Denver - Energy Annual Meeting

December 13, 2001

11

IPAA Oil and Gas Investment Symposium

Private Capital Conference

Tim Murray, Wells Fargo Energy Capital

April 18, 2005

• Introduction of Wells Fargo

• The Mezzanine Market

• The Wells Fargo Philosophy on Mezzanine Financing

• Case Studies

Acquisition and Development Capital

• Wells Fargo was founded in 1852

• 4th largest market cap of all U.S. bank holding companies

• 5th largest bank holding company in U.S. ($428 billion of assets)

• One of the most recognized companies in the financial services industry

• The only Aaa rated bank in the United States

• Wells Fargo Energy Group • Energy Banking – traditional commercial banking services• Energy Capital – mezzanine, sub debt, and equity investments• Energy Advisors – A&D advisory

Wells Fargo

Energy Banking

• Headquartered in Houston, with offices in Dallas and Denver

• 63 professionals on staff ; 7 engineers in an affiliated engineering firm

• Loan portfolio exceeds $4 billion in commitments

• Target middle-market loans $1 to $50 million

• Portfolio composition: E&P 40%; 30% oilfield service; 10% refining & petrochemical; 20% pipelines, gas gathering, and marketing

• Offer traditional commercial banking services: treasury management; purchasing cards; retirement plans; currency, interest rate, and commodity risk management; and investment management

Energy Advisors

• Headquartered in Houston

• Principals: Tom Hedrick and Kevin Neeley

• Combined 28 years, 34 deals, $9 BN oil and gas transaction experience

• Domestic and international asset divestitures and corporate sales

• Advisory service tailored to middle market clients

• Principals involved in every transaction

• One-Stop solution for acquisition and divestment needs

Energy Capital

• 12 professionals on staff , headquartered in Houston, with an office in Denver

• Over $420MM committed to 45 new transactions since 1996

• Target structured loans $5 to $30 million with higher risk/return profiles

• Funds provided for development drilling; highly leveraged acquisitions; bridge facilities; subordinated debt; and production payments

• Make selective equity investments in sponsored funds, and private companies

• Advise Foothill Capital on distressed investments

Definition of Mezzanine Debt

Mezzanine (mez’e nen) n. [from Latin, medianus middle, median] 1. An intermediate story, usually not of full width, between two main floors, especially the ground floor and the one above it.

Energy finance translation: a middle layer of capital, with equity beneath and usually senior debt above; not meant to be a permanent or primary source of capital.

Mezzanine debt is primarily provided to private companies who require more capital than commercial banks can provide and who cannot access the public markets.

Mezzanine debt is a good solution for those companies who exceed commercial bank parameters but still have cash flow to amortize additional debt.

50+

5

10

15

20

25

30

35

40

45

PDP PDNP PUD Probable Possible

---------- Development/Exploitation ------------ (Engineering Risk)

---------- Exploration ----------- (Geologic/Geophysical Risk)

Oil and Gas Industry Risk Spectrum

Bank Loan

0

Tar

get

Rat

e of

Ret

urn

, %

Reserve Risk

Development Loans and Mezzanine Debt

Project Equity

Equity-Linked Securities

Wildcat Drilling

Mezzanine Debt MarketDomestic E&P only, including Term Bs and Second Liens but not VPPs

0

200

400

600

800

1,000

1,200

1,400

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

($M

M's

)

Source: Wells Fargo Energy Capital

Mezzanine & High Yield Debt Markets Domestic E&P Only

Source: John S. Herold, Inc. & Wells Fargo Energy Capital

0

1

2

3

4

5

6

7

1996 1997 1998 1999 2000 2001 2002 2003 2004

($B

n's

)

High Yield Debt Mezzanine Debt

Mezzanine Debt Market

• Primary Drivers

• Conservative commercial bank market

• High thresholds for public debt/equity

• Expensive or scarce private equity

• Strong backwardation in the commodity prices

• Extensive development program requirement (high PUD component)

• Advantages of mezzanine debt versus

Bank Debt Private Equity

limited or non-recourse less control

higher advance rate less expensive

more flexible use of proceeds easier to amend or increase

accelerates reserve development

Wells Fargo’s Mezzanine Philosophy

• Wells Fargo Energy Capital was formed to serve our middle market bank clients with mezzanine finance or A&D advice

The goal is to create a relationship, not complete a transaction

• Mezzanine loans should create value

Funds should be used to acquire or develop reserves

• Mezzanine debt should always have some equity underneath

• A successful development project is defined as one that meets bank refinancing parameters

• High risk capital demands a higher return

• A capital structure that blends mezzanine and senior bank debt is cheaper and more flexible than private equity

Typical Mezzanine Structure and PricingProject Financing

• Fund development of proven reserves

• Borrowing base = 65% of total proved using NYMEX pricing (75% if more than 50% PDP)

