CKUA

[KastelCo]

Connacher get a reco..
JUNE 19, 2008

Connacher Oil and Gas (TSX: CLL)

Integrated Producer with Attractive Valuation

Outperform

Speculative Risk

Price: 4.70

Shares O/S (MM): 227.4

Dividend: 0.00

NAVPS: 7.18

Float (MM): 206.1

Debt to Cap: 42%

Price Target: 6.25

Implied All-In Return: 33%

Market Cap (MM): 1,069

Yield: 0.0%

P/NAVPS: 0.7x

Avg. Daily Volume (MM): 1.53

Event

We are initiating coverage of CLL with a target of $6.25 and an Outperform,

Speculative Risk Rating.

Significant Leverage to Long-Term Oil Prices. Connacher currently has

identified almost 800 million barrels of reserves and contingent/prospective

resources. Connacher conducted an active core hole drilling program this past

winter (120 core holes) and results from the drilling program will be incorporated

into a mid-year reserve report. Although it is difficult to predict the magnitude of

conversion from prospective to contingent resource, we expect the drilling

program will allow a significant amount of the 347 million barrels of prospective

resource to move to the contingent category.

Experienced Management Team. CLL's execution on the company's first oil

sands project was excellent (in terms of days to complete and ultimate capital

efficiency). We expect the management team will be able to duplicate its

successful execution with future phases.

Incremental Production Potential at Pod 1. CLL is considering options to add

additional surface capacity which could increase productive capacity at Pod 1 by

25% to ~12,500 bbl/d. This would involve limited incremental regulatory filings

but ultimately depend on continued ramp up and well performance. Any

production gains at Pod 1 would be incremental to our current valuation.

Significant Un-Risked Potential. Our un-risked NAVPS (futures) estimate

(which includes future growth prospects) is over $13/share, with a risked NAVPS

(futures) estimate of ~$8.50 (see Exhibit 4 for details). We are not yet willing to

set our price targets for long-lived assets off of strip pricing. Therefore, we are

initiating coverage of CLL with a target price at $6.25/share, which is

approximately 25% below our risked NAVPS (futures) estimate and consistent

with our target price methodology for other long-lived assets.

Investment Thesis - History of Impressive Execution. With an experienced

management team, and successful execution at Pod 1, we believe CLL offers

investors exposure to value creation through the development of identified future

Pods with an integrated strategy that limits exposure to highly volatile heavy oil

differentials. Our target price of $6.25/share offers an implied return of 33% and

therefore warrants a rating of Outpeform.