Cracking The Energy Cabal - CTEC

July 23, 2008

Capital Grille - Miami

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Event Summary

Keith Murphy’s Comments

What are Hedge Funds doing in Energy? Why Energy?

Ted Izatt’s Comments

What are the risks to the Energy Sector?

Robert H. Dyas’s Comments

Peak Oil? Is the run-up in oil prices is just another commodity bubble?

Keith Murphy

Petro-Diamond Risk Management Ltd (‘Petro Diamond’)

Petro-Diamond Risk Management Ltd (‘Petro Diamond’) is a London-based energy derivatives specialist.  As experts in energy products, we can deal in any tradable energy commodity. This includes any number of classifications of crude oil, light products, middle distillates, heavy fuel oil, coal and natural gas, or indeed combinations of them. Whether dealing in Kerosene for a customer in Singapore, Naphtha for a customer in Japan, or Brent Crude for a European customer, Petro Diamond has a unique understanding of the energy market.

Petro-Diamond Risk Management Ltd is a wholly owned subsidiary of Mitsubishi Corporation, which has been successfully expanding its commodity derivatives business for years. Because of this, we believe

we enjoy the best of both worlds. We have the support of a large multinational company but we have retained the warmth and approach of a specialist operation. Our dealers and customers get to know

each other well, and we like to think that we work as an extension of our customers’ business, helping them develop the hedging strategies they need to run their businesses successfully.

Our customers range from producers, refiners and storage facilities to consumers and financial institutions.  All have very different needs and require a different approach to managing the risks of trading in the

Energy market. That’s why we have a flexible approach and aren’t afraid to create bespoke solutions to unique situations. From straightforward hedging to more complex exotics and hybrid, structured products, our team has a wealth of experience in coming up with the right solution.  As well as structuring deals for our customers, we also supply market knowledge and information through our market reports, giving our customers access to our first-hand experience.  We are also proud of the service we provide behind the scenes. We offer credit lines (subject to approval) and our dedicated back office team is available to deal with any customer questions.  Petro Diamond is unlike any other energy trading company. Our strength lies in the relationships we have forged with our customers. We give every customer individual attention to find the solutions that suit them best. We believe that’s what makes us a trusted partner; and the best relationships are always founded on trust.

Keith Murphy’s Comments

What are Hedge Funds doing in Energy? Why Energy?

Macro Funds vs. Relative Value Funds

Macro Economic Proxy – Trading the $ via Oil

Attracted to the Liquidity of the Markets and the Alpha Opportunities

Fundamental Plays & Technical Plays as one would expect

So many alpha opportunities because so many crevices, nooks, and crannies…

Correlation / Differential plays, Seasonal / Calendar spreads and plays, Volatility plays, Nat Gas geographical basis plays, etc

How has the business changed / evolved recently?

Fundamental Change in Market

Relative Value Players, HF is like an Investment Bank trading Desk

Example – Nat Gas basis experts…

Day Traders

Now applying Black Box technology strategies/programs from other assets classes

ISDA is OUT and Clearport is IN (Triland Clearing Account) (No Credit/Doc Hassles)

Shared a few Trade Hypothetical’s / Alpha Opportunities from PDRM’s Traders

First is most controversial / my personal opinion only…

Based on my experience selling Commodities Indices to Institutional Investors…

The “Bubble” - POP - ???

($ 50 off the Barrel ???)

Institutional Clients (Pension Funds/Endowments) may now have a changing view due to politics/ public opinion pressures. Senator Lieberman proposals, CNBC sound bites, etc

Now they will be more wary …. (Bearish)

Those “on the fence” for the asset class – may get off the fence…

Also – Example of Regulatory pressures/changes as seen in Financials / Equities ???

Does Equities/Financials short selling issue = Institutional/Speculative long squeeze in Oil?

(IE - Political pressure/Regulators increase margin requirements/costs)

“Counter Hurricane Play” or Seasonal/Volatility Arbitrage

Differential Play/Correlation Analysis: LA Jet Fuel Diff over NYMEX Heat

Spread Trade: WTI VRS BRENT

Keith Murphy

Petro-Diamond Risk Management Ltd.

