regional play assessment ihs herold company valuation & strategy

COPYRIGHT 2012 IHS Regional Play Assessment 1

REGIONAL PLAY ASSESSMENT

IHS Herold Company Valuation & Strategy Research Sven Del Pozzo, CFA FEBRUARY 15, 2012

Bone Spring Complexity Permits Few E&Ps to Shine Key Implications Concho Resources, Cimarex Energy, Energen Resources, and Cross Border Resources are most exposed to the horizontal Bone Springs play, and Clayton Williams Energy and Comstock Resources to the vertical Wolfbone play. Consistently outstanding wells have been drilled only by Concho, which ought to continue consolidating assets/companies in the region. Most E&P’s, including Cimarex and Energen, have stable to disappointing results, and our analysis indicates shareholder value has yet to be created. We argue the play is non-core for EOG, Chesapeake, Andarko and Devon, supporting sales/swaps to enhance focus in core areas. The vertical Wolfbone play in Texas is early stage and high cost, and we believe M&A activity must be driven by expectations of down spacing in tight formations. Unless costs decline, we believe value creation will be limited to core acreage.

The Bone Springs horizontal oil play in the Delaware Basin, including the Avalon/Leonard Shale, spans from southeast New Mexico into west Texas. Drilling has revived since early wells spud ten years ago, but upside is limited for most E&Ps. Stacked, multi-pay reservoirs, each with diverse rock properties, introduce upside potential but also complexity. Some wells in the area rank among the most profitable in the US but to date only Concho Resources has managed to achieve results of this kind. Most E&Ps have strikingly similar, stable to disappointing results. We surmise Concho’s outperformance stems from acreage quality, knowledge enhanced by its niche Permian status and purchase of local E&Ps, and faster evolution of completion technique. Our analysis shows most horizontal Bone Spring wells have lower initial production (IP), but shallower decline rates than today’s most prominent oil/liquids-rich resource plays. Depth and oil-cut increase to the east and south into Texas, where the horizontal play is earlier stage and has weaker economics. Availability of acreage, vertical commingling of stacked pays, and prospective improvement in well-performance is driving M&A in Texas, starting west of the Pecos River moving east toward the Central Basin Platform. Consistency in horizontal well-performance warrants “type curve” construction, using reliable data from over 400 wells. Well productivity is the main risk in this analysis, which we

vary with oil price to construct a matrix of investment performance metrics. Our intent is to build a flexible model to estimate acreage value in US equities and asset transactions.

Net Acres ('000) Shares*** Acres per MM Shares Unrisked* Bone Spring Value, $/Share Share Price Feb-9 Unrisked Bone Spring Value / Price BasinXBOR 13,890 16,152 860 $4.30 $1.92 224% DelawareCRK 44,000 47,645 923 $4.62 $12.34 37% DelawareCWEI** 60,000 12,163 4,933 $24.67 $82.90 30% DelawareCHK** 830,000 659,266 1,259 $6.29 $22.34 28% PermianEGN 182,000 72,094 2,524 $12.62 $49.91 25% DelawareXEC 214,000 85,742 2,496 $12.48 $67.99 18% DelawareOXY** 2,400,000 811,789 2,956 $14.78 $104.23 14% PermianCXO 270,000 103,683 2,604 $13.02 $112.65 12% DelawareWLL 89,000 117,381 758 $3.79 $53.09 7% DelawareAPC 330,000 497,972 663 $3.31 $87.46 4% DelawareDVN** 185,000 403,900 458 $2.29 $66.23 3% DelawareEOG 106,000 268,851 394 $1.97 $112.45 2% DelawareBHP** 325,000 2,474,587 131 $0.66 $79.62 1% Permian*Unrisked upside $5,000 / acre based on $100 oil based on a New Mexico Bone Springs sands well drilled on 320 acres with an IP of 400 boe/d (80% oil) at $100 oil or vertical Wolfbone well drilled on 160 acres with IP of 175 bopd.**CHK, OXY and BHP Include all Permian acreage; DVN includes most Avalon acreage; CWEI: 20,000 leased & estimate 40,000 from CHK farm in; *** BHP's ADR shares adjusted for total market cap

