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QUANTUM ENERGY PARTNERS SM January 14, 2009 IPAA PRIVATE CAPITAL CONFERENCE The Impact of the Credit Crunch on Private Equity Benjamin.

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Presentation on theme: "QUANTUM ENERGY PARTNERS SM January 14, 2009 IPAA PRIVATE CAPITAL CONFERENCE The Impact of the Credit Crunch on Private Equity Benjamin."— Presentation transcript:

1 QUANTUM ENERGY PARTNERS SM January 14, 2009 IPAA PRIVATE CAPITAL CONFERENCE The Impact of the Credit Crunch on Private Equity Benjamin A. Stamets

2 2 QUANTUM ENERGY PARTNERS Firm Overview Quantum Energy Capital, LLC (Quantum) manages a family of energy-focused investment funds with a primary emphasis in the oil & gas, midstream, and oil field service & equipment sectors. Founded in 1998, Quantum currently has over $5.0 billion in assets under management (AUM) across two investment platforms. Quantum Energy Partners (QEP) Private equity fund with $4.0 billion in AUM. Targets $50-$300 million equity or equity-linked investments. Quantum Resources (QR) Producing property acquisition fund with $1.2 billion in AUM. Targets >$200 million long-lived oil & gas property acquisitions. Quantums investment team is uniquely qualified to support and be a value added partner to our portfolio companies. In-house financial, technical, commercial, operational, legal and tax expertise. Extensive experience as CEOs and division heads of private and public energy companies.

3 3 QUANTUM ENERGY PARTNERS Where We Were – Pre-August 2008, and… Ample liquidity in both the debt and public equity markets fueled investment and M&A activity. Credit terms eased as global liquidity was at an all-time high. Commodity prices supported increased borrowing bases. Many new entrants arrived to provide capital to the space. Robust, liquid hedging markets. Super-charged corporate cash flows and increased CAPEX budgets. Land grab mentality emerged, as nearly every play appeared economic. Buy and Flip with hold periods of only 2-3 years was common. Source: Bloomberg. As of 1/13/2009.

4 4 QUANTUM ENERGY PARTNERS …Where We Are Today Commodity prices experienced their most rapid declines in history (in $). Liquidity reversed course as the global credit markets entered crisis mode. Lending ground to a halt as banks worried about their own balance sheets. IPO market is effectively closed. The cost-of-capital has increased dramatically. Hedging markets impaired by heightened counterparty risk. Cash preservation mode = reduced CAPEX budgets. Most resource plays are marginally economic at best. Bid-ask spreads too wide to transact. Source: Bloomberg. As of 1/13/2009.

5 5 QUANTUM ENERGY PARTNERS A Backdrop: The Global LBO Market Declined Materially in 2008 Global LBO volume hit an all-time high in 2006 with over $670 billion in transactions. These transactions represented 19% of all M&A activity. Through 3Q 2008, total LBO volume had shrunk to less than $99 billion, representing only 4% of all M&A activity. This precipitous fall represents an 80% decline from YTD 3Q Worse yet, 2008 saw 49 LBO- backed companies file for bankruptcy vs. only 2 in Of these, only two were energy focused: SemGroup and CDX Gas. Source: Goldman, Sachs & Co.

6 6 QUANTUM ENERGY PARTNERS Industry Wide, PE Fund Raising Hit a Wall in 4Q 2008… After four years of record growth, 2008 fund raising by private equity funds was down 18% below its 2007 level. 363 funds raised $266 billion in 2008 versus $326 billion in Leveraged buyout funds faired worse than other sectors, as only $181 billion was raised in 2008 versus $245 billion in 2007 – a 26% decrease. In the fourth quarter of 2008 alone, capital raising was down 57% versus a year earlier. In 4Q 2008 slightly more than $43 billion was raised versus $100 billion during 4Q Many industry observers anticipate this fourth quarter trend will continue, exacerbated by losses in existing funds and liquidity and allocation concerns among institutional investors.

