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

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. Macquarie Energy Capital

15. Macquarie Energy Capital
Texas Rep Office - Houston
Paul Beck
Brian Hughes
Steve Shatto
Jerry Thompson
Ray Weems
Tel: +1 (713)
London
Andrew Sinclair
Thomas Wagenhofer
Tel:
Sydney
Gavin Bradley
Vanessa Lenthall
Tel: