
- --------------------------------------------------------------------------------
Equity Value Per Share
$
- --------------------------------------------------------------------------------
[Horizontal bar graph showing ranges of equity value per share calculations for
each of: agg. value/BOE ($42 (7.50/BOE) to $56 (9.50/BOE)); equity value/2000E
cash flow (1) ($48 (4.5x) to $64 (6.0x)); and agg. value/2000 EBITDA (1)(2) ($52
(5.5x) to $63 (6.5x)).]
Notes
1. Based on First Call estimates
2. Assumes net debt of $935MM and investment in unconsolidated affiliate of
$41MM
MORGAN STANLEY DEAN WITTER 6
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Comparison Between Kernel and Peers(1)(2)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2000E P/CF as of March 15, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
P/CF as of March 15, 2000, and displaying the following data:]
Kernel $63.13 6.3
Peers(2) 4.0
- --------------------------------------------------------------------------------
2000E Agg. Value/EBITDA as of March 15, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value EBITDA as of March 15, 2000, and displaying the following data:]
Kernel $63.13 6.8
Peers(2) 5.4
- --------------------------------------------------------------------------------
2000E P/CF as of May 3, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
P/CF as of May 3, 2000, and displaying the following data:]
Kernel Offer Price $71.00 6.7
Peers(2) 4.8
- --------------------------------------------------------------------------------
2000E Agg. Value/EBITDA as of May 3, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value/EBITDA as of May 3, 2000, and displaying the following data:]
Kernel Offer Price $71.00 7.2
Peers(2) 5.6
Notes
1. Sources: 10-K's and FactSet. Based on First Call estimates
2. Peers are defined as APC, APA, BR, DVN, EOG, KMG, MUR, NBL, OEI, PXD, SFS,
UPR and UCL
MORGAN STANLEY DEAN WITTER 7
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Comparison Between Kernel and Peers(1)(2) (cont'd)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2000E Agg. Value / BOE as of March 15, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value/BOE as of March 15, 2000, and displaying the following data:]
Kernel $63.13 10.42
Peers(2) 5.98
- --------------------------------------------------------------------------------
2000E Agg. Value / PT SEC-10 as of March 15, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value/PT SEC-10 as of March 15, 2000, and displaying the following data:]
Kernel $63.13 148
Peers(2) 112
- --------------------------------------------------------------------------------
2000E Agg. Value / BOE as of May 3, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value/BOE as of May 3, 2000, and displaying the following data:]
Kernel Offer Price $71.00 11.67
Peers(2) 7.45
- --------------------------------------------------------------------------------
2000E Agg. Value / PT SEC-10 as of May 3, 2000
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing comparison between Kernel and Peers (1)(2) of 2000E
agg. value/PT SEC-10 as of May 3, 2000.]
Kernel Offer Price $71.00 165
Peers(2) 128
Notes
1. Sources: 10-K's and FactSet
2. Peers are defined as APC, APA, BR, DVN, EOG, KMG, MUR, NBL, OEI, PXD, SFS,
UPR and UCL
MORGAN STANLEY DEAN WITTER 8
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Historical Forward Cash Flow Multiples
================================================================================
- --------------------------------------------------------------------------------
Historical Forward Cash Flow Multiples
x
- --------------------------------------------------------------------------------
[Line graph showing historical forward cash flow multiples for each of Kernel
and Peers(1) for the period February 23, 1994 through April 6, 2000.]
Note
1. Median of peers taken. Peers include APC, APA, BR, DVN, EOG, KMG, MUR,
NBL, OEI, PXD, SFS, UPR and UCL. Based on First Call estimates
MORGAN STANLEY DEAN WITTER 9
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Comparable E&P Trading Multiples(1)
================================================================================
Adj. Mkt. Cap.
