It is no secret that the oil and gas industry’s latest downturn has rocked the economic and business landscapes for its participants. In this first eLunch of our multi-part private equity in energy series, our oil and gas partners Denmon Sigler and Craig Vogelsang, along with guest speaker William Marko, managing director at Jefferies LLC, discussed the key trends and issues impacting the upstream oil and gas industry. The discussion included an assessment of the current investment climate, as well as other structural and risk allocation considerations for private equity investment in the upstream oil and gas sector.

1. © 2015 Winston & Strawn LLP
Private Equity in Energy
Upstream Oil and Gas Trends
eLunch briefing June 24, 2015
William A. Marko, Managing Director, Jefferies LLC
J. Denmon Sigler, Winston & Strawn LLP
Craig S. Vogelsang, Winston & Strawn LLP

2. © 2015 Winston & Strawn LLP
Agenda
• Introduction
• Denmon Sigler, Winston & Strawn LLP
• Overview of Current PE Investment Landscape
• William Marko, Jefferies & Company, Inc.
• Practical Considerations for Investment in Upstream Resources
• Craig Vogelsang, Winston & Strawn LLP
• Common PE Investment Structures: Drilling & Participation
• Denmon Sigler, Winston & Strawn LLP
• Common PE Investment Structures: Equity Structure
• Craig Vogelsang, Winston & Strawn LLP
• What does the Future Hold?
• William Marko, Jefferies & Company, Inc.
• Q&A

3. © 2015 Winston & Strawn LLP

4. © 2015 Winston & Strawn LLP

5. Jefferies LLC
Member SIPC
Overview of Current PE Investment Landscape
June 24, 2015
William A. Marko
Managing Director
Jefferies LLC

6. Market Observations
1
4
3
2
The North American energy industry has responded rapidly to the decline in oil prices
Well performance in select plays continues to improve, driven by optimization in
completions
Compression in service costs will enable top-tier, onshore operators to produce attractive
returns
6
Cash M&A market has been “frozen”, but is awakening
5
Private capital firms have unprecedented amount of capital
Few quality assets sit in “weak” or distressed hands
7
Public company equity valuations are assuming a rapid recovery to $80 / Bbl NYMEX WTI

7. Equity Capital
Markets
E&P Market Update
 Q1 2015 has been one of the most active quarters in the primary equity markets for E&P issuers in 5+
years as companies strive to de-lever and maintain liquidity through the cycle
─ 30 equity offerings raising ~$14 B year-to-date 2015
 Companies that have issued equity over the past 90 days have generally outperformed those who have
not
Debt Capital
Markets
 Interest rates remain at all time lows, and are expected to stay depressed for the foreseeable future
 The energy debt capital markets have been active, but less so than equity capital markets as most
issuers are already overleveraged
─ Activity dominated by distressed issuers who have capitalized on first / second lien carve-outs to
“prime” their high-yield bonds
M&A Market
 Virtually non-existent over the past 180 days due to a disconnect in bid / ask resulting from volatile
commodity prices
 More recently, activity has begun to accelerate as commodity prices stabilize and companies feel
increasing pressure around liquidity / leverage
─ Gas assets will likely come to market before oil assets
 Corporate M&A also gaining momentum as companies with meaningful resources view this as an
opportune time to make acquisitions; consolidation may be the only path to survival for certain distressed
companies

8. Crude Oil
Pricing
E&P Market Update (Cont’d)
 Oil price has firmed slightly but there are potential headwinds:
─ Domestic production continues to grow; significant oil-focused rig reductions have been offset by
improved EURs and drilling efficiencies
─ U.S. running low on storage capacity
─ Lifting of sanctions on Iran represents another material headwind
 Prices may fall further before improving, and may remain low for longer than the broader market
anticipates
Natural Gas
Pricing
 U.S. natural gas price outlook equally challenging:
─ Domestic gas supply is enormous; major gas plays are becoming significantly de-risked
─ Improvements in completion design continue to reduce the marginal cost of production
─ Regionalization of natural gas pricing at the forefront, local differentials vary widely
─ Natural gas price “ceiling” at around $4.00 / MMBtu
Bank /
Borrowing Base
Impact
 Impact of depressed commodity prices on borrowing bases is a key concern among operators
─ Banks are under increased regulatory / Fed scrutiny; unlike the fall in oil prices six years ago, they are
likely to respond differently this time
 Oil and gas represents the only “problem child” in their portfolios
─ Jefferies expects limited action by banks in the Spring and active engagement in the Fall if prices
remain depressed

