Wells Fargo Energy Capital Michael Nepveux Senior Vice President Presented to: IPAA Capital Markets Seminar January 16, 2008

Who is the Wells Fargo Energy Group? Quick Facts: Over three decades of lending to the Energy industry 105+ staff members in Houston, Dallas and Denver Our clients have revenues from $10MM to $50B+ Broad product offering including senior debt, mezzanine debt, private equity, commodity and interest rate derivatives, and treasury management. The mission of the Wells Fargo Energy Group is to be the bank of choice for all segments of the energy industry

Who is Wells Fargo Energy Capital? Quick Facts: Headquartered in Houston with representatives in Denver and Pittsburgh 11 professionals on staff Over $1B committed to the mezzanine finance sector since 1996 In 2007 completed 43 deals totaling over $300MM Funds provided for development drilling; highly leveraged acquisitions and bridge facilities Make select equity investments in sponsored funds and private companies

Wells Fargo Energy Group Refining & Petrochemicals- 10% Exploration & Production- 40% Pipelines, Gathering & Processing- 20% $8.5B Energy Services & Equipment- 30%

Where Do We Fit in the Development Cycle? Syndicating Senior Revolver Production Subordinated Debt, Equity Senior Revolver Development Loan, Equity Start-Up Development Acquisition Development

Oil and Gas Industry Risk Spectrum 50+ 50+ 45 45 Equity Equity 40 40 35 35 30 30 Target Rate of Return, % Target Rate of Return, % 25 25 Mezzanine Debt Mezzanine Debt 20 20 (including sub debt and development loans) 15 15 10 10 5 5 Bank Loan Bank Loan ---------- ---------- Development/Exploitation Development/Exploitation ------------ ------------ ---------- ---------- Exploration Exploration ----------- ----------- (Engineering Risk) (Engineering Risk) (Geologic/Geophysical Risk) (Geologic/Geophysical Risk) PDP PDP PDNP PDNP PUD PUD Probable Probable Possible Possible Reserve Risk Reserve Risk

Definition of Mezzanine Debt Mezzanine (mĕz‘ ə-nēn) n. [from Latin, medianus middle, median]: An intermediate story, usually not of full width, between two main floors, especially the ground floor and the one above it. Energy finance translation: a middle layer of capital, typically supported to a material extent by undeveloped reserves, with equity beneath and sometimes senior debt above; not meant to be a permanent or primary source of capital. Good solution for companies who: Need capital to acquire and/or develop undeveloped reserves Require more capital than commercial banks will provide Don’t want to sell or bring in an industry partner Want to avoid ownership dilution inherent in raising equity capital

Mezzanine Debt Market Started in early/mid ’80s with TCW and RIMCO Numerous players have come and gone since then (Enron, Aquila, Williams, Shell Capital, Mirant, etc.) After Enron and merchant sector collapse, only TCW and WFEC remained active Numerous new players today (BlackRock, GasRock, Macquarie, NGP Capital, PetroBridge, Guggenheim, RBS, Goldman, Prospect, etc.) Hedge funds are also now active, but more selective in recent months Competition has driven returns down and increased risk Advantages of mezzanine debt versus: Bank Debt Private Equity higher advance rate less expensive accelerates reserve development less control limited or non-recourse (projects) easier to amend or increase

Typical Mezzanine Structure and Pricing Project Debt Secured with first lien $3MM - $50MM Fund development/acquisition of proven reserves Bridges to conforming bank debt if reserves not sold 1-3 year maturity IRR: 15% - 25%: Coupon Rate: 10% - 12%, ORRI < 5%, APO NPI 15% - 75%, warrants possibly Cash Sweep: 75% - 95% Runs deposited in a cash collateral account Commodity hedging typically required Subordinated Debt Secured with second lien $10MM+ Fund development/acquisition of proven reserves; refinancings; recaps. Advance Rate: senior + sub = up to 75% of NYMEX PV10% Maturity set 6-12 mos. after senior maturity IRR: 10% - 15% in the form of coupon; usually no equity kickers Cash Sweep: no Commodity hedging usually required Typically no borrowing base; protection via asset coverage test (NYMEX PV10)

Mezzanine Advantages vs. Conforming Bank Mezz shops take more reserve risk than commercial banks Smaller equity contribution required Higher advance rates than commercial banks Accelerate funding and development Typically non-recourse

Mezzanine Advantages vs. Private Equity Retain greater portion of the upside Cheaper way to finance a proved drilling program Maintain control Easier to exit

Second Lien Market Domino Effect As the subprime spiral spread, it affected the investment firms that managed them and the hedge funds and other investors that bought them When liquidity dried up arrangers were sitting on immense underwriting positions which created an overhang in the debt markets This liquidity squeeze pushed the entire market into price-discovery mode and substantially increased risk aversion High yield market “impaired but operational” – Treas. Sec. Paulson last week. Volumes down sharply, spreads wider. Oil and Gas 2nd Lien and mezzanine not immune. Markets are open, but at wider credit spreads, reflecting investor appetite and liquidity. That helped the contagion jump in the past few weeks to the market for high-risk corporate debt. Many big banks, holding hundreds of millions in bonds for leveraged buyouts, are having a hard time selling them. “Bad loans can be like an infection. They spread through the financial markets because mortgage companies package them and sell them as investments.” The CLO window remains shut to new vehicles and hedge fund continue to approach the market gingerly, coming in only for bargains, while fund flows into retail funds went sharply negative in late July. In July, total inflows from CLO’s – including changes in the CLO calendar – and prime funds declined to a 17-month low of $4.6 billion, from $7.9 billion in June and a monthly average of $12.6 billion during the first half 1. Despite a strong market correction that has sent large-cap loans reeling, arrangers are pushing forward with a full slate of middle market transactions, gambling that they’ll be able to cobble together syndicates on smaller deals from pockets of cash that don’t rely on CLO funding.

Market Trends

Market Trends

Contacts Mark Green Gary Milavec President Senior Vice President 713-319-1327 724-942-5839 mark.m.green@ wellsfargo.com milavega@wellsfargo.com Chris Carter Michael Nepveux Vice President Senior Vice President 713-319-1369 303-863-5589 chris.c.carter@wellsfargo.com michael.nepveux@wellsfargo.com

Thank you