Share Price to Earnings Price to Cash Flow to EBITDAX Adj. Market Capital
Price ----------------- ------------------ ------------------ ------------------------
Company (5/3/00) 2000E 2001E 2000E 2001E 2000E 2001E to SEC (PT) per BOE
- --------------------- -------- ------ ------ ----- ----- ----- ----- ----------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
Offer Price $71.00 21.7x 18.6x 6.7x 6.4x 7.2x 6.9x 165% $11.67
- ------------------------------------------------------------------------------------------------------------------------------------
Anadarko(2) $43.13 35.1x 59.1x 7.2x 6.1x 8.5x 7.6x 114% $7.66
Apache 49.13 15.0 17.7 5.3 5.5 6.2 6.5 128% 9.79
Burlington Res. 38.63 24.0 23.0 5.6 5.7 6.2 6.3 128% 6.47
Devon 46.63 19.8 23.7 5.1 5.1 5.6 5.7 144% 7.79
EOG Resources, Inc. 26.25 22.9 25.5 4.8 5.0 5.8 6.0 133% 6.88
Kerr McGee Corp. 52.88 9.0 12.4 3.6 4.1 4.4 5.0 110% 7.26
Murphy Oil Corp. 58.00 13.5 14.4 5.0 5.0 5.0 5.1 129% 7.45
Noble 37.25 23.0 26.2 4.8 4.5 5.1 4.9 142% 7.88
Ocean Energy 13.94 14.6 15.9 4.1 4.0 5.5 5.5 129% 9.15
Pioneer 10.50 18.4 17.8 3.1 3.0 5.9 5.7 79% 4.56
Santa Fe Snyder 9.00 13.4 13.6 3.3 3.2 4.4 4.3 117% 6.15
Union Pacific Res. 19.06 24.3 28.0 4.2 4.0 6.0 5.8 112% 7.87
Unocal 32.50 16.3 18.1 4.6 4.6 5.6 5.6 119% 6.54
------------------------------------------------------------------------------------------------------------
High 35.1x 59.1x 7.2x 6.1x 8.5x 7.6x 144% $9.79
Median 18.4 18.1 4.8 4.6 5.6 5.7 128% 7.45
Low 9.0 12.4 3.1 3.0 4.4 4.3 79% 7.46
------------------------------------------------------------------------------------------------------------
Notes
1. Prices as of 5/3/00. Estimates from First Call
2. Pro forma for acquisition of UPR. Estimates from Morgan Stanley Dean
Witter Equity Research
MORGAN STANLEY DEAN WITTER 10
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Transactions Valuation
================================================================================
- --------------------------------------------------------------------------------
Equity Value per Share
$
- --------------------------------------------------------------------------------
[Horizontal bar graph showing precedent transactions' equity value per share, in
dollars, for each of: agg. value/BOE ($39 (7.00 BOE) to $46 (8.00/BOE)); equity
value/2000E cash flow(1) ($57 (5.5x) to $68 (6.5x)); and agg. value/2000E
EBITDA(1)(2) ($57 (6.0x) to $68 (7.0x)).]