9. Historical Horizontal vs. Vertical Rigs Historical Rigs Drilling for Oil vs. Gas
Commodity Price Impact on Active Rig Count
Drilling Activity Overview
Key Points
 Capex cuts by operators have had a
noticeable impact on rig count across
nearly every major U.S. basin
─ Several of the most active basins,
including the Permian, Eagle Ford,
and Bakken have seen rig count fall
by 50-60%
 Over 1,900 rigs active at peak in 2014
in the U.S.
 Currently 859 rigs active in the U.S.
Source: Baker Hughes North America Rotary Rig Count as of 6/12/2015.
Play Permian
Eagle
Ford
Bakken Marcellus Woodford Miss Lime Haynesville Niobrara Utica
Granite
Wash
Barnett Fayetteville
% ∆ -58% -50% -61% -21% -33% -70% -43% -52% -48% -74% -73% -44%
Total U.S. Rig Count
556
207
197
80
67
77
46
63
44
66
22
9
232
104
76
63
45
23
26
30
23
17
6
5
2014 High
Current
-
500
1,000
1,500
2,000
2,500
ActiveRigs
-
300
600
900
1,200
1,500
1,800
ActiveRigs
Horizontal Vertical
-
300
600
900
1,200
1,500
1,800
ActiveRigs Oil Gas

10. Historic Drop in U.S. Drilling Activity
Key Points
 During 2015, the U.S.
land rig count has fallen
faster than at any other
time in the history of the
modern drilling industry
─ Rapid decline is likely
to have a significant
impact on overall
domestic production
U.S. Land Drilling Downcycles
Source: Baker Hughes rig count.

11. Large / Energy Focused
Private Equity
Mezzanine Funds
Institutional Investors
and Hedge Funds
Sovereign Wealth
Funds
North American
Pension Plans and
Retirement Funds
Family Offices
 Large pools of capital
 Significant dry powder and appetite for E&P
exposure
 Ability to lead a transaction and execute quickly
 Economic terms are improving as competition in the
space grows
 Large pools of capital
 Ability to lead a
transaction
 Can move quickly
 Ability to provide low cost
capital at scale
 Can move quickly
 Less focused on governance
 Able to provide superior terms
relative to private equity
 Large pools of capital
 Interested in dis-intermediating private equity and investing
directly
 Generally passive investors, less focused on governance
 Generally move slowly but will move quickly with a lead
investor
 Smaller investment
size
 Can move quickly
Broad Universe of Potential Investors
The Pritzker
Group
Yorktown Partners

12. © 2015 Winston & Strawn LLP
Practical Considerations
• Seller
 Wherewithal
 Funding Current Operations
 Fraudulent Transfers
• Co-Working Interest Owner
 Ability to Pay its Share of Joint Operating Expenses
 Insolvency
 Transfers
• Mitigation
 Due Diligence
 3rd Party Opinions
 Contractual Security
Counterparty Risk

13. © 2015 Winston & Strawn LLP
Practical Considerations
• Title
 NRI Deficiencies
 Target Formation
 Payout/Back-in Interests/Farmouts
 Unrecorded Burdens
 Lease Term
• Environmental
 Contractual Obligations
 Statutory Obligations
 Successor Liability
• Mitigation
 Due Diligence
 Contractual Protections (i.e., representations and warranties, defect mechanism,
indemnification and walk rights)
Title and Environmental Considerations

14. © 2015 Winston & Strawn LLP
Common PE Investment Structures
Drill to Earn Acquire and Drill Equity Structure

15. © 2015 Winston & Strawn LLP
• Investor acquires a direct interest in
each well either (1) as each well is
drilled / completed or (2) when
development costs for that well are
funded
• Investor may earn the remainder of the
JV acreage when the drilling
commitment thresholds have been met
• Large upfront working interest that
decreases after Investor receives a
specified investment return
• Cooperative development relationship
with Investor input on operations and
Investor non-consent rights
• Off balance sheet – no impact on debt
to equity and leverage ratios
Drill to Earn

16. © 2015 Winston & Strawn LLP
• Participation Agreement
• May be called Joint Development
Agreement or Exploration Agreement
• 5-7-year duration
• Addresses title matters,
representations and warranties and
other provisions typically covered in
an asset acquisition agreement
• Carry mechanics, if applicable, drilling
plan and budget
• May include an area of mutual interest
• Transfer restrictions and preferential
purchase rights; Investor “off ramps”
• Investor may have more control over
the operator than in the typical JOA:
for example, Investor-friendly removal
provisions and higher standard of
care in operations
• Joint Operating Agreement
• Usually the AAPL 1989 model form
with modifications for horizontal
drilling
• Participation Agreement provisions
control in the event of a conflict for the
term of the Participation Agreement
• Form of Assignment of Mineral
Interests
• Will be executed and recorded as
mineral interests are earned
• Lessor Consent to Partial
Assignment of Mineral Lease
• Security Documents
• Less typical
Typical Documentation

