Mission Resources - 10-20-03 Report

7/29/2019 Mission Resources - 10-20-03 Report

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Company Description: Exploration & production company Mission Resources Corporation(NASDAQ: MSSN) is a Houston-based independent created by the merger of BellwetherExploration Company with Bargo Energy Company in 2001. Mission's oil properties are located inthe Permian Basin of West Texas (32% of proven reserves, proforma for the East Texas propertydivestiture announced in October 2003) with natural gas properties in the Gulf Coast (30%) and toa lesser degree, the Gulf of Mexico (17%). At December 31, 2002, MSSN's 229 BCFE (64% Oil,77% Proved Developed) of proved reserves, as engineered by Netherland Sewell, maintained a 10-year reserve life based on the Company's most recent quarter's production rate (61.7 MMCFE perday). MSSN's long-term strategy is to be geographically focused onshore in the Louisiana GulfCoast, South Texas and the Permian Basin and shift its asset mix to primarily 70% natural gas inan effort to lower lifting costs and high-grade its oil and gas quality. In addition to its oil and gasassets, the Company holds leases on over 61,000 net undeveloped acres in the US. TheCompany expects 2003 CapEx to total $32 million with nearly $27 million or 83% allocated todevelopment and exploration drilling.

Mission Resources Corp.

Recommendation: Strong Buy

We are increasing our price target on Mission Resources' 10.875% Sr. Sub. Notes 07 ("Notes") to89% from 75% (March 31, 2003 report). We, therefore, recommend the Notes as a strong buyat 78%as we expect management to pursue a combination debt-for-debt and debt-for-equity exchange within6-months - our concept of such a restructuring unlocks value and provides Noteholders an expected

104% future recovery with upside to 117%. The catalyst to this exchange is the uptick in the SeniorSecured Facility coupon to 13% from 12% in February 2004, as well as the Company's ability to takeadvantage of the impressive upward move in MSSN's stock price. Absent a debt exchange, we believe(i) the Notes' 19.7% YTW is attractive relative to the 12.9% CCC-rated high yield index; (ii) Companyfundamentals provide adequate credit statistics that, based on the Notes at market, include: 1.5x (1.4xat par) asset coverage, 4.2x (4.8x at par) total debt leverage, and 1.8x cash interest coverage; and (iii)the Notes at the current level create the Company at nearly a 50% discount to comparables with at$0.77/MCFE and 3.6x LTM EBITDA. The credit statistics are supported by historically elevated oil andgas prices, however, the Company's financial performance is somewhat insulated from commodityprices with almost 60% and 34% of 2H03 and 2004 production, respectively, hedged at prices north of$4/MCFE. We are also encouraged by the recently announced asset sale of Mission's lower qualityreserves in East Texas in addition to the Company's impressive drilling program through 3Q03(excluding asset sales). We estimate these activities have high-graded Mission's oil and gas reserve

quality, while simultaneously increasing reserves an estimated 4% during the first nine-months of 2003,resulting in an estimated 153% reserve replacement ratio.

3Q03 OutlookOur 3Q03 EBITDA estimate is $11.2 mm, after accounting for a $2.7 mm cash hedge loss in thequarter ($13.9 mm unadjusted EBITDA) based on an expected production rate of 63 MMCFE per day(MMCFEpd) (high-end of 58-63 MMCFEpd guidance). We expect the Company's drilling activities TheCompany will release its 3Q03 earnings on November 13, before the market opens. A conference call willbe held that day at 2:00 PM (ET) and may be accessed by dialing 877-894-9681 (replay is 800-642-1687#3408973, available until November 30).

EnergyExploration & Production

High Yield ResearchOctober 22, 2003

Greg Imbruce800/937-5333

[email protected]

Mission Resources Corp. (MSSN)Expect Company to Eye Debt Exchange withSharp Run-up in Stock


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Energy: Exploration & Production High Yield Research

October 22, 2003 Mission Resources Corp. Page 2

Potential RestructuringWe expect MSSN's strong stock price (+607% YTD) provides the Company with the currency requiredto complete a restructuring that is attractive for Noteholders as well as existing shareholders andmanagement. In fact, based on the current $2.63 stock price, we could see MSSN's Notes trade ashigh as 96% (12-month PV20) if a similarly structured debt exchange as outlined herein becomesreality, and assuming the stock trades at levels comparable to today's price. We anticipate that in arestructuring, Noteholders would receive: (i) $80 mm in new Senior Secured Notes ("New

Notes"), representing a 63% recovery; and (ii) 50% of the Company's common shares. Webelieve shareholders would view the deal positively since it appears to be 6% accretive tocurrent shareholders. The Company would be required to issue an aggregate of $160 mm in NewNotes to repay the existing $80 mm Sr. Secured Term Loan. We envision, however, that the NewNotes and existing Revolver would be the only debt outstanding at Mission post this exchange. Sucha deal would benefit both current shareholders and Noteholders in the long-term. First, a successfulrestructuring as outlined would save MSSN $10 mm annually in interest costs that would allow theCompany to redeploy those funds toward its drilling and acquisition effort. The deal may also serve asa segue to a merger or acquisition, whereby MSSN becomes part of a larger, more efficient E&Pplatform.