Notes
1. Based on First Call estimates
2. Assumes net debt of $935MM and investment in unconsolidated affiliate of
$41MM
MORGAN STANLEY DEAN WITTER 11
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Corporate E&P Transaction Multiples
================================================================================
- --------------------------------------------------------------------------------
Aggregate Value/1 Yr. Forward EBITDA
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing precedent corporate E&P transaction multiples
aggregate value/1 Yr. forward EBITDA, and displaying the following data:]
UPR/Norcen 5.8
ARCO/UTH 5.6 7.2x
Kerr-McGee/Oryx 6.9 Offer
Ocean/Seagull 3.5
Santa Fe/Snyder 4.7 5.6x
Devon/PZE 5.0 Median
Burlington/Poco 7.1
Talisman/Rigel 6.3
Anadarko/UPR 5.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price/1 Yr. Forward Cash Flow
x
- --------------------------------------------------------------------------------
[Vertical bar graph showing precedent corporate E&P transaction multiples
price/1 Yr. forward cash flow, and displaying the following data:]
UPR/Norcen 5.7
ARCO/UTH 6.4 6.7x
Kerr-McGee/Oryx 3.8 Offer
Ocean/Seagull 2.9
Santa Fe/Snyder 3.8 3.9x
Devon/PZE 2.6 Median
Burlington/Poco 5.9
Talisman/Rigel 5.1
Anardako/UPR 3.9
MORGAN STANLEY DEAN WITTER 12
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Corporate E&P Transaction Multiples
================================================================================
- --------------------------------------------------------------------------------
Aggregate Value/BOE
$
- --------------------------------------------------------------------------------
[Vertical bar chart showing precedent corporate E&P transaction multiples
aggregate value/BOE, in dollars, and displaying the following data:]
UPR/Norcen 5.03
ARCO/UTH 5.61 11.67
Kerr-McGee/Oryx 5.04 Offer
Ocean/Seagull 3.60
Santa Fe/Snyder 5.28 5.28
Devon/PZE 4.10 Median
Burlington/Poco 7.25
Talisman/Rigel 7.28
Anadarko/UPR 6.02
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate Value/PT SEC-10
%
- --------------------------------------------------------------------------------
[Vertical bar graph showing precedent corporate E&P transaction multiples
aggregate value/PT SEC-10, in percent and displaying the following data:]
ARCO/UTH 96 165
Kerr-McGee/Oryx 98 Offer
Ocean/Seagull 95
Santa Fe/Snyder 145 98
Devon/PZE 119 Median
Anardako/UPR 90
MORGAN STANLEY DEAN WITTER 13
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions: Gulf of Mexico
Corporate
================================================================================
- --------------------------------------------------------------------------------
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
[Combined line and bar graph showing precedent oil and gas corporate
transactions in the Gulf of Mexico. The horizontal axis displays each year 1996
through 2000. The left vertical axis relates to the bar graph and shows
transaction multiple in $/BOE. The bar graph displays the low, median and high
transaction multiples for each year. The low, median and high transaction
multiples for 1996 corporate transactions were 3.24, 5.46 and 6.30; 1997
corporate transactions were 4.75, 8.09 and 14.36; 1998 corporate transactions
were 4.66, 5.01 and 5.55; the low for 1999 corporate transactions was 6.14 and
the low for 2000 corporate transactions was 4.94. A line graph on the same space
shows $/Bbl WTI Price from 1996 through 2000.]
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
Corporate Corporate Corporate Corporate Corporate
--------- --------- --------- --------- ---------
# Transactions 6 7 4 2 1
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER 14
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions: Texas
Corporate
================================================================================
- --------------------------------------------------------------------------------
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
[Combined bar and line graph showing precedent oil and gas corporate
transactions in Texas for each of the years 1996 through 2000. The horizontal
axis displays each year 1996 through 2000. The left vertical axis displays
transaction multiple in $/BOE and corresponds to the bar graph. The bar graph
displays the low, median and high transaction multiples for corporate
transactions in each of the years listed. The low, median and high transaction
multiples in $/BOE for 1996 corporate transactions were 368, 5.25 and 7.75; 1997
corporate transactions were 6.00; 8.05 and 9.96; 1998 transactions were 3.73,
5.10 and 5.94; 1999 corporate transactions were 2.58, 4.10 and 5.35; and the low
transaction multiple for 2000 corporate transactions was 6.02. A line graph on
the same space shows $/Bbl WTI Price for the years 1996 through 2000.]
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
Corporate Corporate Corporate Corporate Corporate
--------- --------- --------- --------- ---------
# Transactions 7 3 9 3 1
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER 15
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions: Mid-Continent
Corporate
================================================================================
- --------------------------------------------------------------------------------
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
[Combined line and bar graph showing precedent oil and gas corporate
transactions in the mid-continent. The horizontal axis shows each of the years
1996 through 2000. The left vertical axis shows transaction multiple in $/BOE
and corresponds to the bar graph. The bars indicate the low, median and high
transaction multiples for each year. The low, median and high transaction
multiples for 1996 corporate transactions were 3.68, 4.57 and 6.05; 1997
corporate transactions were 6.00, 6.75 and 7.79; 1998 corporate transactions
were 4.98, 5.94 and 7.84. There were no transactions listed for 1999 or 2000. A
line graph on the same space shows the $/Bbl WTI Price for the years 1996
through 2000.]
