Wells Fargo Energy Capital August 2006 Presented to: IPAA/COGA Private Capital Conference.

Wells Fargo Energy Capital

August 2006

Presented to:

IPAA/COGA Private Capital Conference

2 Developing RELATIONSHIPS. Providing SOLUTIONS.®

Outline

I Wells Fargo Energy Capital Overview

II Capital Options

III Energy Capabilities

IV Our Energy Team


Wells Fargo

• Founded in 1852• Approx. $122B market cap (4th among U.S. bank holding

companies) • Approx. $500B assets (5th among U.S. bank holding companies)• One of the most recognized companies in the financial services

industry• The only Aaa rated bank in the United States• “AA+” by Standard & Poor’s Ratings Services• Wells Fargo Energy Group

• Energy Banking – Traditional commercial banking services• Energy Capital – Mezzanine, sub debt, and equity investments• Energy Advisors*– A&D advisory

* A division of Wells Fargo Securities


Wells Fargo Energy Group

• Headquartered in Houston, with offices in Dallas and Denver• 80+ professionals on staff; 7 engineers in an affiliated engineering

firm• Loan portfolio exceeds $6 billion in commitments• Target middle-market loans from $1 to $50+ million• Portfolio composition:

• 40% E&P• 30% Oilfield Service• 10% Refining & Petrochemical• 20% Pipelines, Gas gathering and marketing


Energy Capital

• Headquartered in Houston with representatives in Denver and Pittsburgh

• 10 professionals on staff • Over $500MM committed to 50+ new transactions since 1996• Target structured loans $3 to $30MM 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


Oil and Gas Industry Risk Spectrum

50+

5

10

15

20

25

30

35

40

45

PDP PDNP PUD Probable Possible

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

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

Bank Loan

0

Tar

get

Rat

e of

Ret

urn

, %

Reserve Risk

Mezzanine Debt(including sub debt and development loans)

Equity

50+

5

10

15

20

25

30

35

40

45

PDP PDNP PUD Probable Possible

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

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

Bank Loan

0

Tar

get

Rat

e of

Ret

urn

, %

Reserve Risk

Mezzanine Debt(including sub debt and development loans)

Equity


Bank Market

• E&P loans perceived as good “risk” assets by banks• Loan outstandings declining due to increased cash flows • Lenders aggressively seeking new clients to build/maintain

business• List of bank participants is expanding as well as full service

providers• Bank market is extremely competitive and responsive• Loan pricing has decreased and advance rates have increased


Typical Bank Deal

• Maturity of 3-5 years• Security: 80-95% of proved reserves• Hedge 75-80% of PDP reserves

• May be required to achieve desired borrowing base

• Bank group provides hedges; secured pari passu• Interest rate hedging allowed and encouraged• Pricing grid based on utilization• The advance rate will typically be in the range of 50% - 65% of

PDP PV10 (NYMEX).


Bank Reserve Criteria

• Reserves are risked such that PDP comprises the majority of total risked reserves

• Commodity price decks typically 50% - 75% of NYMEX (but can be more or less than that)

• Avoidance of well concentration (a single well often limited to 15% of the total)

• Pay-out within half life of the reserves• Preference for longer-lived reserves and wells with six months of

production history• Semi-annual redeterminations


Conforming Bank LendingA d v a n c e L o a n A d v a n c e A d va n c e R e a l

N Y M E X B a n k P r i c in g B a n k R i s k i n g R a t e ( $ m i ll i o n s ) A g a i n s t P D P A d va n c e R a teP D P 2 0 . 0 1 6 . 0 1 6 . 0P D N P / P U D 5 . 0 4 . 0 2 . 4

2 5 . 0 1 8 . 4 6 0 % 1 1 . 0 5 5 . 2 % 4 4 %

A d v a n c e L o a n A d v a n c e A d va n c e R e a l

N Y M E X B a n k P r i c in g B a n k R i s k i n g R a t e ( $ m i ll i o n s ) A g a i n s t P D P A d va n c e R a teP D P 1 5 . 0 1 2 . 0 1 2 . 0

P D N P / P U D 1 0 . 0 8 . 0 4 . 02 5 . 0 1 6 . 0 6 0 % 9 . 6 6 4 . 0 % 3 8 %


N Y M E X B a n k P r i c in g B a n k R i s k i n g R a t e ( $ m i ll i o n s ) A g a i n s t P D P A d va n c e R a teP D P 1 0 . 0 8 . 0 8 . 0P D N P / P U D 1 5 . 0 1 2 . 0 2 . 7

