Connacher Oil and Gas (TSX: CLL)

A Junior with Integrated Oil Sands Growth

Outperform

Speculative Risk

Price: 3.73

Shares O/S (MM): 208.4

Dividend: 0.00

NAVPS: 4.85

Float (MM): 204.6

Price Target: 5.00

Implied All-In Return: 34.0%

Market Cap (MM): 777

Yield: 0.0%

P/NAVPS: 0.8x

Event

We are initiating coverage on CLL with a rating of Outperform, Speculative Risk

and a target price of $5.00.

Investment Opinion

We believe that Connacher will outperform its peer group for the following

reasons:

• Exploration Upside Not Priced In. Connacher is conducting an active core

hole drilling program at Great Divide this winter. The company plans to drill

120 core holes, which would almost double the existing core hole inventory.

Results are likely to be released with a mid-year reserve report in the third

quarter of 2008. GLJ Petroleum Consultants Ltd. ("GLJ") estimates prospective

resources could be as much as 346 MMbbl, none of which is currently reflected

in Connacher's share price, in our view.

• Experienced Management. Impressive execution on the company's first oil

sands project highlights a very experienced management team, which we

believe is capable of successfully executing currently identified projects, as

well as sourcing new opportunities.

• Operational Control. With a 100% working interest in its oil sands and

refining assets, Connacher is able to advance projects at its own pace and

design. This is unique among most emerging oil sands companies, which often

have partners who may have different views on project timing and scope.

Given their modest scale, we believe these projects are manageable without a

larger partner.

• Fully Funded For Pod Two. Connacher recently raised approximately $850

million, including flow-through common shares ($52 million), senior secured

notes (US$600 million) and a five-year revolving credit facility ($200 million).

As a result, we believe the company can now fund its 2008 capital program, in

addition to the anticipated completion of Algar (Pod Two) in 2009 without the

need to raise additional capital.

• While we believe the recent financings are a positive in terms of funding the

company's integrated growth strategy, the increased financial leverage does add

a significant amount of risk.

A detailed initiation report on CLL will be available shortly.

Valuation. Using the current futures strip, we do not believe Connacher's share

price is reflecting any value for its substantial resources beyond Pod Two or the

potential refinery expansion. We estimate it is trading at NAV discounts of 48%

on an unrisked basis and 23% on a risked basis. We have set our one-year target

at $5.00, in line with our risked NAV estimate of $4.85.