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					                                                                              MORGAN                STANLEY                          RESEARCH
                                                                              ASIA/PACIFIC


                                                                              Morgan Stanley Australia Limited+                   Stuart Baker
                                                                                                                                  Stuart.Baker@morganstanley.com
                                                                                                                                  +61 3 9256 8929

                                                                                                                                  Philip J Bare
                                                                                                                                  Philip.Bare@morganstanley.com
                                                                                                                                  +61 3 9256 8932


                October 8, 2010


Industry View   Australia Oil & Gas
Attractive
                2011 Outlook: Improving
                                                                              Key Changes (A$)
                                                                                                      Px as
                2011 is approaching and we believe a number of                A$                     of EOT                         DCF                  Price Target                  Qtrky
                factors could combine to drive a sector re-rating,                                                                                                                    Report
                                                                                                     6/10/10                  New          Prev         New          Prev              Date
                following a dismal 2010. This report considers the year       Woodside                44.80              46.99          47.91         50.00          51.00            22 Oct
                almost gone and ponders next. Broadly (1) we are              Origin                  16.03              14.67          14.90         14.70          14.20            27 Oct
                constructive on oil prices, (2) valuation support remains     Santos                  12.61              15.93          15.90         15.50          15.50            21 Oct
                if companies meet gas monetization objectives, (3)            Oil Search               6.15               9.13            8.93         6.50           6.50            26 Oct
                “blue-sky” is being wrung out of the sector, (4) M&A has      Caltex                  11.65              14.06         13.12*         14.00          13.00             NA
                been non-existent but plausible combinations exist, and       ESG                      0.87               1.13            1.21         1.10           1.10             TBA
                (5) there could be rotation out of better-performing          AWE                      1.50               2.28            2.34         1.70           1.76            29 Oct
                sectors and energy is typically a late-cycle play. In terms   Beach                    0.67               0.73            0.75         0.75           0.75            26 Oct
                of headwinds, the rising A$ is becoming a gale, fiscal        NZOG                     1.02               1.08            1.08         1.10           1.10            27 Oct
                terms are not yet legislated, and Australia’s carbon          ROC                      0.40               0.59            0.63         0.53           0.53            28 Oct
                policy is still to be formulated.                             *Earnings multiple based valuation
                                                                              Top Overweight Recommendations
                We have fine tuned our oil price deck, marking to             Company                                                                Price Target
                market for the remainder of 2010, and trimming 2011 to        Woodside                                                               A$50.00
                                                                              Oil Search                                                             A$6.50
                US$80/bbl. Our long-term price is unchanged at                Santos                                                                 A$15.50
                US$90/bbl. We are constructive on oil, which has lagged       ROC                                                                    A$0.53
                other commodities despite evidence of improving
                fundamentals.                                                 Performance of E&P’s vs Oil: 2010 CYTD vs 2009
                                                                                        %'age     YTD Performance (%'age)                        2009 Performance (%'age)
                                                                                350
                                                                                                  Oil Price Performance (%'age)                  Oil Price 2009 Performance (%'age)

                The LNG growth opportunity is real and most                     300


                Australian companies have LNG plans. Most of these              250


                are well described and partly captured in equity prices.        200


                Nevertheless, delivery of LNG milestones underpins              150


                future value growth.                                            100


                                                                                 50



                Some companies disappointed by falling short of                    -



                too-high expectations. The effect has been to wring              (50)



                out “blue-sky” and expose value, in certain equities.           (100)
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                Cheapness doesn’t guarantee performance, but it helps.
                                                                              Source: Company data, Morgan Stanley Research
                Asset & deal activity has been quiet and likely
                discounted as a future driver, but the economic logic in
                                                                              Morgan Stanley does and seeks to do business with
                certain combinations is unlikely to diminish, in our view.    companies covered in Morgan Stanley Research. As
                                                                              a result, investors should be aware that the firm may
                We have revised up the A$/US$ rate and this is                have a conflict of interest that could affect the
                negative for A$ earnings and A$ valuations. Impact on         objectivity of Morgan Stanley Research. Investors
                stock prices may be muted as long as investors view the       should consider Morgan Stanley Research as only a
                                                                              single factor in making their investment decision.
                A$ as unsustainably high.
                                                                              For analyst certification and other important
                                                                              disclosures, refer to the Disclosure Section,
                Our preferred stocks are Oil Search, Santos, Woodside         located at the end of this report.
                Petroleum and Roc Oil.                                        += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be
                                                                              associated persons of the member and may not be subject to NASD/NYSE restrictions on
                                                                              communications with a subject company, public appearances and trading securities held by a
                                                                              research analyst account.
                                                                  MORGAN            STANLEY              RESEARCH

                                                                  October 8, 2010
                                                                  Australia Oil & Gas




2011 Outlook: Improving
Energy sector performance has been dismal this year to             Exhibit 1

date. Why is 2010 so bad and what might drive the sector           Future oil supply to 2015 (mbopd LHS)
in 2011?                                                              12                                                                              35
                                                                                     Cumulative RHS (kbopd)
                                                                                                                                                      30
                                                                      10
Step back a year and look at what the sector was offering.
                                                                                                                                                      25
All of the bigger companies had an LNG project starting up               8

                                                                                                                                                      20
late 2013/2014. Measured over the year there has been                    6
progress at the industry level but less than promised and                                                                                             15

                                                                         4
some FID and project timelines have slipped or are under                                                                                              10

pressure. Along the way a tax debate got in the way. Oil                 2
                                                                                                                                                      5
prices were flat and provided no top-down signal. Smaller
                                                                     -                                                                                -
companies were generally much more active with the drill bit




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but with minimal success. Specific M&A deals were the




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subject of media speculation without follow-through. In




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                                                                   Source: Oil & Gas Journal, IEA Report, OPEC Secretariat, Morgan Stanley Research. Left
summary, there has just not been enough good news to               hand scale = mbopd of capacity growth from 2010 to 2015. RHS is cumulative capacity
support equity valuations.                                         growth in mbopd.



Why might 2011 be any better?
                                                                   2. All of the larger companies have LNG plans and
There are a number of factors that could come into play to         delivery of these will drive value growth over the longer
provide sector performance from here:                              term. This is critical as near-term earnings metrics for most
                                                                   companies are not compelling, in our view. There are risks
1. We are constructive on oil prices but are surprised to          with specific projects and share prices will be hostage to
hear that our US$90/bbl long-term forecast is considered           delivery against stated timelines. The LNG market looks
bullish. We are almost there now despite continuing weak           reasonably well supplied through to 2015, so investors need
global growth. Certainly there are still observably high           to remain realistic as to when these large, new green-field
inventories, and there is still 5-6 mbopd of slack capacity        plants are needed.
within OPEC. Demand is recovering, with the US having
recouped half its loss. China is on track to show YoY growth in    However, Australia continues to benefit from problems
2010 of 9% but the rate shows acceleration with the figures to     plaguing rival LNG projects in Iran, Nigeria and Egypt, with
the end of August up 11% YoY. Global demand in 2010 is             majors Chevron, Shell, Exxon, Total, GDF Suez and Hess all
tracking towards 86.6 mbopd (+1.9 mbopd from the 2009 low)         increasing their investments in Australian gas assets via
and we project additional growth in 2011 in the order of 1.3       exploration or acquisition this year.
mbopd. Notably, the cycle of demand downgrades we had
seen from various agencies ceased around Q2 this year.             3. Less “blue sky” today. Delivery against stated strategies
                                                                   has been generally poor and stock prices have responded
Longer term, we remain concerned that until 2015, of the new       accordingly, notably among smaller companies, but for some
capacity needed to meet demand and offset decline, around          is only a partial reversal of large gains in 2009 (Exhibit 2).
30% is projected to come from Iraq (Exhibit 1). This could         Second-tier CSG and LNG developers have generally not
prove very challenging and when fundamentals do start to           been able to sell gas. Exploration programs outside of
improve, we feel supply-side issues could once again drive oil,    offshore WA mostly resulted in dry wells. Specific fields with a
as it did to 2007. No less encouraging is the capacity             history of problems remained true to form sucking in valuable
increment planned to come from Canada oil sands which are          dollars instead of the reverse. The net of all this, in general, is
believed to be near the top of the cost curve.                     for expectation upside or “blue sky” to be wrung out of specific
                                                                   equities and this is most notable among the smaller market
                                                                   cap companies. We can find examples of equities trading at a
                                                                   discount to cash plus production, which is rare.




                                                                                                                                                          2
                                                                                      MORGAN             STANLEY                      RESEARCH

                                                                                      October 8, 2010
                                                                                      Australia Oil & Gas




Exhibit 2                                                                              Exhibit 3
Performance of energy stocks: YTD 2010 & 2009CY                                        Absolute return YTD; energy sector lags
  350            YTD Performance (%'age)         2009 Performance (%'age)
                 Oil Price Performance (%'age)   Oil Price 2009 Performance (%'age)                                     S&P ASX 200 / Materials

  300
                                                                                                                S&P ASX 200 / Consumer Staples


  250
                                                                                                                         S&P ASX 200 / Utilities


  200                                                                                                                  S&P ASX 200 / Industrials


  150                                                                                                                  S&P ASX 200 / Consumer
                                                                                                                            Discretionary

  100                                                                                                                 S&P ASX 200 / Information
                                                                                                                            Technology

   50                                                                                                                  S&P ASX 200 / Financials


    -                                                                                                                 S&P ASX 200 / Health Care


  (50)                                                                                                                    S&P ASX 200 / Energy


                                                                                                               S&P ASX 200 / Telecommunication
 (100)
                                                                                                                          Services
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                                                                                        -20        -15        -10              -5                  0          5          10          15          20



Source: Company data, Morgan Stanley Research                                          Source: Company data, Morgan Stanley Research




4. Consolidation events. The M&A cycle has been dormant                                Exhibit 4

since 2008, despite frequent acknowledgement among                                     How could the energy sector recover?
industry participants that there are synergies to be gained                                                                            1992            2002                   1992        2002
from co-operative or collaborative development, particularly in                                                                        +6M             +6M        Ave.        +12M +12M               Ave.
eastern Queensland, where four separate joint ventures all                             S&P/ASX 200 CONS. DI                               1             1         1.0          3           4          3.5
plan to build multi-train LNG schemes more or less                                     S&P/ASX 200 IT                                     5             2         3.5          1           2          1.5
simultaneously.                                                                        S&P/ASX 200 MATERIAL                               2             5         3.5          2           3          2.5
                                                                                       S&P/ASX 200 ENERGY                                 9             7         8.0          4           1          2.5
The barrier to co-operation in our view is significant, namely                         S&P/ASX 200 INDL.                                  4             4         4.0          7           6          6.5
that participants are ultimately competitors for customers,                            S&P/ASX 200 HEALTHCA                               7             8         7.5          5           5          5.0
capital and skilled labour. However, economic logic will drive                         S&P/ASX 200 TELECOMM                                                                    6           9          7.5
deal activity eventually and that economic logic will not go                           S&P/ASX 200 CONS. ST                               3             6         4.5          11         10          10.5
away any time soon, in our view.                                                       S&P/ASX 200 PROPERTY                               6             3         4.5          12         12          12.0
                                                                                       S&P/ASX 200 FINL. EX                              11            11         11.0         8           7          7.5
                                                                                       S&P/ASX 200 FINANCIA                              10            10         10.0         9           8          8.5
5. Sector rotation. There is capital flowing back into riskier
                                                                                       S&P/ASX 200 UTILITIE                               8             9         8.5          10         11          10.5
assets, notably the mining sector. Exhibit 3 ranks sector gains                        Source: Morgan Stanley Research. Figure in the box are relative rankings. A figure of 1 is
YTD and the flow into mining and basic materials is logical, but                       assigned to the sector with the greatest sector relative performance

energy sector losses barely eclipsing that of Telstra?
Re-allocation of capital between sectors may provide an
element of performance over the next year. Analysis from                               What are the headwinds?
Morgan Stanley’s strategy team shows that the energy sector                            1. Continued appreciation of the A$ / US$ rate is a
is a late cycle performer, and typically only begins to run long                       headwind as the sector is effectively a US$ asset. We have
after mining equities have been bid up to levels where                                 revised up our A$ assumptions in this report again and this is
investors are uncomfortable in owning more, after which there                          generally negative for earnings. There are some partial offsets
is a spill-over effect into oil & gas. Exhibit 4 ranks sector                          given that capital costs are typically in US$ as are some
recovery in prior deep recessions, measured 6 and 12 months                            specific operating costs such as FPSO day-rates. Some
after the bottoming in the ISM.                                                        companies report their financial results in US$, specifically
                                                                                       Woodside, ROC Oil and Oil Search but the higher A$ is
                                                                                       adverse when translating US$ valuations into A$. Historically,
                                                                                       we have been unable to prove a statistical link between a
                                                                                       higher A$ and lower stock prices, as the A$ movement is not
                                                                                       in isolation and usually runs in sync with higher commodity
                                                                                       prices and this is the case now, in our view.




                                                                                                                                                                                                 3
                                                                      MORGAN         STANLEY     RESEARCH

                                                                      October 8, 2010
                                                                      Australia Oil & Gas




2. Fiscal terms are not nailed down. The RSPT “super tax”              cap-and trade emissions trading scheme, originally planned to
issue earlier this year triggered a vociferous industry backlash       be introduced this year, but this eventually collapsed under
and was a key election issue. The re-elected Government has            the weight of economic reality and a country still dependent on
promised to re-address the wider tax debate, and within this           coal-fueled power generation. We believe the earlier regime,
the oil industry strongly anticipates that the existing fiscal         had it been adopted, would have been relatively punitive to the
structure that applies for offshore fields will be applied             domestic gas sector. LNG projects are large CO2 emitters
onshore. Based on extensive modeling we carried out earlier            with these emissions coming from both field gas, and
in the year, a PRRT regime if applied onshore is economically          emissions generated from the liquefaction process machinery.
efficient, allows for the general of at least a “normal” economic      Energy lobby group APPEA pointed out that it made little
return and does not materially diminish the returns from               rational sense to apply a carbon penalty to an LNG producer
projects now being conceived. However the required                     in Australia, if such gas was being used to Asia to displace
legislation is not yet drafted or legislated, and until it is, then    coal from the energy mix, and this remains a valid concern
there is latent risk that the regime could be tweaked in some          today.
way to the detriment of the industry.

3. The “carbon” policy has yet to be formulated and
debate about how and when a “carbon tax” is applied ebbs
and flows. The previous Government attempted to introduce a




                                                                                                                                    4
                                                                    MORGAN         STANLEY      RESEARCH

                                                                    October 8, 2010
                                                                    Australia Oil & Gas




Company updates
Woodside: last A$44.80                                               commissioning of gas production and power generation
(WPL.AX, OW, lowered to A$50 from A$51)                              assets this year, and a full year of earnings from new gas
                                                                     fields (Kupe & additional Otway) and increased capacity in
Woodside offers the combination of low-cost, long life base
                                                                     peaking power plants. Longer term, there is intrinsic value in
business, a strong balance sheet, and 2011 Pluto-driven
                                                                     the large coal seam gas resource within the APLNG venture
earnings growth. We believe the expansion of free cash flow
                                                                     (Origin / Conoco 50/50) but this is an uncertain project in our
after 2010 will deliver the company the sector’s best balance
                                                                     view & it is risked in our valuation. Plans to bring hydro power
sheet but the list of growth projects is smaller than it used to
                                                                     from PNG are very interesting and innovative but very long
be. An aggressive exploration program for gas is under way in
                                                                     dated. We like the strategy, many do, and it comes at a
highly prospective acreage offshore WA to underpin Pluto
                                                                     premium price, in our view.
expansion. Disappointingly, the FID timing for Pluto 2 has
slipped, a key constraint remaining sourcing the gas and the
                                                                     Oil Search: Last A$6.15
time required to complete the appraisal program. We are
                                                                     (OSH.AX, OW, PT A$6.50, unchanged)
more skeptical on the Sunrise and Browse LNG schemes,
which face a combination of location and technical challenges.       OSH is trading at a deep discount to our DCF valuation of
                                                                     A$9.13/sh, which is underpinned by the Exxon-operated PNG
Santos: last A$12.61                                                 LNG project. Completion of construction milestones over time
(STO.AX, OW, PT A$15.50, unchanged)                                  should close the value gap with first production in 2014.
                                                                     Exploration for gas and Hides field appraisal, if successful,
GLNG and other LNG interests in PNG and Darwin provide
                                                                     could deliver additional gas reserves to underpin a third train.
something that Santos lacked for a long time, which is
                                                                     If so, this would materially add to the valuation, in our view. In
sustainable higher production and earnings. There are near
                                                                     early 2011, we would expect the outcome of a detailed
term challenges and constraints, including reserve issues,
                                                                     “Strategic Review” to define new opportunities into the future
additional equity funding, and accessing LNG technical and
                                                                     but we don’t expect a re-direction away from the core assets in
operating skills. The entry of Total into the GLNG project is a
                                                                     PNG.
major endorsement but Santos need to find more customers
yet, and lock-in capital costs that allow for positive project       AWE: last A$1.50
returns. Resolution of capex and funding would reduce GLNG           (AWE.AX, EW, PT cut from A$1.76 from A$1.70)
specific risk and drive a higher valuation, in our view.
                                                                     AWE’s aggressive exploration program did not result in
Caltex: Last A$11.65                                                 meaningful new discoveries and now the cash position,
(CTX.AX, EW, PT raised from A$13 to A$14)                            production profile and future opportunity set look less
                                                                     attractive now than a year ago. Disappointment is in the stock
It is too early to call an up-leg in the next refining cycle, but
                                                                     price too, which we figure is now at a material discount to
there is ample evidence that the worst is over, with demand
                                                                     production value. The search is on for a new CEO and a new
gradually recovering, and capacity growth attenuating. In
                                                                     strategy.
retail and marketing, we are more confident that the company
can deliver further incremental growth from cost reductions
                                                                     Beach Energy: last A$0.67
and volume growth, so that when the refining cycle does
                                                                     (BPT.AX, EW, PT unchanged at A$0.75)
eventually return, the profit potential is likely far higher than
the prior peak. Seasonality in margins is a near-term                Valuation is supported by current production from its Cooper
headwind and we expect the stock price in the short term to          Basin acreage, $140m net cash, plus additional investments.
continue to trend in line with Singapore margins, and bottom         First oil from Egypt is overdue, and further slippage remains a
out in Q4 2010.                                                      risk. Meanwhile, BMG issues continue. There is an
                                                                     increasing focus on unconventional gas, with the first well in
Origin Energy: last A$16.03                                          the Cooper Shale gas drilling programme, Encounter, now
(ORG.AX, UW, PT raised from A$14.20 to A$14.70)                      under way. However we think commercial and technical
                                                                     barriers will need to be addressed before we gain conviction
Origin offers stable earnings growth over the outlook period,
                                                                     on this strategy.
with close to 15% EPS growth achievable in 2011 from




                                                                                                                                    5
                                                                 MORGAN           STANLEY             RESEARCH

                                                                 October 8, 2010
                                                                 Australia Oil & Gas




ROC Oil: last A$0.40                                              passive with regard to its NSW CSG investment. We don’t
(ROC.AX, OW, PT unchanged at A$0.53)                              expect it to remain passive indefinitely, but for now its priority
                                                                  is GLNG in our view.
ROC trades at a 30% discount to our DCF-based valuation,
one of the largest in the space. Production performance is        Exhibit 5
mixed with success in China and ongoing challenges                DCF and EPS Changes (A$/share unless specified)
remaining at BMG. Growth is reliant on Beibu Bay project
                                                                                                                  EPS        EPS         EPS         EPS
sanction, which we believe is imminent, but options beyond it                   (A$)    Target       DCF        2010E/A 2011E          2012E         2013E
are minimal. Longer-term, we think exploration needs to be        Woodside       Old     51.00       47.91       US2.01     US3.10     US3.37          -
rebuilt. With financial issues addressed, we expect today’s                     New      50.00       46.99       US1.92     US2.42     US.305          -
pricing discount to valuation to ease.                            Santos         Old     15.50       15.90         0.37      0.33        0.43          -
                                                                                New      15.50       15.93         0.35      0.23        0.34          -
New Zealand Oil & Gas: last A$1.02                                Oil Search     Old     6.50        8.93          0.11      0.10        0.10          -
(NZO.AX, EW, PT unchanged at A$1.10)                                            New      6.50        9.13          0.10      0.09        0.09          -
                                                                  ORG            Old     14.2        14.90        0.681      0.75       0.852          -
With Kupe development capex complete and production on                                   14.7        14.67       0.666A      0.756      0.896        1.015
                                                                                New
line, NZO is generating substantial free cash flow. The issue     ESG            Old     1.10        1.21         (1.2)c      0.4c       1.4c          -
is where will it be redeployed? NZO’s associate Pike River                      New      1.10        1.13        (0.8)c A    (0.3)c      0.6c        0.8c
Coal has been the recipient of capital and now needs to           AWE            Old     1.76        2.34         (6.8)c      2.1c       3.6c        5.0c
deliver production from its troubled mine to support NZO’s                      New      1.70        2.28        (6.8)c A     2.7c       2.0c        4.8c
investment. We see few options within its core E&P business,      Beach          Old     0.75        0.75         (0.1)c      3.0c       4.7c         4.8c
as exploration activity in 2011 slows to a stand still. New                     New      0.75        0.73        (0.1)c A     0.7c       3.0c        3.4c
ventures overseas are on the table, but come with risks in our    ROC            Old     0.53        0.63        US2.6c     US4.0c     US4.5c          -
view.                                                                           New      0.53        0.59        US1.2c     US3.6c     US4.3c          -
                                                                  NZOG           Old     1.10        1.08        NZ(0.8) NZ11.5c NZ15.8c NZ14.2c
Eastern Star Gas: last $0.88                                                    New      1.10        1.08       NZ(0.8)A NZ9.5c NZ14.4c NZ14.6c

(ESG.AX, OW, PT unchanged at A$1.10)                              Caltex         Old     13.0         NA           1.05      1.29        1.59          -
                                                                                New      14.0         NA           1.13      1.18        1.46          -
ESG holds a strategically significant coal seam gas resource
                                                                  c = cents
in New South Wales. Progressing heads of agreements to            e = Morgan Stanley Research ModelWare estimates
                                                                  Source: Morgan Stanley Research
gas sales agreements is important to support valuations as
                                                                  *EPS for the following stocks are in US$: Woodside, ROC; EPS for NZOG are in NZ$
are finding large gas volume opportunities. LNG may provide
the latter. JV partner and 20% ESG holder Santos has been




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                                                                   October 8, 2010
                                                                   Australia Oil & Gas




                                                                    Exhibit 7
Oil price and exchange rate                                         A$ correlates to oil price
revisions                                                            160
                                                                               WTI-US$/bbl

                                                                     140

Morgan Stanley’s global energy team has fine tuned its oil
                                                                     120
price forecasts for the balance of 2010 and 2011. Fourth                                       Bull

quarter WTI has been reduced from US$79/bbl to                       100
                                                                                              Base
US$77.3/bbl and approximates the forward curve. CY2011                80

has been reduced from US$81/bbl to US$80/bbl. MS                                              Bear
                                                                      60
normalized oil price remains unchanged at US$90/bbl. These
changes have minimal impact on our forward forecasts. Our             40

bear case scenario is unchanged while the bull case scenario          20
                                                                                                                          A$/US$
has been reduced by $5/bbl. Exhibit 6 shows these changes
                                                                       0
                                                                        0.00           0.20      0.40     0.60   0.80   1.00       1.20
Exhibit 6
                                                                    Source: Morgan Stanley Research
Oil price and exchange rate assumptions
                                   Bear     Base        Bull
US$/bbl                                                             Will this drive stock prices lower? Probably not, in our view.
Q4 2010                             70      77.3       85.0         All the E&P companies are effectively US$ companies so a
2011E                               70      80.0       95.0         weak US$ reduces economic value in A$ terms. Despite this,
Long term                           70      90.0       105.0        there is no obvious history of poor sector performance in the
A$/US$ rate                                                         face of a rallying dollar. There are three reasons why
Q4 2010                            0.89     0.94       0.99
2011E                              0.87     0.92       0.97
                                                                    First, markets generally discount the current exchange rate as
2012E                              0.83     0.88       0.93
                                                                    unsustainably high as is evidenced by materially lower rates in
Long term                          0.75     0.80        0.9
                                                                    the forward market.
A$/bbl
Q4 2010                            78.7     82.4       85.9
                                                                    Second, stock prices are not priced against near-term
2011E                              80.7     87.2       98.2
                                                                    earnings given that P/E multiples for most stocks are very
Long term                          84.2     102.1      112.7
Source: Morgan Stanley Research estimates                           high.


