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Navigating the Maze of Available Financing Options

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1 Navigating the Maze of Available Financing Options
Plexus Capital, LLC An Intricately Interwoven Combination of Elements or Parts in a Cohering Structure Navigating the Maze of Available Financing Options New York April 18, 2005 Wayne Williamson 1560 Broadway, Suite 1950, Denver, CO (303)

2 Plexus Capital, LLC Formed to design and source conforming and alternative financing structures, minimizing the cost of capital for oil and gas producers Will assist the producer in determining its capital requirements and advise alternative solutions for accessing it Will assume lead role for transaction to expedite execution and allow producer’s management to continue to focus on current business Previous transactions have been structured as non-recourse monetization of PDP assets, compartmentalizing different risks to enable a high advance rate at lower than market cost of capital, allowing the producer to retain 100% of the upside Previous transactions have been structured as taxable to convert ordinary income to long term capital gain Plexus Capital, LLC

3 CFO’s Capital Formation Responsibilities
Don’t run out of money Forecasting Anticipate capital requirements Reduce cost of capital Evaluate and manage risk Match risk with lender risk tolerance Plexus Capital, LLC

4 Sources of E&P Capital Public Markets Private Markets Debt
Equity and equity-linked debt Private Markets Commercial banks Vendors (well service, seismic, pipeline companies) Individuals Industry partners Private institutions (direct or thru fund managers) Plexus Capital, LLC

5 Why Hire an Intermediary?
Internal personnel available and qualified to handle capital formation? Understanding of the current market range and cost of available capital Identifying tier/type/structure of capital that best fits the need Ability to communicate to capital markets through written and verbal presentations Ability to identify strengths and weaknesses of the internal organization What has been done before? What is reasonable to ask for? Time required to: Design and prepare information to present to capital markets Track process as the market of the cost of capital is determined Read and negotiate agreements Creates an improved dynamic in the negotiation May gain more information from the capital provider Decision maker is removed from direct negotiation creating protection from forced commitments Plexus Capital, LLC

6 Intermediary’s Role Help producer design the capital type and structure to source Producer risk tolerance Cost of capital Draft a transaction memorandum laying out the deal for prospective funders Model the producer entity pro forma the capital being sourced Arrange producer presentations to prospective funders Negotiate term sheets Ensuring the producer understands his true cost of capital and risk he is either keeping or transferring to the funder Keep producer and funder from “talking past each other” Recommend attorneys skilled in the type of transaction being undertaken Review and negotiate documentation Get the deal closed Fund expensive extravagant closing dinner Start to finish can vary based on complexity, where it is in the “bid/ask” spread, deadlines created by other transaction, experience of funder Plexus Capital, LLC

7 Attributes of a Good Intermediary
Good negotiation and communication skills While maintaining a good relationship with and respect of funders, his relationship with producers is paramount Knowledge of capital markets Knowledge of producer business, concerns, future potential tension points Persistent Imaginative Interest in getting the best deal for his client, as opposed to just getting a deal done Plexus Capital, LLC

8 How Does an Intermediary Charge for his Services?
EVERYTHING is negotiable! Only lack of imagination limits what can be done Up front retainer One time Monthly Reimbursement of out of pocket costs approved by client Success fee as a percent (1%-5%) of dollars committed or funded Conforming debt at lower end, non-conforming and equity at upper end Higher up front retainer can be traded for lower success fee Size of deal Tension points in engagement: Exclusivity of representation Term of tail period for additional fundings after initial closing Indemnification Plexus Capital, LLC

9 Understanding Cost of Capital
Weighted Average Cost of Capital Conforming bank debt (coupon, front end fee, commitment fee, admin fee) Sub debt (coupon, front end fee, commitment fee, ORRI, warrants, back-ins) VPP (discount utilized for calculating purchase, additional spread on hedges) Preferred Equity (coupon, expected equity growth rate) Equity (new equity or current owner’s equity) Need to consider term (floating vs fixed), front end fees Subjective values: Transaction closing risk Speed of execution Future availability of capital from funder Call on capital Plexus Capital, LLC