1996 1997 1998 1999 2000
Corporate Corporate Corporate Corporate Corporate
# Transactions 6 5 5 0 0
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER 16
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Components of Break-Up Valuation
================================================================================
- --------------------------------------------------------------------------------
$/Share
($MM Gross Value)
- --------------------------------------------------------------------------------
[Vertical bar chart displaying the components of a break up valuation, in
$/share (and $MM gross value). The components listed are proved reserves: $41.60
($4,127); other assets(1): $44.10 ($4,375); debt & liabilities(2): $31.50
($3,123); exploration: $38.55 ($3,822); and premium: $32.45 (3,211).]
Notes
1. Other Assets includes other long-term assets, working capital, and the net
present value of expected future Section 29 tax credits
2. Debt & Liabilities includes net debt and deferred liabilities and credits
MORGAN STANLEY DEAN WITTER 17
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Exploration Valuation
================================================================================
Net Implied
Exploratory Acreage Undeveloped Valuation Range Valuation Range
- ------------------------- ----------- ---------------------- ----------------------
(per unit) ($MM)
Gulf of Mexico(1) 1,037 $ 175 - $ 200 $ 181 - $ 207
Arkansas 53 50 - 100 3 - 5
Colorado 1 50 - 100 0 - 0
Kansas 12 50 - 100 1 - 1
Louisiana 44 50 - 100 2 - 4
Oklahoma 52 50 - 100 3 - 5
Texas 951 50 - 100 48 - 95
Wyoming 182 50 - 100 9 - 18
Other 52 50 - 100 3 - 5
--------- --------- ---------
Total 2,384
Total Exploration Value $ 249 - $ 342
========= =========
Percent of Proved Value MMBOE
- ----------------------- ----------
25% of Proved Reserves 25% 170 $6.00 - $7.00 $1,018 - $1,188
- -------------------------------------------------------------------------------------------
Average of Methodologies $634 $765
- -------------------------------------------------------------------------------------------
Note
1. Total cost of net GOM leases not expired is $216.3 as of December 15,
1999. Source: Offshore Data Services
MORGAN STANLEY DEAN WITTER 18
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
SEC-10 Valuation
================================================================================
o WTI
- at 12/31/99: $25.60
- 10 yr Historical (avg): $19.73
- 10 yr Forward Curve (avg)(4): $19.29
o Henry Hub
- at 12/31/99: $2.30
- 10 yr Historical (avg): $2.04
- 10 yr Forward Curve (avg)(4): $2.85
[Bar chart showing the components of the SEC-10 valuation, in $/share, (and $MM
gross value) and displaying the following data:]
================================================================================
$/Share ($MM Gross Value
------- ----------------
After-Tax SEC-10 $35.00 ($3,475)
Capitalized G&A(1) $31.50 ($3,125)
Other Assets(2) $34.00 ($3,372)
Debt & Liabilities(3) $21.35 ($2,120)
Exploration $28.45 ($2,820)
Premium $42.55 ($4,213)
================================================================================
Notes
1. Based on 1999 G&A expense capitalized at 10%. 36% tax rate assumed
2. Other Assets includes other long-term assets, working capital, and the net
present value of expected future Section 29 tax credits
3. Debt & Liabilities includes net debt and deferred liabilities and credits
4. As of April 28, 2000
MORGAN STANLEY DEAN WITTER 19
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
1999 Reserves
MMBOE
================================================================================
[Vertical bar chart showing 1999 reserves, in MMBOE, and displaying the
following data:]
================================================================================
1999 Reserves
MMBOE
- --------------------------------------------------------------------------------
Chevron 6,293
Kernel- Proved+ Risked P2/P3 +
Expected Growth + Risked Expl. 5,011
Texaco 4,831
Phillips(1) 4,139
ARCO(1) 2,688
Conoco 2,554
Kernel- Proved+ Risked P2/P3 +
Expected Growth 2,232
Occidental 2,203
Marathon 1,505
Kernel- Proved+ Risked P2/P3 1,011
Kernel- Proved 679
================================================================================
Sources 10-K's, Kernel Management Long-Range Plan
Note
1. Pro forma for ARCO Alaska transaction
MORGAN STANLEY DEAN WITTER 20
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions: Gulf of Mexico
Asset
================================================================================
[Combined line and bar graph showing precedent oil & gas asset transactions in
the Gulf of Mexico. The horizontal axis shows each year 1996 through 2000. The
left vertical axis shows transaction multiple, in $/BOE, and corresponds to the
bar graph. The bars indicate the low, median and high transaction multiple for
asset transactions in each of 1996 through 2000. The low, median and high
transaction multiples for each of the years 1996 through 2000 is listed below. A
line graph on the same chart shows $/Bbl WTI Price for the period 1996 through
2000.]
