Wells Fargo Energy Capital

Michael NepveuxSenior Vice President

Presented to: IPAA Capital Markets Seminar January 16, 2008

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Developing RELATIONSHIPS. Providing SOLUTIONS.®

Who is the Wells Fargo Energy Group?

Quick Facts:Quick Facts:• Over three decades of lending to the Energy Over three decades of lending to the Energy

industryindustry• 105+ staff members in Houston, Dallas and 105+ staff members in Houston, Dallas and

DenverDenver• Our clients have revenues from $10MM to $50B+Our clients have revenues from $10MM to $50B+• Broad product offering including senior debt, Broad product offering including senior debt,

mezzanine debt, private equity, commodity and mezzanine debt, private equity, commodity and interest rate derivatives, and treasury interest rate derivatives, and treasury management.management.

• The mission of the Wells Fargo Energy Group is to The mission of the Wells Fargo Energy Group is to be the bank of choice for all segments of the be the bank of choice for all segments of the energy industryenergy industry

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Who is Wells Fargo Energy Capital?

Quick Facts:Quick Facts:• Headquartered in Houston with representatives in Headquartered in Houston with representatives in

Denver and PittsburghDenver and Pittsburgh• 11 professionals on staff 11 professionals on staff • Over $1B committed to the mezzanine finance sector Over $1B committed to the mezzanine finance sector

since 1996since 1996• In 2007 completed 43 deals totaling over $300MM In 2007 completed 43 deals totaling over $300MM • Funds provided for development drilling; highly Funds provided for development drilling; highly

leveraged acquisitions and bridge facilitiesleveraged acquisitions and bridge facilities• Make select equity investments in sponsored funds Make select equity investments in sponsored funds

and private companiesand private companies

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Wells Fargo Energy Group

$8.5$8.5BB

Energy Services & Energy Services & Equipment- 30%Equipment- 30%

Refining & Refining & Petrochemicals- 10%Petrochemicals- 10%

Exploration & Exploration & Production- 40%Production- 40%

Pipelines, Gathering Pipelines, Gathering & Processing- 20%& Processing- 20%

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Where Do We Fit in the Development Cycle?

Production

Start-Up Development Acquisition Development

Development Loan, Equity

Senior Revolver

Subordinated Debt, Equity

Syndicating Senior

Revolver

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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 o

f R

etu

rn,

%

Reserve Risk

Mezzanine Debt

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 o

f R

etu

rn,

%

Reserve Risk

Mezzanine Debt(including sub debt and development loans)

Equity

Oil and Gas Industry Risk Spectrum

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Definition of Mezzanine Debt

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 (mĕz‘ ə-nēn) n. [from Latin, medianus middle, median]: 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.

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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, but more selective in recent months

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

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Typical Mezzanine Structure and Pricing

Project Debt Secured with first lien $3MM - $50MM Fund development/acquisition of

proven reserves Bridges to conforming bank debt

if reserves not sold 1-3 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 = up to 75% of NYMEX PV10%

Maturity set 6-12 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)

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Mezzanine Advantages vs. Conforming Bank

Mezz shops take more reserve risk than commercial banks

Smaller equity contribution required

Higher advance rates than commercial banks

Accelerate funding and development

Typically non-recourse

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Mezzanine Advantages vs. Private Equity

Retain greater portion of the upside

Cheaper way to finance a proved drilling program

Maintain control

Easier to exit

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Second Lien Market Domino Effect

As the subprime spiral spread, it affected the investment firms that managed

them and the hedge funds and other investors that bought them

When liquidity dried up arrangers were sitting on immense underwriting

positions which created an overhang in the debt markets

This liquidity squeeze pushed the entire market into price-discovery mode

and substantially increased risk aversion

High yield market “impaired but operational” – Treas. Sec. Paulson last

week. Volumes down sharply, spreads wider.

Oil and Gas 2nd Lien and mezzanine not immune. Markets are open, but at

wider credit spreads, reflecting investor appetite and liquidity.

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Market Trends

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Developing RELATIONSHIPS. Providing SOLUTIONS.®

Market Trends

Source: Bloomberg Source: Bloomberg

High Yield Credit Spreads: 01/02/02 - 01/10/08 High Yield Credit Spreads: 01/01/07 - 01/10/08

50

100

150

200

250

300

350

400

450

500

550

600

650

01/01/07 02/16/07 04/04/07 05/21/07 07/07/07 08/22/07 10/08/07 11/24/07 01/10/08

Sp

read

-to

-Wo

rst

(bp

s)

HY IG

0

200

400

600

800

1000

1200

01/02/02 10/03/02 07/05/03 04/05/04 01/05/05 10/07/05 07/09/06 04/10/07 01/10/08

Sp

read

-to

-Wo

rst

(bp

s)

HY IG

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Developing RELATIONSHIPS. Providing SOLUTIONS.®

Contacts

Mark Green Gary Milavec

President Senior Vice President

713-319-1327 724-942-5839

mark.m.green@ wellsfargo.com milavega@wellsfargo.com

Chris Carter Michael Nepveux

Vice President Senior Vice President

713-319-1369 303-863-5589

chris.c.carter@wellsfargo.com michael.nepveux@wellsfargo.com

Thank you