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HEFG/IPAA Capital Markets Breakfast August 9, 2007.

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Presentation on theme: "HEFG/IPAA Capital Markets Breakfast August 9, 2007."— Presentation transcript:

1 HEFG/IPAA Capital Markets Breakfast August 9, 2007

2 HEFG/IPAA Capital Markets Breakfast 2 Summary of the Leveraged Bank Markets Number of Active Bank Investors and Market Share Source: Wachovia Securities and S&P/LCD Pro Rata BB and B Pricing Averages Source: Wachovia Securities and S&P/LCD  With treasuries at historically low levels, overall rates remain attractive though market depth will likely be challenged over the next several weeks.  While the market for larger financings that require institutional participation for successful execution is effectively closed, financings that are distributed exclusively to traditional bank investors remain viable.  Number of banks participating in the syndicated loan market is at highest level since 1999.  Wachovia expects pricing on all bank or “pro rata” deals to ultimately follow the broader market; however, we believe there may now be a limited window for certain issuers to lock in relatively attractive terms.

3 HEFG/IPAA Capital Markets Breakfast 3 Leveraged Loan Market Conditions  The leveraged/non-investment grade loan market is in the midst of an unprecedented technical correction.  Fundamentals remain strong with default rates at low levels.  The correction is driven primarily by a liquidity crisis in the market for collateralized loan obligations (“CLOs”), structured vehicles set up to invest principally in floating rate, secured “bank” debt.  Record leverage multiples for LBOs and aggressive covenant-lite structures, as well as concerns surrounding the sub-prime mortgage market, raised doubts about the soundness of CLO/CDO financing vehicles.  Rating agencies issued across the board downgrades on the debt of many of these structured vehicles.  CLO/CDO bond issuance to fund the purchase of assets (bank loans, sub-prime mortgages, etc.) has dried up and new issuance is expected to be limited for the foreseeable future.  Underwriters of CLO paper have also hampered liquidity by restricting the availability of “warehouse” credit lines.  With little liquidity among institutional investors and a record forward calendar, the market is in a state of grid lock with widespread uncertainty regarding the direction of the market in the 4 th quarter.  Underwriters have had to fund a large number of underwritten financings on their own balance sheets as they have been unable to attract any meaningful interest from potential investors. Institutional Loan Default Rate by Number of Issuers Source: Wachovia Securities and S&P/LCD Loan Forward Calendar vs. CLO Issuance Source: Wachovia Securities and S&P/LCD

4 HEFG/IPAA Capital Markets Breakfast 4 LCDX* Price / Spread Source: Wachovia Securities and Markit; *Index of 100 loan credit default swaps Discounted Spread Source: Wachovia Securities and S&P/LCD Average Cash Loan Levels Source: Wachovia Securities and S&P/LCD Secondary Trading Levels Source: Wachovia Securities and S&P/LCD Leveraged Loan Market Conditions

5 HEFG/IPAA Capital Markets Breakfast 5  The high yield market has also been pressured with secondary spreads and new issue premiums widening.  The secondary market was down for the 9th week in a row with yields on BB and B indices widening 31 bps and 49 bps, respectively, last week.  Despite this, with treasuries at historically low levels, overall rates remain historically attractive though market depth will probably be challenged over the next several weeks. High Yield Market Conditions BB High Yield Index 10-Year Treasury Yield B High Yield Index Source: Bloomberg L.P. Source: Merrill Lynch Global Index System

6 HEFG/IPAA Capital Markets Breakfast 6 High Yield Market Conditions Source: Markit, Merrill Lynch Global Index System and Wachovia Securities Analysis. Note: LCDX Index was launched on 5/22/2007. Historical Market Performance

7 HEFG/IPAA Capital Markets Breakfast 7 High Yield Market Conditions Representative Upstream Bond Performance vs. Broader Market  YTW 6/1 – 7/27 145 bps 110 bps 113 bps 117 bps 177 bps

