2008 IPAA Private Capital Conference
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2008 IPAA Private Capital Conference. Charles Kingswell-Smith, Managing Director January 16, 2008. CONFIDENTIAL. DRAFT. Upstream Market Environment. Commodity Prices (1995 – Present). Henry Hub Natural Gas Spot Price. WTI Cushing Crude Oil Spot Price. Upstream Market Environment.

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2008 IPAA Private Capital Conference

Charles Kingswell-Smith, Managing Director

January 16, 2008

CONFIDENTIAL

DRAFT


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Upstream Market Environment


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Commodity Prices (1995 – Present)

Henry Hub Natural Gas Spot Price

WTI Cushing Crude Oil Spot Price

Upstream Market Environment

Steady market strengthening since 2002 – Punctuated by significant gas price volatility

____________________

Source: Bloomberg, NYMEX spot prices


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U.S. Natural Gas Supply Levels 1985-2007

Upstream Market Environment

U.S. Natural Gas

Henry Hub Price dips below $2.50

Henry Hub Price spikes over $12.00

____________________

Source: Energy Information Administration (EIA)


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U.S. Natural Gas Consumption 1997-2006

Upstream Market Environment

U.S. Natural Gas

____________________

Source: Energy Information Administration (EIA)


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Storage Levels for Week Ending 12/28/07

Upstream Market Environment

U.S. Natural Gas

YE 2007 Storage levels 2,920 Bcfe

U.S. Storage levels have a large impact upon natural gas prices


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Commodity Price Comparison (As of 1/1/08)

WTI Cushing Spot Pricing

Henry Hub Spot Pricing (x6)

Upstream Market Environment

Commodity Price Parity

Average parity over last 2 years has been 10:1

Hurricanes Katrina/Rita

5:1

Natural gas volatility continues in today’s Market with Gas/Oil parity of over 12:1

____________________

Source: Bloomberg


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E&P Sector Loans – Low Credit Risk

Upstream Market Environment

  • Between 1996 and 2005, Standard and Poor’s (“S&P”) tracked 15 bankruptcies among pure-play U.S. Exploration & Production (“E&P”) companies, the most recent of which occurred over 4 years ago

    • Most bankruptcies occurred within one year of the collapse of oil prices in 1998 and 1999 given the combination of a sharp price decline and a mixture of over-leverage and under-diversification

    • Today’s current commodity hedging environment coupled with conservative borrowing base criteria put in place by senior secured lenders have further mitigated bankruptcy risks as experienced in the late 1990s

  • Of the E&P borrowers that defaulted during that ten year period, 77% of the bankruptcies resulted in full recovery of lenders’ capital, 15% resulted in greater than 85% recovery of lenders’ capital, and only 8% resulted in a recovery of less than 85%

  • Recovery rates in U.S. E&P bankruptcies have been excellent

    in recent history and favorable relative to other industries due to the following:

    • Attractive attributes of oil and gas reserves as collateral

    • Well-structured credit agreements

    • Borrowing bases determined by conservative PV-9 values

    • Use of derivative financial instruments to hedge against

      commodity price fluctuations

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44%

44%

46%

46%

Crude Oil Price Deck Comparison (As of 1/1/08)

Natural Gas Price Deck Comparison (As of 1/1/08)

28%

30%

21%

30%

Upstream Market Environment

Bank oil price decks continue to strengthen yet remain well below the NYMEX Strip, on average strip prices are 45% higher than bank price decks.

Clients aggressively use hedging to bridge gap between bank price decks and spot prices

On average, natural gas strip prices are 27% higher than Bank price decks.

____________________

Source: Bloomberg & Tristone Capital.

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Non-Conforming / Stretch 1st Lien Tranches

2nd Lien Term Loans

Upstream Market Environment

Current Three-Tranched Approach to E&P Lending

Conforming 1st Lien Borrowing Base Facility

  • Standard bank advance practices against PDP, PDNP, and PUD reserve categories

  • Indicative utilization-based pricing as outlined below:

Despite overall market pricing jumping 75 – 100 bps, E&P pricing has been relatively unchanged with only a 0 – 25 bps increase.

  • Sized approximately 15% - 20% of conforming tranche

  • Generally amortizes or expires within 12 – 18 months post closing, bringing deal back into conformity

  • Pricing on entire facility increases 25 – 50 bps above > 90% Tier, when non-conforming tranche is utilized

  • Execution impacted by current credit market volatility and levels of institutional liquidity

  • Strategic E&P mezzanine fund players continue to deploy capital to credits with solid NYMEX strip PV-10 coverage

  • Tranche sizes impacted by liquidity, but can be placed in the L+550 - 700 bps range

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Merrill Lynch Capital Energy Finance


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Introduction

Merrill Lynch Capital Energy Finance

  • MLC’s Energy Finance team, established in November 2006, is dedicated to providing senior debt financing to the North American oil and gas and natural resources industry

    • Leading provider of Debt Capital Markets products to middle market upstream and midstream businesses

