TPHMacondoBlowoutConferenceCall DanPickering,DavePursell DavidHeikkinen,TPHResearchTeam

May12,2010

DANPICKERING: Goodmorning.Thanksforjoiningus.Firstoff,letmedirectyoutotheTPH websitetoaccesssomeslideswewillbeusingforthiscalltoday.Youcanfind thematthefollowingaddress: www.tudorpickering.com/pdfs/TPH.Well.Slides.pdfIfthatdoesntworkforyou, simplyemailSarahFarnieatsfarnie@tudorpickering.comorcallherat713333 2967andshewillgetyouacopy. Ourgoalfortodayistodiscusswhatwethinkarethemostlikelyscenariosthat causedtheMacondowellblowoutintheGulfofMexicoonApril20th.Werealize therehavebeennumeroussellsidecallsthathavediscussedtheincident.Until yesterday,wehaventfeltthattherewasenoughinformationtoproperlyassess whatMIGHThavehappenedontherig.But,wegotsignificantlymore informationviathepreparedSenatetestimonybyBP,Transoceanand Halliburton.Togetherwiththeinformationwevepiecedtogetherfromour discussionswithindustrycontacts,wenowthinkthatwecanmakeamuchmore educatedguessabouttheevents.TimeslikethesearewhenIamverythankfulto havearesearchteamstaffedwithfolksthathavetechnicalandengineering backgroundsandindustryexperience.ItmakespiecingtogethertheMacondo jigsawpuzzlemucheasierandpleasenoteIsaideasier..noteasy. Obviously,thestockmarketistryingdesperatelytounderstandtheaccidentin ordertoassessliabilitythoseliablewillhavebigbillstopay..whilethosenot liablewilljusthaveareputationalblackeye(alongwiththeentireindustry).
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Pleasenote,duringthiscall..wearenottryingtoaddresswhenthespillwillstop. Wearenotspecificallytryingtoassessliability.Inherently,ourviewisthat,inthe absenceofnegligence,theultimateliabilityandresponsibilityisthatoftheE&P companyinthiscaseBP,Anadarko,andMitsui.Thatisthewaythebusiness worksthewayithasworkedfordecades..onshore,offshore,deepwater,etc.A servicecompany,whetherrigcontractor,cementprovider,BOPprovider,etc..is indemnifiedbythecustomerforwhathappensasthewellisdrilling.Thereis ampledocumentationofthistypeofindemnificationinRIGsrecent10Q disclosureweencourageyoutoreadit..itwillnotbethefocusofourcalltoday. Norhavewe,orwillwe,trytoassesswhethertherewasnegligencebyanyone associatedwiththisblowout.WesimplyCANTknow.Ourbusinessismaking educatedguesses.Mypersonalview(DanPickering)isthatitisunlikelythat partieswillbeabletoprovenegligence.Doesntmeanitdidntoccur,butproving itwillbesomethingforlawyersandlawsuits.Myownpersonalviewisalsothat thereisaHIGHlikelihoodthattheexaminationthatiscomingwillhighlightthat MISTAKESweremade.Itisunequivocalthattherewereequipmentfailures.A blowoutcantoccurwithoutthefailureofsafetysystems..liketheBOP. However,itisimportanttorememberthatwellproblems,accidents,errorand failuresdonotnecessarilymeanliabilityintheoilpatch.Wellproblems, accidents,errorandfailuresdonotnecessarilymeannegligence.Something wenthorriblywrong.Sadlywrong.Themarkethastakenabout$60Boutofthe marketcapsofBP,APC,RIG,HALandCAM.Thatfeelsexcessivetous.Weare buyersonthemarginofthesestocks..whilewerecognizethatsentimentis horribleandtheunknownsarebiggerthantheknowns. Also,youwillnotethatDavePursellandIarechoosingourwordscarefullyhere. Ifitsoundslikewearereadingascriptthatsbecauseweare.Everythingabout thissituationisintenseandwewanttotryandbeasclearaspossibleconveying whatweTHINKcouldhavehappenedandhowthatcouldhaveoccurred.Frankly, wehopethatthisdiscussionwillencouragemoreanswersfromthecompanies involved..astherearestillmorequestionsthananswers.
