Global Energy Playbook – 4Q10

Morgan Stanley:

Global Energy Playbook – 4Q10

Get Offshore Exploration Exposure: High Potential in 2011

Exploration catalyst in 2011. We expect 2011 to be one of the most active offshore exploration years in the past two decades, providing a meaningful differentiator for stock performance. In 2011, exploration companies will test several high-impact basins/plays, as well as important extensions of existing basins. Many wells have the potential to be “company makers.” Exploration wells have had 15–35% success rate over the past decade; assuming 25% success on the wells we expect to be drilled in 2011 could result in ~21 billion boe in additional discovered resource — the most since 2000, and 31% above the 10- year average.

Country- and basin-specific per barrel valuation models. We have compiled and analyzed all large-scale offshore exploration wells (gross resource potential of >100 mmboe) expected to be drilled globally by YE2011. We built net asset value models for 24 countries.

Offshore exploration basket: We highlight a basket of names that we think provides exposure to statistically significant and independently correlated results, as well as to each of the major new offshore basins and material wells to be drilled in 2011 (MSMSXPLR). We also include services names that we think will benefit from increased activity. We see ~33% price target upside for our basket. While small- and mid-cap names have the most significant exposure, E&Ps and Majors also have active 2011 exploration calendars.

Our basket:

Explorers: AFR, APC, CIE, KAR, MUR, OGX, REP, TLW Services: COSL, PGS, SDRL, SLB (a Morgan Stanley Best Idea), TGS

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