MOGA/IPAA Capital Markets Update Private Equity Overview May 18, 2006

EnCap Investments L.P. 2 University of Texas – 2006 NCAA Champs

EnCap Investments L.P. 3  Privately negotiated equity capital utilized as an alternative to traditional financing sources  Primarily focused on corporate issuers (typically private)  Frequently structured as preferred or common stock or some combination thereof  Seeks an annual rate of return of 25% or greater  Function of the relative risk profile of the Issuer  Three to five year investment cycle  Illiquid Private Equity Overview

EnCap Investments L.P. 4 Risk Spectrum Private Equity 6% - 8%Target IRR 25%+50%+ Bank Loan Wildcat Funding Engineering RiskGeological & Geophysical Risk PDP Reserves Proved Reserves Exploration Mezzanine Bank Debt

EnCap Investments L.P. 5  Acquisitions  Used to facilitate growth in connection with a pending property or corporate acquisition or a development opportunity  Recapitalizations  Strategic “reloading” of the balance sheet to create dry powder for future growth  Start-Ups  Early stage companies seeking capital, advice, and contacts When is Private Equity Used

EnCap Investments L.P. 6  Private Equity is a form of risk capital that is consistently available to support the growth of independents regardless of market conditions  Diverse sources of private equity provide opportunities to find a capital partner with a similar strategy and risk profile  Flexibility in structuring an investment vs. inflexibility and fickleness of public equity and debt capital markets  Private equity providers remain hungry for deal flow Private Equity Benefits

EnCap Investments L.P. 7  Dramatic increase in institutional appetite in oil and gas  Pool of private equity for oil and gas has expanded significantly – more players, larger funds  However, traditional players have been cautious; pace of investment relatively slow  Most of the deals being done today are start-ups; therefore, substantially about people Current Private Equity Trends and Observations

EnCap Investments L.P. 8 First Reserve * (Houston; $1.5MM) Quantum (Houston; $345MM) Energy Trust Partners (Dallas; $300MM) Yorktown * (NYC; $585MM) Warburg Pincus * (NYC; $500MM) GreenHill Capital * (NYC; $350MM) EnCap Investments (Houston; $1.5B) Avista Capital * (Houston; $750MM) Natural Gas Partners (Dallas; $1.3B) Kayne Anderson (Houston; $550MM) Lime Rock Partners * (Houston; $525MM) Riverstone Holdings * (NYC; $1.3B) Active Private Equity Providers to the E&P Industry * * Denotes large energy focused fund; amount listed is estimated portion designated for E&P

EnCap Investments L.P. 9  Lots of “re-cycles” with existing management teams (on the heels of successful exits)  Trend toward larger up-front commitments, particularly with “re-cycles” and proven money-makers  All seeking opportunities to back established money-makers, but open- minded to “un-proven” teams with solid experience and good ideas  With abundance of capital and increased competition for investment opportunities, entry into business never been easier Current Private Equity Trends and Observations EnCap Investments L.P.

10 EnCap Investments L.P.  Greater competition amongst private equity providers resulted in more favorable deal terms  Shift to more common rather than preferred  Still structured with APO promote  Somewhat lower return hurdles to trigger back-in  Bigger slice of the pie to management team if “hit a homerun” Current Private Equity Trends and Observations

EnCap Investments L.P. 11 EnCap Investments L.P.  Historically, preponderance of private equity invested in companies with acquire and exploit growth and value creation strategies  Shift to more drilling-oriented investments due to over-heated state of M&A market and ferocious competition from public E&P companies  Public E&P companies continue to be rewarded for growth  Can’t drill fast enough to replace, much less grow, reserves and production  Plus, rising F&D costs make acquisition economics more compelling  Large public E&P companies driving M&A market; virtually nothing below their radar screen Current Private Equity Trends and Observations

EnCap Investments L.P. 12 EnCap Investments L.P. Acquirers of Private Equity Backed Companies  Public companies acquired 81% of the private equity-backed companies in the A&D market over the last two years, while private companies and private equity purchased the balance. Source: Richardson Barr & Co.