================================================================================
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
$71/Share = $11.67/BOE
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Asset Asset Asset Asset Asset
-------- -------- -------- -------- --------
High 9.29 8.75 10.56 6.63 7.20
Median 5.66 6.99 6.54 5.72 6.57
Low 3.89 3.37 2.65 4.80 5.93
# Transactions 8 11 18 5 2
================================================================================
MORGAN STANLEY DEAN WITTER 21
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions: Texas
Asset
================================================================================
[Combined line and bar graph showing precedent oil & gas asset transactions in
Texas. The horizontal axis shows each year 1996 through 2000. The left vertical
axis shows transaction multiple, in $/BOE, and corresponds to the bar graph. The
bars indicate the low, median and high transaction multiple for asset
transactions in each of 1996 through 2000. The low, median and high transaction
multiples for each of the years 1996 through 2000 is listed below. A line graph
on the same chart shows the $/Bbl WTI Price for the period 1996 through 2000.]
================================================================================
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
$71/Share = $11.67/BOE
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Asset Asset Asset Asset Asset
-------- -------- -------- -------- --------
High 5.89 8.47 7.52 8.86 4.07
Median 4.96 4.50 6.00 4.87 4.00
Low 3.24 3.60 2.92 3.26 3.93
# Transactions 4 5 7 6 2
================================================================================
MORGAN STANLEY DEAN WITTER 22
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Precedent Oil & Gas Transactions:
Combined line and bar graph showing precedent oil & gas asset transactions in
the mid-continent. The horizontal axis shows each year 1996 through 2000. The
left vertical axis shows transaction multiple, in $/BOE, and corresponds to the
bar graph. The bars indicate the low, median and high transaction multiple for
asset transactions in each of 1996 through 2000. THe low, median and high
transaction multiples for each of the years 1996 through 2000 is listed below. A
line graph on the same chart shows the $/Bbl WTI Price for the period 1996
through 2000.
