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Corporate Banking and Investment 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

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Page 1: Corporate Banking and Investment IPAA's 2007 Private Capital

Corporate

Bankingand Investment

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

Page 2: Corporate Banking and Investment IPAA's 2007 Private Capital

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1. E&P Bank Lending Overview

2. Overadvance and Second Lien Bank Facilities

3. About BNP Paribas

Table of Contents

Page 3: Corporate Banking and Investment IPAA's 2007 Private Capital

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1. E&P Bank Lending Overview

Page 4: Corporate Banking and Investment IPAA's 2007 Private Capital

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Energy Industry Risk & Return Paradigm

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

PDP

Reserves

Proven

Reserves

Exploration

Activity

Engineering

and

Operations

Risks

Geological and

Geophysical

Risks

Management Sponsorship

Capitalization Hedging

R/P F&D

Page 5: Corporate Banking and Investment IPAA's 2007 Private Capital

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Energy Bank Lending Parameters

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

Page 6: Corporate Banking and Investment IPAA's 2007 Private Capital

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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

Year NYMEX Crude NYMEX Gas

2006 $50.00 $6.75

2007 $50.00 $6.50

2008 $45.00 $6.00

2009 $40.00 $5.50

Page 7: Corporate Banking and Investment IPAA's 2007 Private Capital

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Current Bank Market Conditions

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

Page 8: Corporate Banking and Investment IPAA's 2007 Private Capital

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2. Overadvance and Second Lien Bank Facilities

Page 9: Corporate Banking and Investment IPAA's 2007 Private Capital

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Bank Market Second Lien Basics

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

Page 10: Corporate Banking and Investment IPAA's 2007 Private Capital

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Drivers for Incremental Senior Debt Needs

Evolution of acquisition metrics

Development of commodity derivative markets

Inability of bank price decks to match growth of futures prices

Expansion of market capacity

Page 11: Corporate Banking and Investment IPAA's 2007 Private Capital

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Overadvance Facility vs. Second Lien RBL Facility

Overadvance Facility Second Lien Facility

Purpose: Bridge/Development Facility Intermediate Term Funding

Tenor: 6-18 Months 3-5 Years

Priority: Pari passu Second Lien

Premium to Revolver: 25-50 bps, with escalation 250-325 bps

Distribution: Bank Participants Banks & Institutions

Market Depth: Moderate Significant

Page 12: Corporate Banking and Investment IPAA's 2007 Private Capital

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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

Page 13: Corporate Banking and Investment IPAA's 2007 Private Capital

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Two Second Lien Markets

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

Page 14: Corporate Banking and Investment IPAA's 2007 Private Capital

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Bank Second Lien Advantages

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

Page 15: Corporate Banking and Investment IPAA's 2007 Private Capital

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Basic Bank Second Lien Terms

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

Page 16: Corporate Banking and Investment IPAA's 2007 Private Capital

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3. About BNP Paribas

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BNP Paribas

3rd 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

Page 18: Corporate Banking and Investment IPAA's 2007 Private Capital

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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

Page 19: Corporate Banking and Investment IPAA's 2007 Private Capital

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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

Page 20: Corporate Banking and Investment IPAA's 2007 Private Capital

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2006 Oil & Gas Lead Arranger Rankings

Rank Bank Holding Company Volume # of Deals Rank Bank Holding Company Volume # of Deals1 JP Morgan 38,235,000,000 78 1 JP Morgan 38,235,000,000 782 Bank of America 22,149,100,000 51 2 Bank of America 22,149,100,000 513 Credit Suisse 16,645,000,000 15 3 Wachovia Securities 11,775,000,000 304 Citigroup 15,331,000,000 21 4 BNP Paribas 11,260,000,000 275 UBS AG 13,749,475,000 5 5 Citigroup 15,331,000,000 216 Wachovia Securities 11,775,000,000 30 6 Wells Fargo & Company 5,150,350,641 177 BNP Paribas 11,260,000,000 27 7 Credit Suisse 16,645,000,000 158 Royal Bank of Scotland Plc 7,900,000,000 7 8 Union Bank of California 2,987,200,000 109 Wells Fargo & Company 5,150,350,641 17 9 SunTrust Bank 2,710,000,000 9

