1. Commodity Linked Financing
Goldman Sachs
Commodity Linked Financing
IPAA Conference
A presentation by Goldman, Sachs & Co.
Commodity Risk Management
(212)
April 2005 1

2. Goldman Sachs Commodities/J Aron
J. Aron is the commodities risk management business of Goldman Sachs and receives the full corporate guarantee of the Goldman Sachs Group (A+/Aa3)
Founded in 1892 and acquired by Goldman Sachs in 1981
Currently employs approximately 200 professionals globally in 6 regional offices (New York, London, Singapore, Tokyo, Sydney and Calgary)
Voted 2004 Commodity Derivatives House of the Year by Risk Magazine
Recent Business Initiatives
Underwritten or principaled over $6.5Bn worth of commodity liked-financings in the past 10 months
On staff petroleum engineers allow us to take oil and gas reserve risk in derivative and financing transactions
Asset Secured Hedging Facilities
Volumetric Production Payments
Production-Contingent Derivatives
Through GS E&P Capital, over $100MM of development financing commitments to the North American oil and gas industry in 2004

3. Goldman Sachs E&P Capital
Houston based principal investing effort for Goldman Sachs
Investing Goldman’s balance sheet
5 energy specialist with 16 years average experience
3 Petroleum Engineers on staff
Flexibility in transaction structure
Junior and/or Senior Debt
VPPs
Drilling partnerships
Preferred Equity
Flexibility in transaction size
$15mm – several hundred million
Seeking principal opportunities, but can arrange a transaction of any size
Desire to build relationships with follow on investments
Can provide capital markets exit
Flexibility in commodity hedging
Long-term, asset-secured hedging
Elimination of cash collateral requirements

4. Financing Alternatives for Private Companies

5. Four Basic Structures for E&P Debt (Debt Like) Investments
Senior Revolving Debt
Corporate debt
Fully secured with financial and asset-based covenant package
Advance rates subject to semi-annual borrowing base
Mostly PDP driven valuation, 1.75 Coverage Ratio
Libor
Typically 2-3 year maturity, no prepayment penalties
May include stretch tranche under same security package
Proceeds available for general corporate purposes
Volumetric Production Payments
Not debt; sale of a real property interest
No covenant package
Operating and delivery obligations often secured by retained interest
Typically 100% PDP with some flexibility to monetize PDNP
Periodic coverage ratio of
Pricing 6-12%
Typically 4-7 year term
No restrictions on use of proceeds

6. Four Basic Structures for E&P Debt (Debt Like) Investments
2nd Lien
Corporate debt
Fully secured but subordinated to senior revolver
More relaxed covenant package
75% PDP, 1.5 Coverage Ratio
Libor
Term debt; 3+ years with prepayment penalties
Proceeds available for general corporate purposes
Mezzanine Debt
Security and covenant package highly customized
% PDP, 1.5 Coverage Ratio
8-10% coupon plus some upside participation, 12-15% all-in
Specific use of proceeds, typically funding of approved drilling program

7. Energy High Yield Bond Returns
Credit spreads have tightened over the past five years as interest rates have declined and commodity prices have increased

8. Increasing Valuations
On a $/boe basis, average acquisition prices paid have grown substantially along with crude prices since 1999

9. Goldman Sachs Commodity Markets
Swaps
Options
Physical
Capability
Locations
Locational
Crude Oil 
WTI/WTS/LLS
Brent
Dubai
Tapis
Bow River/LLB/LLK
WTI
Natural Gas
Northeast
Gulf Coast
Mid-continent
Rockies
Western
Canadian
Liquids
Ethane
Propane
Normal Butane
Iso Butane
Natural Gasoline (Pentane)
Mt. Belvieu TET
Mt. Belvieu non-TET
Conway, KS
Source: Goldman Sachs

10. North American Natural Gas Basis Markets
Goldman Sachs is a leading financial and physical dealer for swaps and options at these and many other locations.
Sumas
AECO
Northwest Rockies
Texas Eastern M-3
Chicago Citygate
Transco Zone 6 Non-New York
Ventura
CIG
Panhandle
ANR Oklahoma
San Juan
Southern California
Sonat
Permian
NGPL Texas-Oklahoma
Henry Hub
Waha
Houston Ship Channel
Source: Goldman Sachs

11. Production Payments Volumetric Production Payment
Nothing new, have been around since the 1930s
Not debt, but the sale of a real property interest
E&P Company sells VPP to financial buyer
Delivery obligation is volumetric; discount rate is not explicitly stated
Underlying instrument is a Term Overriding Royalty Interest
Non-cost, non-expense bearing interest
Property specific burden, recorded conveyance
Seller has ongoing obligations to operate and deliver/market production
Seller must deliver volumes each month
Seller does not guarantee volumes, buyer can only look to specific property for volumes
Typically 100% hedged by VPP buyer
Some limitations on what seller can do with properties