================================================================================
[LINE CHART]
- --------------------------------------------------------------------------------
Transaction Multiple
$/BOE $/Bbl WTI Price
- --------------------------------------------------------------------------------
$71/Share = $11.67/BOE
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Asset Asset Asset Asset Asset
-------- -------- -------- -------- --------
High 4.79 7.00 7.80 6.42
Median 4.53 4.99 5.64 4.35
Low 4.27 4.49 4.44 3.58 3.88
# Transactions 2 8 8 4 1
================================================================================
MORGAN STANLEY DEAN WITTER 23
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
DCF Valuation Based on Kernel's 5-Year Plan
Management Case
================================================================================
'00-'04C AGR
- ---------------------------------
o EBITDA 11%
o Cash Flow 8%
o Reserves 13%
o Production 12%
[Horizontal bar graph displaying DCF Valuation Based on Kernel's 5-Year Plan,
equity value per share, in dollars, based on terminal reserve method, terminal
cash flow multiple and terminal EBITDA multiple, and displaying the information
presented below:]
================================================================================
Equity Value Per Share
$
- --------------------------------------------------------------------------------
Terminal Reserve Method(1) $55 $71
(7.50/BOE) (9.50/BOE)
Terminal Cash Flow Multiple(1) $46 $61
(4.5x) (6.0x)
Terminal EBITDA Multiple(1) $58 $69
(5.5x) (6.5x)
================================================================================
Note
1. Assumes 10% discount rate, 99.2 fully diluted shares outstanding, $935MM
of net debt, and $41MM investment in unconsolidated affiliate
MORGAN STANLEY DEAN WITTER 24
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Kernel Historical vs. Projected Financial Statistics
Management Case
================================================================================
[Vertical bar graph showing production, in MMBOE, and displaying the following
data:]
================================================================================
Production
MMBOE
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 72
1998 78
1999 88
Projected
- --------------------------------------------------------------------------------
2000 96
2001 97
2002 105
2003 133
2004 146
================================================================================
Source Company filings and Long Range Plan
[Vertical bar graph showing reserves in MMBOE, and displaying the following
data:]
================================================================================
Reserves
MMBOE
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 526
1998 617
1999 679
Projected
- --------------------------------------------------------------------------------
2000 780
2001 922
2002 1,073
2003 1,192
2004 1,277
================================================================================
Source Company filings and Long Range Plan
[Vertical bar graph showing net income, in $MM, and displaying the following
data:]
================================================================================
Net Income
$MM
- --------------------------------------------------------------------------------
Historical EPS
- --------------------------------------------------------------------------------
1997 241 2.47
1998 136 1.40
1999 213 2.19
Projected EPS
- --------------------------------------------------------------------------------
2000 382 3.88
2001 371 3.76
2002 316 3.21
2003 414 4.20
2004 494 5.01
================================================================================
Source Company filings and Long Range Plan
[Vertical bar graph showing cash flow, in $MM, and displaying the following
data:]
================================================================================
Cash Flow
$MM
- --------------------------------------------------------------------------------
Historical EPS
- --------------------------------------------------------------------------------
1997 772 7.93
1998 723 7.42
1999 869 8.93
Projected EPS
- --------------------------------------------------------------------------------
2000 1,123 11.40
2001 1,123 11.40
2002 1,193 12.11
2003 1,407 14.28
2004 1,542 15.65
================================================================================
Source Company filings and Long Range Plan
MORGAN STANLEY DEAN WITTER 25
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Kernel Historical vs. Projected Operating Statistics
Management Case
================================================================================
[Vertical bar graph showing production costs per BOE, in dollars, and displaying
the following data:]
================================================================================
Production Costs per BOE
$
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 3.70
1998 3.40
1999 3.40
Projected
- --------------------------------------------------------------------------------
2000 3.47
2001 3.65
2002 3.62
2003 3.48
2004 3.42
================================================================================
Source Company filings and Long Range Plan
[Vertical bar graph showing EBITDAX per BOE in dollars, and displaying the
following data:]
================================================================================
EBITDAX per BOE
$
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 10.28
1998 8.39
1999 9.82
Projected
- --------------------------------------------------------------------------------
2000 12.15
2001 11.82
2002 11.19
2003 11.82
2004 12.19
================================================================================
Source Company filings and Long Range Plan
[Vertical bar graph showing 3-year avg. reserve replacement(1), in percent, and
displaying the following data:]
================================================================================
3-Year Avg. Reserve Replacement(1)
%
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 150
1998 176
1999 188
Projected