17. © 2015 Winston & Strawn LLP
• Investor receives upfront conveyance
of an interest in all subject properties:
often covers a large area
• Usually cash up front plus a
commitment to “carry” a portion of the
operator’s drilling costs
• Working interest typically fixed at
closing
• Cooperative development relationship
with Investor input on operations and
Investor non-consent rights
• Off balance sheet – no impact on debt
to equity and leverage ratios
Acquire and Drill

18. © 2015 Winston & Strawn LLP
• Acquisition Agreement
• Addresses title and environmental matters,
representations and warranties and other
provisions typically covered in an asset
acquisition agreement
• Joint Development Agreement
• Carry mechanics
• Multi-year drilling plan and
development budget
• Drilling decisions may be made by
a “management committee”
comprised of representatives of
both parties
• Management Committee comprised of
representatives of both parties
• Area of mutual interest
• Investor-friendly removal of operator
provisions and higher standard of
care in operations
• Joint Operating Agreement
• Usually the AAPL 1989 model form
with modifications for horizontal
drilling but parties may negotiate a fit-
for-purpose JOA
• Participation Agreement provisions
control in the event of a conflict for the
term of the Participation Agreement
• Form of Assignment of Mineral
Interests
• Executed and recorded at closing
• Lessor Consent to Partial
Assignment of Mineral Lease
• Security Documents
• Secondment Agreement
• Less common
Typical Documentation

19. © 2015 Winston & Strawn LLP
Equity Structure
PE
(Private Equity)
NEWCO
(newly formed special purpose entity)
MEMBERSHIP
INTERESTSCONTRIBUTED AMOUNT
OPCO
(Working Interest Owner)
MEMBERSHIP
INTERESTS OIL & GAS INTERESTS

20. © 2015 Winston & Strawn LLP
Primary Documentation
• Describes oil and gas interests and other assets to be contributed
from OPCO/Seller to the NEWCO
• Sets out the terms and conditions on which these interests and
assets will be contributed by OPCO/Seller to the NEWCO, including:
 Representations and Warranties
 Indemnification
 Title and Environmental Defect Mechanisms
 Preferential Purchase Rights and Transfer Requirements
 Closing Conditions/Termination Rights
Contribution Agreement

21. © 2015 Winston & Strawn LLP
Primary Documentation (Continued)
• Control Provisions
 Drilling Operations
 Buying/selling Assets
 Expenditures
• Development Plan and Budget
• Key-man Provisions
• AMI Provisions
• Exit Rights/Transfer Restrictions
• Other Typical LLC Agreement
Provisions
LLC Agreement

22. Jefferies LLC
Member SIPC
June 24, 2015
William A. Marko
Managing Director
Jefferies LLC
What Does the Future Hold?

23. Essentially No M&A Market Over Past 180 Days
North American Onshore E&P Deal Volume Since 2011 ($B) (1)
Year 2011 2012 2013 2014 2015
Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 TD
Avg. WTI Spot $94 $102 $90 $94 $103 $93 $92 $88 $94 $94 $106 $98 $99 $103 $98 $73 $49 $57
Avg. Size ($MM) $623 $519 $1,308 $1,075 $888 $432 $1,711 $560 $502 $432 $343 $663 $496 $590 $693 $592 $233 $668
 Q1 2015 M&A volume 90% below the average of the last five years
 Virtually non-existent over the past 180 days due to a disconnect in bid / ask resulting from volatile commodity prices
 More recently, activity has begun to accelerate as commodity prices stabilize and companies feel increasing pressure around
liquidity / leverage
─ Gas assets will likely come to market before oil assets
 Corporate M&A also gaining momentum as companies with meaningful resources view this as an opportune time to make
acquisitions; consolidation may be the only path to survival for certain distressed companies
$14.9 $14.5
$27.5 $29.0 $27.5
$11.2
$39.4
$25.2
$7.0 $8.2
$10.3
$21.2
$16.9
$27.1
$30.5
$19.0
$1.9
$9.4
0
10
20
30
40
50
$-
$10.0
$20.0
$30.0
$40.0
$50.0
DealCount
DealVolume
Outlook for Huge Market 2nd Half 2015 and Beyond

