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The Merger and Acquisition Report 2006

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1 The Merger and Acquisition Report 2006
Good afternoon. Today, we would like to review with you some recent Appalachian Basin mergers and acquisitions, but before we get started into the presentation, we need to address a few items* Please note that, All materials presented are:* Timothy Knobloch and Benjamin Thomas James Engineering, Inc. Marietta, Ohio

2 Materials should be viewed as “approximately” correct.
Materials Presented Materials are drawn from public sources: press releases, SEC reports, etc. Materials should be viewed as “approximately” correct.  Materials are not being recommended as a basis for decision making, but are presented as useful market information. First, drawn from public data sources, press releases, or securities and exchange commission reports. None of the values presented are from in house work performed by James Engineering or based upon oil field rumors or speculation.* Therefore, the materials presented should be viewed as approximately correct. We have attempted in some cases to estimate undisclosed values based upon data contained within the various public data sources. For those who are aware of the exact values and would like the data corrected, please see me after the presentation. * Finally, the materials presented should not be viewed as being recommended for decision-making, but are strictly provided as useful market information. With that said, we can move ahead.*

3 The Perfect Storm Continues???
Last transmission from the Andrea Gail “She’s comin’ on boys, and she’s comin’ on strong” Captain Billy Tyne Last year we talked that there were 3 forces creating a perfect storm for acquisitions for sellers: low interest rates, high product prices, and a strong desire for acquisitions. We wonder this year if the perfect storm will continue? Maybe Captain Billy Tyne’s last transmission from the Andrea Gail will give us some encouragement. “She’s comin on boys and she’s comin on strong!.” However, that was before she was never heard from again… In our presentation today*

4 Presentation Outline Price Drivers Pricing Yardsticks
Prime Rate, Gas Price, and Oil and Gas Asset Prices Review of Recent Mergers and Acquisitions Comparison of Recent Mergers and Acquisitions Price Drivers and Pricing Yardsticks Today we will cover* Price Drivers –factors that influence the sale price.* Pricing Yardsticks – measurements used by companies to determine the purchase or sale price.* We’ll look at a relationship between the prime rate, gas prices, and what acquisitions have sold for* We’ll review several recent acquisitions and their associated price drivers and yardsticks,* Finally, we’ll present a comparison of those acquisitions. Today we’ll look at a few basics principals so we can better understand why properties have sold for what they have. Let’s look first at price drivers*

5 Price Drivers Factors Influencing Asset Values
Asset Size Cash Flow Daily Production Net Reserves Geographic Location Well Count Risk Miles of Pipeline Operated vs. Non Operated Interests Developed and Undeveloped Acreage Distribution of Reserves Some of the major factors that influence what assets sell for include Asset size: Size is important. Generally larger assets receive a higher price over smaller assets. Annual cash flow: Annual cash flow would be considered earnings before interest, taxes, and depreciation and depletion. Daily production in mcfeq: Today we’ll talk in terms of mcf equivalent with oil production converted to a natural gas equivalent of 6 mcf per bbl, since our basin is primarily natural gas driven. Similarly, we’ll talk about net reserves in terms of BCF equivalent. Other drivers include geographic location, well count, miles of pipeline, the average working and net revenue interest, the developed and undeveloped acreage, and similarly, the distribution of the net reserves into proved developed or proved undeveloped categories. Now, pricing yardsticks* __________________________________________

6 Pricing Yardsticks Price Determination Methods
Quick Look Multiples Dollars paid per mcfeq Dollars paid per mmcfdeq Multiple of Annual Cash flow Reserve Based Methods % of Discounted Net Cash Flow Discounted Net Cash Flow Hurdle Rates Profit to Investment Ratio Payout Generally there are three methods for determining what an asset is worth: Comparative sales, Rule of Thumb and Income Forecast Methods. Today well look at rule of thumb or quick look multiples and those that are reserve report based. Quick look multiples include the dollars paid per mcfeq of proved reserves. The second multiple is dollars paid per mmcfeq, or million dollars per producing million. The last is a multiple of annual cash flow.. When do Quick Look Multiples Work? - Quick look multiples have been used for a long time, and were designed for established, low decline, stable pricing environments Where do quick look multiples not work? - They are not for assets properties with significant recent development or undeveloped potential, or for those time of volatile product prices. That’s where reserve based methods are more appropriate, these include… Throughout our presentation today, it is important to remember that what is ultimately being bought or sold is future cash flow. Let’s look at two of the underlying factors that impact future cash flow: The cost of money and the price of natural gas.*