We have revised up the A$ rate as well given the recent             Third, stock-specific catalysts such as exploration events,
strength in the A$ and the prospect of further tightening of        asset transactions, and LNG developments can be more
monetary policy. This has a detrimental impact on near-term         tangibly related to share price performance.
earnings for companies that report earnings in A$. Woodside,
Oil Search and ROC Oil report in US$, but for PE calculations,
A$ share prices are converted to US$ at the spot rate.

Historically there has been a positive relationship between oil
prices and commodity prices in general. Refer to Exhibit 7,
which captures 20 years of A$ and US$ WTI into a single
cross-plot. While the data are unadjusted in any way, it is
interesting to observe that that the bulk of data points for oil
prices in the US$75-$90/bbl range are for the A$ rate in the
80-90c range.




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LNG market update
Asian LNG markets have rebounded, with hot weather                  Short term: demand bouncing back, prices not
driving an unexpected surge in demand, in tandem with a
                                                                    LNG demand in key Asian markets has rebounded strongly
general economic recovery. Spot prices, however, have not
                                                                    this year, driven by a general improvement in the regional
shown any strength with supply from new projects abundant.
                                                                    economy, and more recently by record hot weather driving up
Longer term, we continue to see structural issues in the global
                                                                    demand for power. YTD consumption at the end of August in
LNG industry. In a nutshell, rival project developers cling to a
                                                                    Japan, the biggest LNG market in the world is +11%, versus
bullish view of the long term, discounting the fact that the
                                                                    the pcp, and consumption in Korea up 24% YTJuly.
world is long gas, and downplaying having completely missed
                                                                    Combined, Japan, Korea, Taiwan and China imports to end
the US shale gas boom. Recent initiatives in the US are
                                                                    July were 58.9 MT, which is a gain of 13% compared to 52 MT
pushing that country closer to LNG exports, and this could be
                                                                    in the pcp. This recovery should be kept in context, given the
a new paradigm with price implications.
                                                                    sharp reversal in demand witnessed in 2009 (see Exhibit 8).

Events in other LNG exporting countries have been less
                                                                    The bulk of the short-term demand growth has been met by
favourable. Iran’s long-hoped for plans to be a multi-project
                                                                    spot supplies, predominantly from Russia, and to a lesser
producer appear to have completely collapsed under the
                                                                    extent West Africa, Qatar, Yemen and Egypt. Exhibit 9 shows
weight of sanctions. Egyptian and Nigerian production and
                                                                    year-to-date average prices by country of origin. Large volume,
expansion plans are on hold pending domestic supply &
                                                                    long-term suppliers into Asia such as Australia, Indonesia,
feedstock issues. Multi-nationals at the forefront of planned
                                                                    Malaysia and more recently Qatar are achieving prices that
projects in all of these countries (including Shell, Total, BG
                                                                    are either fixed (as in the case of some contracts into China)
and Chevron) have observably increased their investment in
                                                                    or related to oil with gas prices in the US$10-12/mmbtu range
Australia.
                                                                    representing a 10-20% discount to oil. The predominance of
                                                                    low prices from suppliers outside the region, as shown in
However putting together large LNG projects is a slow and
                                                                    Exhibit 9, reflects spot shipments that are priced more
tedious process and locally, despite the continuing strong
                                                                    opportunistically.
multi-national interest in projects here, these projects are all
taking longer than expected. Time lines to FID are under            Exhibit 8
pressure or later than originally planned (e.g. Pluto2, GLNG,       LNG consumption – key markets
APLNG, Ichthys). Exploration activity or deals to grow                                                                                   YTD
bankable gas appear less urgent too (e.g. PNG Hides                                                 2006     2007      2008      2009   20010   YTD 09

appraisal drilling, Pluto2 drilling, eastern Queensland             Japan                           62.0     66.8      69.6      64.5   40.9    37.0
consolidation).                                                     Korea                           26.8     27.1      28.9      25.2   18.7    15.1
                                                                    Taiwan                          8.2       8.8      9.9       8.9     4.9     3.9
We suspect target markets and customers are backing off,            China                           0.8       3.2      3.6       5.7     4.7     2.7
                                                                    Source: Morgan Stanley Research, Japan Ministry of Finance
either with respect to longer-term needs, or with respect to
prices on offer, or both. Key markets apart from Korea appear
well set with respect to long-term contract cover until after
                                                                    Spot markets not that important to local LNG. Unlike other
2015. The market window for new projects is now the
                                                                    LNG regions, Australian LNG producers are predominantly
back-end of this decade.
                                                                    long-term suppliers, with the bulk of production delivered into
                                                                    take-or-pay contracts at prices set and structured for the
We urge investors to approach LNG on a project-by-project
                                                                    duration of the supply contract. The recovery in near-term
basis, rather than generically. Not all the projects being
                                                                    volumes will inevitably help soak up some of the current
wheeled out now will happen. In our view, those that do will
                                                                    excess and provide a more positive backdrop, but for
provide their developers with multi-decade free cash flow and
                                                                    Australian E&P companies looking to launch new Greenfield
there is no in-between.
                                                                    projects, we view the market opportunity as +2015 and not
                                                                    today’s spot market.




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Exhibit 9                                                                                 were standard until recent years. Kogas is named as a
LNG prices by origin – YTD US$/mmbtu                                                      customer close to agreeing to take supply and equity, but
                                   Japan          Korea          China         Taiwan     needs Government approval.
Abu Dhabi                          11.33           7.12          7.08
Alaska                             12.04           7.44                                   S-curves historically have been very important to the
Australia                          11.17           6.72           3.4            9.49     developer, as the floor price locks in a guaranteed minimum
Brunei                              11.0          12.47                                   return which may improve project bankability, but it also
Indonesia                           9.32          10.03          4.75           13.64     surrenders to the buyer any future oil price upside.
Malaysia                           11.69           8.23          6.38           12.16
Oman                                7.38          12.63                          9.75     Given recent re-contract and having regard to likely renewals,
Qatar                              12.44           12.3          12.39           3.52     it still appears to us that:
Algeria                             7.31
Egypt                                             10.27          6.01                     - Japanese market needs about 8 MTPA from 2014,
Eq. Guinea                         13.38          11,85            0                      assuming contract roll-over from existing suppliers in
Nigeria                              13            7.89          9.63            8.74
                                                                                          Indonesia, Brunei and Malaysia. A number of small contracts
Russia                              8.01           5.41          9.37            5.31
                                                                                          from short-term and spot suppliers could satisfy this, because
Trinidad                           11.65           8.51                          8.46
                                                                                          according to our models there are sufficient new projects to
Yemen                                              4.39          10.47
                                                                                          meet this opportunity. After 2016, the INPEX-operated
Average                            10.65           9.99          6.04            9.28
Source: Morgan Stanley Research. Japan Ministry of Finance. Prices are average YTD        Ichthys project could meet this shortfall but we do not observe
realizations to the end of July for Japan, China and Korea, and end of June for Taiwan
                                                                                          Japanese buyers in any rush to lock-in new long term
                                                                                          contracts. We thought that Ichthys would easily slot into the
                                                                                          supply equation, but the project has yet to ink a gas contract,
Long term: next wave of projects target +2015                                             and has yet to secure any form of customer equity
Around the world, we can identify around 30 LNG projects on                               participation. JV partner Total indicates it is seeking a broad
the drawing boards as distinct from under construction. This                              customer base, which may signal diminished appetite from
includes green-field and brown-field expansion. If all these                              Japan. In reality, this project has taken far longer to come
were to be developed, we estimate that global supply would                                together and is evidence of softness in the regional market.
then increase by 200 MTPA.                                                                Exhibit 10 shows our forecast of Japan supply & demand.

                                                                                          Exhibit 10
But where are all the customers?
                                                                                          Japanese demand vs. contract cover
                                                                                                Contracted Volumes   PNG LNG                 Gorgon                Wheatstone
The number of LNG contracts written this year occupies the
                                                                                                BG QCLNG             Spot Capacity           Japanese Demand
back of a postage stamp. Namely:
                                                                                           80

                                                                                           70
- GDF Suez to supply 2.5 MT in total (41 cargoes) to Kogas
                                                                                           60
from Q4 2010 to 2013, which is effectively a short-term deal to
be sourced from the GDF “portfolio”. This portfolio was                                    50


boosted by the commissioning of the Yemen project last year                                40

and GDF’s share of equity LNG being 2.5 MTPA.                                              30

                                                                                           20

- Chevron’s Wheatstone project reaching various                                            10

agreements with Kogas for 1.95 MTPA, Tepco (4.1 MTPA)                                       0
and Kyushu Electric (0.8 MTPA), for a total of 6.9 MTPA from                                    2007         2009     2011E          2013E     2015E       2017E       2019E

a planned initial train production capacity of 8.6 MTPA.                                  Source: Morgan Stanley Research (E) estimates


- Total entering into the GLNG project and buying 1.5
MTPA. This is a binding HoA. However, there is no visibility
regarding where the Total volumes will end up being delivered.
As for prices, we assume a 14% discount to oil parity. The                                -Korea needs more gas and Kogas has been widely reported
Total contract is believed to include an S-curve and if so would                          as active in procuring more volumes. Spot volumes will
represent a move back towards the types of contracts that                                 continue to play an important role given that Korean demand



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has a relatively high weather related element. Even so, there                        Exhibit 12

is a very large uncontracted gap from 2014 and this increases                        US Natural gas prices: HH depressed
                                                                                           US$/mmbtu
as contracts roll-off later in the decade too (see Exhibit 11).                       16


                                                                                      14
Exhibit 11
Korea demand vs. LNG contract cover                                                   12


       Contracted Volumes     Gorgon           Wheastone     Spot    Korea Demand     10

 40
                                                                                       8
 35
                                                                                       6
 30

 25                                                                                    4

 20
                                                                                       2
 15
                                                                                       0
 10                                                                                    Jan-00          Jan-02     Jan-04          Jan-06        Jan-08   Jan-10

  5
                                                                                     Source: Bloomberg, Henry Hub prices in US$/mmbtu
  0
      2007        2009      2011E      2013E         2015E   2017E   2019E


Source: Morgan Stanley Research (E) estimates
                                                                                     2. First signs of production curtailment in the US came in
                                                                                     late September when super-major Conoco announced that it
                                                                                     would shut-in some US gas production, in response to low
-China is nearing adequate coverage, with around 32
                                                                                     prices. We would expect others to follow. Longer term, the
MTPA of imports signed up, compared to projections of import
                                                                                     situation may not improve. We expect total shale and tight gas
requirement in the 35-45 MTPA range by 2020 (incomplete
                                                                                     production in the US to continue rising, to 26-27 Bcfd by 2020.
sentence). There is room for more, but imports by pipeline
                                                                                     This would be enough to satisfy about half of domestic
from Russia and Turkmenistan are key rival sources, as is the
                                                                                     demand, compared to around one-quarter presently.
gathering momentum in the domestic production base in both
conventional and shale gas. Rising domestic prices and
                                                                                     Export prices inevitably will look attractive. With prices in
technology are being applied and could in our view trigger a
                                                                                     the Atlantic market closer to US$10/mmbtu, the theoretical
domestic supply surge and we think this possibility will drive
                                                                                     netback to a US exporter would be in the order of
Chinese importers to seek highly flexible terms in future deals.
                                                                                     US$3/mmbtu. This is after allowing for liquefaction costs
                                                                                     (US$2/mbtu), shipping (US$1/mmbtu) and purchase of gas at
Our capacity, demand and contract volume models are shown
                                                                                     the HH price (approx $4/mmbtu currently).
in exhibits 14, 15 and 16.
                                                                                     Exhibit 13 is from Cheniere’s October update, and shows
Global updates: what’s changed
                                                                                     theoretical “Delivered Ex Ship” prices for exports from the
1. Natural gas prices in the US keep falling, amid high                              Louisiana Gulf coast to Europe.
storage levels, the shale gas production which shows no signs
of letting up. Lease tenure, associated liquids production and                       Exhibit 13

forward sales combine to maintain high drilling rig utilization                      Theoretical delivery prices to Europe-LNG ex Gulf
rates, at least into 2011. Onshore there are 1659 rigs drilling                      coast USA
compared to 1024 this time last year. Current production of                                                                Low             Mid           High

around 15 Bcfd is projected to continue growing, although at a                       Henry Hub price                       4.5             6.5            8.5
reduced rate after 2010. This year, Henry hub prices have                            Terminal fuel                         0.45            0.65          0.85
struggled to break convincingly above US$4/mmbtu (Exhibit                            Liquifaction charge                   1.5             1.5            1.5
12) and last week closed at US$3.67mmbtu. Adding to HH                               Shipping cost                          1               1              1
price pressure, Exxon will commission its Golden Pass regas                          Delivery charges                      2.95            3.15          3.35
terminal this October, opening another delivery point for
Qatari exports.                                                                      DES Price (Europe)                    7.45            9.65          11.85
                                                                                     Source: Cheniere Energy




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3. The US is rapidly repositioning to export surplus gas           once ambitious plans for +40 MTPA of capacity, now lack
as LNG. A wave of regas capacity was installed between             technology, customers and super-major oil companies with
2007 and now, to accommodate imports that most forecasters         the capital and expertise. Grand LNG plans will remain just
thought would be needed. Regas capacity rose from 35 MTPA          that until such time as the Government changes its stance on
in 2006 to 100 MTPA currently, but imports are in the order of     the nuclear issue and until sanctions are lifted.
10-11 MTPA, so there is a large amount of idle capacity.
                                                                   5. New import facilties are planned in LAM in Argentina and
Regas operators are not sitting still. Since August, three         Uruguay. In total, these countries will likely need an additional
terminal owners applied to the FERC or DoE for licenses to         7 MTPA from 2013. Supply is most likely to come from excess
re-export unwanted LNG, joining Cheniere which has already         LNG production from Angola, Nigeria, and potentially the US
secured DoE approvals. These are:                                  in the form of re-export on un-needed volumes.

    •    Sempra at its Cameron terminal (La) which is              6. In Asia, both Vietnam and Pakistan are progressing plans
         seeking authorization to re-export of 250 Bcf (about 5    to import LNG. Vietnam is working on plans to build an import
         MT) of gas over two years                                 terminal that could be up and running by 2014, with initial
    •    Freeport LNG at its terminal at Quintana island,          imports in the order of 3 MTPA. Imports for the first three
         Texas.                                                    years are likely to be sourced from spot markets until volumes
    •    Chevron sought authorization in October for the           build.
         re-export of 72 Bcf from capacity reservations at
         Sabine Pass.                                              Pakistan has faced a domestic gas shortage for several years
    •    Cheniere, with 32 MTPA of little used capacity at         and the solution has been to simply deny the local market.
         Sabine Pass (La) has received DoE approval to             Plans to import LNG have been around for some time and are
         produce and export as much as16 MTPA of LNG               just one option among others including importing gas from
         capacity. In June, Cheniere let a contract to Bechtel     Iran over the 42-inch (i.e. very big) IGAT-7 pipeline which this
         to design and construct the first two 3.5 MTPA            year has been extended to the Pakistan border. Previously,
         liquefaction trains. Should these export projects         Pakistan had come close to signing terms deal to import from
         move forward, then likely destinations for the gas are    Yemen and inked a deal in early 2010 that was subsequently
         Latin America, where both Uruguay and Argentina           overturned in the courts.
         are installing or expanding receiving terminals to
         offset falling domestic supply. Cheniere claim that       All of this data are in our current LNG model, which we like to
         US domestic production could climb to 95 Bcfd by          summarize with the exhibit 14 below. The blue and orange
         2020 (35 Tcf pa) which would exceed domestic              represent existing production capacity and includes new
         consumption by around 10-12 Tcf pa. This could give       developments which are under construction or are sanctioned,
         rise to the export of excess production in the form of    or reasonably likely to be sanctioned in the next 12 months.
         LNG in the order of 19-23 MTPA.                           Projects we consider to be reasonably likely, but not yet,
                                                                   sanctioned are those which are fully contracted (e.g. BG
In total, between now and 2015, re-exports of LNG could            Curtis LNG) or partially contracted (e.g. GLNG, Wheatstone).
approximate 300 Bcf p.a. (6 MTPA LNG) and these are                The pink shaded section represents potential capacity growth
incorporated into our model for US net imports.                    and is dominated by projects in Australia, and to a lesser
                                                                   extent US, Russia and later in the decade, maybe Nigeria and
4. Iran, with the second largest gas reserves in the world,        Iran. The blue and pink lines represent consumption CAGR
looks like exiting stage left ahead of any of the four             rates to 2020 in the 6-8% range. We use these figures
separate LNG schemes that have been proposed for several           because they seem to be commonly promoted, with the higher
years. US sanctions are spreading, with Japan the most             figures from producers with the most to gain. We show these
recent country to join the list of countries seeking to do less    lines to demonstrate what the demand profile needs to be in
business with Iran. Also recently, German group Linde pulled       order to absorb all of the projects that have been currently
out thus denying the 15 MTPA CNOOC-backed “North Pars”             proposed.
project projects any access to the basic liquifaction process
and technology. Repsol & Shell pulled out of the Persian LNG
(South Pars) 13/14 LNG project this September, following the
exit of Total from its South Pars 11 project in 2009. Thus,



                                                                                                                                11
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                                                                                                       Australia Oil & Gas




Exhibit 14
Global LNG demand / capacity scenarios
          MTP
    600




    500




    400




    300




    200




    100          Capacity - existing or under construction   Capacity - possible incremental
                 Demand- MTPA                                Demand at 6% cagr
                 Demand at 8% cagr

      0
      2008       2010E            2012E              2014E        2016E             2018E      2020E


Source: Morgan Stanley Research (E) estimates




In our view, the key takeaway is that under reasonable
demand scenarios (6% p.a.) existing capacity is capable of
meeting demand until around 2017. Customers negotiating
long-term contracts from green-field projects right now do not
need supply until the 2015-2020 timeframe, in our opinion.




