Success in Todays Energy Business

1
Success in Todays Energy Business

• By Mike S. McConnell
• President, Jones Energy, Ltd.
• University of Oklahoma
• April 17, 2008

2
Summary

• Part I Jones Energy
• Part II Natural Gas
• Supply and Demand Factors
• Supply Issues
• Part III General Business and Management
• Good to Great
• Keys to Success

3
Part I Jones Energy
4
Jones Energy Background

• Company formed in 1988 in Oklahoma City, OK
• Moved to Austin, TX in 1993
• Original vision Leverage into gas-prone basin
  gas viewed as an undervalued asset
• Western Anadarko Focus
• 78,000 acres primarily in Ochiltree and Lipscomb
  Counties, TX and Ellis County, OK
• Hansford County, TX has been our most active
  area sold to Laredo Petroleum in June 2007
• Cleveland is our most active play 5 rigs
  running

5
Company Vision

• JEL vision to be recognized as the premier
  exploration and asset optimization company for
  large oil and gas companies in the U.S.
  Mid-Continent
• Outsource partner to the majors BP,
  ConocoPhillips, Devon and ExxonMobil
• 117 wells drilled for ExxonMobil
• Drilling 40th well on BP with 2 rigs running
• Strategy is aligned with industry fundamentals

6
Results 2004-2007
7
Results 2004-2007
8
Results 2004-2007
9
Revenue
34
118
86
71
10
Revenue

9
34
118
86
71
Does not include proceeds from Laredo Sale
11
Revenue
42

9
34
118
86
71
Does not include proceeds from Laredo Sale
12
Capital Spending
109
112
72
56
13
Capital Spending
109
112
72
56
14
Capital Spending
96
109
112
72
56
15
Drilling History
16
Drilling History
17
Drilling History
372 Total Wells
18
Production
10
9
8
7
6
Bcfe
5
43
4
67
3
2
50
1
0
2002
2003
2004
2005
2006
2007
2008e
19
Production
Production is flat despite selling 130 wells
drilling 19 fewer wells
10
9
8
7
6
Bcfe
5
43
4
67
3
2
50
1
0
2002
2003
2004
2005
2006
2007
2008e
20
Production
10
9
8
7
28
6
Bcfe
5
43
4
67
3
2
50
1
0
2002
2003
2004
2005
2006
2007
2008e
21
Cap Ex is Changing
Comparison
22
Well Connect Time
Rig Release to Gas Sales
23
Well Connect Time
Rig Release to Gas Sales
24
Well Connect Time
Rig Release to Gas Sales
25
Well Connect Time
Rig Release to Gas Sales
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Jones Energy Business Strategy

• Follow our Vision
• Grow through the drill bit
• Focus on core area Texas Panhandle
• Generate high returns
• Underpin company assets with long life reserves
• Understand and capitalize on our strengths
• Leverage our outstanding team
• Manage through goals and objectives
• Capitalize on high gas prices
• Monitor key financial metrics

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Cleveland Resource Play

• 43,000 acres in Ochiltree, Lipscomb Ellis
  Counties
• 635 bcfe total Cleveland gas production in
  Lipscomb County
• Over 375 total horizontal completions to date
  with an average EUR of 1.3 bcfe
• JEL 296 potential horizontal wells at 160 acre
  spacing
• Current Well Cost 2.5 MM
• Play capex 740 MM
• Drilling our 104th well with good results
• Five rigs currently running in the play

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Cleveland Horizontal
12-1/4 hole
Stimulation Information 9 Stage Packers Plus
System Frac ports spaced throughout lateral Eight
stages with 64,000 lbs sand per stage Last stage
with 84,000 lbs sand Total sand in formation
596,000 lbs sand
8-3/4 hole
2-3/8 J-55 4.7 Tubing SN _at_ 7750
7800 (TVD) AND 11,800 (TMD), Lateral Length
3800
7 N-80 23 Casing _at_ 8000 FJ 7 P-110 23 around
curve
6-1/8 hole
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JEL Cleveland Daily Production
Impact Play
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JEL Cleveland Daily Production
Impact Play
31
JEL Cleveland Daily Production
Impact Play
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Key Management Philosophies

• Good to Great principles
• Change is good and necessary
• Who Moved my Cheese

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Part II Natural Gas
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Natural Gas Is Key

• Great fuel in energy mix
• Domestic driven
• Clean burning/environmentally friendly
• Competitively priced
• It is not coal or nuclear!!

