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4	Andy Rooney on Oil: There are a lot of folks who can't understand how we came to have an oil shortage here in the USA. Well, there's a very simple answer:
5	Industry Overview - Oil Oil prices will average over $40 as long as: the US dollar is weak, China keeps modernizing, the Middle East remains volatile, OPEC maintains price-band discipline, and the global economy grows modestly China is 30% of global demand growth USD oil prices are up 40% since 2000 but Euro prices are down 9% In 2004, global oil demand was the highest in more than a decade International activity (oil and LNG) will continue to increase. An energy bill will be passed, and the ANWR will be drilled With disconnect between commodity prices and equity valuations, most M&A activity will occur on Wall Street instead of Main Street.
6	Industrialization - Why We’re Bullish on Oil Japan Oil Consumption 1960: 2.6 BOE/Person/Year 1980: 15.5 South Korea Oil Consumption 1970: 1.9 BOE 1994: 14 China Oil Consumption 2000: 1.1 BOE 2010: 5? Equivalent to 25 MMBOPD, about what OPEC produces today!
7	Industry Overview – Natural Gas Natural gas prices are averaging over $6 and will likely go higher. Lack of drilling and rapid depletion will drive gas prices up. LNG imports will moderate gas prices above $4, but not until 2008 or after. 3Q ’04 survey of the 46 largest public companies has 3.3% YOY decline Most optimistic LNG development scenario is 10% of US demand Near term prices may soften if weather stays warm and storage exceeds historical levels. Gas-driven activity will dominate (deep onshore, CBM, and shelf GOM).
8	Houston Energy Banks Oil Price Deck
9	Houston Energy Banks Gas Price Deck
10	Capital Supplied to the Domestic Upstream Segment
11	"Lowest interest rates in four..." Lowest interest rates in four decades and highest oil and gas prices ever: discretionary cash flow exceeds capital expenditures leverage is decreasing and longer term debt is attractive commodity hedges lock in high price realizations and support acquisitions Volumetric Production Payments are utilized to monetize reserves and maintain control MLPs and Canadian Royalty Trusts are raising public equity to support acquisitions Large commercial banks are participating in loans to win investment banking business Investment banks are participating in commercial bank loans to protect their business The mezzanine debt market has been repopulated with new or reconstituted players A record level of private equity capital is available The threshold for going public and complying with security laws has increased dramatically
12	Oil & Gas: Syndicated Volume by Sector
13	Oil & Gas: Borrowing Base Grids Spread Distribution
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15	"“B” Term Loans" “B” Term Loans First lien, longer-dated debt with senior bank covenants (pari passu) and 0-50 bp pricing premium Covenants tend to be light with minimal penalties for prepayment, as are fixed repayment requirements that typically rely almost exclusively on cash sweeps Primarily sold to institutions, therefore can be difficult to amend Minimal amortization requirements, high refinancing risk No borrowing base redeterminations $100MM minimum size Credit rating is typically required
16	"Second Lien Debt (Senior/Sub..." Second Lien Debt (Senior/Sub or Structurally Subordinated Note) Second lien, longer-dated debt with more relaxed covenants and 100-300 bp pricing premium Primarily issued by banks and mezzanine firms Subject to borrowing base redeterminations or asset coverage/tail test Significant hedging is usually required
17	"Volumetric Production Payments" Volumetric Production Payments Limited term over-riding royalty interest, reduces seller’s reserve ownership Seller has responsibility to operate and retains upside on development and reserve tail Primarily issued by banks, mezzanine firms, and utilities/merchant energy firms Subject to a delivery schedule, no borrowing base redeterminations Volumes are hedged, interest rate is usually fixed at 200-600 bp premium High advance rates on PDP reserves
18	"Energy banks have a bullish..." Energy banks have a bullish outlook on the industry Interest rates will stay very low for another year Capital is readily available to the industry Bank credit is available and relatively cheap Mezzanine firms are back Public debt markets are receptive Record amount of private equity is available Threshold for public equity is relatively high Large bank mergers will have a temporary impact Acquisitions can be financed in today’s high price environment
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