Canadian Oil and

Sanjeev Gill | Mohammed Alshanakhnakh | Hans Melis | Alexandrine Austin

Overview
Introduction
Industry Overview
Risk Analysis

Canadian Natural Resources

Corporate Profile
Risk Analysis

Penn West
Corporate Profile
Risk Management

Risk Overview of other

Competitors
Conclusion: Recommendations

Industry Overview

Products
Crude Oil
Gasoline
Heating Oil
Liquefied Petroleum Gas
Kerosene
Jet Fuel
Lubricants

Natural Gas

Process

Major Substitutes

Coal
Nuclear energy
Biomass
Biogas
Solar power
Wind power
Geothermal
Tidal power

Major Costs Incurred

Acquisition Costs

Exploration Costs

Developmental Costs

Production Costs

Oil Industry Structure

Top World Oil Producers (2009)

12000
10000
8000
6000
4000
2000
0

Top World Oil Net Exporters (2009)

20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0

United States Japan

Russia

Germany South Korea

Top World Gas Producers (2009)

25000
20000
15000
10000
5000
0

Major Canadian Producers

EnCana Corporation
Canadian Natural Resources Limited
Husky Energy Inc.
Talisman Energy Inc.
Suncor Energy
Cenovus Energy
Penn West Energy Trust
Nexen

Correlation between
Natural Gas and Oil Prices
Crude Oil Prices (2005- 2011)

Key Economic Events

2008 Financial Crisis
Reduced access to credit
Decreased demand
Decreased liquidity
Increased regulations
Increased supply
Decreased commodity price

Global Regulation
Organization of the Petroleum Exporting
Countries (OPEC)

Iran, Iraq, Kuwait, Saudi Arabia, Venezuela,

Qatar, Libya, Algeria , Nigeria, Ecuador,
Angola, and United Arab Emirates.
Unify Petroleum Policies
Secure stable prices for producers

Canadian Regulation

National Energy Board (NEB)

Office of Energy Efficiency (OEE)
Environment Canada
Canadian Association of Petroleum
Producers (CAPP)
Kyoto Protocol
Reduce carbon emissions

Price Volatility

OPEC and domestic regulations

Geopolitical and Financial Events
Alternative energy sources
World Supply and Demand
Seasonality

Risk Analysis

Risk Exposure

Operational Risk
Economic and Political Risk
Commodity Risk
Financial Risk

Interest Rate Risk and FX Risk

Credit and Liquidity Risk

Regulatory Limitations
Exploration and Development

Risk Measurement

Sensitivity analysis

Simulation Analysis

Probability Estimation

Value at Risk (VaR)

Risk Management

Diversification and Insurance

OTC Forward Contracts

Exchange-Traded Energy Futures

Foreign Exchange Futures

Hedging through Options

Hedging Techniques for

Risk Management

Collar Hedge
Crack spread contracts and options
Interest rate swaps
FX swaps

Risk Management
Expense
Increased
Hedging

Organizational Expense

Risks

Credit Risk

Effective Risk
Management
Affordability

Canadian National Resources

Corporate Overview

Calgary, Alberta based explorer,

producer, and developer of oil and
natural gas
Founded in 1973
Since then, has grown to become both the 2 nd

largest natural gas producer and the largest

heavy oil producer in Canada

Energy products include: natural gas,

light oil, heavy oil, in-situ oil sands
production, oil sands mining and
associated upgrading facilities

Corporate Overview

Key factors of their business approach:

Lowest cost producer strategy
Exploitation focus using existing technologies, discoveries, and

breakthroughs
Strategic acquisitions, often in existing core regions, to increase
operational diversification
Avoid long-term drilling/supply contracts when possible to increase
flexibility
Seek to own and operate 100% of their assets
Effective balance between heavy crude oil, light crude oil, and
natural gas provides some protection against commodity price risk
Financial strength is of paramount importance
-Target strong debt ratings and manage liquidity as a core asset
-closely controlled hedging activities provide short-term cash flow
certainty

Stock Details (Mar. 9, 2011)

As of March 1, 2011,
roughly 1.01 billion CNQ
shares outstanding
Also trades on the NYSE

Historical Stock Performance &

Activity

10 year price movement

Moving average highlights overall long-term
upward trend

Summary of Operations

Canadian Natural relies on a North American

foundation
Hold the largest undeveloped land base in the
Western Canadian Sedimentary Basin