7 _____________________________________________
Current Rate 8.00% First, consider the historic cost of money, or prime lending rate. The prime rate we refer to is the rate provided by lending institutions to their best clients. It’s our observation that the prime rate directly influences the purchase price of an asset in that buyers often try to achieve a minimum rate of return of ~8-10% over the cost of money. For example in 1990 companies would have required a rate of return of 18-20% 12-14% in 2002, and now 15-17%. We understand that  The second major factor to be considered is the price of natural gas.* _____________________________________________

8 Nymex Natural Gas Futures
12 Month Strip Avg. Price The graph shows the cost of gas in $/mmbtu based upon the Henry Hub average gas price vs. time in years. As all are aware, we experienced low, relatively stable gas prices for a long time until the year 2000. We are currently in a of rising interest rates, very high product prices, and a strong desire for acquisitions. So although we don’t have real low interest rates , the high prices and high demand may still allow “The Perfect Storm” to continue.   Lets look at overall United States transactions over the past 15 years courtesy of the Scotia Group.*

9 Example: @ $1.5/mcfe 10 bcfe = $15 Million
This graph presents the $ paid per mcfe of proved reserves on an annual basis from 2000 through The blue represents Appalachian Companies, the red US onshore gas. When we look at the proved reserve based values from 2000 through 2004, we see that the $/mcfe multiple for asset pricing has almost doubled, increasing from 58 cents to $1.10 per mcf. *

10 Current prices appear to be over $2.00 per mcfe

11 Example: @ $10MM/mmcfe/d
Gross: ,000 mcfe/d Net (50%): 500 mcfe/d = $5 MM Similarly, when we look at production multiples in thousand dollars per producing mcfdeq, similar to our million dollar per producing million. Noting the blue Appalachian values, we see that the million dollar per producing million multiple has also increased, going from 4,200 in 2000 to 7,800 in The 7800 would equate to 7.8 million per producing million. We’ve talked about price drivers, pricing yardsticks, and looked at some of the other underlying factors. Now, for some recent acquisitions and mergers*


13 Recent Acquisitions and Mergers
Great Lakes Acquires Pine Mountain NCL Appalachian Partners Acquires Equitable’s Pennsylvania and Ohio Assets EnerVest Acquires Belden and Blake Comparison to Capital C/TPG Chesapeake Acquires CNR/Triana Comparison to Triana/Nisource We will cover six transactions: the Pine Mountain Acquisition, Equitable’s Ohio and Pennsylvanian Assets, Belden and Blake, and CNR. First EOG acquiring ESI*

14 Great Lakes Acquires Pine Mtn Price Drivers
Asset Size $219 MM Cash Flow $? MM per year Daily Production, Net mmcfdeq Net Reserves: 40% PDP 205 bcfe Geographic Location VA, WV Well Count 1,872* Miles of Pipeline 277 Acreage ,000 (1550 loc) *cbm, royalty interest – 1,317 wells wi/royalty – 519 wells, wi only-39 wells Last year we looked at Range’s acquisition of First Energy’s 50% interest in Great Lakes Energy Partners. Today we look at Range’s acquisition of Pine Mountain, a company purchase. Own only a royalty interest in 1317 wells, a royalty and working interest in 519 wells, and a working interest in 39 wells. Of the 1550 identified locations, 790 classified as proven. Range will own a 12.5% royalty and 50% wi in 90% of the locations. 40% of the 14.8 mmcfed is royalty gas 79% of the current production is coal bed methane 30% of the current proved reserves are from royalty interests. Pine mountain had the mineral interests under Equitable’s NORA and HAYSI CBM Cumulative gross production 11/2005 – 236 bcf, gross rate of 52 mmcfd, 1115 gross producing wells, 217,000 gross royalty acreage, 640 proven cbm locations, 2151 unproven, with a 15% per year growth rate for the next 8 years, 119 bcf proven, and 459 bcf unporoven. Royalty Interests have no operating expenses

15 Great Lakes Acquires Pine Mtn. Pricing Yardsticks
Dollars paid per mcfeq ($219MM/205 bcfe) $1.07 per mcfeq of reserves Dollars paid per mmcfdeq ($219MM/14.8 mmcfdeq) $14.8 million per producing million Multiple of Annual Cash flow ($219MM/?) Unknown – cashflow not available from public data sources Therefore, when we look at the pricing yardsticks, the dollars paid per mcfeq was $1.07, but the multiple of dollars paid per producing million was $14.8 million per producing million. The cash flow multiple was unknown since we did not have the annual cash flow value. Next, Triana Energy Holdings acquires Columbia Energy Resources*