BONE SPRING ACREAGE HOLDERS

Source: IHS Herold


History and Rejuvenation of the Bone Springs Play The oldest horizontals were spud mainly by EOG Resources in the southeast New Mexico Avalon/Leonard Shale portion of the play, where it is still drilling, although we have not noticed a large improvement in results over time. EOG still deems the play attractive, but we consider it to be a non core asset. From the Avalon, the play expanded to include Bone Spring sands to the north, and more recently the play has expanded south into Texas. The Bone Spring sands mostly yield oil, and shale wells are larger and gassier with some having meaningful oil and condensate cuts driving profitability. Large tracts of undeveloped acreage across the play partly reflect interference by mining, with the notable exception of Concho. We also believe these large undeveloped acreage swaths also indicate a general reticence by operators to explore this complex play. Concho is the only E&P actively exploring the region. The western boundary of the Bone Springs play has in effect been delimited by gassier wells in western Eddy County, New Mexico, and a handful of wells drilled even farther west by Chesapeake Energy, in Culberson County, Texas. Gas cut rises to the west and is negatively correlated with true vertical depth. Bone Springs: Not a Typical Resource Play The presence of localized sweet spots in the Bone Spring leads us to stray from categorizing it as a resource-play. Instead we have chosen to divide the Bone Spring into four sub-plays. One is horizontal in central Eddy and Lea counties, New Mexico, targeting the first and second Bone Spring sands. Another is in southern Eddy and Lea counties targeting the Avalon/Leonard Shale horizontal sub-play. In Texas, a third horizontal play is developing the Third Bone Spring Sand. The final sub-play is vertical, commingling multiple stacked reservoirs including the Bone Spring and deeper, thicker Wolfcamp in the Wolfbone play extending east beginning in central Reeves County into eastern Pecos County and ending at the western side of the Central Basin Platform. The thick Bone Spring Lime overlies all the Bone Spring formations, and may harbor upside potential, although we have not heard of any commercial successes thus far. Generally, Texas horizontal development is deeper and more expensive. True vertical depth (TVD) in Texas is about 11-12,000 feet versus 6-11,000 in Eddy County, New Mexico. TVD in central Reeves and eastern Ward countries Texas, is similar to deeper Bone Spring wells in Lea County New Mexico, but results of Texas Third Bone Spring Sand horizontal development have thus far been inferior to New Mexico’s horizontal sub-plays. Gas handling infrastructure is in short supply in Texas, forcing some to flare gas. As would be expected from a shale formation, the Avalon is most akin to a resource play, yielding more consistent results across a broader area than the First and Second Bone Spring Sands to the north in Central Eddy and Lea counties, New Mexico. Some operators have likened the vertical Wolfbone to a resource play, especially in the deepest parts of the Delaware

Basin, where formations are theorized to be more uniformly deposited. The Avalon Shale is also in Texas, but unlike Cimarex, Energen, and Whiting, Concho has not publicized any intent to pursue development. By our analysis the New Mexico Avalon Shale, also called the Leonard Shale by EOG Resources, has the most robust and consistent profitability of all the Bone Spring sub-plays. The Avalon also has greater upside from potential horizontal down spacing to 160 acres per well. Despite being gassier, many Avalon Shale wells have early month oil IP rates that match or surpass those of the Bone Spring Sand sub-plays, aided by gas drive. Most Avalon wells produce an average of 100-300 barrels of condensate (priced as oil) during early months. Concho’s wet gas typically gets at least twice the market price of west Texas dry natural gas, but keep in mind our well modeling herein breaks out NGL, oil, and dry gas production separately. Concho Resources has the most exposure to the Avalon sub-play, whereas Cimarex is notably absent, having abandoned development efforts after encountering gas to the west. In our view, Avalon exposure explains a good deal of Concho outperformance and Cimarex’s underperformance in the Bone Spring play overall. As may be expected from sands, we find sweet spots in the first and second Bone Springs of Central Eddy and Lea County, New Mexico, covering less territory than the Avalon Shale, and exhibiting wide ranging results that make us question economic value for most E&Ps in this “sub-play.” Most wells average 100-200 barrels per day. Outstanding wells averaging nearly 1,000 barrels a day in the first month can generate NPV three times larger than the costs of these completed horizontal wells of $5.75MM, but such wells are rare, drilled mostly by Concho, and to a lesser extent EOG and Devon. Concho’s exploration has been aggressive and successful in discovering oil, testing undrilled regions between the New Mexico Avalon Shale and Bone Spring Sands to the North. One such oil well, the Macho State 2H, just north of EOG’s Red Hills field in Lea County New Mexico, averaged 600 b/d of oil/condensate in its first 20 dayse, and 572 boe/d (94% oil/condensate) in its first 42 days online, producing a cumulative 24,000 boe over 42 days. Vertical Wolfbone Play: Success Depends Upon Location Until Well Costs Decline Moving southeast from New Mexico into west Texas, intense and expensive hydraulic fracturing of the Third Bone Spring Sand and underlying Wolfcamp “Wolfbone” play is developing with mixed results, but in sweet spots considerable upside exists. M&A is quite active in this play, likely driven by prospective down spacing in tight formations. But we believe completion costs need to decline to broaden the play’s success, otherwise only E&Ps with the best acreage and down spacing potential can generate shareholder value. In Reeves County, several sweet spots are evolving to which Clayton Williams, Chesapeake, and Comstock have some exposure. Comstock acquired its prospective acreage from Eagle Oil