8 HEFG/IPAA Capital Markets Breakfast 8 High Yield Market Conditions Representative Midstream Bond Performance vs. Broader Market  YTW 6/1 – 7/27 145 bps 120 bps 98 bps 110 bps 130 bps 101 bps

9 HEFG/IPAA Capital Markets Breakfast 9 High Yield RVA: Upstream Source: Advantage Data & Bloomberg

10 HEFG/IPAA Capital Markets Breakfast 10 High Yield RVA: Midstream Source: Advantage Data & Bloomberg

11 HEFG/IPAA Capital Markets Breakfast 11 Upstream MLP Yields Since IPO Date  For upstream assets with the appropriate reserve profile, an upstream MLP IPO offers a compelling alternative for the monetization of oil and gas assets.  C-corps are likely to face increasing competition for long-lived reserves from tax-advantaged flow-through vehicles.  Emergence is similar to historical trends in the midstream market and in the Canadian E&P market.  Wachovia has been involved in all but one upstream MLP/LLC IPO completed to date. Upstream MLP/LLC Distribution Yields Since 1/13/2006

12 HEFG/IPAA Capital Markets Breakfast 12 Upstream MLPs/LLCs Have Been Active Acquirers Recent Upstream Acquisition Activity  MLP/LLCs tend to purchase properties with high reserve to production ratios and significant PDP components.  The highlighted rows represent transactions where the buyer is an MLP or has announced it is contemplating an MLP formation.

13 HEFG/IPAA Capital Markets Breakfast 13 Volumetric Production Payment Overview of a VPP  A VPP is a limited term overriding royalty interest in oil and gas reserves.  The VPP entitles the purchaser to receive scheduled production volumes over a specific time period from specific lease interests.  The VPP guarantees first priority on a specific volume of production from specific lease interests.  A VPP is free and clear of all operating costs, capital expenditures and taxes. Transaction Description  The VPP Seller sells a VPP to a Wachovia entity. In addition to the conveyance, the Wachovia entity records a mortgage on the reserves.  The VPP Seller (or the existing operator) continues to operate the properties. VPP Seller Wachovia VPP and related production Cash (VPP purchase price) Acquisition VPP  The VPP transaction can also be used in conjunction with an acquisition.  The VPP is put in place with the seller of the property before the property purchaser buys the reserves (burdened by the VPP).  The VPP Seller (property purchaser) would book the cushion reserves, LOE reserves, tail reserves and all upside.  The VPP volumes would not be booked as Deferred Revenue.  The Deferred Revenue account would only reflect the present value of the LOE volumes. Monetization VPP  The VPP can be used as a monetization vehicle through which the oil and natural gas producers sells a term royalty in the reserves it already owns.  The VPP Seller would not book the VPP reserves.  The VPP would be disclosed in the footnotes to the financial statements.  With a Monetization VPP, the VPP volumes would most likely be reflected as Deferred Revenue.

14 HEFG/IPAA Capital Markets Breakfast 14  The Seller would sell a VPP to the VPP Buyer, a Wachovia administered entity.  The VPP purchase price will be based on the forward prices hedged by the VPP Buyer.  The VPP Buyer raises 100% debt financing for its acquisition of the VPP in the institutional market.  Typical pricing is approximately LIBOR + 50 to 75 bps (based on term of the VPP and the factors listed below).  Class sizes will vary based upon:  Predictability and stability of the production profile and operating cost profile  Well concentration  Amount of capital raised against the underlying reserves (i.e., size of “cushion”)  Operator / VPP seller  Credit quality of the off-takers and basis volatility  Hedging LOE  Ability to effectively hedge basis  Size of NGL component  Typical transaction of minimum $300 million. Agented VPP – Lowest Cost VPP Rated Debt VPP Seller VPP Buyer VPP and related production Purchase Price Institutional Debt Market Cash Wachovia Bank, N.A. Floating Price Fixed Price Comparison of VPP Structures

