NON-OPERATED OIL & GAS INTERESTS: BUILDING & FINANCING A PORTFOLIO JAY GOLDFARB, PH.D. WOODBRIDGE OIL & GAS ADVISORS MAY 22, 2012

2 I NTRODUCTION Agenda & Presenter 2 AGENDA: 1.Introduction 2.Capital Sources 3.Illustrative Economics 4.Summary/Conclusions 5.Contact Jay Goldfarb, Ph.D. is President of Woodbridge Oil & Gas Advisors 1, an investment banking firm specializing in the sale of upstream oil & gas properties. Jay has assisted his clients with the execution of more than $1 billion of acquisition, divestiture and financing transactions throughout North America, including numerous Bakken projects. Prior to joining Woodbridge, Jay was a Vice President at Mesirow Financial, a Chicago-based boutique investment banking firm. He holds a Ph.D. in Chemical Engineering from the University of Massachusetts at Amherst. 1 Securities offered through Woodbridge Financial Group, LLC. Member FINRA, SiPC PRESENTER:

3 I NTRODUCTION Single Well Economics – Participating vs. Selling Undeveloped Core Acreage 3 Rates of return from drilling in core areas are too extraordinary to forego for lack of funding  Bakken development activity is challenging the non-operated working interest owner’s ability to finance participation  Selling undeveloped core acreage will capture only a fraction of the potential returns available from participating  The market for undeveloped acreage demands a seemingly high rate of return compared to risk NOTE: The examples contained in this presentation are for illustrative purposes only. You should consult with appropriate experts to evaluate specific investment opportunities.

4 I NTRODUCTION Opportunities and Challenges of Non-Op Oil & Gas Interests 4 Non-operated interests are essentially financial assets. Managing these assets consists of choosing the structure and timing for a series of financing and divestiture transactions. Effective planning and decision analysis supported by financial modeling is essential for maximizing value. Opportunity Extraordinary ( 40 to 100%+) rates of return available from participating in drilling on the leases Upside potential from re-fracs, increased density and secondary targets, particularly the deeper Three Forks benches In the core area, no geological risk; development risk is quantifiable Financing is a challenge Up-front investment Limited production = limited borrowing capacity Rapid drill-out accelerated by pad drilling, walking rigs Keys for Success Effective use of leverage – Match to assets, IRR, timing of cash flows Support decisions with engineering data and financial analysis Financial model, capitalization and exit plan

5 I NTRODUCTION Elements of a Successful Plan 5 The plan is the Roadmap for the transformation of a portfolio of undeveloped working interests to cash. It provides support for decision analysis related to potential financing and divestiture transactions. Investment Objectives Capital willing to risk Expected return Risk/Return proposition – growth and exit Define acceptable risk Essential Plan Elements Development plan Cash flow forecast, external funding and contemplated progression of financings Return on equity Hedging/risk management – what is comfort level with oil prices and reserves Engineering and reserve report

6 Capital structure, Risk and Pricing 6 Understanding the capital markets is essential for managing these assets. The market provides a spectrum of products to suit the capital requirements and associated risk. C APITAL S OURCES Risk Type IRR Objective Capital Parameters Engineering RiskExploration Risk 5% 10% 20% 35% 50%+ Proved Producing Proved Non-Producing Proved Undeveloped Probable Producing Proved Undeveloped Wildcat Mezzanine /Sub Debt Development expected to cure loan to conforming bank debt within months Senior Bank Debt ~60% of PDP Small % PDNP/PUD Equity No proven reserves, limited probable reserves

7 I LLUSTRATIVE E CONOMICS Economics of Mezzanine Financing for a Single Well 7 Mezzanine Lenders seek 18%+IRR with typical two year minimum term. The cost of this capital should not be a barrier as the typical Bakken well pays out the loan by maturity. Illustrated for the first two years production, a typical mezzanine maturity

8 Initial Development Funded with Mezzanine, Refinanced with Senior Debt 8 Mezzanine lenders may finance 100% of development expenses with no starting production on the leases. Production generates borrowing base to refinance with less expensive senior debt. Mezzanine finances initial 18% ROR, minimum 2 yr. duration (1.4x return) Refinanced with senior conforming loan, advance rate less than 60% of PDP PV-10, at end of year 2 Further drilling could be funded with senior debt and cash flow Need for mezzanine is limited, cost of capital is a blend of mezzanine and senior rates I LLUSTRATIVE E CONOMICS

9 Summary Economics 9 In this example, 100% of the external capital requirement is funded with debt, resulting in significant value creation relative to the cost of capital. Upside is retained. I LLUSTRATIVE E CONOMICS

10 S UMMARY /C ONCLUSIONS Summary and Conclusions 10 Summary  Rates of return from drilling in core areas are too extraordinary to forego for lack of funding.  Mezzanine loans is an alternative to equity and may finance 100% of development costs is proven areas with attractive economics.  Mezzanine loans can be refinanced with less expensive senior, reserves based lending. Reserves based lending and cash flow will be available to finance subsequent development. Hold or Sell?  The market for undeveloped acreage appears to demand equity returns inconsistent with risk, particularly when considering the potential upside.  Notwithstanding the upside, buyers for production will accept lower returns, limiting the attractiveness of holding. Further, the benefit of holding production is offset by the tax arbitrage between ordinary income and capital gains.

11 C ONTACT 11 Upstream oil & gas asset acquisitions and divestitures CONTACT: JAY GOLDFARB, PH.D. WOODBRIDGE OIL & GAS ADVISORS