- --------------------------------------------------------------------------------
2000 205
2001 216
2002 236
2003 225
2004 195
================================================================================
Source J.S. Herold and Long Range Plan
[Vertical bar graph showing 3-year avg. reserve replacement cost per BOE(1), in
dollars, and displaying the following data:]
================================================================================
3-Year Avg. Reserve Replacement Cost per BOE(1)
$
- --------------------------------------------------------------------------------
Historical
- --------------------------------------------------------------------------------
1997 5.55
1998 6.22
1999 5.67
Projected
- --------------------------------------------------------------------------------
2000 5.17
2001 4.66
2002 5.05
2003 5.18
2004 5.54
================================================================================
Source J.S. Herold and Long Range Plan
Note
1. Based on all sources reserve replacement
MORGAN STANLEY DEAN WITTER 26
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Kernel Historical vs. Projected Acquisition Spending
================================================================================
o Kernel projects its future acquisition spending to increase significantly in
the next five years
[Vertical bar graph showing property acquisition costs incurred, in $MM, and
displaying the following data:]
- --------------------------------------------------------------------------------
Property Acquisition Costs Incurred
$MM
- --------------------------------------------------------------------------------
Historical Mobil
- --------------------------------------------------------------------------------
Mean 188
Mean(1) 101
1995 70
1996 120
1997 161
1998 516 79
1999 75
Projected
- --------------------------------------------------------------------------------
Mean 218
2000 120
2001 370
2002 277
2003 150
2004 175
================================================================================
Note
1. Not including $437MM acquisition of assets from Mobil
MORGAN STANLEY DEAN WITTER 27
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Forward Business Plan-Assumptions Used by Kernel
================================================================================
o Strong US Gas Position With Strengthening US Gas Prices
o Onshore and Shelf Production Base Will Continue to Grow
o Significant Potential for Deepwater GOM Growth
o Significant Exploration Portfolio with Dozens of High Potential Prospects
o Ability to Grow Deepwater GOM Production to ~500 MBOEPD by 2009
MORGAN STANLEY DEAN WITTER 28
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Base Production is Still Growing
================================================================================
================================================================================
U.S. Base Gas Production vs. Kernel
- --------------------------------------------------------------------------------
[Line charts showing U.S. base gas production vs. Kernel. One chart shows
production, in billion cubic feet per day, for the years 1990 through 1999. It
indicates that U.S. industry re-investment delivered a net 1% growth in base
gas supply during the 1990s, and underlying base gas supply decline averaged 19%
in the 1990s. A separate chart shows Kernel production contribution, in BCFE,
for the years 1994 through 2008.]
o U.S. base decline of 19% during the 1990's has been offset to deliver a 1%
increase in supply.
o Kernel base has inclined 6% per year from 1994-99 driven by the
acquisition of Mobil Shelf GOM properties.
o Kernel base is projected to grow by 7% per year from 2000 through 2006
while.
MORGAN STANLEY DEAN WITTER 29
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
o Forward plan dominated by growth in deepwater Gulf of Mexico
o Deepwater scale of growth assertion is dependent upon all of the
following:
-- Kernel's stated prospect inventory and drilling schedule
-- Kernel's ability to deliver projected production forecast without an
historical track record
-- Kernel acquiring the critical mass of underlying leasehold and
historical activity required to deliver production of this scale
-- Kernel's prospect inventory dramatically exceeding historical
statistics for the basin
MORGAN STANLEY DEAN WITTER 30
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Dozens of High Potential Prospects
================================================================================
================================================================================
Implied Exploration Performance to Achieve Kernel's Stated Growth
- --------------------------------------------------------------------------------
Discovery Volumes
[Vertical bar chart showing discovery volumes. The horizontal axis indicates
categories of reserve size (Mmboe) and the vertical axis shows the number of
discoveries. A separate bar for each reserve size category is displayed for
industry discoveries and Kernel prospect inventory.]
o Historical discoveries lie on typical "log-normal" distribution
o A "reasonable" prospect inventory will match the historical pool-size
distribution for the basin
Success Rate
[Line chart showing success rate. The horizontal axis presents well sequence
and the vertical axis displays success rate, ranging from 0% to 50%.]
o Industry's record of success reflects early learning, peaks at greater
than 30% in 1996, and declines to 25% today as easy fields have been found
o Kernel's prospect inventory averages 42% chance of success
MORGAN STANLEY DEAN WITTER 31
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
================================================================================
Kernel's Production Growth
- --------------------------------------------------------------------------------
o Kernel's portfolio and track record do not support growth assumption
-- Delivering the asserted cycle times and concurrent projects implicit
in the plan is unprecedented and extremely difficult
[Line chart showing Kernel's production growth for the years 2000 through 2009,
in mboe/d.]
