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Goldman Sachs Commodity Linked Financing IPAA Conference A presentation by Goldman, Sachs & Co. Goldman Sachs Commodity Linked Financing IPAA Conference A presentation by Goldman, Sachs & Co. Commodity Risk Management (212) 902 -0776 April 2005 1

Goldman Sachs Commodities/J Aron § § § J. Aron is the commodities risk management Goldman Sachs Commodities/J Aron § § § J. Aron is the commodities risk management business of Goldman Sachs and receives the full corporate guarantee of the Goldman Sachs Group (A+/Aa 3) Founded in 1892 and acquired by Goldman Sachs in 1981 Currently employs approximately 200 professionals globally in 6 regional offices (New York, London, Singapore, Tokyo, Sydney and Calgary) Voted 2004 Commodity Derivatives House of the Year by Risk Magazine Recent Business Initiatives § § § Underwritten or principaled over $6. 5 Bn worth of commodity liked-financings in the past 10 months On staff petroleum engineers allow us to take oil and gas reserve risk in derivative and financing transactions § § § Asset Secured Hedging Facilities Volumetric Production Payments Production-Contingent Derivatives Through GS E&P Capital, over $100 MM of development financing commitments to the North American oil and gas industry in 2004 2

Goldman Sachs E&P Capital § § Houston based principal investing effort for Goldman Sachs Goldman Sachs E&P Capital § § Houston based principal investing effort for Goldman Sachs § § § Investing Goldman’s balance sheet 5 energy specialist with 16 years average experience 3 Petroleum Engineers on staff Flexibility in transaction structure § § Junior and/or Senior Debt VPPs Drilling partnerships Preferred Equity Flexibility in transaction size § § $15 mm – several hundred million Seeking principal opportunities, but can arrange a transaction of any size Desire to build relationships with follow on investments Can provide capital markets exit Flexibility in commodity hedging § § Long-term, asset-secured hedging Elimination of cash collateral requirements 3

Financing Alternatives for Private Companies 4 Financing Alternatives for Private Companies 4

Four Basic Structures for E&P Debt (Debt Like) Investments § § Senior Revolving Debt Four Basic Structures for E&P Debt (Debt Like) Investments § § Senior Revolving Debt § § § § Corporate debt Fully secured with financial and asset-based covenant package Advance rates subject to semi-annual borrowing base Mostly PDP driven valuation, 1. 75 Coverage Ratio Libor + 125 -300 Typically 2 -3 year maturity, no prepayment penalties May include stretch tranche under same security package Proceeds available for general corporate purposes Volumetric Production Payments § § § § Not debt; sale of a real property interest No covenant package Operating and delivery obligations often secured by retained interest Typically 100% PDP with some flexibility to monetize PDNP Periodic coverage ratio of 1. 25 -1. 75 Pricing 6 -12% Typically 4 -7 year term No restrictions on use of proceeds 5

Four Basic Structures for E&P Debt (Debt Like) Investments § § 2 nd Lien Four Basic Structures for E&P Debt (Debt Like) Investments § § 2 nd Lien § § § § Corporate debt Fully secured but subordinated to senior revolver More relaxed covenant package 75% PDP, 1. 5 Coverage Ratio Libor + 400 -800 Term debt; 3+ years with prepayment penalties Proceeds available for general corporate purposes Mezzanine Debt § § § Corporate debt Security and covenant package highly customized 10 - 50% PDP, 1. 5 Coverage Ratio 8 -10% coupon plus some upside participation, 12 -15% all-in Term debt; 3+ years with prepayment penalties Specific use of proceeds, typically funding of approved drilling program 6

Energy High Yield Bond Returns Credit spreads have tightened over the past five years Energy High Yield Bond Returns Credit spreads have tightened over the past five years as interest rates have declined and commodity prices have increased 7

Increasing Valuations On a $/boe basis, average acquisition prices paid have grown substantially along Increasing Valuations On a $/boe basis, average acquisition prices paid have grown substantially along with crude prices since 1999 8

Goldman Sachs Commodity Markets Swaps Options Physical Capability Crude Oil WTI/WTS/LLS Brent Dubai Tapis Goldman Sachs Commodity Markets Swaps Options Physical Capability Crude Oil WTI/WTS/LLS Brent Dubai Tapis Bow River/LLB/LLK WTI Brent Dubai Tapis Natural Gas Northeast Gulf Coast Mid-continent Rockies Western Canadian Gulf Coast Mid-continent Rockies Canadian Liquids Ethane Propane Normal Butane Iso Butane Natural Gasoline (Pentane) Mt. Belvieu TET Mt. Belvieu non-TET Conway, KS Mt. Belvieu TET Mt. Belvieu non-TET Commodity Source: Goldman Sachs Locational Options 9

