Success in Todays Energy Business

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Success in Todays Energy Business

• By Mike S. McConnell
• President, Jones Energy, Ltd.
• University of Oklahoma
• October 30, 2008

2
Summary

• Part I Jones Energy
• Part II Natural Gas
• Supply and Demand Factors
• Supply Options
• Part III General Business and Management
• Good to Great
• Management Insights
• 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 development company in the U.S.
  Mid-Continent
• Outsource partner to the majors BP,
  ConocoPhillips, Devon and ExxonMobil
• 124 wells drilled for ExxonMobil
• 40 wells on BP
• Strategy is aligned with industry fundamentals

6
Results 2004-2009
2004
2005
2006
2007
2008e
2009e

• Wells Drilled

34
45
66
46
71
114

• Success Rate

85
82
92
96
90
90

• Net Prod. (bcfe)

3.0
5.0
7.2
7.1
8.5
19.5

• Revenues (MM)

17.9
39.1
52.5
55.7
90.9
206.3

• Capex (MM)

16.1
34.1
70.6
50.0
119.0
211.5
7
Capital Spending
138
106
112
72
56
8
Drilling History
427 Total Wells
9
Production
16
43
67
50
10
Cap Ex is Changing
Comparison
11
Well Connect Time
Rig Release to Gas Sales
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Cleveland Resource Play

• Total wells producing from the Cleveland
  formation 2,450
• 1.1 tcf and 31 million bbls produced to date
• 616 bcf and 9.3 million bbls from Lipscomb
  County alone
• Total horizontal Cleveland wells drilled 502
• 369 horizontal completions in Lipscomb County
  with an average 1.3 bcfe EUR
• JEL activity
• 55,000 gross acres in Ochiltree, Lipscomb
  Ellis Co.s
• 250 potential horizontal wells at 160 acre
  spacing
• Current Well Cost 3.1 MM
• Play capex 775 MM
• Drilling our 128th well with good results
• Four to 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
16
JEL Cleveland Daily Production
Impact Play
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Key Management Philosophies

• Company principles
• Good to Great
• 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!!
• Fundamentals are changing dramatically
• Now a bountiful commodity?

20
Natural Gas Demand

• Demand fundamentals - US
• Demand continues to grow annually 6.2 in 2007
• Summer demand up 5.4 bcf/d since 2003
• Power generation continues to grow rapidly
• Up 3.4 bcf/d from 2003 to 2007
• Up 7.5 in 2007
• Difference between a normal vs. hot summer is 8
  bcf/d
• Industrial demand is recovering up 2.1
• Residential and commercial demand up (21.0 and
  12.0)
• Recession affects are unknown and could be
  dramatic

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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) 2008 8
• GOM production is approx. 7.6 bcf/d vs. 13 bcf/d
  in 2001
• Marginal well production up over 420,000 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

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Natural Gas Supply

• Shale gas is changing everything a true
  paradigm shift
• Biggest change in 30 years?
• Plays Tcf
• Perspective - 2006 Total US Proved reserves
  approx. 204 Tcf
• Approximately 10 of natural gas production is
  now from shale plays

30-50
Barnett
25-45
Fayetteville
10-12
Woodford
20-200
Haynesville
10-40
Marcellus
95-345 Tcf
Total US
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Natural Gas Supply

• Look at recent production
• 2007
• GOM is down 9.6
• Onshore is up over 5.4
• 2008
• GOM is down
• Onshore is up 8
• Gas wells are up 16 in Q3 vs. 2007
• Oils wells are up 34 in Q3 vs. 2007
• Nearly 50 of gas production is now from
  unconventional plays
• 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
25
Dry Natural Gas Production
Source EIA
26
Dry Natural Gas Production
Source EIA
27
Dry Natural Gas Production
Source EIA
28
Dry Natural Gas Production
Source EIA
29
Dry Natural Gas Production
Source EIA
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Producing Wells vs. US Production
Source EIA
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Producing Wells vs. US Production
Source EIA
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Production (cont.)

• 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
• Now represents 50 of production up from 16 in
  1990
• Technology drives steep declines and contributes
  to the problem
• Shale plays decline 70-90 in first year
• Horizontal rig count up 38
• 28 of all drilling
• 8 of all drilling in 2003
• All of Jones rigs are horizontal

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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 but lower
  than 07
• 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 2008 summer was
  lower
• 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
• 2008 prices are flattening again after initial
  rise but steel prices are very high
• JEL able to lower costs/high grade rigs
  significant impact
• Price volatility expected to increase even more
• Growing power generation demand which is
  affected by weather
• Public EP companies were 56 hedged for 2008
• JEL is 73 hedged for 2008 2012
• Gas at 9.70/mmbtu and oil at 130/bbl
• Publics are approx 36 hedged in 2009

35
Liquefied Natural Gas (LNG)

• Once thought to be the key issue of US gas supply
  
• LNG predictions have been proven wrong
• 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 up
  finally in 2007
• 2008 down 52 YTD due to high prices in Europe
  and Asia
• Supply push vs. demand pull could send LNG to US
  in 2009
• 1.5 bcf/d added capacity in late 2008 but 7.8
  bcf/d in 2009
• Significantly higher prices in Asia and Europe
  limiting US LNG imports 7.41 in US vs. 13.72
  in the UK

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Other Supply Options

• Canada imports down
• Volumes expected to fall 8 (.8 bcf/d) in 2008
• Natural gas completions down over 25
• Using huge gas production in tar sand development
• Alaska/Artic gas when 2012?
• Anwar unable to drill on 2,000 acres
• But can drill in neighborhoods in Ft. Worth?
• BP/ConocoPhillips to build a 4 bcf/d pipeline
• Renewables

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Renewable Energy
Total 6.844 Quadrillion Btu
Total 99.960 Quadrillion Btu
Perspective on Wind 4 of 7 .0028 of US
Energy Supply
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Price Volatility
From Previous Year
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NYMEX CLOSING PRICES
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NYMEX CLOSING PRICES
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NYMEX CLOSING PRICES
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NYMEX CLOSING PRICES
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Forward Prices
Natural Gas Curve
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Forward Prices
Natural Gas Curve
45
Forward Prices
Natural Gas Curve
46
Forward Prices
Natural Gas Curve
47
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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Basis
NYMEX vs. PEPL
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Basis
NYMEX vs. PEPL
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Basis
NYMEX vs. PEPL
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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
55
Rig Count (average)
Source EIA Baker Hughes
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Natural Gas Conclusions

• Negative influences on price
• US/Global economy slowdown effecting demand
• Shale gas incredibly successful in bringing up
  production
• Increasing LNG liquefaction and degasification
  world wide - but they are taking much longer than
  expected
• Positive influences on prices
• Global demand unknown but still growing?
• Cold winter this season combined with past strong
  summer demand could raise prices
• High price for LNG by other countries
• Dramatic drilling issues in Canada
• Potential Russian and Qatar supply issues

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Natural Gas Conclusions (cont.)

• Smaller finds faster declines higher costs
  growing demand limited access aging workforce
  huge need for finding oil and gas .. need for
  good people!
• These are dangerous times but opportunity abounds
• Euphoria has waned from last year
• Capex cut by average of 35 for 2009
• Still a good time to be a producer/new graduate
• Huge need for more people with older workforce
• Make a big salary but save your money!
• Ive been laid off twice

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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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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 and should 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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(No Transcript)
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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