Absent a RestructuringAbsent a restructuring and in the case that commodity prices collapse to normalized levels, weestimate that the Notes'

downside risk is limited to a 77% future recovery with the more likelyliquidation scenario being our base case scenario, which indicates a 92% future recovery.Since we expect the Company to remain current on its coupon payments and don't foresee a covenantdefault, these future recoveries combined with almost an 11% coupon provide an 88% and 103% totalrecovery for the downside and base case scenarios, respectively. This implies a 12.4% to 28.8%, 12-month return based on today's level in the event a debt exchange fails to materialize and theCompany continues to operate its existing asset base. Further, the Notes at the current levelcreate the Company at attractive asset and cash flow valuations that provide downside protection.Those valuation metrics are as follows:

Value/Proved Reserve: $0.77/MCFE applying net debt and $0.91/MCFE assuming total debt(utilizes 9/30/03E proved reserves, proforma for E. Texas property sale)

Net Debt/EBITDA: 3.5x last quarter annualized (LQA) EBITDA and 3.6x LTM EBITDA Total Debt/EBITDA: 4.1x and 4.2x LQA and LTM EBITDA, respectively

These valuation metrics represent a deep discount to E&P comparables, which (based on the median)trade at $1.45/MCFE ($1.44/MCFE avg.), 5.9x LQA EBITDA (9.6x avg.) and 6.6x LTM EBITDA (7.0xavg.). Even assuming Notes at par and incorporating the public equity value, MSSN remainsundervalued at $1.21/MCFE, 5.6x LQA EBITDA, and 5.7x LTM EBITDA.

ManagementWe believe Noteholders would be best served by supporting an exchange similar to our concept due tomanagement's accomplishments achieved to date in its "restructuring" effort. The Company began itstransformation in August 2002 with the addition of Mr. Robert Cavnar as Chairman and CEO. Prior tojoining Mission, Mr. Cavnar served as CFO of El Paso Production Company. Previous to his positionsat El Paso, he held senior management positions with Cornerstone Natural Gas and with the GlobalEnergy Division of the Chase Manhattan Bank. In October 2002, Mr. Richard (Rick) Piacenti joined the

Company as CFO. Mr. Piacenti came to Mission from El Paso Production Company as well, where healso served as CFO (just after Mr. Cavnar's departure) and was Controller of the production companyand director of accounting for the midstream company. Prior to El Paso, Mr. Piacenti was Controller ofCornerstone Natural Gas Inc, where he worked with Mr. Cavnar.

We like the fact that management and directors own 4.4% of the stock and that Mr. Cavnar and Mr.Piacenta have a significant history together. We also point out that management takes a majority oftheir compensation in the form of options with the lowest cash compensation packages of any E&Pcompany that we follow. In 2002, for example, total cash compensation for Robert Cavnar (Chairman,


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President & CEO) and Richard Piacenti (CFO) was approximately $132k and $68k, respectively, or$200k in aggregate.

The following highlight management's accomplishments since late 2002 and evidence their ability tobuild a successful E&P company:

Successfully executed debt repurchase in March 2003

Established new $12.5 mm Revolver in June 2003, improving liquidity to nearly $25 mmproforma for 2Q03, which we expect to decline to over $18 mm at the end of 3Q03 afterpayment of the Notes 10/1/03 coupon, Term Loan interest costs, and estimated CapEx

Fended off a NASDAQ delisting in June 2003. Sale of the high unit cost East Texas properties at $0.90/MCFE in October 2003, a relatively

attractive price, and inline with management's strategy to high-grade the Company's oil andgas assets (expected to close end of October) - it seems MSSN's properties in Federaloffshore and the state water of the Gulf of Mexico (GOM) will be next

Excellent YTD drilling results - the most notable being the LeBlanc well in Louisiana, which weexpect to produce at 9.4 MMCFE per day net to MSSN's estimated 52% net revenue interest inthe first year, and add 9.8 BCFE (net) at a $0.32/MCFE F&D cost

