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  • 1. IPAA’s 2007 Private Capital Conference: Managing Leverage in a Volatile Commodity Market Second Lien Term Loans January 18, 2007 Evans Swann Director BNP Paribas
  • 2.
    • 1. E&P Bank Lending Overview
    • 2. Overadvance and Second Lien Bank Facilities
    • 3. About BNP Paribas
    Table of Contents
  • 3. 1. E&P Bank Lending Overview
  • 4. Energy Industry Risk & Return Paradigm PDP Reserves Proven Reserves Exploration Activity Engineering and Operations Risks Geological and Geophysical Risks Institutional Second Liens & High Yield Debt Bank Debt Bank Overadvances & Second Liens Mezzanine Capital Convertible Debt Private and Public Equity 5-10% 10-15% 20-30% 30% + Total Returns Controlled Risks Uncontrolled Risks
    • Management
    • Sponsorship
    • Capitalization
    • Hedging
    • R/P
    • F&D
  • 5.
    • Lend against proven reserve value - primarily PDP
    • Third party reserve estimates - usually risked somewhat
    • Loan value determined by advance rates
    • Cash flow model validates the analysis
    • Conservative price deck employed
    • Full value given to hedged volumes and prices
    Energy Bank Lending Parameters
  • 6.
    • BNP Paribas utilizes the following advance rate guidelines to determine the borrowing base.
      • PDP Reserves 50-70%
      • PDNP Reserves 30-50%
      • PUD Reserves 20-40%
    • BNP Paribas’ currently uses the following Base Case commodity price assumptions.
    • Tristone Capital publishes quarterly a comprehensive review and summary of active oil and gas lender price decks…upcoming releases may be interesting if commodity prices continue to “drift”.
    Current Engineering Metrics
  • 7.
    • Strong Commodity Prices Bolster Cash Flow
      • Debt reduction & Share repurchases
      • “ Hot Sector” syndrome
      • Significant loan appetite
      • Defaults are non-existent
      • Bank Price Deck divergence
    • Private Equity
      • Public “Headaches”
      • Sarbanes Oxley
      • Overadvance and Second Lien Facilities can optimize equity returns
    • Public Equity
      • Popular exit strategy
    Current Bank Market Conditions
  • 8. 2. Overadvance and Second Lien Bank Facilities
  • 9.
    • BNP Paribas opened the Second Lien E&P market in 2003 with a refinancing transaction for Quicksilver
    • Have arranged and agented the majority of the subsequent Second Lien Facilities transacted in the bank market
      • Several recent transactions for private companies
    • Bank and institutional participants
    • Navigated intercreditor issues
    • True underwriting capacity
    • Competitive alternative to High Yield
    Bank Market Second Lien Basics
  • 10.
    • Evolution of acquisition metrics
    • Development of commodity derivative markets
    • Inability of bank price decks to match growth of futures prices
    • Expansion of market capacity
    Drivers for Incremental Senior Debt Needs
  • 11. Overadvance Facility vs. Second Lien RBL Facility
  • 12. Second Lien Fundamentals
    • Structure based upon conventional RBL parameters
      • Engineering Review
      • Cash Flow Analysis (based on bank price deck)
      • Asset Coverage Test (PV / Total Debt)
      • Financial Covenants
      • Semi-Annual Redetermination
    • Transaction Criteria
      • Management
      • Reserve Integrity
      • Hedging
      • Capitalization
    • Standardized Documentation
  • 13.
    • Bank
    • Debt Enhancement Product
    • Smaller deals: $15-100MM
    • Provided by Banks & Long Term Institutional Holders
    • Pricing: LIBOR + 4 to 6%
    • Covenants: PV / Debt and Debt / EBITDA
    • Prepayment Flexibility
    • Institutional
    • Debt Maximization Objective
    • Larger market capacity - $100+MM
    • Paper is Liquid and Trades with Reasonable Frequency
    • Premium Pricing for Larger Loan Capacity: LIBOR + 5% and higher
    • Covenants Less Onerous
    • Higher Prepayment Penalty
    Two Second Lien Markets
  • 14.
    • Capacity enhancement to conventional borrowing
    • Longer maturity profile than standard overadvance bank facilities
    • Ability to enhance equity returns by reducing lower-tiered capital contributions - private equity
    • Compared to the High Yield alternative:
      • True underwriting
      • Lower minimum issuance size
      • Lower placement costs
      • Easily upsized
      • Prepayment flexibility
      • “ Relationship Lending” intangibles
      • More covenanted
    Bank Second Lien Advantages
  • 15.