Operations North American

Production

Operations Horizon Oil Sands

Key oil sands asset located north of Fort

McMurray, Alberta, with ongoing expansion
Supports 232,000 250,000 barrels per day of
light, sweet, crude oil production for over 40
years, with no production declines (recoverable
OOIP of 6 billion barrels estimated)

Operations North American Net Oil & Gas

Reserves

Figures are net of royalties

Obvious uncertainty around the

determination of probable reserves,
which claim a 50% confidence level of
recovery

Operations - International

Provide a strategic source of primarily crude oil

(though in much lower quantities than North
American operations)
Locations: the North Sea and Offshore West
Africa (Espoir, Baobab, Olowi)

Operations International Net Oil & Gas

Reserves

Management
Compensation (2009) &
Background
$10, 578, 701.00 (includes
option awards)
BSc in Chemical
Engineering
$10,009,651.00 (includes
option awards)
BSc in Mechanical
Engineering

Financial Performance

Canadian Natural refers to four metrics that measure

corporate success:

Horizon Oil
Sands

Consolidated Balance Sheets

(as at December 31)

Consolidated Statement of Earnings

(for the year ended December 31)

Adjusted Net Earnings from

Operations

Changes in the intrinsic value of outstanding vested options are

recognized in net earnings (stock-based compensation expense)
Changes in fair value of non-designated hedges are recognized
in net earnings
Unrealized foreign exchange gains and losses, offset by cross
currency swaps, are recognized in net earnings

Consolidated Statements of Cash Flows

(for the year ended December 31)

Corporate Approach to Risk

Management

Hedge program aims to give the company

certainty in their short-term cash flows
Ensures adequate financing for capital plans

Derivatives usage is solely aimed at

managing the various types of risk
exposure, not for speculative activity
Operational risks limited through a focused
effort on large core areas and by operating
key facilities
Product and operations diversity important

Financial Risk Factors

1. Market Risk

Market Risk
3 Primary Types:

Commodity Price Risk

Fluctuations in commodity prices

impact Canadian Naturals cash flows
associated with commodities that are
sold and purchased
Sales to hedge:
Futures crude oil and natural gas

production

Purchases to hedge:
Natural gas

Interest Rate Risk

2 sources of interest rate risk to be

dealt with:
Interest rate price (fair value) risk on

the companys fixed rate long-term

debt
Interest rate cash flow risk on the

companys floating rate long-term debt

Foreign Currency Exchange

Rate Risk

Primary source is the companys US

dollar denominated long-term debt
and working capital
Also exposed because of:
transactions conducted in other

currencies (in its subsidiaries)

Carrying value of self-sustaining
foreign subsidiaries

Sensitivity Analysis

Commodity Price Risk Management

Net derivative financial instruments outstanding (Dec. 31, 2010):

The Companys outstanding commodity derivative financial

instruments are expected to be settled monthly based on the
applicable index pricing for the respective contract month.

Interest Rate Risk Management

Interest rate swap contracts outstanding (Dec.

31, 2010):

The interest rate swap contracts require the

periodic exchange of payments without the
exchange of the notional principal amounts on
which the payments are based

Foreign Currency Exchange Rate Risk

Management

Cross currency swap contracts outstanding (Dec. 31, 2010):

The cross currency swap contracts require the periodic

exchange of payments with the exchange at maturity of
notional principal amounts on which the payments are based.
Canadian Natural also uses foreign currency forward contracts
in response to currency exposure (at December 31, 2010,
US$1.162 billion in foreign currency forward contracts were
outstanding, with terms of roughly 30 days or less.)

Financial Risk Factors

2. Credit Risk

Credit Risk

Results from the failure of a party to a financial

instrument to live up to contract obligations

Canadian Naturals Counterparty Credit Risk Management:

Normal industry credit risk levels for accounts receivable
Canadian Natural regularly reviews risk exposure to

individual companies

Risk of default by counterparties on derivative

instruments expected
Canadian Natural only enters into agreements with

investment grade counterparties in order to manage this risk

Financial Risk Factors

3. Liquidity Risk

Liquidity Risk

The risk that Canadian Natural will find it

hard to cover financial liability obligations

Canadian Naturals Liquidity Risk Management:

Canadian Natural maintains adequate cash &
cash equivalents
Also maintains other sources of capital
Cash flow from operations
Available credit facilities
Access to debt markets

Risk Management Overview

Statemen
t of
Earnings

Other Risk Factors

Changing Royalty Regimes

Crude oil and NGLs royalties averaged approximately 19% of revenues in

2010, compared to 14% in 2009.
Natural gas royalties averaged approximately 5% of revenues in 2010,
compared to 7% in 2009.