15 HEFG/IPAA Capital Markets Breakfast 15 Reversionary Interest Partnership Considerations  A reversionary interest partnership structure can be used to partially monetize and develop existing properties or in conjunction with an acquisition.  Wachovia would buy a portion of the property and contribute its pro rata share of capital expenditures required for development drilling as well as operating, maintenance and COPAS expenses.  The Seller and Wachovia can continue developing the properties, thereby increasing the value of the reserves.  Wachovia’s contribution to development costs gives the Seller access to future proved developed reserves with minimal upfront capital commitment and reduces risk during the exploitation period.  This product can be also be used for acquisitions where Wachovia and the Seller can partner to acquire large properties.  The Seller would have the opportunity to purchase Wachovia’s portion of the property to achieve its growth objectives. Reversionary Interest Transaction Example  The Seller sells its working interest in a $400 million property. The property is purchased by a newly formed Partnership Co. in which the company is the general partner (“GP”), with an interest of 2% and a Wachovia-administered entity (“WAE”) is the limited partner, with an interest of 98%.  The partnership agreement entitles WAE and the GP to receive their proportionate units of the net revenue from the reserves until WAE achieves a predetermined IRR target (cash on cash), which is based on the property profile. At this time, WAE will receive 65% of the net cashflows while the GP receives 35%. The IRR calculation will include cashflows from production (including hedging) and any proceeds from the sale of the property.  Net revenues will be calculated by taking COPAS, capital expenditures, LOE and cash flow from hedges into account.  This structure can be used as a complement to a partial direct working interest purchase of a property.

16 HEFG/IPAA Capital Markets Breakfast 16  EnerVest Management Partners, Ltd. (“EnerVest”) was founded on October 30, 1992, to acquire, exploit, operate, and manage oil and gas properties on behalf of institutional investors.  Currently operates approximately 11,500 wells in 11 states including Colorado, Kansas, Louisiana, Michigan, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Texas and West Virginia  Serves as the general partner or manager of various institutional funds and partnerships, including EV Energy Partners (“EVEP”), a publicly traded master limited partnership  Has made over $2.0 billion in acquisitions, including the $750 million acquisition from Anadarko, and over $467 million in divestitures since January 2005  April 16, 2007 – EnerVest announced that EVEP and certain institutional partnerships it manages have signed an agreement to acquire oil and natural gas properties in Central and East Texas from Anadarko Petroleum Corp. for $728 million (the “Transaction”).  1,297 active wells (892 operated)  82% PDP  52% gas, 21% crude and 27% NGLs  R/P of 8.1 years  Estimated productive life of over 40 years  Implied value of $2.48/Mcfe and $7,029/MMCfe/d.  EVEP expects the acquisition to be 45% accretive to distributable cash flow per unit in 2H 2007.  The acquisition closed on June 27, 2007.  Wachovia co-invested in the Transaction through its Reversionary Interest Partnership product.  Wachovia will be entitled to its proportionate share of cash flows and will provide capital for its share of the necessary capital expenditures, thus reducing the developmental risk to EnerVest and EVEP.  Wachovia’s initial interest in the partnership is reduced as certain IRR targets are met  Through the Reversionary Interest Partnership and EnerVest’s institutional funds, EnerVest and Wachovia allowed EVEP to participate in an acquisition that would have been too large to conduct independently.  Wachovia’s participation also allowed EnerVest to allocate its investment capital available to other ventures and reduce any investment concentration risks. Wachovia’s Role EnerVest Management Partners, Ltd. Asset Description & Acquisition Rationale Case Study – EnerVest Management Partners, Ltd. $170,000,000 Co-Investment through a Wachovia Reversionary Interest Partnership Sole Arranger

17 HEFG/IPAA Capital Markets Breakfast 17 Disclaimer Wachovia Securities is the trade name for the corporate and investment banking services of Wachovia Corporation and its subsidiaries. Debt and equity underwriting, trading, research and sales, loan syndications agent services, and corporate finance and M&A advisory services are offered by Wachovia Capital Markets, LLC, member NASD, NYSE and SIPC. Mezzanine capital, private equity, municipal securities trading and sales, cash management, credit, international, leasing and risk management products and services are offered by various non-broker dealer subsidiaries of Wachovia Corporation.

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