North American Natural Gas Basis Markets Goldman Sachs is a leading financial and physical North American Natural Gas Basis Markets Goldman Sachs is a leading financial and physical dealer for swaps and options at these and many other locations. AECO Sumas Northwest Rockies Ventura CIG Southern California Waha Texas Eastern M-3 Transco Zone 6 Non-New York Panhandle ANR Oklahoma San Juan Permian Source: Goldman Sachs Chicago Citygate NGPL Texas. Oklahoma Sonat Henry Hub Houston Ship Channel 10

Production Payments § § § Volumetric Production Payment § § Nothing new, have been Production Payments § § § Volumetric Production Payment § § Nothing new, have been around since the 1930 s Not debt, but the sale of a real property interest E&P Company sells VPP to financial buyer Delivery obligation is volumetric; discount rate is not explicitly stated Underlying instrument is a Term Overriding Royalty Interest § § § Non-cost, non-expense bearing interest Property specific burden, recorded conveyance Seller has ongoing obligations to operate and deliver/market production Seller must deliver volumes each month § § § Seller does not guarantee volumes, buyer can only look to specific property for volumes Typically 100% hedged by VPP buyer Some limitations on what seller can do with properties 11

Volumetric Production Payments § Principal factors determining size and pricing § § § § Volumetric Production Payments § Principal factors determining size and pricing § § § § Reserve mix – needs to have large percentage of PDP Value diversity – no value concentration in a few wells Periodic coverage – projected volumes available each month compared to volumes required to be delivered Tail – the amount of reserves expected to be remaining at the termination of the production payment Regional basis markets and available market points Seller’s operating capabilities and creditworthiness Alternative: Dollar Denominated or Financial Production Payment § § § No delivery schedule, rather buyer receives a fixed percentage of production Discount rate/IRR hurdle is explicitly stated Large percentage of production still hedged, but not 100%. More flexibility in hedge structure Easier to handle non-producing and undeveloped reserves Easier to handle two phases (both oil and gas) 12

Case Study: Volumetric Production Payment § § In 2004, GS E&P Capital purchased a Case Study: Volumetric Production Payment § § In 2004, GS E&P Capital purchased a VPP for $15 mm from a private seller The VPP burdens long-lived properties in the Arkoma Basin Goldman Sachs and the Seller arranged for the Seller to market the VPP production on behalf of Goldman Sachs The price received under the marketing arrangement is linked to an appropriate basis location Goldman Sachs hedged its price risk financially at closing; seller has no exposure to basis risk (other than physical vs. financial spreads) Volumes § § § LOE VPP Volumes Retained Interest Time 13

Second Lien Case Study: Belden & Blake Corporation $170. 0 million Senior Secured Credit Second Lien Case Study: Belden & Blake Corporation $170. 0 million Senior Secured Credit Facilities $192. 5 million Senior Secured Notes 1 Up to $15 mm of LCs can be issued to support the hedges. 14

Second Lien Case Study: Belden & Blake Corporation $170. 0 million Senior Secured Credit Second Lien Case Study: Belden & Blake Corporation $170. 0 million Senior Secured Credit Facilities $192. 5 million Senior Secured Notes 1 2 Pricing on LC facility and revolver can step down to L+250 bps and L+225 bps based on specific leverage levels. Pricing on term loan can step down to L+250 bps based on specific leverage levels. 15

Investor Perspectives 16 Investor Perspectives 16

Current Trends § § § New money from non-traditional sources § § Hedge funds, Current Trends § § § New money from non-traditional sources § § Hedge funds, investment banks; non-energy commercial banks Chasing yield; rates and credit spreads at historically low levels Intense competition among capital providers § § § Private equity in abundance Lenders willing to lend more and accept lower yield Traditional mezzanine financing being crowded out by aggressive 2 nd lien and private equity capital Unconventional Gas Plays § CBM, shale gas, tight sands plays offer the scale and risk profile to attract significant capital 17

Primary Financing Factors for Small Cap E&P Companies § § § § Track record Primary Financing Factors for Small Cap E&P Companies § § § § Track record § § Operating history, financial performance Reputation Size and Nature of Financing § § < $10 mm; $10 mm - $50 mm; > $50 mm Specific future growth opportunities available Is cash flow available to pay current interest, amortize debt? Use of proceeds Perceived Risk / Asset Mix § § § Percentage of PDP reserves Location (onshore vs. offshore, conventional vs. unconventional) Nature and potential of growth opportunities Term objectives § Up to 3 years; 3 -5 years; > 5 years The perceived risk of a given opportunity will vary significantly among capital providers Private Deals are difficult to benchmark; terms generally not disclosed Capital providers are forced to rely upon their past experience and inexact comparisons 18

Contacts § § Commodities (New York) § § Colleen Foster (212 902 0776) Simon Contacts § § Commodities (New York) § § Colleen Foster (212 902 0776) Simon Collier (212 902 0776) GS E&P Capital (Houston) § § Kurt Talbot (713 658 2680) John Howie (713 658 2682) 19

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