Goldman Sachs

Commodity Linked Financing

IPAA Conference

A presentation by Goldman, Sachs & Co.

Commodity Risk Management
(212) 902-0776
April 2005

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 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+/Aa3)
 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 $6.5Bn 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 $100MM of development financing commitments to
the North American oil and gas industry in 2004

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 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
 $15mm – 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

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Financing Alternatives for Private Companies

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 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

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 Four Basic Structures for E&P Debt (Debt Like) Investments

 2nd 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

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 Energy High Yield Bond Returns

1800

1600
GS Energy High Yield Index Returns 5 Year Treasury Yield
1400

1200

1000
bps

800

600

400

200

0
Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05

Credit spreads have tightened over the past five years as interest rates
have declined and commodity prices have increased

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 Increasing Valuations

$16.00 $55.00
Av erage Acquisition $/boe Crude Prices (right axis)
$14.00 $50.00

$12.00 $45.00

$10.00 $40.00

$8.00 $35.00

$6.00 $30.00

$4.00 $25.00

$2.00 $20.00

$0.00 $15.00
1999 2000 2001 2002 2003 2004 2005
Sources: John S. Herold, Inc., Bloomb erg
Includes announced upstream transactions with disclosed transaction values of $10 million or greater
On a $/boe basis, average acquisition prices paid have grown
substantially along with crude prices since 1999

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 Goldman Sachs Commodity Markets

Commodity Swaps Options Physical Locations Locational

Capability Options

Crude Oil    WTI/WTS/LLS WTI

Brent Brent
Dubai Dubai
Tapis Tapis
Bow River/LLB/LLK

Natural Gas    Northeast Gulf Coast

Gulf Coast Mid-continent
Mid-continent Rockies
Rockies Canadian
Western
Canadian

Liquids    Mt. Belvieu TET Mt. Belvieu TET

Ethane Mt. Belvieu non-TET Mt. Belvieu non-TET
Propane Conway, KS
Normal Butane
Iso Butane
Natural Gasoline (Pentane)

Source: Goldman Sachs 9

 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.

Sumas
Sumas AECO
AECO

Northwest
Northwest Texas
Texas
Rockies
Rockies Chicago
Chicago Eastern M-3 Transco
Transco Zone
Zone 6
Ventura
Ventura Citygate
Citygate Non-New
Non-New York
York

CIG
CIG
Panhandle
Panhandle
ANR
San
San Juan
Juan Oklahoma
Oklahoma
Southern
Southern Sonat
Sonat
California
California
Permian
Permian NGPL
NGPL Texas-
Texas-
Oklahoma
Oklahoma
Henry
Henry Hub
Hub
Waha
Waha Houston
Houston
Ship
Ship
Channel
Channel

Source: Goldman Sachs 10

 Production Payments

 Volumetric Production Payment

 Nothing new, have been around since the 1930s
 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

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 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)

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 Case Study: Volumetric Production Payment

 In 2004, GS E&P Capital purchased a VPP for $15mm 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
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 Second Lien Case Study: Belden & Blake Corporation
$170.0 million Senior Secured Credit Facilities
$192.5 million Senior Secured Notes
Company Overview Transaction Overview
 Belden & Blake Corporation is an oil and gas company with operations
 On July 7, 2004, Capital C Energy, a Carlyle/Riverstone portfolio
focused in the Appalachian basin in Ohio, Pennsylvania and New York
company, closed the acquisition of Belden & Blake from Texas Pacific
and in the Antrim Shale in Michigan
Group
 At December 31, 2003, the Company’s estimated proved reserves
st
totaled 355 Bcfe, with 90% natural gas  Belden & Blake entered into a $170mm 1 lien Senior Secured Credit
nd
 Q1 2004 net production averaged 51 Mmcfe per day, implying an R/P Facility and issued $192.5mm of 2 lien Senior Secured Notes in
of 19 years order to fund the transaction
 Concurrent with the financing, the Company entered into long term
Proved Reserves Proved Reserves hedges with Goldman Sachs that cover approx. 62% of expected
By Geography by Category production from current proved reserves for 10 years
Proved — Hedged volumes cover operating expenses and interest for each
Undeveloped year and more than 50% of capex needed for proved reserves in
Coalbed
35% aggregate
Methane
10% Michigan Proved
37% Developed — Goldman Sachs took assignment of the Company’s existing
65% hedges (term of 18 months)