    • Seasoned team of professionals with extensive experience arranging, underwriting, and syndicating senior debt financings

  • MLC Energy Finance distinguishes itself from its competitors through:

    • Strong, long-standing relationships with management teams and equity sponsors

    • Experience and market knowledge, delivering client focused results

    • Consistent and disciplined lending practices

    • A dedicated balance sheet driven approach

    • Ability to provide significant and timely capital commitments to clients (ranging from approximately $10MM - $2BN)


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Organizational Structure

Merrill Lynch Capital Energy Finance

Greg O’Brien

Managing Director and Head of Energy Finance

Over 20 years of corporate banking experience at Bank of America, Fleet Securities and BankBoston

Exploration & Production

Midstream / Downstream / E&P

Loan Syndications

Boston, MA

Houston, TX

Boston, MA

Chuck Kingswell-Smith

Managing Director

Over 25 years of energy lending experience at JP Morgan, Bank One and predecessor institutions

Terry Ronan

Managing Director

Over 15 years of energy lending experience at Bank of America, Fleet Securities and BankBoston

Rick Makin

Managing Director

Over 23 years of experience in energy corporate finance & capital markets at Bank of America, Fleet Securities, and BankBoston

Greg Hanson

Vice President

Dan Condley

Director

Dave Henderson

Vice President

Patrick McWilliams

Vice President

Mirna Kassir

Assistant Vice President

Deana Dincecco

Associate

2 Petroleum Engineers

Hank Johnston (Houston)

Tommy Watts (Houston)

3 Administrative Assistants

Lynore DeSimone (Boston)

Kristin Mastodomenico (Boston)

Cherie Barrera (Houston)

Salman (Sal) Patoli

Assistant Vice President

Matt Lemieux

Senior Specialist

Mark Olivier

Senior Specialist

Todd Wellons

Senior Specialist


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Momentum Building: MLC Energy Finance Growth by Quarter

Merrill Lynch Capital Energy Finance

In first year of business, 28 new clients have come on board with MLC Energy Finance


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Momentum Building: MLC Energy Finance Growth by Quarter

Merrill Lynch Capital Energy Finance

MLC Energy Finance grew from $0 committed to almost $1.2 Billion in first year of operations


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Terms

Merrill Lynch Capital Energy Finance

Case Study: Sheridan Production Partners (“Sheridan”)

  • In July 2007, Merrill Lynch Capital was selected as Joint Lead Arranger and Administrative Agent on Sheridan’s initially syndicated $500.0 million 5-year Senior Secured Revolving Credit Facility (the “Facility”)

    • Initial Facility was governed by a $0 Borrowing Base, given no assets in place

  • In August 2007, Merrill Lynch Capital served as the Joint Lead Arranger and Administrative Agent on an $85.0 million Borrowing Base to support Sheridan’s acquisition of certain oil and gas assets located in Oklahoma, New Mexico and Texas from Sage Energy Company

  • In November 2007, Merrill Lynch Capital served as Joint Lead Arranger and Administrative Agent on an increased $500.0 million Borrowing Base in support of Sheridan’s upcoming acquisition of certain oil and gas properties in the Permian Basin and Oklahoma from Aethon

Key Takeaway: Structured an innovative financing accommodating the Company’s complex tax structure and supporting Sheridan’s future acquisition of long lived oil and gas reserves

This announcement is under no circumstances to be construed as an offer to sell or as

a solicitation of an offer to buy any of these securities.

The offering is made only by the Prospectus.

New Issue

November 2007

$500,000,000

Key Takeaway: Merrill Lynch Commodities, Inc. provided deal contingent hedges in support of the acquisition

RevolvingCredit Facility

Joint Lead Arranger & Bookrunner

Merrill Lynch Capital

Key Takeaway: Merrill Lynch Capital was the sole provider of a letter of credit used as a down payment for the acquisition on behalf of the Company


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Terms

Merrill Lynch Capital Energy Finance

Case Study: Petsec Energy Inc. (“Petsec”)

  • In November 2007, Merrill Lynch Capital provided committed financing to support Petsec’s acquisition of interests in seven onshore and offshore Louisiana gas fields from LLOG for $103.8 million (the “Acquisition”)

This announcement is under no circumstances to be construed as an offer to sell or as

a solicitation of an offer to buy any of these securities.

The offering is made only by the Prospectus.

New Issue

November 2007

$230,000,000

  • Merrill Lynch Capital served as Sole Lead Arranger and Sole Bookrunner on a $30.0 million Senior Secured Second Lien Term Loan used to partially finance the Acquisition

  • In addition, Merrill Lynch Capital was Joint Lead Arranger and Syndication Agent on $200.0 million of Senior Secured First Lien Credit Facilities, with $105.0 million of initial availability

    • The First Lien Credit Facilities are comprised of a $170.0 million Revolving Credit Facility that is governed by $75.0 million Borrowing Base and a $30.0 million Term Loan A

Key Takeaways:

  • The Acquisition was completed under a 30 day timeline and required focused coordination among various lender classes and the Company

  • Financing terms were closed into as proposed to client upon commitment, without flex requirements

$200MM First Lien Credit Facilities

$30MM Second Lien Term Loan

Lead Arranger & Bookrunner

Merrill Lynch Capital


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This announcement is under no circumstances to be construed as an offer to sell or as

a solicitation of an offer to buy any of these securities.