12. Volumetric Production Payments
Principal factors determining size and pricing
Reserve mix – needs to have large percentage of PDP
Value diversity – no value concentration in a few wells
Periodic coverage – projected volumes available each month compared to volumes required to be delivered
Tail – the amount of reserves expected to be remaining at the termination of the production payment
Regional basis markets and available market points
Seller’s operating capabilities and creditworthiness
Alternative: Dollar Denominated or Financial Production Payment
No delivery schedule, rather buyer receives a fixed percentage of production
Discount rate/IRR hurdle is explicitly stated
Large percentage of production still hedged, but not 100%.
More flexibility in hedge structure
Easier to handle non-producing and undeveloped reserves
Easier to handle two phases (both oil and gas)

13. Case Study: Volumetric Production Payment
In 2004, GS E&P Capital purchased a VPP for $15mm from a private seller
The VPP burdens long-lived properties in the Arkoma Basin
Goldman Sachs and the Seller arranged for the Seller to market the VPP production on behalf of Goldman Sachs
The price received under the marketing arrangement is linked to an appropriate basis location
Goldman Sachs hedged its price risk financially at closing; seller has no exposure to basis risk (other than physical vs. financial spreads)
Volumes
LOE
VPP Volumes
Retained Interest
Time

14. Second Lien Case Study: Belden & Blake Corporation
$170.0 million Senior Secured Credit Facilities
$192.5 million Senior Secured Notes
1 Up to $15mm of LCs can be issued to support the hedges.

15. Second Lien Case Study: Belden & Blake Corporation
$170.0 million Senior Secured Credit Facilities
$192.5 million Senior Secured Notes
1 Pricing on LC facility and revolver can step down to L+250 bps and L+225 bps based on specific leverage levels.
2 Pricing on term loan can step down to L+250 bps based on specific leverage levels.

16. Investor Perspectives

17. Current Trends New money from non-traditional sources
Hedge funds, investment banks; non-energy commercial banks
Chasing yield; rates and credit spreads at historically low levels
Intense competition among capital providers
Private equity in abundance
Lenders willing to lend more and accept lower yield
Traditional mezzanine financing being crowded out by aggressive 2nd lien and private equity capital
Unconventional Gas Plays
CBM, shale gas, tight sands plays offer the scale and risk profile to attract significant capital

18. Primary Financing Factors for Small Cap E&P Companies
Track record
Operating history, financial performance
Reputation
Size and Nature of Financing
< $10mm; $10mm - $50mm; > $50mm
Specific future growth opportunities available
Is cash flow available to pay current interest, amortize debt?
Use of proceeds
Perceived Risk / Asset Mix
Percentage of PDP reserves
Location (onshore vs. offshore, conventional vs. unconventional)
Nature and potential of growth opportunities
Term objectives
Up to 3 years; 3-5 years; > 5 years
The perceived risk of a given opportunity will vary significantly among capital providers
Private Deals are difficult to benchmark; terms generally not disclosed
Capital providers are forced to rely upon their past experience and inexact comparisons

19. Contacts Commodities (New York) GS E&P Capital (Houston)
Colleen Foster ( )
Simon Collier ( )
GS E&P Capital (Houston)
Kurt Talbot ( )
John Howie ( )

20. Disclaimer
This material has been prepared specifically for you by the Fixed Income Trading/Sales Department and is not the product of Fixed Income Research. We are not soliciting any action based upon this material. Opinions expressed are our present opinions only. The material is based upon information which we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Certain transactions, including those involving futures, options and high yield securities, give rise to substantial risk and are not suitable for all investors. We, or persons involved in the preparation or issuance of this material, may from time to time, have long or short positions in, and buy or sell, the securities, futures or options identical with or related to those mentioned herein. Goldman Sachs does not provide accounting, tax or legal advice; such matters should be discussed with your advisors and or counsel. In addition, we mutually agree that, subject to applicable law, you may disclose any and all aspects of this material that are necessary to support any U.S. federal income tax benefits, without Goldman Sachs imposing any limitation of any kind. This material has been issued by Goldman, Sachs & Co. and has been approved by Goldman Sachs International, which is regulated by The Securities and Futures Authority, in connection with its distribution in the United Kingdom and by Goldman Sachs Canada in connection with its distribution in Canada. Further information on any of the securities, futures or options mentioned in this material may be obtained upon request and for this purpose persons in Italy should contact Goldman Sachs S.I.M. S.p.A. in Milan, or at its London branch office at 133 Fleet Street. 2