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Exhibit 15
Potential LNG exports by country or project name
                   Name                           Operator/Buyer                                Poss start    2010E   2011E    2012E   2013E   2014E   2015E   2016E    2017E   2018E   2019E   2020E
Canada             Kitimat                                                                        2103                                     2       2       3       3        3       3       3       3
USA                Cheniere & Re-exports                                                          2011                   3        3                4       8      12       16      16      16      16
North America                                                                                                                     3       2        6      11      15       19      19      19      19
Equatorial Guinea Bioko-phase2                    Marathon                                        2017                                                     -       -        4       4       4       4
Equitorial Guinea                                                                                                                                          -       -        4       4       4       4
Egypt              Damietta II                    Segas (ENI, BP)                                 2014E          -       -        -       -       -        -       4        4       4       4       4
Iran               Iran LNG                       National Iranian Oil Company (NIOC)             2017E          -       -        -       -       -        -       -        -       -       -      11
Iran               North Pars                     CNOOC                                           2020E          -       -        -       -       -        -       -        -       -       -      15
Iran               South Pars 11                  NIOC                                            2020E          -       -        -       -       -        -       -        -       -       -      10
Iran               Persian LNG (Sth Pars 13 &14 NIOC, Khataolvasaya                               2020E          -       -        -       -       -        -       -        -       -       -       9
Iran                                                                                                             -       -        -       -       -        -       -        -       -       -      44
Venezuela          Marischal Sucre                Shell, Mitsubishi                                ???           -       -        -       -       -        -       -        -       -       -       -
Venezuela          Deltana                        PVDSA, Chevron                                   ???           -       -        -       -       -        -       -        -       -       -       -
Venezuela                                                                                                        -       -        -       -       -        -       -        -       -       -       -
Russia             Yamal                                                                           ???           -       -        -       -       -        -       -        -       -       -       -
Russia             Ust Luga                       Gazprom, Petrocanada                             ???           -       -        -       2       2        2       2        2       2       2       2
Russia                                                                                                           -       -        -       2       2        2       2        2       2       2       2
Indonesia          Masela / Abadi                 INPEX                                            ???           -       -        -       -       -        -       -        -       -       -       -
Indonesia          Tangguh Expansion              BP, Nippon, Oil Corp, Japan LNG Corp, CNOOC      ???           -       -        -       -       -        -       -        -       -       -       -
Indonesia                                                                                                        -       -        -       -       -        -       -        -       -       -       -
Australia          Wheatstone expansions          Chevron
Australia          Gorgon 4 & 5                   Chevron                                         2018E                                                                            5       5      10
Australia          APLNG-trains 1-3               Conoco                                          2016E                                                                    5       9      14      14
Australia          Ichthys                        INPEX                                           2017E                                                                    9       9       9       9
Australia          Scarborough                    Exxon / BHPBilliton                             2018E                                                                                   10      10
Australia          Sunrise-FLNG                   WPL                                             2020E          -       -        -       -       -       -       -        -       -       4       4
Australia          Prelude-FLNG                   Shell, Mitsubishi                               2020E          -       -        -       -       -       -       -        -       -       4       4
Australia          Browse                         Woodside, Chevron, BHP, Shell                   2017E          -       -        -       -       -       -       -        4       4       8       8
Australia          Pluto2                         Woodside, Tokyo Gas, Kansai Elec.               2014E                                   -       2       4       4        4       4       4       4
Australia          Pluto3 or others               Woodside, Tokyo Gas, Kansai Elec.               2016E                                   -       -       -       4        4       4       4       4
Australia          Gladstone-Curtis LNG           BG-train 3                                      2017E                                                   -       4        4       4       4       4
Australia          Shell / Petrochina             Curtis Island                                   2016E                                                                    4       8      12      16
Australia          Bonaparte LNG                  Total                                            2017          -       -        -       -       -       -       -        -       2       2       2
Australia                                                                                                        -       -        -       -       2       4      13       34      49      79      88
Algeria            Eastern Algeria                Soc. De Licuefaccion (Repsol and Sonatrach)                    -       -        -       -       -       -       -        -       -       -       -
Algeria                                                                                                          -       -        -       -       -       -       -        -       -       -       -
Nigeria            Bonny Island - NLNG7plus proj Nigeria LNG                                        ?            -       -        -       -       -       -       -        -       -       -       -
Nigeria            Brass River LNG                NNPC, ENI, Total, Conoco                        >2015          -       -        -       -       -       -       -        -       -       -       -
Nigeria            Brass River LNG                Shell, Chevron, BG, Nigeria                     >2015          -       -        -       -       -       -       -        -       -       -       -
Nigeria            Olokola-up to 2 Trains each 6.3BG, (13.5) cvx(19), Shell(19)                   >2015                                                   -       -       13      13      13      13
Nigeria                                                                                                          -       -        -       -       -       -       -       13      13      13      13
Norway             Snohvit expansion              Statoil                                         2017E                                                                    4       4       4       4
PNG                PNG LNG-train3                 Exxon /Oil Search                               2016E                                                           3        3       3       3       3
PNG                Elk / Antelope                 Interoil                                        2017E                                                           -        3       3       3       3
PNG                                                                                                              -       -        -       -       -       -       3        7       7       7       7
Qatar              de-bottlenecking               Various                                             >2013                                       2       4       6        8      10      12      12
Total potential new supply                                                                                       -       -        -       4      12      21      43       95     115     147     200
Source: Morgan Stanley Research




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Exhibit 16
LNG consumption by country- MTPA
Y/e Dec 31                        2008     2009   2010E    2011E       2012E       2013E       2014E    2015E    2016E    2017E     2018E     2019E    2020E
USA                               7.44     9.11     10.7     12.0        10.0        10.0        10.0     10.0     10.0     10.0      10.0      10.0     10.0
Canada                                     0.71      1.0      1.0         1.0         1.0         1.0      1.0      1.0      1.0       1.0       1.0      1.0
Mexico                             2.87    2.73      4.0      4.0         4.0         4.0         4.0      4.0      4.0      4.0       4.0       4.0      4.0
  total Nth America               10.31   12.55     15.7     17.0        15.0        15.0        15.0     15.0     15.0     15.0      15.0      15.0     15.0
Argentina                          0.30    0.62      1.0      1.0         2.0         3.0         3.0      3.0      3.0      3.0       3.0       3.0      3.0
Dom republic                          0       0        0        0           0           0           0        0        0        0         0         0        0
peurto Rico                           1       1        1        1           1           1           1        1        1        1         1         1        1
Uruguay                                       0        0        0           3           3           3        3        3        3         3         3        3
Chile                                         0        1        1           1           1           2        2        2        2         2         2        2
Brazil                                        0        0        0           0           0           0        0        0        0         0         0        0
Total LAM                            1        2        3        4           8           9          10       10       10       10        10        10       10
Belgium                              2        5        5        5           5           5           6        6        6        6         6         6        6
France                              10       10       10       10          10          10          11       11       11       11        11        12       12
Greece                               1        1        1        1           1           1           1        1        1        1         1         1        1
Italy                                1        2        5        5           5           5           5        6        6        6         6         6        6
Portugal                             2        2        2        2           2           2           2        2        2        2         2         3        3
Spain                               23       20       21       21          21          22          22       23       23       24        24        25       25
Turkey                               4        4        4        4           4           4           4        5        5        5         5         5        5
UK                                   1        8       12       14          15          15          16       16       16       17        17        17       18
others
  total UK Europe                   44      52       59       62           64             66      67       68       70       71          72      74       75
China                                4       6        8       13           13             15      21       27       32       35          35      35       35
India                                9       9        9       11           12             14      15       16       17       17          18      19       20
Japan                               70      64       70       69           70             70      71       72       73       73          74      75       75
S. Korea                            29      25       30       29           30             31      32       33       34       35          36      37       38
Taiwai                              10       9       10       10           10             10      12       12       12       12          12      12       12
Singapore                                                                                  0       3        3        3        3           3       3        3
Pakistan                                                                                   3       3        3        3        3           3       3        3
Vietnam                                                                                            2        3        3        3           3       3        3
others                                                                      1           1          1        1        1        1           1       1        1
Total Asia / pac                   121     114      127      131          136         144        159      169      177      182         185     188      191
Dubai                                                                                                       3        5        6           7       8        8
Kuwait                                       1        1        1            1             1        1        1        1        1           1       1        1
Abu Dhabi
  Total Mid east                             1        1        1            1           1          1        4        6        7           8       9        9
TOTAL MTPA                         177     181      206      215          224         235        252      266      277      285         290     295      300
  growth rate                      1%      2%      14%       5%           4%          5%         7%       6%       4%       3%          2%      2%       1%
Source: Morgan Stanley Research




                                                                                                                                   14
                                                                     MORGAN         STANLEY        RESEARCH

                                                                     October 8, 2010
                                                                     Australia Oil & Gas




Exhibit 17
Existing LNG production capacity by country
Country                    2006        2007    2008   2009   2010E     2011E      2012E    2013E    2014E   2015E   2016E   2017E   2018E   2019E   2020E
Algeria                           20      20    20     20      20         20         25      29       29      29      29      29      29      29      29
Angola                          -          -     -      -       -          -          1       5        5       5       5       5       5       5       5
Australia                      15         16    16     19      19         22         24      24       28      38      44      55      63      63      63
Brunei                          7          7     7      7       7          7          7       7        7       7       7       7       7       7       7
Egypt                          12         12    12     12      12         12         12      12       12      12      12      12      12      12      12
Equatorial Guinea               -          4     4      4       4          4          4       4        4       4       4       4       4       4       4
Indonesia                      25         23    21     20      25         21         19      17       16      16      16      17      17      17      11
Libya                           1          1     1      1       1          1          1       1        1       1       1       1       1       1       1
Malaysia                       23         23    23     23      23         23         23      23       23      23      23      23      23      23      23
Nigeria                        18         18    22     22      22         22         22      22       22      22      22      22      22      22      22
Norway                          -          0     2      3       4          4          4       4        4       4       4       4       4       4       4
Oman                           11         11    11     11      11         11         11      11       11      11      11      11      11      11      11
PNG                             -          -     -      -       -          -          -       -        5       7       7       7       7       7       7
Peru                            -          -     -      -       3          4          4       4        4       4       4       4       4       4       4
Qatar                          26         26    30     39      57         73         77      77       77      77      77      77      77      77      77
Russia                          -          -     -     10      10         10         10      10       10      10      10      12      14      14      14
Trinidad                       15         15    15     15      15         15         15      15       15      15      15      15      15      15      15
Abu Dhabi                       6          6     6      6       6          6          6       6        6       6       6       6       6       6       6
United States                   1          1     1      1       1          1          1       1        0       0       0       0       0       0       0
Yemen                           -          -     -      1       4          7          7       7        7       7       7       7       7       7       7
TOTAL-existing or             178        182   191    212     242        261        271     278      285     298     303     316     327     327     321
Source: Morgan Stanley Research




                                                                                                                               15
                                                                     MORGAN                  STANLEY                 RESEARCH

                                                                     October 8, 2010
                                                                     Australia Oil & Gas




Woodside Petroleum – Overweight
                                                                     acquisition of the site by the WA Government is a potential
                                                                     flash-point with the local community and action groups.
Key Points
                                                                     Earnings Estimates, Valuation and Price Target
•   Superior production growth and earnings growth over              Our production forecasts are unchanged and assume a Pluto
    the outlook, relative to peers.                                  ramp-up from the second quarter with production in the year
•   Strong balance sheet and free-cash expansion after               60% of nameplate.
    2011 provide funds for organic growth.
•   Exploration success or a deal to buy gas to underpin             US$ earnings have been fine-tuned versus the previous report
    Pluto2 is pivotal to the next leg of growth.                     with the changes minor. The higher A$/US$ rate has a small
                                                                     positive impact as higher A$ revenues from domestic gas sales
Investment case                                                      are translated into higher US$ income. Our US$ DCF is
We believe WPL’s most tangible and valuable growth                   broadly unchanged but upward revision of the A$/US$ rate
opportunity is a brown-field expansion of Pluto (Pluto2 &3) but      results in A$ DCF falling to A$46.99 from A$47.91. Our price
lack of own gas and inability to do a deal so far to source from     target is reduced commensurately to A$50 from A$51.
others are key constraints and the targeted FID has slipped
into 2011. Discussions with other companies to access WPL’s          Risk Factors
site to develop Pluto4 &5 may gather momentum in the 4th             The key macro risk is the WTI oil price, and A$/US$ rate. At the
quarter and present new opportunities for Woodside but in the        company level, key risks are production levels, reserves, and
longer run, it’s the gas that is valuable in our opinion.            capex trends. Pluto start-up in 2011 is a period of heightened
                                                                     technical risk. Expansion of Pluto depends on exploration and
Compared to this time a year ago, it appeared that WPL had           this is risky.
multiple strategies to move on a Pluto expansion. The reality
today is that the project is no more certain, and with the FID       Woodside Risk-Reward
slipping into 2011, no closer in time. We believe our price            A$70


target is realistic if plans for Pluto2 crystalize, but equally is       60                                                                                             A$60.5 (+35%)

potentially a performance ceiling too as other projects that may
                                                                         50                                                                                         A$50.00 (+12%)
                                                                                                                                               A$ 44.80
follow (Broswe, Sunrise) are displaced in time by a number of
years.                                                                   40
                                                                                                                                                                        A$35.8 (-20%)

                                                                         30

Exploration results are sporadic from the expanded drilling
                                                                         20
campaign offshore WA, with gas intersection announced from
two wells in mid August (Larsen Deep and Alaric) but detail is           10


lacking. Exploration activities over the next 4 months will likely       0

focus on the WA404 block to the north of Pluto and the                   Oct-08             Apr-09
                                                                              Price Target (Oct-11)
                                                                                                            Oct-09           Apr-10
                                                                                                                Historical Stock Performance
                                                                                                                                               Oct-10          Apr-11
                                                                                                                                                          Current Stock Price
                                                                                                                                                                                            Oct-11
                                                                                                                                                                            WARNINGDONOTEDIT_RRS4RL~W PL.AX~




“Claudius Hub” further to the west, followed by an appraisal
                                                                     Source: Company data, Morgan Stanley Research
campaign. We doubt WPL will be able to move forward on a             Scenario Summaries
Pluto2 FID before the completion of appraisal work on any                                             Small premium to DCF (WACC 9.6%) captures re-rating if
                                                                      Price Target
discovery, pushing an investment decision on the project into                                         Pluto completed smoothly (lowers risk) and reflects
                                                                      A$50                            near-term exploration catalysts
the mid 2011 timeframe, in our view.
                                                                      Bull Case                       US$105/bbl normalized oil price; value for Pluto 2 unrisked
                                                                                                      assuming own gas, Browse and Sunrise gas re-valued
The Sunrise and Browse: slow going. These two projects                A$60.5                          higher.
are evolving but it is not clear if substantive key impediments                                       US$90/bbl normalized oil price; value for P2 expansion
                                                                      Base Case
are in fact being resolved. A key obstacle to Sunrise is the                                          using own gas, 30% risked. Browse basin and Sunrise 2C
                                                                      A$46.99                         gas valued at 20c/mcf.
objection by the Timor Leste Government over the adoption of
an FLNG concept, and this opposition was re-iterated this             Bear Case                       US$70/bbl normalized oil price; Pluto 2 given zero value.
                                                                                                      Sunrise and Browse basin gas given option value halved.
October. Regarding the Browse Basin project, compulsory               A$35.80
                                                                     Source: FactSet, Morgan Stanley Research




                                                                                                                                                                                               16
                                                                                          MORGAN               STANLEY       RESEARCH

                                                                                          October 8, 2010
                                                                                          Australia Oil & Gas




Exhibit 18
Woodside: Financial Summary (NOTE: switch to US$ functional currency from FY 2010)
Scenario: base Case                             A$       US$        US$          US$                                                 A$             US$      US$      US$
P&L. Y/e Dec                                  2009     2010E      2011E        2012E     Balance Sheet                                    2009     2010E    2011E    2012E
Oil Price- WTI US$/bbl                        61.71      77.47      80.00        90.00   Payables                                          1328       840      840      640
Spot A$ rate from 2010                         0.79       0.90       0.90         0.90   Provisions, tax & other                            440       231      355      445
Producton- oil & condensate- mbbls             36.9       32.2       34.4         33.4   Short term debt                                      0        95       95       95
Production-LNG- k tonnes                       2405       2448       4859         6369   Total Current Liabilities                         1768      1166     1290     1180
Production-LPG- k tonnes                        299        258         248         248   Interest bearing liabilities                      5529      4814     3514     1714
Production- Natural gas -PJ pa                122.6       97.0       90.3         88.9   Provisions & other                                2201      1934     2234     2434
Production (mboe )                             80.9       72.0        94.5       106.7   TOTAL LIABILITIES                                 9498      7914     7038     5328
Oil & Gas Sales Revenue                        4352       4007       5492         6896   Cash                                              1351       970      405       24
other recoveries                                 63         66         100          60   Receivables                                        563       281      539      681
Revenue, oil & gas operation                   4415       4073       5592         6956   Inventories & other                                794       187      187      187
Interest, other & forex                         898          3           0           0   Total current ssets                               2708      1437     1131      892
Total revenue                                  5313       4076       5592         6956   Receivables                                          0         0        0        0
-OPEX                                           513        422         769        1010   Inventories & other                                 49        43       43       43
-LNG shipping & marketing costs                  77         54          93         116   Investments & other financial assets               133       122       99       80
-Royalties (State & Excise)                     437        354         329         374   Capitalised exploration & development             1298     1504     1704      1808
-G&A, Inventory changes & other                 106         38          80          80   Land,buildings, plant & equipment                15602    16428    16324    15684
-Cost of assets sold                              0          0           0           0   Deferred tax assets & other                          0       185       46       19
-Exploration expensed                           342        267         300         416   TOTAL ASSETS                                     19874    19765    19392    18572
EBITDA                                         3838       2940       4021         4961   Shareholders Equity                              10376    11851    12354    13244
-Depreciation & amortisation                    966        759       1042         1260   minority interests                                 511       541      156      156
EBIT                                           2872       2181       2979         3700   Ratios & Margins                                  2009    2010E    2011E    2012E
-interest expensed & provisions                  23        -35         123         129   Weighted average shares                          723.6     769.2    789.7    789.7
Pre-tax operating profit                      2849       2216       2856          3572   Current shares                                   782     782         782      782
Tax expense                                    938        544        780           982   Average share price          US$               40.32  40.32        40.32    40.32
RRT Tax                                                   198        168           187   Market cap                                    35034   31530        31530    31530
+Share of associate net profits                  4          5          6             6   +net debt                                       4178    3939        3204     1785
Reported NPAT before significant item         1915       1479       1915          2409   + net cumulative repurchases                     205     757          757     757
+Non-recurring items, sale of assets           -97         88          0             0   + minorities                                     511     541          156     156
+Derivatives/ Hedging after tax                  0          0          0             0   -less investments                                  0       0            0
Reported NPAT                                 1818       1567       1915          2409   Enterprise value             US$m             39928   36768        35648    32558
Reconciliation to operating EBIT                                                         Modelware EBIT                                  2049    1988        2818     3520
Reported EBIT                                 2872       2181       2979         3700    Modelware EBITDA                                3015   2747         3859     7220
less interest & dividend income                  7           0        0.0          0.0   Modelware EBITDAX                               3357   3014         4159     7636
-forex gains                                   820           0        0.0          0.0   Reported EPS                  US cents         259.0   203.7       242.5    305.1
-RRT put back above EBIT line                             -198       -168         -187   Modelware EPS                US cents          264.7  192.3        242.5    305.1
+share of JV profits & other                   4.0         5.0        6.0          6.0   D.P.S.                        US cents         110.0   105.0       175.0    183.1
=Modelware EBIT                               2049       1988       2818         3520    Payout ratio                                    42%     55%         72%      60%
+interest, dividend & other income             827           0          0            0   PER                                 X           16.9    21.0         16.6     13.2
-interest expense                               23         -35        123          129   Yield                               %          2.5%    2.6%         4.3%     4.5%
-tax on operating profit                       938         544        780          982   Dcf-A$ / share                               $46.99 WACC            9.6%
=Modelware NPAT                               1915       1479       1915         2409
Cashflow                                      2009      2010E      2011E        2012E    Balance sheet & returns
Operating revenue                             4422       4075       5592         6956    Net Debt / Equity                       %         40%       33%     26%       13%
- operating costs & royalites                 1553       1188       1438         1767    Net Debt / Net Debt +Equity             %         29%       25%     21%       12%
-Tax Paid                                      838        629        780           982   Interest cover                          X           7.9    -62.3     24.2     21.5
- Net interest paid                            172        233        174           129   EBIT / total assets                     %        10.3%    10.1%    14.5%    19.0%
Net operating cashflow                        1859       2025       3200          4080   Return on Equity                        %        27.6%    14.3%    16.2%    19.5%
Proceeds from asset sales                        16        708          0            0   Unit revenues & costs
-Capex: exploration & Development              6022       3801       1438         1141   Sales revenue / boe            US$/boe           43.15     50.93    53.28    58.68
-acquisitions & other                             0          0          0            0   Cash production cost / boe     US$/boe           11.07     10.86    12.11    13.33
Net investing cashflows                       -6006      -3093      -1438        -1141   EBIT / boe                     US$/boe           28.07     27.28    28.39    31.21
free cash flow                                -4147      -1068       1762         2939   NPAT / boe                     US$/boe           18.72     18.49    18.25    20.32
- Ordinary Dividend                             368        654       1027         1520   Reserves
+ Equity                                       1661       1478          0            0   Reserves 1P- boe                 m boe            1296      1187     1209     1225
+Debt Movement                                 3771         54      -1300        -1800   Reserves 2P- boe                 m boe            1651      1696     1727     1750
Net financing cashflow                         5354        878      -2327        -3320   Contingent resources (2C)        m boe            1867      2000     2000     2000
Increase in cash                               1207       -190       -565         -380   EV / 1P reserves               US$/boe           27.73     30.97    29.49    26.58
+exchange rate differences                        3       -191          0            0   EV / 2P reserves               US$/boe           21.77     21.68    20.65    18.60
Net change in cash                             1210       -382       -565         -380   EV / 3P reserves               US$/boe            10.2       9.9      9.6      8.7
e = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research