and Gas, which has some of the best wells in the play thus far. Moving east into Pecos County, results are mostly disappointing. Vertical completed well costs are guided by most to be in the range of $4-$5 million. The hope is that increasing intensity of hydraulic fracturing will allow the Delaware Basin vertical Wolfbone play to repeat the extensive down spacing to 40 and 20 acres per well that has revitalized the Midland Basin’s Wolfberry play. The deeper Wolfcamp is generally tighter in the Delaware Basin, which bodes well for infill drilling. The Wolfcamp section’s thickness in Reeves County measures up to roughly 7,000 feet, also making it likely that will take time for E&Ps to identify multiple pay zones. Concho’s Horizontal Outperformance Concho’s learning curve in the play has been steeper than that of its peers, catalyzed by the summer 2010 acquisition of Marbob Energy, which was the horizontal play’s pioneer, having drilled about a third of the play’s horizontal wells in the industry at time of acquisition by Concho. Typically, E&Ps drilling in proximity of Concho’s have generated inferior results, leading us to believe Concho is likely to have a technical advantage in addition to good acreage. Unlike most of its competitors, Concho’s Bone Spring wells have improved with time, growing IP rates and demonstrating shallower decline rates. Thus far, Bone Spring wells in New Mexico, where Concho has most of its Bone Spring exposure, outperform those in Texas, where the play is in an earlier stage and is expanding southeasterly toward the Central Basin Platform. We also would expect Concho to have an advantage in negotiating with mining companies for the most prospective acreage, since it appears to be best informed about the play. Concho also has an advantage in well completion technique. It has been quietly optimizing Bone Spring fracturing-jobs since it acquired Marbob in the summer of 2010, and has reduced fracturing-stages, which has coincided with improved well performance. The vast majority of proppant used in the Bone Spring is sand, although EOG sometimes uses ceramics in its deeper Red Hills Field in southwest Lea County, New Mexico. Some Gas Wells Are Good Oil Wells, Too New Mexico gas wells can also be sizeable oil/condensate wells, and many of the better wells are Concho’s Avalon wells. Most of Cimarex’s Bone Spring exposure in New Mexico is to the first and second Bone Spring sand, where oil wells often produce as much oil as gas wells do in the Avalon Shale. Comparison of Well Performance by Operator What follows is a New Mexico Bone Spring IP rate comparison by well for the entire industry and also by company. We have chosen to exclude Texas at this time because data is sparse and less reliable when compared to New Mexico, owing to differences in state

reporting standards. Our general takeaways are that with the exception of Concho, New Mexico well performance has most recently deteriorated from 2010 to 2011 (60 day rate falls from 375boe/d to 354 boe/d) after improving from 2009-2010 (60 day rate rises from 257boe/d to 375 boe/d).

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NEW MEXICO OIL 30-40 DAY OIL IP VS GAS % SOME GAS WELLS ARE GOOD OIL WELLS TOO

Source: IHS Herold

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Source: IHS Herold

30-40 DAY OIL IP VS GAS % CXO's GAS WELLS ARE GOOD OIL WELLS


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XEC: 30-40 DAY OIL IP VS GAS % NOT ALL GAS WELLS HAVE GOOD OIL CUTS

Source: IHS Herold

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ALL BONE SPRING HORIZONTALS ('08-'11), AVERAGE DAILY PRODUCTION, BOE/D

Source: IHS Herold

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2009 BONE SPRING HORIZONTALS, AVERAGE DAILY PRODUCTION, BOE/D

Source: IHS Herold

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2010 BONE SPRING HORIZONTALS, AVERAGE DAILY PRODUCTION, BOE/D

Source: IHS Herold

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2011 BONE SPRING HORIZONTALS, AVERAGE DAILY PRODUCTION, BOE/DDAILY PRODUCTION, BOE/D

Source: IHS Herold


Only Some E&Ps Have Improved Well Performance The following analysis vintages Bone Spring horizontal wells by individual operator to show changes over time, with wells getting newer from left to right (bars on left/right are older/newer wells). Individual operator history reflects overall industry trends we have already discussed, again with the notable exception of Concho.