Netback

Influenced by royalty figures (plus other

factors)

Stock-Based Compensation

Stock Option Plan gives employees choice to receive either:

Common shares
Direct cash payment in exchange for surrendered options

Changes in the intrinsic values of stock options recognized in

each period (increased transparency)

Options have a term of 5-6 years until expiry, with exercise

price based on closing price on the day prior to the grant (TSX)

stock option plan liability measured using the Black-ScholesMerton option pricing model

Significant stock price changes lead to volatile earnings

Stock-Based Compensation

Corporate Overview

Based in Calgary, Alberta, the company

operates throughout the Western Canadian
Sedimentary Basin.
Largest producer of light and medium density
oil in western Canada by volume.
Considerable interests in light/medium oil pools,
an extensive in-situ oil sands project under
early stages of development, and a large
inventory of enhanced oil recovery
opportunities.
In January 2011 Penn West converted from an
income trust (Penn West Energy Trust) back into
an independent corporation (Penn West

Financial Profile

Current Market Capitalization: $12.03

Billion CAD
Shares Outstanding (Dec. 31, 2010): 461
million
Stock Quote (Mar. 10, 2011): $26.10
CAD PWT.TSX
52 Week Range: 17.09 26.25
PWE.NYSE

P/E: 50.41
EPS: $0.52
Dividend
Yield: 4.14%
ROE: 3% (2010) [-2% (2009), 19%

Historical Stock Price & Volume

10 Year PWT.TSX versus S&P/TSX

Composite

Operational Profile

Average Daily Production: 164,633 boe

Production Ratio: 60% oil and 40%
natural gas
Proved Reserves (as at Dec. 31, 2010):
259 mmboe

Management Profile
William E. Andrew, Chief Executive Officer
Professional Engineer with 35 years of oil and natural gas

industry experience, including over 18 years with Penn West.

Joined Penn West in 1992 as founding member.

Todd Takeyasu, Chief Financial Officer

A Chartered Accountant with more than 25 years of oil and

natural gas industry and public accounting experience.

Joined Penn West in 1994, holding various positions including
Financial Controller and Treasurer.

Keith Luft, General Counsel & Senior Vice President

A lawyer with more than 20 years of experience in private

practice.
Joined Penn West in 2006 as Vice President responsible for land
and legal matters.
In 2008 he was promoted to his current position, responsible for
Legal, Regulatory, Corporate Resources, Insurance and Risk
Management.

Risk Management Statement

We are exposed to normal market risks
inherent in the oil and natural gas business,
including, but not limited to, commodity
price risk, foreign currency risk, credit risk,
interest rate risk, liquidity risk and
environmental and climate change risk. We
seek to mitigate these risks through various
business processes and management
controls and from time to time by using
financial instruments.
(4th Quarter Report, 2010)

Risk Management Philosophy

Increasing the insurance of
budgeted
expected cash flows
Managing downside risk, while
preserving exposure to commodity
price upside

Statement on Hedging
Penn West considers price hedging of oil and natural gas production to
be a useful tool of risk management. Its uses include protecting planned
capital budgets, safeguarding the economics of acquisitions and providing
downside cash flow protection to support planned distributions.
Penn West continues to employ derivative instruments on a portion of its
production volumes spanning several quarters into the future. The
company also secured hedges to fix the costs of electric power at its
oilfield operations, improving its ability to project operating costs,
netbacks and cash flows.
Penn West is careful and judicious in its hedging activities in order to
preserve exposure to commodity price upside and avoid unreasonable
opportunity costs.
(www.pennwest.com)

Risk Factors
Commodity Price Risk
Foreign Currency Exchange Risk
Interest Rate Risk
Credit Risk

Commodity Price Risk

Oil and natural gas price risk most significant

exposure.
Active hedging program that uses swaps, collars and
other financial instruments up to a maximum of 50%
of forecasted short term sales volumes.
Secures hedges to fix the costs of electric power at its
oilfield operation, improving its ability to project
operating costs and cash flows.