                                                                                                                                                                       17
                                                                   MORGAN                  STANLEY               RESEARCH

                                                                   October 8, 2010
                                                                   Australia Oil & Gas




Santos – Overweight
                                                                   include new projects such as Halyard/Spar and Wortel
                                                                   expected from late 2011. Our new DCF valuation is A$15.93,
Key Points                                                         compared to A$15.90 previously. Our price target is
                                                                   unchanged at A$15.50, a small discount to DCF which we think
•   STO inching closer to having a number of good quality,         is appropriate given there is latent uncertainty as to whether or
    long-life LNG projects but this transformation will take       not STO will successfully sell-out the balance of capacity in
    time, and additional funds.                                    GLNG.
•   GLNG advanced with Total entering on September 10
    and they adhere to an FID decision in Q4 2010. There is        Risk Factors
    risk of slippage, in our view. Environmental clearances        Key macro risks are the oil price and AUD/USD exchange rate.
    are delayed, capital costs are not defined and Kogas           At the company level, oil and gas field reserves, production,
    have yet to ink a deal.                                        opex, and future capital costs are all subject to risk. GLNG is a
•   We believe certain risks are factored in with the stock        material part of the value equation and progress, or the lack of
    price discounting full value for GLNG.                         it, could materially shift the base and bull scenarios.
Investment Thesis
Santos has a commanding position in eastern Australia’s coal       Santos Risk-Reward
                                                                     A$25
seam and unconventional gas, by way of acreage, reserves                                                                                                         A$23.54 (+87%)

and resources when the potential of NSW is also included. The
                                                                       20
immediate opportunity is the proposed LNG project at
Gladstone (GLNG) using gas from the Fairview field, which has                                                                                                   A$15.50 (+23%)
                                                                       15
been reliably producing CSG for the domestic market since                                                                                  A$ 12.61


1998. Current plans are for two trains with approx 7.2 MTPA of         10
                                                                                                                                                                 A$10.99 (-13%)


saleable production, with FID for a single train targeted for Q4
2010.                                                                   5




GLNG advanced in September with Total S.A taking equity in             0
                                                                       Oct-08             Apr-09        Oct-09           Apr-10             Oct-10         Apr-11                      Oct-11
the project including gas off-take, however at implied prices               Price Target (Oct-11)           Historical Stock Performance              Current Stock Price
                                                                                                                                                                        WARNINGDONOTEDIT_RRS4RL~STO.AX~




that are keener than 2008 and in our view reflects a current
reality of a softer LNG market. Ahead of a Q4 FID, commercial,     Scenario Summaries
technical and logistical challenges and dictate that the stock
should trade at a discount to GLNG full value. This appears to      Price Target                    Price target set at a small discount to DCF (WACC
be the case, so as GLNG continues to meet milestones, we            A$15.50                         10.6%)
would expect a further re-rating. In due course we would            Bull Case                       US$105/bbl normalized oil price. GLNG 2 train
expect release of capex estimates for GLNG (we expect               A$23.54                         development costing US$15b and valued unrisked.
US$15B for 2-trains), entry by Kogas into the project, and
                                                                    Base Case                       US$90/bbl normalized oil price. 2 train GLNG risked at
clarification of additional external funding needs.                 A$15.93                         50%: value for other CSG resources based on A$0.58/GJ
                                                                                                    transaction multiple.
Elsewhere, we expect Wortel FUD imminently and further
progress on sale of non-core oil and gas assets in the Timor        Bear Case                       US$70/bbl normalized oil price. GLNG uneconomic.
                                                                    A$10.99
Sea and W.A.                                                       Source: FactSet, Morgan Stanley Research


Earnings Estimates, Valuation, and Price Target
Earnings are lowered over the outlook period mostly due to our
higher A$ rate assumption. Production has been revised up to




                                                                                                                                                                                          18
                                                                                                   MORGAN             STANLEY              RESEARCH

                                                                                                   October 8, 2010
                                                                                                   Australia Oil & Gas




Exhibit 19
Santos: Financial Summary
Key Assumptions- Y/e Dec                            2009       2010E       2011E       2012E         Balance Sheet                  Y/E Dec      2009      2010E     2011E      2012E
Realised oil price- A$/bbl                            80.17      86.07       87.74      102.79       Payables                                       709      1324      1792        2311
Production (mboe)                                      54.4       49.8        54.5        58.5       Interest bearing liabilities                   164         0         0           0
Profit & Loss                                                                                        Provisions & other                             207       267       267         267
Oil & Gas Sales Revenue                              2180.5     2169.8      2497.9      2982.8       Total Current Liabilities                     1080      1591      2059        2578
Royalty and pipeline tolls                             38.0       60.8        62.7        64.8       Non- Current Liabilities
Total operating Revenue                              2218.5     2230.6      2560.5      3047.6       Interest bearing liabilities-non current      1649      3064      3457       4479
Other income                                          125.0      127.3       107.0        63.8       Provisions & other- non-current               1665      1699      1899       2599
Asset sales                                            35.0        0.0         0.0         0.0       Total Liabilities                             4394      6354      7416       9656
Reported revenue                                     2378.5     2357.9      2667.5      3111.5       Cash & investments                            2240      2306      2311       1716
-OPEX, inventory & 3rd party gas                      659.0      745.1       833.2       875.0       Receivables                                    941       856       318        343
-Pipeline tolls & tarifs                               91.0       92.4        76.0        76.2       Inventories & other                            338       282       282        100
-Royalties                                            152.5       53.2        65.3        69.1       Total current ssets                           3519      3444      2910       2159
-S G & A other                                         95.0      120.2       123.8       150.0       Investments                                    179       199       199        199
-Forex / financial instruments / other               -10.00       0.00        0.00        0.00       Capitalised exploration & development         4127      7194      8737       9582
- Emissions costs                                       0.0        0.0         0.0         0.0       Land, buildings,plant and equipment           3313      2029      3072       3932
EBITDAX                                              1391.0     1346.9      1569.2      1941.2       Intangibles (Goodwill)                           0         0         0          0
-Depreciation & amortisation                          612.0      577.8       719.3       866.7       tax & other                                    213       419       460       1668
-Exploration, writedowns & other                      239.0      172.2       184.5       184.5       TOTAL ASSETS                                 11361     13295     15389      17550
EBIT                                                  540.0      596.9       665.4       890.1       preference capital                               0         0         0          0
-interest expensed                                     98.0       91.9       174.4       196.6       Ordinary capital                              6967      6941      7973       7894
Pre-tax operating profit                              442.0      505.0       491.0       693.4       Shareholders Equity                           6967      6941      7973       7894
PRRT after tax                                                    72.8       136.3       166.4       Ratios, Margins & Valuation
Tax expense                                            185.0     144.6       147.3       208.0       Weighted average shares                       779.2     833.1     919.3      947.3
Net operating profit-reported                          257.0     287.6       207.4       319.0       Current issued shares                       832.552   832.587   832.587    832.587
+Non-recurring items, net of tax                       177.0       0.0         0.0         0.0       Average share price                           14.09     12.61     12.61      12.61
Reported profit after non-recurring items              434.0     287.6       207.4       319.0       Market Cap                                   11700     10499      10499      10499
Preference & convertible dividends                      28.0       0.0         0.0         0.0       +plus net debt                                 -427       758      1147       2764
Reported profit                                        229.0     287.6       207.4       319.0       +plus preference capital                          0         0         0           0
Reconciliation: reported profit to adjusted operating profit                                         -less investments                               0.0       0.0       0.0         0.0
Reported EBIT                                          540.0     596.9       665.4       890.1       Enterprise Value                             11273     11257      11646      13263
-less RRT after tax                                               72.8       136.3       166.4
-less interest & dividend income                        85.0     110.3       107.0        63.8       Operating EBIT                        A$m     370.0     396.8     422.1      659.8
-less other (insurance recoveries, forex)               40.0      17.0         0.0         0.0       Operating EBITDA                                982       975      1141       1526
-less profit on asset sales                             35.0       0.0         0.0         0.0       Operating EBITDAX                             1221      1147       1326       1711
+other / forex / financial insr.                       -10.0       0.0         0.0         0.0       Reported EPS                          cps      52.1      34.5       22.6       33.7
= Operating EBIT inc. RRT                              370.0     396.8       422.1       659.8       Adjusted EPS                          cps      24.9      34.5       22.6       33.6
+Interest, Dividend & other income                     135.0     127.3       107.0        63.8       D.P.S.                                cps        42        42        42         42
-Interest expense                                       98.0      91.9       174.4       196.6       Payout Ratio (%)                       %        143      122        187        125
-Tax & PRRT                                            185.0     144.6       147.3       208.0       PER                                     X      56.6      36.5      55.9       30.7
-Preference Dividend                                    28.0       0.0         0.0         0.0       EV / EBITDAX                            X       9.2       9.8        8.8        7.8
=Adjusted operating profit                            194.0      287.6       207.4       319.0       EV / EBITDA                             X      11.5      11.6      10.2        8.7
Cashflow                                                                                             Yield                                  %        3.3       3.3       3.3        3.3
Receipts                                             2524.0     2335.9      2667.5      3111.5       DCF valuation                   $/share             $ 15.93 WACC:           10.6%
-Operating costs & royalties                         1234.0     1157.4      1098.4      1170.2       Bear / bull / PX target                       10.99    23.54   15.50
-Tax Paid                                              55.0       93.6       147.3       208.0       Balance sheet & returns
- interest paid                                        80.0       69.9       174.4       196.6       Net Debt / N.D. +Equity                %       -7%       10%       13%        26%
Net operating cashflow                               1155.0     1015.0      1247.5      1536.6       Interest cover                         X        7.8      11.1       4.9        5.8
Proceeds from asset sales                              36.0      256.4         0.0         0.0       ROA                                    %        3.8       3.5       3.2        4.3
-capex, exploration & development                    1354.0      2247.0      2975.7      2755.8      ROE                                    %        5.0       4.1       3.0        4.0
-acquisitions & other                                1093.0        68.0      -515.0         0.0      Unit revenue & costs
Net investing cashflows                              2411.0      2058.5      2460.7      2755.8      Sales revenue / boe              A$/boe       40.06     43.61     45.84      50.99
PRE-FINANCING CASHFLOW                              -1256.0     -1043.5     -1213.2     -1219.2      Production cash cost / boe       A$/boe       18.33     20.32     20.16      20.00
Ordinary dividends                                    262.0       334.3       375.5       397.9      EBIT / boe                       A$/boe        6.80      7.97      7.75      11.28
Preference & convertible dividends                    35.00       0.00        0.00        0.00       NPAT / boe                       A$/boe        4.21      5.78      3.81       5.45
+ Equity                                             2403.0       14.0      1200.0         0.0       NPAT / Sales margin               %          11.6%     12.9%      8.1%      10.5%
-Debt repayments (borrowings)                         -92.0     1307.5       393.7      1022.1       Reserves measures
+ other                                                 -60            0           0           0     Reserves 1P- boe                  mboe          647      806        810        811
Net financing cashflow                               1954.0      987.2      1218.2        624.2      Reserves 2P- boe                  mboe        1440      1466       1472       1474
Increase in cash                                      698.0       57.6         5.0       -595.0      Contingent resources              mboe        2497      2248       2248       2248
Exchange rate & other/ asset sale adj.                -11.0        8.0         0.0          0.0      2P / 1P                                         2.2       1.8        1.8        1.8
Net change in cash                                    687.0       65.6         5.0       -595.0      EV / 1P Reserves                  A$/bbl      17.42     13.96     14.38      16.36
Carbon                                             2009E       2010E       2011E       2012E         EV / 2P Reserves                  A$/bbl       7.83      7.68      7.91       9.00
CO2e (mt)                                                           3.2         3.5         3.8      EV / 3P Resources                 A$/bbl       2.86      3.03      3.13       3.56

E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research




                                                                                                                                                                                    19
                                                                   MORGAN                 STANLEY             RESEARCH

                                                                   October 8, 2010
                                                                   Australia Oil & Gas




Oil Search – Overweight
                                                                    Earnings Estimates, Valuation, and Price Target
Key Points                                                          Our production outlook is unchanged at 7.3 mboe (guidance
                                                                    range 7.2-7.4). Earnings estimate changes reflect the lower
•   Trading at a steep discount to DCF of development               A$ oil prices and other adjustments since the interim profit
    assets.                                                         report to tax rates and depreciation rates.
•   Delivering successful LNG project construction
    milestones should drive a gradual re-rating.                    Our DCF is currently A$9.13 versus A$8.93 previously, with
•   Potential for exploration, particularly for gas to underpin     the increase from a modest but positive re-assessment of
    LNG expansion, appears steeply discounted, but may not          value for surplus gas that could be allocated to a third LNG
    be evident until drilling levels pick up in 2011-12.            train. Our price target is set at A$6.50, the steep discount
                                                                    reflecting the long duration to LNG cash flows and a perceived
Investment case                                                     lack of other catalysts in the short term.
The PNG-LNG development transforms OSH’s reserves,
production and financial metrics. The Exxon-operated,               Risks
6.6mtpa project has just started construction and production is     Key macro risks are oil prices, LNG prices and the AUD/USD
not expected until 2014, so patience is required.                   exchange rate for conversion of US$ cash flows back to A$. At
                                                                    the company level, risks arise from field production and
Importantly, unlike other gas resources that are attracting         reserves, operating and capital costs. OSH’s asset base is
value, the PNG-LNG project is sanctioned, fully funded and          dominated by the LNG project and delivery of milestones is a
has all output sold to Asian customers at oil linked prices. We     critical risk factor. Finally there is PNG country risk to consider
expect exploration to resume late in 2011, on oil and gas           and the potential for disruption to orderly construction of the
targets in PNG. Drilling on the Hides gas field in 2012, or         LNG project
earlier, is very important. Booked reserves (c. 4.5Tcf) are
constrained by the limited number of wells and planned              Oil Search Risk-Reward
appraisal drilling may increase the reserves enough to trigger        A$12

development of a third LNG train, representing a 50%                                                                                                         A$11.06 (+80%)

                                                                        10
expansion. Our latest valuation includes some value for
OSH’s share of gas reserves that are not allocated to the                8

existing 2-train LNG, and so could form the basis for a third                                                                           A$ 6.15
                                                                                                                                                                A$6.50 (+6%)
                                                                         6
train. Recent asset deals including acquisitions of static gas                                                                                                  A$5.24 (-15%)

by Talisman, generate a trade value in the order of 20c/mcf.             4




As a potential brown-field expansion, we consider a third train          2


as more competitive than some rival green-field projects
                                                                        0
elsewhere in the region. The joint venture partners indicate            Oct-08             Apr-09    Oct-09           Apr-10            Oct-10         Apr-11                      Oct-11
                                                                             Price Target (Oct-11)       Historical Stock Performance             Current Stock Price
                                                                                                                                                                    WARNINGDONOTEDIT_RRS4RL~OSH.AX~



that the Hides drilling may advance in time, which is important
from the perspective of firming up a train-3 expansion option,      Scenario Summaries
but even so, an expansion is unlikely to be in production            Price                  Our price target is set at c.29% discount to DCF (WACC
before 2016 and it is too early to assess and price this option.     Target                 10.4%), set with reference to the industry peer
                                                                     A$6.50                 discounts.
Assets in the Middle East are non-core in our view and in time       Bull Case US$105/bbl normalized oil price, 10% capex savings,
could be sold but are not material at this time in context.          A$11.06   additional oil exploration success.
Results of a “strategic review” are expected in early 2011. We       Base Case US$90/bbl normalized oil price, first gas from PNG LNG
expect this will result in a continued focus on OSH’s                A$9.13    1Q14, and total project capex plus finance costs of
substantial acreage base in PNG with other activities declared                 US$18b.
                                                                     Bear Case US$70/bbl normalized oil price, LNG projects slips in
non-core.
                                                                     A$5.24    time or over-budget by 10%. No value for exploration
                                                                    Source: FactSet, Morgan Stanley Research




                                                                                                                                                                                     20
                                                                                                 MORGAN                     STANLEY         RESEARCH

                                                                                                 October 8, 2010
                                                                                                 Australia Oil & Gas




Exhibit 20
Oil Search: Financial Summary
Income statement                     y/e Dec 31       2009     2010E     2011E     2012E    Balance sheet                                       2009      2010E        2011E      2012E
Oil Price-WTI A$/bbl                  US$/bbl        61.75     77.47     80.00     90.00    Payables                                            226.9      287.9        345.7      456.5
Exchnage rate: A$/USD                                  0.79     0.91      0.92      0.88    Interest bearing liabilities
Realised oil price- A$/bbl                           79.56     83.29     87.72    102.65    Tax liabilities                                      54.7      100.8        100.8      100.8
Production- LNG                       k tonnes                                              Provisions                                           13.3         14.9       14.9       14.9
Production- Oil & Condenaste              Mbbls        7.20     6.40      5.35      4.77    Total Current Liabilities                           294.9      403.6        461.4      572.2
Production- Nat Gas.                       Bcf         5.52     5.45      5.40      5.40    Payables
PRODUCTION (mboe)                         mboe         8.12     7.30      6.25      5.67    Interest bearing liabilities                                   986.6       1917.2     3194.3
Oil & Gas Sales Revenue                              647.6     640.4     571.2     590.7    Tax Liabilities                                     107.5      104.3        104.3      104.3
Pipline & other income                                                                      Provisions                                          135.7      151.4        151.4      151.4
Total revenue                             A$m        647.6     640.4     571.2     590.7    Total non-current liabilities                       243.2     1277.3       2172.8     3450.0
-OPEX                                                109.3      88.0     103.8     109.8    TOTAL LIABILITIES                                  538.10    1680.90      2634.17    4022.16
-Royalties                                             10.2     10.5      10.0      10.4    Cash                                               1432.0     1528.0       1208.8      726.3
-G&A, Leases, Inventory changes & other                16.4     24.4      28.0      28.8    Receivables                                         120.8      130.7        112.7      117.7
-Provisions                                                                                 Inventories                                          66.1         72.2       72.2       72.2
- forex losses                                                                              other assets
EBITDAX                                              511.7     517.5     429.4     441.6    Total current ssets                                1623.8     1733.6       1396.5      919.0
-Depreciation & amortisation                         127.3      54.7      55.3      52.6    Receivables & inventories                             0.5          0.5        0.5        0.5
-Goodwill                                                                                   Equity investments / other fin.
-Exploration expensed/ impair.                         95.8    185.4     122.4     143.0    Capitalised exploration                             898.0      424.4        476.9      538.1
EBIT                                                 288.6     277.3     251.7     246.1    Capitalised production & PPE                        795.0     2604.8       3918.3     5733.2
+interest income                                        7.0     11.5      14.7      22.1    Deferred tax assets                                 102.6      120.6        120.4      120.2
-interest expensed                                     11.2     12.5      19.2      25.3    Goodwill & intangibles
Pre-tax operating profit                             284.4     276.3     247.1     242.9    other                                                 1.3         12.2       53.0      159.1
Tax expense                                          158.4     144.3     131.0     126.3    TOTAL ASSETS                                        3421       4896         5966       7470
Net operating profit                                 126.0     132.0     116.1     116.6    Shareholders Equity                                2883.1     3215.3       3331.4     3448.0

+Non-recurring items, net of tax                       43.1                                 Key ratios                                          2009      2010E        2011E      2012E
Reported profit                           A$m        169.1     132.0     116.1     116.6    Weighted average diluted shares                    1166.7     1322.0       1331.0     1340.4
-preference dividend                                                                        Current issued shares                            1308.279   1308.279     1308.279   1308.279
-one time items/ asset sales                          -43.1                                 Share price                                          6.13         6.15       6.15       6.15
+goodwill                                                                                   Market cap                                          8003       8046         8046       8046
Modelware NPAT                            A$m        126.0     132.0     116.1     116.6    +net debt                                         -1432.0     -541.4        708.4     2468.0
Reconciliation from reported EBIT to Modelware EBIT & NPAT                                  -less investments/ plus other                                  -48.3       -105.2     -162.2
Reported EBIT                                        288.6     277.3     251.7     246.1    Enterprise value                                    6571       7553         8860      10676
+goodwill                                                                                   M'ware EBIT                                         288.6      277.3        251.7      246.1
less forex gains                                                                            M'ware EBITDA                                       415.9      332.0        307.0      298.7

less interest & other income                                                                M'ware EBITDAX                                      511.7      517.5        429.4      441.6