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 Withthatpreamble,letmeturnitovertoDavePursellandremindyouofthe slideswearegoingtouse:www.tudorpickering.com/pdfs/TPH.Well.Slides.pdf DavePursell,DavidHeikkinenandmyselfandourresearchteamwillbeavailable toanswerquestionsattheconclusionofourpreparedremarksweknowthat themarketwillopenduringthisdiscussionandwelllosesomeofyou..butlets forgeahead.

DAVIDPURSELL: WearebasingouranalysisbasedonwhatweknowfromtheSenatetestimony yesterday,mediareports,andtalkingtoindustryaboutthisforthelasttwo weeksandtherearealotofpertinentdetailsyettobediscussedorconfirmed Wearenottryingtoassessblameinthisanalysis.Rather,weareattemptingto bracketthepotentialcausestostarttounderstandwhathappenedinthedays andhoursleadinguptotheApril20thexplosion. Wethinkthereare3possiblescenariosforwhathappened.Inallthree scenarios,multipleproblemshadtooccur.Wethinktherehadtobea combinationofbadluck,physicalproblemswiththewellandhumanand/or proceduralerror.Somethingwentwrongforhydrocarbonstoenterthewell, somethingwentwrongwhentheywerentdetectedquicklyandsomethingwent wrongwhentheywerentcontained. Weknowtherehadtohavebeenadownholeproblembecausegasand, eventually,oilgotintothewellbore(thiswaseitherafailedcementjobor collapsedcasing).Therearemethodsandproceduresinthedrillingindustryto identifywhenawellistakingakickwhengashasgottenintothewelland pressureisbuildingup.Thesesomehowhadtohavebeenmissed.Finally,the BOPwasunabletocontaintheblowoutsoitdidnotfunctionasintended.
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Welladdresseachofthethreescenarioswethinkwerepossible,butfirstlets discusswhatweknowabouttheconfigurationofthewell.Thisisbasedonthe schematicsfromHalliburtonandTransoceanssenatetestimonyyesterday,as wellasinformationwevegatheredfromconversationswithdeepwaterindustry folksfromE&Pandservicecompanies.Wehavereceivednoinformationfrom anypubliccompanywhichwasmaterialornonpublic. Now,letsstartpiecingtogethertheeventsrefertoSchematic#1 Becausethewellwasdeep,therearemultiplestringsofcasing.Eachoneis cementedinplaceanddrillingcontinuesinwithasmallerdrillbit. Drilledwellto18,360ftwhereitencounteredalostcirculationzone(whichis essentiallyaformationthatstealsdrillingmud,makingithardandunsafeto continuedrillinglower).Drilledwith14.3ppgdrillingmudwhichputsthe formationpressureat~13,000psi. Controlledlostcirculationzone,weareassumingwithstandardlostcirculation materials. Spentmorethanoneweektestingpotentialhydrocarbonbearingzone(s)with openholelogs,fluidsamples,androtarysidewallcores. TheBOPsweretestedonApril10thandagainonApril17thwehavenotseenthe resultsofthosetests..althoughTransoceantestimonyindicatedtheBOPswere functionalafterthetests. Rana97/8x7taperedcasingstringtojustover18,300ft.Thisisimportant becausewenowknowthattherewasacontinuouslongstringfromthetopof thewelltotheproductionzone.Wewillcallthistheproductioncasinggoing forward. Becausetherewasalostcirculationzonenearthebottomofthecasing,the cementmixturewasreportedlyNitrogenbasedtoincreasechancethatthe cementwouldfillthecasingannulus(andwasnotlosttothethiefzone).The
