1. Wells Fargo Energy Capital Michael Nepveux Senior Vice President Presented to: IPAA Capital Markets Seminar January 16, 2008

2. Who is the Wells Fargo Energy Group?
Quick Facts:
Over three decades of lending to the Energy industry
105+ staff members in Houston, Dallas and Denver
Our clients have revenues from $10MM to $50B+
Broad product offering including senior debt, mezzanine debt, private equity, commodity and interest rate derivatives, and treasury management.
The mission of the Wells Fargo Energy Group is to be the bank of choice for all segments of the energy industry

3. Who is Wells Fargo Energy Capital?
Quick Facts:
Headquartered in Houston with representatives in Denver and Pittsburgh
11 professionals on staff
Over $1B committed to the mezzanine finance sector since 1996
In 2007 completed 43 deals totaling over $300MM
Funds provided for development drilling; highly leveraged acquisitions and bridge facilities
Make select equity investments in sponsored funds and private companies

4. Wells Fargo Energy Group
Refining & Petrochemicals- 10%
Exploration & Production- 40%
Pipelines, Gathering & Processing- 20%
$8.5B
Energy Services & Equipment- 30%

5. Where Do We Fit in the Development Cycle?
Syndicating Senior Revolver
Production
Subordinated Debt, Equity
Senior Revolver
Development Loan, Equity
Start-Up Development Acquisition Development

6. Oil and Gas Industry Risk Spectrum
50+
50+ 45 45
Equity
Equity 40 40 35 35 30 30
Target Rate of Return, %
Target Rate of Return, % 25 25
Mezzanine Debt
Mezzanine Debt 20 20
(including sub debt and development loans) 15 15 10 10 5 5
Bank Loan
Bank Loan
Development/Exploitation
Development/Exploitation
Exploration
Exploration
(Engineering Risk)
(Engineering Risk)
(Geologic/Geophysical Risk)
(Geologic/Geophysical Risk)
PDP
PDP
PDNP
PDNP
PUD
PUD
Probable
Probable
Possible
Possible
Reserve Risk
Reserve Risk

7. Definition of Mezzanine Debt
Mezzanine (mĕz‘ ə-nēn) n. [from Latin, medianus middle, median]: An intermediate story, usually not of full width, between two main floors, especially the ground floor and the one above it.
Energy finance translation: a middle layer of capital, typically supported to a material extent by undeveloped reserves, with equity beneath and sometimes senior debt above; not meant to be a permanent or primary source of capital.
Good solution for companies who:
Need capital to acquire and/or develop undeveloped reserves
Require more capital than commercial banks will provide
Don’t want to sell or bring in an industry partner
Want to avoid ownership dilution inherent in raising equity capital

8. Mezzanine Debt Market Started in early/mid ’80s with TCW and RIMCO
Numerous players have come and gone since then (Enron, Aquila, Williams, Shell Capital, Mirant, etc.)
After Enron and merchant sector collapse, only TCW and WFEC remained active
Numerous new players today (BlackRock, GasRock, Macquarie, NGP Capital, PetroBridge, Guggenheim, RBS, Goldman, Prospect, etc.)
Hedge funds are also now active, but more selective in recent months
Competition has driven returns down and increased risk
Advantages of mezzanine debt versus:
Bank Debt Private Equity higher advance rate less expensive accelerates reserve development less control limited or non-recourse (projects) easier to amend or increase

9. Typical Mezzanine Structure and Pricing
Project Debt
Secured with first lien
$3MM - $50MM
Fund development/acquisition of proven reserves
Bridges to conforming bank debt if reserves not sold
1-3 year maturity
IRR: 15% - 25%: Coupon Rate: 10% - 12%, ORRI < 5%, APO NPI 15% - 75%, warrants possibly
Cash Sweep: 75% - 95%
Runs deposited in a cash collateral account
Commodity hedging typically required
Subordinated Debt
Secured with second lien
$10MM+
Fund development/acquisition of proven reserves; refinancings; recaps.
Advance Rate: senior + sub = up to 75% of NYMEX PV10%
Maturity set 6-12 mos. after senior maturity
IRR: 10% - 15% in the form of coupon; usually no equity kickers
Cash Sweep: no
Commodity hedging usually required
Typically no borrowing base; protection via asset coverage test (NYMEX PV10)

10. Mezzanine Advantages vs. Conforming Bank
Mezz shops take more reserve risk than commercial banks
Smaller equity contribution required
Higher advance rates than commercial banks
Accelerate funding and development
Typically non-recourse

11. Mezzanine Advantages vs. Private Equity
Retain greater portion of the upside
Cheaper way to finance a proved drilling program
Maintain control
Easier to exit

12. Second Lien Market Domino Effect
As the subprime spiral spread, it affected the investment firms that managed them and the hedge funds and other investors that bought them
When liquidity dried up arrangers were sitting on immense underwriting positions which created an overhang in the debt markets
This liquidity squeeze pushed the entire market into price-discovery mode and substantially increased risk aversion
High yield market “impaired but operational” – Treas. Sec. Paulson last week. Volumes down sharply, spreads wider.
Oil and Gas 2nd Lien and mezzanine not immune. Markets are open, but at wider credit spreads, reflecting investor appetite and liquidity.
That helped the contagion jump in the past few weeks to the market for high-risk corporate debt. Many big banks, holding hundreds of millions in bonds for leveraged buyouts, are having a hard time selling them.
“Bad loans can be like an infection. They spread through the financial markets because mortgage companies package them and sell them as investments.”
The CLO window remains shut to new vehicles and hedge fund continue to approach the market gingerly, coming in only for bargains, while fund flows into retail funds went sharply negative in late July. In July, total inflows from CLO’s – including changes in the CLO calendar – and prime funds declined to a 17-month low of $4.6 billion, from $7.9 billion in June and a monthly average of $12.6 billion during the first half 1.
Despite a strong market correction that has sent large-cap loans reeling, arrangers are pushing forward with a full slate of middle market transactions, gambling that they’ll be able to cobble together syndicates on smaller deals from pockets of cash that don’t rely on CLO funding.

13. Market Trends

14. Market Trends

15. Contacts Mark Green Gary Milavec President Senior Vice President
wellsfargo.com
Chris Carter Michael Nepveux
Vice President Senior Vice President

16. Thank you