2 Houston Energy Office opened in September 2005 A private, global diversified financial services firm with $120+ BN under managementWealth Management, Investment Management, Capital Markets500+ professionals worldwide, 70 in Investment ManagementHouston Energy Office opened in September 20057 professionals, including 3 petroleum engineersInvested in 41 deals for an aggregate $2.1 BNTotal IRR of 25.5% as of March 31, 2008Syndicated over $1.2 BN senior and second lien debtRaised $230 MM of co-investment equityRaising an Energy Opportunities FundProvide senior and mezzanine debt plus equityBlend of financial and technical expertise is unique
3 PDP PDNP PUD Probable Possible Target Rate of Return, % Reserve Risk Energy Financing Risk Profiles50+51015202530354045PDPPDNPPUDProbablePossibleDevelopment/Exploitation(Engineering Risk)Exploration(Geologic/Geophysical Risk)Traditional Commercial BankLoansTarget Rate of Return, %Reserve RiskSecured Loans, Mezzanine Debt,and Second Lien LoansProject EquityEquity-Linked and Equity SecuritiesWildcatDrillingTargetedInvestment Types forGuggenheim EnergyOpportunities Fund
4 Mezzanine DebtHigh advance rates against PDP, often all PUD reservesAdvances against AFEs during development, borrowing base control alsoFirst or second lien on development, non-recourse to companyAsset coverage/tail test, but few/no financial covenantsFees up front and prepayment fees, plus an equity kicker (ORRI or NPI)Fixed interest spread, bp over bank debt (liquidity discount for large deals)Advancing term loansMonthly cash flow sweep to amortizeHedging requiredCommercial Bank DebtTraditional advance rates against mostly PDP, some PDNP+PUD (20-30%)Borrowing base controls advancesFirst lien on collateral, recourse to the companyCovenants: TNW, CR, interest coverage, max debt/ebitdaMinimal feesPricing grid based on usageRevolver and term loanHedging optional
5 Private Equity Focused strategy and use of proceeds Equity investment a function of target return and leverage assumedNo collateral, but could have a liquidation preferencePerformance covenants onlyHedging encouragedManagement must deliver a preferred return before backing in for their promoteNo amortizationEquity investor controls most major decisions, including replacing managementMezzanine DebtFlexible use of proceedsHigh advance rate against proven reservesFirst or second lien on development assets but non-recourse to the companyAsset coverage/tail test, but few/no financial covenantsHedging requiredFees up front and prepayment fees, plus an equity kicker (ORRI or NPI)Fixed interest spread, bp over bank debt (liquidity discount for large deals)Advancing term loansMonthly cash flow sweep to amortizeNo management input or control
6 $/BblTristone Capital Q2/08 Survey and NYMEX (7/17/2008)
7 $/MM BtuTristone Capital Q2/08 Survey and NYMEX (7/17/2008)
8 Commercial BanksBanks are challenged to maintain and grow loans with new and aggressive competition, restrictive loan policies, and declining loan yields. Some banks continue to aspire to be investment banks.Investment BanksInvestment Banks are expecting a more moderate M&A market and less receptive public markets in the energy sector. Some investment banks aspire to be commercial banks.Private EquityA record levels of private equity capital is competing for limited management teams in a moderating M&A market with high commodity pricing and rising F&D costs. Current investors may be challenged to realize the same level of returns as the predecessor funds.
9 Mezzanine FirmsNew entrants and retooled teams have increased to more than a dozen firms, up from 3 or 4 survivors in Pressure to build portfolios has resulted in some of the same mistakes being made all over again.Institutional Loan InvestorsA record volume of Term B and Second Lien loan product was bought by hedge funds, mutual funds, and CLOs in 2006 and first half of For deals in the $100 million range that accessed this market, loan pricing was bid down and covenant-lite structures were over-subscribed overnight. Today, some firms that were heavily engaged in leveraged lending with a mark-to-market balance sheet are liquidating energy loans to meet investor demands for redemptions.ClientsEnergy clients have never enjoyed such an abundance of capital. The challenge is to stay focused on your strategy and not pursue an idea just because you can raise the capital.
