Corporate Banking and the Energy Sector David Hunt Managing Director January 19, 2006

Best of Times E&P loans perceived as good risk assets by banks Loan outstandings declining as borrowers generate excess cash Energy lenders aggressively seeking new clients to build/maintain business List of bank participants is expanding Broad array of private capital providers have equity for new and existing companies Public debt and equity markets increasingly open to smaller and less seasoned stories 2

Best (Worst) of Times –Energy Sector List of industry participants is also expanding and active M&A market is increasingly more efficient Sellers market yields many dry holes for potential bidders Aggressive hedging is increasingly necessary to support acquisition prices 3 Aggressive hedges can provide the marginal dollar of debt capacity and be the key to winning bids

Best (Worst) of Times –Lenders Banks lending appetite more aggressive than recent years 4

General Observations Financial buyers typically have short investment horizons (3-5 years) Good management teams are often reincarnated multiple times, based on historical value creation Bank market extremely responsive to strong/proven management teams even in start-up companies While the cost of equity is relatively expensive for young companies, the cost of bank debt is not highly differentiated from larger, more established companies A companys longer term objectives (grow, go public, sell) should guide bank and other financing decisions. 5

Bank Market Participants Full service providers versus traditional lending-focused institutions Match financial providers with longer term objectives Meaningful roles for both types of institutions Hedging capabilities Underwriting capabilitiesWRITING THE CHECK 6

The Typical Borrowing Base Deal Maturity of 3-5 years 5 years is becoming typical for long-lived reserves Security: 80-95% of proved reserves Security is highly dependent on capital structure Hedging typically limited to 75-80% of PDP production Hedging may be required to achieve desired borrowing base Bank group-provided hedges; secured pari passu This eliminates liquidity challenges inherent in margin hedging arrangements Interest rate hedging allowed Not normally utilized except with 2 nd lien subordinated debt structures Pricing grid based on utilization Utilization cost influenced by other debt in cap structure 7

Second Lien / Subordinated Market Transitional capital Primarily institutional but some bank participants Maturities outside bank facility, typically 5-7 years Documentation evolving 8 Investors in the Leveraged Loan Market Source: Loan Pricing Corporation

Borrowing Base Methodologies Banks use differing methodologies to determine appropriate loan amounts including: Price decks Limitations on non-producing reserve categories Limitations on hedging Discount or interest rates Consideration of second lien / subordinated debt Aggressive price decks do not necessarily yield the most robust borrowing basesASK ALL THE QUESTIONS 9

Other Considerations Bank price decks have typically been lower than strip prices Commodity hedging is increasingly filling the gap between the bank market and the forward market Hedging capabilities are important Significant margin calls in recent months have focused companies on aggressively using hedging capabilities of participating banks 10

Concerns for Producers and Banks Over-hedging production Changing bank appetites Maintaining borrowing base capacity in a backwardated market Concentration of production and take-away capacity Cost and availability of services Personnel Offshore Gulf production in post-Katrina environment Flexibility of second lien / subordinated lender 11

Advice Maximize market access: Good independent engineering Audited financials Selecting the right financial partners: Capabilities as well as price Responsive institutions that can quickly approve and fund Long-term commitment to the market 12

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