The offering is made only by the Prospectus.

New Issue

November 2007

$250,000,000

RevolvingCredit Facility

Sole Lead Arranger, Sole Bookrunner

& Administrative Agent

Merrill Lynch Capital

Terms

Merrill Lynch Capital Energy Finance

Case Study: Warren Resources, Inc. (“Warren”)

  • In November 2007, Merrill Lynch Capital arranged and syndicated a new $250.0 million 5-year Senior Secured Revolving Credit Facility (the “Facility”) for Warren Resources, Inc., with initial availability of $125.0 million

    • The Facility is governed by a $110.0 million Conforming Borrowing Base and a $15.0 million Overadvance

    • The Facility refinanced the Company’s existing indebtedness and provided liquidity for capital expenditures, ongoing working capital and other general corporate purposes

    • Over $330.0 million in total papered commitments raised ($215.0 million of commitments to the Borrowing Base)

Key Takeaways:

  • Merrill Lynch Capital was able to identify greater lendable asset value in Warren’s reserve base as compared to the Company’s previous credit facility

  • Increased Borrowing Base provided Warren with liquidity to fund future capital program, without need to tap equity market at an un-opportunistic time


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$200,000,000

Senior Credit Facilities

Joint Lead Arranger &

Syndication Agent

November 2007

$30,000,000

Second Lien Term Loan

Sole Lead Arranger & Administrative Agent

November 2007

$550,000,000

Senior Credit Facility

Documentation Agent

October 2007

$250,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

November 2007

$250,000,000

Senior Credit Facility

Documentation Agent

July 2007

$200,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

September 2007

$150,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

August 2007

$285,000,000

Senior Credit Facilities

Joint Lead Arranger & Syndication Agent

June 2007

$700,000,000

Senior Credit Facility

Joint Lead Arranger & Syndication Agent

August 2007

$500,000,000

Senior Credit Facilities

Joint Lead Arranger & Administrative Agent

Nov./Aug./July 2007

$75,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

July 2007

$100,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

October 2007

$750,000,000

Senior Credit Facility

Documentation Agent

October 2007

Oak Valley Mineral & Land, LP

$30,000,000

Senior Credit Facility

Sole Lead Arranger & Administrative Agent

June 2007

MLC Lead Arranged and Agented Transactions

Midstream

Exploration & Production

$75,000,000

Senior Credit Facility

General Partner of:

Sole Lead Arranger & Administrative Agent

Q1 2008

Since inception in November 2006, Merrill Lynch Capital Energy Finance has been selected as a lead arranger on 14 completed transactions, and tier-one tilted agent on an additional 4 transactions


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$545,000,000

Senior Credit Facility

Bill Barrett Corporation

November 2007

$1,130,000,000

Senior Credit Facilities

Atlas Pipeline Partners, L.P.

July 2007

$1,250,000,000

Senior Credit Facility

Encore Acquisition Company

March 2007

$750,000,000

Senior Credit Facilities

Quantum Resources

March 2007

$1,175,000,000

Senior Credit Facilities

Niska Gas Storage

May 2006

$365,000,000

Senior Credit Facilities

Pine Prairie Energy Center, LLC

April 2007

$200,000,000

Second Lien Credit Facility

Concho Resources, Inc.

March 2007

$750,000,000

Senior Credit Facilities

Milagro Exploration

November 2006

$2,150,000,000

Senior Credit Facilities

SemCrude, L.P.

December 2006

$225,000,000

Senior Credit Facility

TransMontaigne L.P.

December 2006

$286,600,000

Senior Credit Facilities

Vulcan Energy Corporation

March 2006

$1,300,000,000

Senior Credit Facilities

W&T Offshore, Inc.

November 2007

MLC Additional Portfolio Holdings: Strategic Commitments

Exploration & Production / Other

Midstream


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Merrill Lynch prohibits (a) employees from, directly or indirectly, offering a favorable research rating or specific price target, or offering to change such rating or price target, as consideration or inducement for the receipt of business or for compensation, and (b) Research Analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investor clients.

This proposal is confidential, for your private use only, and may not be shared with others (other than your advisors) without Merrill Lynch's written permission, except that you (and each of your employees, representatives or other agents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the proposal and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and tax structure. For purposes of the preceding sentence, tax refers to U.S. federal and state tax. This proposal is for discussion purposes only. Merrill Lynch is not an expert on, and does not render opinions regarding, legal, accounting, regulatory or tax matters. You should consult with your advisors concerning these matters before undertaking the proposed transaction.

Disclaimers


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