Direct 212 605 1394

kmurphy@trilandusa.com

Ted Izatt’s Comments

Presentation on Energy to Miami Hedge Fund Community

July 23^rd, 2008

1. The longer term prospects for the sector are very positive despite expected near term downside risk due to the current negative impact of high prices on the economy
2. Demand trends will remain positive over the long term
   1. High population growth in many regions of the world (India/China/Latin America/Africa)
   2. The desire of people to have a better standard of living

1. Supported by global communications which allows people to realize the standard of living that is ultimately attainable

1. Supply concerns continue
   1. Easy to find oil has been found
   2. Natural decline of oil/gas fields globally has to be overcome each year
   3. Political problems in many regions slow down new development

1. U.S. does not allow drilling in many areas

1. Venezuela—mismanagement

1. Nigeria—political unrest

1. Russia—not too friendly to foreign investment

1. Iraq—security issues

1. Near term, prices likely to moderate due to impact of high prices on demand and slowing U.S. economy specifically and global economy generally
2. Yet, oil industry will still do well from an earnings/cash flow standpoint even if price decline to well below $100/barrel
3. Recommendations’
   1. Companies that have good credit will generally do well from both an equity and fixed income standpoint
   2. National Oil Companies will have solid growth opportunities
   3. Master Limited Partnerships are not widely followed and are fairly safe from a credit standpoint and have solid balance sheets
   4. Refiners—are down now, but will have a good recovery at some point

• Risks to Energy sector
  1. Deep global recession (China would need to decline to less than 5% growth)
  2. Rotation out of Energy into Financials and/or other sectors
  3. Development of Alternative energy
  4. Event risk (i.e. M&A) could be negative or positive
  5. Hurricanes in the Gulf (could hurt some companies that have high exposures, but would help others as oil/gas prices increase)

Ted Izatt

Contact Information

832-656-8203

tedizatt@gmail.com

Robert H. Dyas’s Comments

• Few people outside of the oil industry are familiar with the concept of Peak Oil. Most assume that the recent run-up in oil prices is just another commodity bubble.
• Peak Oil is NOT about the world running out of oil, but rather the world running out of the ability to increase oil production rates.
• Increasing production rates matters immensely as demand is growing rapidly throughout the developing world. China alone is putting 25,000 new cars per day on its roads. Essentially 100% of a global transport (ships, planes, trains, trucks, cars) depends on oil. Global intrinsic demand growth (how much oil the world would like to consume if oil prices were flat at $100/bbl) is about 2 to 2.5 mm b/d annually. Over the next 5 years that is a minimum of 10 mm b/d of intrinsic demand growth.
• Global oil production has plateaued since May 2005 at about 85mm b/d. This is in spite of every drill rig and able-bodied person working overtime in the industry for the last 3 years. This flat supply coupled with increasing demand is what has driven oil prices up over the last 3 years.
• The reason oil production has peaked is due to depletion rates. The global average annual oil field depletion rate is currently estimated at between 4.5% and 10% annually. This means the global oil industry has to find, build-out and produce between 4 and 8 mm b/d of new capacity every 12 months just to keep production at its current rates. Even the low end of that range, 4 mm b/d, is like finding, building-out and producing a new Iran every 12 months.
• Due to advances in oil field technology, global depletion rates are increasing. Modern technology (called EOR in the trade, or ‘enhanced oil recovery’) allows a company to get more oil out sooner, but increases the decline rate once the field peaks. A normal oil field production profile looks like a bell shaped curve. With EOR, the bell shaped curve becomes taller and more narrow. Since no major oil fields have been discovered in over 30 years of looking, more and more fields have been put on EOR. This increasing percentage of fields on EOR is responsible for essentially doubling the global average decline rate since 2004. The rate of depletion is accelerating according to all credible sources. Grossly insufficient new finds coupled with increasing depletion rates are ultimately the reason why global production has plateaued for 3 years and eventually will enter irreversible decline.
• The most optimistic supply scenarios from credible sources show that global production will plateau for another zero to 7 years, then enter terminal decline with supplies decreasing at anywhere from a 2% to 5% annual rate.
• Due to the scale of the problem, there is essentially nothing that can be done over the next 3 or so years (other than using less). The industry is out of rigs and out of people.
• Oil prices cannot be predicted with accuracy as we are in uncharted demand elasticity territory. However, what is known with virtual certainty is that a) production can’t grow and b) intrinsic demand is increasing at a constant rate; that means the gap between available supply and intrinsic demand gets WIDER each year. This means that you can say, with extremely high confidence,  that the average annual price of crude will be higher in 2008 than 2007, and that the average price will be higher in 2009 than 2008, 2010 will be higher than 2009, etc.
• How high will it go? Impossible to say. But consider this: Western Europe, the UK, Australia, and New Zealand already pay over $400 per barrel when you factor in taxes. Traffic jams are as bad as ever in the UK. Do Americans like their cars any less?
• Counter intuitively, many “oil companies” are actually bad investments. This is due to most companies falling short on one or more key drivers for success (business mix, depletion rates, or production sharing contract terms). The available pool of investments that score favorably on these drivers is limited.

For additional information or questions, please contact:

Robert H. Dyas

Portfolio Manager

RHD Asset Management LLC

Advisor to the Peak Oil Opportunity Fund

(561) 352-3235 Direct

rdyas@comcast.net