plexus capital, llc

Plexus Capital, LLCAn Intricately Interwoven Combination of Elements or Parts in a Cohering Structure

Capital Choices for Private E & P Companies

It Is Out There But How do I Choose?

August 10, 2006

Wayne Williamson 1560 Broadway, Suite 1950, Denver, CO 80202 www.PlexusCapital.com

(303) 225-5298

Plexus Capital, LLC 2

Plexus Capital, LLC Formed to design and source conforming and alternative financing

structures, minimizing the cost of capital for oil and gas producers

Will assist the producer in determining its capital requirements and advise alternative solutions for accessing it

Will assume lead role for transaction to expedite execution and allow producer’s management to continue to focus on current business

Determine cost of capital and help producer decide what risks to keep and what risks to transfer to least expensive holder of the risk

Through years of experience on both sides of the table (provider and producer) we can anticipate and structure the deal to avoid future potential problem areas


Private MarketsPrivate Markets

• Commercial banksCommercial banks

• Vendors (well service, seismic, pipeline companies)Vendors (well service, seismic, pipeline companies)

• IndividualsIndividuals

• Industry partnersIndustry partners

• Private institutions (direct or through fund managers)Private institutions (direct or through fund managers)

• Insurance CompaniesInsurance Companies

• UtilitiesUtilities

Sources of E&P Capital


Understanding Cost of Capital Weighted Average Cost of Capital

• Conforming bank debt (coupon, front end fee, commitment fee, admin fee)

• Sub debt (coupon, front end fee, commitment fee, ORRI, warrants, back-ins)

• VPP (discount utilized for calculating purchase, additional spread on hedges)

• Preferred Equity (coupon, expected equity growth rate)

• Equity (new equity or current owner’s equity/valuation)

• Need to consider term (floating vs fixed), front end fees

Subjective values:

• Transaction closing risk

• Speed of execution

• Future availability of capital from funder

• Call on additional capital


Cost vs Risk

0%5%

10%15%

20%25%

30%35%

Conforming Mezzanine Equity

Cost of Capital Relative Risk


Risk and Who Bears it Affects Cost of Capital

Reserve Well Known 3rd Party Eng. --------------- No Engineering/No 3D Category PDP --------- Proved Undeveloped ----------Probable ---------No Nearby Prod Conventional or Resource Resource -------------------------------------------Conventional Reservoir type Depletion Drive ------------------------------------Water Drive Production history/forecast term 1 Year History/Long Life ------------------- Recently Drilled/3 Year Life

Operational/Drilling/Completion Industry Successful History -----------------New Area/Unknowns Rig availability Long term rig contract ---------------------- Will try to find one

Management Previous Success -------------------------------No Previous SuccessSkin in Game -------------------------------------No Skin in GameFunder Control of $ -----------------------------Management Control of $

Commodity Price Max Hedging --------------------------------------No HedgingBasis Max Hedging --------------------------------------No HedgingMarketing/Transportation Firm Transport/Purch --------------------------Monthly deals/No infrastructure

Weather Onshore/geographic spread -----------------Concentrated operations/GulfInterest Rates Fixed -------------------------------------------------FloatingTerm of Capital 1 Year -----------------------------------------------7 YearsUnknowns Everything nailed down ------------------------Haven't figured everything outRegulatory/Government U.S./Wyoming ------------------------------------Int'l/California

Lower <------------------------------------------------------------------> HigherRisk/Cost


Conforming Debt Attributes Advance 50% – 75% (60% - 65% is typical) risked proved PV10 at

higher of bank pricing or hedge price

Senior secured

Payout within half life of reserves

Maximum term 8 years

Coupon at Prime or Libor + 100 to 300

Borrowing base review 2 times per year

Proved non producing limited to 20% of borrowing base

Single property no more than 15% of value

Single bank hold limit $25MM - $50MM


Private Mezzanine Attributes Limit total debt to 100% PV10 PDP at higher of institution pricing

or hedge price

Subordinated secured, requires inter-creditor agreement with senior lender

No corporate governance issues

Covenants similar to senior debt

Cost from Libor + 400 to 25% total cost of capital including ORRI or other equity kickers

May allow a portion to revolve

1-2 months to complete financing


Private Equity Attributes

Investment focus is on management

3-7 year investment time frame

Active corporate governance, board representation, control

Management receives 10-50% back-in after 8-25% IRR

Meaningful investment from management

3-6 months to complete financing


Debt Combinations

Senior secured with a tranche B (Lender A): No inter-creditor issues. Tranche B could revolve, pay more expensive debt off first.

Senior secured (Lender A) with subordinated secured (Lender B): Inter-creditor issues (Lender A and B not necessarily aligned). Can pay off more expensive debt first.

Senior secured mezzanine: Blended cost of capital. Cannot reduce average capital cost until take out of facility.

VPP: Same issues as senior mezzanine, but recourse limited to specific properties. Eliminates margin calls on hedging. More difficult to unravel cost of capital (hedge spreads, marketing risk spreads, discount rate). Need to understand cost of under-delivery.

SPE with combinations above: Limits enterprise risk to specific properties for lender. No inter-creditor issues with corporate lenders. Ring fences capital partner within specific properties, so risk attributes can be tailored to different capital providers.

Example of Recent Unusual Transactions


Financing Structure

ProducerProducer

SPE

Funder

InsuranceCompany

Property

Secured Loan

Cash Purchase Price

Swap Counter-Party(s)

CommodityPrice Hedge

Mortgage

Credit Support

Financial Guaranty

Guaranty Fee

Subordinated Note

Interest Rate Swap


Structure Benefits for Producer Can convert ordinary income to long term capital gain (1031 option)

Lock in historically high commodity prices without risk of margin calls

Potentially higher advance rate than conforming commercial bank loan

Financing is recourse only to subject properties

No inter-creditor issues

Diversifies capital structure

Producer retains all property upside

Vehicle for wealth transfer in estate planning


PV Tax Savings for Various Reserve Profiles

Note: Compares 15% capital gains rate to 35% ordinary tax rate.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1.38 2.25 3.00 4.00

Half Life of Reserves (years)

Per

cen

t o

f F

utu

re D

isco

un

ted

Tax

Sav

ed

PV5 PV10 PV20


A Few Pearls Create competition for your transaction

• Don’t assume a lender will not be interested in your type of transaction

• Ping as many lenders as you can, then focus on the 2 – 5 best fits

Try to convince lower risk/lower cost lenders to move up the risk spectrum• Lenders with minimum return will not accept lower return, regardless

of lower risk• Possible to get lenders to accept more risk for slightly higher return

Find out what the lender’s return criteria is and what they value


A Few More Pearls Identify your assets/attributes (what you have to give)

and find the lender that values them• Other non-producing assets to pledge or value (seismic, equity in

other enterprises, equipment, commitment of equity from VC)• Geographic concentration of production• Analyze and measure the risked value of your assets so the lender

understands Always negotiate a detailed comprehensive term

sheet• Reduces legal cost• Insures you have a deal before you invest too much time and legal

costs to walk away Get senior lender to provide additional margin facility

for hedging with non bank counterparties or have at least two banks/counterparties in facility for competitive hedges.

plexus capital, llc

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