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FIRST 30 DAY AVG. PRODUCTION, BOE

Source: IHS Herold

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Source: IHS Herold

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Source: IHS Herold

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YATES WELLS DETERIORATE OVER TIME, BOE/D

Source: IHS Herold

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XEC WELLS DETERIORATING OVER TIME, BOE/D

Source: IHS Herold


Sub-Play Type Curve Modeling and Well Economics We now proceed to “type-curve” modeling, which we believe is warranted given similar horizontal well performance among most E&Ps, as illustrated in our bar charts. Our horizontal completed well cost estimates are drawn from company guidance. E&Ps have published various completed well costs ranging from $5-$7 million for Concho in New Mexico, to $7.3 million and $6.1 million for Energen in Texas drilling to the Third Bone Spring Sand and shallower Avalon Shale, respectively, with the latter being unproven. Most E&Ps mention Texas Avalon prospectivity, but Concho does not. Historical guidance suggests completed well costs have risen rapidly in the play over the past year. Texas Bone Spring development appears expensive relative to well-performance for most horizontals and also for most verticals when drilled outside of the Wolfbone’s sweet spots. The New Mexico Avalon Shale has the best investment performance on an absolute and risk-adjusted basis, considering its greater consistency across a broader area. Our analysis is limited to two wells per section, but Concho envisions four, potentially doubling acreage values in the Avalon. Based on our analysis, among horizontals the weakest economics of the Bone Spring play is in Texas owing to lower, less consistent production rates, higher royalties, and higher costs. Texas is also at a less advanced stage of development among the Bone Spring sub-plays, and has less infrastructure. We do note some improvement in horizontal well performance as the play migrates east, but we cannot be sure if this is related to rock or operator quality.

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EOG: WELLS STABLE DESPITE LONG HISTORY IN REGION, BOE/D

Source: IHS Herold

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DVN: STABLE TO IMPROVING WELLS, BOE/D

Source: IHS Herold

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CXO: BEST WELLS IN THE BONE SPRING & IMPROVING, BOE/D

Source: IHS Herold


INPUTS NM Avalon Shale NM Bone Spring Sands TX Bone Spring SandsCompleted Well Cost (CWC with 4,500 foot lateral) $6,500,000 $5,750,000 $6,250,000Lifting Costs per BOE*: $6.50-$8.50 $11.00-$16.00 $11.00-$16.00Oil Production Tax: 13% 8.0% 8.0% 4.5%Royalty: 17% 17.0% 17.0% 23.0%Oil/Gas Split: Oil / NGL / Gas 30% / 35% / 35% 75% / 25% 75% / 25%Differentials: Oil / NGL / Gas (-$5 / 50% of WTI / -$0.35) (-$5 / 50% of WTI / -$0.35) (-$5 / 50% of WTI / -$0.35)

Gross EUR at $90/bbl oil reference price with 20 Year R / P 550,000 250,000 250,000Decline Rates: Shown Beneath Table*$/Boe over life of well with range to reflect variation in EURSource: IHS Herold

INPUTS TABLE

24-Hr IP, boe/d $50 Oil $60 Oil $70 Oil $80 Oil $90 Oil $100 Oil $110 Oil $120 Oil

IRR (PRE-TAX) 400 NM NM NM NM NM 4% 7% 10%500 NM NM NM 4% 8% 12% 16% 20%600 NM NM 6% 11% 16% 21% 26% 32%700 NM 7% 13% 18% 24% 31% 37% 45%800 6% 12% 19% 26% 33% 41% 50% 58%900 11% 18% 26% 34% 43% 53% 63% 73%

1,000 15% 24% 33% 43% 54% 65% 76% 88%NPV@10%, $ 000s

400 (3,699) (3,179) (2,659) (2,140) (1,620) (1,100) (580) (61)500 (2,933) (2,283) (1,633) (983) (334) 316 966 1,615600 (2,166) (1,386) (607) 173 952 1,732 2,512 3,291700 (1,400) (490) 420 1,329 2,239 3,148 4,058 4,967800 (633) 406 1,446 2,485 3,525 4,564 5,604 6,643900 133 1,303 2,472 3,642 4,811 5,980 7,150 8,319

1,000 900 2,199 3,498 4,798 6,097 7,397 8,696 9,995Payout Period, Quarters (Undiscounted)

400 NM NM NM NM 64 40 29 22500 NM NM 65 37 25 19 14 12600 NM 50 30 20 15 11 9 8700 51 28 18 13 10 8 6 5800 30 18 12 9 7 6 5 4900 20 13 9 7 6 5 4 3

1,000 15 10 7 6 4 4 3 3

AVALON SHALE, NEW MEXICO: (HORIZONTAL WELL, 4,000 FOOT LATERAL)-Flat Gas Reference Price of $3.50/Mcf

24-Hr IP, boe/d $50 Oil $60 Oil $70 Oil $80 Oil $90 Oil $100 Oil $110 Oil $120 Oil

