Pod 1 Up and Running. Connacher completed construction of its first 10 mb/d
SAGD bitumen project in late 2007, which is currently producing at ~7.5 mb/d and
improving. In our opinion, this project set the benchmark for smaller operators, as Pod
1 was constructed on time and on budget ($270 mm or $27 K/b/d). Connacher’s
independent reserve evaluator (GLJ) has identified 7 pods on its lands with the
potential for nearly 50 mb/d of bitumen production on current oil sands leases.

Pod 2 (Algar) Construction Underway. After a hiatus induced by the global
economic downturn and cratering oil prices in 2008, Connacher has recently re-started
construction at its second 10 mb/d SAGD project. The budget is $360 mm ($375 mm
including contingency) with first oil in Q4/10. With Pod 2 essentially a ‘cookie cutter’
design to Pod 1, with $160 mm of the budget already spent, we see reduced execution
risk, as Connacher has proven its construction management ability.

Refinery & Conventional Assets Provide “Mini-Integration”. As a raw SAGD
bitumen producer, natural gas costs are a large component of oil sands expenses. With
~3.2 mboe/d of conventional production (66% gas), Connacher has a physical hedge
on fluctuations in natural gas prices. With its 9.5 mb/d heavy oil refinery in Great
Falls, Montana, the company also has a partial hedge on heavy to light differentials.

Initiating Coverage at $1.30/sh and Outperform Rating. Connacher represents
only one of a few ways to invest in the oil sands among publicly traded companies.
Trading at 0.8x our NAV on flat US$70/b pricing, we feel the current share price is a good entry point into the Connacher story. At its current valuation, we rate Connacher as Outperform.