Operating EBIT                            A$m        288.6     277.3     251.7     246.1    Reported EPS                                         14.6         10.1        8.8        8.8
                                                                                            Modelware EPS                       A$ cents         10.8         10.0        8.7        8.7
Cashflow                             y/e Dec 31       2009     2010E     2011E     2012E    DPS                                 A$ cents          4.8          4.4        4.4        4.5
Operating revenue                                    604.6     668.1     585.8     612.8    Payout ratio                                         33%        44%          50%        52%
- operating costs                                    139.7     129.1     141.8     149.1    PER                                     times        56.8         61.6       70.5       70.7
-Tax Paid                                            100.4     124.6     131.0     126.3    EV / EBITDAX                            times        11.8         14.6       14.0       24.2
- interest paid                                         5.3       9.7     19.2      25.3    EV / EBITDA                             times        15.0         22.7       17.4       35.7
+other                                                                                      YIELD                                    %          0.8%       0.7%         0.7%       0.7%
Net operating cashflow                               359.2     404.8     293.9     312.1    DCF Valuation                       $/share        $9.13 WACC-%            10.4%
+Proceeds from sale                                  102.3                                  Net D/ Net D+E                           %          -99%       -20%          18%        42%
-Capex: exploration & Dev                            585.4    1367.2    1543.6    2071.7    EBIT / total assets                      %           13.7          9.9        5.8        3.9
-acquisitions & investments                                                                 NPAT/ S'holder funds                     %            4.9          4.3        3.5        3.4
+other                                                                                      Unit revenues & costs
Net investing cashflows                              -483.1   -1367.2   -1543.6   -2071.7   Sales revenue / boe                 US$/boe          59.4         73.6       75.0       83.2
- Ordinary Dividend                                    63.1     48.3      57.0      58.9    Production costs / boe              US$/boe         13.23      15.27        20.81      23.19
- preference dividend                                                                       EBIT / boe                          US$/boe         28.10      34.45        36.93      38.27
+ Equity (Dividend u/w)                             1138.3      52.0      57.0      58.9    NPAT / boe                          US$/boe         12.27      16.40        17.04      18.13
+Debt Movement                                                 953.2     930.5    1277.2    NPAT/ Revenue                       %              19.5%      20.6%        20.3%      19.7%
+other                                                  1.0                                 Reserves metrics
Net financing cashflow                              1076.2     957.0     930.5    1277.2    1P reserves                         mboe            344.5      392.4        388.7      385.5
Increase in cash                                     952.3       -5.4    -319.2    -482.4   2P Reserves                         mboe            567.0      560.6        555.3      550.7
+exchange rate & adjustments                         -287.6    101.4                        Total res + resources               m boe            848          942        942        942
Net change in cash                                   664.8      96.0     -319.2    -482.4   EV / P1 Reserves                    A$/bbl           19.1         19.2       22.8       27.7
Opening cash balance                                 767.3    1432.1    1528.1    1208.8    EV / P2 Reserves                    A$/bbl           11.6         13.5       16.0       19.4
Closing cash balance                                1432.1    1528.1    1208.8     726.4    EV / P3 Resources                   A$/bbl            4.6          5.0        5.9        7.2

E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research




                                                                                                                                                                                   21
                                                                  MORGAN                 STANLEY             RESEARCH

                                                                  October 8, 2010
                                                                  Australia Oil & Gas




Origin Energy – Underweight
                                                                   partially offset by higher interest rates and charges and higher
                                                                   average exploration expenses resulting from increased
Key Points                                                         exploration activity.
•   Target 15% EPS growth highly likely next few years
•   Growth opportunities such as NSW privatization, APLNG,         Our price target is set in line with DCF and coincidentally is
    future PNG hydro and balance sheet to fund                     around 20x 2011e EPS, which approximates historical peak
•   At a large premium to DCF and peak P/E multiple                trading multiples. There is a premium in the stock price, in our
                                                                   view, for the potential in APLNG and much later, a possible
Investment thesis                                                  PNG hydro scheme, and the potential to acquire an electricity
Origin is seen as a defensive company with a reliable earnings     customer base in NSW that may be accretive.
growth profile, strong balance sheet and suite of growth
options. These are desirable and highly visible investment         Risk factors
attributes, but the share price reflects a premium for this and    Macro risks to our call result from upward movements in oil &
we think the investment risk arises should there be earnings       gas prices, as well as domestic power prices, and downward
slippage or any delays with “banner” projects such as APLNG.       movements in A$/US$ and A$/NZ$ exchange rates. The
                                                                   trigger for domestic power price rises and or gas price rises
Origin’s vertically integrated business model developed a          could be progress on a carbon price in Australia. Advances in
decade ago has stood the test of time and allows ORG to            APLNG, and the recently announced PNG Hydro initiative,
capture value anywhere in the energy value chain, either in        may provide upside risk to our call.
the production or generation phase, or when on-sold to the
customer. However, there are weaknesses emerging too. The          Origin Risk-Reward
                                                                     A$20
asset base is biased to gas and in a world that is ‘long gas”
                                                                       18
and lacking a “carbon price”, the opportunity in gas is not as         16
                                                                                                                                       A$ 16.03                 A$16.83 (+5%)


great today as previously. This may play out in progress to            14
                                                                                                                                                                A$14.70 (-8%)


develop APLNG, in a market where there are many rival LNG              12
                                                                                                                                                              A$13.04 (-19%)


projects and long-term LNG prices once again seem to be                10

retreating away from oil linkages.                                      8

                                                                        6

We estimate that earnings growth this year should approach              4

15% EPS, following significant investment in power and gas              2


production assets. Retail and generation between them,                 0
                                                                       Oct-08             Apr-09    Oct-09           Apr-10             Oct-10         Apr-11                      Oct-11
however, have been the mainstay of earnings growth for some                 Price Target (Oct-11)       Historical Stock Performance              Current Stock Price
                                                                                                                                                                    WARNINGDONOTEDIT_RRS4RL~ORG.AX~




years now and other assets need to be addressed. Contact           Source: FactSet, Morgan Stanley Research
Energy’s divisional EBIT has almost halved in 4 years, and the
                                                                   Scenario Summaries
contribution from upstream E&P is 60% lower than its peak.
                                                                    Price Target A$14.70 In line with DCF and reflecting about 20x EPS
                                                                                         which is top end of P/E trading range, but realistic if
There are growth opportunities, some immediate such as the                               EPS growth delivered in 2011
opportunity to acquire a retail customer base in NSW, and
                                                                    Bull case                DCF      US$105/bbl normalized oil price. APLNG assumed
longer term from the APLNG JV (+/- 2015) and now, a new             A$16.83
                                                                                                      with 100% certainty
initiative to consider a hydro-power investment in PNG. The
                                                                    Base case                DCF      US$90/bbl normalized oil price. APLNG assumes
cash position is eroding post the APLNG transaction but on          A$14.67
                                                                                                      2x trains, risked at 40% under PRRT
any measure ORG is still under-geared, in our view.
                                                                    Bear case                DCF      US$70/bbl normalized oil price. APLNG not
                                                                    A$13.04
                                                                                                      economic and gas given low value in domestic
Earnings, valuation and price target
                                                                                                      market
Our earnings estimates are revised upwards in the outer years
from continuing better-than-expected performance from retail,




                                                                                                                                                                                     22
                                                                                            MORGAN            STANLEY            RESEARCH

                                                                                            October 8, 2010
                                                                                            Australia Oil & Gas




Exhibit 21
Origin Energy: Financial Summary
Income statement                            2010       2011E      2012E      2013E    Balance Sheet                                 2010    2011E    2012E    2013E
Oil price: US$/bbl WTI                     75.30        79.43      85.50     90.00    Current liabilities
Exchange rate A$/US$/bbl                    0.88         0.92        0.90     0.86    Payables                                      1205     1205     1205     1205
Oil & gas production (PJe)                 104.2        174.7      175.3     175.0    Interest bearing debt                          113      113      113      113
Retail sales volumes (PJe)                 267.5        261.0      262.1     263.7    Provisions & other                             161      161      161      161
Customer numbers (million)                  2.94          2.95       2.96     2.99    Tax                                              7        7        7        7
Sales revenue                               8534         9030       9515     10012    other                                          398      398      398      398
Interest income                                                                       Total current liabilities                     1884     1884     1884     1884
other income                                56.0          8.0        8.0       8.0    Payables                                        65       65       65       65
Share of associate & JV profits            144.0         76.3       64.1      51.6    Interest bearing debt                         3373     3423     3473     3523
Total revenue                               8734        9114       9587      10072    Provisions                                    4173     4199     4225     4251
operating costs                             7388        7186       7441       7814    Tax                                            901      901      901      901
BV of assets sold                              0            0          0         0    Total liabilities                            10396    10472    10548    10624
EBITDA                                      1346        1928       2145       2258    Cash & investments                             823     1183     1775     2892
Depreciation                                 450         745        756        764    Receivables                                   1381     1381     1381     1381
Goodwill & licene amort                        0            0          0         0    Inventories                                    177      385      385      371
Amort of other intangibles                     0            0          0         0    other                                          657      657      657      657
EBIT                                         896        1183       1390       1494    Total current assets                          3038     3606     4198     5301
Interest                                      13         183         183       134    Inventments -equity accounted                 5395     5395     5395     5395
Pretax profit                                883        1000       1207       1361    Receivables                                      0        0        0        0
Tax                                          232         269        334        371    Investments                                    194      194      194      194
Net profit                                   651         730        873        990    Exploration & development                     1039     1381     1714     1889
Minority interest                             66          64          84        96    Property, plant & equipments                  9244     8860     8425     7761
Net operating profit                         585         666        789        894    Goodwill & licenses                           2796     2796     2796     2796
Significant items                             27            0          0         0    Tax assets                                      88       88       88       88
Reported profit                              612         666         789       894    other                                           40       40       40       40
Reconciliation to operating EBIT                                                      Total Assets                                 21834    22360    22850    23464
Reported EBIT                              896.0      1182.7     1389.8      1494.3   Shareholder funds                            11438    11888    12302    12840
less interest & dividend income              1.0         0.0        0.0         0.0   Minority interest                             1189     1189     1189     1189
-forex gains/ other                          0.0         0.0        0.0         0.0   Key Ratios & margins
-profit on asset sales                       0.0         0.0        0.0         0.0   Weighted average diluted shares             877.744 880.676 880.706 880.736
+goodwill                                    0.0         0.0        0.0         0.0   Diluted shares                                880.6   880.6   880.6   880.6
=operating EBIT                            895.0      1182.7     1389.8      1494.3   Share price                                $ 16.03 $ 16.03 $ 16.03 $ 16.03
+interest & dividend income                  1.0         0.0        0.0         0.0   Market cap                                    14117   14117   14117   14117
- interest expense                          13.0       183.1      183.0       133.6   +net debt                                      2663    2353    1811     744
-tax                                       232.0       269.4      333.6       370.9   -less investments, non-operating                  0       0       0       0
-minority interst                           66.0        64.3       84.3        95.7   +minority                                      1189  1189.0  1189.0  1189.0
Normalised profit                          585.0       665.9      788.9       894.1   -cumulative repurchases                           0       0       0       0
CASHFLOW                                    2010       2011E      2012E      2013E    Enterprise value                             17969    17658    17117    16050
Operating revenues                        9186.0      9143.1     9630.7     10147.0   Operating EBITDA                              1345     1928     2145    2258
Operating costs                           7890.0      7186.3     7441.2      7813.9   Reported EPS                       cents       69.7     75.6     89.6   101.5
Interest paid                              285.0       183.1      183.0       133.6   Modelware EPS                      cents       66.6     75.6     89.6   101.5
Tax parid                                  102.0       269.4      333.6       370.9   PER                                  X         24.1     21.2     17.9    15.8
Net operating cashflow                     345.0      1504.3     1672.9      1828.5   EV / EBITDA                          X         13.4      9.2      8.0     7.1
                                                                                      D.P.S.                             cents       50.0     50.0     50.0    52.0
Investing cashflows                                                                   Payout ratio                                   75%     66%      56%      51%
+Proceeds from asset sales                   7.0          0.0        0.0        0.0   Yield                              %            3.1      3.1      3.1     3.2
-Development capex & exploration          1679.0        753.7      691.3      312.0   Valuation (DCF)                 A$/share      14.67
-Acquisitiion & other                     1201.0          0.0        0.0        0.0   Balance sheet & returns
Net investing cashflow                    2873.0        753.7      691.3      312.0   Net Debt / Net Debt +Equity         %          19%      17%      13%       5%
                                                                                      Interest cover                      X          68.9      6.5      7.6     11.2
Ordinary dividends                         409.0        440.3      440.3      449.2   Return on assets                    %         4.3%     5.6%     6.6%     7.3%
Debt movements                            -143.0         50.0       50.0       50.0   Return on Equity                    %         5.2%     5.7%     6.5%     7.1%
Equity                                      13.0          0.0        0.0        0.0
Net financing cashflow                    -539.0       -390.3     -390.3     -399.2   Divisional EBIT-operating
                                                                                      Exploration & Production           A$m         48.0   144.9    181.9    212.0
Increase in cash helds                   -3067.0        360.3      591.2     1117.4   Retail                             A$m        503.0   507.7    572.9    620.0
Exchange rate adjustments                   -5.0          0.0        0.0        0.0   Generation                         A$m        131.0   284.4    320.4    320.4
Net change in cash                       -3072.0        360.3      591.2     1117.4   Networks                           A$m          0.0     0.0      0.0      0.0
Carbon                                      2010       2011E      2012E      2013E    Contact                            A$m        214.0   245.7    314.6    341.9
Carbon Cost($/tCO2e)                           0            0          0         13   Margins
Emissions (mt CO2e)                          0.9          1.4        1.4        1.3   EBITDA / sales                      %        15.8%    21.4%    22.5%    22.6%
Cost built into Opex(A$m)                    0.0          0.0        0.0       17.8   EBIT / sales                        %        10.5%    13.1%    14.6%    14.9%
Opex as %'age of Revenue                     0%           0%         0%         0%    NPAT / Sales                        %         6.9%     7.4%     8.3%     8.9%



E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research




                                                                                                                                                                23
                                                                       MORGAN                  STANLEY           RESEARCH

                                                                       October 8, 2010
                                                                       Australia Oil & Gas




Caltex – Equal-weight
                                                                       Earnings Estimates, Valuation and Price Target
                                                                       We revised up our 2010e EPS due to a higher-than-expected
Key Points                                                             half-to-date Singapore margin. Future years are lowered due to
                                                                       upwards revisions to the A$/US$ rate, which lowers the
•   Earnings potential going into the next refining cycle              A$ realized margin. Our price target is increased
    higher than prior cycle, due to cost-outs and growth in            commensurately with the EPS upgrade for 2010, from A$13 to
    downstream income                                                  A$14 and reflects 12.5x 2010e expected EPS.
•   Structural improvements in refining cycle in sight with
    demand recovering and capacity growth in check                     Risk factors
•   Longer-term value emerging but in the short term, lower            At the macro level, regional refining margins in US$ and
    margins in Q4 represent a headwind                                 A$/US$ rates set the level and direction of refinery earnings.
                                                                       Reliable operation of the refineries is imperative; unexpected
Investment case                                                        outages result in sudden shortages, and covering these from
In our view, 2010 is shaping up as a repeat of 2009 with               imports can be very expensive.
higher-than-expected first half margins and profits, followed by
a weaker second half. We expect regional refiner margins to            CTX Risk-Reward
                                                                         A$25
reach seasonal lows in Q4, and the higher A$ results in lower
A$ refinery income. In prior years, this has impacted negatively
                                                                           20
                                                                                                                                                                 A$19.43 (+67%)
on CTX share price performance in the fourth quarter.
                                                                           15
                                                                                                                                                                A$14.00 (+20%)
Longer term, there is a value case building. This year (and                                                                                A$ 11.65

last) likely represents the trough in the global refining cycle, yet       10
                                                                                                                          c

earnings multiples and p/book metrics do not look demanding,                                                                                                        A$8.0 (-31%)

in our view.                                                                5




We see evidence of a gradual recovery in the refining                      0
                                                                           Oct-08             Apr-09    Oct-09           Apr-10             Oct-10         Apr-11                      Oct-11
cycle. Compared to record capacity growth in 2009, we believe                   Price Target (Oct-11)       Historical Stock Performance              Current Stock Price
                                                                                                                                                                        WARNINGDONOTEDIT_RRS4RL~CTX.AX~




the outlook to 2013 is subdued and insufficient to meet modest
demand growth, necessitating a gradual recovery in regional            Scenario Summaries
capacity utilization rates and eventually the structure of              Price Target                    P/E multiple of 12.5x (approx) applied to
margins.                                                                A$14.00                         2010E base case EPS. Historically, CTX P/E
                                                                                                        trading range is 10x to 15x current earnings,
                                                                                                        with a cycle average of 12.5x.
Downstream growth. Cost outs, growth in marketing volumes
and continued increases in marketing margins are all driving up         Bull                12.5x       Higher average margin of US$8/bbl in 2011,
                                                                        A$19.43             Bull case   marketing margin up 10% and cost outs
income from non-refining and thus lift the base-line from which                             EPS         increase from A$100m to A$200m.
an eventual recovery in refinery profits can only add to, once          Base                12.5x       Singapore margins average US$8.80/bbl in
the refining cycle kicks in. Our forecasts capture of these             A$14.06             2010e       H2 2010 and 12.5x represents average
                                                                                            EPS         “through the cycle” P/E.
effects we consider to be conservative with most scenarios to
                                                                        Bear                12.5x       Refinery margins fall to $5/bbl, oil price rises
the upside. For example, we capture $100m of a planned                                      Bear        to US$105/bbl and A$ reaches parity with
                                                                        A$8.00
$235m pa opex reduction by 2010. In marketing, we capture                                   Case        US$. Cost outs & marketing margins as per
volume gains in line with trend growth in national consumption                              EPS         base case.
                                                                       Source: FactSet, Morgan Stanley Research
without continued market share gains, and we maintain
marketing margins flat despite a historical improvement in
margins apparent since 2002.




                                                                                                                                                                                          24
                                                                                         MORGAN                 STANLEY                  RESEARCH

                                                                                         October 8, 2010
                                                                                         Australia Oil & Gas




Exhibit 22
Caltex: Financial Summary
Income statement                                 2009    2010E    2011E    2012E     Balance Sheet                          y/e Dec           2009        2010E     2011E     2012E
Refinery average utilisation                      77%      76%     78%       80%     Current Liabilities
Refinery production (B Litres)                     9.9      9.9     10.5      10.6   Payables                                                 1186         1209      1317      1472
Transport fuel sales (B Litres)                   14.5     15.2    15.6       16.2   Interest bearing liabilities                               78           42        42        42
Singapore margin                                  5.31   11.38     6.75      7.75    Provisions & other                                        142          133       143       153
Caltex refiner margin       (US$/bbl)             5.92     7.67    6.95       7.55   tax                                                        26           46        46        46
CTX integrated margin- A cents/L                   8.0      8.7      8.1       8.7   Total Current Liabilities                                1433         1472      1549      1714
Sales revenue (A$m)                             17740    17836    18438    20373
Government excise                                4739     4442     4030      4094    Interest bearing liabilities-non current                  431          577       577       477
Net sales revenue                               13001    13395    14408    16279     tax                                                         0            0         0         0
Royalty, franchise & rental income              174.0    166.0    174.0    174.0     Provisions & other- non-current                           163          168       168       168
Operating revenue                               13175    13561    14582    16453
Other income                                       6.0      6.0      6.0       6.0   TOTAL LIABILITIES                                        2027         2217      2294      2359
Asset sales                                        0.0      0.0      0.0       0.0   Current Assets
Total reported revenue                          13181    13567    14588    16459     Cash                                                       22          164       210       365
   Gross refining margin                           521      514      498      573    Receivables                                               773         1098      1197      1338
   Tranport fuels marketing margin                 444      507      519       539   Inventories                                              1209         1008      1002       925
   Lubes                                           104      124      100      104    Other                                                      41           38        38        38
   Non-fuel income                                 153      161      166      171    Total current ssets                                      2045         2307      2447      2665
   other                                           0.0      0.0      0.0       0.0   Non Current Assets
Total gross margin                               1222     1306     1283     1387     Receivables                                              0.54         0.72      0.72      0.72
-G&A & other                                    110.0    100.0     80.4      84.5    Investments                                                22           22        22        22
-production costs                               753.0    726.0    680.0     666.8    Property, Plant & equipment                              2780         2874      2964      3050
-other costs                                     -43.0    -24.7      0.0       0.0   Goodwill                                                   85           84        84        84
-forex loss (gains)                              -88.0     12.4      5.2      12.4   tax & other                                                19            0         9        10
Replacement cost EBIT                           490.0    492.1    516.9     622.9    TOTAL ASSETS                                             4952         5288      5527      5832
-interest expensed                                28.0     58.3    60.0      60.0    preference capital                                          0            0
Tax expense                                     137.5    129.8    137.1     168.9    Reserves & contributed equity                             543          543       543       543
Replacement cost profit A$M                     324.5    304.0    319.8     394.0    Retained earnings                                        2380         2521      2686      2927
+inventory gains after tax                       110.9     3.6      8.4     42.0     Minority interests                                         11           11        10         9
Historical cost profit                           435.4   307.6    328.2    436.0     Shareholders Equity                                      2925         3070      3233      3473
+Significant items after tax                    -121.0   -14.0      0.0      0.0

+minority interest                                0.7     -0.1     -1.0     -1.0     Key Ratios                             Y/E Dec 31
Historical cost NPAT                            315.1    293.5    327.2    435.0     Stock price                                11.65
Replacement cost NAPT & minorities A$M          325.2    304.0    318.8    393.0     Weighted average capital                   M             270.0        270.0     270.0     270.0
EPS- reported replacement cost NPAT-            120.4    112.6    118.1    145.6     Average share price                     $/share           0.00         0.00      0.00      0.00
Reconciliation to M'ware EBIT & Profit                                               Market Cap                                                3146         3146      3146      3146
Reported EBIT                                   490.0    492.1    516.9    622.9     +plus net debt                                           487.1        455.9     409.2     154.6
-less interest, dividend, forex, other           2.00     2.00     2.00     2.00     +plus minority interest                                   10.8         10.7       9.7       8.7
+Goodwill                                         0.0      0.0      0.0      0.0     Enterprise Value                           A$m      $   3,643 $      3,612 $   3,564 $   3,309
= Modelware EBIT                                488.0    490.1    514.9    620.9     Operating EBIT                             A$m           488.0        490.1     514.9     620.9
+Interest & Dividend & other income               2.7      1.9      1.0      1.0     Depreciation                               A$m           196.6        204.1     220.0     224.4
-financing expense                               28.0     58.3     60.0     60.0     Operating EBITDA                           A$m             685          694       735       845
-Tax                                            137.5    129.8    137.1    168.9     EPS- Replacement Cost profit               cps           120.4        112.6     118.1     145.6
=Modelware net income A$m                       325.2    304.0    318.8    393.0     EPS- Modelware                                           120.4        112.5     118.1     145.6