NPV, $/Acre (320s)400 (3,699) (3,179) (2,659) (2,140) (1,620) (1,100) (580) (61)500 (2,933) (2,283) (1,633) (983) (334) 316 966 1,615600 (2,166) (1,386) (607) 173 952 1,732 2,512 3,291700 (1,400) (490) 420 1,329 2,239 3,148 4,058 4,967800 (633) 406 1,446 2,485 3,525 4,564 5,604 6,643900 133 1,303 2,472 3,642 4,811 5,980 7,150 8,319

1,000 900 2,199 3,498 4,798 6,097 7,397 8,696 9,995Sum 1st 2 Yrs Cash Flow / Completed Well Cost

400 0.3x 0.3x 0.4x 0.4x 0.5x 0.6x 0.6x 0.7x500 0.4x 0.4x 0.5x 0.6x 0.6x 0.7x 0.8x 0.8x600 0.4x 0.5x 0.6x 0.7x 0.8x 0.8x 0.9x 1.0x700 0.5x 0.6x 0.7x 0.8x 0.9x 1.0x 1.1x 1.2x800 0.6x 0.7x 0.8x 0.9x 1.0x 1.1x 1.2x 1.3x900 0.7x 0.8x 0.9x 1.0x 1.2x 1.3x 1.4x 1.5x

1,000 0.8x 0.9x 1.0x 1.1x 1.3x 1.4x 1.5x 1.7xYearly Decline Rate in 24 HR IP

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78% 34% 29% 22% 19% 15% 11% 9%

Source: IHS Herold

AVALON SHALE, NEW MEXICO: (HORIZONTAL WELL, 4,000 FOOT LATERAL)-Flat Gas Reference Price of $3.50/Mcf


24-Hr IP, boe $50 Oil $60 Oil $70 Oil $80 Oil $90 Oil $100 Oil $110 Oil $120 OilIRR (PRE-TAX) 200 NM NM NM NM NM 3% 7% 10%

300 NM NM 4% 10% 15% 21% 28% 34%400 2% 9% 17% 25% 33% 43% 52% 62%500 11% 20% 31% 42% 54% 66% 79% 93%600 21% 33% 47% 62% 78% 94% 111% 128%

NPV@10%, $ 000s 200 (3,786) (3,245) (2,700) (2,150) (1,601) (1,051) (501) 49300 (2,490) (1,665) (841) (16) 809 1,633 2,458 3,282400 (1,180) (81) 1,019 2,118 3,218 4,317 5,417 6,516500 130 1,504 2,878 4,253 5,627 7,001 8,376 9,750600 1,507 3,185 4,864 6,543 8,222 9,901 11,579 13,258

Payout Period, Quarters (Undiscounted)200 NM NM NM NM NM 41 28 20300 NM NM 35 21 14 11 9 7400 46 22 13 9 7 6 5 4500 19 11 8 6 4 4 3 2600 11 7 5 4 3 2 2 2

NPV, $/Acre (320s)200 (11,830) (10,142) (8,436) (6,720) (5,002) (3,284) (1,566) 152300 (7,780) (5,204) (2,627) (50) 2,527 5,104 7,680 10,257400 (3,687) (252) 3,184 6,620 10,056 13,491 16,927 20,363500 406 4,700 8,995 13,290 17,584 21,879 26,174 30,469600 4,708 9,954 15,201 20,447 25,693 30,939 36,186 41,432

Sum 1st 2 Yrs Cash Flow / Completed Well Cost200 0.3x 0.3x 0.4x 0.4x 0.5x 0.6x 0.6x 0.7x300 0.4x 0.5x 0.6x 0.7x 0.8x 0.9x 0.9x 1.0x400 0.5x 0.7x 0.8x 0.9x 1.0x 1.1x 1.3x 1.4x500 0.7x 0.8x 1.0x 1.1x 1.3x 1.4x 1.6x 1.7x600 0.8x 1.0x 1.2x 1.4x 1.6x 1.8x 1.9x 2.1x

Yearly Decline Rate in 24 HR IP DAY 365 END YR 2 END YR 3 END YR 4 END YR 5 END YR 6 END YR 7 END YR 870% 35% 30% 22% 20% 15% 12% 10%

Source: IHS Herold

BONE SPRING SANDS, NEW MEXICO: (HORIZONTAL WELL, 4,000' LATERAL)-Flat Gas Price of $3.50/Mcf