MORGAN STANLEY DEAN WITTER 32
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
================================================================================
Implied Exploration Performance to Achieve Kernel's Stated Growth
- --------------------------------------------------------------------------------
o Doubling the track record delivers scale, but not pace
o To deliver scale and pace, Kernel must discover 1 billion boe in 2000 in
addition to discoveries of 100 MMBOE per year
[Line graph showing implied exploration performance to achieve Kernel's stated
growth, in mboe/d for the years 2000 through 2002.]
[Line graph showing mboe/d for the years 2000 through 2009 including existing
discoveries, extrapolated track record and one billion BOE discoveries in 2000.]
MORGAN STANLEY DEAN WITTER 33
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Deepwater Positioning
Gulf of Mexico
================================================================================
================================================================================
Leading Deepwater Position - Top 15 Leaseholders >1,500 ft(1)(3)
No. Leases
- --------------------------------------------------------------------------------
Maize Kernel
----- ------
Maize/Wheat(2) 767 130
ExxonMobil 654
RD / Shell 623
Texaco 420
Chevron 396
Conoco 316
Unocal 222
BHP 218
Kerr-McGee 214
Burlington 193
Total Fina Elf 145
Kernel 130
Phillips 118
Amerada Hess 106
================================================================================
Source Offshore Data Services, Inc.
Notes
1. Ranked by Number of Blocks (% interest)
2. Includes 100% of Kernel share, Wheat owns 81.9% of Kernel
3. As of December 15, 1999
MORGAN STANLEY DEAN WITTER 34
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
================================================================================
Deepwater GOM Leaseholds
- --------------------------------------------------------------------------------
o Dominant players have long history of material lease positions
o Kernel is a late entrant and its leasehold is not material
[Line graph showing deep water GOM leaseholds for the years pre-1985 through
2000 for each of Maize, Shell, ExxonMobil and Kernel.]
MORGAN STANLEY DEAN WITTER 35
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
================================================================================
Early movers have dominated discovery history
BOE
- --------------------------------------------------------------------------------
o Industry wildcats 248
o Commercial discoveries 57
o Success rate ~25%
[Pie Chart indicating BOE, displaying the following data:]
ROI 2.2 Bn
Maize 2.9 Bn
Kernel 0.2 Bn
ExxonMobil 0.9 Bn
Shell 2.7 Bn
MORGAN STANLEY DEAN WITTER 36
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Assumption: Kernel is Poised for Significant DW Growth
================================================================================
================================================================================
Leasehold and Production
- --------------------------------------------------------------------------------
o Kernel does not have sufficient critical mass of leasehold or reserve base
to deliver growth assertion
o Kernel's growth assertion implies first-mover performance without material
leasehold or first-mover "quality" advantage
[Bar graph showing leaseholding at year of first production for each of Shell
(509); Maize (408); ExxonMobil (338) and Kernel (128).]
[Line graph showing production, in MBOE/D (WI) for each of Maize, Shell,
ExxonMobil and Kernel for each year from year 1 through year 11.]
MORGAN STANLEY DEAN WITTER 37
- --------------------------------------------------------------------------------
Project Kernel
- --------------------------------------------------------------------------------
Valuation Overview
- --------------------------------------------------------------------------------
Forward Business Plan - Summary Points
================================================================================
o Sustained growth in production base is not supportable
o Prospect inventory, acreage holdings and activity levels do not support
projected growth in deepwater GOM
o Will be difficult for Kernel to finance simultaneous growth in base and in
deepwater GOM
o Based on proposed Kernel portfolio, multiple successes are needed for
significant growth in deepwater production resulting in strain on external
and internal resources
o Kernel projects to substantially outperform industry-wide historical track
record despite limited experience and scale
MORGAN STANLEY DEAN WITTER 38