Cashflow                                         2009    2010E    2011E    2012E     D.P.S.                                      cps            25           59        65        80

Net operating cashflow                           675.1    471.9    520.8    759.7    Payout Ratio (%)                             %              21           52        55        55
Proceeds from asset sales                         18.4      0.0      0.0      0.0    PER                                          X             7.7         10.4       9.9       8.0
-capex                                           313.6    283.7    290.0    290.0    EV / EBITDA                                  X             5.3          5.2       4.9       3.9
-acquisitions & other                             15.5     12.3     20.0     20.0    Yield                                        %             2.1          5.0       5.6       6.9
+other                                             0.0      0.0      0.0      0.0    P/book                                                     0.9          1.1       1.0       1.0
Net investing cashflows                         -310.8   -296.0   -310.0   -310.0    Valuation                                                        $   14.06
Ordinary dividends                                 0.0    148.5    164.1    195.1    Balance sheet & returns
+ Equity                                           0.0     0.0       0.0      0.0    Net debt                                   A$M             487          456       409       155
-Debt movement                                  -373.7   114.0       0.0   -100.0    Net Debt / Net Debt +Equity                 %             14%          13%       11%        4%
+other                                             0.0     0.0       0.0      0.0    Interest cover                              X             17.5          8.4       8.6      10.4
Net financing cashflow                          -373.7   -34.5    -164.1   -295.1    EBIT / Av. Total assets                     %            9.9%         9.6%      9.6%     11.0%
Increase in cash                                  -9.4   141.4      46.7    154.6    NPAT / Av. S'holder funds                   %           11.8%        10.1%     10.1%     11.7%
Exchange rate adjustments                          0.0     0.0       0.0      0.0    Margins
Net change in cash                                -9.4   141.4      46.7    154.6    Gross revenue/ bbl sold                    A$/bbl       194.1        186.8     188.2     200.0

Carbon Cost                                      2009    2010E    2011E    2012E     Exchange rate                          A$/USD            0.79         0.91      0.92      0.88
Price (A$/tCO2e)                                              0        0       10    Gross revenue/ bbl sold                USD/bbl          153.7        169.5     172.7     176.3
CO2e (mt)                                                  1.08     1.15     1.17    Gross margin / sales revenue             %              6.9%         7.3%      7.0%      6.8%
CO2e cost in Opex (A$m)                                     0.0      0.0      5.9    Gross margin/ net sales                  %              9.4%         9.7%      8.9%      8.5%
Opex as %'age of Revenue                                  0.0%     0.0%     0.0%     NPAT / sales revenue                     %              1.8%         1.7%      1.7%      1.9%
E = Morgan Stanley Research estimates
Source: Company data, Morgan Stanley Research




                                                                                                                                                                               25
                                                                   MORGAN                    STANLEY             RESEARCH

                                                                   October 8, 2010
                                                                   Australia Oil & Gas




AWE Ltd. – Equal-weight
                                                                   the base business and management front are needed to re-rate
                                                                   the stock in our view.
Key Points
                                                                   Earnings Estimates, Valuation, and Price Target
•   AWE is cheap, and today trades at less than production         The negative impact of revised oil prices and exchange rates
    backing.                                                       was partly offset by lower exploration write-offs. We are yet to
•   However without an MD, defining a clear strategic              receive official guidance on this front but view our previous
    direction to re-rate the stock is challenging.                 estimate of A$58m for 2011 as aggressive given the
•   The base business is beginning to look less attractive as      opportunity slate. We have also assumed that the drilling
    Tui declines, and spending on BassGas for additional           programme at BassGass is pushed into Q42011, reducing the
    production increases.                                          downtime in FY2011 at the field and increasing it in FY2012.
                                                                   Production is impacted accordingly. We lower our price target
                                                                   from A$1.76/sh to A$1.70/sh, in line with the fall in underlying
Investment case                                                    valuation from A$2.34 to A$2.28/sh.
The value proposition for AWE has changed. This time a year
ago, value creation was largely dependent on an intensive          Company-specific Risk Factors
exploration programme, which has subsequently failed to            Key risks are oil prices and the AUD/USD rate. At the company
deliver high-impact results. Now value creation is less tangible   level, production, reserves, opex, and capex risks exist.
and will be determined by new and as-yet unknown                   Exploration has been wound back but outcomes from ongoing
management.                                                        programmes will also impact valuation and price performance.

We see risks concentrating in the base business. BassGas is        AWE Risk-Reward
now producing from 1 well and Tui reserves are being                 A$3.50

reassessed. The outcome of the latter could result in positive
                                                                       3.00
or negative revisions, but recent near field exploration results
are not supportive of upward revisions in our view. Production         2.50                                                                                     A$2.48 (+65%)


guidance for 2011 is for 6.5-7.0mmboe, with the upper and              2.00

lower end of the range dependent on timing of the BassGas                                                                                 A$ 1.50               A$1.70 (+13%)
                                                                       1.50
work programme and flows from the Pateke well at Tui                                                                                                               A$1.38 (-8%)


following work-over activity.                                          1.00



Adephi is a bright spot and offers upside, in our view. Booked         0.50


reserves from the play stand at 6.3mmboe but with a resource           0.00

backing of up to 19mmboe. This is potentially meaningful                  Oct-08              Apr-09
                                                                              Price Target (Oct-11)
                                                                                                        Oct-09           Apr-10
                                                                                                           Historical Stock Performance
                                                                                                                                          Oct-10          Apr-11
                                                                                                                                                    Current Stock Price
                                                                                                                                                                                      Oct-11
                                                                                                                                                                      W ARNINGDONOTEDIT_RRS4RL~AWE.AX~




despite AWE’s low equity interest in the Eagleford Shale play.
                                                                   Scenario Summaries
We value the asset at cost presently pending further detail on
                                                                    Price Target DCF-based sum of the parts. We maintain a
full field development plans.                                       A$1.70       significant discount (25%) to our DCF on expectations
                                                                                 of ongoing strategic uncertainty.
We anticipate news on a new managing director over the
coming months, which should remove an impediment to the             Bull                      Oil price of US$105/bbl normalized, Adlephi at cost
                                                                    Case                      and Trefoil resource risked at 50%.
company implementing new strategies to reverse the price            A$2.48
decline. Until then, AWE will likely be treading water in our
                                                                    Base                      Oil price of US$90/bbl. Adelphi at cost, Trefoil
view.                                                               Case                      resource risked at 50%.
                                                                    A$2.28
Amid the obvious headwinds for AWE, its share price has fallen
precipitously. At today’s price of A$1.50/sh, it looks cheap,       Bear                      Oil price of US$70/bbl. No value for static assets,
trading at 34% below our base case DCF, and 14% below               Case                      and investments, cash discounted 50%, Pateke
                                                                    A$1.38                    workover fails and 20% capex overrun at BassGas.
production value of A$1.75/sh. However, positive updates on
                                                                   Source: FactSet, Morgan Stanley Research




                                                                                                                                                                                      26
                                                                                                       MORGAN              STANLEY            RESEARCH

                                                                                                       October 8, 2010
                                                                                                       Australia Oil & Gas




Exhibit 23
AWE Ltd: Financial Summary
Profit & Loss                                    2010A      2011E      2012E      2013E     Balance Sheet                          Y/eJune          2010    2011E    2012E    2013E
Oil price- A$/bbl                   US$/bbl       86.13      85.27      96.18      90.00    Cash                                                    135.3    181.2    130.3    150.5
Production- liquids                 mboe            3.5        3.2        2.7        2.6    Receivables                                              65.2     64.3     62.6     65.1
Production- gas                       PJ           15.8       22.5       22.8       22.0    Inventories & other                                      10.4     10.4     10.4     10.4
Total production                     mboe           6.1        6.9        6.5        6.3    Total current assets                                    211.0    255.9    203.4    226.0
Sales Revenue                                     354.2      333.1      324.3      338.3    Capitalised production & Dev                            817.3    762.6    824.1    829.1
+interest income                                    0.0        0.0        0.0        0.0    Capitalised exploration                                 271.3    289.3    310.3    331.3
+sale of assets/investments/Other                   0.0        0.0        0.0        0.0    Investments                                              10.6     35.6     35.6     35.6
+other                                              1.8        1.2        1.2               other                                                     2.1     61.7     96.7     93.6
Total revenue                                     356.0      334.3      325.5      338.3    Total assets                                           1317.1   1405.1   1470.0   1515.6
-OPEX                                             128.6      107.0      103.2       97.8    Payables                                                 75.0     75.0     75.0     75.0
-Tariffs                                            0.0        0.0        0.0        0.0    provisions & tax                                         17.9     23.9     23.9     23.9
-General & other                                   22.9       28.7       30.3       31.9    other                                                     1.0      1.0     55.0     75.0
-forex / other / inventory                          9.2        0.0        0.0        0.0    Current debt                                              0.0      0.0      0.0      0.0
-inventory & other                                  3.4        0.0        0.0        0.0    total current liabilities                                93.9     99.9    153.9    173.9
-cost of assets sold                               -6.6        0.0        0.0        0.0    interest bearing debt                                     0.0      0.0      0.0      0.0
EBITDAX                                           198.5      198.5      192.0      208.6    other liabilities                                       125.3    217.9    217.9    217.9
-Exploration expensed&impairments                 126.6       42.0       49.0       49.0    Total liabilities                                       219.3    317.9    371.9    391.9
EBITDA                                             71.9      156.5      143.0      159.6    Shareholder funds                                       1098     1087     1098     1124
-Depreciation & Amortisation                        94.5     111.2      103.4       97.0    Valuation & ratios
EBIT                                               -22.5      45.3       39.6       62.6
 interest capitalised                                0.0       0.0        0.0        0.0
-net interest                                        1.3      -3.7       -5.5       -3.3    Share price                                              1.50     1.50     1.50     1.50
Pre-tax operating profit                           -23.9      48.9       45.1       66.0    Weighted average shares
Tax expense                                        -20.4      14.7       13.5       19.8    Current issued shares                                   521.9    521.9    521.9    521.9
Royalties                                           25.4      19.7       20.7       20.5    Diluted capital                                         523.5    535.9    535.9    535.9
Net operating profit                               -28.9      14.5       10.8       25.6    Market Cap                                                783      783      783      783
Minority interest                                    0.0       0.0        0.0        0.0    +net debt                                              -135.3   -181.2   -130.3   -150.5
+non recurring items                                 0.0       0.0        0.0        0.0    -less investments / other                               -10.6    -35.6    -35.6    -35.6
Reported profit                                    -28.9      14.5       10.8       25.6    Enterprise Value                       A$m                637      566      617      597
Reported EBITDA                                     71.9     156.5      143.0      159.6    M'ware EBIT                            A$m              -45.3     25.6     18.9     42.1
less interest income                                 0.0       0.0        0.0        0.0    M'ware EBITDA                          A$m               49.2    136.8    122.2    139.1
less forex gains                                     9.2       0.0        0.0        0.0    Reported EPS                           cents             -5.5      2.8      2.1      4.9
less asset sales                                     6.6       0.0        0.0        0.0    Modelware EPS                          cents             -6.8      2.7      2.0      4.8
less RRT tax provision                             25.4       19.7       20.7       20.5    DPS                                    cents                0        0       0        0
Mware EBITDA                                        49.2     136.8      122.2      139.1    Payout ratio                           %                    0        0       0        0
Mware EBIT                                         -45.3      25.6       18.9       42.1    PER                                    X          NA              55.5     74.3     31.5
Mware NPAT                                         -35.4      14.5       10.8       25.6    EV / EBITDA                            X                 13.0      4.1      5.0
Cashflow                                         2010A      2011E      2012E      2013E     EV / EBITDAX                           X                 13.0      4.1      5.0
Cash from operations                               368.2     343.2      336.2      346.9    Yield                                                    0.0      0.0      0.0      0.0
-Operating costs                                   155.5     135.8      133.5      129.6    DCF Valuation                          A$/share        $2.28    WACC       11.1
-interest paid                                       3.7       5.3        5.3        5.3    Bear / bull /Px target                 A$/share        $1.38    $2.48    $1.70
-tax                                               100.9      14.7       13.5       19.8    Ratio analysis
Gross cashflow from operations                     108.1     187.5      183.9      192.2    Net debt / ND + E                          %             -0.1     -0.2     -0.1     -0.2
-exploration                                       148.2      60.0       70.0       70.0    interest cover                             x             -3.0      8.6      7.5     11.9
-development                                        38.5      56.6      164.8      102.0    Dividend payout ratio                      %              0%       0%       0%       0%
-acquisitions                                      118.0      25.0        0.0        0.0    EBIT / total assets (ROA)                  %             -2%       3%       3%       4%
+divestments / other                                 0.2       0.0        0.0        0.0    Net profit / Shareholder funds (ROE)       %             -3%       1%       1%       2%
Pre-financing cashflow                            -199.4      45.9      -50.9       20.2    Effective tax rate                         %             85.5     30.0     30.0     30.0
-dividends                                           0.0       0.0        0.0        0.0    Unit revenues & costs
+equity/other                                        1.8       0.0        0.0        0.0    Sales revenue / boe                    $/boe            58.54    48.25    50.24    53.56
+debt raised/(repaid)                                0.0       0.0        0.0        0.0    Cash cost / boe                        $/boe            25.34    19.60    20.61    20.53
Net cashflow                                      -197.6      45.9      -50.9       20.2    Non cash cost / oe                     $/boe            36.35    22.12    23.52    23.12
+exchange rate adjustments                         -23.2       0.0        0.0        0.0    EBIT / boe                             $/boe            -3.71     6.53     6.11     9.92
Increase in cash                                  -220.7      45.9      -50.9       20.2    NPAT / boe                             $/boe            -4.75     2.10     1.67     4.06
Cash at BOP                                        356.1     135.3      181.2      130.3    EBIT / Sales                           %                 -6%      14%      12%      19%
Cash at EOP                                        135.3     181.2      130.3      150.5
Net debt at year end                              -135.3     -181.2     -130.3     -150.5   Reserves
Carbon                                          2010A      2011E      2012E      2013E      2P Reserves                            m boe              66       72       68       65
Price (A$/tCO2e)                                              0.00       0.00       0.00    Gas / Liquids split                    %                   50       63       63       63
CO2e (mt)                                                     0.02       0.02       0.02    EV / boe                               A$/bbl            9.63     7.91     9.05     9.16
CO2e cost in Opex (A$m)                                       0.00       0.00       0.00    EV / boe                               US$/boe           8.49     7.31     8.14     7.91

Source: Company data, Morgan Stanley Research
e = Morgan Stanley Research estimates




                                                                                                                                                                               27
                                                                    MORGAN                  STANLEY               RESEARCH

                                                                    October 8, 2010
                                                                    Australia Oil & Gas




Beach Energy – Equal-weight
                                                                    Equal-weight. Concerns over successful delivery on Egyptian
                                                                    projects, uncertainty over Cooper Basin drilling and capital
Key Points                                                          redeployment are ongoing, but adequately reflected in today’s
                                                                    price in our view.
•   Beach needs a reliable core of assets to drive growth.
    Egypt and the Cooper are shaping up to fill this role, but      Earnings Estimates, Valuation, and Price Target
    both need to be de-risked.                                      Changes to earnings principally reflect our new oil price and
•   The company has a number of peripheral assets which             exchange rate deck, resulting in lower earnings profile across
    soak-up capital, and show little evidence of adding to          the outlook period. We have also updated field models,
    shareholder value.                                              resulting in minor negative impacts to earnings, mainly from
•   The balance sheet is strong, and the stock’s price is not       Egypt and the Bass Basin. Our valuation reduces from A$0.75
    onerous at these levels, but progress on the issues             to A$0.73/sh, reflecting changes previously outlined as well as
    outlined above is needed for positive price performance         mark-to-market of investments and the latest information
    in our view.                                                    regarding BW Offshore contingent claims (BPT share assumed
                                                                    to be US$9.75m). We leave our price target unchanged at
Investment Thesis                                                   A$0.75/sh, set with reference to our Base Case valuation.
There are many irons in the fire but few are hot and we argue
that it is important for the company to mature prospects over       Risk Factors
the coming year or risk continuing this year’s                      Key risks are oil prices and the AUD/USD rate. At the company
underperformance into the next.                                     level, production, reserves, opex, and capex risks exist as
                                                                    evidenced from previous downgrades at the BMG field.
Two key areas of the portfolio are emerging, which have the         Exploration in frontiers is expensive and the risk from dry-wells
potential to form the foundation for future value growth. These     is of relatively large exploration costs. Capture of value for
are Egypt and the Cooper Basin. Work over the next six              shale gas and unconventional gas acreage via way of asset
months will be important in de-risking these assets and we look     trade is a source of upside risk.
to news flow from Cooper Basin Shale gas flow tests in Q1
2011 and long-awaited first oil production from Egypt for this.     BPT Risk-Reward
The Cooper strategy is long dated and faces challenges from           A$1.20

unsupportive gas prices. Positive results from the upcoming                                                                                                           A$1.09 (+61%)

                                                                        1.00
programme could impound at least minimal value for this asset,
in a share price which currently reflects none in our view. The         0.80
                                                                                                                                                A$ 0.68                  A$.75 (+11%)
first well in the programme, Encounter, has spudded, and
which we expect it to be followed by Holdfast towards year end.         0.60
                                                                                                                                                                         A$0.53 (-21%)

Meanwhile, positive news from Egypt is needed to vindicate              0.40

Beach’s significant investment in the region, but we do not see
positive momentum on this front, and anticipate some delays.            0.20


We model first oil in Q1 2011.                                          0.00
                                                                           Oct-08              Apr-09         Oct-09           Apr-10           Oct-10          Apr-11                      Oct-11
                                                                               Price Target (Oct-11)             Historical Stock Performance             Current Stock PriceW ARNINGDONOTEDIT_RRS4RL~BPT.AX~



Financially BPT is strong with cash of c.A$170m plus A$43m
relating to Tipton West contingent payments. The company
                                                                    Scenario Summaries
has no debt and access to A$25m loan facility. This capacity         Price Target A$0.75                Price target is set with reference to our base case valuation
will be put to work over the coming year with a large A$245m                                            (WACC 11.1% for oil, 10.2% for gas).
development and exploration programme. The bulk of this              Bull Case                          US$105/bbl normalized oil price. Un-conventional and
expenditure will go to activity in the Cooper Basin. Flooding is     A$1.09                             contingent gas resources risked at 50%
still an issue and waters will need to recede if the programme is    Base Case                          US$90/bbl normalized oil price. Modest value for exploration
to meet drilling objectives.                                         A$0.73                             acreage. Cooper contingent and unconventional risked at 10%.