10 Cost vs Risk Plexus Capital, LLC

11 Conforming Debt Attributes
Advance 50% – 75% (60% - 65% is typical) risked proved PV10 at higher of bank pricing or hedge price Senior secured Payout within half life of reserves Maximum term 8 years Coupon at Prime or Libor to 300 Borrowing base review 2 times per year Proved non producing limited to 20% of borrowing base Single property no more than 15% of value Single bank hold limit $25MM - $50MM Plexus Capital, LLC

12 Private Mezzanine Attributes
Limit total debt to 100% PV10 PDP at higher of institution pricing or hedge price Subordinated secured, requires inter-creditor agreement with senior lender No corporate governance issues Covenants similar to senior debt Cost from Libor to 25% total cost of capital including ORRI or other equity kickers May allow a portion to revolve 1-2 months to complete financing Plexus Capital, LLC

13 Private Equity Attributes
Investment focus is on Management 3-7 year investment time frame Active corporate governance, board representation, control Management receives 10-35% back-in after 8-25% IRR Meaningful investment from management 3-6 months to complete financing Plexus Capital, LLC

14 Private Capital Sources (several play in both groups)
Equity Providers Altira Group LLC ARC Financial ArcLight Capital Partners, LLC Camcor Capital Inc. Canfund VE II Mgmt. Ltd. Darby Latin Am. Mezz. Fund, LP Encap Investments Energy Spectrum Partners LP GE Capital Goldman Sachs Greenhill Capital Partners, LLC Kayne Anderson Capital Advisors Lime Rock Partners Morgan Stanley Private Equity Natural Gas Partners QUANTUM ENERGY PARTNERS Riverstone Holdings LLC SCF Partners Warburg Pincus Yorktown Partners LLC Mezzanine Providers Ableco Finance LLC AIG Financial Products Corp. Axiom One L.L.C. (a J.M. Huber Co.) BlackRock Energy Capital Constellation Power Source Crown Capital Partners Inc. Foothills Capital (affiliated with Wells Fargo) Liberty Mutual Macquarie Energy Capital Petrobridge Investment Management LLC Prudential Capital Group Standard Bank of So. Africa TCW Asset Management UnionBanCal Equities, Inc. Wachovia Capital Partners Wells Fargo Energy Capital Plexus Capital, LLC

15 Example of Recent Unusual Transactions

16 Financing Structure Funder Swap Counter-Party(s) Producer Producer SPE
Credit Support Secured Loan Mortgage Commodity Price Hedge Interest Rate Swap Property Producer Producer SPE Insurance Company Subordinated Note Financial Guaranty Cash Purchase Price Guaranty Fee Plexus Capital, LLC

17 Structure Benefits for Producer
Converts ordinary income to long term capital gain Lock in historically high gas prices without risk of margin calls Potentially higher advance rate than conforming commercial bank loan Financing is recourse only to subject properties No inter-creditor issues Diversifies capital structure Producer retains all property upside Vehicle for wealth transfer in estate planning Plexus Capital, LLC

18 PV Tax Savings for Various Reserve Profiles
Note: Compares 15% capital gains rate to 38% ordinary tax rate. Plexus Capital, LLC

19 A Few Pearls Create competition for your transaction
Don’t assume a lender will not be interested in your type of transaction Ping as many lenders as you can, then focus on the 2 – 5 best fits Try to convince lower risk/lower cost lenders to move up the risk spectrum Lenders with minimum return will not accept lower return, regardless of lower risk Possible to get lenders to accept more risk for slightly higher return Find out what the lender’s return criteria is and what they value Plexus Capital, LLC

20 A Few More Pearls Identify your assets/attributes (what you have to give) and find the lender that values them Other non-producing assets to pledge or value (seismic, equity in other enterprises, equipment, commitment of equity from VC) Geographic concentration of production Analyze and measure the risked value of your assets so the lender understands Always negotiate a detailed comprehensive term sheet Reduces legal cost Insures you have a deal before you invest too much time and legal costs to walk away Get senior lender to provide additional margin facility for hedging with non bank counterparties Plexus Capital, LLC

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