EnCap Investments L.P. 13 EnCap Investments L.P.  New twist for private equity – opportunity for portfolio companies to go public  Valuations compelling versus cash sale  Seed capital currently able to sweep chips via sale of secondary shares  Plus, company has access to more aggressive form of capital  Continue to take advantage as long as window stays open  Arbitrage partially achieved historically through strategic sale to public company buyers Current Private Equity Trends and Observations

EnCap Investments L.P. 14 EnCap Investments L.P. Summary  Expanding pool of private equity capital  Shift from acquire and exploit strategy to resource play strategy  Multiple exit opportunities  Most often through the sale to public E&P companies  Shorter cycles  Significant returns for management and private equity providers  Opportunity for repeat management teams

EnCap Investments L.P. 15 EnCap Investments L.P.  A leading provider of capital to the independent sector of the U.S. oil and gas industry since 1988  Focus on the upstream and midstream sectors of the oil and gas industry  Manage aggregate capital commitments of approximately $2.5 billion  Provide growth capital to companies with acquire and exploit and/or lower- risk drilling strategies. Avoid pure exploration risk.  Oil and gas industry is cyclical. Cyclicality creates opportunity. EnCap has invested across four or five distinct cycles. EnCap Overview

EnCap Investments L.P. 16 EnCap Investments L.P.  Partner with seasoned management teams with solid value creation strategies  Acquire and exploit  Lower-risk drilling  Midstream  Invest $20 million to $100 million of equity alongside management  Work with management to build the company into a larger independent’s “strategic acquisition”  Exit when the opportunity presents itself What We Do

EnCap Investments L.P. 17 EnCap Investments L.P.  Backed 115 different companies/management teams helping them create value for themselves and our institutional investors  Generally have portfolio companies at various stages of strategy execution  Geographically dispersed in traditional oil and gas provinces  Predominantly all North America, generally all US with the ability to invest up to 15% internationally Who do we do business with?

EnCap Investments L.P. 18 EnCap Investments L.P.  Demonstrate a proven ability to create value  Articulate their strategy in a way which makes you feel comfortable about their ability to manage risk  Technically proficient team that gives confidence in their ability to execute their strategy  Sufficient focus in their strategy to improve chances for success  Experienced in the key technologies utilized to successfully execute their strategy  Have an interest in developing a working relationship with their financial partner and in aligning all of our interests What attributes in a management team do we look for?

EnCap Investments L.P. 19 EnCap Investments L.P.  Terms can be negotiated but generally management can back into 20-25% interest in the Company out of the Private Equity partners’ profits in excess of performance hurdle  Lower performance hurdles equates to lower equity earn-in percentages  Higher performance hurdles equates to higher equity earn-in percentages  Example ($’s in millions) How do you make money?

EnCap Investments L.P. 20 EnCap Investments L.P.  We end up with about 80% of our management teams signing up to establish a new company with us after a sale  40% of our current management teams are teams we have done business with successfully in the past  We continue to add teams at the rate of 6-8 per year  Our management teams averaged making $35MM per team on the 10 companies sold last year Are we a good partner?

EnCap Investments L.P. 21 EnCap Investments L.P.  Plantation Petroleum I  Assisted the Company in the acquisition of a publicly held company  EnCap invested $30 million in common and preferred stock  The Company increased production, reduced costs, and later sold to Forest Oil Company  EnCap has since made two additional investments with the Plantation management team  Laredo Energy I  EnCap committed $20 million to this start-up entity with a focus on the Lobo Trend  Initial strategy of acquire and exploit but struggled to make acquisitions in the competitive environment  Management and EnCap shifted Laredo to more of a drilling oriented company  After the successful sale to Chesapeake, EnCap and Management have partnered an additional three times in continuance of the drilling strategy Portfolio Company Examples

EnCap Investments L.P. Houston Office 1100 Louisiana Suite 3150 Houston, Texas (713) Dallas Office 3811 Turtle Creek Blvd Suite 1080 Dallas, Texas (214)