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decisionandauthoritytousethistypeofmudwouldhavebeenmadebyBP, probablyinconsultationwithHalliburton. Halliburtonstestimonyindicatesonly51bblsofcementslurrywaspumpedso onlyasmallfractionofthe7productioncasingwouldhavebeencoveredwith cementevenifthecementjobwaspumpedasdesignedandtherewasnoloss tothethiefzone.Note:thisprovidesapproximately1,000ftofcementcoverage fromthebottomofthewellboreat18,360up1000orsotoaround17,360The remainderoftheproductioncasingannulusisleftopenwithnocement(per industrypractice).Butnotethatthisdoescreateanopenbacksideofthe wellwhichyoucanseeinbothourSchematic1andinbothHALandRIGs schematics.Thecementdidnotmoveuphighenoughtoconnectorcement againstthepriorstringof97/8casingat17,168. Aftercementingtheproductioncasingorlongstring,thecasingsealassembly wassetinthecasinghanger/wellhead,whichwasprovidedbyDrillquip.Inother words,thetopofthecasingisconnectedintothewellheadtomakeitonesealed system. NowmovetoSchematic#2.Apositivepressuretestwasconductedto demonstratetheintegrityoftheproductioncasingstringormakesurethat therewerenoleaksatthetoporthebottomofthestringTheresultsofthistest havenotbeendisclosed(diditpass?)andBPwasvagueinyesterdayshearings. AllthatHalliburtonsaidwastheresultsofthetestwerereviewedbythewell ownerandthedecisionwasmadetoproceedwiththewellprogram.Wasthe datatransmittedofftherigbeforetheaccident?Thisprocedurewouldhave testedthecasingandthecementaroundthebottomofthecasingshoenot necessarilythequalityofthecementacrossthehydrocarbonbearingzone. Thenextstepwastoensurethecasingsealassemblyinthewellhead(thetopof thecasing)wasinstalledproperlyandanegativepressuretestwasperformed. HALrecordedthedrillpipepressures.Again,theresultsofthistesthavenotbeen disclosed.Onthistopic,HALstestimonysaysHalliburtonscementingpersonnel
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wereadvisedbythedrillingcontractorthatthenegativepressuretesthadbeen completed. Withthelongstringofproductioncasinginplaceandthe51bblsofcement pumpedacrosstheformationandupperhapsashighas1000,wenowhavea largeopenannulusbetweentheproductioncasingandpreviouslycemented casingsthisrunsallthewayupfromaround17,000feettothetopofthe wellheadontheoceanfloor.Remember,thisiswhatwearecallingtheback sideandwevepointedtoitonourSchematic1. Priortorunningthefinalcementplugat8,000fttotemporarilyabandonthewell, BPcirculatedoutheavydrillingmud(14.3ppg)andreplaceditwith8.4ppg seawater.Often,thefinalcementplugissetbeforereplacingthedrillingmud withseawater.Accordingtopressreports,drillingrigpersonnelclaimthatBP receivedawaiverfromtheMMStochangetheorderoftheprocedure.We haventgottenanyoneattheMMStoconfirmthis,butassumethatiscorrect. Wedontknow,butsuspectthatthisproceduremighthavebeendonetoallow forfasterreentryofthewellwhentheoperatorreturnedtoputthewellback intoproduction.Thiswouldhaveavoidedthetimeofpumpingoutdrillingmud onreentry. Itisalsoworthwhiletopointoutthataworkboatwasoffloadingdrillingmud fromtherigwhentheblowoutoccurred.Moreonthatinasecond. Notealsothatatthispoint,itappearstherehadnotbeenanyactualtestofthe cementjob.Thepositiveandnegativepressuretestingarebeingdonetomake surethatthetopandthebottomoftheproductioncasingaretight,butthere wasnobacksidetestorcementbondlogsortemperaturelogsdone..sothe integrityofthecementjobacrosstheformationhadnotbeendeterminedatthis point. Whatwealsodontknowiswhatactualprocedurewasbeingconductedatthe timeoftheblowout.Fromvariouswitnessaccounts,therewasdrillpipeinthe holesotherewaslikelysomesortofcirculationbutwedontknowifthat