The E. Texas sale combined with new production from the 2003 drilling program shouldimprove the Company's production mix from approximately 39% natural gas in 2Q03 toapproximately 50% gas by the end of the year

Results continue to exceed production and EBITDA guidance - 2Q03 production came in at61.7 MMCFE per day compared to the Company's 55-60 MMCFE per day guidance


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Capital Structure

At 6/30/03, Mission's debt totaled $207 mm, consisting of $80 mm of Sr. Secured Term Loanoutstanding under its Senior Secured Facility, and $127 mm of 10.875% Sr. Sub. Notes '07. During2Q03, the Company established a $12.5 mm Revolver with Foothill Capital Corp. (Prime+50 bps,subject to minimum 4.75% annual rate), which we expect remains undrawn at the close of 3Q03.

Interest CostsThe Sr. Sub. Notes' next semi-annual coupon payment is 4/1/04 in the amount of $6.9 mm ($13.9 mmannually). The Company pays interest monthly on the Term Loan at 12% currently and isapproximately $9.6 mm per annum based on the $80 mm outstanding at the end of 2Q03 - Mission'sinterest expense related to the Term Loan will increase in February 2004 by approximately $0.8 mm.In aggregate, the Company's total cash interest cost is approximately $24.4 mm per year, which willincrease to $25.2 mm per year if the Company fails to restructure.

Note RepurchaseThe Company originally issued $225 mm of 10.875s in two parts - $100 mm in April 1997 with an add-on of $125 mm of the Notes with identical terms in May 2001. In March 2003, MSSN borrowed $80.0mm in the form of a Term Loan under a secured credit facility (Facility) to acquire approximately $97.6mm face amount of Notes, to pay accrued interest on the Notes purchased, and to pay closing costs.The highlights of the Term Loan are as follows:

Led by Farallon Capital Management (Farallon Energy Lending, LLC) $75 mm funded bond purchase and associated closing costs Borrow Base: $80 mm (fully drawn) Maturity: 1/6/05 (21 months) Rate: Initial 12%, 13% after 2/16/04 Additional $10 mm available at lenders' discretion for additional Note repurchases Allowed MSSN to put up to $12.5 mm Revolver with 3rd party

In the Note repurchase, the Company: Paid $71.7 mm (73% of face value) plus accrued interest Reduced the face amount of Notes outstanding to $127.4 mm

Captured almost $26 mm of value through bond repurchase

New Credit FacilityIn June 2003, the Company amended the Facility to add a revolving credit facility (Revolver) of up to$12.5 mm, including a letter of credit sub-facility of up to $3.0 mm. The Facility, which includes theTerm Loan and Revolver, is secured by a lien on substantially all of the Company's property and theproperty of all of the Company's subsidiaries, including a lien on at least 90% of their respective oil andgas properties and a pledge of the capital stock of all the subsidiaries.


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The Term Loan matures 1/6/05 and the Revolver 6/6/06. However, if the maturity of the Term Loan isnot extended to at least 30-days after the Revolver's maturity date, the maturity date of the Revolverwill accelerate to 12/6/04 and (ii) 30-days prior to the xxxxxxxxxxxxxxxxxxxxxxxx.

New Credit Facility Covenants Exploration CapEx during any fiscal year shall not exceed $15.0 mm CapEx not spent in 2003 may be carried forward to 2004


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Net Asset Value (NAV)We believe that the current market prices E&P equities using NYMEX prices of $27.25/Bbl and$4.80/Mcf - representative of our high case scenario in the below table, to which we assign a 67%probability. The Base and Low case scenarios apply more normalized commodity prices as indicatedand are assigned a 27% and 7% probability, respectively. Pre-restructuring, our weighted averagecalculation or "Expected" scenario points to a $1.70 per share NAV and a 147% P/NAV. Incomparison, the High case results in a $2.36 share price and more inline with today's stock price

(112% P/NAV) - and in the Low case we don't believe the current capital structure lends any value toexisting shareholders.

The restructuring, however, provides existing shareholders with almost $32 mm of equity value or$0.67 per share in the Low case scenario and is expected to be 6% accretive overall. On the upside,post-restructuring in the Base case is 52% accretive. The only downside to existing shareholders post-restructuring on an NAV basis is in the High case scenario, which shows the deal would be 7% dilutive.We don't think the dilution is a factor due to the deal being accretive on an overall basis and creatingshare value in the base and low case scenarios. In the long-term, shareholders would also benefitfrom the estimated $10 mm in annual interest cost savings the Noteholders would forego - theCompany would be able to redeploy those funds toward its drilling and acquisition program in an effortto grow the Company. The deal may also serve as a segue to a merger or acquisition, whereby MSSNbecomes part of a larger, more efficient E&P platform.