Appalachia  Prior to closing, the Company sold its oilfield service division and its
53% exploratory assets in the Trenton Black River play leaving the
Company focused on shallow drilling locations in Appalachia and
Michigan
Pro Forma Capitalization ($mm)  Between signing and closing the merger, the Company initiated a
% of Total x LTM Mar 2004 tender process for the Company’s existing bonds
Amount Capitalization Adj. EBITDAX
LC Facility ($40mm) $0.0
Revolver1 ($30mm) 0.0
Term Loan 100.0 27% 1.6x
Senior Secured Credit Facilities $100.0 27% 1.6x
Senior Secured Notes 192.5 52%
Total Debt $292.5 79% 4.8x
Sponsor Equity 77.5 21%
Total Capitalization $370.0 100% 6.1x

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Up to $15mm of LCs can be issued to support the hedges. 14
 Second Lien Case Study: Belden & Blake Corporation
$170.0 million Senior Secured Credit Facilities
$192.5 million Senior Secured Notes
Transaction Highlights Debt Profile

 The integration of long term hedges for a significant amount of Call

proved production with the financing allowed the Company to Offering Amount Maturity Rating Protection Price
LC Facility $40.0 2010 B2/BB- NM L+2751
— Put in place aggressive leverage (79%)
Revolver $30.0 2010 B2/BB- NM L+2751
— Achieve significant ratings upgrade from a Caa1/CCC+ corporate
rating and Caa3/CCC- subordinate debt rating Term Loan $100.0 2011 B2/BB- NM L+2752
Sr. Secured Notes $192.5 2012 B3/B- NC4 8.75%
— Secure very attractive pricing for the new financing
 The transaction was structured to eliminate liquidity drains on the
Company from the hedging program
— No posting of cash collateral required. The LC facilities support
the Company’s obligations under the hedges and any exposure
beyond the LC facilities are satisfied by a second lien on the
assets Hedged Volumes
 The entire transaction (tender process, Credit Facilities, Notes and 20,000
hedges) was executed in a record time (approximately 2 weeks
between signing the merger agreement and pricing the financing)
15,000
 As a result of the creative structure (integrating the financing with the
hedging), the Company’s refocus on developing its core shallow

Mmcfe
assets and a concise execution process 10,000

— The Senior Secured Notes priced at 8.75%, the tight end of price
talk (8.75-9.00%), and was over subscribed with more than 100 5,000
accounts in the order book
— The Term Loan priced at an initial price of L+275 bps with a step 0
down to L+250 bps (upon reaching certain leverage levels) 6 Mos. 2005 2006 2007 2008 2009 2010 2011 2012 2013
representing one of the lowest pricing for a B2 term loan in recent 2004
years
Proved Developed Production Proved Undeveloped Production Volumes Hedged

1
Pricing on LC facility and revolver can step down to L+250 bps and L+225 bps based on specific leverage levels.
2
Pricing on term loan can step down to L+250 bps based on specific leverage levels. 15
Investor Perspectives

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 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 2nd lien and
private equity capital
 Unconventional Gas Plays
 CBM, shale gas, tight sands plays offer the scale and risk profile to attract
significant capital

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 Primary Financing Factors for Small Cap E&P Companies

 Track record
 Operating history, financial performance
 Reputation
 Size and Nature of Financing
 < $10mm; $10mm - $50mm; > $50mm
 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

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 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)

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 Disclaimer

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Street.

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