M&A Activity and Review: Well-Performance and Down Spacing Potential Could Justify Some Deal Values in Vertical Wolfbone; Horizontal Texas Play Needs Improvement Most Bone Spring M&A activity is in Texas, mainly because of availability of acreage and the enticement of commingling production from the Third Bone Spring Sand and the underlying Wolfcamp formation in the Delaware Basin’s vertical Wolfbone play. Remote location, lack of infrastructure, deeper drilling, and formation tightness elevate costs, especially for

hydraulic fracturing which represents the majority of completed well cost. Over time, success in the region could attract services and lower costs. Our analysis indicates peak, initial 30 day oil production rates above 150 barrels per day are necessary to justify deal values of $4,000-$6,000 per acre, and about 25% of wells posted such production rates in 2010-2011. We believe the play holds promise if down-spacing evolves as has occurred in the Midland Basin on 20 acres per well in the vertical Wolfberry play, which is generally shallower and not as tight. Our general conclusion is that vertical well-performance to date is highly variable, but that sweet spots exist. Prospective down spacing from 320 acres to 160 or 80 acre spacing in sweet spots could generate highly attractive economics, making entry costs to date seem inconsequential on a $/boe basis. Energen’s is the only Texas M&A deal with horizontal development as its primary objective. Thus far, Energen, Comstock, and Clayton Williams (farm-in) have the most expensive deal values on a $/acre basis, while Whiting and Concho have paid the least. More time is needed to assess Concho’s Wolfbone performance, while Whiting’s has been disappointing after entering the play early and cheaply in Pecos County. Comparing our M&A deal values for raw acreage with our type curve analysis leads us to conclude that Energen’s acquisition of SandRidge’s Delaware Basin acreage for nearly $3,000/acre would require a 300 boe/d IP rate and $85/bbl WTI on 320 acre spacing to make the full-cycle economics of that transaction break-even, and most of Energen’s early month IP rates have not reached this threshold. Energen’s more recent horizontals east of the Pecos River, where other E&Ps are also improving results, is beginning to lift average well performance, but we conclude that Energen’s learning curve needs to steepen and well productivity must improve to create shareholder value. Energen has experience drilling vertical wells in the Midland Basin, which means the company may be better suited to Wolfbone development. Comstock Resources recently acquired Delaware Basin acreage in north central Reeves County, Texas, from Eagle Oil and Gas that is prospective for vertical development of the Wolfcamp and Third Bone Spring formations (“Wolfbone” with potential upside from commingling lower pressure, shallower Bone Spring formations later in well-life, or horizontal development of these formations. The purchase price was nearly $4,400/acre if 1,400 boe/d of production is subtracted at $100,000/daily boe (reserves 75% oil), or equivalently, about $2/boe of total recoverable resource net to Comstock prior to royalty at the minimum guidance range of 180,000 boe per 40-acre well location. About 15% of Eagle Oil and Gas’ wells have produced 25% of Comstock’s 180,000 boe figure in about one year, which is good well performance. We believe Comstock must have justified the price of its debt-financed acquisition on a $/boe of recoverable resource basis. Comstock believes 40-acre down-spacing of wells can be justified on its acreage which is in a deeper part of the Delaware Basin, and which may enhance uniformity. Eagle Oil and Gas has some of the best wells in the play. One of Eagle Oil and Gas’ better wells produced 175 b/d in its peak month declining to 80 b/d after about 6 months online. Fifty percent decline rates are typical in the vertical Wolfbone play. Comstock has no recent history of Permian operations. One area of concern for Comstock shareholders is its ability to internally finance development of the acquired acreage.

NPV@10%Oil Price

$50 Oil 60 Oil 70 Oil 80 Oil 90 Oil 100150 (2,343) (1,843) (1,343) (843) (343) 157175 (1,907) (1,324) (741) (158) 425 1,008200 (1,472) (806) (139) 527 1,194 1,860225 (1,037) (287) 463 1,213 1,962 2,712250 (602) 232 1,065 1,898 2,731 3,564275 (166) 750 1,667 2,583 3,499 4,416

Pre-Tax IRR Oil 50 Oil 60 Oil 70 Oil 80 Oil 90 Oil 100150 NM NM NM NM NM 11%175 NM NM NM 9% 12% 16%200 NM NM 9% 13% 17% 21%225 NM NM 13% 17% 22% 26%250 NM 11% 16% 21% 26% 32%275 9% 14% 20% 25% 31% 38%

Q's Until Payout Oil 50 Oil 60 Oil 70 Oil 80 Oil 90 Oil 100150 160 122 62 39 29 23175 136 61 36 27 21 17200 73 38 26 20 16 14225 45 28 21 16 13 11250 33 23 17 13 11 9275 27 19 14 11 9 8

NPV/Acre (160s), $ Oil 50 Oil 60 Oil 70 Oil 80 Oil 90 Oil 100150 -$14,642 -$11,518 -$8,394 -$5,270 -$2,146 $978175 -$11,922 -$8,277 -$4,632 -$987 $2,658 $6,302200 -$9,201 -$5,036 -$870 $3,295 $7,461 $11,627225 -$6,481 -$1,794 $2,892 $7,578 $12,264 $16,951250 -$3,760 $1,447 $6,654 $11,861 $17,068 $22,275275 -$1,039 $4,688 $10,416 $16,144 $21,871 $27,599

