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

2 Developing RELATIONSHIPS. Providing SOLUTIONS. ® Outline IWells Fargo Energy Capital Overview IICapital Options IIIEnergy Capabilities IVOur Energy Team

3 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

4 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

5 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

6 Developing RELATIONSHIPS. Providing SOLUTIONS. ® Oil and Gas Industry Risk Spectrum

7 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

8 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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).

9 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

10 Developing RELATIONSHIPS. Providing SOLUTIONS. ® Conforming Bank Lending

11 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

12 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

13 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

14 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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 DebtPrivate Equity higher advance rateless expensive accelerates reserve developmentless control limited or non-recourse (projects) easier to amend or increase

15 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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)

16 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

17 Developing RELATIONSHIPS. Providing SOLUTIONS. ® 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

18 Developing RELATIONSHIPS. Providing SOLUTIONS. ® Contacts Mark GreenGary Milavec PresidentSr. Vice President Clay TaylorMichael NepveuxVice President

19 Developing RELATIONSHIPS. Providing SOLUTIONS. ® Thank You