24. Historical WTI Oil Price (3-Year Forward Average vs. Spot Price)
Increased Stability in Oil Price with Favorable
Long-Term Outlook
Key Points
 Commodity price environment has
stabilized
─ 3 year forward average has
traded within a tight range
between $55 - $65 / Bbl since
late December 2014
 The long-term commodity outlook
reflected by the out years of the
NYMEX curve (2018+) has
stabilized between $65 - $70 / Bbl
 Wall Street research is generally
bullish on oil prices going into 2016
and 2017
Wall Street Oil Price Estimates
% of Estimates
above NYMEX /
Avg. Premium
30% / $(1.67) 59% / $3.26 81% / $6.93
6/12/2015
3-Yr Fwd Avg:
$63.03
Spot Price:
$59.96
Note: NYMEX pricing as of 6/12/2015.
Source: Bloomberg, CapitalIQ and Wall Street research.
$35.00
$45.00
$55.00
$65.00
$75.00
$85.00
$95.00
Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15
OilPrice($/Bbl)
3-Year Forward Average
Spot Price
$55.34
$65.69
$70.75
$57.01
$62.44 $63.82
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
2015 2016 2017
OilPrice($/Bbl)
Wall Street Range
Wall Street Average
NYMEX

25. Near Term Future
1 The drastic oil price decline has forced the industry to focus on efficiency rather than speed
2 Rig count may have bottomed out and could start growing in next few weeks
3
The A&D market is about to awaken from its slumber and deal activity should pick up
dramatically
5
Deal activity to grow due to desire to sell non-core assets, a dearth of properties in the
market over the past 6 months and the tidal wave of private equity money
4 There could also be limited and targeted M&A activity but not massive corporate M&A
6
Private equity will continue to be more flexible in terms of deal structure, type of ownership
and governance

26. Large / Energy Focused
Private Equity
Mezzanine Funds
Institutional Investors
and Hedge Funds
Sovereign Wealth
Funds
North American
Pension Plans and
Retirement Funds
Family Offices
 Large pools of capital
 Significant dry powder and appetite for E&P
exposure
 Ability to lead a transaction and execute quickly
 Economic terms are improving as competition in the
space grows
 Large pools of capital
 Ability to lead a
transaction
 Can move quickly
 Ability to provide low cost
capital at scale
 Can move quickly
 Less focused on governance
 Able to provide superior terms
relative to private equity
 Large pools of capital
 Interested in dis-intermediating private equity and investing
directly
 Generally passive investors, less focused on governance
 Generally move slowly but will move quickly with a lead
investor
 Smaller investment
size
 Can move quickly
Broad Universe of Potential Investors
The Pritzker
Group
Yorktown Partners

27. © 2015 Winston & Strawn LLP
Questions?
Energy Transactions, Houston Office
(713) 651-2723
dsigler@winston.com
Denmon Sigler is a partner in Winston’s Houston office.
Ms. Sigler represents private equity investors, exploration
and production, midstream, refining, chemical and
petrochemical companies and service providers, in
acquisitions and divestitures, formation and governance of
joint ventures, financing transactions and project
development. Ms. Sigler also advises clients on farmout,
participation and operating agreements and product sales,
exchange, tolling, and shared site arrangements. Ms.
Sigler has been recognized for her energy transaction work
by Chambers USA, Nationwide, Energy: Oil and Gas
(Transactional), Legal 500 United States, The International
Who’s Who of Energy Lawyers, and Houston Business
Journal’s Who’s Who in Energy.
Energy Transactions, Houston Office
(713) 651-2741
cvogelsang@winston.com
Craig Vogelsang is an oil and gas partner in the Winston’s
Houston office advising U.S. and foreign clients in the
acquisition, disposition, and development of oil and gas
exploration and producing properties, intrastate and
interstate natural gas, crude oil, natural gas liquids and
other hydrocarbon product pipelines, and gas processing
plants. Mr. Vogelsang also advises in the legal aspects of
operations, commercial activities, and financings in the oil
and gas sector, including exploration and production,
gathering and processing, LNG, and joint development and
operation of upstream and midstream properties. Mr.
Vogelsang was recognized by The Legal 500 U.S. –
Energy: Transactions, Who’s Who in Energy published by
the Houston Business Journal, and named a Texas Rising
Star in energy and natural resources.
Denmon Sigler
Partner
Craig Vogelsang
Partner

28. © 2015 Winston & Strawn LLP
Name of Staff: William (Bill) Marko
Position: Managing Director
Nationality: American
Education:
Masters and Bachelor of Science degrees in
engineering from Tulane University
Key Qualifications:
William "Bill" Marko is a Managing Director of Jefferies LLC in the Energy
Investment Banking Group. He has managed more than $60 billion of asset
and corporate transactions. His client base consists of many of the world's 50
largest oil and gas companies. Prior to joining Randall & Dewey, subsequently
purchased by Jefferies, Mr. Marko worked more than 18 years in various
engineering, operations and commercial roles at Mobil Oil, followed by COO
of Madison Energy Advisors, a transaction advisory firm.
With more than 35 years of industry experience in worldwide acquisition,
divestment and new business development, he has evaluated transactions in
all major U.S. basins and more than 70 countries.
Bill is a registered Professional Engineer in Louisiana and is on the Tulane
University President’s Council and the Board of the Tulane School of Science &
Engineering.

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