• Maturity set soon after project completion

• Secured with first lien

• Rate: 10% - 12%

• ORRI: < 5%

• NPI: 15% - 75%

• Warrants: if appropriate

• Cash Sweep: 75% - 95%

• Runs deposited in a cash collateral account

• Commodity hedging required

Subordinated Debt

•Accelerate development activity or refinance debt

• Borrowing base: senior + sub < PW10%

• Maturity set soon after senior maturity

•Secured with second lien

• Rate: 6% - 15%

• ORRI: not usually

• NPI: not usually

• Warrants: if appropriate

• Cash Sweep: no

• Commodity hedging usually required

How to Finance Acquisitions in a High Price Environment

“B” Term Loans

• First lien, longer-dated debt with senior bank covenants (pari passu) and 0-50 bp pricing premium

• Covenants tend to be light with minimal penalties for prepayment, as are fixed repayment requirements that typically rely almost exclusively on cash sweeps

• Primarily sold to institutions, therefore can be difficult to amend

• Minimal amortization requirements, high refinancing risk

• No borrowing base redeterminations

• $100MM minimum size

• Credit rating is typically required

Term Loan B Market

175

200

225

250

275

300

325

350

375

400

425

450

475

12/99 4/00 8/00 12/00 4/01 8/01 12/01 4/02 8/02 12/02 4/03 8/03 12/03 4/04 8/04 12/04

basis points

BB BB/B split rated B

LIBOR Spread

Source: Loan Pricing Corporation

How to Finance Acquisitions in a High Price Environment

Second Lien Debt (Senior/Sub or Structurally Subordinated Note)

• Second lien, longer-dated debt with more relaxed covenants and

100-300 bp pricing premium

• Primarily issued by banks and mezzanine firms

• Subject to borrowing base redeterminations or asset coverage/tail test

• Significant hedging is usually required

Oklahoma based Independent• Approximately $5MM of PDP value at initiation with

numerous PUD and Probable locations• $5MM initial facility with a large APO NPI that decreased

if WFEC achieved certain hurdle rates of return• Facility used for development drilling, approximately

$1MM was available for additional leases • Swaps and/or collars were required• After merger with a public company, a new facility was

structured with $10MM of senior WFB bank debt and $7.5MM of subordinated WFEC debt

• WFEC granted a warrant (with a put option) to purchase approximately 12% of the Client

Cherokee Basin CBM Development Financing

Cherokee Basin CBM Development

050

100150200250

300350400450500

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

(MMC

F/Mo

nth)

WFEC

WFB & WFEC

Marietta Basin Development Financing

North Texas Development drilling program • $28MM of initial PDP and $80MM of PUD reserves• Long production history for the field; long life properties• Experienced management team with only $1MM of equity

between them• $40MM Senior Mezzanine facility and $10MM limited

partnership equity investment for initial acquisition, with $4MM of availability for additional development

• 10% guaranteed IRR on limited partnership equity• 85% of PDP hedged initially• WFEC syndicated half of the facility to a hedge fund

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004 2005 2006

(MM

CF

/Mo

nth

)

0

5

10

15

20

25

30

(MB

bl's

/Mo

nth

)

Marietta Basin Development Financing

WFEC

Texas-based offshore development company• GOM shelf operator previously financed by Shell Capital• WFB syndicated a $14MM reducing revolver (now $41MM); WFEC

provided a $6MM subordinated facility• Proceeds used for future development• WFEC facility secured by second liens • No equity kicker for WFEC• Company actively hedges PDP volumes on an ongoing basis• The facility has been refinanced with a senior bank / subordinated

debt structure with a lower blended cost

WFEC committed $27.5MM for development facilities for two affiliated companies, which included an ORRI.

Offshore Gulf Of Mexico Development Financing

0

200

400600

800

1,000

1,200

1,4001,600

1,800

2,000

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

(MMC

FE/M

onth

)Offshore Gulf of Mexico Development

Shell Capital

WFB / WFEC

Williston Basin Development Financing

Texas-based independent developing the Sleeping Giant Field in Montana

• Horizontal drilling play on the Bakken Dolomite at 10-12,000’• Acreage in Montana, plus DJ Basin acreage and reserves pledged• Facility included a high interest rate and fees, but no ORRI or NPI • Crude oil collars were used to protect against a decline in oil prices• Reduced mechanical risk through a partnership with Halliburton • Drilled and fraced 22 laterals in 24 months• Monthly production increased from 200 to 2,700 BOPD• PDP PW10% almost doubled in one year; Total Proved PW10%

almost tripled in one year • Private equity firm invested equity and the development loan was

refinanced by a Wells Fargo senior credit facility• Daily production now averages around 10,000 BOPD

Williston Basin Field Development

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

BO

PD

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

MC

FD

WFEC (6/01)

Equity + WFB/WFEC

Conclusions

• Capital is readily available to the industry• Bank credit is available and relatively cheap• Mezzanine firms are back• Public debt markets are receptive• Record amount of private equity is available• Threshold for public equity is relatively high

• Acquisitions and development can be financed in today’s high price environment

Denver - Energy Annual Meeting

December 13, 2001

11

IPAA Oil and Gas Investment Symposium

Private Capital Conference

Tim Murray, Wells Fargo Energy Capital

April 18, 2005