Post-restructuring, we are confident that the Company would generate equity interest due to its largermarket capitalization, increasing to an estimated $115 mm from its current $62 mm. Plus, the stockwill be more liquid. We also expect that the stock would perform well post-restructuring due to theCompany's ability to high-grade its reserve base through its drilling and divestiture effort. We alsoexpect the Company's 3Q03 will come in at the high-end of guidance with 4Q03 guidance that shows aupward production trend.


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Proved Reserves

At December 31, 2002, Mission's total proved reserves were 229.1 BCFE or 38.2 MMBOE, asengineered by Netherland, Sewell & Associates (NSA), with the majority of reserves in the Gulf Coast(33% of total, 55% natural gas) and the Permian Basin (36% of total, 20% natural gas). Missionsproved reserves were 36% natural gas, 77% developed, and based on the Companys most recentquarters production rate of 61.7 MMCFE per day, maintained a 10.2-year reserve life - based on ourinternal 6/30/03 reserve estimate, the reserve life declines to 9.0-years. Of note, management stated

in its 2Q03 conference call that Mission's reserves will be calculated by Noble & Tool and Associates atyear-end 2003, a change from NSA.

Oil & Gas Price Differentials

The Company's realized price for natural gas has averaged $0.15/Mcf less than the NYMEX price overthe twelve months ended 6/30/02. The Company's realized price for oil has averaged $0.61/Bbl lessthan the NYMEX price over the same period. Realized prices differ from NYMEX due to factors suchas the location of the property, the heating content of natural gas and the quality of oil.

Proforma ReservesIn 1H03, we estimate the Company allocated approximately 83% or $12.9 mm to its drilling effort andadded 18.4 BCFE during the period. This reserve estimate is based on (i) an expected 9.8 BCFEaddition from the LeBlanc well at a net cost of $3.1 mm ($0.32/MCFE F&D cost); and (ii) an assumed$1.14/MCFE F&D applied to the estimated $9.9 mm balance of the Company's drilling activities. Theoverall F&D cost is, therefore, $0.70/MCFE for 1H03. The estimated reserve additions indicate a 163%reserve replacement ratio after accounting for 11.3 BCFE of 1H03 production and would represent a3% increase in proved reserves to nearly 236 BCFE at mid-year 2003 from the 229 BCFE reported at12/31/02. The Company, however, also announced the sale of E. Texas oil properties, estimated to be4 MMBOE or 24 BCFE. After accounting for this sale and the 10 BCFE sale associated with the of thePoint Pedernales field, we expect reserves would be approximately 202 BCFE at 6/30/03, representinga 12% decline from the year-end 2002 figure.


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High-Grade StrategyIn 1H03, we estimate the Company allocated approximately 83% or $12.9 mm to its drilling effort andadded 18.4 BCFE during the period. This reserve estimate is based on (i) an expected 9.8 BCFEThe value of these reserves, however,Not all reserves are created equal, and as such, in MSSN's goal to transform the Company form oil tonatural gas, we believe that even if the company only replaces production through its 2003 drillingprogram, the value per unit of proved reserve becomes more valuable, whereby the oil and gas value

per MCFE may increase from its current $0.83/MCFE to above $1.00/MCFE. Such action would add$38 mm in asset value or almost 30 bond points, without altering the proved reserve value.


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Estimated RecoveriesIn 1H03, we estimate the Company allocated approximately 83% or $12.9 mm to its drilling effort andadded 8.4 BCFE during the period. This reserve estimate is based on (i) an expected 9.8 BCFE

The stock currently trades at 114% of NAV (high case). Assuming a similar premium, wewould expect the stock to trade at $2.46, representing just under $120 mm marketcapcompany, a similar marketcap to such E&P companies as ATP Oil & Gas (ATP), Carrizo Oil &

Gas (CRZO), Clayton Williams Energy (CWEI), North Coast Energy (NCEB), and Wiser Oil(WZR).

Equally weighting the three scenarios (low, base, and high) indicates that the deal would be49% accretive to the Company's NAV. The most measurable increase is in the base casescenario, increasing to $1.53 per share from $1.10 per share or 39%. The low scenario is alsoimportant to consider in that such a transaction creates equity value for existing shareholders,altering the NAV from negative to $0.62 per share. Although the high scenario is13% dilutive,this "cost" is minimal relative to the value that the deal creates for existing shareholders andmay be irrelevant in the equity market due to MSSN's enhanced financial flexibility to grow theCompany's reserves with the $10 mm in annual interest cost savings that the Noteholders areforegoing.

