IPAA 2008 Private Capital Conference “How Private Equity Views the E&P MLP Model” January 16, 2008

1. QUANTUMENERGY PARTNERSSM IPAA 2008 Private Capital Conference “How Private Equity Views the E&P MLP Model” January 16, 2008 www.quantumep.com

2. Firm Overview • Family of energy-focused private equity and direct property acquisition funds with primary emphasis in oil and gas sector and secondary emphasis in midstream, oil field services, coal, power, and alternative energy sectors. • Currently manage $3.2 billion; latest fund $1.32 billion in commitments. • Quantum Energy Partners: • Private equity fund. • Investment size: $25 - $150 million. • Multidisciplinary investment team with complimentary expertise in finance, engineering, geology, geophysics, operations, tax, and law. • Quantum Resources: • Direct property acquisition fund. • Investment size: > $200 million. • Partnership w/ Aspect Energy.

3. Market Update On E&P MLPs • Currently there are nine E&P MLPs with a collective market cap of > $8.8 billion. Four E&P MLPs currently in registration process and multiple others have discussed potential plans for an offering. • E&P MLP trading metrics include a median yield today of 8.0% (vs. 5.1% six months ago). Despite recent weakness, majority of E&P MLPs outperformed broader MLP index in 2007. • Valuation gap between E&P MLPs and C-corps has tightened. • Public market valuations – Recent E&P MLP offerings (Quest and Vanguard) have traded below their initial pricing, with current yields above 10.0%. • Asset deals – Significant competition in the A&D market, partly driven by MLPs, has lifted valuation metrics on upstream asset transactions. • Two clear strategies have emerged: • Drop-Down Strategy – Parent entity contributes assets to its MLP over time providing visibility on future growth. • Acquisition Strategy – The MLP looks to replace and grow production through the A&D market. • Significant “quick” equity capital available via PIPE transactions (> $8.5 billion raised for all MLPs in last 12 months). However, widening PIPE discounts have forced some MLPs back to conventional equity offerings.

4. Will E&P MLPs Become Mainstream? • There is plenty of precedence. >30 U.S. E&P MLPs in early 80s; >40 Canadian royalty trusts with market cap peaking >$60 billion; >40 current midstream MLPs with market cap ~$100 billion. • Pool of mature assets with limited ability to grow production (i.e. assets that are candidates for E&P MLP ownership) is significant. We estimate that ≈ $250 to $300 billion of assets in the U.S. fit the MLP profile. • Significant supply of capital from Baby Boomers seeking both current income as well as growth and institutional investors entering the MLP space. • Arbitrage still exists between MLP valuations on one hand and C-corps and asset deals on the other. Although this valuation gap has tightened recently.

5. Private Equity And E&P MLPs • Private equity firms primarily employ two different strategies in the upstream oil and gas space: • Acquire, exploit and improve the cost structure of mature, often under-capitalized, assets; and • Aggregate acreage and pursue moderate risk exploitation/exploration opportunities. • In both strategies, the overriding goals remain constant: • Economically grow production; • Lower costs; • Generate inventory; and • Identify value-maximizing exit strategies. • The advent of E&P MLPs has several implications (good and bad) for energy private equity firms. • Good – fundamental valuation shift in existing assets. • Bad – significant competitor with a superior cost-of-capital.

6. “Management Team Risks” To The E&P MLP Model • To be competitive, MLPs will be tempted to make aggressive assumptions about decline curves, production and capital costs and exploitation opportunities. Many will fail to execute their plans. • Some MLPs don’t understand their cost-of-capital. Management teams often mistake a stock’s distribution yield for their cost-of-capital. It is not. There is a significant implied distribution growth rate and GP IDRs (if applicable) that must be included in determining an MLPs cost-of-capital. • MLPs can create the false sense of distribution growth by purchasing higher-decline, lower-RLI properties. This happened in Canada. • Commodity price and interest rate volatility can have a devastating affect when they go the wrong way for an MLP that isn’t sufficiently hedged.

7. “Market Risks” To The E&P MLP Model • Acquisition prices are getting bid up. An increasing number of MLPs will escalate the competition for assets and erode the valuation arbitrage. • Will the larger companies continue divesting their assets to MLPs that are arbitraging an immediate and significant gain or will they set up their own “drop-down” MLPs? • Publicly traded partnerships are being targeted by Congress for taxation. A rewrite of the tax code and partnership law would be a mess, but the risk is higher now than at anytime in the past 20 years. • Interest rates and the market’s expected spread to Treasuries could increase. A 100 basis point increase in average yields would lower unit prices on average 10-15%.

8. A Blueprint For Building A Successful E&P MLP • To the extent possible, avoid the “Risks” described on the prior two slides. • Get behind a great management team. • Acquisition-driven businesses depend on a management team’s ability to asses risk and allocate capital accordingly, not over-pay, control costs, identify additional by-passed opportunities, and execute according to plan. • Purchase assets that truly fit the MLP model. • High PDP component, ideally > 80%; • Low decline rates, ideally < 10%; • High RLI, ideally > 15 years; and • Low maintenance capital requirements to keep production flat, ideally < 25%. • Hedge aggressively. Remember, you are no longer an oil and gas company but rather a bond with a growth component. You are paid to never miss a distribution target and penalized severely when you do.