Private Capital Conference IPAA – New York 2005

Company Background  Start-up July 1, 1999 “There is no joy in life greater than starting with nothing and ending up with something.” - Joe B. Foster  Founding Members include: Bryan Nelson (Geologist) Todd Stone (Geologist) Mike Minarovic (Petroleum Engineer)  Current Staff of Nineteen

Gulf of Mexico Shelf – 1999  4 year average of 12 month strip was $2.21/MMBTU.  Shelf decline rates increased during the 1990’s from 28% to 40%.  3D Boom past peak, but significant opportunities remained.  Ownership transition from larger to mid-cap companies.  Public company all-in-costs of about $1.90/MCFE (15% Margins).

Original Business Plan “Second Mouse Plan”  Generate lower-risk exploitation drilling opportunities.  Focus on the Gulf of Mexico shelf near existing fields.  Grow the company mainly through the drill bit.  Focus on gas. Expect higher prices, but plan on $2.25/MCF.  Operate as soon as possible.  Limit the growth of the company over the long-term.

How Arena Differentiates  Focused strategy in a focused area.  Integrated geological, geophysical, and engineering evaluations.  Thorough understanding of the opportunities that remain on the GOM shelf.  Smaller minimum reserve size required to make a project drillable.  Top-notch operating staff.  Win/Win solutions for existing lease holders.  Strong passion for the work and significant personal investment.

Initial Financing Options “Creating Something from Nothing”  Founder’s Equity  Industry Participants  Private Equity

Financing Solutions Simplified by Drilling Results and High Prices  Founder’s Equity for Start-up Phase.  Industry Participants for G&A, Seismic Data, and Operations.  Additional Founder’s Equity for Drilling.  Drilled Good Wells & High Prices - Mezzanine Debt (Shell Capital).  Drilled Good Wells & High Prices - Senior Debt (Wells Fargo / Hibernia).  Drilled Good Wells & High Prices - Mezzanine (Wells Fargo Energy Capital).  Drilled Good Wells & High Prices - Senior Debt (Wells Fargo / Hibernia / UBOC).

Current Financing Options  Internal Cash Flow  Senior Bank Debt  Mezzanine Debt  Volumetric Production Payments  Industry Participants  Private Equity  Additional Member Equity  Public Equity

Why Project Debt Worked for Arena and the Lenders  Initial company equity and reserve value was established.  Firm development program was ready for funding.  G&A and seismic data purchases were funded separately.  High gas prices and successful drilling lead to funding of additional projects.  Lenders have had strong technical understanding of Arena’s business plan.

KEY DISADVANTAGES Bootstrap / Project Debt Capitalization  Initial growth significantly limited due to limited capital.  “The Big Deal” was not an option.  No Board of Directors.  Founder’s equity at risk in drilling wells in the Gulf of Mexico.  Reserve based lenders are typically more conservative.  Business plan may not be executed during a sustained period of low commodity prices or by a negative “Act of God”.

KEY ADVANTAGES Bootstrap / Project Debt Capitalization  100% of the company’s equity is owned by the employees of the company.  Big decisions can be made quickly.  No obligation to have a short-term exit strategy.

Gulf of Mexico Shelf – 2005  4 year average of 12 month strip is $4.90/MMBTU.  Shelf decline rates have increased to over 50%.  3D Boom way beyond peak, but some limited opportunities remain.  Abandonment liability and high finding costs are key issues.  Public company all-in-costs are about $3.50/MCFE (30% Margins).  Activity level is down significantly relative to gas prices.

Measuring Results  Bi-Annual Audited Reserve Reports from Ryder Scott.  Quarterly Financials and Annual Audited Financials.  Quarterly detailed budget analysis and planning.  Detailed review of lease operating statements.  AFE versus Actual Cost evaluation.  “The commodity game is a game of margins.” – Danny Weingeist

Arena Results  Recent Capital Invested: $65 million $75 million 2005 Budget - $80 million  Successfully drilled 48 of 53 Gulf of Mexico wells (28 operated) with an average working interest exceeding 60%.  Current debt is less than six months of cash flow.  Current production rate exceeds 70 MMCFEPD net.  Acquisition expenditures total less than $20 million.  Joint ventures with Apache, BP, Noble Energy, and Shell and many others.  Diversified reserve and production portfolio. Ownership in 54 GOM leases.  Net MMS royalty payments of more than $40 million through December 31,  Aggressive drilling program planned for the next 12 months.

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the Arena.....” Theodore Roosevelt Paris, 1910