2 5 . 0 1 0 . 7 6 0 % 6 . 4 6 4 . 0 % 2 6 %


N Y M E X B a n k P r i c in g B a n k R i s k i n g R a t e ( $ m i ll i o n s ) A g a i n s t P D P A d va n c e R a teP D P 5 . 0 4 . 0 4 . 0

P D N P / P U D 2 0 . 0 1 6 . 0 1 . 32 5 . 0 5 . 3 6 0 % 3 . 2 6 4 . 0 % 1 3 %

P V 1 0 ( $ m il l io n s )

P V 1 0 ( $ m il l io n s )

P V 1 0 ( $ m il l io n s )

P V 1 0 ( $ m il l io n s )


Private Equity Market

• Significant amount of new capital has been committed to seasoned and new funds

• Traditional energy private equity players have been raising complementary, non-equity funds

• Working interest funds, mezzanine funds, royalty funds, etc.• Larger funds necessitate larger transactions and/or more portfolio

companies


Private Equity Market Trends

• Funds are bigger, able to write much larger checks and need to deploy capital

• “Blank check” investing for established management teams• Less management equity required• Better economics for management after return thresholds are met• Fewer exploitation/development transactions since many

companies are selling earlier in the development cycle• More exploration and foreign investment transactions


Definition of Mezzanine Debt

Mezzanine (mĕz‘ ə-nēn) 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, typically supported to a material extent by undeveloped reserves, with equity beneath and sometimes senior debt above; not meant to be a permanent or primary source of capital.

• Good solution for companies who:• Need capital to acquire and/or develop undeveloped reserves

• Require more capital than commercial banks will provide

• Don’t want to sell or bring in an industry partner

• Want to avoid ownership dilution inherent in raising equity capital


Mezzanine Debt Market

• Started in early/mid ’80s with TCW and RIMCO• Numerous players have come and gone since then (Enron, Aquila, Williams,

Shell Capital, Mirant, etc.• After Enron and merchant sector collapse, only TCW and WFEC remained active• Numerous new players today (BlackRock, GasRock, Macquarie, NGP Capital,

PetroBridge, Guggenheim, RBS, Goldman, Prospect, etc.• Hedge funds are also now active• Competition has driven returns down and increased risk• Advantages of mezzanine debt versus:

Bank Debt Private Equity

higher advance rate less expensive

accelerates reserve development less control

limited or non-recourse (projects) easier to amend or increase


Typical Mezzanine Structure and Pricing

Project Debt• Secured with first lien• $3MM - $25MM • Fund development/acquisition of

proven reserves • Borrowing base < 65% proved PV10

using NYMEX pricing • 2-4 year maturity • IRR: 15% - 25%: Coupon Rate: 10% -

12%, ORRI < 5%, APO NPI 15% - 75%, warrants possibly

• Cash Sweep: 75% - 95%• Runs deposited in a cash collateral

account• Commodity hedging typically required

Subordinated Debt• Secured with second lien• $10MM+• Fund development/acquisition of

proven reserves; refinancings; recaps.• Advance Rate: senior + sub = 65% to

75% of NYMEX PV10%• Maturity set 6 mos. after senior

maturity • IRR: 10% - 15% in the form of coupon;

usually no equity kickers• Cash Sweep: no• Commodity hedging usually required• Typically no borrowing base;

protection via asset coverage test (NYMEX PV10)


Mezzanine Debt Advantages

• Typically non-recourse• Smaller equity contribution required• Will take more reserve risk than commercial banks• Higher advance rates than commercial banks• Accelerate funding and development• Avoid dilution of equity ownership• Maintain control• Capture a larger share of the value created• Less expensive than equity or bringing in a working interest

partner


Mezzanine Debt Philosophy

• Mezzanine loans should create value • Mezzanine debt should always have some equity underneath (and

it may be ours)• A successful development project is defined as one that meets

bank refinancing parameters• Higher level of risk capital demands a higher return• A capital structure that that incorporates all senior project debt or

a combination of sub debt and senior bank debt is cheaper and more flexible than private equity


Contacts

Mark Green Gary MilavecPresident Sr. Vice President

713-319-1327 724-942-5839

mark.m.green@ wellsfargo.com [email protected]

Clay Taylor Michael NepveuxVice President Vice President

713-319-1611 303-863-5589

[email protected] [email protected]


Thank You

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Wells Fargo Energy Capital August 2006 Presented to: IPAA/COGA Private Capital Conference.

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