Additionally, Restructuring as outlined herein would provide more liquid stock with largerMarketCap

We also expect that the New 9% Sr. Sec. Nts would trade up to yield 8.25% (+75 bps forSecurity), implying a 102.5 price.


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Valuation

Asset ValueThe valuation method we employed for Mission is a blend of hard asset and cash flow analysis. Ourexpected value for MSSN's 12/31/02 proved reserves is $240 mm ($1.10/MCFE). At 9/30/03, webelieve the oil and gas reserve value is $224 mm after applying the same unit value to our 204 BCFEreserve estimate, and $248 mm including proforma working capital. Our cash flow valuation is basedon $42.9 mm LTM EBITDA and a 5.3x EV/EBITDA multiple, equating to a $227 enterprise value which

when after including proforma working capital totals $251 mm. The average of the asset and cashflow valuations is $250 mm (Expected Asset Value).

The oil and gas reserve value represents an internal market value, based on NYMEX prices of $22.00-$27.25/Bbl and $3.50-$4.80/Mcf, according the scenario as indicated - the weighted averages are$26.30/Bbl and $4.57/Mcf. The realized prices applied incorporate price differentials of -$0.61/Bbland -$0.15/Mcf, representing the LTM averages. In addition, we risk the proved developed andproved undeveloped reserves at a 97% and 80% success rate, respectively.


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Reserve Value SensitivityFor the commodity bulls and bears, we also provide sensitivity tables of Mission's oil and gas reservevalue per below. We recognize that our NYMEX prices, even in the high case scenario, areconservative when compared to today's 12-month strip prices of $28.15/Bbl and $4.94/Mcf. Weestimate, however, that buyers of oil and gas assets utilize the 5-year forward curve, representative ofour High case scenario, which applies NYMEX prices of $27.25/Bbl and $4.80/Mcf.


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Asset CoverageThe Expected $250 mm total asset value provides 133% asset coverage or almost $170 mm of valueto the $127 mm of Notes outstanding after $80 mm of secured debt. Asset coverage increases to143% based on NYMEX prices of $27.25/Bbl and $4.80/Mcf applied to our High case scenario, whichincreases to over 160% using today's 12-Month strip prices.


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Debt ExchangeWe anticipate that in a debt exchange, Noteholders would receive (i) $80 mm in new debt conductedthrough a new $160 mm new 9% Senior Secured Note offering; and (ii) 50% of the Company'scommon shares. The New Notes and existing Revolver would be the only debt outstanding at Missionpost this exchange. We based the amount of the new bond issue targeting a 3x net debt leverage and3x interest coverage, while limiting Net Debt/Proved Developed to below $0.95/MCFE. MagnumHunter's Sr. Notes appear to be the most comparable bond issue of the group with slightly higher

leverage, albeit better interest coverage. Of course we recognize that MHR's market capitalization isfour times that of MSSN on a post restructuring basis. However, MHR's bond issue is unsecuredcompared to our expectation of a secured note for Mission.

, while simultaneously being ___% accretive to current shareholders. The Company would be requiredto raise an $160 mm of New Notes in aggregate in order to repay the existing $80 mm outstandingunder the existing Sr. Secured Term Loan. We envision, however, that the New Notes and existingRevolver would be the only debt outstanding at Mission post this exchange. Such a deal would benefitboth current shareholders and Noteholders in the long-term as we expect E&P consolidation tocontinue and as such, a successful restructuring serves as a segue to a merger or acquisition wherebyMSSN becomes part of a larger platform.


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Credit StatisticsWe believe MSSN could adequately support up to $160 mm of 9% Senior Secured Debt, for which thecredit statistics would be as follows: $0.91/MCFE in debt per proved developed reserve unit, 3.0xleverage, and 3.7x interest coverage. The Company's weighted cost of capital would decline to below9% (dependent on any Revolver drawn). Simultaneously, total debt would be reduced by over $47 mmand cash interest expense would plummet almost 40% or nearly $10 mm per year to $14.4 mm from$23.5 mm.

Debt ComparablesThe below high yield comparable analysis indicates that the median for E&P companies with similarstatistics is 637 bps. Conveniently, this spread-to-treasuries translates into a 9.0% yield for a 4-yearnote. We believe that a newly issued, second lien E&P Notes would most likely trade up upon issuance

based on its Sr. Secured position and decent amount of public equity value. The Company would mostlikely retain its existing $12.5 mm working capital facility and possible request and receive approval forup a total $20 mm carve-out in place to replace the working capital facility. If an additionally $20 mm infirst lien debt were fully drawn, the additional debt capacity would increase the debt per proveddeveloped reserve to $1.02/MCFE, increase leverage to 4.2x leverage, and cause interest coverage todecline to 2.6x. We trust, however, that certain milestones would be required to draw any availabledebt beyond the existing $12.5 mm.