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Natural Gas Demand

• Demand fundamentals - US
• Demand continues to grow annually 6.2 in 2007
• Summer demand up 5.4 bcf/d since 2003
• Difference between a normal vs. hot summer is 8
  bcf/d
• Power generation continues to grow rapidly
• Up 3.4 bcf/d from 2003 to 2007
• Up 7.5 in 2007
• Industrial demand is recovering up 2.1
• Residential and commercial demand up (8.2 and
  6.1)
• Recession affects are unknown

36
Natural Gas Demand (cont.)
37
Natural Gas Supply

• Annual production is up and growing
• Actual production 2002 (3.5) 2003 .9
  2004 (2.6) 2005 (2.8) 2006 2.1 2007
  3.9 (54.3 bcf/d)
• GOM is down 9.6 in 2007
• GOM production is approx. 7.6 bcf/d vs. 13 bcf/d
  in 2001
• Onshore is up over 5.4 in 2007
• Marginal well production up over 400,000 wells
  producing an average of 2.20 bbls/day
• In the US over 1 million BOE/day of new
  production is required to stay even due to
  decline
• Globally over 3 million BOE/day of new production
  is required - 2 Prudhoe Bays each year
• Reserves per well down significantly
• GOM average size of new discoveries have dropped
  96 since 1965

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Dry Natural Gas Production
Source EIA
39
Dry Natural Gas Production
Source EIA
40
Dry Natural Gas Production
Source EIA
41
Producing Wells vs. US Production
Source EIA
42
Producing Wells vs. US Production
Source EIA
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Natural Gas Production
54.3 bcf/d
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Production (continued)

• Well decline rates are steeper
• In 1990 - base production decline rate from new
  discoveries was 16
• In 2007 decline rate increased to 34
• Producers must develop new production equal to
  new GOM every year just to stay even
• Unconventional gas drilling continues to grow
  exponentially
• 35,000 wells drilled in US in 2007
• Growth is up 80 since 2002
• Technology drives steep declines and contributes
  to the problem
• Horizontal rig count up 38 26 of all drilling

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Decline Rates
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Natural Gas Storage

• Gas Storage drives pricing volatility
• Very high storage levels in 2005, 2006 and early
  2007
• 2008 now in line with 5 year average
• 183 bcf of capacity added in 2007
• 400 bcf of capacity additions anticipated by 2010
• LNG storage to increase 55 bcf in 2008
• 2006 and 2007 summer demand was above normal
  along with the winter of 2008
• US owns gt 80 of the NG storage in LNG importing
  countries

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Supply Issues

• Finding and developing costs are increasing
• Up 15 per year since 1997
• Up 120 since 2002 but lower in 2007
• JEL able to lower costs/high grade rigs
  significant impact
• 2008 prices are back on the rise
• Price volatility expected to increase
• Growing power generation demand which is
  affected by weather
• Public EP companies were 55 hedged for 2008
• JEL is 73 hedged for 2008

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Liquefied Natural Gas (LNG)

• The magic solution to US gas supply issues?
• LNG will help but when and how much?
• LNG is a true global commodity
• LNG imports make up only 3 of total US supply
  but can have a dramatic affect on US gas prices
• Only 15 of total LNG supply is available for
  spot purchases
• Despite increasing natural gas prices LNG
  imports actually decreased in 2005, 2006 and were
  flat 2007
• 2008 down 60 YTD due to high prices in Europe
  and Asia
• Supply push vs. demand pull could send LNG to US
  in 2008 but especially in 2009
• Significantly higher prices in Asia and Europe
  limiting US LNG imports

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LNG Sales Prices (per mcf)

• USA - Lake Ch. 8.61
• USA - Cove Pt 9.87
• UK 10.07
• Spain 11.50
• India 12.00
• Korea 12.50
• Japan 13.00

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Other Supply Solutions?

• Canada imports down
• Volumes expected to fall 6 (.6 bcf/d) in 2008
• Natural gas completions down over 25
• Alaska/Artic gas when 2012?
• BP/ConocoPhillips to build a 4 bcf/d pipeline
• Renewables

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Other Supply Solutions?