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circulationwashappeningwithdrillpipedownintothewell/productioncasing stringorifthedrillpipewassimplyintheriser. Nowletsmoveontoour3potentialscenariosfortheblowoutSchematic3 Welabelthisscenariobacksideblowout.Itwouldoccurwithacementfailure whichwouldallowoilandgastomigratedfrom~18,100ftupthecasingannulus andcollectbelowthecasingsealassembly(topofthecasing)inthe wellheadjustbelowtheBOPonly5,000ftbelowtherig. Inthisscenario,thecasingsealassemblyfailedwhenthepressureintheannulus, belowthesealassembly,becametoogreatandthecasingsealassemblyfailed. Thepressurebelowthesealassembly,fromanaturalgasinflow,couldhavebeen 8,000psiorhigher(reservoirpressureis~13,000psi)andthepressureabovethe sealassemblywas~2,500psi.theweightoftheseawater. Ifthesealassemblyfailedwiththispressuredifferential,thefailurecouldhave beencatastrophic.Almostinstantlyputtingalarge,violentupwardpressureon thecolumnofseawaterinthedrillingriserandquicklycausing1)thereported watershootingabovethedrillingderrickand2)thelackofsignificantwarning. Easytoseehowthewellcouldquicklygetawayfromrigpersonnel.Acommon themefromtalkingtoeyewitnessaccountshasbeentherewasnowarning. Thisscenariodoesnotexplain(andthereforecreatesquestionswestillhave) aboutthefollowing: 1. whythecementjobdidnotcompletelysealofftheoilandgasinterval. 2. whytheBOPdidnotshutofftheflow.TheBOPsitsontopofthewellhead andcatastrophicfailureinthewellheadmayhavedamagedtheBOP (imaginepiecesofmetalfromthewellheadbeingblownintotheBOPand gumminguptheworks).Evenso,boththeannularandshearswould havefailed.WasthepipebeingblownoutoftheholesotheBOPcouldnot closeproperly?Didtheshearramsattempttocloseonatooljoint?We simplydontknow.
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3. Whyapressurebuildupintheannuluswentundetected?Thewellhead containsaporttomonitorannularpressurewasitconnected?Wasthe pressuregaugeworkingandnotnoticed/addressedbyrigpersonnel? Therehasbeenmuchdiscussionthatthedrillingmudwasreplacedwithlighter seawaterbeforesettingthefinalcementplug(s).Inthisscenario,theplugwould nothavecontrolledabacksideblowoutasshowninSchematic#4.Theplugis designedtobealevelofprotectionforflowUPthecasingnotintheannulus. Scenario2 Asecondscenarioinvolvesthepotentialforcasingcollapseasshownin schematic#5.Thiswouldmostlikelyhaveoccurredwhenthedrillingmudwas beingcirculatedoutoftheproductioncasingandbeingreplacedwithseawater. Astheseawaterreplacedtheheavymud,thepressureinthebottomofthewell wouldhavebeen~3,000psilessthantheformationpressureoutsidethecasing. Asthecasingwasstillunperforated,thiswouldhavecreatedcollapseforceonthe outsideofthecasing.Wearenotsureofthecasinggradespecifiedbutcertainly thecasinghadacollapseratingofwellabove3,000psi.Itisourunderstanding thecasingwasmadebySumitomoandtheRIGtestimonyindicateditwasrunin theholebyWeatherford. Assumingthecasinghadadefect(eitherfromthemanufacturerorinhandling) anddidcollapseacrosstheoilandgasbearingformation,thiscouldhavecreated alarge,suddeninflowofoilandgasintotheproductioncasing. Thisscenariodoesnotexplain 1. Whydidthecasingcollapse? 