Foreign Currency Exchange Risk

Commodity prices referenced to US dollars, thus realized

prices are impacted by CAD/USD exchange rates.
Debt capital is denominated in USD, thus principal and
interest payments in CAD are also impacted by
exchange rates.
Use forward contracts to fix or collar future exchange
rates to fix the CAD equivalent of oil revenues or to fix
USD denominated long-term debt principal repayments.
Foreign Currency Forward Contracts Outstanding
as of Dec. 31, 2010

Interest Rate Risk

Currently maintain a portion of debt capital in

floating-rate bank facilities which results in exposure
to fluctuations in short-term interest rates which
remain at lower levels than longer-term rates.
May increase the certainty of future interest rates by
entering fixed interest rate debt instruments or by
using financial instruments to swap floating interest
rates for fixed rates or to collar interest rates

Credit Risk

Credit risk is the risk of loss if purchasers or

counterparties do not fulfill their contractual
obligations.
Oil and natural gas sales: follow a counterparty
risk procedure whereby each counterparty is
reviewed on a regular basis for the purpose of
assigning a credit limit and may be requested to
provide security.
Financial derivatives: transact with counterparties
who are members of their banking syndicate or
other counterparties that have investment grade
bond ratings.

Financial Statement Analysis

Balance Sheet
Income Statement
Cash Flow Statement
As of Dec. 31, 2010

Consolidated Balance Sheets

Consolidated Statement of Earnings

Consolidated Statements of Cash

Flows

Sensitivity Analysis

Trust Unit Compensation

Trust Unit Rights Incentive Plan

Compensation expense for the plan is

based on the fair value of rights granted,
amortized over the vesting periods.

A binomial option pricing model is used

to determine the fair value of rights
when granted.

Risk Factors

Common Risk Factors:

o Substantial decline in oil and gas prices
o Increased environmental regulations
o Counterparty Risk

EnCana:
o Hedging activates could result in losses

Nexen:
o Exploration and development loss
o Reliance on few highly productive wells
o Operations in unstable countries

Hedging Philosophy

partially mitigates its exposure to

financial risks through the use of
various financial instruments and
physical contracts.

Use of derivative financial instruments is

governed under formal policies and is
subject to limits established by the Board
of Directors.

Financial Risks

Natural gas price risk (Commodity price risk)

Credit risk

Liquidity risk

Foreign exchange rates risk

Interest rates risk

Financial Risk Management

Natural Gas Price Risk:

o Mitigates natural gas price risk by swaps

that fix the NYMEX prices.

o Manages price deferential between
production areas and sales points by
swaps

Financial Risk Management

Financial Risk Management

Foreign Exchange Risk:

o Foreign exchange contracts
o Natural hedge
o Cross currency swaps

Interest Risk:
o Holding a mix of fixed and floating rate debt
o Interest rate swaps

Counterparty and Credit Risk:

o Board approved credit policies

Liquidity Risk:
o Cash and debt management programs

Financial Risk Management

Financial Risk Management

Hedging Philosophy

Recognize market risks and manage

them to the extent that its practical
using derivatives for trading and nontrading purposes as part of an overall
risk management policy.

Financial Risks

Commodity Price Risk

Foreign Exchange Risk

Interest Rate Risk

Credit Risk

Financial Risk Management

Commodity Price Risk:

o Futures
o Forwards
o Swaps
o Options

Financial Risk Management

Foreign Exchange Risk:

o Matching expected cash flows and

borrowings in the same currency

Credit Risk:
o Assessing financial strength of

counterparties
o Limiting exposure to individual parties

Financial Risk Management

Financial Risk Management

Note 2. Accounts Receivables

Financial Risk Management

Note 6. Derivative contracts related to
trading activates:

Hedging Philosophy

The company may use derivatives to

manage financial risks

Financial Risks

Commodity Price Risk

Interest Rates Risk

Foreign exchange Risks

(C$;US$,UK, NOK)

Credit Risk

Financial Risk
Management

Commodity price risk:

Financial Risk
Management

Foreign Exchange Risk:

o Denominating most borrowings in US$ to

reduce exposure.
o Managing currency translation with
subsidiaries by matching internal
borrowings with the functional currency of
the subsidiaries
o Cross currency interest rates swaps

Interest Rate Risk

o Interest rate swaps to manage the fixed-

float rates debts.

Financial Risk
Management

Recommendations

Risk Management Committees

Sensitivity Analysis

Value at Risk (VaR)

Thanks for
listening!