10 Barclays Bank Plc 4,050,000,000 2 10 RBC Capital Markets 1,596,001,382 911 Union Bank of California 2,987,200,000 10 11 Royal Bank of Scotland Plc 7,900,000,000 712 SunTrust Bank 2,710,000,000 9 12 General Electric Capital Corporation 906,136,842 613 Goldman Sachs & Company 2,048,316,000 4 13 UBS AG 13,749,475,000 514 RBC Capital Markets 1,596,001,382 9 14 Lehman Brothers 1,450,000,000 515 Lehman Brothers 1,450,000,000 5 15 Fortis Bank 1,275,000,000 516 Fortis Bank 1,275,000,000 5 16 BMO Capital Markets 1,110,000,000 517 BMO Capital Markets 1,110,000,000 5 17 Goldman Sachs & Company 2,048,316,000 418 TD Securities 1,091,001,382 3 18 Scotia Capital 775,000,000 419 General Electric Capital Corporation 906,136,842 6 19 TD Securities 1,091,001,382 320 Scotia Capital 775,000,000 4 20 Barclays Bank Plc 4,050,000,000 2

2006 U.S. Oil & Gas Lead Arranger - Volume 2006 U.S. Oil & Gas Lead Arranger - # of Deals

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.

Page 21: Corporate Banking and Investment IPAA's 2007 Private Capital

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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.

Rank Bank Holding Company Volume # of Deals Rank Bank Holding Company Volume # of Deals1 Citigroup 79,382,000,000 44 1 JP Morgan 76,903,000,000 1062 JP Morgan 76,903,000,000 106 2 Bank of America 63,741,600,000 843 Bank of America 63,741,600,000 84 3 BNP Paribas 37,656,000,000 604 Royal Bank of Scotland Plc 45,849,002,765 28 4 Wachovia Securities 31,318,316,000 455 BNP Paribas 37,656,000,000 60 5 Citigroup 79,382,000,000 446 UBS AG 32,965,800,000 10 6 Wells Fargo & Company 14,433,825,641 327 Credit Suisse 31,447,002,765 16 7 Royal Bank of Scotland Plc 45,849,002,765 288 Wachovia Securities 31,318,316,000 45 8 BMO Capital Markets 13,735,000,000 239 Mitsubishi UFJ Financial Group 28,522,000,000 16 9 Fortis Bank 13,406,856,041 23

10 Barclays Bank Plc 18,350,000,000 9 10 SunTrust Bank 13,480,000,000 2111 Wells Fargo & Company 14,433,825,641 32 11 Union Bank of California 8,604,400,000 1812 BMO Capital Markets 13,735,000,000 23 12 Credit Suisse 31,447,002,765 1613 SunTrust Bank 13,480,000,000 21 13 Mitsubishi UFJ Financial Group 28,522,000,000 1614 Fortis Bank 13,406,856,041 23 14 RBC Capital Markets 7,297,002,765 1515 Union Bank of California 8,604,400,000 18 15 Credit Agricole SA 8,164,400,000 1216 Credit Agricole SA 8,164,400,000 12 16 Scotia Capital 6,138,858,805 1217 RBC Capital Markets 7,297,002,765 15 17 UBS AG 32,965,800,000 1018 Societe Generale 6,180,000,000 10 18 Societe Generale 6,180,000,000 1019 Scotia Capital 6,138,858,805 12 19 Barclays Bank Plc 18,350,000,000 920 Deutsche Bank 6,050,000,000 8 20 Deutsche Bank 6,050,000,000 8

2006 U.S. Oil & Gas Agent Only - Volume 2006 U.S. Oil & Gas Agent Only - # of Deals

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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.