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COGA/IPAA Denver Private Capital Conference

COGA/IPAA Denver Private Capital Conference. August 10, 2006. EnCap Investments L.P. Background. The leading source of private equity to the independent sector of the oil and gas industry. Formed in 1988 Offices in Dallas and Houston Four Co-Founders and Partners

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COGA/IPAA Denver Private Capital Conference

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  1. COGA/IPAA Denver Private Capital Conference August 10, 2006

  2. EnCap Investments L.P. Background The leading source of private equity to the independent sector of the oil and gas industry • Formed in 1988 • Offices in Dallas and Houston • Four Co-Founders and Partners • Worked together over 25 years • 100 years collective experience in oil and gas finance • Supported by strong team comprised of 14 investment professionals • Average 10 years of related experience

  3. EnCap Investments L.P. PRINCIPALS David Miller Partner Gary Petersen Partner Marty Phillips Partner Bob Zorich Partner Current Organization ADMINISTRATIVE STAFF INVESTMENT STAFF Bobby Haier CFO Donna Wright Controller Audrey White Sr. Acct. John Stricker Sr. Acct. Brent Bechtol Mng. Dir. Jason DeLorenzo Mng. Dir. Murphy Markham Mng. Dir. Sean Smith Mng. Dir. Wynne Snoots Mng. Dir. Doug Swanson Mng. Dir. Mitch Hovendick Vice Pres. Jason McMahon Vice Pres. Jonathan Shepko Vice Pres. Mark Welsh Asst. VP Jimmy Crain Associate Ryan Devlin Analyst Todd Hassen Analyst Kyle Kafka Analyst

  4. EnCap Investments L.P. Business Concept “Conduit” between institutional capital sources and oil and gas investment opportunities • 12 Institutional Oil & Gas Investment Funds • Total capital commitments of approximately $4.0 billion • 1988 - 1994 • 3 Mezzanine Debt Funds • 3 Reserve Acquisition Funds • 1994 - 2006 • 6 Private Equity Funds • Closed new fund (sixth private equity fund) on May 17th with $1.5 billion in total commitments

  5. EnCap Investments L.P. EnCap Energy Capital Fund VI • Fund Size: $1.5 billion • 100 Institutional Investors • Consists of insurance companies, university endowments, energy banks, foundations and wealthy family trusts • Investment Mandate • Private Equity • Transaction Size: $20MM to $100MM • Upstream and Midstream Sectors • North America and select international • Target Returns • 2.0x ROI • 25% IRR

  6. EnCap Investments L.P. Business Concept Long history of helping companies grow and create shareholder value • Provided 130 companies with growth capital • Hallmark of investment record is consistency of returns across multiple industry and hydrocarbon price cycles • Investment approach continues to evolve with changing industry environment / market dynamics

  7. EnCap Investments L.P. Investment Strategy / Philosophy Equal emphasis on capital preservation and value creation • Back seasoned management teams with compelling business plans and like-minded approach to risk management • Provide growth capital to companies with acquire and exploit and/or repeatable drilling strategies • Structure designed to achieve alignment of interest with management • Capital generally advanced in tranches as attractive opportunities are presented • Engineerable reserve value substantially underpins invested capital

  8. EnCap Investments L.P. Deal Structure / Management Incentive • EnCap generally contributes 95%+ of equity capital • Capital structure incorporates senior bank debt in addition to private equity • Multi-tiered back-in arrangement positions management to earn a blended 20% - 25% of the company • Our management teams averaged making $35 million in conjunction with 10 companies sold last year

  9. EnCap Investments L.P. Private Equity Truths • Pool of capital and number of fund managers have expanded substantially • All seeking opportunities to back established money-makers, but open-minded to “un-proven” teams • Majority of deals are start-ups • With abundance of capital and increased competition for investment opportunities, entry into business never been easier • Management teams have the value creation strategies • Input from private equity partner relates largely to risk management and strategic issues • Strong sense of reality and appreciation for cyclicality of business

  10. EnCap Investments L.P. Natural Resource Funds Source: Private Equity Intelligence. • Average IRR for 1996 - 2003 vintage natural resource funds was 23% • versus 3.25% for all Private Equity Funds • and -3.60% for all Venture Capital Funds

  11. EnCap Investments L.P. Private Equity Myths • Over involved in business • Exercise too much control / influence • Board representation is a function of size of investment • 19 out of 20 times we say “yes” • Do not tell people who to . . . what to . . . when to . . . • Third-Party Engineering • Utilized more in a “hand holding” capacity than for detailed evaluations • Our sense of potential value and risk profile is shaped substantially by management • Generally do not require anything more than banks • Impatient money

  12. EnCap Investments L.P. Management Team Attributes • Honesty, Integrity and Forthrightness • Strong technical and operational backgrounds • Well-defined business plan / value creation strategy consistent with experience • Adaptability • Common understanding of risk management • Receptive to “partnership” relationship

  13. EnCap Investments L.P. Differentiation between Proven and Unproven Teams • Proven money-makers have demonstrable track record of creating value • Initial commitments typically larger • Receive somewhat more favorable terms • Greater upfront spending flexibility • Unproven teams • Emphasis more on background/experience and strength of business plan • Greater receptivity early on to strategic input

  14. EnCap Investments L.P. Reality and Importance of Adaptability • There are multiple forces that affect the industry • All your projects won’t be successful • What works today and what will work in 2-3 years probably will be different

  15. EnCap Investments L.P. Private Equity Investment Example • Commitment Size: $50 million • $48.5 million from EnCap; $1.5 million from Management Team • Spend $5-$10 million of equity acquiring acreage and drilling initial test wells • Initial success facilitates accelerated drilling program funded largely by additional equity. Equity supplemented by senior bank debt as PDP value grows. • Likely add acreage and bolt-on acquisitions • Over a 2 to 4 year time horizon, drill a total of 25 wells, establishing proof of concept • Creating net daily production of 12.5 MMcfed, plus substantial inventory of PUD and Probable drilling locations • Sell to a large independent for $250 million • Waterfall results in payday for management team of $40 million

  16. COGA/IPAA Denver Private Capital Conference Houston Office 1100 Louisiana Suite 3150 Houston, TX 77002 (713) 659-6100 mphillips@encapinvestments.com Dallas Office 3811 Turtle Creek Blvd. Suite 1080 Dallas, TX 75219 (214) 599-0800 dmiller@encapinvestments.com

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