AAPG Annual Convention Perfecting the Search for Drilling Capital Leslie Haines Editor-in-chief Oil and Gas Investor AAPG Annual Convention DPA Luncheon Speaker April 2006

Why use outside capital? Speedier growth Flexibility Better deal flow/more contacts Access to other $ sources Outsourced CFO Identify strategies-- Sounding board Negotiation Tax advantages if LP or LLC Credibility

Perfecting the Search 4 Themes: How much is available? Where do you find it? What structures are possible? E&P Success stories

$ Makes the World Go Around Between Private Equity, Mezzanine Funds & Hedge funds, $8.5 Billion raised in last 2 years!

New Capital Company: Fund $ Amount Fund Type Investment Goal Energy Spectrum Capital: Energy Spectrum Partners IV LP $353MM Equity Initial investments of $20- to $30 million FirstMerit Commercial Energy Group NA Reserve-based and project financing to independents in the Appalachian, Illinois and Michigan basins. Seeks deals between $500,000 and $40 million Foundation Energy Co. LLC $21MM Direct investments in U.S. onshore oil and gas properties GasRock Capital LLC Mezzanine Project debt investments or acquisitions of between $5- and $50 million or larger Greenhill & Co. Inc.: Greenhill Capital Partners II LP $875MM Middle-market energy investments

New Capital Company: Fund $ Amount Fund Type Investment Goal Kayne Anderson Capital Advisors LP $550MM Equity Early- to mid-stage North American E&P companies with investments from $10- to $75 million Lime Rock Partners: Lime Rock Resources/Lime Rock Partners III LP $875MM Privately negotiated investments in the oil-service, oil-service technology and E&P sectors NGP Energy Capital Management: Natural Gas Partners VIII LP $1.3B Investing capital in the E&P, midstream, oilfield-service and technology-related energy sectors. NGP Energy Capital Management: NGP Energy Technology Partners LP $148MM Investing capital in technology-related energy sectors.

New Capital Company: Fund $ Amount Fund Type Investment Goal NGP Energy Capital Management: NGP Income Co-Investment Opportunities Fund II LP $250MM Equity Investing capital to buy royalty, net profits and other interests in properties and other energy-related assets. Sowood Capital Management LP: Sowood Commodity Partners Fund IV LP $1.24B Projects in energy, natural resources, soft commodities, grains, industrial assets and metals. Source: Oil and Gas Investor This Week

The Capital Pyramid Tier 1: Institutional Aggregators Tier 2: General/Specific Tier 2: Institutional Investors Pensions, Endowments, Ins. Cos. Financial Corp. Industry Corp. Tier 3: Individual Aggregators Mutual Funds, Hedge Funds, Family Offices Tier 4: Individual Investors High Net Worth “Angels” Source: COSCO Capital Management LLC

For Leasing/Seismic/Drilling: For Acquisition & Follow-on Drilling: Financing Alternatives for Early Stage or Private Company For Leasing/Seismic/Drilling: Affluent individuals/Angels Industry partners Prospect brokers For Acquisition & Follow-on Drilling: Volumetric Production Payments (VPP) Bank Debt Mezzanine Debt Private Equity Joint Ventures

Alternatives for Growth Stage (Private or Public) Private placements Bank Debt Notes/Debentures 144A Equity or Debt IPO Sale of Company

Laredo Energy & Chesapeake Sell and restart: Laredo Energy & Chesapeake

Where/How do you find it? Oil and Gas Investor Oil and Gas Investor This Week Oil and Gas Finance Sourcebook Financial Intermediaries

What do investors want? Strong management team — technical, financial, operational Track Record: Drilling success & financial value creation Competitive Advantages: Geographic focus, land position or technical niche Skin in the game

What do investors want? Acquire and exploit Management reputation Drill-bit growth Acquire and exploit Management reputation

Path to Success John Doe Partners 1995-97 $2 MM Principals’ sweat equity, angels, industry partners 1998 $1 MM VPP 1998 $5 MM Commercial bank debt 1999 $8 MM Property-level JV w/ a fund 2000 $12 MM Private equity from a fund 2001 $15 MM Project debt from fund 2003 $38 MM Sale to public E&P 2004 $10 MM Start over!

Some Recent Investments Funded Company Recent Deal/Goal Source Blacksand Energy LLC Commitments of up to $50 million to recapitalize the company and fund development projects onshore California Kayne Anderson Capital Advisors, Jefferies Capital Partners and Wells Fargo Energy Capital. Canaan Resources LLC $150 million to acquire onshore long-life gas reserves Canaan Natural Gas Partners Fund IX LP and associated entities Cobalt International Energy LP $500 million to focus on E&P in the deepwater Gulf of Mexico and other global basins. Carlyle/Riverstone and Goldman Sachs Capital Partners Cordillera Energy Partners II LLC $176 million to focus on E&P in the Rockies, San Juan Basin, Midcontinent, East Texas and Permian Basin. EnCap Investments LP Coronado Resources LLC $80.8 million to develop natural gas resources in unconventional reservoirs in the Midcontinent and Eastern U.S. Greenhill Capital Partners LLC, Lime Rock Partners and COSCO Capital Mgmt. LLC

Some Recent Investments Funded Company Recent Deal/Goal Source Crusader Energy II LLC $52 million to develop assets in the Anadarko Basin and the Golden Trend areas of Oklahoma, as well as in the Texas panhandle and North Texas David D. Le Norman, other ex-Crusader I mgmt. and Kayne Anderson Energy Fund II Escondido Resources LP An undisclosed amount to focus on E&P in South Texas EnCap Investments Fund V and Wells Fargo Bank Fairfield Energy Ltd. $200 million of private equity to fund E&P activity A syndicate of investors led by Warburg Pincus and including SGAM/4D Global Energy Development Capital Fund and Kern Energy Partners I Fund Prime Offshore LLC Formed a $70 MM limited partnership. GE also financed the completion of a 48-mile gas pipeline from Prime’s fields in the South Padre Island area offshore Texas. GE Commercial Finance Energy Financial Services Genesis Gas & Oil LLC $70MM to pursue coalbed-methane projects and other unconventional reserves in the Rockies. Greenhill Capital Partners LLC, Citigroup Private Equity and COSCO Capital Management LLC

Some Recent Investments Funded Company Recent Deal/Goal Source Rockford Energy Partners II LLC $50 million to acquire long-life reserves in Oklahoma and the Texas Panhandle Quantum Energy Partners III LP Sequoia Resources LP $19 million to focus on E&P in the South Texas and Gulf Coast areas. Slate River Resources LLC $30 million for three consecutive years to focus on unconventional gas in the Rockies and development projects in the Uinta and Piceance basins in eastern Utah and western Colorado. Lime Rock Partners SouthView Energy LLC $50 million to acquire domestic oil and gas assets through financing exploitation and development drilling in the $2- to $20 million range Jefferies Capital Partners Tecton Energy LLC $30 million to fund E&P in unconventional resource gas plays in the Rockies and Canada. Quantum Energy Partners Source: Oil and Gas Investor This Week

Capital Providers are eager to hear your story Execution is more important than strategy Return is more important than growth Dollars are better than barrels