1. Navigating the Maze of Available Financing Options
Plexus Capital, LLC
An Intricately Interwoven Combination of Elements or Parts in a Cohering Structure
Navigating the Maze of Available Financing Options
New York
April 18, 2005
Wayne Williamson 1560 Broadway, Suite 1950, Denver, CO
(303)

2. Plexus Capital, LLC
Formed to design and source conforming and alternative financing structures, minimizing the cost of capital for oil and gas producers
Will assist the producer in determining its capital requirements and advise alternative solutions for accessing it
Will assume lead role for transaction to expedite execution and allow producer’s management to continue to focus on current business
Previous transactions have been structured as non-recourse monetization of PDP assets, compartmentalizing different risks to enable a high advance rate at lower than market cost of capital, allowing the producer to retain 100% of the upside
Previous transactions have been structured as taxable to convert ordinary income to long term capital gain
Plexus Capital, LLC

3. CFO’s Capital Formation Responsibilities
Don’t run out of money
Forecasting
Anticipate capital requirements
Reduce cost of capital
Evaluate and manage risk
Match risk with lender risk tolerance
Plexus Capital, LLC

4. Sources of E&P Capital Public Markets Private Markets Debt
Equity and equity-linked debt
Private Markets
Commercial banks
Vendors (well service, seismic, pipeline companies)
Individuals
Industry partners
Private institutions (direct or thru fund managers)
Plexus Capital, LLC

5. Why Hire an Intermediary?
Internal personnel available and qualified to handle capital formation?
Understanding of the current market range and cost of available capital
Identifying tier/type/structure of capital that best fits the need
Ability to communicate to capital markets through written and verbal presentations
Ability to identify strengths and weaknesses of the internal organization
What has been done before? What is reasonable to ask for?
Time required to:
Design and prepare information to present to capital markets
Track process as the market of the cost of capital is determined
Read and negotiate agreements
Creates an improved dynamic in the negotiation
May gain more information from the capital provider
Decision maker is removed from direct negotiation creating protection from forced commitments
Plexus Capital, LLC

6. Intermediary’s Role
Help producer design the capital type and structure to source
Producer risk tolerance
Cost of capital
Draft a transaction memorandum laying out the deal for prospective funders
Model the producer entity pro forma the capital being sourced
Arrange producer presentations to prospective funders
Negotiate term sheets
Ensuring the producer understands his true cost of capital and risk he is either keeping or transferring to the funder
Keep producer and funder from “talking past each other”
Recommend attorneys skilled in the type of transaction being undertaken
Review and negotiate documentation
Get the deal closed
Fund expensive extravagant closing dinner
Start to finish can vary based on complexity, where it is in the “bid/ask” spread, deadlines created by other transaction, experience of funder
Plexus Capital, LLC

7. Attributes of a Good Intermediary
Good negotiation and communication skills
While maintaining a good relationship with and respect of funders, his relationship with producers is paramount
Knowledge of capital markets
Knowledge of producer business, concerns, future potential tension points
Persistent
Imaginative
Interest in getting the best deal for his client, as opposed to just getting a deal done
Plexus Capital, LLC

8. How Does an Intermediary Charge for his Services?
EVERYTHING is negotiable! Only lack of imagination limits what can be done
Up front retainer
One time
Monthly
Reimbursement of out of pocket costs approved by client
Success fee as a percent (1%-5%) of dollars committed or funded
Conforming debt at lower end, non-conforming and equity at upper end
Higher up front retainer can be traded for lower success fee
Size of deal
Tension points in engagement:
Exclusivity of representation
Term of tail period for additional fundings after initial closing
Indemnification
Plexus Capital, LLC

9. Understanding Cost of Capital
Weighted Average Cost of Capital
Conforming bank debt (coupon, front end fee, commitment fee, admin fee)
Sub debt (coupon, front end fee, commitment fee, ORRI, warrants, back-ins)
VPP (discount utilized for calculating purchase, additional spread on hedges)
Preferred Equity (coupon, expected equity growth rate)
Equity (new equity or current owner’s equity)
Need to consider term (floating vs fixed), front end fees
Subjective values:
Transaction closing risk
Speed of execution
Future availability of capital from funder
Call on capital
Plexus Capital, LLC