CWC/Sum 2YR CF Oil 50 Oil 60 Oil 70 Oil 80 Oil 90 Oil 100150 0.3x 0.3x 0.4x 0.4x 0.5x 0.5x175 0.3x 0.4x 0.4x 0.5x 0.6x 0.6x200 0.4x 0.4x 0.5x 0.6x 0.6x 0.7x225 0.4x 0.5x 0.6x 0.6x 0.7x 0.8x250 0.4x 0.5x 0.6x 0.7x 0.8x 0.9x275 0.5x 0.6x 0.7x 0.8x 0.9x 1.0x

Yearly Decline Rate in 24 HR DAY 365 END YR 2 END YR 3 END YR 4 END YR 5 END YR 6Yearly Drop 24 Hour IP YR 1: -74% -21% -16% -11% -10% -9%Source: IHS Herold

VERTICAL WOLFBONE (Oil/NGL/Gas 70%/20%/10%) $4.5MM CWC, 88% NRI)


Whiting’s Vertical Bone Springs Program Has Been Disappointing Whiting Petroleum entered the vertical Texas Wolfbone play early and paid reasonable prices in an attempt to establish a new play in northwestern Pecos County where the Wolfcamp shallows moving east as it approaches the Central Basin Platform. Our analysis concludes that Whiting’s vertical Wolfbone drilling program has been disappointing after drilling roughly a dozen operated wells. Whiting has a history in the region, operating the North Ward Estes water and CO2 flood north of its Wolfbone acreage. Whiting has since emphasized horizontal drilling in the area, with its first such well producing about 750 boe per day at the end of July, 2011, declining a steep 70% after three months, which is a fast decline rate. But it is still too early to draw any conclusions about the economics of horizontally developing the Bone Spring in northwestern Pecos County. Although the disappointing vertical Wolfbone drilling campaign in Pecos County is relatively immaterial to a company of Whiting’s size, we believe the company is in need of establishing new core areas that can offset declines from the Middle Bakken formation in the Sanish Field. Concho’s most recent acquisition of 114,000 net acres in the Delaware Basin in southeast Reeves and southwest Pecos counties (where the Wolfcamp thickens) was relatively large, is farther southeast than the afore-mentioned vertical Wolfbone deals, and was struck at nearly $1,600 per net acre if production is subtracted at $100,000 per daily boe. Despite lacking history of vertical or horizontal wells in that region, Concho’s strong operational track

record and relatively low entry cost bode well. Production and total deal value were basically identical in Concho’s and Comstock’s acquisitions, but Concho netted 2.5 times more acreage than Comstock. We speculate that improving well results in central Reeves County, Texas, have heated up that region’s M&A market, and that Concho is relying upon its technical expertise to unlock the value of undeveloped acreage where there is less well data and less competition for properties. In a March, 2011 deal, Clayton Williams Energy farmed into Chespaeake Energy’s Wolfbone acreage in Reeves County, which is in the vicinity of Comstock’s more recent deal. Clayton Williams had about 10 rigs it could dedicate to the play’s development, helping to earn it operatorship. Under the terms of the agreement, and assuming full development under 160 acre well spacing, Clayton Williams could earn nearly 50,000 net acres at an undiscounted cost of $365 million ($7,300 per net acre), or $5,850/acre after accounting for the time value of money. Clayton Williams can drill up to 100 wells to earn the option to have a 75% interest in 64,000 gross acres. The drilling program requires 20 wells to be drilled each year, but drilling is ahead of schedule. Thus far we have little production data, but Clayton Williams ranks among the most exposed to the Wolfbone play and has some good wells in sweet-spots where down-spacing potential could harbor large upside. We would imagine Clayton Williams will choose not to earn maximum acreage because it will keep only the most prospective acres.

Ann'd Date Buyers Sellers

Total Trans. Value

US$MM

Daily Production Transacted

(boe/d)

Acreage Value (subtracts

$100K / daily boe production)

US$MMNet

AcreageUS$ / Acre

Est. Undevel. Acreage

Asset Value US$MM

Key TX Delaware Basin Assets

WTI SPOT DAY PRIOR

ANNC'D US$

NYMEX OIL 12 MO.

STRIP DAY PRIOR

ANNC'D US$

HENRY HUB GAS SPOT

DAY PRIOR ANNC'D US$

NYMEX GAS 12 MO.