    • Amount - $15 - $100 MM
    • Maturity - 3 to 5 years
    • Pricing - LIBOR +  4 - 6%
    • Covenants
      • Asset Coverage Ratio (PV / Total Debt)
      • Debt Service Coverage
      • PDP / Proven Ratio
    • Execution Timing - 2 to 6 weeks
    Basic Bank Second Lien Terms
  • 16. 3. About BNP Paribas
  • 17. BNP Paribas
    • 3 rd largest bank in the world, with total assets of $1.3 Trillion
    • Energy practice is largest revenue contributor globally
    • Highly rated with S&P (AA) and Moody’s (Aa2)
    • Worldwide presence: 500+ offices in 85 countries
    • 15,000+ employees in the U.S.
    • BNP Paribas’ activities are organized into four core businesses:
      • Corporate and Investment Banking
      • Private Equity
      • Retail Banking
      • Private Banking and Asset Management
  • 18. BNP Paribas’ Energy Finance Group
    • BNP Paribas has a global approach to the Energy sector:
    • Reserve-Based and Corporate Lending
      • Senior Bank Debt
      • Second Liens
      • VPP’s
    • Commodity Derivative market maker
      • OTC
      • NYMEX
    • 500 Energy Specialists in Houston, New York, Geneva, Paris, London and Singapore
    • Global Capital Markets Capabilities
      • High Yield
      • Equity – Linked Securities
      • Common Equity
  • 19.
    • BNP Paribas’ Houston office focuses on the upstream sector
    • Primarily oriented toward independent producer financings
    • $8 Billion portfolio with over 130 clients
    • Seamless financing for commodity derivative products
    • Dedicated marketer of commodity derivatives located in Houston office
    • Demonstrated international transaction capabilities
    BNP Paribas’ Commitment to the Upstream Sector
  • 20. 2006 Oil & Gas Lead Arranger Rankings
    • BNP Paribas’ rank by Volume fell from 5 th in 2005 to 7 th in 2006 due to Credit Suisse and UBS being significantly affected by $24 billion Anadarko financing.
    • However, with its focus on smaller, independent producers, BNP Paribas ranked 4 th in # of Deals.
  • 21. 2006 Oil & Gas Agent Only Rankings
    • BNP Paribas’ rank by Volume fell from 4 th in 2005 to 5 th in 2006 as several banks benefited from substantial financings by Anadarko ($24 billion) and Conoco Phillips (5 deals totaling $27.5 billion).
    • As measured by # of Deals, BNP Paribas retained its 3 rd place ranking in 2006, thereby demonstrating the breadth of its market penetration.
  • 22. This presentation is only an expression of our interest in connection with the proposed transaction and nothing contained in this presentation should in any way be construed as an offer or a commitment by BNP Paribas to extend or to provide any financing of any type, either on behalf of itself or any other entity. This presentation has been prepared by BNP PARIBAS for informational purposes only. Although the information in this presentation has been obtained from sources which BNP PARIBAS believes to be reliable, we do not represent or warrant its accuracy, and such information may be incomplete or condensed. This presentation does not constitute a prospectus and is not intended to provide the sole basis for any evaluation of the securities discussed herein. All estimates and opinions included in this presentation constitute our judgement as of the date of the presentation and may be subject to change without notice. Changes to assumptions may have a material impact on any recommendations made herein. BNP PARIBAS or its affiliates may, from time to time, have a position or make a market in the securities mentioned in this presentation, or in derivative instruments based thereon, may solicit, perform or have performed investment banking, underwriting or other services (including acting as adviser, manager or lender) for any company, institution or person referred to in this presentation and may, to the extent permitted by law, have used the information herein contained, or the research or analysis upon which it is based, before its publication. BNP PARIBAS will not be responsible for the consequences of reliance upon any opinion or statement contained herein or for any omission. This presentation is confidential and is being submitted to selected recipients only. It may not be reproduced (in whole or in part) to any other person without the prior written permission of BNP PARIBAS. Any U.S. person receiving this presentation and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker dealer. BNP Paribas Securities Corp. is a U.S. registered broker/dealer. © 2005 BNP PARIBAS. All rights reserved.