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Asset Sales in 2003

Point PedernalesIn March 2003, the Company sold its interests in the Point Pedernales field to Nuevo Energy (NEV),the operator of the property. This transaction divested Mission of all California properties; however,MSSN retained the option to participate in future drilling at Tranquillion Ridge. The Company paid $1.8million to the purchaser, who in turn assumed the Company's environmental, plugging andabandonment (P&A) liabilities, estimated to be between $3 million and $5 million. Point Pedernales

produced approximately 1,000 Barrels of oil per day (6 MMCFE per day) with lease operating expenses(LOE) averaging $10.00/BOE ($1.67/MCFE), subject to a $9.00/BOE price cap. The field, therefore,represented a negative future value excluding the associated P&A liabilities.

East TexasOn 10/1/03, Mission Resources announced that it singed a definitive agreement to sell all of its EastTexas assets to Danmark Energy for $21.5 million and expected to close in October. Highlights are asfollows:

All of the properties are in the East Texas Field, a mature oil field with relatively high unitoperating costs

LOE (including taxes) related to the asset sold was $13.35/BOE or $2.22/MCFE; as a result ofthe asset sale, the Company's overall LOE including taxes should decline to $11.09/MCFE or$1.85/MCFE, still high when compared to $1.13/MCFE for the high yield group in 2Q03

Deal equates to $5.38/BOE or $0.90/MCFE based on the estimated 4.0 MMBOE Production related to properties being sold is 1,150 Bbls/Day or 6.9 MMCFE/Day (11.2% of

MSSN's 2Q03 production) Deal increases Company's liquidity to $44-45 mm from $24 mm ($12 mm cash @ 6/03 plus

$12 mm avail. under WorkCap Facility) Company plans to use cash from asset sale to acquire Gulf Coast properties Sale and new production coming online will improve MSSN's production mix from 39% to 50%

natgas by year-end Combination of property acquisition enhances MSSN's goal of shifting from high unit cost oil

properties to low unit cost natgas properties We estimate the Company will generate $19 million in net proceeds after fees and adjustments

related to the August 1, 2003 effective date. Assuming that MSSN's new production comes online at $0.80/MCFE due to its natgas

composition, we estimate the Company's overall LOE (including production taxes) woulddecline to $_____/MCFE or more than 5% below the 2Q03 level.

Potential AcquisitionsWe estimate that the Company could purchase natural gas properties at $1.75/MCFE and that theCompany could afford a $25 million acquisition. This would equate to 14 BCFE size acquisition andincrease estimated mid-year 2003 reserves from 207 to 221 BCFE.


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Drilling Update

MSSN will participate in drilling 13 (4.7 net) wells during 2003, 6 of which were located in the gas-proneMiocene trend of southern Louisiana and evenly split betweet exploratory and development projects.The remaining seve ninclude 2 Wilcox exploratory wells in central Texas, a high potential prospect inthe South Texas Vicksburg trend, a development well in the Raccoon Bend field and 3 wells in theoffshore Louisiana shelf (2 of which the Company has a minor interest).

Completing Wells Phillip LeBlanc #1 (Vermillion Parish, Louisiana). We estimate that the LeBlanc well

respresents 18.8 BCFE gross or 9.8 BCFE net to MSSN (based on estimated 52% NRI). Thisreserve figure is based on a 4-year reserve life and 15% average decline rate. This well isprimarily natgas and designed as a dual completion allowing for simultaneous production fromtwo zones (Camerina 2 and the Marg Howei). First production is expected during October atan anticipated initial gross rate of 10-20 MMCf per day (up from 5-15 MMcf in 2Q03 pressrelease) and we understand from industry sources that the production rate will most likely be attop end of this range - for the analysis we assume an initial rate of 18 MMcf. MSSN holds a77% working interest in the Marg Howei zone and a 68% working interest in the Camerinazone. We estimate that the net weighted average working interest in the LeBlanc #1 is 75%and 69% on a net interest basis. CapEx allocated to this well is $----- mm (gross) and $___ netto MSSN, indicating a $____/MCFE finding and development (F&D) cost. ____ is operator.

The Bluntzer #1 (Goliad County, Texas). This well was drilled to a total depth of almost16,000 feet and production casing has been set for completion testing of the Lower and MiddleWilcox indicated natgas zones. Testing of this well, in which MSSN holds a 20% workinginterest (increased from 20% in 2Q03 press release), will begin in late October. ____ isoperator.

