ipaa │2009 Private Capital Conference

Surviving and ProsperingIn Uncertain Times

January 14, 2009

Overview of ESS Funds Group

• Energy Special Situations Funds est. late 2005• Two institutional funds - $340+ million• Pursue middle-market, energy opportunities• 13 investments since inception• $150+ million uncommitted capital• Fund managers:

Jon Linker, Jeff Hewitt, Tim Sullivant

ESSF Strategy

• Invest in companies/projects - all energy sectors – Seek growth and value creation

• Sole manage small investments ($5 - $40 mm)• Partner large deals ($30 - $150 mm); 5 co’s.• Management track record and co-invest are key• Structure, incentives create common objectives• Equity-oriented - all financial structures possible

Our E&P Portfolio• 10 entities with 8 management groups• Highly-focused niche strategies

What Will 2009 Bring?

“Every new beginning starts from some other beginning’s end …”

Dan Wilson, Semisonic

Past 3 Cycles Lasted 4-6 YearsNormalized OSX Index with Peak = 100

• Peak-to-Trough value increase: 3x–4x

• Trough-to-Trough value increase +35-70%

• Peaks occurred at different points in cycle

• Public / Private values not always correlated

Note: SLB stock price used for OSX proxy prior to March 97.

History Indicates Bottom May Be Near• Past bottoms formed after 6 months of rationalization

Key E&P Challenges This Year

• Low commodity prices = uneconomic projects• Live within internal cash flow (up to 75% less)

– Banks cautious about new lending, for now– Equity availability limited

• Pressure to reduce balance sheet leverage• Questions to consider

– What projects do we pursue?– When will demand and prices rebound?– How do we plan for the future?

Where is Oil’s New Price Level?

What Will Establish the Gas Price?

Volatility is the Only Certainty

Looking to the Future

Focus on Long-Term Value Creation

Accumulate low-risk producing assets

Build portfolio of future growth opportunities

Prudently use leverage (leverage kills)

Create sustainable corporate entity

BackTo

Basics

Looking to the Future

Minimize Operating Costs

Diligently pursue cost reductions in all areas

Ensure short-term viability Retain long-term upside

Position company for future margin expansion

Valuation multiplier benefits

BackTo

Basics

Focus on Long-Term

Value Creation

Impact of Pricing, Fixed Costs• Small price moves enormously impact cash flow

                     

          2008     2009    

  Gas                  

  Price                  

  $ 9           33% Decline    

      PUD 2P &       In Gas Price    

  $ 8   Cash 3P       Provides    

      Flow CF   Total   ~65% Decline    

  $ 7 Proved     Cash Flow   In Cash Flow Gas  

    Producing             Price  

  $ 6 Cash             $ 6  

    Flow   All       Proved    

  $ 5     Costs       Producing $ 5  

                Cash Flow    

  $ 4   Capital           $ 4  

      and     Total Capital and        

  $ 3   Operating     Operating Costs     $ 3  

    Operating Costs              

  $ 2 Costs           Operating $ 2  

                Costs    

  $ 1               $ 1  

                     

                     

Looking to the Future

Adjust to Higher Capital Costs

Private equity targeting 25%+ return opportunities

Mezzanine funds availability shrinkingcapital cost rising

Fewer bank credit options higher spreadstighter terms

Maximize available capital

BackTo

Basics

Focus on Long-Term

Value Creation

MinimizeOperating

Costs

Looking to the Future

Eliminate Downside Risk

Entering a new risk-reward paradigm

Avoid high risk activities exploration blanket leasing

Use conservative financial structures, hedging

BackTo

Basics

Focus on Long-Term

Value Creation

MinimizeOperating

Costs

Adjust toHigherCapital Costs

Our Keys to Success

BackTo

Basics

Focus on Long-Term

Value Creation

MinimizeOperating

Costs

Adjust to HigherCapital Costs

EliminateDownside

Risk

We may be returning to conditions similar to those experienced in the 1990’s

www.essfunds.com