16 NCL Appalachian Partners Acquires Equitable PA/OH Assets Price Drivers
Asset Size $147 MM Annual Cash Flow $ ? MM Daily Production 10 mmcfd Net Reserves: 90% PDP 66 bcfe Geographic Location PA, OH Well Count 1,200 Miles of Pipeline Acreage * *220 proven and probable locations In January 2005, Equitable Resources sold non core assets GE Commercial Energy Financial Services and Locin Oil Corporation bought 66 Bcf of net proved reserves for for $147 million GE Commercial Energy Financial Services holds a 95% limited partnership interest in NCL Appalachian Partners LP formed as a result of the acquisition in which the principals of Locin will be the general partner and operator with the remaining 5%. The four fields included 35 bcfe in the Noble Lordstown field and 2 bcfe Cambridge Fields in Ohio and 27 bcfe the Snowshoe and 2 bcfe in the Grugan Fields in Pennsylvania. 59 bcf of proved producing, 59/66 = 72%

17 NCL Appalachian Partners Acquires Equitable PA/OH Assets Pricing Yardsticks
Dollars paid per mcfeq ($147MM/66 bcfe) $2.22 per mcfeq of reserves Dollars paid per mmcfdeq($147MM/10 mmcfdeq) $ 14.7 million per producing million Multiple of Annual Cash flow ($147MM/$?MM) Unknown – cashflow not available from public data sources The dollars per mcfeq of reserves was ~$2.22 (at a reported 96 bcf the value would drop to 1.53 While the asset sold for $5.5 million per producing million And the multiple of annual cash flow was 8.2 Next, EXCO acquires North Coast Energy*

18 EnerVest Acquires Belden and Blake Aug 2005 Price Drivers
Asset Size $309 MM* Annual Cash Flow $50 MM(SEC 8K) Daily Production 48 mmcfdeq Net Reserves: 77% PDP 285 BCFE Geographic Location OH, PA, NY, MI Well Count 3,650 Miles of Pipeline 1,268 Acreage ,267 (gross) *$116MM Cash + $192MM Debt ** Gas prices hedged through 2013 EnerVest Management Partners, Ltd acquired Belden and Blake in August BB took a 57 BCFE write down at the end of Most of which occurred in the proved undeveloped. AS of August 31, 2005 the estimated termination value of the hedge with J. Aron was a negative 296 million to the company. Hedged volumes in 2005 represented 82% of current production levels. The average NYMEX based hedge prices for the second half of 2005 was $4.51 per mmbtu and 33.5 per barrel compared to and 66. The natural gas price then goes form 4.97 to 4.04 from with oil form 3652 wells = 89% of gross wells respresenting 98% of pdp reserves. 712,267 gross acres (565,060 net), 272,697 gross undeveloped ( net) The price drivers in this case was a sale price including a reported $2.2 Billion in Cash + $75 million working capital deficit. Annual cash flow was estimated at $60 million, with daily production reported at 50 million. Note that the proved developed reserves represented 66% of the 355 BCE, or that 34% were undrilled. *

19 Enervest Acquires Belden and Blake Aug 05 Price Drivers
Dollars paid per mcfeq ($309MM/285BCFE) $1.08 per mcfeq of reserves Dollars paid per mmcfdeq ($309MM/48mmcfdeq) $6.4 million per producing million Multiple of Annual Cash flow($309MM/$50MM) 6.2 Compare to Prior sale The pricing yardsticks then indicate a $0.99 per mcfeq of reserves, and that Capital C paid ~$7.8 million per producing million. Based upon the estimated annual cashflow of $60 million, the multiple of final sale price to annual cashflow was 5.9. The last deal of the day we’ll look at is Fortuna’s acquiring of Belden and Blakes Trenton Black River Assets. *

20 Belden and Blake Acquisition Buyer Comparison
Capital C EnerVest Asset Size $352 $309 Cash Flow, mm/yr $60 $50 Daily Prod, mmcfdeq Net Reserves, bcf 355** 285** Well Count, operated 3,400 3,650 Acreage 1,118, ,267 $/mcfeq $0.99 $1.08 $MM/mmcfdeq $7.8 $6.4 Valued less in 2005? Reserve write down by Capital C Sold Deep acreage Hedged gas prices through 2013 Belden Partially hedged exposure to the variability in future cashflows through December 2013

21 Chesapeake Buys Columbia Natural Resources Price Drivers
Asset Size $2,950 MM* Annual Cash Flow $?MM Daily Production mmcfed Net Reserves 70% PDP 1,100 BCFE** Geographic Location OH, PA, NY, WV,KY Well Count 8,200 Miles of Pipeline – 100% 6,500 Acreage (9435 locations) 4,100,000 * $2,200MM Cash +$750MM Hedging Liabilities **1.4 tcfe prob/poss (1316 pud, 6286 poss, 1833 prob) Chesapeake Energy Corporation purchased Columbia Natural Resources, LLC and certain affiliated entities (CNR) form Triana Energy Holdings LLC. The prepaid hedging liability through 2009 $325 million at $7.00 ($775 at Sept 1, 2005 prices) Ah the difference a year make Triana-CER $800 $ ,100 (73%) 5.5 $ The purchase price in this sale was estimated included a reported $200 million in cash, the retirement of $28 million in oil and gas commodity hedges, and the assumption of $70 million in debt. This sale resulted in increasing Ranges production by 35 million and their net reserves by 255 BCFE. *