Black Stone #1 (Hidalgo County, Texas). MSSN owns a 30% working interest in this well,which has drilled to a total depth of 18,500 feet to test Vicksburg objectives. The well has beenperforated and fracture stimulated, and is being prepared to flow back. ____ is operator.

Drilling Wells Davis #26-3 well (Cameron Parish, Louisiana). This well has a 15,000 foot target in the

Abbevil le 2 sand as the primary objective with secondary potential in the Abbevil le la sand.Mission operates this well and holds a 50% working interest to casing point and a 57% workinginterest thereafter. The Company reported the well was drilling at 11,900 feet in early Octoberand we, therefore, expect results will be available by MSSN's 3Q03 earnings release.

JL&S Well #146 (St. Martin Parish, Louisiana). Mission is operator of this West Lake Verretdevelopment well, reported to be at 4,000 feet in early October toward its 7,900 foot target.We would expect to learn the result of this well, which will test the Micocene age "N", "O" and"Q" sands, by the 3Q03 earnings release.

Wells to Begin Drilling A-11/C-5 Wells (South Marsh Island, Block 142). Mission is participating in two wells in this

offshore Gulf of Mexico block. The A-11 well is scheduled to spud later this month and will bedrilled to 9,340 feet to test multiple natgas objectives. The C-4 well will be drilled in late

October to 9,300 feet to test multiple gas zones. MSSN holds a 31% working interest in eachof these wells. ____ is operator.


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Quarter Highlights

EBITDAX: 2Q03 adjusted EBITDAX was $____ mm and $___ mm on an LTM basis (after anegative $3.3 mm and $17.2 mm adjustment for cash losses from hedging activities in the 1Q03and LTM period, respectively) - excluding the hedge losses for the LTM period, WZR would havereported almost $60 mm of EBITDAX. The quarter's adjusted EBITDAX improved 8% from $13.4mm ($6.6 mm negative adjustment for cash losses from hedging activities) in the prior quarter andimproved 81% from $8.0 mm (negative $2.4 mm adjustment) in the year-ago period. The

sequential and year-over-year improvement is due to increased production, lower unit costs, andreduced hedge losses. As the below table indicates, we expect quarterly EBITDAX to increase in2H03 due to the expiration of out-of-the-money hedge contracts and estimate $58 mm and $59 mmof EBITDAX in 2003 and 2004, respectively.

Credit Statistics: 2Q03 adjusted EBITDAX covered cash interest expense 3.9x (2.8x LTM), whiletotal debt to annualized 2Q03 EBITDAX was 2.7x (3.7x LTM). The Company should be able toreduce debt an additional $6-8 mm by year-end 2004 ($2 mm in 2H03 and $2-$4 mm in 2004) and

further improve the Company's credit statistics.

Production: 2Q03 production totaled 6.4 BCFE or 69.9 MMCFE per day (56% natural gas) andbeat guidance of 67.7 MMCFE per day (MMCFEpd). This quarter's production was up animpressive 11% from 62.9 MMCFEpd (53% natural gas) in the prior quarter and up 9% from lastyear's 64.0 MMCFEpd (52% natural gas). Management mentioned in its conference call thatcurrent production is approximately 66-67 MMCFEpd, although down from 2Q03, remains slightlyabove WZR's 2H03 production guidance of 65.3 MMCFEpd. The Company noted that the Gulf ofMexico wells are producing 11 MMCFEpd net or approximately 17% of the Companys overallproduction.

Wild River Discovery: The new Wild River well in Alberta, Canada, tested at rate of up to 14MMCFEpd gross and in the Companys 2Q03 conference call, management noted that theyexpect production to come online at 20 MMCFEpd gross in December 2003 or approximately 8MMCFEpd net to WZR's 50% WI and after royalties (WZR is the operator). Managementstated that 2 to 3 wells would be required to drain the reservoir and that, in response to thediscovery and other wells in the area that are not yet online, the Company is sizing natural gasproduction facilities to handle 40 MMCFEpd. At a $4.50/MCFE NYMEX price ($3.50/MCFE

realized), conservative compared to the current $5.14/Mcf 12-month strip, this discovery wouldadd over $7 mm of incremental EBITDAX net to WZR excluding any other success in the area.

West Cameron 488 Discovery: Wiser announced the discovery of West Cameron 288 #1,located 100 miles offshore Louisiana in 125 feet of water, in which WZR owns a 25% workinginterest. This well was drilled to 9,250 feet and encountered 56 feet of net gas pay. The wellwas not flow tested and has been temporarily abandoned while platform facilities and pipelineare installed. The Company expects production in 1H04.