• Renewables

Total 6.844 Quadrillion Btu
Total 99.960 Quadrillion Btu
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Prices
Source EIA
53
Forward Prices
Natural Gas Curve
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Forward Prices
Natural Gas Curve
55
Forward Prices
Natural Gas Curve
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Basis
NYMEX vs. PEPL
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Basis
NYMEX vs. PEPL
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Rotary Rig Count - USA
Worldwide rig count also increased over 10 per
year since 2003
Source EIA Baker Hughes
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Rig Count compared to Production
Source EIA Baker Hughes
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Rig Count compared to Production
Source EIA Baker Hughes
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Natural Gas Conclusions

• Negative influences
• Growing EP capital spending and domestic
  production
• Increasing LNG liquefaction and degasification
  world wide
• Unknown US economy
• Positive influences
• Strong global demand
• Cold winter this season combined with past strong
  summer demand
• Slower LNG liquefaction completions
• Dramatic drilling issues in Canada
• Potential Russian and Qatar supply issues
• High commodity prices with low interest rates

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Natural Gas Conclusions (cont.)

• Smaller finds faster declines higher costs
  growing demand limited access huge need for
  finding oil and gas .. need for good people!
• These are dangerous times but opportunity abounds
• Good time to be a producer or a new graduate
• Huge need for more people with older workforce
• You can add real value for the country
• Make a big salary but save your money!

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Part III General Business and Management
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Good to Great by Jim Collins

• This book got it right
• Confront the brutal facts
• Yet never lose faith
• Level 5 leadership
• Plow horse not a show horse
• Paradoxical blend of personal humility and
  professional will
• First whothen what
• People first, strategy second
• Getting the right people and removing the wrong
  people
• Hedgehog concept (simplicity within 3 circles)
• What can you be the best in the world at?
• What are you deeply passionate about?
• What drives your economic engine?

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Good to Great (cont.)

• A culture of discipline
• Not a tyrant who disciplines
• When you have disciplined people, you dont need
  hierarchy
• Technology accelerators
• Technology is an accelerator of momentum, not a
  creator of it
• The flywheel and the doom loop
• Building momentum hits a point of breakthrough
• Buy this book!

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Successful Management

• Leadership is the ability to translate vision
  into reality
• General management insights
• Lead by example
• Promote teamwork
• Empower your employees
• Recognize good work and extra effort
• Show your work ethic
• Focus on communication
• Create goals and objectives

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Goals and Objectives

• A goal not written is only a wish
• Personal goals
• Long term and short term
• My personal goals 5 categories - family,
  personal, work, spiritual, material
• List them out for yourself have 4-10 action
  steps under each one
• Business goals
• Develop together creates accountability
• Organic
• Quarterly Business Reviews (QBRs)
• Measure what is important
• Monthly financial reports and radar screens

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• Enron Thoughts

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What Did Enron Do Well?

• Company hired very smart people
• People identified their job/work with the price
  of the stock
• Company was a true meritocracy
• Linked with performance
• High-Energy culture
• Decision making process was streamlined
• Decisions made quickly
• Decision making pushed down to lower levels
• Technology was used to pull away from the
  competition
• Enron Online
• Employees were less afraid of change
• Company had a very diverse culture

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What Did Enron Do Poorly?

• Company made huge bets
• Many leaders cared more about making money for
  themselves than serving customers (greed)
• Simply too much debt
• Corporate culture changed
• Trading, trading, trading
• Became harsh
• Company went from confident to arrogant
• Company went from smart to clever

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Keys to Success My Top Ten

• Integrity it is not just a word, its a way of
  life
• Be reliable, diligent and honest
• Have an understanding with your boss
• Set goals and objectives
• Model yourself after the best
• Make a difference have real accomplishments
• Be a player at your company or area

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Keys to Success (cont.)

• Take risks in your career
• Focus on what is best for the company or the
  customer not on how to make money for yourself
• Dont do something stupid (when you do, learn
  your lesson)
• Emails, elevators bathrooms
• Do what is asked for and then over deliver
• You can always vote with your feet

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Conclusions

• Carpe Diem!
• When you dont know what to do do what is right
• Read these books and add to your personal balance
  sheet!
• Remember, just because you can doesnt mean you
  should

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• www.jonesenergy.com

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Lessons Learned A Hit List

• Continue to learn especially in areas that you
  have a weakness
• Dont stray from your principles ever
• Believe in yourself
• Share credit every time
• Dont look back
• Outwork the competition
• Treat people with respect, at all levels
• Build a support system
• Dont be afraid to ask for help or advice

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Lessons Learned (cont.)

• Do a self evaluation performance review
• Do thorough performance reviews on your staff
• Work like an Olympian/play like a champion today
• Dress the part
• Look at failure as feedback
• Change is inevitable, be ready and welcome it
• Remember, not making a decision is a decision
• When in command, take command
• Live with passion