7 7 QUANTUM ENERGY PARTNERS …And Private Equity LPs Faced Their Own Challenges Limited partners (LPs), the institutional investors behind private equity funds, were not immune to the economic crisis that impacted almost every corner of the financial industry. As the value of their public equity and fixed income investments decreased dramatically, LPs found themselves over-allocated to private equity on a portfolio basis. California State Teachers (CalSTRS), one of the largest pension funds, saw its allocation to private equity jump from 9% in early 2008 to ~14% by year end. A robust secondary market for private equity commitments emerged. Most public of these, Harvard University marketed its $1.5 billion PE portfolio. For certain LPs, liquidity for capital calls became a problem as free cash and attractive sale opportunities dried up.

8 8 QUANTUM ENERGY PARTNERS The Good News: Energy PE Re-Loaded in 2008 Source: Oil and Gas Investor estimates, Quantum estimates. Many of the major energy focused private equity players raised new pools of capital prior to the downturn and multiple new entrants emerged.

9 9 QUANTUM ENERGY PARTNERS Very Much Open for Business, But the Landscape Has Changed Private equity investors will be forced to over-equitize their investments. Higher hurdle rates for investment (PV15 vs. PV10?). Less credit and more scrutiny given to non-PDP reserve classes. For debt that is available, senior secured lenders are tightening their underwriting criteria, characterized by: More expensive, with LIBOR spreads widening by at least 100 bps. Shorter tenures with required amortization. More restrictive maintenance covenant packages. Project financings without near term cash flows and any construction or counter- party credit risk will be very challenging. Deal sizes will likely be smaller. Companies operating within the bounds of their equity commitments. Bank financings beyond the size of a clubbed deal will be difficult.

10 10 QUANTUM ENERGY PARTNERS Expectations for the A&D Market in 2009 A&D market was effectively closed in the 4Q 2008 and today a backlog of delayed sales exists. However, at current prices and valuations, no one wants to sell control unless they have to. Divestiture market may remain slow until the second quarter: Borrowing base redeterminations will force certain companies to pare assets in order to reduce bank borrowings. Companies will high-grade their portfolio of projects in a cash flow and capital constrained environment. Distress could lead to consolidation, generating additional asset sales down the road. Greater potential for farm-outs and joint venture opportunities as capital constrained companies face lease expirations. Much depends on the lending market as more credit is required to provide liquidity to the A&D market.

11 11 QUANTUM ENERGY PARTNERS How Quantum is Approaching the Current Market We are believers in the long-term fundamentals of the energy industry. Continue to seek out complete, proven management teams with sustainable competitive advantages. Challenging markets put a premium on talent. Remain creative and nimble with regard to investment structure. Equity line of credit with start-ups still possible. Growth equity in existing, operating businesses will be more common than in Expect longer hold periods of 5-7 years. Acquisition strategies are generally more attractive than resource plays or pure exploration. Must be prepared to fund development projects with 100% equity. Great example: Primary Natural Resources III Quantum backing Rich Talley, Mark Sheehan and Jack Fritts with $100 million commitment. Acquisition and exploitation strategy. Primarily focused in mature basins of Midcontinent, Panhandle and Permian.

12 12 QUANTUM ENERGY PARTNERS In Summary Energy-focused private equity funds have ample available cash. Quantum is open for business (as are many of our competitors). Credit, when available, will be more expensive. Over-equitization of transactions will increase hurdle rates. Bid-ask spreads remain too wide to transact. Creativity in deal structuring will be important. Forced selling in distressed situations likely by mid But robustness of A&D market will depend on the credit and hedging markets. On the one hand…private equity likely to be patient, waiting for the fat pitch. But on the other…2009 could prove to be the best buyers market in a decade.

13 13 QUANTUM ENERGY PARTNERS For more information on Quantum, or to submit information on your company, please call or send your information to the following: Quantum Contact Information Alan Smith Managing Director – Oil & Gas (713) Quantum Energy Partners 777 Walker Street, Suite 2530 Houston, TX Phone: (713) Fax: (713) David Bole Managing Director – Business Development (713) Ben Stamets Principal (713)

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