22 Chesapeake Acquires Columbia Natural Resources Pricing Yardsticks
Dollars paid per mcfeq ($2950MM/1100BCFE) $2.06 per mcfeq of reserves (1.4 TCF Prob-Poss) Dollars paid per mmcfdeq ($2950MM/125 mmcfdeq) $18.2 million per producing million Multiple of Annual Cash flow ($2950MM/$?MM) Unknown – cashflow not available from public data sources When we look at the yard sticks for this asset purchase, Chesapeake paid $2.06 per mcfeq of reserves and $18.2 million per producing million, and had a multiple of X. Our next to the last sale we’ll look at today is Capital C’s acquiring of Belden and Blake in June from TPG.*

23 CNR Acquisition Buyer Comparison
Triana Chesapeake 08/ /2005 Asset Size, $MM $800 $2,950 Cash Flow, $mm/yr $97 $? Daily Prod, mmcfdeq Net Reserves, bcf 1,100 1,100 Well Count, operated 8,200 8,200 Acreage 4,000,000 4,100,000 $/mcfeq $0.73 $2.06 $MM/mmcfdeq $5.5 $18.2 Most of the physical attirbutes about CNR remained the same, acreage, wells, reserves, so why the difference. The driver that makes the difference between these two deals is the gas price.

24 Acquisition Summary Buyer Seller Asset Size $MM Daily Prod mmcfd Res.
BCFE % PDP Per Mmcfd $ Mcfe Range Resources Pine Mountain $219 14.8 205 (40%) $1.07 NCL App Partners Equitable– OH, PA $147 10 66 (90%) 14.7 $2.22 Enervest Belden Blake $309 48 285 (77%) 6.4 $1.08 Chesapeake CNR $2,950 125 1,100 (70%) 18.2 $2.06 While most of the price driver and pricing yardstick information has been presented here, I would like to focus on the highlighted section. Each transaction was unique. Range a large share of undeveloped reserves, therefore the millions per producing million high While we understand the larger deal, the First, we notice that EOG appears to have paid an unusually high purchase price based upon the $14 million per producing million and the cash flow multiple. However, note the 59% of undeveloped reserves. The Triana the 5.5 million per producing million seems low but remember the honoring the forward sales of 97 BCF. The EXCO/North Cost deal seems in line with others but note high percentage of proved developed reserves when compared to the others. The Range/First Energy acquisition, seems similar to the EXCO North Coast deal except that only 58% of the reserves are developed. Similarly, the Capital C/Belden also has significant undeveloped reserves. Finally, the Fortuna / Belden TBR asset reserves most likely do not reflect all the potential reserves associated with the asset Overall it appears that the acquisitions reviewed today, while excluding some of the unusually high multiples, were in the 7 – 8 million per producing million range, around $1.10 per mcfe of proved reserves, and having associated cash flow multiples of 6 to 7. What can we then conclude based upon the information provided today.*

25 The Merger and Acquisition Report What do we know?
Every transaction is unique. Every transaction is supported by a reserve report. Every transaction is supported by a team of professional advisors. Asset Preparation Asset Presentation Asset Placement smaller operators have to work harder (smaller assets) company significant time should be taken in asset preparation in order maximize value.   The relatively low prime rate, the high product prices, and a desire for acquisitions, has created a “Perfect Storm” for sellers. 2.    Remember that Rule of thumb multiples or Quick Look Multiples have limitations. They are only applicable to established, low decline assets in a stable price environment. 3.    Most sales are unique as we saw today, either in regards to the undeveloped potential or the existing debt. Ultimately to make a successful acquisition and realize the projected future cash flow, an operator must not only achieve full asset development, but also achieve the forecasted operating costs, product prices, and cost of capital. Thank you Get expertise to assist in the sale. Prepare your own asset evaluation. Fully market the properties or assets Do your homework – “The devil really is in the details.” Prepare a plan for fully developing all the acquisition assets. Prepare a plan for integrating the new assets into existing operations. Implement both plans after the acquisition is complete.

26 The Merger and Acquisition
Report Thank you. Timothy Knobloch and Benjamin Thomas James Engineering, Inc. Marietta, Ohio

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