STRIP DAY PRIOR

ANNC'D US$24-Mar-11 Clayton Williams

Energy ($5,850=NPV)Chesapeake Energy $365.0 $365.0 40,000 $5,850 $234 Vertical Wolfbone Farm

in on CHK Acres Operated by CWEI

6-Dec-11 Comstock Resources Inc

Eagle Oil & Gas Company; Undisclosed

$332.7 1,400 $192.7 44,000 $4,380 $333 Vert. Wolfbone & Horiz. Upside acreage, Reeves Cnty.

$100.99 $94.40 $3.38 $4.08

2-Nov-11 Concho Resources Inc

Undisclosed $330.0 1,500 $180.0 114,000 $1,579 $330 Vert. Wolfbone & Horiz. acreage Pecos Cnty.

$92.19 $93.21 $3.49 $4.13

27-Apr-11 Whiting Petroleum Undisclosed $7.8 0 $7.8 11,567 $671 $8 Vert. Wolfbone & Horiz. acreage Pecos Cnty.

$112.21 $85.00 $4.32 $4.16

5-Apr-11 Energen Corporation State of Texas General Land Office

$37.0 0 $37.0 11,000 $3,364 $37 Bone Spring and Avalon shale trend acreage

$108.47 $109.70 $4.21 $4.69

23-Feb-11 Whiting Petroleum Undisclosed $35.2 0 $35.2 71,736 $491 $35 Vert. Wolfbone & Horiz. acreage Pecos Cnty.

$93.57 $81.08 $3.89 $4.19

7-Jan-11 Energen Corp Undisclosed (Various)

$15.3 0 $15.3 17,000 $900 $15 Bone Spring and Avalon Shale acreage

$88.38 $92.49 $4.49 $4.58

10-Dec-10 Energen Corp SandRidge Energy Inc

$110.0 0 $110.0 40,000 $2,750 $110 Bone Spring acreage $88.37 $89.90 $4.52 $4.54

Totals $578.0 349,303 $1,655Source: IHS Herold

BONE SPRING TRANSACTIONS


www.ihs.com

Sven Del Pozzo, CFA [email protected] The research analyst who prepared this report certifies that the views expressed herein accurately reflect the research analyst’s professional opinions, are consistent with established Herold methodologies and standards and that no part of his or her compensation was, is or will be directly or indirectly related to specific views contained in this report. Copyright © 2012 IHS Herold Inc. All rights reserved. IHS Herold Regional Play Assessment is published by IHS Herold Inc., 200 Connecticut Avenue, Suite 3A, Norwalk, CT 06854, USA for the exclusive use of IHS Herold clients. Reproduction of this report, even for internal distribution, is strictly prohibited. The information contained herein has been obtained from sources believed to be reliable, but IHS Herold does not guarantee their accuracy or completeness. No information or opinions contained herein constitutes a representation or solicitation for the purchase of any securities of the companies mentioned herein. From time to time, IHS Herold and/or its officers and employees may have long or short positions in the securities mentioned herein or during the past year may have transacted in securities of the companies mentioned.

ACREAGE: CLAYTON WILLIAMS ENERGY (BLUE) & CHESAPEAKE (YELLOW)

mailto: [email protected]


Appendix

Source: Concho Resources

Source: Concho Resources


ALL BONE SPRING HORIZONTALS-WELL CLUSTERS SUGGEST MULTIPLE SWEET SPOTS

Source: IHS Herold

Avalon Shale Horizontals

1st and 2nd Bone Spring Sands Horizontals

3rd Bone Spring Sands Horizontals


Dry Gas

Dry Gas

BONE SPRING GAS FINDS LIMIT WESTERN AND SOUTHERN EXPANSION

Source: IHS Herold


BROADER EXTENT AND MORE CONSISTENT RESULTS OF AVALON/LEONARD SHALE

Source: IHS Herold


NEW MEXICO BONE SPRING SANDS COVER LESS GROUND AND EXHIBIT GREATER VARIANCE

Source: IHS Herold


NEW MEXICO, CXO's MORE AGGRESSIVE STEP OUT EXPLORATION IN 2011

CXO Stepouts

Macho State Well

CXO Stepouts

Source: IHS Herold


TEXAS THIRD BONE SPRING SAND-DEPTH & LOWER IP MAKES DRILLING TOUGH TO JUSTIFY 2nd MONTH OIL AVERAGE

Source: IHS Herold


COMSTOCK’S RECENT WOLFBONE ACREAGE ACQUISITION

Source: Comstock Resources


WOLFBONE : BEST SECOND MONTH OIL RATES

Source: IHS Herold


SMALL WOLFBONE WELLS IN PECOS COUNTY CANT JUSTIFY COSTS

Source: IHS Herold


SECOND MONTH OIL INITIAL PRODUCTION AND COMPLETION DATE. WIDE RANGING RESULTS CAN'T YET JUSTIFY COSTS

Sweet Spot #2

Sweet Spot #1

Source: IHS Herold

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