                                                                     Bear Case                          US$70/bbl normalized oil price. No value for 2C resource
                                                                     A$0.53                             potential and production 20% lower than base case in 2011.
Concerns Priced: Following significant underperformance
this year, we recently upgraded our rating from Underweight to      Source: FactSet, Morgan Stanley Research




                                                                                                                                                                           28
                                                                                               MORGAN            STANLEY            RESEARCH

                                                                                               October 8, 2010
                                                                                               Australia Oil & Gas




Exhibit 24
Beach Petroleum: Financial Summary
Profit & Loss                    Y/e June       2010A      2011E      2012E 2013E    Balance Sheet                 Y/e June           2010A    2011E     2012E     2013E
Exchange rate                     US$/A$          0.89       0.92       0.90     0.89Cash                                              169.9    105.4     123.5     128.9
Realised oil price                 A$/bbl        86.79      85.37      94.11   103.99Receivables                                       116.1     72.6      71.6      66.1
Production-Oil & condensate        mbbls           2.9        2.9        2.8     2.3 Inventories & other                               116.9    173.3     123.8     135.1
LPG                               k tonnes        43.4       41.9       38.3    34.0 Investments                                         0.0      0.0       0.0       0.0
Natural gas                          PJ           23.6       23.7       22.5    20.6 Property, plant & equyipment                      367.2    384.4     384.0     403.8
Total production                   mboe            7.3        7.3        7.0     6.1 Capitalised development                           573.9    601.1     602.8     604.4
Sales Revenue                                    487.5      462.8      482.3   453.6 Capitalised exploration & evaluation              269.2    271.0     265.2     256.7
other operating income                             4.5        0.0        0.0     0.0 Deferred taxes                                     63.9     63.9      63.9      63.9
Operating revenue                  A$m           491.9      462.8      482.3   453.6 other
+sale of assets & other                            0.0        0.0        0.0     0.0 Total assets                                    1677.0    1671.6    1634.8    1658.9
+interest income                                   5.9        9.8        6.4     7.8 Payables                                          93.9      98.2      47.8      53.5
Total revenue                      A$m           497.8      472.5      488.7   461.4 provisions                                        79.1      79.1      79.1      79.1
-OPEX                                            167.6      159.2      145.5   128.3 other                                             10.0      10.0      10.0      10.0
-third party purchases                            72.7       74.0       80.0    86.1 interest bearing debt                              0.0       0.0       0.0       0.0
-Royalties                                        54.2       53.7       54.5    52.5 Deferred taxes                                   119.0     119.0     119.0     119.0
-General & other                                  21.1       21.1       21.6    22.2 Financial instruments                              3.4       3.4       3.4       3.4
-forex & hedging realised                          4.7        0.0        0.0     0.0 Total liabilities                                305.5     309.7     259.4     265.1
-change in inventory                               6.0        0.0        0.0     0.0 Total parent entity interest                    1370.4    1361.9    1375.4    1393.8
EBITDAX                                          171.5      164.5      187.1   172.2 Minority interest                                  1.2       0.0       0.0       0.0
-Exploration expensed                             68.1       20.0       20.0    20.0 Shareholder funds                               1371.6    1361.9    1375.4    1393.8
EBITDA                                           103.4      144.5      167.1   152.2    Key Ratios
-Depreciation & Amortisation                     114.2      127.8      115.7    94.4    Share price                                    0.68      0.68      0.68      0.68
EBIT                                             -10.8       16.7       51.3    57.9    Weighted average shares                      1071.0    1092.5    1092.5    1092.5
-borrowing costs                                   6.1        5.0        4.7     4.3    Current issued shares                        1084.9    1084.9    1084.9    1084.9
Pre-tax operating profit                         -16.9       11.7       46.7    53.6    Market Cap                                      738       738       738       738
Tax expense                                      -15.5        3.5       14.0    16.1    +net debt                                    -169.9    -105.4    -123.5    -128.9
Profit                                            -1.4        8.2       32.7    37.5
Minority interest                                  0.0        0.0        0.0     0.0    -less investments / other                      0.00      0.00      0.00      0.00
+non recurring items A.T                          34.5        0.0        0.0     0.0    Enterprise Value                   A$m          568       632       614       609
Reported profit                                   33.1        8.2       32.7    37.5    M'ware EBIT                        A$m        -11.9        7.0     44.9      50.1
Reconciliation to Mware EBITDA & EBIT                                                   M'ware EBITDA                      A$m        102.3     134.8     160.7     144.5
Reported EBITDA                                  103.4      144.5      167.1   152.2    Reported EPS                      cents         3.1       0.7       3.0       3.4
less interest income                               5.9        9.8        6.4     7.8    Modelware EPS                     cents        -0.1       0.7       3.0       3.4
less forex gains                                  -4.7        0.0        0.0     0.0    Beach Normalised EPS              cents         3.8       2.0       4.6       5.1
less asset sales                                   0.0        0.0        0.0     0.0    DPS                               cents         1.8       1.8       1.8       1.8
Mware EBITDA                                     102.3      134.8      160.7   144.5    Payout ratio                        %     NA              234        59        51
Mware EBIT                                       -11.9        7.0       44.9    50.1    PER                                 X     NA             90.9      22.7      19.8
Mware NPAT                                        -1.4        8.2       32.7    37.5    EV / EBITDA                         X            5.6       4.7       3.8       4.2
Beach Normalised NPAT                             40.8       22.2       51.5    56.7    EV / EBITDAX                        X            3.3       4.1       3.4       3.7
Cashflow                     Y/e June           2010A      2011E      2012E 2013E       Yield                               %            2.6      2.6       2.6       2.6
Cash revenues                                    491.4      472.5      488.7 461.4      DCF Valuation                    A$/share    $0.73
-Operating costs                                -313.3     -308.0     -301.6 -289.1     Bear /bull / px.target           A$/share      0.53      1.09      0.75
-interest paid                                    -0.6       -5.0       -4.7   -4.3     WACC oil / gas                   %                     11.1%     10.2%
-tax                                             -49.2       -3.5      -14.0  -16.1     Ratio analysis
+other                                             0.2        0.0        0.0    0.0     Net debt / ND + E                   %          -0.14    -0.08     -0.10     -0.10
Gross cashflow from operations                   128.5      156.0      168.4 151.8      interest cover                      x          -1.97     1.38      9.62     11.58
-capex- development                             -112.0     -109.0      -71.3  -57.3     EBIT / total assets (ROA)           %           -1%       0%        3%        3%
-exploration & appraisal                         -35.0     -128.0      -60.0  -70.0     Net profit / Shareholder funds      %            2%       1%        2%        3%
-acquisitions                                     -7.4       -7.4        0.0    0.0     Effective tax rate                  %           0.92     0.30      0.30      0.30
+proceeds from sales / other                      68.2       43.0        0.0    0.0     Unit revenues & costs
Pre-financing cashflow                            42.3      -45.4       37.1   24.6     Sales revenue / boe               A$/boe       66.35    63.07     69.13     74.64
-dividends                                       -26.5      -19.1      -19.1  -19.1     Cash cost / boe                   $/boe        33.06    31.90     31.77     33.41
+equity/other                                     19.2        0.0        0.0    0.0     Non cash cost / oe                $/boe        24.82    20.14     19.45     18.82
+debt raised/(repaid)                              0.5        0.0        0.0    0.0     EBIT / boe                        $/boe        -1.47     2.28      7.36      9.53
Net cashflow                                      35.5      -64.5       18.0    5.5     NPAT / boe                         $/boe        4.51     1.11      4.68      6.17
+exchange rate adjustments                        -1.7        0.0        0.0    0.0     EBIT / Sales                         %          -2%       4%       11%       13%
Increase in cash                                  33.8      -64.5       18.0    5.5     Reserves
Cash at BOP                                      136.2      170.0      105.4 123.5      2P Reserves                       m boe          66       77        91       107
Cash at EOP                                      170.0      105.4      123.5 128.9      Contingent Reserves               m boe         297      297       297       297
Carbon Cost                                   2010A       2011E       2012E 2013E       Gas / Liquids split                 %           61%      69%       73%       74%
Price (A$/tCO2e)                                      0           0        0    0       EV / boe- 2p                      A$/bbl        8.60     8.25      6.74      5.71
CO2e (mt)                                             0           0        0    0       EV / boe- 2C                      A$/bbl        1.91     2.13      2.07      2.05
CO2e cost in Opex (A$m)                               0           0        0    0       EV / boe                         US$/boe        7.63     7.62      6.06      5.09
E = Morgan Stanley Research estimates. Source: Company data, Morgan Stanley Research




                                                                                                                                                                      29
                                                                      MORGAN                  STANLEY            RESEARCH

                                                                      October 8, 2010
                                                                      Australia Oil & Gas




ROC – Overweight
                                                                      Earnings Estimates, Valuation, and Price Target
                                                                      Earnings and US$ valuation fall modestly as a result of our
Key Points                                                            lower oil price deck, exchange rate, and the mark-to-market of
                                                                      ROC’s hedge book, based on the latest Brent forward curve.
•   Meeting operating targets is key to unwinding ROC’s               We have also made adjustments to field models resulting in
    valuation discount. So far the company is on track.               lower production for the full year. We have included ROC’s
•   Wei project FID targeted for H2 2010. Progress                    share of the BW Offshore settlement payment (US$9.8m)
    continues to be slow which is a headwind for the stock,           based on latest information, which was broadly in line with
    but we expect news flows this quarter.                            previous estimates. Our A$ price target falls further than our
•   ROC trades at a c. 32% discount to our DCF, one of the            DCF, based on higher exchange rate, up c.10% since our last
    largest in the space, supporting our Overweight                   published note (August 25, 2010). We leave our price target
    recommendation.                                                   unchanged at A$0.53/sh despite modest reductions in DCF.
                                                                      We believe we are moving closer to an FID on the Wei,
Investment Thesis                                                     supporting a less significant discount to our base case
ROC’s asset base is capital intensive and BMG is high cost.           valuation.
DDA in 2010 of US$24/boe is high relative to peers (e.g. AWE
A$15/boe). That said, cash generation from the underlying             Risk factors
business is healthy at around US$27/bbl at the operating level.       The key macro risks are oil prices and exchange rates. Stock
Prudent reinvestment of this cash flow should, in our view, with      specific factors are oil field production levels, oil and gas
smooth underlying operations, help ROC turn the performance           reserves, opex and field capex.
corner.
                                                                      ROC Risk-Reward
Wei Progress, Slow: The company announced in August that                A$1.00

CNOOC had signed a supplemental development agreement                     0.90

(SDA) for the Wei fields - the next step before Overall                   0.80
                                                                                                                                                                    A$0.77 (+93%)
Development Plan sign-off and project sanction which is                   0.70

expected before year end. News flow on the project since the              0.60

signing of the SDA has been minimal, and we would expect an               0.50
                                                                                                                                                                       A$.53 (+33%)

                                                                                                                                              A$ 0.40
update over the coming weeks. We also note that JV partner                0.40

Petsec is struggling with financial issues amid low gas prices in         0.30
                                                                                                                                                                       A$0.26 (-35%)
the US and production shut-ins at its Main Pass field. The                0.20

company notes it has engaged advisors to renegotiate the                  0.10

terms of its existing debt as well as explore options for the             0.00

financing of its share of the Wei development. We understand                 Oct-08              Apr-09
                                                                                 Price Target (Oct-11)
                                                                                                            Oct-09           Apr-10
                                                                                                               Historical Stock Performance
                                                                                                                                              Oct-10          Apr-11
                                                                                                                                                        Current Stock Price
                                                                                                                                                                                          Oct-11
                                                                                                                                                                           WARNINGDONOTEDIT_RRS4RL~ROC.AX~



that these issues are not expected to cause a delay to project
                                                                      Source: FactSet, Morgan Stanley Research
FID, but they can’t help. Nevertheless, the Wei development is
an attractive project on our numbers. If Petsec can’t meet its        Scenario Summaries
share of project costs, we expect interest in its stake to be high.     Price Target Our price target is set with reference to our DCF (WACC
                                                                        A$0.53       11.5%)
Guidance unchanged: Production guidance for the full year               Bull Case                   Oil price of US$105/bbl and full value for Wei
                                                                        A$0.77
2010 is for 8-9kbopd (MS 8.2), and importantly unchanged                                            development.
from previous guidance in H1 2010. With the exception of                Base Case                   Oil price of US$90/bbl. No value for BMG. Wei valuation
                                                                        A$0.59
BMG, ROC’s asset base looks attractive. Development and                                             risked at 50% and mark to market of hedge book
exploration capex is skewed to H2, with c. 80% or c.US$66m of           Bear Case                   Oil price of US$70/bbl. No value for Wei development or
                                                                        A$0.26
the FY2010 budget expected to be spent in H2. The balance                                           exploration and cash discounted (50%)
sheet is healthy with net cash of US$52.7m but we expect this
to fall to c.US$32m by year end as spending increases, and
production moderates.




                                                                                                                                                                              30
                                                                                                MORGAN               STANLEY            RESEARCH

                                                                                                October 8, 2010
                                                                                                Australia Oil & Gas




Exhibit 25
ROC: Financial Summary – US$m
Profit & Loss                                        2009     2010E     2011E     2012E      Balance Sheet                          Y/eJune     2009     2010E     2011E     2012E
Oil-WTI                                US$/bbl       61.75     77.47     80.00     90.00     Assets
US$/A$                                    ¢           0.78      0.91      0.92        0.88   Cash                                                67.1     80.4      48.1     101.8
Production- liquids                  mmboe             3.6       3.0       2.9         2.5   Receivables                                         16.7     13.0      13.0      13.0
Production- gas                          PJ            0.1       0.0       0.0         0.0   Inventories & other                                  7.0       6.3       6.3       6.3
Total production                        mboe           3.7       3.0       2.9         2.5   Total current assets                                90.8     99.7      67.4     121.1
Sales Revenue                                        205.6    230.0     220.0     209.7      Receivables                                            -         -         -         -
+interest income                                       1.6       3.9       3.8         3.1   Capitalised Production & Dev                       246.0    218.7     214.1     189.7
investments&other                                     14.2         -         -           -   Capitalised exploration                             16.1     22.2      27.2      32.2
Total revenue                                        221.3    233.9     223.8     212.8      Investments                                            -         -         -         -
-OPEX                                                 64.9     63.3      61.8         37.7   other                                                1.3     85.5      51.9      35.8
-Royalties                                             6.8     13.0      18.0         25.9   Total non-current assets                           263.4    326.5     293.2     257.7
-General & other operating                            12.4       6.7       7.0         7.2   Total assets                                       354.2    426.2     360.7     378.8
-forex / inventory                                     6.4      (4.3)        -           -   Payables                                            21.5     19.6      19.6      19.6
-Provisions                                              -       0.5       1.0         1.0   provisions & tax                                     9.4     13.9      13.9      13.9
-losses from assets sold (other)                       5.6         -         -           -   other                                               15.2     19.8          -         -
-derivatives                                          37.0       9.3         -           -   Current debt                                           -     49.5          -         -
EBITDAX                                               88.2    145.5     136.0     140.9      Total current liabilities                           46.1    102.8      33.5      33.5
-Exp. expensed and Impair. Oil&Gas                    89.3     33.5      20.0         20.0   interest bearing debt                               49.3         -         -         -
-Impairment Goodwill                                     -         -         -           -   other liabilities                                   91.0     85.8      85.8     110.8
EBITDA                                                (1.1)   112.0     116.0     120.9      Total non-current liabilities                      140.3    146.1     123.8     110.8
-Depreciation & Amortisation                          91.7     76.5      77.2         63.6   Total liabilities                                  186.4    248.9     157.3     144.3
EBIT                                                 (92.8)    35.5      38.8         57.3   Shareholder funds                                  167.8    177.3     203.4     234.5
-interest expense                                     10.9       2.7       0.7           -   Valuation & ratios                                 2009     2010E     2011E     2012E
Pre-tax profit                                      (103.7)    32.8      38.0         26.1   Share price                            US$/share     0.4       0.4       0.4       0.4
Tax expense (benefit)                                 11.7     23.8      11.9         26.1   Weighted average shares                            646.2    713.2     713.2     713.2
Net Profit                                          (115.4)      9.0     26.1         31.2   Current issued shares                              713.2    713.2     713.2     713.2
Minority interest                                        -         -         -           -   Ave Diluted Capital                                646.2    727.2     727.2     713.2
+non recurring items                                     -         -         -           -   Market Cap                                         278.1    278.1     278.1     278.1
Reported profit                                     (115.4)      9.0     26.1         31.2   +net debt                                          (17.8)    (30.9)    (48.1)   (101.8)
Reported EBITDA                                       (1.1)   112.0     116.0     120.9      -less investments / other                              -         -         -        -
less interest income                                   1.6       3.9       3.8         3.1   Enterprise Value                       US$m        260.4    247.2     230.0     176.3
plus impairment of goodwill                              -         -         -           -   M'ware EBIT                            US$m        (59.9)    41.8      34.5      54.3
less forex (gains) /plus losses                          -       0.9         -         0.9   M'ware EBITDA                          US$m         31.8    118.3     111.7     117.9
less asset sales/plus loss                             2.5         -         -           -   Reported EPS                           cents       (17.9)      1.3       3.7       4.4
plus derivative loss/-gain                            37.0       9.3         -           -   Normalised EPS                         cents         0.0       1.3       3.6       4.4
Mware EBITDA                                          31.8    118.3     111.7     117.9      Modelware EPS                          cents       (19.1)      1.3       3.5       4.3
Mware EBIT                                           (59.9)    41.8      34.5         54.3   DPS                                    cents
Mware NPAT                                          (123.6)      9.4     25.6         30.4   Payout ratio                           %
ROC Normalised NPAT                                    3.7       9.8     26.1         31.2   PER                                    X            (2.0)    11.9        7.9       6.8
Cashflow                                             2009     2010E     2011E     2012E      EV / EBITDA                            X             8.2       2.1       2.1       1.5
                                                                                             Yield                                  %               -         -         -         -
Cash from operations                                 216.6    219.9     227.5     215.8      DCF Valuation                          A$/share     0.59    WACC        12%
-Operating costs                                     (76.6)    (79.2)    (87.8)    (71.9)    DCF Valuation                          US$/share    0.56
-interest paid                                        (7.4)     (2.7)     (0.7)          -   Ratio analysis
-tax                                                 (47.0)    (31.8)    (17.9)    (26.1)    Net debt / ND + E                           %      -12%     -21%      -31%       -77%
-other (hedges)                                       12.7     (25.2)    (19.8)          -   interest cover                              x       (8.5)    13.1      53.8
Gross cashflow from operations                        98.2     81.0     101.3     117.8      Dividend payout ratio                       %          -         -         -         -
-exploration                                         (11.4)    (31.4)    (25.0)    (25.0)    EBIT / total assets (ROA)                   %       (0.3)      8%       11%       15%
-development                                         (87.8)    (38.3)    (72.6)    (39.1)    Net profit / Shareholder funds (ROE)        %       (0.7)      5%       13%       13%
-acquisitions                                            -         -         -           -   Effective tax rate                          %        na      72.5      31.3      45.6
+divestments / other                                  51.5         -         -           -   Unit revenues & costs
Pre-financing cashflow                                50.5     14.8        3.6        53.7   Sales revenue / boe                    $/boe        55.9     73.2      75.8      82.9
-dividends                                               -         -         -           -   Cash cost / boe                        $/boe        24.7     26.1      30.3      28.4
+equity/other                                         74.3         -         -           -   Non cash cost / boe                    $/boe        25.1     25.2      26.6      25.2
+debt raised/(repaid)                               (120.0)        -     (35.9)          -   EBIT / boe                             $/boe       (25.4)    11.7      13.4      22.7
+-other                                               (0.0)        -         -           -   NPAT / boe                             $/boe       (31.6)      3.0       9.0     12.3
Net cashflow                                           4.8     14.8      (32.3)       53.7   EBIT / Sales                           %            (0.5)     15%       35%      30%
+exchange rate adjustments                             8.1       1.8         -           -   Reserves
Increase in cash                                      12.9     16.6      (32.3)       53.7   2P Reserves                            m boe        13.9     10.9        8.0      5.5
Cash at BOP                                           54.3     67.1      80.4      48.1      Gas / Liquids split                    %               -         -         -        -
Cash at EOP                                           67.1     80.4      48.1     101.8      EV / boe                               A$/bbl       23.9     25.0      31.3      36.4
Net debt at year end                                 (17.8)    (30.6)    (47.8)   (101.5)    EV / boe                               US$/boe      18.7     22.6      28.7      32.1


E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research




                                                                                                                                                                               31
                                                                  MORGAN                    STANLEY             RESEARCH

                                                                  October 8, 2010
                                                                  Australia Oil & Gas




New Zealand Oil & Gas – Equal-weight
                                                                  prospects are important in determining the future direction of
                                                                  the programme. However, these are high risk targets and
Key Points                                                        presently there is limited rig availability for them to be drilled.

•   There are now fewer drivers ahead for NZOG, with limited      Earnings Estimates, Valuation and Price Target
    exploration activity in 2011 following a significant and      The impact of lower oil prices on earnings has been softened
    unsuccessful programme in 2010.                               but not entirely offset by revised earnings profile for PRC,
•   NZOG extended a further NZ$25m capital line to PRC, on        following evidence of some progress with new continuous
    the back of a US$28.9m debt purchase and c.NZ$15m             miners. Our valuation is unchanged, with positive impacts of
    equity raising in Q2 2010. Pike River Coal (PRC) remains      mark-to-market effects of investments offsetting commodity
    a cash drain for NZO.                                         price revisions. Our price target is unchanged at A$1.10/share,
•   Pressure to find alternative growth options is increasing.    broadly in line with our DCF of A$1.08/sh.

Investment Thesis                                                 Risk factors
NZO’s strategic direction lacks clarity in our view. The          Kupe commenced production early 2010, and early production
company is largely inactive on the exploration front in FY2011,   performance will be important in achieving forecast earnings.
and on the back of a large and unsuccessful programme in          Pike River Coal has yet to reach stable operation and could
2010, is looking outside NZ for opportunities. We forecast cash   require additional risk capital. Production and reserves
to build strongly over the outlook period, but uncertainty        performance at Tui is critical given the importance of this asset
remains over where it will be redirected.                         to value, and the field is declining. A reserves reassessment at
                                                                  the field is currently under way.
NZOG has a 29% investment in Pike River Coal, which
continues to weigh on the stock. NZO offered a funding            NZO Risk-Reward
                                                                    A$1.60
package for the cash strapped miner to the tune of NZ$15m
equity plus US$28.9m convertible bond in Q2 2010. More was            1.40


required and NZOG provided a further NZ$25m working capital           1.20                                                                                        A$1.2 (+17%)
                                                                                                                                         A$ 1.03                  A$1.10 (+7%)
facility on September 30, 2010. Before steady state production        1.00

is reached, more will be needed and presently PRC is working                                                                                                      A$0.89 (-13%)
                                                                      0.80
on medium term loan facility with financiers. For NZO, with
                                                                      0.60
every additional investment it makes in Pike, the pressure
increases to fund the next capital shortfall to protect its           0.40


previous outlay. That said, operations at the mine are                0.20

de-risking with better progress from the new continuous miners.       0.00

We model a ramp-up in output over the coming year, but note              Oct-08              Apr-09
                                                                             Price Target (Oct-11)
                                                                                                       Oct-09           Apr-10
                                                                                                          Historical Stock Performance
                                                                                                                                         Oct-10          Apr-11
                                                                                                                                                   Current Stock Price
                                                                                                                                                                                     Oct-11
                                                                                                                                                                      WARNINGDONOTEDIT_RRS4RL~NZO.AX~




that production guidance from the company is subject to
                                                                  Source: FactSet, Morgan Stanley Research
outcomes of a review under way.
                                                                  Scenario Summaries
Looking ahead, NZO guide FY2011 production to c.1.2mmboe           Price                    Our price target is set with reference to our base case
(in line with MS expectations), with declines at Tui, more than    Target                   valuation for NZOG (WACC 11.4%).
                                                                   A$1.10
offset by full year production at Kupe. We expect production to
plateau around 1.2mmboe over the outlook period. Meanwhile,        Bull Case                 US$105/bbl normalized oil price. PRC re-rates by 30% as
capex and exploration spend is expected to fall significantly      A$1.20                    coal project comes into production
following the completion of Kupe construction and no drilling      Base Case US$90/bbl normalized oil price. Investments at current
commitments in 2011. Cash will build.                              A$1.08    market.