10. Cost vs Risk
Plexus Capital, LLC

11. Conforming Debt Attributes
Advance 50% – 75% (60% - 65% is typical) risked proved PV10 at higher of bank pricing or hedge price
Senior secured
Payout within half life of reserves
Maximum term 8 years
Coupon at Prime or Libor to 300
Borrowing base review 2 times per year
Proved non producing limited to 20% of borrowing base
Single property no more than 15% of value
Single bank hold limit $25MM - $50MM
Plexus Capital, LLC

12. Private Mezzanine Attributes
Limit total debt to 100% PV10 PDP at higher of institution pricing or hedge price
Subordinated secured, requires inter-creditor agreement with senior lender
No corporate governance issues
Covenants similar to senior debt
Cost from Libor to 25% total cost of capital including ORRI or other equity kickers
May allow a portion to revolve
1-2 months to complete financing
Plexus Capital, LLC

13. Private Equity Attributes
Investment focus is on Management
3-7 year investment time frame
Active corporate governance, board representation, control
Management receives 10-35% back-in after 8-25% IRR
Meaningful investment from management
3-6 months to complete financing
Plexus Capital, LLC

14. Private Capital Sources (several play in both groups)
Equity Providers
Altira Group LLC
ARC Financial
ArcLight Capital Partners, LLC
Camcor Capital Inc.
Canfund VE II Mgmt. Ltd.
Darby Latin Am. Mezz. Fund, LP
Encap Investments
Energy Spectrum Partners LP
GE Capital
Goldman Sachs
Greenhill Capital Partners, LLC
Kayne Anderson Capital Advisors
Lime Rock Partners
Morgan Stanley Private Equity
Natural Gas Partners
QUANTUM ENERGY PARTNERS
Riverstone Holdings LLC
SCF Partners
Warburg Pincus
Yorktown Partners LLC
Mezzanine Providers
Ableco Finance LLC
AIG Financial Products Corp.
Axiom One L.L.C. (a J.M. Huber Co.)
BlackRock Energy Capital
Constellation Power Source
Crown Capital Partners Inc.
Foothills Capital (affiliated with Wells Fargo)
Liberty Mutual
Macquarie Energy Capital
Petrobridge Investment Management LLC
Prudential Capital Group
Standard Bank of So. Africa
TCW Asset Management
UnionBanCal Equities, Inc.
Wachovia Capital Partners
Wells Fargo Energy Capital
Plexus Capital, LLC

15. Example of Recent Unusual Transactions

16. Financing Structure Funder Swap Counter-Party(s) Producer Producer SPE
Credit Support
Secured Loan
Mortgage
Commodity
Price Hedge
Interest Rate
Swap
Property
Producer
Producer
SPE
Insurance
Company
Subordinated Note
Financial Guaranty
Cash Purchase Price
Guaranty Fee
Plexus Capital, LLC

17. Structure Benefits for Producer
Converts ordinary income to long term capital gain
Lock in historically high gas prices without risk of margin calls
Potentially higher advance rate than conforming commercial bank loan
Financing is recourse only to subject properties
No inter-creditor issues
Diversifies capital structure
Producer retains all property upside
Vehicle for wealth transfer in estate planning
Plexus Capital, LLC

18. PV Tax Savings for Various Reserve Profiles
Note: Compares 15% capital gains rate to 38% ordinary tax rate.
Plexus Capital, LLC

19. A Few Pearls Create competition for your transaction
Don’t assume a lender will not be interested in your type of transaction
Ping as many lenders as you can, then focus on the 2 – 5 best fits
Try to convince lower risk/lower cost lenders to move up the risk spectrum
Lenders with minimum return will not accept lower return, regardless of lower risk
Possible to get lenders to accept more risk for slightly higher return
Find out what the lender’s return criteria is and what they value
Plexus Capital, LLC

20. A Few More Pearls
Identify your assets/attributes (what you have to give) and find the lender that values them
Other non-producing assets to pledge or value (seismic, equity in other enterprises, equipment, commitment of equity from VC)
Geographic concentration of production
Analyze and measure the risked value of your assets so the lender understands
Always negotiate a detailed comprehensive term sheet
Reduces legal cost
Insures you have a deal before you invest too much time and legal costs to walk away
Get senior lender to provide additional margin facility for hedging with non bank counterparties
Plexus Capital, LLC