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West Cameron 428 #1: The West Cameron 428 #1 well went online 7/31/03 at a rate of 10.5MMCFEpd or 2.6 MMCFEpd net to WZRs 25% working interest.

Unit Costs: Average 2Q03 Lease Operating Expenses (LOE), including production taxes,declined 21% to $1.16/MCFE from $1.47/MCFE in the prior quarter. Although this is a 5% increasefrom last year's $1.10/MCFE, it is not comparable since last year's quarter benefited from lowerproduction taxes as a result of softer oil and gas prices. The sequential decline in LOE is

attributable primarily to Wellman CO2 sales, which began May 14, 2003 and are reported as areduction of LOE. Overall, unit costs declined 14% sequentially to $2.14/MCFE from $2.50/MCFEin 1Q03 and remained flat with the year-ago quarter. The Company expects LOE (includingproduction taxes) to increase 7% in the second half of 2003 as a result of lower production whencompared to the Company's record 2Q03 production rate. G&A, however, should decline almost8% to $0.37/MCFE and allow the Company to keep total unit costs below $2.20/MCFE.


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CapEx

Mission's 2003 exploration and development CapEx budget is $32 mm, up from the previous year's$21 mm. 2Q03 and 1H03 CapEx totaled $6.5 mm and $15.6 mm, respectively, implying a $16.9 mm2H03 CapEx budget. Of the annual budget, approximately 65% or $23-$25 mm is to be allocated toCanadian activities with the balance targeted for US properties. The increase includes the Companysnew Buick Creek exploration project in Canada and its Wild River development project in Alberta,Canada. Additional CapEx was also approved for the Companys Gulf of Mexico activities. In its

conference call, management indicated that the revised CapEx budget would be allocated as follows:30%-35% to exploration, 60-65% for development projects, and 5% toward seismic, land and othercapital uses.

The majority of the development capital has been spent in the Permian Basin and the onshore GulfCoast regions.


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Liquidity

As a result of its new Revolver received in June 2003, MSSN's total liquidity stood at almost $25 mm atthe end of 2Q03 with full availability under the Revolver. Including an expected $19 mm in netproceeds from the recently announced E. Texas property sale, we estimate liquidity was close to $55mm with the inclusion of $11.3 mm for 3Q03E EBITDA. We expect the Company's "uses" during 3Q03to total an estimated $18 mm so that the Company closes 3Q03 with $44 mm of liquidity and just over$37 mm post its 10/1/03 coupon payment on the 10.875s.


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Hedge Contracts

Based on the Company's 2Q03 production and as of 8/12/03, MSSN had 60% and 49% of its 2H03and 2004 oil production (all swaps), respectively, hedged at $23.77/Bbl and $24.55/Bbl. TheCompany also had 58% and 19% of natural gas hedged (using collars), respectively, at $4.32/Mcfand$4.42/Mcf for the same periods. Additionally, a small portion of 2005 natural gas production (3%) isalso hedged at $4.91/Mcf using collars with a $4.25/Mcf floor. Overall, Mission hedge portfolio 59%of 2H03 production at $4.11/MCFE, 34% of 2004 production at $4.24/MCFE and 3% of 2005

production at $4.91/MCFE. We estimate the value of the hedge contracts is $4.5 mm , ($1.6 mm),and ($7.0 mm) in the low ($22.00/$3.50), base ($25.00/$4.25), and high case ($27.25/$4.80)scenarios, respectively.


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2001 Jefferies & Company, Inc. All rights reserved.

This material has been prepared by Jefferies & Company, Inc. ("Jefferies") a U.S.-registered broker-dealer, employingappropriate expertise, and in the belief that it is fair and not misleading. It is approved for distribution in the United Kingdom by

Jefferies International Limited ("JIL") regulated by the Financial Services Authority ("FSA"). The information upon which thismaterial is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore exceptfor any obligations under the rules of the FSA, we do not guarantee its accuracy. Additional and supporting information isavailable upon request. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion orestimates constitute our best judgment as of this date, and are subject to change without notice. Jefferies and JIL and theiraffiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principalfor their own account. This material is intended for use only by professional or institutional investors falling within articles 19 or49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001and not the general investing public. Noneof the investments or investment services mentioned or described herein are available to other persons in the U.K. and inparticular are not available to "private customers" as defined by the rules of the FSA or to anyone in Canada who is not a"Designated Institution" as defined by the Securities Act (Ontario)."

I, Greg Imbruce, certify that all of the views expressed in this research report accurately reflect mypersonal views about the subject security(ies) and subject company(ies). I also certify that no partof my compensation was, is, or will be, directly or indirectly, related to the specific recommendations orviews expressed in this research report.

Mission Resources - 10-20-03 Report

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