IPAA’s 12th Annual Private Capital Conference Capital Markets Update “Mezzanine Capital” Paul Beck Macquarie Energy Capital

Mezzanine – Historical Perspective Started in early/mid 80’s with RIMCO and TCW Encap entered in the late 80’s MG Trade Finance and Enron in early 90’s Then the heyday in mid 90’s through early 2000’s ~$1b per annum market size Primary Players: Aquila, Cambrian, Duke, Enron, Mirant, Shell, TCW Following Enron and Merchant Sector collapse, all but TCW ceased to exist

Traditional Mezzanine Structure Senior Secured Loan Always “Project” Focused High Interest Rate (~10% vs. Prime @ ~5%) Equity Kicker Concurrent ORRI After Loan payout NPI or ORRI Control via Loan Covenants Returns of 20%+ Exit Issues

Mezzanine Today Now a Plethora of Players AIG Financial Products Corp., ARC Financial, BlackRock Energy Capital, Cerberus/AbleCo., Constellation Commodities Group, GasRock Capital, GE Capital, Goldman Sachs E&P Capital, Guggenheim Partners, Laminar Direct Capital, Lehman Bros, Macquarie Bank Limited, Morgan Stanley, Municipal Energy Resources, NGP Capital Resources, Petrobridge Investment Management, Prospect Energy, Prudential Capital Corp, Royal Bank of Scotland, Sowood Capital Management, TCW, Wells Fargo Energy Capital But Market Size is Fraction of Before

What is Mezzanine Today? Same as before, BUT Interest Rates relatively Lower Real Property Equity Kickers are lower, incorporate step-downs to bridge reserve estimate differences Warrants – willing to place bet on Market Sophisticated Players using fewer, smarter Control Covenants Better Engineering at Lender – less 3rd Party Dependence IRRs in the low teens for relatively higher risk New Structures with Seamless Exits

New Mezzanine Structures Senior Secured Project Loan Development Funding as Needed - Advance Line of Credit Cash Sweep for Debt Service Subordinated Debt Lower Cost of Capital by Blending Commercial Bank and “Mezzanine” Monies Structure to Enhance Interim Financial Flexibility High-grade non-PDP to Increase Bank Borrowing Base Structure to Facilitate Exit Strategy Nonconforming Corporate Loan Aggressive Borrowing Base Revolver Yield Enhancement via Warrants

New Mezzanine Structures Nonconforming Corporate Loan “MEGA” Structure Aggressive Borrowing Base Revolver PDP PW10% or greater Tiered Pricing Structure L+2% to 7% depending on usage Yield Enhancement via Warrants Seamless “Conforming Loan” Transition Post Near-term Development

Energy Investment Risk/Reward Private Equity and Industry - 100% R I S K “MEGA” Structure (Revolver) Percent of Reserves Exploitation Based Mezzanine Capital VPPs and “B” Loans Commercial Banks - 0% Prime Rate Low Teens 25%+ REWARD

Mezzanine vs Equity Comparison Project - Offshore Acquisition in late 2002 PDP PW10% - $10 million PDNP PW10% - $3.5 million PUD PW10% - $7 million Probable PW10% - $0.5 million Total PW10% - $21 million Purchase Price - $15 million Near-term Development Capex - $4 million Purchase Price ~ $1/Mcfe

Mezzanine vs Equity Comparison Traditional Senior Mezzanine Up-front Loan $9 million $13.5 million Development Loan $0 $4 million Equity – Upfront $6 million $1.5 million Equity - Development $3 million Interest 7% 10% After-payout NPI 25% Sweep for Debt Service 50% 90% RESULTS Lender IRR 7.0% 19.4% Lender Cash Flow $0.8 million $7.6 million Client IRR 35.4% 68.5% Client Cash Flow $12.1 million $5.3 million Client CF PW10% $7.3 million $3.5 million

Mezzanine vs Equity Comparison Client Risk Capital - $10m Client Risk Capital - $1.5m

Macquarie Group Overall Australian Based Financial Service Co. 7,000 Employees in 23 countries >US$85b Assets under Management Energy Focus Macquarie Energy Capital Macquarie Energy Markets Price Risk Management Recent Acquisition of Cook Inlet Macquarie Securities (USA) Inc. Capital and M&A Advisory

Macquarie Energy Capital Business Unit affiliated with Metals & Energy Capital Division World Leader in Natural Resource Investment Macquarie Bank - Energy Capital Provides a Wide Array of Debt and Equity Capital for the Upstream Oil and Gas Industry Conforming Senior Debt Senior “B” Loans Volumetric Production Payments (“VPPs”) Structured and Project Finance (“Mezzanine”) Subordinated Debt Corporate Restructurings and Recapitalization Convertible Debt Public and Private Equity Capital Deal Size - $10 million to $100 million Domestic and International

Macquarie Energy Capital

Macquarie Energy Capital Texas Rep Office - Houston Paul Beck Brian Hughes Steve Shatto Jerry Thompson Ray Weems Tel: +1 (713) 986 3600 London Andrew Sinclair Thomas Wagenhofer Tel: + 44 20 7065 2489 Sydney Gavin Bradley Vanessa Lenthall Tel: +61 2 8232 4248