2. Whywasthekicknotdetectedearlier?Agasbubbleunderpressure(at 18,000ft)iffairlysmallbutrapidlyincreasesinsizeasitapproachesthe surface(youscubadiversoutthereunderstandthis).Thisexpansionforces moredrillingfluidoutofthewellandintothemudpitsthanisbeing pumpedintothewell.Whywasthisnotdetectedsooner?Weresafety
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systemallhookedupandfunctioning?Wastheoffloadingofcementonto theworkboatdivertingattentionawayfromrigoperations? 3. WhydidtheBOPnotwork?Withdrillpipeintheholecirculatingout seawater,theBOPannularandrampreventersshouldhavefunctioned. Perhapspipewasblowingoutoftheholesoquicklythattheramscouldnot grabon..orperhapstheshearswentupagainstatooljointintheBOP andcouldntclose..orperhapstheBOPjustsimplydidntwork(even thoughitwastestedseveraldaysbeforetheincident). Scenario3 Showninschematic#6thisscenariowouldhaveoccurredifthemudhad alreadybeendisplacedinthewellboreandthecrewwasthenclearingtheriser. Thiswouldhaveinvolvedsettingapluginthewellhead(belowtheBOP)whilethe seawaterwascirculatedoutofthedrillingriser.priortosettingthefinalcement plug.Thisscenariowouldhaveisolatedthecasingfromthelowerhydrostatic pressureinriser.Oncetheplugwaspulled,eitheragasbubblehadbuiltup belowtheplugduetocollapsedpipeorfailedcementjob.Thisscenarioisnot materiallydifferentthanScenario1thegaskickwouldhavebeensevereand suddenasthepressurehadtimetobuildwhiletheplugwasset. However,thismayofferaplausiblescenarioforwhytheBOPdidnotcloseas theremayhavebeenalandingtoolatthebottomofthedrillstringthatwould havebeenin/neartheblowoutpreventershortlyaftertheplugwasremoved. TheBOPramsmaynotbeequippedtoshearalargediameter,thickwalled landingtool. Thisscenariostilldoesnotexplainwhyabuildupinpressurewasnotrecorded,or whythecasing/cementfailed.

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Basedonourreviewofthesescenarios,thereareafewthingswewouldliketo askthecompaniesinvolved. Moredetailaroundthelostcirculationandtheseeminglysmallamountof cementappliedtotheproductioncasingstring. Giventhetoughwellboreconditions(lostcirculationzoneatthebottomofthe casingstring),wasthereadequatetestingofthecementandwasacementbond logplanned? Moredetailinthespecificwelloperationsbetweenthecementingandthe blowout(i.e,wasseawatercirculatedtothemudline.orto8,000ft).Wastherea landingtoolonthedrillstringandwasitclosetotheBOP? Wasallsafetyequipment(onrigandsubsea)hookedupandfunctioningjust precedingtheaccident? DataontheBOPtestApril10andApril17? Wasthereindicationthatthebacksideblowoutscenariooccurred? Wethinkthatthisinformationwillgetpiecedtogetheroverthenextfewmonths. RetrievaloftheBOPwillbeanimportantcomponentofansweringwhichofthe scenarioswedescribedmighthaveoccurred.Atthistime,welltakequestions.