We see few catalysts in NZO’s underlying E&P business,             Bear Case                 US$70/bbl normalized oil price. PRC falls 30% on further
                                                                   A$0.89                    operational issues and production issues lower 2011 output
following an intensive drilling programme this year. Progress
on 200mmbls Kaupokonui and 1.3 Tcf 154mmbls Barque                                           by 30%.




                                                                                                                                                                                       32
                                                                                             MORGAN            STANLEY           RESEARCH

                                                                                             October 8, 2010
                                                                                             Australia Oil & Gas




Exhibit 26
NZO: Financial Summary
Profit & Loss                                  2010     2011E     2012E      2013E     Balance Sheet                          Y/eJune       2010      2011E    2012E    2013E
All prices in NZ$                              0.716      0.726     0.709     0.698    Cash                                                  142.4     175.8    246.0    277.4
Realised oil price- NZ$/bbl       NZ$/bbl     112.80     106.49    118.33    128.72    Receivables                                            20.8      20.8     20.8     20.8
                                                                                       Inventories & other                                     2.0       2.0      2.0      2.0
Production- liquids               mboe           0.8        0.7       0.7        0.6   Total current assets                                  165.2     198.6    268.7    300.1
Production- gas                     PJ           1.4        3.0       3.0        3.0   Capitalised production & Dev                          258.0     243.6    226.3    210.4
Total production                   mboe          1.0        1.2       1.2        1.1   Capitalised exploration                                 6.6       9.6     25.6     41.6
                                                                                       Investments                                           117.0     117.0     77.1     77.1
Operating Revenue                              100.1       95.1      97.7      98.7    other                                                  19.9      18.7     34.8     49.5
+interest & Div income                           2.3       12.7      12.8      15.0    Total assets                                          566.7     587.6    632.6    678.7
+sale of assets / deriv. gains                   0.0        0.0       0.0       0.0    Payables                                               20.8      20.8     20.8     20.8
Total revenue                                  102.4      107.8     110.4     113.7    provisions & tax                                        0.0       1.2      2.4      3.6
-OPEX                                           15.2       14.9      14.2      13.2    other                                                   0.0       0.0      0.0      0.0
-other royalties                                 0.0        0.0       0.0       0.0    Current debt                                            3.2       3.2      3.2      3.2
-Admin & other                                  12.9       15.0      15.9      16.8    total current liabilities                              24.0      25.2     26.4     27.6
-forex / other                                   8.1        6.0       6.0       6.0    interest bearing debt                                  59.6      59.6     59.6     59.6
-loss on assets                                  0.0        0.0       0.0       0.0    other liabilities                                      36.3      36.3     36.3     36.3
EBITDAX                                         66.1       71.8      74.3      77.7    Total liabilities                                     119.9     121.1    122.3    123.5
-Exploration expensed                           30.7        4.0       4.0       4.0    Shareholder funds                                       447       466      510      555
EBITDA                                          35.4       67.8      70.3      73.7    Valuation & ratios
-Depreciation & Amortisation                     15.7      20.7      20.3      20.0    Share price                                            1.33      1.33     1.33     1.33
EBIT                                             19.8      47.1      50.1      53.7    Weighted average shares
-Finance costs                                    3.2       0.6       0.6       0.6    Current issued shares                                394.4      394.4    394.4    394.4
Pre-tax operating profit                         16.6      46.5      49.5      53.1    Diluted capital                                      392.1      395.6    400.0    404.5
-tax expense                                      0.9      14.0      13.9      14.9    Market Cap                                              525       525      525      525
-government royalties                             7.5       3.1       4.2       9.0    +net debt                                             -79.6    -113.0   -183.2   -214.5
Net operating profit                              8.2      29.5      31.4      29.2    -less investments / other                           -117.0     -117.0    -77.1    -77.1
Minority interest                               -11.5       8.0      26.3      29.7    Enterprise Value                         NZ$m           328       295      264      233
+non recurring items                              0.0       0.0       0.0       0.0    M'ware EBIT                                            25.6      40.5     43.3     44.7
Reported profit                                  -3.3      37.5      57.7      58.9    M'ware EBITDA                                          41.3      61.1     63.6     64.6
Reported EBITDA                                  35.4      67.8      70.3      73.7    Reported EPS                                            -0.8      9.5     14.4     14.6
less interest income                              2.3      12.7      12.8      15.0    Modelware EPS                          NZ cents         -0.8      9.5     14.4     14.6
less forex gains                                  8.1       6.0       6.0       6.0    DPS                                     cents              5        5        5        5
less asset sales                                  0.0       0.0       0.0       0.0    Payout ratio                              %            -598        53       35       34
Mware EBITDA                                     41.3      61.1      63.6      64.6    PER                                       X         -159.1       14.0      9.2      9.1
Mware EBIT                                       25.6      40.5      43.3      44.7    EV / EBITDA                               X              7.9      4.8      4.2      3.6
Mware NPAT                                       -3.3      37.5      57.7      58.9    Yield                                     %           3.8%      3.8%     3.8%     3.8%
                                                                                       DCF Valuation                                     A$/share       1.08

Cashflow                                       2010     2011E     2012E      2013E     Bear/ bull /Px target                  A$/share       0.89      1.20     1.10

Cash from operations                            91.4      107.8     110.4     113.7    Ratio analysis
-Operating costs                                45.4       28.8      28.9       28.8   Net debt / ND + E                         %           -22%      -32%     -56%     -63%
-interest paid                                   0.9        0.6       0.6        0.6   interest cover                            x             6.2       NA       NA       NA
-tax                                             1.6       14.0      13.9       14.9   Dividend payout ratio                     %          -598%       53%      35%      34%
Gross cashflow from operations                  47.4       64.4      67.1       69.4   EBIT / total assets (ROA)                 %             3%        8%       8%       8%
-exploration                                    28.6        7.0      20.0       20.0   Net profit / Shareholder funds (ROE)      %            -1%        8%      11%      11%
-development                                    33.6        6.2       3.0        4.0   Effective tax rate                        %             5.6      30.0     28.0     28.0
-acquisitions                                   14.4        0.0       0.0        0.0   Unit revenues & costs
+divestments / other                           -42.9        0.0      39.9        0.0   Sales revenue / boe                    $/boe           99.1     87.5     89.4     99.9
Pre-financing cashflow                         -72.1       51.2      84.0       45.4   Cash cost / boe                        $/boe           14.7     12.1     11.5     11.6
-dividends (net DRP)                            13.7       13.8      13.8       14.0   Non cash cost / oe                     $/boe           15.2     16.8     16.4     17.5
+equity/other                                   -1.0       -4.0       0.0        0.0   EBIT / boe                             $/boe           19.1     38.3     40.5     47.2
+debt raised/(repaid)                           63.0        0.0       0.0        0.0   NPAT / boe                             $/boe            -3.2    30.4     46.7     51.7
Net cashflow                                   -23.6       33.4      70.2       31.4   EBIT / Sales                           %               19%      44%      45%      47%
+exchange rate adjustments                      -8.7        0.0       0.0        0.0   Reserves
Increase in cash                               -32.3       33.4      70.2       31.4   2P Reserves                            m boe             13        12       12       11
Cash at BOP                                    174.8      142.4     175.8      246.0   Gas / Liquids split                    %                 47        47       47       47
Cash at EOP                                    142.4      175.8     246.0      277.4   EV / 2P boe                            NZ$/bbl         25.1      23.7     22.3     20.6
Net debt at year end                           -79.6     -113.0    -183.2     -214.5   EV / 2P boe                            US$/boe         18.0      17.2     15.8     14.4

E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research




                                                                                                                                                                         33
                                                                  MORGAN                   STANLEY                 RESEARCH

                                                                  October 8, 2010
                                                                  Australia Oil & Gas




Eastern Star Gas – Overweight
                                                                   immaterial. Nevertheless, our changes principally reflect
                                                                   adjustments to the roll out of power generation at the Narrabri,
Key Points                                                         and timing of gas sales into the Central Ranges pipeline.
•   Strategically significant gas resource in NSW
    Progressing HoA’s to firm gas sales agreements is              Valuation and price target
    important to support valuations, as are finding large gas      Our valuation is based on sum-of-parts DCF where we have
    volume opportunities. LNG may provide it.                      confidence on end markets for gas, and trading multiples for
•   JV partner and 20% ESG holder Santos has been                  reserves awaiting further definition on commercial outcomes.
    passive with regard to its NSW CSG investment. We              We apply a reserve multiple of A$0.60/GJ which we believe is
    don’t expect it to remain passive indefinitely, but for now    reasonable within the context of recent CSG transactions and
    its priority is GLNG in our view.                              net backs achieveable to ESG within the context of a possible
                                                                   NLNG development on our numbers (albeit still subject to
Investment thesis                                                  considerable uncertainty around key elements). Our valuation
Presently ESG has the most advanced CSG project in NSW,            has fallen from A$1.2 to A$1.13/sh, on increased share count
the Narrabri CSG development in PEL 238. ESG is the                on recent equity raising and some adjustments to field models.
operator with a 65% interest in the permit. The remaining          Our price target is set with reference to our valuation and is
interest is held by Santos. As of December 2009, ESG’s             unchanged at A$1.10/sh.
booked 2P reserves from this acreage were 988PJ with
1818PJ in 3P net, and significant contingent resource              Risk factors
potential (4040PJ 3C net). Additional reserve bookings are         Key risk factors include, domestic gas prices, LNG markets
expected by year end.                                              and pricing and gov. approvals with developments awaiting
                                                                   3A signoff. Technical risks also exist, with optimal well
Eastern Star Gas is still principally an explorer, so earnings     developments still being fine tuned. The ability to scale the
are immaterial at this stage. The main focus is on moving          development, implicit in our valuation may impose additional
from gas explorer to commercialiser. On this front, progress       risks.
has been made over the last year with MoU’s now in place for
up to 1700PJ’s of gas, and plans for a small scale Newcastle       Eastern Star Gas Risk Reward
                                                                     A$1.60
LNG (NLNG) development with Toyo and Hitachi. Ongoing                                                                                                             A$1.52 (+75%)

exploration and development and NLNG feasibility work for              1.40


the year ahead is funded on the back of a recent A$100m                1.20
                                                                                                                                                                  A$1.10 (+26%)
equity raising (at A$0.82c). While NLNG offers the potential           1.00
                                                                                                                                            A$ 0.87
for larger gas volume opportunities, we believe domestic               0.80
                                                                                                                                                                     A$0.74 (-15%)
opportunities or supply of gas to more advanced east coast
                                                                       0.60
LNG developments are the more likely drivers of upside for
                                                                       0.40
ESG.
                                                                       0.20


The elephant in the room is major shareholder in ESG (20%)             0.00
                                                                          Oct-08              Apr-09      Oct-09           Apr-10           Oct-10          Apr-11                      Oct-11
and JV partner Santos, who has been largely silent with                       Price Target (Oct-11)          Historical Stock Performance             Current Stock PriceWARNINGDONOTEDIT_RRS4RL~ESG.AX~




regards to its investment in the company and the PEL 238. It       Scenario Summaries
laid down real money in 2009 of c. A$480m to acquire its           Price Target A$1.10                 Sum-of-parts and resource based market multiples
interest, and as MoU’s move to binding offtake commitments,
                                                                    Bull case                          EV/3P multiple of A$0.60/GJ, but increased reserves to meet
we expect some engagement by Santos if it wishes to                 A$1.52
maintain maximum optionality for its NSW Gas interests.                                                existing MoU’s (c. 1700PJ’s net) plus 65% share of 1mtpa

Engagement may be a 2011 event, as presently STO is                                                    NLNG volumes (assuming 60PJ/a gross for 20y).
                                                                    Base case                          EV/3P multiple of A$0.60/GJ
focused on delivering an FID decision on its GLNG project.          A$1.13
Earnings estimate changes                                           Bear case                          EV/3P transaction multiple of A$0.36/GJ, at low end of
                                                                    A$0.74
Earnings are largely insensitive to exchange rate and oil price                                        transaction multiples
movements, and at this stage in the company’s lifecycle, are



                                                                                                                                                                                          34
                                                                                                MORGAN            STANLEY         RESEARCH

                                                                                                October 8, 2010
                                                                                                Australia Oil & Gas




Exhibit 27
Eastern Star Gas
Profit & Loss                             2010A      2011E     2012E     2013E     Balance Sheet                          Y/eJun    2010A     2011E      2012E     2013E
Price assumptions                                                                  Cash                                              31.6       48.3       48.1      69.5
US$/A$                            $          0.9       0.9       0.9       0.9     Receivables                                        3.8        0.5        1.4       1.6
Oil-WTI                         US$/bbl     75.3      78.3      85.0      90.0     Inventories & other                                1.3        1.3        1.3       1.3
Production- gas                   PJ         0.2       0.7       5.6       6.5     Total current assets                   A$m        36.7       50.1       50.9      72.4
Total production                 PJe         0.2       0.7       5.6       6.5     Capitalised production & Dev                       9.0       56.6       73.8      71.8
Sales Revenue                                1.5       3.4      24.2      29.1     Capitalised exploration                          122.6      152.1      181.6     211.1
+interest income                             1.8       3.8       2.2       2.6     Equity in associated company                       -          -          -         -
+sale of assets/investments                  -         0.3       -         -       Deferred tax asset                                 -          -          -         -
Total revenue                                3.3       7.6      26.4      31.7     Intangibles                                        9.6        -          -         -
-OPEX                                        4.4       4.8       7.1       8.0     other                                              2.6       14.8       13.9      13.8
-General & other                             4.4       4.2       4.3       4.4     Total assets                           A$m       180.6      273.6      320.2     369.1
-Provisions                                  -         -         -         -       Payables                                           4.3        4.3        4.3       4.3
-cost of assets sold                         -         -         -         -       provisions                                         0.5        0.5        0.5       0.5
EBITDAX                                     (5.4)     (1.4)     14.1      18.7     other                                              -          -          -         -
-Exploration expensed                        0.2       0.5       0.5       0.5     Current debt                                       -          -          -         -
EBITDA                                      (5.6)     (1.9)     13.6      18.2     Total current liabilities              A$m         4.8        4.8        4.8       4.8
-Depreciation & Amortisation                 0.9       0.7       4.2       5.0     Interest bearing debt                              -          -          -         -
EBIT                                         (6.5)     (2.6)      9.4     13.2     other liabilities                                   2.3        1.9        1.9       1.9
-interest expensed                            -         -        -         -       Total liabilities                                  7.1        6.7        6.7       6.7
Pre-tax profit                               (6.5)     (2.6)     9.4      12.7     Shareholder funds                      A$m       173.5      266.9      313.5     362.4
Tax expense                                  -         -          2.8       3.8
RRT                                           -         -        -         -       Valuation & ratios                               2010A     2011E      2012E     2013E
Net profit                                   (6.5)     (2.6)     6.6       8.9     Share price                                         0.9        0.9        0.9       0.9
Minority interest                             -         -        -         -       Weighted average shares                           855.3      964.8    1,049.9   1,101.0
+non recurring items                          -         -        -         -       Current issued shares                           1,023.8    1,023.8    1,023.8   1,023.8
Reported profit                              (6.5)     (2.6)     6.6       8.9     Diluted capital                                   855.3      964.8    1,049.9   1,101.0
Reported EBITDA                              (5.6)     (1.9)    13.6      18.2     Market Cap                                        890.7      890.7      890.7     890.7
less interest income                          1.8       3.8      2.2       2.6
less asset sales                              -         0.3      -         -       -less investments / other                          -          -          -         -
less RRT tax                                 -         -         -         -       Enterprise Value                       A$m       859.1      842.4      842.5     890.7
Mware EBITDA                                 (7.5)     (6.0)    11.4      15.6
Mware EBIT                                   (8.4)     (6.7)     7.2      10.6     M'ware EBIT                                        (8.4)      (6.7)      7.2      10.6
Mware NPAT                                   (6.5)     (2.9)     6.6       8.9     M'ware EBITDA                                      (7.5)      (6.0)     11.4      15.6
Cashflow                                  2010A      2011E     2012E     2013E     Reported EPS                                       (0.8)      (0.3)       0.6       0.8
Cash from operations                          2.5       7.3     26.4      31.7     Modelware EPS                          cents       (0.8)      (0.3)       0.6       0.8
Operating costs                              (8.7)     (9.0)    (12.4)    (13.5)   DPS                                    cents       -          -          -         -
Interest paid                                 -         -         -         -      Payout ratio                           %           -          -          -         -
Tax                                           -         -        (2.8)     (3.8)   PER                                    X            na         na         na        na
Other                                         0.7      (0.0)     (0.9)     (1.1)   EV / EBITDA                            X            na         na         na        na
Cashflow from operations         A$m         (6.2)     (1.7)     11.3      14.3    EV / EBITDAX                           X            na         na         na        na
Exploration                                 (43.9)    (30.0)    (30.0)    (30.0)   Yield                                  %           -          -          -
Development                                   -       (48.2)    (21.4)     (3.0)   DCF Valuation                          A$/sh.        1.1
Acquisitions                                 (1.3)      0.3       -         -
Divestments / other                          (1.7)      0.3       -         -      Ratio analysis
Pre-financing cashflow           A$m        (53.2)    (79.3)    (40.1)    (18.6)   Net debt / ND + E                                    na         na        na        na
Dividends                                     -         -         -         -      interest cover                         x             na         na        na        na
Equity/other                                 25.2      96.0      40.0      40.0    Dividend payout ratio                  %            -          -         -         -
Debt raised/repaid                            -         -         -         -      EBIT / total assets (ROA)              %           (0.0)      (0.0)      0.0       0.0
Other                                         -         -         -         -      Net profit / Shareholder funds (ROE)   %           (0.0)      (0.0)      0.0       0.0
Net cash                         A$m        (28.0)     16.7      (0.1)     21.4    Effective tax rate                     %            -
+exchange rate adjustments                    -         -         -         -      Unit revenues & costs
Net movement in cash                        (28.0)     16.7      (0.1)     21.4    Sales revenue / boe                                 na         na       27.3      28.4
Cash at BOP                                  59.6      31.6      48.3      48.1    Cash cost / boe                                     na         na       12.8      12.1
Cash at EOP                                  31.6      48.3      48.1      69.5    Non cash cost / boe                                 na         na        4.8       4.9
Net debt at year end                        (31.6)    (48.3)    (48.1)    (69.5)   EBIT / boe                                          na         na        9.7      11.4
                                                                                   NPAT / boe                                          na         na         6.8       8.0
                                                                                   EBIT / Sales                           %            na         na         0.4       0.5
Carbon Cost                                                                        Reserves
Price (A$/tCO2e)                                          0          0         0   2P Reserves                            PJ          988         na         na
CO2e (mt)                                              0.02      0.04      0.06    3P Reserves                            PJ        1,818         na         na
CO2e cost in Opex (A$m)                                 0.0       0.0       0.0    EV / 2P                                A$/GJ       0.9
Opex as %'age of Revenue                              0.0%      0.0%      0.0%     EV / 3P                                A$/GJ       0.5

E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research




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                         Coverage Universe    Investment Banking Clients (IBC)
                                        % of                   % of % of Rating
Stock Rating Category       Count       Total     Count Total IBC Category
Overweight/Buy               1115        42%         394        43%         35%
Equal-weight/Hold            1146        43%         413        45%         36%
Not-Rated/Hold                 14         1%            4        0%         29%
Underweight/Sell              381        14%           99       11%         26%
Total                        2,656                   910




                                                                                                                                                    36
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                                                                                              Australia Oil & Gas




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                                                                                             October 8, 2010
                                                                                             Australia Oil & Gas




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                                                                                                                                                                            38
                                                                                      MORGAN    STANLEY            RESEARCH




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Industry Coverage:Australia Oil & Gas

Company (Ticker)                              Rating (as of) Price* (10/07/2010)


Stuart Baker
Caltex Australia Ltd (CTX.AX)                E (07/15/2009)                 A$11.57
Eastern Star Gas (ESG.AX)                    O (02/04/2009)                   A$.88
Karoon Gas Australia (KAR.AX)                O (09/28/2009)                  A$8.78
Oil Search Ltd. (OSH.AX)                     O (08/22/2006)                  A$6.28
Origin Energy Ltd. (ORG.AX)                  U (05/09/2010)                  A$16.2
Santos (STO.AX)                              O (07/22/2010)                 A$12.71
Woodside Petroleum (WPL.AX)                  O (05/06/2009)                 A$44.64
Philip J Bare
AWE Ltd (AWE.AX)                             E (04/14/2010)                  A$1.52
Beach Energy Ltd (BPT.AX)                    E (08/30/2010)                   A$.68
New Zealand Oil & Gas (NZO.AX)               E (03/10/2009)                  A$1.02
ROC Oil Company (ROC.AX)                     O (07/14/2009)                    A$.4

Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.




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