10 Guggenheim Energy Energy Capital Provider Spectrum Equity Mezzanine SeniorGuggenheim EnergyEnergy “Mezzanine” FirmsGasRock;GE Energy; Laminar Direct; Macquarie;NGP Capital Resources; Petrobridge; Prospect Energy; TCW;Wells Fargo Energy Capital; Goldman Sachs E&P CapitalResource Funds/Asset AggregatorsMerit Energy; Quantum Resources; Celero;EnerVest; LimeRock; Sheridan ResourcesStretch Senior Debt ProvidersAmerican Capital; CIT; Foothill;Fortress Capital; SilverPoint;Power & Infrastructure/Alternative AssetsArcLight Capital; D.E. Shaw; First Reserve; Haddington Ventures;MetalMark Capital; Quantum Infrastructure FundTraditional Energy BanksAmegy Bank; Bank of America;Bank of Oklahoma/Texas; Bank of Scotland;BNP Paribas; Capital One; Citigroup;Comerica Bank; Compass Bank;Deutsche Bank; Fortis; Frost Bank;GE / Merrill Lynch; Guaranty Bank;JPMorgan; Texas Capital; RBS; UBOC;US Bank; Wachovia; Wells Fargo;WestLB; Whitney BankEnergy-Focused Private Equity FundsAvista Capital; Carlyle / Riverstone; DB Zwirn;EnCap Investments; Energy Spectrum; First Reserve;Greenhill Capital; Kayne Anderson; Lime Rock Partners;Pine Brook Road Partners; Post Oak Partners;Quantum Energy; Natural Gas Partners; SCF Partners;Warburg Pincus; Yorktown Partners
11 The Leveraged Finance capital markets experienced a major correction in the second half of 2007 through the first quarter of 2008.Record forward calendar of committed transactions built through the first half of the year with aggressive structures and pricing weighed upon new issue underwritingsProblems started in the Leveraged Loan market following the collapse of structured vehicles that were a major driver of liquidityFormation of new CLOs effectively stalled following sub-prime and asset-backed crisis and inability to syndicate AAA tranches and source equityEnergy credit availability since 2Q 2007, while more constrained in the second half of 2007 in sympathy with the broader market, remains one of only a few select industry sectors successfully accessing the leveraged markets across the credit spectrumSince mid-December 2007, energy issuance has comprised the majority of the high yield calendar/high yield primary issuance
12 1,056614427419418249199182Merrill Lynch High Yield desk
13 Fixed Income Market: during the first quarter, the 10 year note declined about 60 bps, while 3-month LIBOR declined approximately 200 bps.Leveraged Loan Market: institutional issuance totaled $27 billion during the 1Q 2008, down 80% from the $138 billion issued during the 1Q 2007
14 Milagro Exploration Background Transaction Update Petrohawk Energy Corporation announced intention to sell its Gulf Coast Division, a significant portion of which were former Mission Resources assets and personnelGuggenheim teamed with former Mission Resources management team, now Milagro Exploration, to bid on the divestitureAttractive opportunity: 266 BCFE of proved reserves (68% developed) with 400 BCFE upsideTransactionMilagro bid $825 MM funded with $260 MM of senior (L+2.25%) and $200 MM of second lien debt (L+6.25%), $27 MM of Management equity and $250 MM of new private equity, plus a $125 MM subordinated seller note (12% PIK)80% of PDP volumes were hedged prior to closingUpdateProved reserves increased through drilling and the senior borrowing base increased by $60 MM to $375 MMSeller note repurchased for $100MM, funded with increase in senior revolver and second lien term loanOil and Gas Investor Magazine named this “Financing Deal of the Year for 2007”
15 North Texas Development BackgroundClient was awarded a substantial farm-in opportunity from a Major to develop Cleveland Sand acreage in North TexasAttractive “resource play” opportunity with minimal geological riskImproved completion techniques made for very attractive economics in the playWell known management team with very strong track recordTransactionGuggenheim committed $37 MM Advancing Term Loan (P+2.2%) to drill and complete 16 wells under the farm-in agreementUpside participation came in the form of an ORRI (2% BPO, 8% APO)UpdateFirst 8 wells came in at or above expectations, after which Guggenheim was refinanced under the client’s traditional senior bank facilityRealized proceeds to date have generated better than a 20% IRRGuggenheim’s ORRI is currently generating more than $80,000 per month
16 Bakken Shale Development BackgroundPrivate equity sponsored team sought to acquire and develop Bakken Shale assets while minimizing management dilutionGuggenheim’s mezzanine facility allowed management team to leverage private-equity dollars to more efficiently acquire and develop assetsStrong management and operating team with experienced equity sponsorTransaction$50 MM Advancing Term Loan (L+6.5% with 4% ORRI BPO/10% NPI APO) to finance drilling and completion costs$10 MM equity co-investment to participate as a working interest partnerUpdateMezzanine facility accelerated drilling program with 8 wells drilled and completedClient was able to acquire and develop a larger acreage position by utilizing mezzanine capital for drilling and completion costs.
17 A leveraged loan too far… Private company focused on unconventional gas in multiple areas in North America and International. Company is leveraged 4 times EBITDA and experiencing liquidity problems.Reserve replacement in 2005: downward revisions (13%) exceed additions; excluding reserve divestitures and acquisitions and price effect, proved reserves decline 5.5%. Proved reserve replacement in prior year was also not achieved.New management team hired as founder/major shareholder left the business.Company is acquired for about $3.00/MCFE Total Proved. The acquisition is funded with senior debt, a Second Lien term loan (42%), and equity (58%). Debt is approximately equal to SEC total proved PW10% at $10/MMBTU and $61/BBL.Asset coverage covenant includes 50% credit for Probable reserves.Second Lien term loan flexed down ½% to L+5 1/4%, but still oversubscribed four times over within a week of launch in March 2006.