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Copyright 2010, Tudor, Pickering, Holt & Co. Securities, Inc. This information is confidential and is intended only for the individual named. This information may not be disclosed, copied or disseminated, in whole or in part, without the prior written permission of Tudor, Pickering, Holt & Co. Securities, Inc. This communication is based on information which Tudor, Pickering, Holt & Co. Securities, Inc. believes is reliable. However, Tudor, Pickering, Holt & Co. Securities, Inc. does not represent or warrant its accuracy. This message should not be considered as an offer or solicitation to buy or sell any securities. Analyst Certification: We, Dan Pickering, Dave Pursell, Jon Mellberg, Jeff Tillery, Joe Hill, David Heikkinen, Mike Jacobs, Becca Followill, Brandon Blossman, Brian Lively, Brad Pattarozzi, Jessica Chipman, Max Barrett, George OLeary and Oliver Doolin do hereby certify that, to the best of our knowledge, the views and opinions in this research report accurately reflect our personal views about the company and its securities. We have

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not nor will we receive direct or indirect compensation in return for expressing specific recommendations or viewpoints in this report. Important Disclosures: The following analysts were involved in creating or supervising the content of this message; Dan Pickering, Dave Pursell, Jon Mellberg, Jeff Tillery, Joe Hill, David Heikkinen, Mike Jacobs, Becca Followill, Brandon Blossman, Brian Lively, Brad Pattarozzi, Jessica Chipman, Max Barrett, George OLeary and Oliver Doolin. One or more of these analysts (or members of their household) have a long stock position in Allis-Chalmers Energy, American Oil & Gas, Anadarko Petroleum Corp., Antares Energy, Bristow Group, Carbo Ceramics, Chesapeake Energy, Complete Production Services, ConocoPhillips, Copano Energy, Deep Down, Inc., Dynegy, El Paso, El Paso Pipeline Partners, Endeavour International Corp., Enterprise Products Partners, EXCO Resources, ExxonMobil, Far East Energy Corp., Halliburton, Hugoton Royalty Trust, iShares MSCI Brazil Index, Key Energy Services, Kodiak Oil & Gas, Magellan Midstream Partners, McMoRan Exploration, Mirant Corp., Occidental Petroleum, Omni Energy Services, ONEOK Partners, Pacific Rubiales, Petrohawk Energy Corp., Plains All American, Plains Exploration & Production, Reliant Energy, Southern Co., Southwestern Energy, Spectra Energy, Spectra Energy Partners, T-3 Energy Services, Tag Oil Ltd., Total SA, Transatlantic Petroleum, Weatherford, Williams Companies, Williams Partners and ExxonMobil. One or more of these analysts (or members of their household) have an Interoil Corp. short put position. One or more of these analysts (or members of their household) have an Interoil Corp. short call position. Analysts compensation is not based on investment banking revenue and the analysts are not compensated by the subject companies. In the past 12 months, Tudor, Pickering, Holt & Co. Securities, Inc. has received investment banking or other revenue from Berry Petroleum, Boardwalk Pipeline Partners, Brigham Exploration, Cobalt International, Concho Resources, Constellation Energy, Direct Drive Systems, El Paso Pipeline Partners, Enerplus Resources, Gastar Exploration, Legacy Reserves, Magellan GP, LLC, Magellan Midstream Partners, Mariner Energy, Newfield Exploration, NuStar Energy, ONEOK, Petrohawk Energy, Plains Exploration & Production, Range Resources, Regency Energy Partners, Rosetta Resources, SandRidge Energy, Inc., Stone Energy, Superior Well Services, Targa Resources, Western Gas Holdings, and Williams Companies. In the next three months we intend to seek compensation for investment banking services from the companies mentioned within this report. This communication is based on information which Tudor, Pickering, Holt & Co. Securities, Inc. believes is reliable. However, Tudor, Pickering, Holt & Co. Securities, Inc. does not represent or warrant its accuracy. The viewpoints and opinions expressed in this communication represent the views of Tudor, Pickering, Holt & Co. Securities, Inc. as of the date of this report. These viewpoints and opinions may be subject to change without notice and Tudor, Pickering, Holt & Co. Securities, Inc. will not be responsible for any consequences associated with reliance on any statement or opinion contained in this communication. This communication is confidential and may not be reproduced in whole or in part without prior written permission from Tudor, Pickering, Holt & Co. Securities, Inc. For detailed rating information, distribution of ratings, price charts and other important disclosures, please visit our website at http://www.tudorpickering.com/Disclosure/ or request a written copy of the disclosures by calling 713-333-2960. It should be noted that thispresentationandcommentsdepictTPHsassessmentofpossiblescenarios

thatmighthaveoccurredontheMacondoblowout.Theyarenotfactsandshouldnotbeinterpretedas such. [Typetext]