EXECUTIVE SUMMARY
Below is a summary of our opinion on the sector and of what we believe are the primary
drivers of the sector.
Sector Stance
• We are positive on the sector and believe there is currently an opportunity to
selectively invest in undervalued companies.
• Valuations are attractive, with many companies trading at discounts to their net
asset value and at historically low multiples.
• On average, the junior sector is trading at a 53% discount to 52-week highs.
Driver 1: Commodity Prices
Natural Gas
• We believe 2008 will be a better year for gas prices than was 2007.
• A colder-than-average winter or significant hurricanes will likely be required for a
material increase in gas prices from current levels.
• For the longer term, we feel that expanded liquefied natural gas (LNG) capacity in
the United States will put a cap on North American prices.
• The cap would be European prices plus the liquefaction,
transportation and regasification cost of delivering LNG to North
America.
Crude Oil
• We are bullish on crude oil prices and believe that even a recession in the United
States will not dampen prices by more than 5% to 8%, given the strong demand
growth from non-OECD countries.
• In our opinion, geopolitical risk in the crude market adds about 10% to what we
believe is the fundamental price of oil.
Driver 2: Operating Environment
• The proposed Alberta royalty changes have caused an exodus of capital from
Alberta to British Columbia and Saskatchewan.
• Companies confined to Alberta have shown a willingness to reduce both capital
spending and drilling activity as a result of the reduced economics of drilling in
Alberta.
• The positive side for producers is that the cost structure has improved with lower
activity levels.
• We expect a period of increased merger and acquisition activity due to stretched
balance sheets (primarily caused by lower natural gas prices), eroding play
economics caused by increasing royalties, the lack of investor interest in the sector,
and the elimination of the previous Royalty Trust exit plan.
Driver 3: Company-Specific Characteristics
In this market, we believe investors will target those companies with:
• Lower-risk assets (see Asset Risk Summary, p. 19)
• Clear growth prospects
• Strong balance sheets

• A diversified commodity mix, if not an oil weighting
• Proven management teams with a history of performance
• Attractive valuations
SECTOR DRIVERS
Driver 1: Commodity Prices
Commodity prices are the single biggest driver in the energy sector, plain and simple. Nothing
can move the broad sector like an increase or decrease in commodity prices. Figure 2 plots the
relative return in the senior oil and gas sector, junior oil and gas sector, crude oil price and
natural gas price. The senior oil sector is 55% weighted to crude oil and is more strongly
correlated to crude prices than to gas prices. The opposite is true for the junior sector: natural
gas is the primary product and the sector, on the whole, tracks that price closely.

Table of Contents
Initiating Coverage 1
Executive Summary 3
Driver 1: Commodity Prices 4
Driver 2: Operating Environment 16
Driver 3: Company-Specific Asset Base 19
Driver 4: Valuation 20
Accrete Energy (GZ–TSX) 24
Breaker Energy Ltd. (WAV.A–TSX) 42
NuVista Energy Ltd. (NVA–TSX) 68
Rock Energy Inc. (RE–TSX) 94
Storm Exploration (SEO–TSX) 114
TriStar Oil & Gas Ltd. (TOG–TSX) 134